UNIT: 1:

Corporate personality:
Corporate personality is the fact stated by the law that a company is recognized as a legal entity distinct from
its member. A company with such personality is an independent legal existence separate from its shareholder,
directors, officers and creditors.

To run any business why people make a company?

Because apart from any individual company has many rights and advantages.

Whenever any company is formed or it is incorporated, it has its separate legal personality & independent
status apart from its members.

Means after incorporation members & company both are separate from each other and becomes two
separate legal entity. And this separation concept is known as corporate personality.
Actual usuage of this can be understood by this three important case laws:
1. Oakes v. Turquand
2. Salomon v. Salomon & co ltd.
3. Lee v. lee’s Air Farming Ltd.

The concept of corporate personality was developed in case Oakes V. Turquand. And it is established in case
Salomon V. Salomon & co ltd.

Salomon v. Salomon co ltd.( 1897) AC 22

Mr. Aron Salomon was a businessman & was specialized in manufacturing leather boots. He formed a
company named Salomon & co ltd. and sold his business for 38000 pounds. Total share capital of company-
40000 ( 1 pound each)

Memorandum
This company has 7 subscribers-
1. Salomon 1
2. Wife 1
3. Daughter 1
4. Sons 4
All of them have one share & Salomon have 20000 shares& 10000 debentures (pounds)
After 1 year… this company goes into liquidation.
● Assets – 6000 pounds
● Liabilities – 17000 pounds
Division of liabilities:-
17000:- 10000 Salomon
7000 unsecured creditor

Issue-
1. Company has limited pounds, so the question was to whom he gives the first.
2. If only one family manages, administer & controls business than the identity of the family & business
will be same or separate.
Considering the same & making it an issue unsecured creditors believes that the money they should get first,
because the company doesn’t have the separate / independent existence.

Unsecured creditor-
1. No separate legal existence
 2. Company was acting as an agent

Court-
After incorporation the company itself becomes the independent legal person and as Salomon was the
debenture holder he gets the priority first above the unsecured creditors.
So, the money Salomon gets first.

Lee v Le Air Farming Co.Ltd

A Company is their named LEE AIR FARMING.
Total share capital- 3000 shares
Lee – 2999 shares
Lee himself made him company’s
● Managing Directors
● Chief Pilot
At the time work of the company LEE’s plane crashes & LEE dies.
Lets understood the relationship of MASTER & SERVANT of the company.
Between the company & company’s employes there is relation of MASTER- SERVANT means at the time of
course of action if anything happens that master will compensate for the same.

Master-Servant = Compensation Issue

Lee’s widow now demands compensation from Lee v Le Air Farming Co.Ltd.

ISSUE- Was there a separate legal entity? Whether MRS. LEE can claim compensation?
Insurance company said lee was managing director & master+ employee. They both entity are same & widow
will not get compensation for the same.

Court-
Whether LEE was holding the whole company but they are separate legal personality and to have both the
personalities power of master & servant.
And this compensation LEE was demanding as the position of the servant which he will be getting.

This was the concept of corporate or legal personalities. Which says after incorporation, company & member
became two different legal entity.

In India, this concept was accepted by case-

Re Kondoli Tea Co Ltd
Advantages of corporate personality-
1. Legal personality
2. Perpeptual succession
3. Company can sue & can be sued
4. Unlimited liability.

Conclusion-
A company in law is separate person from its subscribers to the memorandum of association.

General Principles of Company Law:

Basic principles of company law

The separate personality of a company
Acompany is an entity that is distinct from its owners – the shareholders – as well as from its directors,
creditors and employees. It has a separate legal personality with its own rights and obligations. A company
continues to exist even if its shareholders and/or directors change. This is a fundamental concept of company
law, since there is always an extra entity to take into account: the company.
Directors, in general, owe their duties to the company, not to the shareholders. Shareholders usually have
rights against the company, rather than against the directors, and third parties with whom the company does
business contract with the company, even though they negotiate with the directors.

Limited liability
Limited liability does not mean that the company’s liability is limited; it means that the shareholders’ liability
(i.e. shareholders’ responsibility for the company’s debts) is limited. The creditors to whom the company
owes money can assert their rights in full against the company but if the company has insufficient funds to
meet its liabilities the company’s creditors cannot then pursue their claims against the shareholders.
If their company goes into an insolvency procedure (such as liquidation or administration), the shareholders
will be liable to lose the money that they have invested in the company by subscribing for its shares but that is
the extent of their liability.

Limited companies as popular commercial vehicles

Limited liability is the quality that has caused companies to become such useful commercial tools. The
personal assets of shareholders are distinguished from the assets of the company. The concept of limited
liability is fundamental to:
1. passive investment: the shareholders can invest in a company following an assessment of the risks of losing
that investment, knowing that the rest of their personal assets is safe and without having to take an active role
in management;
2. why many entrepreneurs seek to conduct business through the medium of a limited liability company; and
3. why groups of companies have developed: riskier business divisions can be conducted through separate
companies within the group without the less risky companies becoming vulnerable to creditors of the riskier
companies.
Section 74 Insolvency Act 1986 enshrines the concept of limited liability, confirming that the shareholders of
a limited company are, generally speaking, not liable to contribute towards the debts of the company
following it going into
liquidation expect to the extent they owe money for the purchase of their shares.

Limits to the doctrine of limited liability

Note that it is possible to incorporate unlimited companies and also that there are limits on the doctrine of
limited liability, both commercially and legally. In certain, much debated, situations the court can ‘pierce the
corporate veil’ in the interests of justice, for example if the company is considered a façade.
There are however many devices which creditors can employ to try to improve their position. This is usually
by contractual means. Properly entered into, these contracts are effective and enforceable: for example a
creditor can require a guarantee from the shareholder(s) of a company, which will then circumvent the
limited liability of the shareholder(s). The use of these strategies comes down to commercial factors: the
bargaining power of the parties and the ingenuity of their advisors.
It is only possible to grasp why these devices are needed if you can appreciate the underlying fundamental
concepts of limited liability of shareholders and the separate legal personality of a company.

Nature and Definition of Company:

The word ‘company’ is derived from the Latin word Com Panis (Com means ‘With or together’ and Panis
means ‘Bread’), and it originally referred to an association of persons who took their meals together. In the
leisurely past, merchants took advantage of festive gatherings, to discuss business matters. In popular
parlance, a company denotes an association of like minded persons formed for the purpose of carrying on
some business or undertaking In the legal sense, a company is an association of both natural and artificial
persons and is incorporated under the existing law of a country. In terms of the Companies Act, 2013 a
“company” means a company incorporated under this Act or under any previous company law [Section 2
(68)] In common law, a company is a “legal person” or “legal entity” separate from, and capable of surviving
beyond the lives of its members.
NATURE AND CHARACTERISTICS OF COMPANY
1. CORPORATE PERSONALITY: A company incorporated under the Act is vested with a corporate
personality so it bears its own name, acts under name, has a seal of its own and its assets are separate and
distinct from those of its members. It is a different ‘person’ from the members who compose it. Therefore it is
capable of: owning property, incurring debts, borrowing money, having a bank account, employing people,
entering into contracts and suing or being sued in the same manner as an individual.
2. COMPANY AS AN ARTIFICIAL PERSON: A Company is an artificial person created by law. It is not a
human being but it acts through human beings. It is considered as a legal person which can enter into
contracts, possess properties in its own name, sue and can be sued by others.
3. COMPANY IS NOT A CITIZEN: The company, though a legal person, is not a citizen under the
Citizenship Act, 1955 or the Constitution of India.
4. COMPANY HAS NATIONALITY AND RESIDENCE: Though it is established through judicial decisions
that a company cannot be a citizen, yet it has nationality, domicile and residence.
5. LIMITED LIABILITY: “The privilege of limited liability for business debts is one of the principal
advantages of doing business under the corporate form of organisation.” The company, being a separate
person, is the owner of its assets and bound by its liabilities. The liability of a member as shareholder, extends
to the contribution to the capital of the company up to the nominal value of the shares held and not paid by
him.
6. PERPETUAL SUCCESSION: An incorporated company never dies, except when it is wound up as per
law. A company, being a separate legal person is unaffected by death or departure of any member and it
remains the same entity, despite total change in the membership. Perpetual succession, means that the
membership of a company may keep changing from time to time, but that shall not affect its continuity.
7. SEPARATE PROPERTY: A company being a legal person and entirely distinct from its members, is
capable of owning, enjoying and disposing of property in its own name. The company is the real person in
which all its property is vested, and by which it is controlled, managed and disposed off.
8. TRANSFERABILITY OF SHARES: The capital of a company is divided into parts, called shares. The
shares are said to be movable property and, subject to certain conditions, freely transferable, so that no
shareholder is permanently or necessarily wedded to a company. Section 44 of the Companies Act, 2013
enunciates the principle by providing that the shares held by the members are movable property and can be
transferred from one person to another in the manner provided by the articles.
9. CAPACITY TO SUE AND BE SUED: A company being a body corporate, can sue and be sued in its own
name.
10. CONTRACTUAL RIGHTS: A company, being a legal entity different from its members, can enter into
contracts for the conduct of the business in its own name.
11. LIMITATION OF ACTION: A company cannot go beyond the power stated in its Memorandum of
Association. The Memorandum of Association of the company regulates the powers and fixes the objects of
the company and provides the edifice upon which the entire structure of the company rests.
12. SEPARATE MANAGEMENT: The members may derive profits without being burdened with the
management of the company. They do not have effective and intimate control over its working and they elect
their representatives as Directors on the Board of Directors of the company to conduct corporate functions
through managerial personnel employed by them. In other words, the company is administered and managed
by its managerial personnel.
13. VOLUNTARY ASSOCIATION FOR PROFIT: A company is a voluntary association for profit. It is
formed for the accomplishment of some stated goals and whatsoever profit is gained is divided among its
shareholders or saved for the future expansion of the company.
14. TERMINATION OF EXISTENCE: A company, being an artificial juridical person, does not die a
natural death. It is created by law, carries on its affairs according to law throughout its life and ultimately is
effaced by law. Generally, the existence of a company is terminated by means of winding up

Private Company and Public Company:

Public organisations and privately owned businesses both can be enormous. It’s simply the manner in which
they source reserves or funds that are different and unique.
The privately-owned business takes the assistance of private financial backers and venture capitalists, and
they don’t have to disclose any organisational information or data to the overall population or the general
public.
The public companies or public organisations take the assistance of the general population or general public
and miss out on the proprietorship, and they need to comply with the guidelines of the SEC.

Meaning of Private Company:

A privately-owned business isn’t similar to a public organisation. A privately owned business can’t exchange
or trade its shares among the overall population or the general public. What’s more, the shares of privately
owned businesses are not exchanged on open stock trades or public stock exchanges.
That doesn’t imply that privately owned businesses don’t have shares, and there’s none who can possess
them. For privately-owned businesses, the shares are possessed or owned and secretly exchanged or traded by
a couple of willing financial backers. A privately-owned business is run similarly to how a public organisation
is run. The main distinction is on account of a privately owned business, the quantity of shares exchanged is
generally more modest, and furthermore, the exchanged shares are claimed by restricted or limited people.
On account of privately owned businesses, capital frequently is obtained from financial speculators or
venture capitalists. Funding resources or investing in privately owned businesses are ideally suited for
financial speculators as they search for high-risk, high-reward ventures. Privately owned businesses can open
up to the world or go public, assuming they need more money to grow the business. For that, they go for an
initial public offering (IPO) and issue shares to the overall population.
A public organisation can likewise change itself into a privately owned business with the assistance of a
private equity firm.

Meaning of Public Company:

A public organisation can offer its own enrolled or registered securities to the overall population. After an
IPO, an organisation turns into a public organisation. A public organisation can likewise be named a
publicly-traded company.
A publicly-traded corporation implies that the organisation can exchange in public capital business or
markets and can straightforwardly offer its shares to general society. According to the US Securities and
Exchange Commission (SEC), in the event that an organisation has $10 million in resources and more than
500 supporters or subscribers, the organisation needs to enrol with SEC and must observe all the announcing
guidelines and rules.
The shares of a public organisation are shared by the investors or shareholders, top managerial staff, and
executives. An organisation becomes public to create more capital for business through open and thus, they
can grow their span or reach and market.

Difference between Private Company and Public Company:

PRIVATE COMPANY PUBLIC COMPANY

Meaning

A privately-owned business can sell its own, secretly or A public organisation can offer its own
privately held shares to a couple of willing financial enlisted shares to the overall population
backers. or the general public.

Regulations to Follow
Until the privately owned businesses reach $10 million A public organisation needs to comply
and a greater number of than 500 investors or with a ton of guidelines and detailing
shareholders, they don’t need to follow any guidelines principles according to the Government.
given by the Government.

Advantage

The essential benefit of a privately traded or exchanged The essential benefit of a public
organisation is that it doesn’t have to pay all due corporation is that it can take advantage
respects to any investors, and there’s no requirement for of the market by selling more shares.
divulgences also.

Size of the Firm

Privately owned traded organisations can likewise be Public corporations are enormous
huge organisations. The possibility that a privately held organisations.
organisation is a more modest or small company is
absolutely false.

Funds and their Sources

For privately-held organisations, the wellspring of assets For the public corporation, the source of
is not many private financial backers or investors. assets or funds is by selling its bonds and
shares.

Traded in

The stock of a privately owned business is claimed and The stocks of a public organisation are
exchanged or traded by a couple of private financial exchanged or traded in the stock
backers. exchanges.
One Person Company:

With the enactment of the Companies Act, 2013, some new ideas have been introduced into India’s Corporate
Legal System which weren’t part of the erstwhile old Companies Act, 1956, one such concept introduced by
the Act is the concept of “One Person Company”, which means an individual can now constitute a company.
Earlier, if you wanted to set up a private company, you need at least one other person because the law
mandated a minimum of two shareholders. The object behind the incorporation of this concept is to promote
entrepreneurship. It will help the entrepreneurs to access certain facilities like bank loans, thorough access to
the market as a separate entity and legal shield for their business. The Act provided single person with full
freedom to contribute in the economic activities of India. This article tries to exhibit an outline about the
progressive new idea of One Person Company as presented by the Companies Act, 2013.At the heart of this
article lies an attempt by the author to understand: (i) the basic concept of the One Person Policy, (ii) the
need of emergence of the concept, (iii) to appreciate the merits and point out the demerits and deficiencies of
the concept.

The concept of One Person Company was introduced in the Indian company law regime by the enactment of
the Companies Act, 2013 (the ‘Act’). This new concept was in furtherance of the objective of creating the
necessary environment for the present global corporate structure in India. The main aim behind the
incorporation of such a concept is to encourage entrepreneurs who wish to set up micro economic industry,
but are in search of a business structure with less effort, time and monetary resource consumption in legal
conformity. Under the Company Law 1956, there was a complete bar on an individual to start a company, the
only option left with him was to have a sole proprietorship, as the erstwhile law required at least two people
to form a company.

One Person Company is defined under Sub-section 62 of Section 2 of the Act. It defines One Person Company
as “a company which has only one person as a member”, where all the legal and financial liabilities are
limited to the company and not its members. Only naturally born Indian who is a resident of India (i.e. have
stayed for at least 182 days during the immediate preceding financial year) can incorporate One Person
Company.

This concept of One Person Company is similar to the existing concept of Sole proprietorship. However, the
ills of Sole- proprietorship which were generally faced by the proprietors were removed by this concept. The
important feature of One Person Company is that the risks mitigated are limited to the extent of the value of
shares held by such person in the company. This will help the entrepreneurs to take the risks of doing
business without bothering litigations and liabilities getting attached to the personal assets.

II. Rationale Behind The Concept

The origin of the concept of One Person Company can be traced back to the international corporate regimes
of U.K., Singapore, China and other European countries and the recommendations of the “Expert committee
on Law” supervised by Dr. J.J. Irani in 2005. The reason why this concept was introduced can be best
understood from the summary of the report of the committee as mentioned herein below:

“With increasing use of information technology and computers, emergence of the service sector, it is time that
the entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such
economic activity may take place through the creation of an economic person in the form of a company. Yet it
would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and
participating in the market place should do it through an association of persons. We feel that it is possible for
individuals to operate in the economic domain and contribute effectively. To facilitate this, the Committee
recommends that the law should recognize the formation of a single person economic entity in the form of
‘One Person Company’. Such an entity may be provided with a simpler regime through exemptions so that
the single entrepreneur is not compelled to fritter away his time, energy and resources on procedural
matters.”

III. Features of One Person Company

The concept of One Person Company is mentioned in the various provisions of the Act, and an analysis of
these provisions, Salient features of the One Person Company can be inferred:
· It is a company which has only person as a member.

· Unless excluded by the Act, it has all the characteristics of a private company.

· It has the minimum paid up share capital of INR one lakh.

· One Person shall have minimum of One Director; and maximum of 15 directors.

· One person Company need not hold annual general meetings every year.

· It is not mandatory by One Person Company to include Cash Flow Statement in the financial statements.

· One Person Company is required to be mentioned in brackets below the name of such name of the company,
wherever its name is printed, affixed or engraved.

· Shareholder of a One Person Company acts as first director, until the Company appoints a director.

IV. Advantages of One Person Company

One of the most crucial questions which arises before us is, why would a person prefer company over a
proprietorship? To answer this question, we have to look at the rationale behind this concept which is to
provide an individual with the benefits of incorporation while functioning like a Sole Proprietor. Following
are the advantages that make the title of company more desired than that of proprietorship:

Independent Corporate existence: The Company has its own existence separate from that of its Director and
Shareholder; and same will apply to One Person Company too.. This Principal was originated from the Case
of Salomon v. Salomon & Co Ltd. Company forms a distinct legal personality from its members, thus a
company is a person in law. In the case of T.R. Pratt v. E.D. Sasoon & Co. Ltd, the Bombay High Court has
held that, “Under the law, an incorporated company is a different entity, and although the entire share
maybe practically controlled by one person, in law a company is a distinct entity.”

Therefore, there is a difference between One Person Company and Sole Proprietorship. In sole
Proprietorship there is no separation between person and his business.

Limited liability: As mentioned above, One Person Company has its own separate legal identity and thereby
limits the liability of the entrepreneur to the extent of paid subscription money. Limited liability is considered
as the most precious characteristics of the Corporation. President Eliot of Harvard regarded limited liability
as "the corporation's most precious characteristic" and "by far the most effective legal invention made in the
nineteenth century.” Therefore, this concept of One Person Company encourages single shareholder to
participate in the economy by limiting their liabilities. In contrast to the above, in Sole Proprietorship there is
no limitation on the liability.

Perpetual Succession: In the One Person Company nomination of a successor by the Director is mandatory;
and he will be the sole member in case of death or disability of Director. Therefore, unlike Sole
Proprietorship, death or disability of sole member would not dissolve the company. Members may come and
go but the company can go on forever.

Compliances: Unlike private companies, One Person Companies have not been subject to various procedural
formalities such as Annual General Meeting, General Meeting or Extraordinary General Meeting, etc. The
exemption from these formalities makes operation of One Person Company convenient and trouble free.

V. Deficiencies of One Person Company

Restriction On Nris: The objective behind the introduction of the concept of One Person Company was to
boost economic growth of the country by promoting entrepreneurship. However, this seems to be an irony
because only a naturally born Indian who is also resident of India shall be eligible to incorporate a One
Person Company. On one hand this concept encourages small entrepreneurs and other hand it discourages
Foreign Direct Investment by disallowing foreign companies and multinational companies to incorporate
their subsidiaries in India as a One Person Company.

Mandatory Requirement To Appoint Nominee: The very purpose of the One Person Company concept was to
enable the single person to enter into business venture alone without wasting his time and energy looking for
a partner. This entire purpose has been defeated due to the legal mandate, which requires the shareholder to
appoint a nominee, who shall, in the event of the subscriber's death or his incapacity to contract becomes the
member of the company at the time of incorporation of the One Person Company. This creates procedural
trouble for the subscriber such as looking for a nominee, obtaining his consent, etc.

Perpetual Succession: According to the concept of perpetual succession, the nominee whose name has been
mentioned will become the sole member of the company on the event of death or disability of the subscriber.
This does not sound good for the future of the company because the person who is not involved in day to day
operation of the company, would not be able to handle the business properly and this will lead to the winding
up of the company.

Tax Obligation: In the context of tax, a sole proprietor remains in better position than One Person Company.
The concept of One Person Companies is not recognized under the Income Tax Act and therefore is taxed
equal to the private companies. As per Income Tax Act, 1961, tax rate for private companies is 30%, while
for sole proprietors tax rate depends upon their income. Thus, from taxation point of view, it puts heavy
burden on the One Person Company.

VI. Suggestions And Conclusion

The concept of One Person Company has been proved to be a boon for the individual entrepreneurs. It has
provided a speedy mechanism where a person can single handedly incorporate himself into a company rather
than wasting his time, energy and resources in finding a partner. One Person Company is beneficial for both
regulators as well as market players. From the perspective of regulators, organising the unorganised sector of
proprietorship will make the regulation of these entities convenient and effective. On the other hand, from the
perspective of market players, the status of private limited company will not only limit the liability of sole
entrepreneurs but will also provide access to market players to various credit and loan facilities.

Despite of this remarkable feature introduced in the Companies Act, 2013, there are certain shortcomings
which must be addressed in order to achieve the true intent of the legislature. Few changes which are
immediately required to be introduced to make the concept better are as follows:

i. The position that only Indian citizen who is resident of India can form One Person Company should be
relaxed and even foreign companies and NRIs should be allowed to incorporate One Person Company.

ii. The Distinction between the legal person and the natural person should be removed with respect to
incorporation of One Person Company.

iii. Income Tax Act, 1961 should recognize the concept of One Person Company in order to encourage more
entrepreneurs to incorporate companies.

iv. The procedural requirements which a person has to comply with in order to incorporate his company as
One Person Company should be relaxed, so as to encourage more and more people to use the benefit there
under.
Classification of companies:

On the basis of size or number of members in a company:

Private Company:
According to section 2(68) of the Companies Act, 2013 (as amended in 2015), “private company” is
essentially defined as a company having a minimum paid-up share capital as may be prescribed, and which
by its articles, restricts the right to transfer its shares. A private company must add the word “Private” in its
name. It can have a maximum of 200 members.

Public Company
Section 2(71) of the Companies Act, 2013 (as amended in 2015), defines a “public company”. A public
company must have a minimum of seven members and there is no restriction on the maximum number of
members. A public company having limited liability must add the word “Limited” at the end of name. The
shares of a public company are freely transferable.

One Person Company:

The Companies Act, 2013 also provides for a new type of business entity in the form of a company in which
only one person makes the entire company. It is like a one man- army. Under section 2(62), One Person
Company (OPC) means a company which has only one person as a member.

On the basis of control, we find the following two main types of companies:

Holding Company:
Such type of company directly or indirectly, via another company, either holds more than half of the equity
share capital of another company or controls the composition of the Board of Directors of another company.
A company can become the holding company of another company in any of the following ways:
● by holding more than 50% of the issued equity capital of the company,
● by holding more than 50% of the voting rights in the company,
● by holding the right to appoint the majority of the directors of the company.

Subsidiary Company:
A company, which operates its business under the control of another (holding) company, is known as a
subsidiary company. Examples are Tata Capital, a wholly-owned subsidiary of Tata Sons Limited.

On the Basis of Ownership, companies can be divided into two categories:

Government Company:
“Government company”under Section 2(45) of the Companies Act, 2013 is essentially defined as, that
company in which equal to or more than 51% of the paid-up share capital is held by the Central
Government, or by any State Government or Governments (more than one state’s government), or partly by
the Central Government and partly by one or more State Governments, and includes the company, which is a
subsidiary company of such a Government company.
A government company gives its annual reports which have to be tabled in both houses of the Parliament and
state legislature, as per the nature of ownership.
Some examples of government company are National Thermal Power Corporation Limited (NTPC), Bharat
Heavy Electricals Limited (BHEL), etc.
Non-Government Company:
All other companies, except the Government Companies, are known as Non-Government Companies. They
do not possess the features of a government company as stated above.

Associate companies
The provisions of Section 2 (6) of the Companies Act, 2013 and the Rule 2 of Companies (Specification of
definitions details) Rules, 2014, essentially explains (defines) “associate company” as;
For companies say X and Y, X in relation to Y, where y has a significant influence over X, but X is not a
subsidiary of y and includes joint venture company. Here X is an associate company. Wherein;
1. The expression, “significant influence” means control of at least twenty percent of total voting power,
or control of or participation in business decisions under an agreement.
2. The expression, “joint venture” means a joint agreement whereby the parties that have joint control
of the arrangement have rights to the net assets of the arrangement.
When a company under which some other company holds either 20% or more of share capital, then they
shall be known as Associate Company.
If in case a company is formed by two separate companies and each such company holds 20% of the
shareholding then the new company shall be known as Associate Company or Joint Venture Company. The
Companies Act 2013 for the first time had introduced the concept of the Associate Company or Joint Venture
Company in India through section 2(6). A company must have a direct shareholding of more than 20% and
indirect one is not allowed.
For example, A holds 22% in B and B holds 30% in C. In this case, C company is an associate of B but not of
A.
Kinds of Companies from Diganth Raj Sehgal

Registration & Incorporation of Company

A company comes into existence once it has been correctly incorporated under the provisions of the
Companies Act 2013 or any earlier Companies Act that may apply. This initial step of incorporation is crucial
for any company before it can engage in business transactions. During the incorporation process, several
fundamental decisions need to be made, including whether the company will be classified as a private or
public company, defining the company's objectives, determining the initial capital investment, and addressing
various other important matters.
Section 7 of the Companies Act 2013 outlines the essential documentation required for the incorporation of a
company. These documents need to be submitted to the Registrar of Companies, who will then conduct an
inquiry to ensure that all the necessary paperwork has been correctly filed. Upon the registrar's satisfaction
with the compliance of these requirements, they proceed to retain and register the company's memorandum
of association, along with other pertinent documents. Subsequently, the Registrar of Companies issues a
Certificate of Incorporation, which serves as the company's official "birth certificate." In addition to this
certificate, the Registrar also assigns a corporate identity number, which bestows upon the company the
status of a distinct legal entity.
In essence, the process of incorporation under Section 7 of the Companies Act 2013 honors the official birth
of a company, with the Certificate of Incorporation serving as its legal acknowledgment of existence.

Understanding Registration and Incorporation of a Company

Registration involves the formal recognition of a business entity by the relevant government authorities. It
provides the business with a unique identity and legal standing. The term "incorporation," on the other hand,
specifically refers to the creation of a corporation, which is a distinct legal entity separate from its owners.

What are the documents required for the registration of the company?
A. Documents for Identity Verification
1. Permanent Account Number (PAN)
 2. Choose one from the following as identity proof:
1. Aadhaar Card
2. Passport
3. Driving License
4. Voter Identity Card
B. Documents for Address Verification
1. Telephone Bill or Mobile Bill
2. Electricity Bill or Water Bill
3. A copy of the Bank Passbook with the most recent transaction entry or a Bank Statement (not
exceeding 2 months old)
C. Passport-sized Photographs (3 copies each)
Note: It is essential that all the aforementioned documents are self-attested by the relevant stakeholders.
Additionally, it is recommended to submit the most up-to-date documents and ensure that the telephone bill
is current, while the electricity bill should not be older than 2 months.

The Main Steps of Registration and Incorporation of a Company

Choose a Business Structure:

The first step in this journey is selecting the appropriate business structure. Common choices include sole
proprietorships, Limited Liability Partnership (LLPs), Private Limited Company, One Person Company
(OPC), and Public Limited Company. Each structure has its own set of advantages and disadvantages, so
careful consideration is paramount.

Select Business Name:

The selection of a business name is pivotal. It must be unique and not infringe on existing trademarks. Once a
suitable name is chosen, it needs to be registered with the relevant authorities.

Obtain Director Identification Number (DIN):

The Director Identification Number (DIN) stands as a pivotal document requisite for submission to the
authorities. It serves as a unique identifier for individuals aspiring to assume the role of a company's director.
Acquisition of a DIN is mandatory for those seeking directorship within a company's framework.

Digital Signature Certificate (DSC):

As the process of registering a company is conducted online, it is imperative that the company's stakeholders
possess digital signatures to affix on the numerous forms required for submission through the MCA portal.

Registration on the MCA (Ministry of Corporate Affairs) Portal:

To initiate the company registration process, it is imperative to submit the SPICe+ form along with the
requisite documents through the MCA portal. To facilitate this process seamlessly, the company's director
must first register on the MCA portal and subsequently gain access to a range of electronic services, including
form submission and access to public documents.
Certificate of Incorporation:
Last but certainly not least, once the documents are submitted, the Registrar of Companies examines the
application. If it is successful, the Registrar issues a Certificate of Incorporation of the Company.

Commencement of Business
Every company incorporated with a share capital is obligated to fulfill specific conditions before commencing
business or exercising borrowing powers:
1. The director must submit a declaration in Form INC-20A to the Registrar of Companies (ROC)
within 180 days from the company's incorporation. This declaration, verified by a practicing
Chartered Accountant (CA), Company Secretary (CS), or Cost and Management Accountant
(CMA), confirms that every subscriber to the Memorandum of Association (MOA) has paid the
agreed-upon value of shares at the time of filing.
2. Within 30 days of incorporation, the company must file for verification of its registered office by
submitting Form INC-22 to the ROC.
The process of incorporating a company is facilitated through the SPICe+ form, which can be submitted
online via the MCA website. Once submitted, the ROC will review the form and accompanying documents,
subsequently issuing the Certificate of Registration upon successful examination.

What is Corporate Veil

A company is composed of its members and is managed by its Board of Directors and its employees. When
the company is incorporated, it is accorded the status of being a separate legal entity which demarcates the
status of the company and the members or shareholders that it is composed of. This concept of differentiation
is called a Corporate Veil which is also referred to as the ‘Veil of Incorporation’.

Meaning of Lifting of Corporate Veil

The advantages of incorporation of a company like perpetual succession, transferable shares, capacity to sue,
flexibility, limited liability and lastly the company being accorded the status of a separate legal entity are by
no means inconsiderable, under no circumstance can these advantages be overlooked and, as compared with
them, the disadvantages are, indeed very few.
Yet some of them, which are immensely complicated deserve to be pointed out. The corporate veil protects
the members and the shareholders from the ill-effects of the acts done in the name of the company. Let’s say
a director of a company defaults in the name of the company, the liability will be incurred by the company
and not a member of the company who had defaulted. If the company incurs any debts or contravenes any
laws, the concept of Corporate Veil implies that the members of the company should not be held liable for
these errors.

Basics of Limited Liability

Organizations exist to a limited extent to shield the individual resources of investors or shareholders from
individual obligation for the obligations or activities of a company. Almost opposite to a sole proprietorship in
which the proprietor could be considered in charge of the considerable number of obligations of the
organization, a company customarily constrained the individual risk of the investors. This is why Limited
Liability as a concept is so popular.
Puncturing the Veil of Incorporation commonly works best with smaller privately held companies in which
the organization has few investors, restricted resources, and acknowledgement of the separateness of the
partnership from its investors.
Germany
German corporate law built up various speculations in the mid-1920s for lifting the corporate veil based on
“control” by a parent company over a subsidiary. Today, investors can be held subject on account of an
obstruction devastating the partnership. The company is qualified for at least impartial assets.
Rolf Serick elaborated on the phrase “durchgriffshaftung” in great detail, and numerous observers
emphasised its importance. The independent entity of a firm should be ignored in some situations, as the
courts had already agreed. This does not nullify the legal entity itself, even if the veil is breached.
Durchgriffshaftung refers to situations not governed by statutory or other legal norms in which an entity’s
existence is disregarded and the owner is held personally accountable for the company’s debts.
In general, only if bankruptcy proceedings are started will owners be held personally accountable for the
company’s debts. Hence, durchgriffshaftung is typically seen as a shareholder’s complementary and ultimate
liability. From the perspective of a creditor, a shareholder’s personal obligation arising from penetrating the
veil is irrelevant until the debtor company experiences financial difficulty. The facts indicating a
shareholder’s obligation often don’t surface until such circumstances exist.
German statutes such as Section 13 of the Act on Limited Liability Companies (GmbHG) and Section 1 of the
German Stock Corporation Act (AktG) deal with the principles of the corporate veil and limited liability.

United Kingdom
The corporate veil in UK company law is pierced every once in a while. After a progression of endeavours by
the Court of Appeal during the late 1960s and mid-1970s to set up a straight-jacketed formula for lifting the
veil, the House of Lords reasserted a universal methodology. As indicated by a 1990 case at the Court of
Appeal, Adams v Cape Industries plc, the main genuine “veil piercing” may happen when a company is set
up for false purposes, or where it is set up to avoid a statutory obligation.

Tort Victims and Employees

Tort victims and representatives, who did not contract with an organization or have very inconsistent and
limited dealing power, have been held to be exempted from the standards of limited liability in Chandler v
Cape plc. In this leading case law, the petitioner was a representative of Cape plc’s entirely claimed
subsidiary, which had gone insolvent. He effectively acquired a case of tort against Cape plc for causing him
an asbestos sickness, asbestosis. Arden LJ in the Court of Appeal held that if the parent had meddled in the
activities of the subsidiary in any capacity, for example, over exchanging issues, then it would be connected
with obligation regarding wellbeing and security issues. Arden LJ underscored that piercing the corporate
veil was a bit much in this case. The limitations on lifting the veil, found in legally binding cases had no effect.

“Single Economic Unit” Theory

It is a proverbial standard of English company law that a company is an element isolated and unmistakable
from its individuals, who are at risk just to the degree that they have added to the company’s capital:
Salomon v Salomon. The impact of this standard is that the individual backups inside a combination will be
treated as independent elements and the parent cannot be made obligated for the auxiliaries’ obligations on
insolvency. This standard particularly applies in Scotland.
While on the face of it, it may look like there are a lot of scenarios for “lifting” or “piercing” the veil, judicial
dicta is of the view that the standard in Salomon is liable to special cases are slender on the ground. Lord
Denning MR sketched out the hypothesis of the “single economic unit” – wherein the court analyzed the
overall business task as an economic unit, instead of a strict legal form -in DHN Food Distributors v Tower
Hamlets.
The “single economic unit” hypothesis was in like manner dismissed by the CA in Adams v Cape Industries,
where Slade LJ held that cases, where the standard in Salomon had been circumvented, were just occasions
where they didn’t have a clue what to do. The view communicated at first case by HHJ Southwell QC in
Creasey v Breachwood that English law “unquestionably” perceived the rule that the corporate veil could be
lifted was depicted as a sin by Hobhouse LJ in Ord v Bellhaven, and these questions were shared by Moritt
V-C in Trustor v Smallbone, the corporate veil cannot be lifted only because equity requires it. In spite of the
dismissal of the “equity of the case” test, it is observed from judicial thinking in veil piercing cases that the
courts utilize “fair circumspection” guided by general standards, for example, mala fides to test whether the
corporate structure has been utilized as a simple device.

Perfect Obligation
In the landmark case of Tan v Lim, where an organization was utilized as a “façade” (per Russell J.) or in
common layman terms, to defraud or to swindle the lenders of the respondent and Gilford Motor Co Ltd v
Horne, where an order was conceded against a merchant setting up a business which was simply a vehicle
enabling him to evade a pledge in limitation. The common element in these two cases was the element of
defrauding the other person via the vehicle of the company. The company in fact was set up for absolutely no
other purpose collateral to it. The main purpose was to defraud. Also, in Gencor v Dalby, a suggestive remark
was provided that the corporate veil was being lifted where the organization was having an image exactly
similar to that of the litigant. In reality however, as Lord Cooke (1997) has noted extrajudicially, it is a result
of the different characters of the organization concerned and not regardless of it that value interceded in
these cases. They are not occurrences of the corporate veil being pierced but rather include the utilization of
different standards of law.

Reverse Piercing
There have been cases in which it is to the benefit of the shareholder to have the corporate structure
overlooked. Courts have been hesitant to consent to this. The often referred to case Macaura v Northern
Assurance Co Ltd is an example of that. Mr Macaura was the sole proprietor of an organization he had set
up to develop timber. The trees were devastated by flame yet the back up plan wouldn’t pay since the
strategy was with Macaura (not the organization) and he was not the proprietor of the trees. The House of
Lords maintained that refusal was dependent on the different lawful character of the organization.

Criminal Law
In English criminal law, there have been cases in which the courts have been set up to pierce the veil of
incorporation. For instance, in seizure procedures under the Proceeds of Crime Act 2002 monies gotten by an
organization can, contingent on the specific facts of the case as found by the court, be viewed as having been
‘acquired’ by a person (who is for the most part, yet not generally, a chief of the organization). As a result,
those monies may turn into a component in the person’s ‘advantage’ acquired from a criminal lead (and
consequently subject to seizure from him). The position with respect to ‘piercing the veil’ in English criminal
law was given in the Court of Appeal judgment on account of R v Seager in which the court said:
There was no significant contradiction between directions on the lawful standards by reference to which a
court is qualified for “pierce” or “rip” or “evacuate” the “corporate veil”. It is “hornbook” law that an
appropriately framed and enrolled organization is a different legitimate element from the individuals who are
its shareholders and it has rights and liabilities that are independent of its shareholders. A court can “pierce”
the carapace of the corporate element and see what lies behind it just in specific conditions. It can’t do as
such basically on the grounds that it thinks of it as may be simply to do as such. Every one of these conditions
includes inappropriateness and deceitfulness. The court will at that point be qualified for search for the
legitimate substance, not just simply the structure. With regards to criminal cases, the courts have recognized
at any rate three circumstances when the corporate veil can be pierced. First, if an offender endeavours to
shield behind a corporate façade, or veil to shroud his crime and his advantages from it. Secondly, where the
transaction or business structures comprise a “gadget”, “shroud” or “hoax”, for example, an endeavour to
mask the genuine idea of the transaction or structure to delude outsiders or the courts.

United States
In the United States, corporate veil piercing is the most contested issue in corporate law. Although courts are
hesitant to hold a functioning shareholder at risk for activities that are legitimately the obligation of the
organization, regardless of whether the partnership has a solitary shareholder, they will regularly do as such
if the enterprise was particularly rebellious with corporate customs, to forestall misrepresentation, or to
accomplish value in specific instances of undercapitalization.
To put it plainly, there is no strait-jacketed formula that exists here and the decision entirely depends on
customary law points of reference. In the United States, various hypotheses, most significant “modify the
sense of self” or “instrumentality rule”, endeavored to make a piercing standard. Generally, they rest upon
three essential pillars—namely:
● Unity of Interest and Ownership: This is a situation in which the different personalities of the
shareholder and organization stop to exist.
● Conduct which is Wrongful in Nature: In case the corporation takes steps which are deemed to be
wrongful in nature.
● Proximate Cause: If the company indulges in wrongful conduct, there must be some foreseeable
ramifications that might be arising out of it, so the party which is actually seeking the piercing of the
corporate veil must have suffered some harm arising out of the wrongful conduct of the corporation.
Despite all these guidelines laid out, the speculations neglected to explain a genuine methodology which courts
could legitimately apply to their cases. Accordingly, courts battled with the confirmation of every
circumstance and rather examine every given factor. This is known as “totality of circumstances”.
Another apparent question here is to decide the jurisdiction of a corporation if the business of the corporate
entity is not limited to just one state. All enterprises have one place of business where they were initially set
up and incorporated, (their “home” state) to which they are incorporated as a “household” company, and in
the event that they work in different states, they would apply for power to work together in those different
states as a “remote” organization. In deciding if the corporate veil might be pierced, the courts are required
to utilize the laws of the company’s home state and not the numerous other states that they might be doing
business in.
This issue, at first sight, may not look like a big thing to worry about but sometimes it can be huge; for
instance, Californian law is progressively liberal in enabling a corporate veil to be pierced, the standards that
the Californian Corporate Law has set in terms of scenarios under which the Veil can be pierced are quite
many in number and even if an organisation simply encroaches wrongdoing, the Courts might order for the
Piercing of the Veil, while the laws of neighbouring Nevada are quite strict when it comes to piercing the veil.
The law in Nevada may allow the veil to be pierced only under exceptional circumstances and thus it makes
doing such things increasingly troublesome.
Therefore, the owner(s) of an organization working in California would be liable to various potential for the
company’s veil to be pierced if the enterprise was to be sued, contingent upon whether the partnership was a
California residential partnership or a Nevada remote organization working in California.
By and large, the offended party needs to demonstrate that the incorporation was only a formality and there
was nothing more to it and that the enterprise dismissed corporate customs and conventions, for example,
using the voting method to approve the daily decisions of the corporate entity. This is regularly the situation
when an enterprise confronting lawful obligation moves its benefits and business to another company with a
similar administration and shareholders. It likewise occurs with single individual enterprises that are
overseen in a random way. All things considered, the veil can be pierced in both common cases and where
administrative procedures are taken against a shell enterprise.

Factors for courts to consider

Variables that a court may think about when deciding whether or not to pierce the Corporate Veil include the
things that are laid out below:
● Non-appearance/Absence or mistake of corporate records;
● In case the members of the corporation are misrepresented or concealed;
● Inability to look at corporate conventions regarding conduct and documentation;
● Mixing of advantages enjoyed by the enterprise and the shareholder;
● Control of assets or liabilities to concentrate them;
● Non-working corporate officials as well as chiefs;
● Noteworthy undercapitalization of the business (capitalization necessities fluctuate depending on the
industry, area, and specific conditions of the corporation which may vary from one company to the
other);
● Directing of corporate assets by the predominant shareholder(s);
● Treatment by a person of the advantages of partnership as his/her own;
 ● Was the enterprise being utilized as a “façade” for predominant shareholder(s) individual dealings
like we have already seen in the article that some companies are set up only to defraud other persons
or corporations and their incorporation serves absolutely no other purpose.
It is essential to take note that not all these elements should be met altogether for the court to pierce the
corporate veil. Even if the corporation indulges in a few of the aforementioned bulleted provisions, it is well
under the radar for getting its veil pierced. Further, a few courts may locate that one factor is so convincing
in a specific case that it will discover the shareholders at risk. For instance, numerous enormous
organizations don’t pay profits, with no recommendation of corporate inappropriateness, however, especially
for a partnership firm which is small the inability to pay profits may propose monetary impropriety.

Internal revenue service

Lately, the Internal Revenue Service (IRS) in the United States has utilized corporate veil-piercing
contentions and rationale as a method for recovering salary, domain, or blessing tax revenue, especially from
business entities which are incorporated for the sole reason of bequest arranging purposes. Various U.S. Tax
Court cases including Family Limited Partnerships (FLPs) show the IRS’s utilization of veil-piercing
arguments. Since proprietors of U.S. business substances made for resource security and home purposes
frequently neglect to keep up legitimate corporate consistency, the IRS has accomplished various prominent
court triumphs and victories.

Reverse piercing
Inverted veil piercing is the point at which the obligation of a shareholder is credited to the organization. All
through the United States, the general guideline is that turn-around veil piercing isn’t allowed. However, the
California Court of Appeals has permitted inverted veil piercing against a limited liability company (LLC) in
view of the distinction in cures accessible to lenders with regards to joining resources of an account holders’
LLC when contrasted with connecting resources of an enterprise.

Whether fundamental rights can be claimed by the corporations

The two key issues at stake in the two significant Supreme Court cases involving the doctrine of the lifting of
the corporate veil were whether corporations can assert their claim to fundamental rights and whether the
corporate veil might be pierced in order to do so.

State Trading Corporation v. The Commercial Tax Officer (1963)

In this case, the State Trading Corporation, a government entity registered under the Indian Companies Act,
requested relief from the States of Andhra Pradesh and Bihar by issuing a writ of certiorari or other
appropriate writ or direction for quashing the order of the commercial tax officers of the states in question,
assessing the corporation to sales tax and also for quashing. The respondents submitted a few preliminary
objections questioning the maintainability of the petitions under Article 32 of the Indian Constitution when
the Attorney General filed the case for the petitioners.
Two of those initial concerns were:
1. Whether the State Trade Company, a business licenced to operate under The Companies Act of 1956,
qualified as a citizen under Article 19 and qualified to request the observance of fundamental rights,
and
2. Whether the State Trading Corporation was, despite the formality of incorporation under the
Companies Act, in fact, a department and an organ of the Government of India, with the entirety of
its capital contributed by the government, and whether it could assert that it had the authority to
enforce fundamental rights under Part III of the Constitution against the state as defined in Article
12 of that Constitution.

Tata Engineering and Locomotive Company Ltd. v. State of Bihar (1965)

In the Tata Engineering and Locomotive Company Ltd. case (1965), the petitioners were a company that had
been registered under the Indian Companies Act, 1913, and that was engaged in the manufacturing of, among
other things, diesel truck and bus chassis, as well as their spare parts and accessories, in Jamshedpur, Bihar.
The business offers these items to dealers, state transportation agencies, and other companies operating in
different states. Bombay served as the petitioners’ registered office. The petitioners have entered into
dealership arrangements with various people to promote their trade around the nation.
In order to conduct business in various regions of India, the petitioners used the appropriate sections of the
dealership agreements to sell their products to the dealers. As a result, the petitioners sell their automobiles to
consumers, state transportation agencies, and dealers. The petitioners, in this case, argued that because their
purchases were made in the course of interstate commerce, they were exempt from paying sales tax.
On the other side, the sales tax officer argued that because the transactions had taken place within the
boundaries of the State of Bihar and were, therefore, intra-state sales, they were subject to assessment under
the Bihar Sales Tax Act, 1956. The petitioners had been warned by the sales tax officer that if they failed to
pay the sales tax, he would take the appropriate legal action. The majority of the company’s stockholders
were and still are Indian nationals. In this case, the petitioners also cited Article 32.

Concluding remarks for both cases

Hence, the 1965 case involved a privately owned firm, but the 1963 case included a government-owned one.
Nonetheless, both of the companies were registered under the Indian Companies Act. In both instances, the
court refused to pierce the corporate veil and acknowledged that the shareholders were the ones who had
filed the Article 32 motion. This is due to the fact that it would actually imply that what businesses cannot
accomplish directly, they may accomplish indirectly by depending on the notion of lifting the veil.
The Supreme Court declined to pierce the veil in the aforementioned cases not because it was thought to be
against judicial principles but rather because, in their Lordships’ opinion, the veil could not be lifted in order
to grant companies fundamental rights. Then, may it have been lifted in another way? No, not always.
Nothing could have been a more practical, wise, and sinful way to raise the curtain if it had ever been lifted in
order to provide companies with fundamental rights.

Whether fundamental rights can be claimed by the corporations

The two key issues at stake in the two significant Supreme Court cases involving the doctrine of the lifting of
the corporate veil were whether corporations can assert their claim to fundamental rights and whether the
corporate veil might be pierced in order to do so.

State Trading Corporation v. The Commercial Tax Officer (1963)

In this case, the State Trading Corporation, a government entity registered under the Indian Companies Act,
requested relief from the States of Andhra Pradesh and Bihar by issuing a writ of certiorari or other
appropriate writ or direction for quashing the order of the commercial tax officers of the states in question,
assessing the corporation to sales tax and also for quashing. The respondents submitted a few preliminary
objections questioning the maintainability of the petitions under Article 32 of the Indian Constitution when
the Attorney General filed the case for the petitioners.
Two of those initial concerns were:
1. Whether the State Trade Company, a business licenced to operate under The Companies Act of 1956,
qualified as a citizen under Article 19 and qualified to request the observance of fundamental rights,
and
2. Whether the State Trading Corporation was, despite the formality of incorporation under the
Companies Act, in fact, a department and an organ of the Government of India, with the entirety of
its capital contributed by the government, and whether it could assert that it had the authority to
enforce fundamental rights under Part III of the Constitution against the state as defined in Article
12 of that Constitution.

Tata Engineering and Locomotive Company Ltd. v. State of Bihar (1965)

In the Tata Engineering and Locomotive Company Ltd. case (1965), the petitioners were a company that had
been registered under the Indian Companies Act, 1913, and that was engaged in the manufacturing of, among
other things, diesel truck and bus chassis, as well as their spare parts and accessories, in Jamshedpur, Bihar.
The business offers these items to dealers, state transportation agencies, and other companies operating in
different states. Bombay served as the petitioners’ registered office. The petitioners have entered into
dealership arrangements with various people to promote their trade around the nation.
In order to conduct business in various regions of India, the petitioners used the appropriate sections of the
dealership agreements to sell their products to the dealers. As a result, the petitioners sell their automobiles to
consumers, state transportation agencies, and dealers. The petitioners, in this case, argued that because their
purchases were made in the course of interstate commerce, they were exempt from paying sales tax.
On the other side, the sales tax officer argued that because the transactions had taken place within the
boundaries of the State of Bihar and were, therefore, intra-state sales, they were subject to assessment under
the Bihar Sales Tax Act, 1956. The petitioners had been warned by the sales tax officer that if they failed to
pay the sales tax, he would take the appropriate legal action. The majority of the company’s stockholders
were and still are Indian nationals. In this case, the petitioners also cited Article 32.

Concluding remarks for both cases

Hence, the 1965 case involved a privately owned firm, but the 1963 case included a government-owned one.
Nonetheless, both of the companies were registered under the Indian Companies Act. In both instances, the
court refused to pierce the corporate veil and acknowledged that the shareholders were the ones who had
filed the Article 32 motion. This is due to the fact that it would actually imply that what businesses cannot
accomplish directly, they may accomplish indirectly by depending on the notion of lifting the veil.
The Supreme Court declined to pierce the veil in the aforementioned cases not because it was thought to be
against judicial principles but rather because, in their Lordships’ opinion, the veil could not be lifted in order
to grant companies fundamental rights. Then, may it have been lifted in another way? No, not always.
Nothing could have been a more practical, wise, and sinful way to raise the curtain if it had ever been lifted in
order to provide companies with fundamental rights.

Development of the Concept of “Lifting of Corporate Veil”

Once a company is incorporated, it becomes a separate legal identity. An incorporated company, unlike a
partnership firm which has no identity of its own, has a separate legal identity of its own which is
independent of its shareholders and its members.
The companies can thus own properties in their names, become signatories to contracts etc. According to
Section 34(2) of the Companies Act, 2013, upon the issue of the certificate of incorporation, the subscribers to
the memorandum and other persons, who may from time to time be the members of the company, shall be a
body corporate capable of exercising all the functions of an incorporated company having perpetual
succession. Thus the company becomes a body corporate which is capable of immediately functioning as an
incorporated individual.
The central focal point of Incorporation which overshadows all others is a distinct legal entity of the
Corporate organisation.

Solomon v Solomon
What the milestone case Solomon v Solomon lays down is that “in inquiries of property and limitations of acts
done and rights procured or liabilities accepted along these lines… the characters of the common people who
are the organization’s employees is to be disregarded”.

Lee v Lee’s Air Farming Ltd

In Lee v Lee’s Air Farming Ltd., Lee fused an organization which he was overseeing executive. In that limit
he named himself as a pilot/head of the organization. While on the matter of the organization he was lost in a
flying mishap. His widow asked for remuneration under the Workmen’s Compensation Act. At times, the
court dismisses the status of an organization as a different lawful entity if the individuals from the
organization attempt to exploit this status. The aims of the people behind the cover are totally uncovered.
They are made to obligate for utilizing the organization as a vehicle for unfortunate purposes.
The King v. Portus Ex Parte Federated Clerk Union of Australia
In this case, Latham CJ while choosing whether or not workers of a company which was incorporated in the
name of the Federal Government were not employed by the Federal Government decided that the company
possesses a distinct identity from that of its shareholders. The shareholders are not at risk to banks for the
obligations of the company. The shareholders don’t claim the property of the company.

Life insurance corporation of India v Escorts Ltd.

“It is neither fundamental nor alluring to count the classes of situations where lifting the veil is admissible,
since that must essentially rely upon the significant statutory or different arrangements, an outcome which is
tried to be achieved, the poor conduct, the element of public interest, the impact on parties who may be
affected by the decision, and so forth.”
This was reiterated in this particular case.

Circumstances under which the Corporate Veil can be Lifted

There are two circumstances under which the Corporate Veil can be lifted. They are:
1: Statutory Provisions
2: Judicial Interpretations

Statutory Provisions

Section 5 of the Companies Act, 2013

This particular section characterizes the distinctive individual engaged in a wrongdoing or a conduct which is
held to be wrong in practice, to be held at risk in regard to offenses as ‘official who is in default’. This section
gives a rundown of officials who will be at risk to discipline or punishment under the articulation ‘official
who is in default’ which includes within itself, an overseeing executive or an entire time chief.

Section 45 of the Companies Act, 2013

Reduction of membership beneath statutory limit: This section lays down that if the individual count from an
organization is found to be under seven on account of a public organization and under two on account of a
private organization (given in Section 12) and the organization keeps on carrying on the business for over
half a year, while the number is so diminished, each individual who knows this reality and is an individual
from the organization is severally at risk for the obligations of the organization contracted during that time.

Madan lal v. Himatlal & Co.

In this case, the respondent documented a suit against a private limited company and its directors because he
had to recover his dues. The directors opposed the suit on the ground that at no time did the company carried
on business with individual count which was to go below the statutory minimum and in this manner, the
directors couldn’t be made severely at risk for the obligation being referred to. It was held that it was for the
respondent being dominus litus, to choose the people himself who he wanted to sue.

Section 147 of the Companies Act, 2013

Misdescription of name: Under sub-section (4) of this section, an official of an organization who signs any bill
of trade, hundi, promissory note, check wherein the name of the organization isn’t referenced in the way that
it should be according to statutory rules, such official can be held liable on the personal level to the holder of
the bill of trade, hundi and so forth except if it is properly paid by the organization. Such case was seen on
account of Hendon v. Adelman.
Section 239 of the Companies Act, 2013
Power of inspector to explore affairs of another company in the same gathering : It gives that in the event
that it is important for the completion of the task of an inspector instructed to research the affairs of the
company for the supposed wrong-doing, or a strategy which is to defraud its individuals, he may examine into
the affairs of another related company in a similar group.

Section 275 of the Companies Act, 2013

Subject to the provision of Section 278, this section provides that no individual can be a director of in excess
of 15 companies at any given moment. Section 279 furnishes for a discipline with fine which may reach out to
Rs. 50,000 in regard of every one of those companies after the initial twenty.

Section 299 of the Companies Act, 2013

This Section emphasises and offers weightage to the existing proposal of the Company Law Committee: “It is
important to see that the general notice which a director is bound to provide for the company of his interest
for a specific company or firm under the stipulation to sub-section (1) of Section 91 which is ought to be given
at a gathering of the directors or find a way to verify that it is raised and read at the following gathering of
the Board after it is given. The section not only applies to public companies but also applies to private
companies. Inability to consent and act in consonance to the necessities of this Section will cause termination
the Director and will likewise expose him to punishment under sub-section (4).

Section 307 & 308 of the Companies Act, 2013

Section 307 applies to each director and each regarded director. The register of the shareholders should
contain in it, not just the name but also how much shareholding, the description of shareholding and the
nature and extent of the right of the shareholder over the shares or debentures.

Section 314 of the Companies Act, 2013

The object of this section is to restrict a director and anybody associated with him, holding any business
which provides compensation if the company supports it.

Section 542 of the Companies Act, 2013

Pretentious Conduct: If over the span of the winding up of the company, it gives the idea that any business of
the company has been continued with goal to defraud the creditors of the company or some other individual
or for any deceitful reason, the people who were intentionally aware of this and still agreed to the carrying on
of the business, in the way previously mentioned, will be liable on a personal level without incurring the
liabilities of the company, and will be liable in a manner as the court may direct.
In Popular Bank Ltd, it was held that Section 542 seems to leave the Court with attentiveness to make an
assertion of risk, in connection to ‘all or any of the obligations or liabilities of the company’.

Judicial interpretations and pronouncements

Instances are not few in which the courts have resisted the temptation to break through the Corporate Veil.
But the theory cannot be pushed to unnatural limits. Circumstances must occur which compel the court to
identify a company with its members. A company cannot, for example, be convicted of conspiring with its sole
director. Other than statutory arrangements for lifting the corporate veil, courts additionally do lift the
corporate veil to see the genuine situation. A few situations where the courts lifted the veil are laid down
below as per the following case laws:
United States v. Milwaukee Refrigerator Transit Company
In this leading case law, the U.S. Supreme Court held that where a company is solely set up to defeat the
statutory norms, justify the wrongdoings of the people of the company who use this corporate entity as a
vehicle for the wrongdoing, where defrauding isn’t a collateral purpose of the company but the main purpose,
the law will not see the company as a separate legal entity but will see it as an association of the members that
it is made up of.
Early examples where the English and Indian Courts neglected the guidelines built up by the landmark
Salomon’s ruling are:

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd
In a great deal of cases, it ends up being important to check the character of an organization, to check
whether it is a companion or a foe of the country the business is set up in. A milestone managing in this field
was spread out in Daimler Co Ltd v Continental Tire and Rubber Co Ltd. The facts of the case are
referenced below:
An organization was set up in England and it was set up to sell tires which were thus made by a German
organization in Germany. Most of the control in the British organization was held by the German
organization. The holders of the rest of the shares with the exception of one, and every one of the chiefs were
German, dwelling in Germany. In this way the genuine control of the English organization was in German
hands. During the First World War, the English organization started an activity to recover an exchange
obligation. What’s more, the inquiry was whether the organization had turned into an adversary
organization and should, accordingly, be banned from keeping up the activity.
The House of Lords laid out that an organization consolidated in the United Kingdom is a lawful entity. It’s
anything but a characteristic individual with brain or inner voice. It can nor be anyone’s companion nor foe
yet it might accept a foe character when people in ‘true’ control of its issues are inhabitants in any adversary
nation or, any place the occupants are, are acting under the control of the foes. Just in case the activity had
been permitted, the organization would have been utilized as a means by which the motivation behind
offering cash to the foe would be practiced.
That would be incredibly against open arrangement. But in case there was no such fear, the courts may
decline to tear open the Corporate Veil.

People’s Pleasure Park Co v. Rohleder

In People’s Pleasure Park Co v Rohleder, certain terrains were moved by one individual to another
interminably ordering the transferee from offering the said property to hued people. He moved the property
to an organization made only out of Negroes.
An activity was started for dissolution of this movement on the ground that every one of the individuals from
the organization being Negroes, the property had, in break of the confinement, go to the hands of the hued
people. The court rejected the contention and held that the individuals exclusively or all in all are not the
partnership, which “has a particular presence separate from that of its investors.

Dinshaw Maneckjee Petit, Re.

The court has the ability to slight and infer the corporate substance in case that it is utilized for tax avoidance
purposes or to go around expense commitment. An unmistakable and appropriate description of this
situation is given in Dinshaw Maneckjee Petit, Re. The assessee was an affluent man getting a charge out of
tremendous profit and intrigue pay. He shaped four privately owned businesses and concurred with each to
hold a square of speculation as an operator for it. Pay was credited in the records of the organization yet the
organization gave back the sum to him as an imagined advance.
Further, he isolated his pay into four sections in an attempt to lessen his assessment obligation. It was held
that the organization was shaped by the assessee absolutely and basically as a method for maintaining a
strategic distance from super-charge and the organization was just the assessee himself. It did no business
however was made essentially as a legitimate substance to apparently get the profits and interests and to hand
them over to the assessee as imagined credits.
Government Companies
An organization may some time be viewed as an operator or trustee of its individuals or of another
organization and may, accordingly, be esteemed to have lost its distinction for its head. In India, this inquiry
has regularly emerged regarding Governmental organizations. Countless privately owned businesses for
business purposes have been enrolled under the Companies Act with the president and a couple of different
officials as the investors.
The undeniable preferred position of framing an administration organization is that it gives the exercises of
the State “a tad bit of the opportunity which was appreciated by private partnerships and the legislature got
away from the standards which hampered activity when it was finished by an administration division rather
than an administration enterprise. At the end of the day, it gave the administration portion of the robes of the
person”.
So as to guarantee this opportunity, the Supreme Court has repeated in various cases that an administration
organization isn’t an office or an augmentation of the state. It’s anything but a specialist of the State. As need
be, its representatives are not government workers and right writs can’t issue against it. In one of the cases,
the court commented:
“The organization being a non-statutory body and one consolidated under the Companies Act there was
neither a statutory nor an open obligation forced on it by a resolution in regard of which requirement could
be looked for by methods for the writ of Mandamus”.
The Madhya Pradesh High Court regarded a Government company to be a separate entity for the purpose of
enabling a Development Authority to subject it to development tax. The assets of a Government company
were held to be not exempt from payment of non-agricultural assessment under an AP legislation. The
exemption enjoyed by the Central Government property from State taxation was not allowed to be claimed
by a Government company.

Gilford Motor Co v Horne.

The corporate entity is wholly incapable of being strained to an illegal or fraudulent purpose. The courts will
refuse to uphold the separate existence of the company where the sole reason of it being formed is to defeat
law or to avoid legal obligations. Some companies are just set up simply to defraud their customers or to act
in a way which is against the statutory guidelines. This was clearly illustrated in the landmark ruling Gilford
Motor Co v Horne. The case of the facts are laid out below:
The litigant was selected as an overseeing chief of the company of the plaintiff depending on the prerequisite
condition that he will not, whenever he will hold the workplace of an organisation in which he will oversee the
executive work subsequently, open a business similar to the one which he was presently leaving or give the
clients of the previous. His work was resolved under an understanding that is mentioned above. In the blink
of an eye thereafter he started a business in the name of his wife the role of which was exactly what he had
been prohibited to do according to the aforementioned contract. The new business was definitely a competing
business and it was soliciting the customers of its previous business which was clearly a provision that was
going against what he had agreed to before he left the job in the previous company.It was held that the
organization was clearly based on conflicting terms that the defendant had agreed upon.
The respondent organization was an insignificant channel utilized by Horne to empower him, for his very
own advantage, to acquire the upside of the clients of the offended party organization, and that the litigant
organization should be limited just as Horne.
Where an individual obtain cash from an organization and put it in offers of three distinct organizations in all
of which he and his children were the main individuals, the loaning organization was allowed to join the
advantages of such organizations as they were made uniquely to dupe the loaning organization.

Re, FG (Films) Ltd

In this case, the court would not propel the leading group of film censors to enlist a film as an English film,
which was in truth created by a ground-breaking American film organization for the sake of an organization
enrolled in England so as to dodge certain specialized troubles. The English organization was made with an
apparent capital of just a mere 100 pounds, comprising of 100 shares of which 90 were held by the American
president of the organization. The Court held that the real producer of the movie was the American
organization and that it would be a sham to hold that the American organization and American president
were simply operators of the English organization for delivering the film.
Jones v. Lipman
In this case, the merchant of a real estate property tried to dodge the particular execution of a contract for
the clearance of the land by passing on the land to a company which he shaped for the reason and along these
lines, he attempted to abstain from finishing the property deal of his home to the offended party. Russel J.
depicting the company as a “devise and a hoax, a veil which he holds before his face and endeavors to stay
away from acknowledgment by the eye of equity” and requested both the litigant and his company explicitly
to fulfil the obligations of the contract to the offended party.

Tata Engineering and Locomotive Co. Ltd. State of Bihar

In this case, it was expressed that a company is likewise not permitted to file a case in the name of
fundamental rights by calling itself a collection of individuals who possess the fundamental rights. When a
company is framed, its business is the matter of an incorporated body therefore shaped and not of the people
that it is composed of and the privileges of such body must be made a decision on that balance and can’t be
made a decision on the supposition that they are the rights owing to the matter of the individual that are a
part of the organisation.

N.B. Finance Ltd. v. Shital Prasad Jain

In this case, the High Court of Delhi allowed to the offended party organization a stay order which restrained
the company of the defendant from alienating the properties that they owned on the ground that the
defendant had borrowed money fraudulently from the plaintiff companies and the defendant had purchased
properties in the name of the defendant companies. The court in this case did not award protection under the
piercing of the corporate veil.

Shri Ambica Mills Ltd. v. State of Gujarat

Although the names of the petitioners of the case were not expressly mentioned, they were still held to be the
parties to the proceedings. Also the managing directors couldn’t be said to be complete outsiders to the
company petition although they in their individual limit might not be parties to such proceedings but in their
official capacities, they are certainly capable of representing the company in such matters.

Approach of the Indian Courts in the 21st Century

Subhra Mukherjee v. Bharat Coking Coal Ltd.

In this situation, Hoax or façade is being talked about. A private coal company sold its real estate to the
spouses of executives before nationalization of the company. Truth be told,archives were tweaked and back-
dated to corroborate that the deal of the selling of the real estate to the wives of the directors was before
nationalization of the company. Where such exchange is claimed to be a hoax and deceitful, the Court was
supported in piercing the veil of incorporation to discover the genuine idea of the exchange as to realize who
were the genuine parties to the deal and whether it was real and in good faith or whether it was between the
married couples behind the façade of the different entity of the company.

Bajrang Prasad Jalan v. Mahabir Prasad Jalan

This case is about a Subsidiary Holding Company. The court, to consider an objection of mistreatment held
that the corporate veil can be lifted in the instances of not simply of a holding company, but also its
subsidiary when both are belonging to the parent organisation.

Singer India v. Chander Mohan Chadha

The idea of a corporate entity was advanced and endorsed to empower the trade,commerce and business
scene and not to cheat the general population. In case where the court finds out that the corporate entity was
not properly made use of, was set up only for illegal purposes, the court has every right to pierce the Veil and
therefore see who actually was behind the Veil using the company as a vehicle for undesirable purposes.

Saurabh Exports v. Blaze Finance & Credits (P.) Ltd.

Defendant no. 1 was a private limited company. Defendant no. 2 and 3 were the directors of that company.
Defendant no. 4 was the husband of Defendant-3 and the sibling of Defendant -2. On the basis of alleged
representation of Defendant-4 that Defendant-1 company was welcoming momentary deposits at great
interest rates, the offended party deposited a sum of Rs. 15 lakhs in the company for a time of six months. At
the point when the company neglected to pay the sum, the offended party sued it for the said sum alongside
interest. Defendant-2 and Defendant-3 denied their risk on the grounds that they couldn’t have been made
personally liable under any circumstance as the sum was deposited in the name of the company and not in the
name of the directors of the company.
D-4 denied the risk on the ground that it had nothing to do with him as he was neither a director of the
company nor a shareholder of the company so he had absolutely no role whatsoever in the case. It was held
that Defendant-3 being a housewife had little task to carry out and hence couldn’t be made at risk. The
offended party was looked to be put under the cloak of a corporate entity of Defendant-1 and, in this way, the
corporate veil was lifted contemplating that Defendant-1 was just a family setting of the rest of the
defendants. Defendant-2 was maintaining the business for the sake of the company. So Defendant-1 and
Defendant-2 were both liable on a personal level.

Universal Pollution Control India (P.) Ltd. v. Regional Provident Fund Commissioner
This is an instance of ‘default in payment of the provident fund of the employee’’- Certain sum was expected
and payable to the provident fund office by the sister concern of the company of the plaintiff, a demand was
made by the defendant from the company of the petitioner on the ground that both the companies had two
directors in common. It was held that the dispute raised by the respondent that the Court should lift the
corporate veil and affix the obligation on the applicant was with no benefits and was unjustifiable. Both the
companies were distinct legal entities under the provisions of the Companies Act and there was no
arrangement under the Provident Fund Act that a risk of one organization can be secured on the other
organization even by lifting the corporate veil, which is why this exercise would have been considered futile.

Richter Holding Ltd. v. The Assistant Director of Income Tax

Richter Holdings Ltd., a Cypriot company and West Globe Limited, a Mauritian company bought all shares
of Finsider International Co. Ltd. (FICL), a U.K. company from Early Guard Ltd. another U.K. company.
FICL held 51% shares of Sesa Goa Ltd. (SGL), an Indian company. The Tax Department issued a show
cause notice to Petitioner claiming that the Petitioner had by implication obtained 51% in Sesa Goa Ltd and
was, subsequently, obligated to deduct tax at source before making installment to Early Guard Limited.
The Income Tax Department battled that according to Section 195 of the Act, the Petitioner is at risk to
deduct tax at source in regard of installment made for the buy of the capital resource. The High Court of
Karnataka held that the Petitioner should answer to the show-cause notice issued by the Tax department and
urge every one of their disputes before it. The High Court additionally stressed that the reality of finding
authority (Tax Department) may lift the corporate veil to investigate the genuine idea of the exchange to find
out the fundamental actualities.
The angle that merits more noteworthy consideration is that the Karnataka High Court shows a distinct
fascination for lifting the corporate veil. This has various ramifications. Initially, the Richter Holding Case
broadens significantly further the extent of the standards laid out in the Vodafone Case. For instance, in the
Vodafone case, the Bombay High Court did not consider lifting the corporate veil to force taxation if there
should arise an occurrence of transfers made by indirect measures.
Secondly, it isn’t obvious from the judgment itself whether the tax experts propelled the contention with
respect to lifting the corporate veil. For the most part, courts concede to the sacredness of the corporate
structure as a different legitimate personality and are moderate to lift the corporate veil, as proven by Adams
v. Cape Industries , except if one of the built-up grounds exist.
Balwant Rai Saluja v. Air India Ltd. (2014)
A three-judge Supreme Court bench recently addressed a number of significant issues regarding whether, if
ever, it is permissible to lift the corporate veil in its decision in Balwant Rai Saluja v. Air India Ltd. (2014). It
is significant to take into account Lord Sumption’s recent ruling in the UK case of Prest v. Petrodel
Resources Ltd. (2013) in this context. The Indian Supreme Court’s acknowledgement that the corporate veil
should rarely be lifted is commendable, even though it does not support exactly the same standards as did
Lord Sumption.
The Supreme Court properly notes that the six criteria outlined by Munby J. in Ben Hashem v. Ali Shayif
(2008) have come to dominate the law on the issue, which was also approved by Lord Sumption in the Prest
case. This is good news because it indicates that the Supreme Court is indirectly challenging the far broader
justifications for lifting the veil in the past.
Using the “piercing the veil” doctrine, a court may overlook a company’s distinct legal identity and hold those
who have actual control over it accountable. However, this principle has been and should be used sparingly,
that is, only in situations where it is obvious that the firm was merely a camouflage or sham that the people in
control of the said corporation purposefully formed in order to avoid liability.
The veil must be lifted sparingly by the courts, and the current facts would not be a suitable instance in which
to do so. Therefore, only having ownership or control is insufficient to lift the veil of incorporation. It must be
proven that Air India’s interference and improper behaviour deprived the appellants-workers in this case of
their legal rights.

Whether arbitral tribunals have the power to lift the corporate veil
The issue of the arbitrator’s authority to lift the corporate veil has been addressed in a number of cases
during the past few years by the Supreme Court, the High Courts of Bombay and Delhi, and other courts. In
the absence of a ruling by the full or constitutional bench of the Supreme Court, the case law has been
contradictory in how it has addressed the issue.
According to chronological order, the case of Indowind Energy Ltd. v. Wescare (I) Ltd. (2010) was the first to
have briefly addressed the issue. The Court, in this case, recognised that Indowind, which was not a party to
the arbitration agreement but was being forced to arbitrate by Wescare, did not act in a way that indicated
its assent to engaging in the arbitration. The existence of a legitimate arbitration agreement between Subuthi
and Wescare was not regarded as important. In this instance, the Court observed that the requirements for
lifting the corporate veil had not been satisfied. It was emphasised that non-signatories could not be bound by
an arbitration agreement, despite the fact that the ability of an arbitrator to lift the corporate veil was not
addressed.
The judgement in Purple Medical Solutions (P) Ltd. v. MIV Therapeutics Inc. (2015) was the next case to
explore how lifting the corporate veil intersects with the Company Act and the Arbitration Act. Neither one
of the two respondents in the current case was a signatory to the arbitration agreement with the petitioner,
but the petitioner nonetheless requested the appointment of an arbitrator on their behalf. The second
respondent sought to be charged due to the fact that the first respondent simply served as the second’s
corporate guise and carried out all transactions on the second’s behalf. The second respondent’s corporate
veil was lifted by a single Supreme Court judge, who also chose an arbitrator on its behalf. It’s crucial to
remember that the court lifted the corporate veil in this case and then appointed the arbitrator after doing
the same. While this case clarifies the law about whether a court can remove the corporation’s veil during an
arbitration procedure, it says nothing about an arbitrator’s ability to do the same.
By far, the most significant case addressing the issue at hand is Sudhir Gopi v. Indira Gandhi National Open
University (2017), and it merits a more thorough study. The judgement begins by stating that an arbitral
tribunal is a creation of consent and that the parties’ agreement limits its jurisdiction. This restricted
jurisdiction does not give it the authority to arbitrate on behalf of someone who hasn’t given their consent.
With this limited justification, the Court came to the conclusion that the arbitral tribunal lacked the
authority to lift the corporate veil. According to the ruling, the court may bind non-signatories to an
agreement under specific conditions. It references the Chloro Controls ruling as it cites the two scenarios,
implied consent and contempt for corporate personality, that were previously explored. This is done with the
goal of highlighting the fact that courts have the authority to bind non-signatories when certain requirements
are met. The case cites ONGC v. Jindal Drilling & Industries Ltd. (2015) as support for the finding that the
arbitral tribunal’s authority is limited and that only a court, not an arbitral tribunal, has the authority to lift
the corporate veil. Other cases include Great Pacific Navigation (Holdings) Corp. Ltd. v. M.V. Tongli Yantai
(2011) and Balmer Lawrie v. Balmer Lawrie Workers’ Union (1985). The Court then went on to draw
comparisons between the facts of this case and several other cases on related issues before restating that the
Arbitral Tribunal would not have the authority to lift the corporate veil.
A different Delhi High Court single-judge bench, however, reached a different conclusion and upheld the
Sudhir Gopi decision as per incuriam. The High Court upheld relief in GMR Energy Ltd. v. Doosan Power
Systems India (P) Ltd. (2017) by rejecting the argument that the Arbitral Tribunal has the authority to lift
the corporate veil. It took note of the types of conflicts that were determined to be unresolvable by arbitration
in A. Ayyasamy v. A. Paramasivam (2016) and pointed out that uncovering the corporate veil did not fit
under any of the listed categories. The Court concluded its observation on this specific matter by noting that
the Arbitral Tribunal and the court can both decide on the matter of alter ego.
In a recent judgement by the Delhi High Court, Delhi Airport Metro Express Private Limited v. Delhi Metro
Rail Corporation Ltd. (2021), the Delhi Metro Rail Corporation’s corporate veil was recently broken or lifted
by the Hon’ble High Court in an intriguing ruling. The Union Ministry of Housing and Urban Affairs and the
Government of the National Capital Territory of Delhi (Union Government and GNCTD, respectively) were
found to be the two major shareholders in DMRC, and the Court determined that they are each responsible
for paying off DMRC’s debt as a result of an arbitral award that was made against it. The DMRC needed to
be able to discharge its liabilities that had developed after it received an arbitral decision, so the Hon’ble
High Court of Delhi was petitioned to weigh in on whether the corporate veil-piercing theory needed to be
used. The Hon’ble High Court of Delhi also decided whether relief might be requested in an execution
procedure against a party who wasn’t a party to the original award or decree. The High Court then gave its
opinion on the relevant situation, defending the necessity of applying the corporate veil principle in the
absence of any allegations of deception, façade, or evasion of taxes or any other duties. According to the
Court, the notion of piercing the corporate veil was not only appropriate in the aforementioned situations but
could also be used when equity and the ends of justice were called for.
However, in the absence of a ruling by a full or constitutional bench of the Supreme Court, the legal position
of the proposition is still up for debate. It is essential that the government take the initiative and publish
guidelines or rules that make it clear that arbitrators have the required authority to decide on matters of
company law.

Conclusion
It ought to be noticed that the rule of Salomon v. A. Salomon and Co. Ltd. is as yet the standard and the
occasions of piercing the veil are the exemptions to this standard. The rule that a company has it’s very own
different legitimate character of its own finds a significant spot in the Constitution of India too. Article 21 of
the Constitution of India, says that: No individual will be denied of his life and individual freedom with the
exception of as per the procedure set up by law.
Under Article 21 a company likewise has the option to live and individual freedom as an individual. This was
set down on account of Chiranjitlal Chaudhary v. Association of India where the Supreme Court held that
fundamental rights ensured by the constitution are accessible not simply to singular natives but rather to
corporate bodies also.
Along these lines, an organization can possess and sell properties, sue or be sued, or carry out a criminal
offense in light of the fact that the partnership is comprised of and kept running by individuals, going about
as operators of the company. It is under the ‘seal of the company’ that the individuals or shareholders submit
misrepresentation.
It is conspicuously clear that incorporation of the company does not cut off personal liability at all times and
in all circumstances. The sanctity of a separate corporate entity is upheld only in so far as the entity is
consonant with the underlying policies which give it life.

Company distinguished from Partnership , HUF and LLP.

What is Partnership?
A partnership is a kind of business where a formal agreement between two or more people is made who agree
to be the co-owners, distribute responsibilities for running an organization and share the income or losses
that the business generates.
In India, all the aspects and functions of the partnership are administered under ‘The Indian Partnership Act
1932’. This specific law explains that partnership is an association between two or more individuals or parties
who have accepted to share the profits generated from the business under the supervision of all the members
or behalf of other members.

Features of Partnership:
Following are the few features of a partnership:
1. Agreement between Partners: It is an association of two or more individuals, and a partnership
arises from an agreement or a contract. The agreement (accord) becomes the basis of the association
between the partners. Such an agreement is in the written form. An oral agreement is evenhandedly
legitimate. In order to avoid controversies, it is always good, if the partners have a copy of the
written agreement.
2. Two or More Persons: In order to manifest a partnership, there should be at least two (2) persons
possessing a common goal. To put it in other words, the minimal number of partners in an enterprise
can be two (2). However, there is a constraint on their maximum number of people.
3. Sharing of Profit: Another significant component of the partnership is, the accord between
partners has to share gains and losses of a trading concern. However, the definition held in the
Partnership Act elucidates – partnership as an association between people who have consented to
share the gains of a business, the sharing of loss is implicit. Hence, sharing of gains and losses is vital.
4.Business Motive: It is important for a firm to carry some kind of business and should have a profit
gaining motive.
5. Mutual Business: The partners are the owners as well as the agent of their firm. Any act
performed by one partner can affect other partners and the firm. It can be concluded that this point
acts as a test of partnership for all the partners.
2. 6. Unlimited Liability: Every partner in a partnership has unlimited liability.

Hindu Undivided Family (HUF)

The Joint Hindu Family Business or the Hindu Undivided Family (HUF) is a unique type of business entity. It
is governed and dictated by the Hindu Law, which is one of the several religious laws prevalent in India.
So who all are members of such an organization? Well, any person born into the family (boy or girl) up to the
next coming three generations is a part of the HUF. These members are the co-parceners. The head of such a
Joint Family Business is the eldest member of the family, the “Karta”. He is the main person responsible for
the business and the finances.

Features of a HUF
● Formation: To begin a Hindu Undivided Family there must be a minimum of two related family
members. There must be some assets, business or ancestral property that they have inherited or will
eventually inherit. The formation of a HUF does not require any documentation and admission of
new members is by birth.
● Liability: The liability of all the various co-parceners is only up to their share of the property or
business. So they have limited liability. But the Karta being the head of the HUF has unlimited
liability.
● Control: The entire control of the entity lies with the Karta. He may choose to confer with the co-
parceners about various decisions, but his decision can be independent. is actions will be final and
also legally binding.
 ● Continuity: The HUF can be continued perpetually. At the death of the Karta, the next eldest
member will become the Karta. However, keep in mind a Hindu Undivided Family can be dissolved
if all members mutually agree.
● Minority: As we saw earlier the members are eligible to be co-parceners by the virtue of their birth
into the family. So in this case, even minor members will be a part of the HUF. But they will enjoy
only the benefits of the organisation.

Advantages of the HUF

● A Hindu Undivided family is comprised of family members running a business. Like any other
organisation, there is scope for disagreements and conflicts. But since the Karta has absolute power
and takes all decisions by himself, it will lead to effective management.
● Just like a company, the existence of a HUF is perpetual. The death or retirement of one member of
even the Karta will not affect it, and it will continue on.
● Since the co-parceners do not have any effective control over the management of the HUF, and all
power lies with the Karta, the liability of the members has also been limited to only their share of the
property. This keeps the balance between power and responsibility.
● Also since all members of the HUF are relatives and members of the same family, there is a sense of
loyalty and cooperation. The trust among members is also there and leads to overall cooperation.

Disadvantages of the HUF

● No outside members other than family members can be introduced to the HUF. This makes it very
difficult to get additional capital from the market. With limited capital, the chances of expansion are
very low. It limits the scope of the business.
● While the Karta has all the power he also has the burden of unlimited liability. This may make him
overly cautious and timid in his business dealings. In turn, the business could suffer. Another factor
is that he may even be held responsible for the actions of other members.
● Also, the absolute dominance of the Karta overall business and financial decisions make cause
conflict among the HUF. His decisions and business acumen may be questioned by other members,
and cause issues within the HUF.
● Another issue may be that the Karta may not be the most qualified person to lead the business. The
position is given to the senior most family member, whether he is the most qualified or not is not
taken into consideration.
Limited Liability Partnership (LLP) refers to a body corporate or partnership formed and incorporated
under the provisions of Limited Liability Partnership Act, 2008. The following attributes of a Limited
Liability Partnership sets it distinct from other forms of legal entities and is garnering popularity in the
business world

a. LLPs shall have perpetual succession;

b. Unlike other forms of legal entities, any change in the partners of LLP shall not affect the
existence, rights or liabilities of LLP;
c. LLPs have lesser compliance burden in terms of annual filings, returns, audit etc.
d. LLPs are not obligated with the restriction of not having more than 200 members as is in the case
of a private limited company.

LLPs are often misinterpreted as Partnership Firms but there is a very thin line of difference between these
two forms of legal entities which had been highlighted in the following table

S/ Diffe LLP Partnership Firm

N rence
o. s
1. Entit LLP shall have either A partnership firm may choose any name of their choice.
y words “Limited However if the firm is registered, then it shall use the
Nam Liability Partnership” brackets and word (Registered) immediately after its name.
e or acronym LLP as the
last words of its name.

2. Perp LLPs has perpetual Existence of a partnership firm depends upon the will of its
etual succession as its identity partners so a partnership firm does not have perpetual
Succe is distinct from its succession.
ssion designated partners.

3. Liabi A partner is not directly Every partner in a partnership firm is jointly and severally
lity of or indirectly or liable with other partners for all the acts of the firm done
the personally liable, for the while he is a partner.
Partn obligations arising in
ers contract or otherwise
solely by reason of being
a partner of the LLP.

4. Legal Upon registration the No suit to enforce a right arising from a contract or
Effec LLPs shall, by its name conferred by the Partnership Act shall be instituted in any
t of be capable of suing and Court by or on behalf of any persons suing as a partner in a
Regis being sued. firm against the firm or any third party or any person
tratio alleged to be or to have been a partner in the firm unless
n the firm is registered and the person suing is or has been
shown in the Register of Firms as a partner in the firm.

MANDATORY REQUIREMENTS

1. Minimum 2 Partners either Individuals or body corporate.

2. Minimum 2 Designated Partners (only individuals) one of whom should be an Indian resident.
3. Obtain prior written consent from designated partners in Form LLP 9 within 30 days of such
appointment.
4. Every designated partner shall have a DPIN and Digital Signature Certificate (DSC).
5. LLP to have a registered office address where all communications and notices may be forwarded
and taken.
6. LLP shall have either words “Limited Liability Partnership” or acronym LLP as the last words
of its name.

PROCEDURE

1. Obtain Digital Signature Certificate

Submit an application for obtaining Digital Signature Certificate from any of the Certifying
Authority in India along with the requisite fees of the respective Certifying Authority and the
following documents;
 i. Aadhaar Card
ii. PAN Card
iii. Photograph
iv. Email address
v. Mobile Numbe
2. Name Reservation

i. Any person desirous of forming an LLP may apply for reservation of its name in
Form RUN-LLP along with stipulated fee to Registrar.
ii. A maximum of 06 names can be provided for name reservation for the proposed
LLP.
iii. In case the name includes banking, insurance, venture capital, mutual fund, stock
exchange, CA, CS, CWA, Advocate, etc. a copy of in- principle approval from such
regulatory authority or council governing concerned profession should be attached
with Form RUN LLP at the time of LLP incorporation.
iv. Registrar may if satisfied reserve the name for a period of 3 months from the
intimation date by Registrar.
3. Filing of application for LLP Incorporation

i. Next step for an LLP is to file incorporation document in Form FiLLiP* [Form for
Incorporation of Limited Liability Partnership] with the Registrar having
jurisdiction over the State where the registered office of LLP is situated along with
stipulated fees and the following documents
● In case appointed partner is a body corporate, Copy of resolution (On the
letterhead of such body corporate) consenting to become partner in
proposed LLP and copy of resolution/authorization stating the name and
address of individual nominated to act in such capacity
● Proof of registered office address of proposed LLP
● Subscribers Sheet including consent
● In-principle approval of regulatory authority, if any
● Details of LLP(s) and/ or company(s) in which partner/ designated
partner is a director/ partner
● Approval of the trademark owner or applicant of such application for
registration of Trademark
● Copy of approval in case proposed name contains any word(s) or
expression(s) which requires approval from central government
● Copy of approval from competent authority in case of collaboration and
connection with any foreign country or place
● Identity and Address proof of two designated partners
● Board resolution copy of existing company or its consent as proof of no
objection
● Any optional attachment (s) as the applicant may deem fit
ii. In case of an individual to be appointed as designated partner who does not have a
DPIN, application for allotment of DPIN can also be made in Form FiLLiP (Note:
Such DPIN allotment application can be made for only five individuals in Form
FiLLiP).
iii. Name reservation application can also be made through Form FiLLiP (Note: In case
application had been made via Form RUN-LLP and the same has been approved,
applicant may fill the reserved name as proposed name of LLP in the form).
iv. Registrar on examining Form FiLLiP may call the applicant for further information
in case it finds such application or document to be defective or incomplete in any
respect and such form is to be re-submitted within 15 days from Registrar’s
intimation date. On further re-occurrence of any defect, applicant shall be extended
one more chance of 15 days to ratify the same.
 v. Incorporation Certificate of LLP shall be issued by the Registrar in Form 16 and
mention Permanent Account Number and Tax Deduction Account Number issued by
the Income Tax Department.
4. Prepare LLP Agreement
LLP agreement shall be prepared considering the following points-
i. agreement shall be on Stamp Paper of appropriate stamp duty value based on the
state where its registered office is situated;
ii. agreement shall be duly notarized;
iii. agreement shall be duly signed by the Designated Partners and Partners;
iv. such agreement shall be signed by witnesses.
5. Filing of LLP agreement (Form-3)
Every LLP shall file information about the LLP agreement executed in Form 3 with the Registrar
within 30 days of the date of incorporation or parallelly at the time of filing Form FiLLiP along
with the stipulated fee and the following documents-
i. Initial LLP agreement or Supplementary/ amended LLP agreement containing
changes;
ii. Any other information as is necessary.
6. Make Applications for Various Statutory Registrations
The LLP shall upon incorporation make an application for various statutory registrations such as
Goods and Service Tax Identification Number (GSTIN), Employee State Insurance Corporation
(ESIC), Employees’ Provident Fund organization (EPFO), Registration and Opening of Bank
Account etc.

UNIT:2
Promoters
Promoters play a crucial role in establishing a company right from its inception stage. An individual or a
group of people who come up with the concept of starting a business are the promoters of a company. They
carry out the required processes to establish the firm.
The company’s promoters shape the company and thus are moulding blocks of the company. However, a
promoter is not the owner of a company. The promoter helps to establish and run the company, but the
company shareholders are the actual owners of the company.

Who Are The Promoters of a Company?

As per Section 2(69) of the Companies Act, 2013, promoter means any of the following persons:
● A person named as a promoter in the prospectus or identified by the company in its annual return in
Section 92.
● A person who controls the company affairs, indirectly or directly, whether as a director, shareholder
or otherwise.
● A person in accordance with whose directions, advice or instructions the Board of Directors of a
company are accustomed to act.
In simple words, promoters perform the preliminary steps, like floating the securities in the market, making
the prospectus of the company, etc., for establishing the company’s business. However, if a person is doing
these things professionally, they will not be considered a promoter.

Types of Promoters of a Company

A promoter is a person/entity who conceives the idea of company formation. An individual, firm, association
of person or company can be a promoter. A promoter of a company can be any of the following types:
● Professional promoter: A professional promoter is an expert in promoting the business during its
formation or inception. They transfer the ownership of the business to shareholders when it is
established in the market.
 ● Financial promoter: A financial promoter is a promoter who invests capital or money and has a
sizable company share. They promote banks or financial institutions. They aim to assess the market's
financial situation and start a company at the right moment.
● Managing promoter: A managing promoter helps in company formation. They also get the managing
rights in the company after it is formed.
● Occasional promoter: An occasional promoter is a promoter whose main job is to float the company.
They do not promote the business routinely since they are in charge of two to three enterprises, and
they get involved only in the crucial matters of the business.

Functions of a Promoter
A promoter plays many functions in the formation of a company, from conceiving the business idea to taking
all the required steps to make the idea a reality. Below are some of the functions of a promoter:
● A promoter needs to comprehend/conceive the idea of company formation.
● A promoter looks into the feasibility and viability of the business idea. He/she assesses whether the
company formation will be practicable or profitable.
● Once the idea is conceived, the promoter organises and collects the available resources to convert the
business idea into a reality.
● The promoter decides the company name and settles the contents of the company’s Memorandum of
Association and Articles of Association.
● The promoter decides the location of the company’s head office.
● The promoter nominates associations or people for vital company posts, such as appointing the
auditors, bankers and the company’s first directors.
● The promoter prepares all the necessary documents required to incorporate a company.
● The promoter decides the company’s funding sources and capital requirements.
A promoter cannot be considered a trustee, employee or agent of a company. The role of the promoter ceases
when the company is established and is handled by the board of directors and the company management.

Duties of a Promoter
The promoters have certain duties towards the company, which are as follows:
Disclose hidden profits
The first duty of the promoters is to be loyal to the business and not involve in malpractice. They should not
earn secret or hidden profits while carrying out promoting activities such as buying a property and selling it
for a profit without disclosing it. They are not barred from making such profits, but the only condition is that
they must disclose it. They must share all the information regarding their profitability and earnings with all
the relevant company stakeholders.
Disclose all material facts
A promoter has a relationship of trust and confidence with the company, i.e., a fiduciary relationship. Under
this fiduciary relationship, the promoter has the duty to disclose all material facts relating to the company’s
business and formation with the relevant stakeholders.
Act in the best interest of company
In all situations, promoters should prioritise the company’s interest over their personal interests. They must
give utmost consideration to the company’s best interest in its formation and all business dealings.
Disclose all private arrangements
While forming and establishing a company, many private transactions take place. However, such transactions
must be disclosed by the promoters to the stakeholders. It is the duty of the promoters to disclose all private
transactions and the profit earned from them to the stakeholders.

Rights of a Promoter
The rights of promoters include the following:
Right of indemnity
Promoters are jointly and severally accountable for any hidden profits made by any of them and false
statements made in the prospectus. All the promoters are individually and equally responsible for the
company’s affairs. Thus, one promoter can claim the compensation or damages paid by him/her from the
other promoters.
Right of preliminary expenses
A promoter is entitled to reimbursement for preliminary expenditures incurred for the company’s
establishment, such as solicitors’ fees, advertising costs and surveyors’ fees.
Right of remuneration
A promoter has the right to receive remuneration from the company unless a contract to the contrary. The
company’s Articles of Association can also provide that the directors can pay an amount to the promoters for
their services. However, the promoters cannot sue the company for remuneration unless there is a contract.

Liability of a Promoter
The liabilities of a promoter include the following:
● They cannot make secret profits out of company profits or deals for personal promotion. The
promoters are liable to pay such profits to the company when they make such profits.
● They can be held liable for damages or losses suffered by a person who subscribes for debentures or
shares due to the false statements made in the company prospectus.
● They are criminally liable for mentioning untrue statements in the prospectus.
● They can be held liable for a public examination of private company documents when there are
reports alleging fraud in the company formation or promotion activities.
● They are also liable to the company where there is a breach of duty on their part, misappropriated
company property or guilty of breach of trust.

Frequently Asked Questions

What are promoters of a company?

A promoter is a person or entity who settles on an idea to establish a specific business and completes the
required formalities for its establishment. An individual, company, firm or association can conceive the idea
of company formation and be the company’s promoter. The promoter undertakes all the activities necessary
for the company’s incorporation and establishes it as a separate legal entity.

Can a promoter of a company be the independent director?

As per the Companies Act, 2013, an independent director is a director other than the whole-time, managing
or nominee director. An independent director should not be or have been a promoter of the company. A
person related to the promoters or directors of the company, its subsidiary, holding, or associate company
cannot be a director. Thus, a promoter of a company cannot be the independent director.

How to become promoter of a company?

Any person or set of individuals who come together collectively to establish a business or idea can become
promoters. Any person in whose mind the seed of starting a business emerges can be a promoter. To be a
promoter, it is not essential to be a business founder. A person who arranges for capital and assists in crucial
work part-time can also be a promoter. However, a person must have an understanding of the industry,
marketing or sales knowledge to be a promoter.

How to find promoters of a company?

Following is the process to find out the promoters of a company:
● Visit the official MCA website.
● On the homepage, click on the ‘MCA Services’ tab and choose the ‘Master Data’ option from the
drop-down menu.
● Click on the ‘View Signatory Details’ option.
● Enter the company name and CIN and click on the ‘Submit’ button.
● The company’s signatories will be displayed on the screen. All the signatories, or any one of them,
would be the company promoter.
What is the legal position of a promoter?
It is tough to define the legal status of a promoter. Promoters are not the trustees or agents of the company.
They behave in a fiduciary capacity for the company. They take actions and activities to create the company
and pay the preliminary costs related to its incorporation, such as stamp duty, registration and professional
fees. They have a fiduciary duty towards the company and are liable for any profits made by them personally
in company deals.

What is MoA?
A Memorandum of Association (MoA) represents the charter of the company. It is a legal document prepared
during a company's formation and registration process. It defines the company's relationship with
shareholders and specifies the objectives for which the company has been formed. The company can
undertake only those activities mentioned in the Memorandum of Association.
As such, the MoA lays down the boundary beyond which the company’s actions cannot go. When the
company's actions are beyond the boundary of the MoA, such actions will be considered ultra vires and thus
void. The MoA is a foundation upon which the company is established. The company's entire structure is
written down in a detailed manner in the MoA.
The Memorandum of Association is a public document. Any person can get the MoA of the company by
paying the prescribed fees to the ROC. Thus, it helps the shareholders, creditors and any other person
dealing with the company to know the basic rights and powers of the company before entering into a contract
with it. Also, the contents of the MoA help by the prospective shareholders make the right decision while
considering investing in the company. MoA must be signed by at least 2 subscribers in the case of a private
limited company and 7 members in the case of a public limited company.

Format of Memorandum of Association

Section 4(6) of the Companies Act, 2013 (‘Act’) states that the format of an MoA will be as specified in Table
A to Table E of Schedule 1 of the Act. Every company needs to select the appropriate format provided in
Table A to E depending on its business type. The different formats provided in Act are as follows:
Table A – It is applicable to companies with a share capital.
Table B – It is applicable to a company limited by guarantee but does not have a share capital.
Table C – It is applicable to a company limited by guarantee having a share capital.
Table D – It is applicable to an unlimited company but does not have a share capital.
Table E – It is applicable to an unlimited company with a share capital.
The MoA should be numbered, printed and divided into paragraphs. The subscribers of the company must
sign the MoA.

Objectives in Registering MoA

The Memorandum of Association is a necessary document that includes the company’s crucial information.
Section 3 of the Act states that the company can be formed when the following members subscribe to the
memorandum:
● Seven or more members in the case of a public company.
● Two or more members in the case of a private company.
● Only one member in the case of a One Person Company (OPC).
A company can be registered only when the MoA is drafted and it is signed/subscribed by the minimum
numbers as provided above. Thus, the MoA of all companies is required for company registration.
Section 7(1)(a) of the Act further provides that a company’s Memorandum of Association and Articles of
Association (AoA) must be duly signed by the subscribers for the company to be registered with the ROC.
The MoA copy should be given to the ROC while applying for company registration. The ROC can provide
the certified copy of the MoA to the public upon payment of the prescribed fees. It helps shareholders in the
following ways:
● Allowing shareholders to know about the company before buying its shares and determine the
capital they can invest in the company.
 ● Provide all company information to stakeholders willing to associate with it.

What are Main Clauses of the Memorandum of Association?

The following are the clauses in Memorandum of Association:

● Name Clause
● Registered Office Clause
● Object Clause
● Liability Clause
● Capital Clause

Contents of Memorandum of Association

The memorandum of association clauses/contents are as follows:
1. Name Clause:
This clause specifies the name of the company. The name of the company should not be identical to any
existing company. Also, if it is a private company, then it should have the word ‘Private Limited’ at the end.
In the case of a public company, then it should add the word “Limited” at the end of its name. For example,
ABC Private Limited in the case of the private, and ABC Ltd for a public company. The name should be in
compliance with the provisions laid down in the Companies Act and Rules.
2. Registered Office Clause:
This clause specifies the name of the State in which the registered office of the company is situated. It helps to
determine the jurisdiction of the Registrar of Companies. The company must inform the registered office
location and address to the Registrar of Companies within 30 days from the date of incorporation or
commencement of the company. The registered office is the official office of the company. All
communications, legal notices and documents will be sent to the registered office address.
3. Object Clause:
This clause states the objective with which the company is formed. The company must carry out its business
activities to fulfill the objectives mentioned in this clause. It helps to protect the interests of the stakeholders
since the company must operate within the scope of its object clause and should not engage in any activities
not specified in this clause. The objectives can be further divided into the following 3 subcategories:
● Main Objective: It states the main business of the company
● Incidental Objective: These are the objects ancillary to the attainment of main objects of the
company
● Other objectives: Any other objects which the company may pursue and are not covered in above (a)
and (b)
4. Liability Clause:
It states the nature of liability of the members of the company in case of any loss or debts incurred by it. In
the case of an unlimited company, the liability of the members is unlimited. Whereas, in the case of a
company limited by shares, the liability of the members is restricted by the amount unpaid on their share.
For a company limited by guarantee, the liability of the members is restricted by the amount each member
has agreed to contribute.
5. Capital Clause:
This clause details the maximum capital a company can raise, also called the authorized/nominal capital of
the company. It provides the maximum amount of capital that can be issued to the company shareholders. It
also explains the division of such capital amount into the number of shares of a fixed amount each. It should
also specify the type of shares the company is authorised to issue, i.e. equity shares, preference shares, or
debentures.

Alteration of MoA
If there are any changes in the clauses of the MoA, the MoA must be altered or amended to include the
changes. The following changes will lead to the alteration of the MoA:
● Change in the company name
 ● Change in location of the registered office
● Change in company objects
● Change in the nature of liability of company members
● Change in the maximum limit of authorised capital of the company or division of authorised capital
The process of alteration of the MoA is as follows:
● Hold board meeting: The company must hold a board meeting to approve the alterations to the
MOA.
● Hold a general meeting: A general meeting should be conducted to obtain the approval of the
shareholders for the alterations to the MOA.
● Filing of a special resolution: A special resolution to alter the MoA should be filed with the ROC
within 30 days of the passing of the resolution.
● Approval of ROC: The ROC will scrutinise the special resolution and approve the MoA alteration.

The Doctrine of Ultra Vires

Background: MoA of any company is the basic charter of that company. It is a binding document that
narrates about the scope of that company, about which it’s written.
Ultra vires in literal sense is a Latin phrase, which means “beyond the powers”. In the legal sense, the
“Doctrine of Ultra Vires” is a fundamental rule of the Company Law. It states that the affairs of a company
has to be in accordance with the clauses mentioned in the Memorandum of Association and can’t contravene
its provisions.
Therefore, any act or contract is said to be void and illegal if the company is doing the act, attempts to
function beyond its powers, as prescribed by its MoA. So, it can be stated that for any contract or any act to
not fall under this criteria, has to work under the MoA.
It is noteworthy that a company can’t be bound by means of an ultra vires contract.
Estoppel, acquiescence, lapse of time, delay, or ratification cannot make it ‘Intra Vires’ (an act done under
proper authority, is intra vires).
An act being ultra vires the directors of a company, but intra vires the company itself, can be done if
members of the company, pass a resolution to ratify it. Also, an act being ultra vires the AoA of a company,
can be ratified by a special resolution at a general meeting.

The Disadvantage to this doctrine

This doctrine stops the company from changing its activities in a direction agreed by all members, which if
done would be profitable to the company. This is because clauses of the MoA don’t allow the company to go
in that direction.
If any Act done by the directors, on behalf of the company, contravenes the clauses of MoA, the MoA can be
amended, by virtue of passing a resolution, pursuant to which the aforesaid Act will become intra vires, vis-a-
vis MoA. This defeats the whole purpose of having such a Doctrine, as then any act can be done, no matter
what, since the clauses of the MoA can be amended anytime in order to make any action legal.

Distinction Between Memorandum and Articles of Association

The pivotal differences between memorandum and articles of association are as follows:
S.No. Memorandum of Association Articles of Association
1 Contains fundamental conditions upon which the Contain the provisions for internal
company is incorporated. regulations of the company.
2 Meant for the benefit and clarity of the public and Regulate the relationship between the
the creditors, and the shareholders. company and its members, as well
amongst the members themselves.
 3 Lays down the area beyond which the company’s Articles establish the regulations for
conduct cannot go. working within that area.
4 Memorandum lays down the parameters for the Articles prescribe details within those
articles to function. parameters.
5 Can only be altered under specific circumstances Articles can be altered a lot more easily,
and only as per the provisions of the Companies by passing a special resolution.
Act, 2013. Permission of the Central Government is
also required in certain cases.

6 Memorandum cannot include provisions contrary Articles cannot include provisions

to the Companies Act. Memorandum is only contrary to the memorandum. Articles
subsidiary to the Companies Act. are subsidiary to both the Companies Act
and the Memorandum.

7 Acts done beyond the memorandum are ultra vires Acts done beyond the Articles can be
and cannot be ratified even by the shareholders. ratified by the shareholders as long as the
act is not beyond the memorandum.

Nature and Content of Articles of Association

As per the Companies Act, 2013, the articles of association of different companies are supposed to be framed
in the prescribed form, since the model form of articles is different for companies limited by shares,
companies limited by guarantee having share capital, companies limited by guarantee not having share
capital, an unlimited company having share capital and an unlimited company not having share capital.

The signing of the Articles of Association

The Companies (Incorporation) Rules, 2014 prescribes that both the Memorandum and the Articles of a
company are to be signed in a specific manner.
● Memorandum and Articles of a company, are both required to be signed by all subscribers, who are
further required to add their names, addresses and occupation, in the presence of at least one
witness, who must attest the signatures with his own signature and details.
● Where a subscriber is illiterate, he must affix a thumb impression in place of his signature, and
appoint a person to authenticate the impression with his signature and details. This appointed person
should also read out the content of the documents to the illiterate subscriber for his understanding.
● Where a subscriber is a body corporate, the memorandum and articles must be signed by any
director of the body corporate who is duly authorised to sign on behalf of the body corporate, by a
passing a resolution of the board of directors of the body corporate.
● Where the subscriber is a Limited Liability Partnership, the partner of the LLP who is duly
authorised to sign on the behalf of the LLP by a resolution of all the partners shall sign.

Provisions for Entrenchment

The concept of Entrenchment was introduced in the Companies Act, 2013 in Section 5(3) which implies that
certain provisions within the Articles of Association will not be alterable by merely passing a special
resolution, and will require a much more lengthy and elaborate process. The literal definition of the word
“entrench” means to establish an attitude, habit, or belief so firmly that bringing about a change is unlikely.
Thus, an entrenchment clause included in the Articles is one which makes certain changes or amendments
either impossible or difficult.
Provisions for entrenchment can only be introduced in the articles of a company during its incorporation, or
an amendment to the articles brought about by a special resolution in case of a public company, and an
agreement between all the members in case of a private company.

Alteration of Articles of Association

Section 14 of the Companies Act, 2013, permits a company to alter its articles, subject to the conditions
contained in the memorandum of association, by passing a special resolution. This power is extremely
important for the functioning of the company. The company may alter its articles to the effect that would
turn:

A public company into a private company

For a company wanting to convert itself from public to a private company simply passing a special resolution
is not enough. The company will have to acquire the consent and approval of the Tribunal. Further, a copy of
the special resolution must be filed with the Registrar of Companies within 30 days of passing it. Further, a
company must then file a copy of the altered, new articles of association, as well as the approval order of the
Tribunal with the Registrar of Companies within 15 days of the order being received.

A private company into a public company

For a company wanting to convert from its private status to public, it may do so by removing/omitting the
three clauses as per section 2(68) which defines the requisites of a private company. Similar to the conversion
of the public to a private company, a copy of the resolution and the altered articles are to be filed with the
Registrar within the stipulated period of time.

Limitations on power to alter articles

● The alteration must not contravene provisions of the memorandum, since the memorandum
supersedes the articles, and the memorandum will prevail in the event of a conflict.
● The alteration cannot contravene the provisions of the Companies Act, or any other company law
since it supersedes both the memorandum and the articles of the company.
● Cannot contravene the rules, alterations or suggestions of the Tribunal.
● The alteration cannot be illegal or in contravention with public policy. Further, it must be for the
bona fide benefit and interest of the company. The alterations cannot be an effort to constitute a
fraud on the minority and must be for the benefit of the company as a whole.
● Any alteration made to convert a public company into a private company, cannot be made until the
requisite approval is obtained from the Tribunal.
● A company may not use the alteration to cover up or rectify a breach of contract with third parties
or use it to escape contractual liability.
● A company cannot alter its articles for the purpose of expelling a member of the board of directors is
against company jurisprudence and hence cannot occur.

Binding effect of Memorandum and Articles of Association

After the Articles and the Memorandum of a company are registered, they bind the company and its
members to the same extent as if they had been signed by each of the members of the company. However,
while the company’s articles have a binding effect, it does not have as much force as a statute does. The effect
of binding may work as follows:
Binding the company to its members
The company is naturally completely bound to its members to adhere to the articles. Where the company
commits or is in a place to commit a breach of the articles, such as making ultra vires or otherwise illegal
transaction, members can restrain the company from doing so, by way of an injunction. Members are also
empowered to sue the company for the purpose of enforcement of their own personal rights provided under
the Articles, for instance, the right to receive their share of declared divided.
It should be noted, however, that only a shareholder/member, and only in his capacity as a member, can
enforce the provisions contained in the Articles. For instance, in the case of Wood v. Odessa Waterworks Co.,
the articles of Waterworks Co. provided that the directors can declare a dividend to be paid to the members,
with the sanction of the company at a general meeting. However, instead of paying the dividend to the
shareholders in cash a resolution was passed to give them debenture bonds. It was finally held by the court,
that the word “payment” referred to payment in cash, and the directors were thus restrained from acting on
the resolution so passed.

Members bound to the company

Each member of the company is bound to the company and must observe and adhere to the provisions of the
memorandum and the articles. All the money that may be payable by any member to the company shall be
considered as a debt due. Members are bound by the articles just as though each and every one of them has
signed and contracted to conform to their provisions. In Borland’s Trustees v. Steel Bros. & Co. Ltd., the
articles the company provided that in the event of bankruptcy of any member, his shares would be sold at a
price affixed by the directors. Thus, when Borland went bankrupt, his trustee expressed his wish to sell these
shares at their original value and contended that he could do so since he was not bound by the articles. It was
held, however, that he was bound to abide by the company’s articles since the shares were bought as per the
provisions of the articles.

Binding between members

The articles create a contract between and amongst each member of the company. However, such rights can
only be enforced by or even against a member of the company. Courts have been known to make exceptions,
and extend the articles to constitute a contract even between individual members. In the case of Rayfield v
Hands Rayfield was a shareholder in a particular company., who was required to inform directors if he
intended to transfer his shares, and subsequently, the directors were required to buy those shares at a fair
value. Thus, Rayfield remained in adherence to the articles and informed the directors. The directors,
however, contended that they were not bound to pay for his shares and the articles could not impose this
obligation on them. The courts, however, dismissed the directors’ argument and compelled them to buy
Rayfield’s shares at a fair value. The court further held that it was not mandatory for Rayfield to join the
company to be allowed to bring a suit against the company’s directors.

No binding in relation to outsiders

Contrary to the above conditions, neither the memorandum nor the articles constitute a contract between the
company and any third party. The company and its members are not bound to the outsiders with respect to
the provisions of the memorandum and the articles. For instance, in the case of Browne v La Trinidad, the
articles of the company included a clause that implied that Browne should be a director that should not be
removed or removable. He was, however, removed regardless and thus brought an action to restrain the
company from removing him. Held that since there was no contract between Browne and the company, being
an outsider he cannot enforce articles against the company even if they talk about him or give him any rights.
Therefore, an outsider may not take undue advantage of the articles to make any claims against the company.

The doctrine of Constructive Notice

When the Memorandum and Articles of Association of any company, are registered with the Registrar of
Companies they become “public documents” as per section 399 of the Act. This implies that any member of
the general public may view and inspect these documents at a prescribed fee. A member of the public may
make a request to a specific company, and the company, in turn, must, within seven days send that person a
copy of the memorandum, the articles and all agreements and resolutions that are mentioned in section
117(1) of the Act.
If the company or its officers or both, fail to provide the copies of the requisite documents, every defaulting
officer will be liable to a fine of Rs. 1000, for every day, until the default continues, or Rs. 1,00,000 whichever
is less.
Therefore, it is the duty of every person that deals with the company to inspect these public documents and
ensure in his own capacity that the workings of the company are in conformity with the documents.
Irrespective of whether a person has actually read the documents or not, it is assumed that he familiar with
the contents of these documents, and that he has understood them in their proper meaning. The
memorandum and articles of association are thus deemed as notices to the public, hence a ‘constructive
notice’.
Illustration: If the articles of Company A, provided that any bill of exchange must be signed by a minimum of
two directors, and the payee receives a bill of exchange signed only by one, he will not have the right to claim
the amount.

The doctrine of Indoor Management

The concept of the Doctrine of Indoor Management can be most elaborately explained by examining the facts
of the case of Royal British Bank v. Turquand, which in fact, first laid down the doctrine. It is due to this that
the doctrine of indoor management is also known as the “Turquand Rule”.
The directors of a particular company were authorised in its articles to engage in the borrowing of bonds
from time to time, by way of a resolution passed by the company in a general meeting. However, the directors
gave a bond to someone without such a resolution being passed, and therefore the question that arose was
whether the company was still liable with respect to the bond. The company was held liable, and the Chief
Justice, Sir John Jervis explained that the understanding behind this decision was that the person receiving
the bond was entitled to assume that the resolution had been passed, and had accepted the bond in good faith.
However, the judgement, in this case, was not fully accepted into in law until it was accepted and endorsed by
the House of Lords in the case of Mahony v East Holyford Mining Co.
Therefore the primary role of the doctrine of indoor management is completely opposed to that of
constructive notice. Quite simply, while constructive notice seeks to protect the company from an outsider,
indoor management seeks to protect outsiders from the company. The doctrine of constructive notice is
restricted to the external and outside position of the company and, hence, follows that there is no notice
regarding how the internal mechanism of the company is operated by its officers, directors and employees. If
the contract has been consistent with the documents on public record, the person so contracting shall not be
prejudiced by any and all irregularities that may beset the inside, or “indoor” operation of the company.
This doctrine has since then been adopted into Indian Law as well in cases such as Official Liquidator,
Manabe & Co. Pvt. Ltd. v. Commissioner of Police and more recently, in M. Rajendra Naidu v. Sterling
Holiday Resorts (India) Ltd. wherein the judgment was that the organizations lending to the company should
acquaint themselves well with the memorandum and the articles, however, they cannot be expected to be
aware of every nook and corner of every resolution, and to be aware of all the actions of a company’s
directors. Simply put, people dealing with the company are not bound to inquire into every single internal
proceeding that takes place within the company.

Exceptions to the Doctrine of Indoor Management

1. Where the outsider had knowledge of the irregularity— Although people are not expected to know
about internal irregularities within a company, a person who did, in fact, have knowledge, or even
implied notice of the lack of authority, and went ahead with the transaction regardless, shall not have
the protection of this doctrine. Illustration: In Howard v. Patent Ivory Co. (38 Ch. D 156), the
articles of a company only allowed the directors to borrow a maximum amount of one thousand
pounds, however, they could exceed this amount by obtaining the consent of the company in a
general meeting. However, in this case, without obtaining this requisite consent, the directors
borrowed a sum of 3,500 Pounds from one of the directors in exchange for debentures. The company
 then refused to pay the amount. It was eventually held that the debentures were only good to the
extent of one thousand pounds since the director had full knowledge and notice of the irregularity
since he was a director himself involved in the internal working of the company.
2. Lack of knowledge of the articles— Naturally, this doctrine cannot and will not protect someone who
has not acquainted himself with the articles or the memorandum of the company for example in the
case of Rama Corporation v. Proved Tin & General Investment Co. wherein the officers of Rama
Corporation had not read the articles of the investment company that they were undertaking a
transaction with.
3. Negligence— This doctrine does not offer protection to those who have dealt with a company
negligently. For example, if an officer of a company very evidently takes an action which is not within
his powers, the person contracting should undertake due diligence to ensure that the officer is duly
authorized to take that action. If not, this doctrine cannot help the person so contracting, such as in
the case of Al Underwood v. Bank of Liverpool.
4. Forgery— Any transaction which involves forgery or is illegal or void ab initio, implies the lack of
free will while entering into the transaction, and hence does not invoke the doctrine of indoor
management. For example, in the case of Ruben v. Great Fingal Consolidated, the secretary of a
company illegally forged the signatres of two directors on a share certificate so as to issue shares
without the appropriate authority. Since the directors had no knowledge of this forgery, they could
not be held liable. The share certificate was held to be in nullity and hence, the doctrine of indoor
management could not be applied. The wrongful an unauthorized use of the company’s seal is also
included within this exception.
Further, this doctrine cannot include situations where there was third agency involved or existent. For
example, in the case of Varkey Souriar v. Keraleeya Banking Co. Ltd. this doctrine could not be applied
where there was any scope of power exercised by an agent of the company. The doctrine cannot be implied
even in cases of Oppression.

Conclusion
Therefore, it is to be understood that in the sphere of corporate governance, the articles of a company is a
crucial document which, along with the memorandum from the company’s core constitution and rule book,
and hence defines the responsibilities of its directors, kinds of business es to be undertaken by the company,
and the various means by which the shareholders may exert their control over the directors, and the company
itself. While the memorandum lays down the objectives of the company, the articles lay down the rules by
which these objectives are to be achieved. In cases of conflict, the Memorandum supersedes the Articles and
the Companies Act further, supersedes both Memorandum and Articles.
These articles may be altered as per Section 14 of the Companies Act, 2013. The entrenchment provisions in
the Articles of a company protect the interests of all the minority shareholders by ensuring that amendment
in the article can only occur after obtaining the requisite prior approval of the shareholders. The Articles of a
company bind the company to its members and bind the members to the company and further also bind the
members to each other, they constitute a contract amongst themselves and therefore, its members with
respect to their rights and liabilities as members of the company.

Prospectus:
A prospectus is a legal disclosure document that provides information about an investment offering to the
public, and that is required to be filed with the Securities and Exchange Commission (SEC) or local
regulator. The prospectus contains information about the company, its management team, recent financial
performance, and other related information that investors would like to know.
Investors use the legal document to determine the growth and profitability prospects of the selling company
to decide whether they will take part in the offering or not. In the U.S., the legal name of the public filing is an
S-1.

Prospectus for a stock or bond issue

When a company is issuing stocks or bonds, it publishes a prospectus to provide investors with all the
information that they need to make an informed decision. The issuer provides both a preliminary and a final
prospectus. A preliminary prospectus is the initial offering document that provides details about the
proposed transaction. The final prospectus is offered when the offering’s been finalized and is being offered
to the public for subscription.
Information in the final prospectus includes the number of shares issued, offering price, company’s financial
data, risk factors, use of the proceeds, the dividend policy, and other relevant information. This information
helps an investor make an informed decision on whether to invest in the company.

Prospectus for mutual funds

A mutual fund prospectus is a legal disclosure document that the SEC requires mutual funds to file and make
available to interested investors. The details provided in the document include the fund’s objectives, risks,
performance, distribution policy, executive team, investment strategies, etc.
A mutual fund may provide a summary prospectus, which is a few pages long and contains important
information that investors require. It may also issue a statutory prospectus, which is long and extremely
detailed, to provide investors with as much information as they may need to make a buying decision. Mutual
funds are required to give investors the document after the purchase of shares. Investors can also access the
information on the fund’s website.

Legal liabilities of company CIVIL/CRIMINAL

A corporation can do only those things which are incidental to the fulfilment of the purposes for which it has
been created under the law. All its acts must direct to its end purpose of creating the corporation. Thus a
company incorporated by special statute is limited to the powers conferred by the statute and those which are
reasonably incidental thereto. The purpose and objects of a company registered under the Companies Act,
2013 are contained in its Memorandum of Association and the company cannot go beyond the limits so laid
down for its activities. Anything done by the company beyond its object clause is ultra vires. [i] It may be
reiterated that a corporation is not a natural person. It doesn’t have a mind, body, soul or brain of its own. It
has to act through its proxies, employees and other officers such as directors etc. It therefore, follows that a
corporation neither has its own will nor an interest of its own. The interest of a company is, in fact, the
interest of its shareholders which is represented by the Board of directors. Despite this reality, the law confers
a fictitious legal personality on corporations which vests rights, duties and property in them. Consequently, a
corporation can sue or can be sued and owes both civil and criminal liability for the acts done by it.

Civil Liability
Civil liability has imposed on the companies as well. Though the company is an artificial person having no
brain and body of its own, however, it would be held liable for the wrongful acts committed by its agents or
servants during the course of their employment.

Vicarious Liability
The company is an artificial person having no brain and body of its own, however, it would be held liable for
the wrongful acts committed by its agents or servants during the course of their employment. This liability is
based on the principle of vicarious liability. This is further strengthened by the Latin maxim of “Qui facet
alium facet per se” meaning that the authorised act which is done through another is deemed to be done by
him. The company is therefore, liable for the torts of its employees and agents just as a master is held liable
for the wrongful and negligent acts of his servants. Thus, based on the principle of agency, the master, i.e. the
corporation would be liable for the acts of the servants done in the course of employment. The operative word
here is being the course of employment. Any act which has though been done by the agent but is not within
the purview of its job and not been authorised to be done by the principal, the company shall not be liable for
it. Only the person who does the act would be liable.

Over the years, the concept of vicarious liability has been incorporating various other facets within its ambit
as well. The questions whether, the actions involving malice as an ingredient, has been subject to number of
discussions by the court and there has been a shift in trend in recent years. Earlier, in the case of Stevens v.
Midland Counties Rly. Company, Baron J. took the view that a corporation does not possess a mind of its
own, hence it cannot be held liable in a civil action involving malice. This view was reiterated again in Abrath
v. Nor Eastern Railway Company[ii]. In this case, the railway company prosecuted Dr. Abrath a surgeon for
issuing a fabricated certificate to a passenger who had alleged that he had received injuries in a railway
accident. The surgeon was, however, acquitted, thereafter, the surgeon sued the railway company for
malicious prosecution. The plaintiff had to establish that a there was a hidden intent and motive behind his
prosecution. Lord Bram well, however, ruled that a corporation being merely a fiction, it is not possible to
attribute any mind to it and therefore, it is incapable of conceiving any malice. Overruling the decision in
earlier case, Citizen’s Life Assurance Company v. Brown[iii], Lord Lindley has observed that a company can
be held liable for the torts involving malice such as defamation. In this case a superintendent of the
corporation had sent a letter to its policy-holders containing certain allegations against an ex-employee of the
company. The ex-employee sued the company for defamation. Lord Lindley held the corporation is
responsible and liable for defamation due to the principle of agency and since the alleged tort committed in
the course of employment of the company, it cannot claim immunity.
This has put the matter to rest and firmly established that a corporation can be sued for malicious
prosecution or deceit or defamation which involves malice as an essential ingredient.
A corporation is, however not liable if the act of its employee or servant or agent is not authorised by the
Article of its Association. The case of Poulton v. London & S.W.Rly. Company[iv] is a leading decision on the
point. In this case, a Station Master in the employment of the defendant Railway Company arrested the
plaintiff for refusing to pay the freight for a horse that had been carried by the railway. The railway company
had authority under the Act of Parliament to arrest a person who did not pay the fare, but not to arrest a
person for non-payment of freight for the carriage of goods. The Court held the company not liable because it
had no power itself to arrest for such non-payment and therefore, it could not delegate such a power to the
Station Master (its employee) to do so. The plaintiff’s remedy for the illegal arrest in such a case could be
against the Station Master personally and not the railway company as the master of its employee. The reason
for the decision appears to be that the Station-Master did not have the implied authority to arrest the plaintiff
on behalf of the railway company thus, he cannot be held liable for an act which the agent was not authorised
to do and held that railway company cannot be held latter vicariously liable.

Companies Act, 2013

Apart from the above mentioned liability, the company has a civil liability under the Companies Act, 2013 as
well. A civil liability has been imposed for the misstatements in the prospectus under Section 35. If any
person on the issuance of a prospectus which contains misstatements has subscribed to the securities of the
company and consequently has obtained any damage or loss, the director of the company at the time of the
issuance of the prospectus, the promoter of the company, and any person mentioned in the prospectus would
be liable for compensating persons who have suffered any loss due to the same.

Criminal Liability
A body corporate can be held vicariously liable for the wrongs committed by its employee just as the liability
of the principal extends to unauthorised acts of his agent.
This view has been fairly new however, the orthodox view is that a corporation cannot be held criminally
liable for the criminal acts of its employees on the principle of vicarious liability. Salmond observes, “To
punish a body corporate, either criminally or by the enforcement of penal redress, is in reality to punish the
beneficiaries on whose behalf its property is held for the acts of the agents by whom it fulfils its functions.[v]”
It is for this reason that criminal liability of corporation is of exceptional nature. Even assuming that a
corporation is deemed to possess an imaginary will just as it is attributed an imaginary existence by legal
fiction, the only acts that can emanate from the so-called will, are those which the Memorandum of
Association permits it to do, i.e., which are intra vires the company. Therefore, a corporation cannot commit
a crime because a criminal act or illegal act would be necessarily ultra vires its Memorandum of Association.
This traditional view has, however, been abandoned now and a corporation can be held criminally liable for
the criminal acts done by its representatives.
It is well settled that a corporation may incur criminal liability in cases involving malice, fraud or other
wrongful motives. A company may be held liable for malicious prosecution, slander or libel or even deceit.
The will of the human being who control the affairs of the corporation is attributed to the corporation itself.

Thus in R. v. I.C. R. Haulage Ltd[vi], the company was indicted for conspiracy along with its Managing
Director and others and the fraud of the director was computed to the company.
The practical difficulty as regards imposition of criminal liability on corporations arises in respect of
punishing them for their guilt. If the corporation be punished with fine or forfeiture, it would be easy to carry
out the punishment without punishing its members. But if any corporeal punishment is awarded, then it
would be difficult to separate the members from the corporate entity. Thus, the courts have to exercise their
discretion in such cases.
In D.P.P. v. Kant & Sussex Contractors Ltd[vii], the manager of a transport company submitted false returns
to obtain petrol coupons. The Division Court held that the company had committed fraud through its
manager and therefore, was liable for that offence.

In yet another case, Moore v. Bresler Ltd[viii], the Secretary of the company was himself the Branch
Manager and Sales Manager of the company. He did certain acts which were ultra vires the Board of
Directors of the company. The Court, held the company criminally liable being a legal person. In R. v. I.C.R.
Haulage Ltd[ix] a company was held liable for conspiracy for defrauding its managing directors and some
others who had conspired to practise fraud upon another company,
Companies Act, 2013
In India also, criminal liability may be imposed on corporation under the Companies Act, 2013 and other
statutes. Under Section 34, where the company has issued the prospectus, and the same is distributed an d
circulated among the general public or the creditors and it contains some omissions or misleading statements,
in such a case, every individual who has authorised the issue of prospectus shall be liable under Section 447
for fraud. However, if any person has reason to believe that the statements contains no such omissions and
are irrelevant and he had reasonable grounds to believe in the same, he would not be liable,
Under Section 53, the act has imposed a prohibition on issue of shares on discount. If any company does the
same, the share would be void and company would be fined for the amount not less than one lakh but which
may extend up to five lakhs. In addition, the person in default may face imprisoned for up to six months or
fine of rupees one lakh which can go up to five lakh rupees. Under Section 57, if any person has wilfully
personated a shareholder with the objective of obtaining any security, he shall be punished and may face up
to three years in imprisonment and a fine rupees one lakh which can go up to five lakh rupees. Under Section
58(6), when the private company refuses to register the transfer and transmission of shares, such individual is
in default and may face imprisonment up to three years or fine of rupees one lakh which can go up to five
lakh rupees.

Under Section 118(12), the minutes of proceedings of general meeting have to be recoded and if any person is
interfering or tampering with the minutes of meeting then such individual is in default and may face
imprisonment up to 2 years or fine of twenty-five thousand which can go up to one lakh depending upon the
nature of interference. Under Section 128(6) the books of account, financial statements, and other important
books are maintained by the Company. If the company fails to so do, the officer and the company shall be
deemed to be in default and may face imprisonment up to one year or fine of Rs. 50,000 which may go up to
Rs. 5 lakhs or with both. Under Section 129(7), the financial statements are to be maintained for every year
and must present a true picture of the company. If the company fails to so do, the officer and the company
shall be deemed to be in default and may face imprisonment up to one year or fine of Rs. 50,000 which may
go up to Rs. 5 lakhs or with both. Under Section 134 – Financial statements have to be annexed to the Board
of Director’s report and must have the essential requirements depending upon the nature of the company. If
the company fails to so do, the officer and the company shall be deemed to be in default and may face
imprisonment up to three year or fine of Rs. 50,000 which may go up to Rs. 5 lakhs or with both.
Under Section 182(4), there have been certain prohibitions regarding the contributions of companies other
than government companies and they can only contribute a certain aggregate of amount earned in the last
financial year. If the company makes a political contribution contravening the same, a fine may be imposed
on the company which would be five times the amount of contribution of the company. The company will be
in default and may face imprisonment up to six months along with a fine of the aforesaid amount. Under
Section 184(4), every director at the first general meeting after his appointment shall disclose if he has any
conflict or interest in the company or the body corporate and failure to do would make the director in default
and could make him liable to face imprisonment up to one year or face a fine of Rs 50,000 which may go up to
one lakh rupees. Under Section 187(4), all the Investments of Company whether be in assets or property is to
be in the name of the Company and if the corporation contravenes the same it may face a fine of Rs. 25,000
which can go up to Rs.25 lakhs and Officer in charge of the same would also be liable along with the company
be in default and face imprisonment of 6 months or a fine. Under Section 188(5), the company cannot enter
into a related party transaction without the approval and consent of the Board of Directors and imposition of
certain conditions of sale, lease etc. In case of unlisted Company, if it fails to follow the requisite
preconditions, it can be punishable with fine of Rs. 25,000 which may go up to Rs. 5 lakhs or with both.
Under Section 447, prescribes that any person who is found to be guilty of fraud within the company
management shall face imprisonment for up to 10 years and be liable to fine which may be 3 times the
amount involved.

Conclusion
The liability of corporation has gained a profound foothold in the past few years. Corporations though not
real persons, they have been bestowed with legal personality and must thus be responsible for its acts. Due to
increasing ambit of corporations in everyday life, the liability has to be imposed on corporations as well.
Thus, the new Companies Act, 2013 has also incorporated various provisions to incorporate liability of
corporations.
Liability for misstatement in prospectus

A prospectus is a vital part of any business. In general, consumers search for a firm’s prospectus to determine
whether or not they should invest in that company. It’s crucial that the things described in the prospectus are
genuine. Companies create prospectuses because they want customers to come in and buy the firm’s
debentures or credit money through the company. The contents of the prospectus must be accurate. If there
are any misstatements in prospectus , and the public acts on that information, the firm may face civil or
criminal liability.
The Companies Act of 2013, Section 2(70), defines “prospectus” as “any document characterised or
distributed as a prospectus, including notices, circulars, and documents, as well as ads presenting an
invitation to purchase or subscribe stocks.” Simply said, a prospectus is a document that invites public
deposits or offers for the subscription of shares or debentures. A prospectus is also a document that offers the
sale of a company’s shares by its members. The Securities and Exchange Board of India (SEBI), in
cooperation with the Central Government, must include information and reports on financial facts in the
prospectus. A prospectus is an important document that can be used to determine the validity of a company’s
scheme. It is the responsibility of the corporation to verify if the contents of the prospectus are accurate.

Types of Prospectus
There are several types of prospectuses:

1. Shelf Prospectus
A shelf prospectus is a prospectus provided by any funding organisation or bank for one or more issues of
securities or classes of securities mentioned in the prospectus. A corporation that has already filed a shelf
prospectus with the registrar does not need to file a new prospectus at each stage of the offering of securities
within a reasonable time after the validity of that prospectus has expired.

2. Deemed Prospectus
Deemed Prospectus is defined in Section 64 of the Companies Act. It’s a provision that prevents the issuance
of a prospectus. Making and filing a prospectus is a complex operation, and the prospectus’ criteria are
stringent; as a result, a corporation can bypass this by paying the entire amount to an intermediary known as
an issuing house. The shares are then given to the public via an announcement by the issuing house.

3. Information Memorandum and Red Herring Prospectus

A Red Herring Prospectus is a type of prospectus that lacks complete details on the price of the securities
offered and the quantity of securities offered, whereas an Information Memorandum is a process undertaken
prior to the filing of a prospectus in which a demand for securities intended to be issued by a company is
elicited and the terms for the issue and the price of such securities are examined through notices, circulars,
advertisements, or documents.

Misstatements in prospectus
A prospectus is a document that contains information that the public can use to subscribe to or purchase a
company’s securities. If it contains any inaccuracies, it will have major ramifications. Any statement in the
prospectus that is erroneous or misleading is referred to as misstatements in the prospectus. A
misrepresentation is defined as the inclusion or omission of a fact that is likely to mislead the public. The
prospectus shall be regarded a prospectus with an erroneous statement if a relevant matter has been omitted
from the prospectus and such omission is likely to mislead the public.
There have been instances when representation for future events has been called into question. A mere
remark that something will be done or happen in the future is not a statement of fact that could lead to
liability for misrepresentation. A misstatement of an existing fact is required to activate it. If a representation
was true only at the time of prospectus issuance and not at the time of allotment, it would trigger liability. A
statement in a prospectus about the persons who would be directors is a significant statement, and if it is
false, a person who subscribed on the basis of it is prima facie entitled to cancel their subscription.

Liabilities for Misstatements in Prospectus

Liabilities for prospectus misstatements can be classified under the following headings:
● Civil Liability
● Criminal Liability

1. Civil Liability in case of misstatements in prospectus

If a person who has subscribed for a company’s securities suffers any loss or harm as a result of any
statement made in the prospectus, or any inclusion or omission of an item included in the prospectus that is
deceptive, and acts on the content of the prospectus, then the company and everyone involved who:
● is a director of the company at the time of the prospectus’s issue,
● or is named in the prospectus as a director of the company or agreed to become one,
● or is a promoter of the company,
● or has authorized/allowed the prospectus’s issue, and is an expert who has been engaged or
interested in the company’s formation, management, or promotion. Shall be liable to pay
compensation to every person, without prejudice to any punishment to which any person may be
liable, to every person who has suffered such loss or damage.

Exemption from Liability from misstatements in prospectus

No person shall be liable for misstatement if the person proves that-
● The person had withdrawn his permission prior to the prospectus’s release. If a person who had
agreed to become a director of the firm withdraws his consent before to the prospectus’s release and
claims that it was released without his permission.
● When the prospectus is distributed without a person’s consent or knowledge. When a prospectus is
issued without a person’s knowledge or approval, and the person learns of it, he or she must give a
reasonable public notice stating that the prospectus was issued without his consent.

Issuing a prospectus with the intent to defraud or for any other illegal purpose–
If it is proven that a prospectus was issued with the intent to defraud applicants for the company’s securities,
or any other person for that matter, or for any other malicious purpose, each person mentioned in the
preceding paragraph shall be personally liable for all or any of the damages suffered by any person who
subscribed to the securities on the basis of such prospectus.

2. Criminal Liability in case of misstatements in prospectus

Criminal liability for misstatements in prospectuses is dealt with in Section 63 of the Companies Act.
Every person who authorises the issue, circulation, or distribution of a prospectus that contains any
statement that is incorrect or misleading in any form in which it is contained, or where any inclusion or
omission of any matter is likely to mislead, is responsible for fraud.
Sec. 447 defines “fraud” as any act, omission, or concealment of any fact with the aim to deceive, obtain an
unfair advantage, or harm the company, its shareholders, creditors, or any other person. It is not required
that such a conduct result in any unjust profit or loss. If a person abuses his or her position, that is also
deemed fraud under this provision.

Punishment for misstatement in prospectus

If a person is found guilty of fraud, they will be sentenced to prison for a period of not less than six months
but not more than ten years. He will also face a fine that will not be less than the amount involved in the fraud
but could be up to three times the amount involved in the scam. If the fraud was perpetrated in the public
interest, the sentence must be at least of three years .
Exemption from criminal responsibility
No one can be held criminally accountable if they can prove that-
● Such a statement or omission was irrelevant,
● or he had reasonable grounds to think, and did believe, until the prospectus was issued, that the
statement was truthful and the omission or inclusion was required.

Conclusion
When creating a prospectus, extreme caution and discretion are required. Before it is released to the general
public, the prospectus must be verified for any misstatements or anomalies. The Companies Act holds specific
people liable and punishes them for any misstatements revealed in a company’s prospectus. Because the
general public relies on the prospectus to make investment decisions, its integrity must be

Statement in lieu of Prospectus:

When a public company is formed and chooses not to issue a prospectus, it is legally required to submit a
statement in lieu of a prospectus, which is also referred to as a substitute prospectus or substitute circular.
This statement contains essential information about the company and its offering and must be filed with the
registrar of companies to ensure transparency and compliance with regulatory requirements.
It serves as an alternative to a traditional prospectus, providing investors with necessary details while
accommodating situations where a full prospectus may not be suitable.

What is a Statement in Lieu of Prospectus?

Statement in lieu of prospectus means a statement instead of a prospectus. A statement in lieu of a prospectus
is a statement issued by a public unlisted company instead of a prospectus. It’s a document prepared by
public companies that don’t issue a prospectus when they are formed.
This statement has all the information that a prospectus has and it is signed by all the directors of the public
company or the directors-to-be. If the company doesn’t file a statement in lieu of prospectus, it won’t be
allowed to allocate any shares or debentures.

Contents of Statement in Lieu of Prospectus

Information in the statement instead of a prospectus includes:
● Company Name.
● The company’s share capital is divided into ordinary shares and the value of one share.
● Description of the planned activities and prospectus.
● Names, addresses, roles and responsibilities of proposed or appointed directors, officers, appointed
lawyers and company secretaries.
● Rules for selecting and compensating these corporate representatives.
● Voting rights during company meetings.
● Quantity and value of shares and debentures intended to be issued.
● Names, jobs and addresses of those selling goods bought or offered for sale by the company.
● Amount to be paid in cash, stocks or bonds to each real estate seller.

Provision for Statement In Lieu Of Prospectus [Section 70, Companies Act, 2013]
Section 70 of the Companies Act, 2013 deals with statement in lieu of prospectus as:
A company with share capital that either doesn’t issue a prospectus or has issued one but hasn’t allocated any
shares to the public must follow certain rules before allotting shares or debentures. At least three days before
making the allotment, the company must submit a ‘statement in lieu of prospectus’ to the Registrar for
registration.
This statement should be signed by every person listed as a director or proposed director of the company or
by their authorised agent in writing. It should contain the details outlined in Part I of Schedule III and
include the reports specified in Part II of Schedule III, while taking into account the provisions in Part III of
that Schedule (Section 70).
When a private company transforms into a public company, it must provide the Registrar with a statement in
lieu of prospectus. This statement should include the particulars described in Part I of Schedule IV, along
with the report outlined in Part II of Schedule IV, subject to the provisions in Part III of that Schedule
(Section 44(2)(b)).
Failure to comply with these rules can result in a fine of up to Rs. 1,000 for the company and every director
responsible.
If the ‘statement in lieu of prospectus’ contains false information, the person who authorised its submission
can face imprisonment of up to two years or a fine of up to Rs. 5,000 or both. However, they can avoid
liability if they can prove that the statement was not significant or that they had reasonable grounds to
believe it was true. The legal and criminal consequences for incorrect statements or misrepresentations are
the same as those for a prospectus (Section 70(5)).

Differences Between Prospectus and Statement in Lieu of Prospectus

The differences between prospectus and statement in lieu of prospectus are:

Purpose
A prospectus is a detailed document that provides information about a company’s securities offering, while a
statement in lieu of prospectus serves a similar purpose but is used in specific situations where a regular
prospectus cannot be used.

Issuer
A prospectus is usually issued by a company that is going public or issuing new securities, whereas a
statement in lieu of prospectus is issued by a company that is already publicly traded.

Content
A prospectus typically contains extensive information about the company’s management, financial statements
and the terms of the securities offering. In contrast, a statement in lieu of prospectus may have less detailed
information.

Regulation
Prospectuses are subject to strict regulatory requirements and must be filed with the appropriate securities
commission. Statements in lieu of prospectus may have fewer regulatory requirements.

Approval
A prospectus needs approval from the securities commission before it can be used, while a statement in lieu of
prospectus may not require approval.

Distribution
A prospectus is usually distributed to potential investors, whereas a statement in lieu of prospectus may not
be widely distributed.

Timeframe
A prospectus is typically prepared and distributed when a securities offering takes place, whereas a statement
in lieu of prospectus may be prepared and distributed at any time.

Purpose of use
Prospectuses are used to attract investment in securities, whereas a statement in lieu of prospectus is typically
used for less formal purposes, such as enabling a company to make a public offering without the cost and
time associated with preparing a prospectus.
Table on Differences Between Prospectus and Statement in Lieu of Prospectus

Basis Prospectus Statement In Lieu of Prospectus

Object Provides information about a Used in specific situations when a

company’s securities regular prospectus can’t be used

Matters Offers detailed information about the Contains less detailed information
Contained company compared to a prospectus

Issue Typically issued by a newly going public Issued by a company already

company or one offering new securities trading in the market

Approval Requires approval from securities No such approval is needed to issue

commission a statement in lieu of prospectus

Distribution Generally distributed to potential Not widely distributed

investors

Time Prepared at the time or before offering Can be prepared or distributed at

securities any time

Use Used to gather investment through Used for less formal purposes
securities

Conclusion
A Statement in Lieu of Prospectus is a document issued by a publicly traded company, which provides
essential information about the company’s securities without the extensive detail found in a traditional
prospectus. It is employed in specific situations where a regular prospectus cannot be used, such as when a
company that is already trading in the market wishes to offer additional securities.
Unlike a prospectus, a statement in lieu of prospectus does not require prior approval from securities
commissions and is not widely distributed. It serves a less formal purpose, allowing companies to make public
offerings without the time and expense associated with a full prospectus.

Pre- incorporation Contracts:

A corporation, though regarded as an independent person in the eyes of law, never materializes by itself.
Behind every company there are persons or association of persons who strive to actualize the being of a
company. These persons are most times referred to as promoters.
The promoter is obligated to bring the company in the legal existence and to ensure its successful running and
in order to accomplish his obligation he may enter into some contract on behalf of prospective company.
These types of contract are called 'Pre-incorporation Contract'.

These are contracts which the promoters of the company make before the company is incorporated, on the
assumption the company will assume responsibility for the contract.

"A pre-corporation contract is one which is entered into when the Company is in the process of being
incorporated but is not yet completed it. At common law such contracts were held to be void, as the Company
is not yet in existence."

The person who enters into a pre-incorporation agreement is usually called the Promoter. The Indian
Companies Act 2013 defines the Promoter under Section 2(69). The Job of promoter is not only limited
towards, performing certain duties, but surely it extends toward the incorporation of a company. It depends
on the nature of the company which is to be established, to arrange their respective persons.

Pre-incorporation contracts perform a valuable function. By permitting valid and binding legal commitments
with third parties, nascent companies are able to secure significant and sometimes essential services necessary
to become a fully capitalized and stable corporation.

Cockburn C.J., described a promoter as:

"one who undertakes to form a company with reference to a given project and to set it going and who takes
the necessary steps to accomplish that purpose"

In Lagunas Nitrate Co. v. Lagunas Syndicate, it was stated that:

"To be a promoter one need not necessarily be associated with the initial formation of the company; one who
subsequently helps to arrange floating of its capital will equally be regarded as a promoter."

"There are, however, significant problems that plague pre-incorporation contracts, such as the spectre of
fraud by entrepreneurs and promoters, as well as the possibility of pre-incorporation commitments being
disregarded or voided after the fact.

These problems give rise to certain legal issues and questions which include, could the company ratify or
adopt a pre-incorporation contract so as to become liable upon it?; if the company cannot, were those who
acted for the company before its incorporation personally liable on the contracts made by them? In these
situations, parties look to legal statutes and case laws to determine the enforceability of such pre-
incorporation contract, liability of parties if any, remedy available for parties to the contracts, and finally the
issue of who bears the risk of loss." The project discusses all these questions in detail.

Legal Status Of Pre-Incorporation Contracts

"The legal status of a pre-incorporation contract is not easy to assess. Going by the definition of the contract,
there have to be at least two parties/persons who enter into contract with each other. "So, the general
principle is that if one of the parties to the contract is not in existence at the time of entering into the contract
then no contract will there.

Hence, the company can't enter into a contract before it comes into existence, and it comes into existence only
after its registration. Thus it is said that the pre-incorporation contract is entered into by the promoters on
behalf of the company.

The promoters, while entering into the contract, act as agents of the company. However when the principal,
that is the company is itself not in existence, how can it appoint an agent to act for it." So, the promoters,
themselves" and not the company, become personally liable for all contracts entered into by them even
though they claim to be acting for the prospective company.

But under section 230 of the Indian Contract Act , "an agent cannot personally enforce contracts entered into
by him on behalf of his principal, nor is he personally bound by them if he specifies clearly, at the time of
making the contract, that he is only acting as an agent and he is not personally liable under the contract. So if
this principle is applied, the contract becomes in fructuous as neither of the parties is liable under the
contract."

Before Specific Relief Act, 1963

"A pre-incorporation contract never binds a company since a person (legal or juristic) cannot contract before
his or its existence and a company before incorporation has no legal existence. Another reason is that
promoters are proverbially profuse in their promises and if the corporation were to be bound by them, it
would be subject to many unknown, unjust and heavy obligations."

"Even where there is a request purported to enforce such a contract, the company cannot be found because
ratification is not possible as the ostensible principal did not exist at the time the contract was made. In re
English and colonial Produce Company case , a solicitor was engaged to prepare the necessary documents
and obtain the registration of a company. He paid the registration fee and incurred the certain expenses
incidental to registration. It was held in this case that the company was not liable or bound to pay for his
services and expenses."

"The company is also not entitled to sue on a pre-incorporation contract. As it was held in the case of Natal
land and Colonisation Company v. Pauline Colliery Syndicate that the syndicate was not entitled to its claim
as it was not in existence when the contract was made and a company cannot obtain the benefit of a pre-
incorporation contract in the suit of specific performance.

So, fact of this case was that the a 'N' company contracted with 'A', the nominee of the syndicate company
which was not even incorporated, to grant a lease of certain coal mining rights for three years. After the
syndicate was registered, it claimed the contracted lease which the company 'N' refused."

After Specific Relief Act, 1963

"Until the passing of the Specific Relief Act, 1963, in India the promoters found it very difficult to carry out
the work of incorporation. Since contracts prior to incorporation were void and also could not be ratified,
people hesitated to either supply any goods or services for the cause of incorporation. However, the Specific
Relief Act, 1963 came as a relief to the promoters.

Section 15(h) and 19(e) of the Specific Relief Act provides as" follows:
1. The contract should have been entered into by the promoter for the purpose of the company.
2. The terms of incorporation should warrant should warrant such contract.
3. The company should accept the contract after incorporation.
4. Such acceptance should be communicated to the other party to the contract.
"Section 15(h) of the Specific Relief Act, 1963, the definition, it expressly states that the contracts
incorporated before the incorporation stage are "entered into by the promoters of the for the very purpose
and utility of the company and subject to terms of incorporation of the company, the company may ask for
specific performance from the third party.

However, this condition can only be applied if, after the registration/incorporation, the company has
expressly demonstrated acceptance of those contracts, and communicated such contracts to the third party
concerned." Under identical circumstances the other party to the contract under Section 19(e) of The Specific
Relief Act, 1963 may enforce specific performance against the company.

Accordingly, in order for the company to enforce the contract against the other party to contract, the
members must ratify the contract followed by a communication of acceptance. The company may not receive
any benefit from such a contract unless the contract is accepted by the company and the promoters would be
personally liable for the contracts."

Role Of The Promoter

The Common Law propounds that "the term promoter is a short and convenient way of designating those
who set in motion the machinery by which the Act enables them to create an incorporated company" and
therefore promoter is one who "undertakes to form a company with reference to a given project and to set it
going, and who takes the necessary steps to accomplish that purpose."

"Promoter plays a very important role in a company. Formation of a company starts with the promotion of a
company. Usually the idea of the company will be of the promoters, they have the idea of the business and its
feasibility.

"Promoter is a person who brings about the incorporation and organization of a corporation. He brings
together the persons who become interested in the enterprise, aids in procuring subscriptions, and in motion
the machinery which leads to the formation itself."

Under Section 2 (69) Companies Act, 2013 "promoter" means a person:

1. Who has been named as such in a prospectus or is identified by the company in the annual return
referred to in section 92; or
2. Who has control over the affairs of the company, directly or indirectly whether as a shareholder,
director or otherwise; or
3. In accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act: provided that nothing in sub-clause (c) shall apply to a person who is acting
merely in a professional capacity; i.e. CA, Attorney

"The eminence of a promoter is generally terminated when the Board of Directors has been formed and they
start governing the company. Technically, the first persons who control the company's affairs are its
promoters. They carry out the necessary investigation to find out whether the formation of a company is
possible and profitable. Thereafter, they organize the resources to convert the idea into a reality by forming a
company. In this sense, the promoters are the originators of the plan for the formation of a company.

They are the ones who It to arrange or find ones who can arrange the share and loan capital and other
financial resources, Promoters are the one who arrange for the company to acquire the business which the
company is to conduct or the property or assets from which it is to derive its profits or income, when these
things have been done, the promoter hand over the control of the company to its director, who are themselves
under a different name."

Functions Of A Promoter
1. The formation of idea and forming the company and explore the possibilities.
2. To conduct the negotiation for the purchase of business.
3. To collect the number for signing of the MOA and the AOA.
4. To decide the name of the company, location of the registered office, amount and form of share
capital.
5. To get the MOA and the AOA drafted and printed.
 6. To arrange for the minimum subscription.
7. To arrange for the registration of company and certificate of incorporation.

Liability Of The Promoter

"Promoters are generally held personally liable for pre-incorporation contract. If a company does not ratify
or adopt a pre-incorporation contract under the Specific Relief Act, then the common law principle would be
applicable and the promoter will be liable for breach of contract.

"The common Law in this context gave prime importance to the intention of the parties in adjudicating the
contract. If the promoter purported to act for the corporation, then he was held personally liable for the
contract. However, if the contract is entered in name of the proposed company and the promoter merely
authenticated the signature, the promoter was absolved from all liability." The justification for the same was
based on the intention of the parties i.e. who they look to when contracting."

A promoter is subjected to liabilities under the various provisions of the Companies Act:
● Section 26 of the Companies Act, 2013 lay down matters to be stated in a prospectus. A promoter
may be held liable for non-compliance of the provisions of the section

● Under section 34 and 35, Companies Act, 2013 a promoter may be held liable for any untrue
statement in the prospectus to a person who subscribes for shares or debentures in the faith of such
prospectus. However, the liability of the promoter in such a case shall be limited to the original
allottee of shares and would not extend to the subsequent allotters.

● According to section 300, a promoter may be liable to examination like any other director or officer
of the company if the court so directs on a liquidator‟s report alleging fraud in the promotion or
formation of the company.

● A company may proceed against a promoter on action for deceit or breach of duty under section 340,
where the promoter has misapplied or retained any property of the company or is guilty of
misfeasance or breach of trust in relation to the company.

● The Madras High Court in Prabir Kumar Misra v. Ramani Ramaswamy, has held that to fix liability
on a promoter, it is not necessary that he should be either a signatory to the Memorandum/Articles
of Association or a shareholder or a director of the company. Promoter's civil liability to the
company and also to third parties remain in respect of his conduct and contract entered into by him
during pre-incorporation stage as agent or trustee of the company."

Novation Of Contract
Novation of contract is defined in Scarf v Jardine as, 'being a contract in existence, some new contract is
substituted for it either between the same parties (for that might be) or different parties, the consideration
mutually being the discharge of the old contract'.

"Novation is different from the Ratification; because in Novation, a new contract is made on the same terms
but this time between the company and the third party, whereas in Ratification, dates back to the time of the
act ratified, so that if the company ratifying, who is not in existence, cannot itself have then performed the act
in question its subsequent ratification of it is ineffective.

In the situation of Novation of Contract, the Company can replace the promoter from the pre-incorporation
contract. But one might say that such contract would not be called pre-incorporation contract, but it should
be called post-incorporation contract; because novation of contract result into a new contract." In Howard v
Patent Ivory Manufacturing , the English Court accepted the novation of contract. It was observed by the
court that even though the promoter is personally liable for the pre-incorporation contract, he can shift his
liability to the company. This novation of contract principle was later incorporated into the Specific Relief
Act, 1963."

Under Specific Relief Act

Under the Specific Relief Act 1963, section 15(h) and 19(e) are the two important sections for pre-
incorporation contract. (As explained under second sub-heading).

Relationship Between The Promoter And The Company

Though the case laws and the academic discourse on this issue has been multifaceted and inconclusive but the
Indian Supreme Court has affirmed that the relation between the two as that of a fiduciary relation. "It
rejected the position of the promoter with respect to that of the unincorporated company as that of agency or
trustees." In the case of Weavers Mills v. Balkis Ammal , it was held that even without express conveyance of
property by the promoter to the unincorporated company, since the promoter stands in fiduciary duty to the
company, all the benefits of the pre-incorporation contract would pass on to the company.

"Position of the promoter is fiduciary concerning the company which the promoter promotes his position is
quasi legal. A promoter is neither a trustee nor an agent of the company which he promotes because there is
no trust or principal in existence at the time of his efforts. But certain fiduciary duties, like an agent, have
been imposed on him under the Companies Act. As such he is said to be in a fiduciary position (a position full
of trust and confidence) towards the company and the original allottee of shares." Consequently, a promoter
must make full disclosure of the relevant facts, including any profit made.

"One position can be that if the company accepts the benefits of the contract, then it must accept the burden
too and hence must compensate the promoter for all his expenses under the said contract. However, if the
company doesn't ratify the contract, then the promoter can't claim for reimbursement."

"As he has a fiduciary relationship with the company so generally there is no issue with regard to his
remuneration. The Chancery Court in the Re English & Colonial Produce Co. case held that a promoter is
not entitled" to claim expenses in his duty unless there is an express provision to do so but he is entitled to a
reasonable remuneration as stated in the Article of Association.

In Touche v Metropolitan Rly Warehousing Co. Lord Hatherly highlighted the importance of remuneration
saying that "the help of the promoter is unique which requires great efficiency, power and which is employed
in developing a business plan and making it so to the best benefit and thus should be given his fees."

Case Laws

Kelner V. Baxter
In this case, "on behalf of unformed company i.e. before the incorporation of the company, the promoter
accepted an offer of Mr. Kelner to sell wine, subsequently the company failed to pay Mr. Kelner, and he
brought the against the promoter with whom he entered a contract. The court found that the principal-agent
relationship cannot be in existence in the pre-incorporation contract that means before incorporation of a
company and if the company is unformed, the principal of an agent cannot be in existence.

He further explains that the company cannot take the liability of pre-incorporation contract through
adoption or ratification of the contract and the company was stranger at the time they enter a contract." So,
he held that promoters are personally liable for the pre-incorporation contract because they act on behalf of
the unformed company as they are the consenting party to the contract.
Newborne V. Sensolid (Great Britain) Ltd
This case explain the facts of in a different way and developed the principal further. "If the company entered
a contract before incorporation, the other contracting party can have refused to perform his duty to that
contract." The court observed that before incorporation the company cannot come into existence and if it is
not in existence then the contract which the unformed company signed would not be in existence. So,
company cannot bring an action for pre-incorporation contract, and the promoter cannot bring the suit
because they were not the party to contract.

Goodman V. Darden
In the instant case both the parties were aware of the fact, that the corporation is non-existent at the time of
making the contract and further that, the corporation accepted the contract and the promoter who is acting
on behalf of the corporation directed all the payments received under the contract by the corporation itself.
"Still the court went ahead to hold that the intention of the third party was never to release promoter form
their personal liability for entering the contract on behalf of the corporation having an intent that
corporation has not yet formed.

The knowledge of it being a pre-incorporation contract would indicate that to reduce the uncertainty, the
third party was never had an intent to release the promoter from their liability too which didn't end of
corporation adopting the contract. This is going to ask for warranty that the corporation would perform its
obligations, which is comparable to the South African statutory law.

Thus, what the court examines is this the third parties as to limit the liability of the promoter on the
corporation adopting the contract the third party intended to do it." This case clarified that just because the
co rporation adopted the contract, that doesn't mean the promoter would be dissolved from all his personal
liability.

Weavers Mills V. Balkis Ammal & Ors.

In this case:
"The promoters have agreed to purchase some property for and on behalf of the company. On incorporation,
the company assumed possession and constructed structures upon it. The Madras High Court held that
without disclosure of all the facts and the materials related to the contract the promoter has entered, since the
promoter stands in fiduciary duty to the company, all the benefits of pre-incorporation contract would pass
on the company".

The company's title of the property would not be set aside.

Conclusion And Suggestions

"The promoter is obligated to bring the company into the legal existence and to ensure its successful running,
and in order to accomplish his obligation; he may enter into some contract on behalf of the prospective
company. These types of contract are called 'Pre-incorporation Contract'. Therefore, Pre-incorporation
contracts, though at first stage may appear to be with no legal status but they are very much legally
acceptable and enforceable in the tribunal and courts.

There is no legal position of a promoter as he only has a fiduciary relationship with the company as he is
neither an agent nor a director or an employee. He cannot make secret profits or else he will be held
accountable. Therefore there are many liabilities on him as he does the duties of the drafting of the
prospectus, entering into pre-incorporation agreements etc.
In Indian Law the rule of Kelner v. Baxter is applicable but under the Specific Relief Act 1963, section 15(h)
and 19(e) promoter can shift his right and responsibility to the company, if it is warranted by the terms of
incorporation. The principle of novation of pre-incorporation contract is also applicable, the reason behind is
that, the novation replace the old contract with the new contract, so there is no problem of non-existence of
company."

Membership in a Company:

By function, an organisation consists solely of various workers to describe typically. The workers with the
same thoughts in their minds have to follow their leader’s footpath to accompany them on the journey. The
success of a perfectly plotted plan depends upon its exhibition in action. Even though the leader is in the
decision-making, workers are also allowed to put forward their opinions and consider them worthy enough.
More experienced workers are given honors with promotions. Above all, a company can’t succeed without
the worker’s contribution. So, it is safe to say that workers are the core part of an organization that works
smoothly. Let us know about the Membership in a Company in detail.

Who Is a Member?
A company member is a person who agrees to become a part of the company by entering their name in the
list of registered members, that is, the ‘Register of members’. The person designated to become a member
should have to accept the norms as a part of the company. They also tend to hold the shares of the company
under their names. In a limited company, those who own shares are called members. But in an unlimited
company, those people who have liability claims in the company’s debts are the members.
Members are different from shareholders in some aspects. For example, shareholders own a part of the
company while the members do not. Members are appointed in a company that is stated accordingly in the
Companies Act 2013. However, shareholders are not listed in the act. Each company should have a minimum
number of members and shareholders limited to their shares. You may officially become a company member
once you sign the memorandum with the appropriate details.

Membership in the Company

According to the Companies Act 2013, those who agreed to include their name under the company’s list of
members by signing the memorandum are the rightful members of the organization. The people who are
members of a company will be provided with a membership card as a token of proficiency for their
acceptance. After you accept to become one of the members of the company, there are some official steps to
be taken care of.
To complete the process of acquiring membership in a company, the following two elements are essential to
be presented:
● An agreement is to be signed for membership acceptance.
● The relevant person’s name is in the ‘Register of members’.
Company Registration in India

Modes of Acquiring Membership

Considering the imprinted in the Companies Act 2013, the membership of a company can be acquired in the
following ways:
● Subscribing to the memorandum.
● Written agreement.
● Shareholding.

Subscribing to the Memorandum

Memorandum is a paper of agreement that clearly defines a member’s role and liabilities. A memorandum
acts as a tool for accepting weapons for the members. By accepting the memorandum, they pledged to
become a company member. Their names are enrolled in the Register of members as a completion of the
process.After that, if the members want to own shares in the company, they will become the shareholders.
Written Agreement
In the company management, everything depends upon the agreement basis. You must strictly follow the
company rules and sign the agreement for each decision. To become a company member, you must sign the
written agreement as a memorandum to show your acceptance.
The same goes for your shareholder prospects too. There are four ways to this aspect:
1. Application and allotment: To become a member, you must apply for the company’s shares. Notice
of allotment gives your acceptance, and your name will be entered into the list of members.
2. Transfer of shares: It is another way of acquiring membership by acquiring shares with other
existing members to enrol your names in the Register.
3. Estoppels: If you are obliged to enlist as a company member without definite cause, the person may
be estopped to deny his membership.

Shareholding
You can become a member when your anime is entered under the company’s beneficial owner. In this case,
you need not submit the written agreement for membership acceptance.

Rights and Liabilities of a Membership

Liability is the state of accepting being responsible for something by accepting your role. The company’s
members also have some liabilities in pursuing their membership. The liabilities are the person’s
responsibilities in an organization.
Some of the particular responsibilities the members have to sustain are:
● You should make deals if the law allows.
● You can pay due shares if you want.
● You should follow the majority’s decision.
● It would be best if you contributed to the company’s assets.
For completing your work with utter determination, you are gifted with certain rights to enlighten your
authority over the company:
● You are given rights to access documents and other account details.
● Rights to make fundamental decisions for corporate dealings.
● As a member, you have the right to participate in general board meetings.
● You have the right to appoint new directors.
● You have given the right in the company’s profit participation.
● You can oppose any mismanaging decisions and other wrongdoings.

Removal of Membership
The termination of membership is the process of officially removing their name from the ‘Register of
members’. It is not a simple process but acquires principle changes in the member’s list.
The following are the ways of removing one’s membership from the company:
1. Transfer of membership: One of the standard methods of removing a member from the company.
You can transfer your shares to your preferred person. After transferring the shares, your name will
be removed from the registered member of the company.
2. Transmission of membership: It slightly differs from the above mode of membership removal. In this
mode, your membership will be transferred to your future descendant.
3. Surrender of membership: The membership can also be removed by submitting your part shares to
the company with the board acceptance report.
4. Forfeiture of membership: It is unfortunate for a member to lose their share over something. Also,
your membership card will be terminated if they claim to sell their share.
Conclusion
Membership in a company is a crucial prospect for maintaining the company’s shares and transactions.
Members are the company’s assimilators of dealings and decisions.

Borrowing Powers:
Every trading company has an implied power to borrow, as borrowing is implied in the object for which it is
incorporated. A trading company can exercise this power even if it is not included in the Memorandum.
However non-trading company has no implied power to borrow and such power can be taken by it implied
power to borrow and such power can be taken by it by including a clause to that effect in the Memorandum.

Definition
The ability to borrow more funds. A person or company with a great deal in assets and little in debt is likely
to have greater borrowing power than a person or company in the opposite position.

Restrictions on borrowing power

A public company can borrow only after the receipt of Commencement Certificate. [Section 149(1)]. But a
private company can borrow immediately after the incorporation
The Board of Directors may borrow moneys by passing a resolution passed at the meetings of the Board. The
board may delegate its borrowing powers to a Committee of Directors. Such a resolution should specifically
mention the aggregate amount upto which the moneys can be borrowed by the Committee, the Managing
Director, Manager or any other principal officer of the company on such conditions as it may prescribe
[Section 292 (1) (c)]
The moneys borrowed together with the moneys already borrowed by the company (excluding loans obtained
from banks i.e. working capital) shall not exceed the aggregate of the paid up capital and the free reserves.
[Section 293(1)(d)]
It may be noted that a company may borrow in excess of its paid up capital and free reserves if it is so
consented and authorized by the shareholders at a general meeting.

Transactions, which are not borrowing

Temporary loans (repayable within six months or on demand) obtained from the company’s banker in the
ordinary course of business.
Borrowing of money by a banking company in the ordinary course of business.
Hire purchase and leasing transactions.
Purchase of machinery on deferred payment.

Ultra Vires Borrowing

A Company is said to resort to ultra vires borrowing if it exceeds the authority given to it in this respect by
the Companies Act, the Memorandum and the Articles of the company. An act of borrowing by the company
may be ultra vires (outside the power of) the company or ultra vires the directors or ultra vires the Articles.
Void ab initio borrowings – Where such loan is ultra vires the company, such loan is null and void and does
not create an actionable debt. Any securities given in respect thereof are inoperative. Thus, the lender cannot
sue the company for the return of the loan and shall be under an obligation to return back the securities, if
any.
However, if the lender has acted in good faith that is without any knowledge that the company borrowed the
money beyond its powers, he may have the following remedies
1. Injunction - If the company has not spent the money so borrowed, the lender may obtain an
injunction order against the company restraining it from spending the amount and recover the same.
2. Restitution - If the money has been invested in some particular asset, he may claim that asset, or if
such asset cannot be ascertained he may claim that any increase in the assets as a result of such
borrowing be restored to him in the even of a winding up.
3. Subrogation - If the money has been applied in paying off some debts of the company, he is entitled
to step into the shoes of the creditors so paid off and can rank as a creditor of the company to the
extent of the money so applied.
4. Suit for breach of warranty - The lender may sue the directors personally for breach of implied
warranty of authority and claim damages for the same.
 5. Ratification of borrowing - If the borrowing power exercised by the company is ultra vires the
Memorandum, that is beyond the powers given to its by the Memorandum, such borrowing cannot
be ratified afterwards in any way, even by a unanimous resolution of the shareholders in a general
meeting.
But if the borrowing is ultra vires the Articles, but intra views the Memorandum the act of borrowing can be
ratified by the shareholders in general meeting by altering the Articles or by passing a resolution as per
Articles.
If the borrowing is ultra vires the directors but intra vires the Memorandum, that is within the powers given
by the Memorandum but beyond the authority of the directos, the company in general meeting may ratify
such act of the directors. In that case the debt will be valid and binding on the company.

BORROWINGS & CHARGES

Even if the borrowing is not ratified by the company, the lender in good faith will be protected since the
directors in borrowing the money had acted as agent of the company. However in that case the directors will
be liable to indemnify the company against the loss incurred thereby.
Even in the case of unauthorized borrowings, the company will be liable to repay, I it is shown that the money
had gone into company’s pocket [Lakshmi Ratan Cotton Mills Co. Ltd v. J K Jute Mills Co; Ltd (1957) 27
Comp. Cas. 660 (All).]

CHARGES
Borrowing has become an equally important method along with share capital of financing projects.
Corporate borrowing has its own peculiarities. No single individual may in normal circumstances be in a
position to meet the loan requirements of a company. Loan-money has, therefore, to be raised from a large
number of individuals very much in the same way as share capital. Loans may have to be obtained in a
sequence one after the other.
The problem was solved by the evolution, on the one hand, of debentures and, on the other, of the concept of
floating charge, both being reserved only for the corporate sector. The same assets are charged to several
lenders and also to several lenders in a series. That raises a question as to who shall have priority. This gave
rise to the concept of pari passu ranking. Since other trade creditors have also to seek payment only out of the
company’s assets, the problem had to be tackled as to how they should know, before supplying more credit,
what assets would be available as security for their payments?
The Act prescribes for registration of charges with the Registrar of Companies, and also gives a list of assets a
charge on which must be registered. Registration of charges identifies the assets, which are subject to the
charge. It becomes a source of knowledge, and, therefore, operates as constructive notice and a protection, to
“all classes of persons interested in knowing the assets position of the company. It makes the charge effective
against all quarters including the liquidator.

Types of charges
1. Fixed charge – a charge is fixed when it is made specifically to cover definite an ascertained assets of
permanent nature such as land, building, o heavy machinery. A fixed charge passes legal title to certain
specific assets and the company loses the right to dispose of the property unencumbered, though the company
retains possession of the property.
2. Floating charge – it is a charge on the current assets of the company, present or future which changes from
time to time in the ordinary course of business e.g. stock in trade, bills receivable, cash in hand, work in
progress, goods in transit, inventory etc.
(i) When the company goes into liquidation;
(ii) When the company ceases to carry on the business;
(iii) When the creditors or the debenture holders take steps to enforce this security e.g. by appointing receiver
to take possession of the property charged;
(iv) On the happening of the even specified in the deed.
Registration of charges [Section 125]
The security created and charged for the following purposes must be registered with the ROC within 30 days
(or further period of 30 days with additional fees) after the date of their creation:
(i) Securing any issue of debentures;
(ii) Uncalled share capital of the company;
(iii) Any immovable property;
(iv) Book debts, stock in trade or other current assets of the company;
(v) Any movable property (not being a pledge);
(vi) Calls made but not paid;
(vii) IPRs of the company.
The ROC shall with respect to each company maintain a Register of charges containing all the specified
particulars. Upon registration of charge by the company, ROC shall issue a Certificate of charges, which
shall be conclusive evidence.

Memorandum of satisfaction [Section 138-140]

On payment or satisfaction of any charge in full, the company must notify the fact to the ROC within 30 days
from the date of such payment or satisfaction. The ROC shall on receipt thereof, shall record the same after
send due notice to the concerned creditor and on receipt on him being satisfied (the creditor may issue NOC
to the satisfaction) shall register the satisfaction of the charge. A memorandum of satisfaction shall be entered
in the Register by the ROC.
The Central Government has been empowered to extend time for registration of charge or satisfaction of
charge of issue of debenture of a series and to order that the omission or mis-statement in the Register of
Charges be rectified.

Debentures:

A debenture is a kind of document acknowledging the money borrowed containing the terms and conditions
of the loan, payment of interest, redemption of the loan, the security offered (if any) by the company. The
present article briefs the Debentures under Companies Act, 2013 and its features and types.

Debentures under Companies Act, 2013

As per Section 2(30) of Companies Act, 2013 “debenture” includes debenture stock, bonds, or any other
instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or
not;
(a) the instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934; and
(b) such other instrument, as may be prescribed by the Central Government in consultation with the Reserve
Bank of India, issued by a company, shall not be treated as debenture;]
From the above definition, we conclude that debentures are a type of bond or loan which a company takes
against security or in any other form
From the above definition, we conclude that Debentures under the Companies Act, 2013 are a type of bond or
loan which a company takes against security or in any other form
A person holding debenture or debentures is called a debenture holder. A debenture holder is the creditor of
the company.
A debenture is a document issued under the seal of the company. It is an acknowledgment of the loan
received by the company equal to the nominal value of the debenture. It bears the date of redemption and
rate and mode of payment of interest.

Issue of Debentures
A Debenture is a unit of the loan amount. When a company intends to raise the loan amount from the public
it issues debentures. Issuing debentures means the issue of a certificate by the company under its seal which is
an acknowledgment of debt taken by the company. The procedure of issue of debentures by a company is
similar to that of the issue of shares. A Prospectus is issued, applications are invited, and letters of allotment
are issued. On rejection of applications, application money is refunded. In the case of partial allotment, excess
application money may be adjusted towards subsequent calls.
For more details on the Issue of Debentures by a Company, click here

Features of debentures
A debenture is a debt tool used by a company that supports long-term loans. Here, the fund is a borrowed
capital, which makes the holder of debenture a creditor of the business. The debentures are redeemable and
unredeemable, freely transferable with a fixed interest rate. It is unsecured and sustained only by the issuer’s
credibility.
● A debenture is a loan document that acknowledges a debt
● The debentures are the part of the borrowed fund capital
● It is in the form of a certificate issued under the seal of the company called a debenture deed
● The interest is payable irrespective of the profit level, which means that even when the company is at
loss, it has to pay the interest
● Debentures can be secured against the assets of the company or maybe unsecured.
● Debentures are generally freely transferable by the debenture holder.
● Debenture holder does not have the right to vote in the company’s general meetings of shareholders,
but they may have separate meetings to vote.
● The debenture holders are eligible to get a fixed rate of interest.
● In the event of liquefying the company, the debenture holder get preference in terms of repaying the
borrowed amount

Different Types of Debentures

Unlike shareholders, the debenture holders who are the creditor of the company do not hold any voting
rights. The debentures are of the following types:

Types of Debentures based on Security

Secured Debentures
Secured debentures are the kind of debentures where a charge is being established on the properties or assets
of the enterprise for any payment. The charge might be either floating or fixed.
The fixed charge is established against those assets which come under the enterprise’s possession for the
purpose to use in activities not meant for sale whereas floating charge comprises all assets excluding those
accredited to the secured creditors. A fixed charge is established on a particular asset whereas a floating
charge is on the general assets of the enterprise.

Unsecured Debentures
This type of debentures does not have a particular charge on the assets of the enterprise. However, a floating
charge may be established on these debentures by default. Usually, these types of debentures are not
circulated.

Types of Debentures based on Tenure

Redeemable Debentures
These debentures are those debentures that are due on the cessation of the time frame either in a lump-sum
or in installments during the lifetime of the enterprise. Debentures can be reclaimed either at a premium or
at part.
Irredeemable Debentures
These debentures are also called Perpetual Debentures as the company doesn’t give any attempt for the
repayment of money acquired or borrowed by circulating such debentures. These debentures are repayable
on the closing up of an enterprise or the expiry (cessation) of a long period.

Types of Debentures based Convertibility

Convertible Debentures
Debentures that are changeable to equity shares or in any other security either at the choice of the enterprise
or the debenture holders are called convertible debentures. These debentures are either entirely convertible
or partly changeable.

Non-Convertible Debentures
The debentures which can’t be changed into shares or in other securities are called Non-Convertible
Debentures. Most debentures circulated by enterprises fall in this class.

Types of Debentures based Coupon Rate

Specific Coupon Rate Debentures

Specific Coupon Rate Debentures Debentures are circulated with a mentioned rate of interest, and it is
known as the coupon rate.

Zero-Coupon Rate Debentures

These debentures don’t normally carry a particular rate of interest. To restore the investors, such types of
debentures are circulated at a considerable discount and the difference between the nominal value and the
circulated price is treated as the amount of interest associated with the duration of the debentures.

Types of Debentures based Registration

Registered Debentures
These debentures are such debentures within which all details comprising addresses, names, and particulars
of holding of the debenture holders are filed in a register kept by the enterprise. Such debentures can be
moved only by performing a normal transfer deed.

Bearer Debentures
These debentures are debentures that can be transferred by way of delivery and the company does not keep
any record of the debenture holders Interest on debentures is paid to a person who produces the interest
coupon attached to such debentures.

Nature of Debentures

Debentures for cash

As defined above, debentures are usually issued for raising funds for the company. They are mainly issued
for cash. The Debentures can be issued either at par, at discount, or at a premium

Debentures as collateral security

Collateral security is additional security along with the primary security when a company obtains a loan or
overdrafts facility from a bank or any other financial institution. Debentures issued as such a collateral
liability are a contingent liability for the company, Only when the company defaults on such a loan plus
interest will this liability arise.

Debentures issued as consideration other than cash

This is another type of issue of debentures. Sometimes a company requires some assets or types of machinery,
plants, equipment that are huge in cost. The company need not have money at that particular time for the
payment
So, instead of making payment in cash, the Company issues debentures to the vendor against such purchase
with the terms of payment of the consideration other than cash

insider trading of company shares.

Insider Trading Definition

Insider Trading is the act of purchasing, selling, underwriting, or agreeing to underwrite the securities or
stocks of an organization by key executives/personnel of the company who have access to UPSI - Unpublished
Price Sensitive Information regarding the company.

Insider Trading Meaning

This is malpractice in which a company's unpublished sensitive information is used to trade in the company's
securities. Using this information to make an improper profit or loss is called Insider Trading. The
information is said to be "price sensitive" because it can affect a company's share price in the market.

Who is an Insider?
An insider is a person who is a part of the company whose shares he trades. He can be a person who owns
more than 10% of the company's stock, for example, a company's directors, presidents, and senior executives.
Sometimes the insider can be someone who isn't a part of the company but still has ample confidential
information on stock performance from a real company executive. Some NSE Insider Trading examples are:
Officers, directors, and employees of the company who trade in the securities of the company after
becoming aware of important and confidential business developments
Friends, peers, or relatives of such officers, directors, and employees, who exchanged securities after
receiving such information
Employees of legal, banking, and press firms who acted on information obtained about the provision of
services to the company whose securities they trade
Government employees who have exchanged confidential information learned from their office
Political intelligence consultants who can make suggestions or act on material non-public information
obtained from government employees
Others have misused and abused confidential information from their employers, family, friends, and
others.

Types of Insider Trading

This can be legal or illegal, depending on the type of material information available to the insider. If the
insider has non-public information, they are prohibited by law from trading their existing stock for that
company. On the other hand, if the information is already public, these people can trade safely without taking
legal action against them.

What Are The Effects Of Insider Trading?

Misuse of inside information is discouraged for several reasons:
1. Insiders take unfair advantage of the person whose information has been withheld
 2. It creates a conflict of interest because it is in the insider's interest and not in the company's best
interest.
3. It damages the prestige of the market and discourages investment.

Who Regulates Insider Trading in India

Several countries have objected to this practice. The USA was the first country to take action against Insider
Trading. The UK, too, followed suit and imposed many restrictions on administrators to control the practice.
TheSecurities and Exchange Board of India SEBI, under the Companies Act and SEBI Regulations 1992, and
the SEBI (Prohibition of Insider Trading) ("PIT") Regulations, 1992, strictly regulates NSE Insider Trading
in India today. Any merchant or insider caught violating the various regulations imposed by the government
agency can be subject to hefty fines.
The penalty under SEBI Act 1992 (Section 15G) and Companies Act 2013 (Section 195) cannot be less than
INR 10 lakhs and may extend to INR 25 crores or 3 times the profit of the tort of 'insider' as the case may be.

SEBI regulations
The SEBI has drafted the SEBI Regulations 2015, which sets out the rules for the prohibition and restriction
of Insider Trading in India.
The Insider Trading regulations provide that the transmission of any confidential information related to a
company by an insider is prohibited unless authorized.
The information misused by the person or another person on their behalf will be considered a violation,
which will be treated as a criminal offence under the law. This offence is punishable by imprisonment of up to
10 years or a fine of up to 25 crores, whichever is greater. Under the SEBI rules, the arbitrator may impose a
penalty on anyone who violates the provisions of the rules other than the offence committed under section 24
of the act.

The Restrictions/Prohibitions imposed by SEBI

The Insider Trading regulations impose the following restrictions:
The Regulations restrict/prohibit Insiders from communicating, providing, or providing access to UPSI
related to any publicly traded company or security to any person, including other Insiders.
These regulations restrict/prohibit a person from purchasing a UPSI from an insider related to a publicly
traded company or securities to any person, including other insiders.
The Regulation restricts/prohibits an insider, when in possession of UPSI, from dealing in securities listed or
proposed for listing on a recognized stock exchange.
SEBI also has the authority to investigate NSE Insider Trading and related matters. SEBI may exercise
investigative powers for two main reasons:
Investigate complaints from investors, intermediaries, or other persons regarding matters relating to
allegations of this practice; and,
Investigations based on its knowledge or information in its possession to protect the interests of securities
investors against violations of these regulations.
Under the Insider Trading regulations, company founders will be held liable regardless of their shareholder
status if they violate Insider Trading standards by using price-sensitive unpublished information. Of society
without a legitimate purpose.
Legal Insider Trading and Exceptions to the Rule
Disclosure is permitted for a legitimate purpose, to comply with a duty, or to comply with a legal
obligation.
Disclosure is permitted where it is in the best interest of the company.

Insider Trading Examples - Cases Of Insider Trading In India

On May 21, SEBI fined Indiabulls Venture, former non-executive director Pia Johnson, and her husband
Mehul Johnson for violating PIT regulations by exchanging the company's scrip using USPI.
 The incidence of this practice seems to be increasing as many large companies, such as SpiceJet, Sun
Pharma, Future Group, etc., appear to violate laws.
Rakesh Jhunjhunwala Case - Independent investor and billionaire Rakesh Jhunjhunwala has been
summoned by SEBI for alleged NSE Insider Trading at Aptech Limited. According to reports, the
regulator investigates the period between February and September 2016. Apart from Jhunjhunwala,
SEBI is also looking into the role of a member of his family in the matter.
Balram Garg Case - Another high-profile case of alleged Insider Trading came to light in December
2019, when SEBI issued a notice to PC Jeweler's Managing Director, Balram Garg. At the same time,
the government agency ordered the confiscation of approximately INR 8 Crore, which deserves two
promoters and associated units of alleged illegal trade.
Countless other cases are pending. However, the rate of conviction and the sentence according to the results
of SEBI are generally very limited. The government authority has also received violent criticisms due to the
poor application of commercial regulations. However, as a responsible trader, you should understand the
rules established by the authoritative body to reduce such instances of NSE Insider Trading.
SEBI has a long way to go to strengthen the governance of the NSE Insider Trading laws as it lags in many
ways, such as the lack of technical experience, making it very difficult for SEBI to catch the culprit.
Even if SEBI can identify the culprit, initiating Insider Trading cases is difficult because these allegations are
usually based on circumstantial evidence, which makes them difficult to prove. SEBI does not have the
authority or power to wiretap phones.

Conclusion
With such strict rules against Insider Trading, obtaining fines, and imprisonment, investors should ensure
that they do not engage in such illegal activities by being aware of its rules and regulations.

UNIT-3

Shares
Shares are defined as the units into which the total share capital of a firm is divided or split. It is a fractional
portion of an organisation’s share capital, and it also comprises the ground for the ownership interest within
the company. The individuals or groups who make the monetary contribution to the company to purchase the
shares are known as shareholders. The amount of authorised capital of the company, along with the total
number of shares in which it gets split, are mentioned in the Memorandum of Association. But the division of
shares along with the specific obligations and rights is recommended by the Articles of Association of that
company. As per the Companies Act, any organisation can issue the following two types of shares:
● Preference shares – Preference shares (also known as preferred stock) come with a dividend option
payable to the shareholders before the equity shares. In case the enterprise enters insolvency, the
members who own these preference shares are also designated to get paid from the assets of a
company. It is important to note that most of the preference shares have the option of a fixed
dividend, and it gets paid regardless of whether the firm makes a profit or not. However, the owners
of these shares do not possess any voting rights, unlike equity shareholders.
● Equity shares – The holders of equity shares (also known as ordinary shares) are the authentic
owners of the company. They, however, do not have the option of a fixed dividend, and they get paid
only when a company makes a profit. The owners of equity shares possess voting rights for the
selection of the management, and thus they have control over the working of the organisation. The
equity shareholders get a dividend only after the company pays off the creditors and the preference
shareholders.

Stock
Stock is defined as a type of investment done by both individuals and businesses when they put money in an
organisation with the aim to fetch higher returns. It is a common term that is used to describe ownership of a
part of the company that one has invested in. It also entitles the owner of a stock to a proportion of the
company’s assets and profits that is in proportion to the value of their shares. These stocks are bought and
sold mostly on the stock exchange markets, and they are the foundation for many investor portfolios. The
transactions for purchasing, selling as well as trading of stock have to conform with the government rules and
regulations to protect the investors from any fraudulent practices.

Difference between Shares and Stocks

Both shares and stocks can help individuals and organisations put their money in firms along with getting a
share of the profits. These two financial instruments are also a very important source for companies to raise
capital for the firm both in the short and long run. However, there are some crucial points of difference
between shares and stocks, and we will discuss them below to get a better understanding of the topic:
Shares Stocks

Definition

A share is a financial instrument that A stock is a financial instrument that represents part
represents the part ownership of a company. ownership in one or more organisations.

Denomination

The value of two different shares of a The value of two different stocks of a company may
company can be equal to each other. or may not be equal to each other.

Nominal Value

There is a nominal value that is associated There is no nominal value that is associated with
with shares. stocks.

Possibility of Original Issue

There is zero possibility of an original issue There is a possibility of an original issue in the case
in the case of shares. of stocks.

Paid-up Value

The shares of a company are either fully paid The stocks of a company (or a group of companies)
up or partially paid up. are always fully paid up.
 Scope

Shares have a narrower scope when Stocks have a wider scope when compared to shares.
compared to stocks.

Conclusion
Both shares and stocks have a very important role to play for any company that wishes to generate sufficient
capital to fulfil its long and short term needs. Although there are several differences between these two
instruments, both companies and investors use them on a regular basis to achieve their financial goals.

Types of Shares
Share, as defined in the Companies Act 2013, is the measure of a shareholder’s interest in a company’s assets.
In other words, shares represent a shareholder’s stake of ownership of a company.
Public limited companies can raise capital for their business by issuing stocks. Apart from possessing
ownership rights, these shares also carry an array of other entitlements. Some types of shares confer voting
rights, the right to dividends on priority, the company’s surplus profits, share in the company’s losses, etc.
A common feature in all variants of shares is the right to dividends, which a company pays out of the profit.

What are the Different Types of Shares?

As per Section 43 of the Companies Act 2013, shares can be broadly classified into two types –
● Ordinary Equity Shares
Ordinary or equity share is the commonest variant of stock that a public company issues to raise capital.
Typically, holders of ordinary shares enjoy voting rights, can attend general and annual meetings of a
company, and are also entitled to a company’s surplus profits.
● Preference Shares
Preference shares carry special rights or preferential treatments, especially in regard to dividend receipt and
capital reimbursement when an organisation is winding up.
In other words, preference shareholders receive dividends on the highest priority and also companies return
their capital before ordinary shareholders when undergoing liquidation.
Both these types of shares vary in regards to share in profitability, voting rights, as well as settlement of
capital when a company is winding up or is being liquidated.

Types of Ordinary Equity Shares

When it comes to types of shares, ordinary shares involve classification based on two understandings. One is
definition-based, and the other is feature-based.
The definition-based types of equity shares are –
● Authorised Share Capital
It denotes the total amount of capital that a company can raise by issuing stocks, as mentioned in the
Memorandum of Association (MoA).
● Issued Share Capital
As the name suggests, issued share capital refers to the amount of capital a company raises by means of
issuing stocks.
● Subscribed Capital and Paid-up Capital
It refers to a percentage of issued capital to which investors have subscribed. It can happen that investors do
not purchase all the shares that a company issues.
Feature-based types of equity shares are –
 ● Voting Shares and Non-voting Shares
As the name suggests, entities holding these voting shares are entitled to cast their vote in matters concerning
a company’s policies or election of directors. Typically most ordinary shares are voting shares.
In the case of non-voting shares, it might entail differential voting rights or none at all. An example of
differential voting rights is mentioned above, where Tata Motors issued ‘A’ shares in 2008.
● Sweat Equity Shares
Companies can issue shares to their employees and directors as a means of compensation, usually when they
perform excellently. By means of sweat equity shares, companies retain efficient employees by giving them a
stake in the ownership.
● Right Shares
Among the many types of stocks, a company issues this variant to its existing shareholders. In a stricter sense,
companies proffer existing stakeholders the right to purchase such shares before it is open for trade to
external investors.
● Bonus Shares
Companies issue bonus shares in lieu of monetary compensation for dividends. Therefore, existing
shareholders are only entitled to bonus shares. Organisations can also issue bonus shares to convert a portion
of retained earnings into equity shares.

Types of Preference Shares

The different types of shares under preference shares are –
● Redeemable and Irredeemable Preference Shares
In the case of redeemable types of shares, the issuing company and such shareholders agree that the company
can redeem or buy-back those shares at a later period, either after the expiration of a certain time or on a
future date.
Redeemable shares vary based on who can exercise the buy-back provision – the shareholder or the
organisation. An irredeemable share is, therefore, the exact opposite of a redeemable stock.
● Convertible and Non-convertible Preference Shares
Another way types of shares can be categorised based on whether they carry the provision of conversion or
not. To that effect, holders of convertible preference stocks can convert their holdings to equity shares upon
meeting specific conditions.
Conversely, holders of non-convertible preference shares are not entitled to that provision.
● Participating and Non-participating Preference Shares
Holders of participating preference shares have the right to partake in a company’s profits once a company
allots dividends to ordinary shareholders.
Therefore, when a company’s net income is substantially high, such shareholders stand to receive a part of
such profits. On the other hand, holders of non-participating shares are only entitled to a fixed dividend
payment. The latter is a commoner variant.
● Cumulative and Non-cumulative Preference Shares
If a company does not provide dividends for preference shares in a particular year, such dividend entitlement
is carried forward to the following year if it is a cumulative stock.
Conversely, in the case of non-cumulative preference shares, the dividend amount is not carried forward if an
organisation does not pay dividends in a specific year.

Statutory restrictions on allotment of shares:

A company makes an offer to subscribe to its shares by way of an application. "The allotment of shares
precedes the issue of shares. Allotment of shares means appropriation of unissued shares to any particular
person preliminary to the issue of shares. Issue of shares is something distinct from allotment and is some
subsequent act whereby the title of the allottee becomes complete. A re-allotment and re-issue of shares which
have already been issued and have subsequently been forfeited is not an issue of shares. An issue of a share
creates a movable property in the shape of the issued share. There can be no issue of a share which has
already been issued and which is already an existing article of property."[1]

Statutory restrictions on allotment (S. 39):-

The first step towards a valid allotment is the fulfillment of required minimum subscription amount. Every
company offering shares to the public has to state a minimum subscription amount in the prospectus.
Further, there is a restriction on the company towards allotment of shares until the minimum stated amount
has been subscribed and the application money has been received by the company in the form of a cheque or
any other instrument. Also, the minimum application money cannot be less than five percent of the nominal
value of security or any other percentage or amount specified by SEBI.

Another restriction imposed upon the company is towards receiving of minimum subscription amount within
a period of thirty days, failing which the company has to return the amount so received within a period as
may be specified. Also, a company making allotment of securities is required to file a return of allotment with
the registrar of companies in a prescribed manner.

Consequences of default- The penalty to be paid towards non-compliance by the company or the officer-in-
charge is of Rs. 1,000 for each default for each day the default continues or Rs. 1,00,000 whichever is less.

Applicable Rules: (Prospectus and allotment of securities) Rules, 2014-

# Rule 11- If the minimum amount has not been subscribed and application money has not been received then
a company is obligated to return the money within fifteen days. Further, the application money can be
credited only to the bank account from which the subscription was remitted.
\
# Rule 12- A company having a share capital makes an allotment of securities is required to file a return of
allotment with the registrar of companies within thirty days in form PAS-3 along with fees as specified in
(Registration offices and fees) Rules, 2014.

Shares to be dealt in on stock exchange (S. 40):-

The company offering shares or debentures to the public by way of a prospectus is required to first make an
application to one or more recognized stock exchanges and has to obtain its consent for the securities to be
dealt with in the stock exchange(s). Further, it is required to state in the prospectus, the name(s) of the stock
exchange in which the securities shall be dealt with. Also, it is mandatory to keep all the money received
towards subscription from the public on application in a separate bank account and it can only be used for
adjustment against allotment of securities if the securities have been permitted to be dealt with in the stock
exchange(s) specified in the prospectus or towards repayment to the applicants in case the allotment of
securities is not possible for any other reason, within a time period prescribed by SEBI.

Any condition which may require or bind the applicant to waive compliance with respect to any requirements
under this section is void. Further, a company is allowed to pay commission to any person in connection with
the subscription to its securities subject to certain prescribed conditions.

Consequences of default-A penalty of minimum five lakhs can be imposed upon the company which may
extend to fifty lakhs in case a default is made with respect to this section and every officer who is in default
shall be punishable with imprisonment upto one year or with a minimum fine of fifty thousand which can be
extended upto three lacs or with both.

Applicable Rules: (Prospectus and allotment of securities) Rules, 2014-

Rule 13- A company may pay commission to any person in connection with the subscription or procurement
of subscription to its securities, whether absolute or conditional, subject to the following conditions, namely:-
# the articles of association of the company shall authorize the payment of such commission;
# the commission may be paid out of proceeds of the issue or the profit of the company or both;
# the rate of commission paid or agreed to be paid shall not exceed, in case of shares, five per cent of the price
at which the shares are issued or a rate authorised by the articles, whichever is less, and in case of debentures,
shall not exceed two and a half per cent of the price at which the debentures are issued, or as specified in the
company's articles, whichever is less;
# the prospectus of the company shall disclose-(i) the name of the underwriters; (ii)the rate and amount of the
commission payable to the underwriter; and (iii)the number of securities which is to be underwritten or
subscribed by the underwriter absolutely or conditionally.
# there shall not be paid commission to any underwriter on securities which are not offered to the public for
subscription;
# a copy of the contract for the payment of commission is delivered to the Registrar at the time of delivery of
the prospectus for registration.

Private Placement (S.42):-

A company can make a private placement by way of issue of offer letters. An offer of securities/ invitation to
subscribe to securities can be made to a number of persons not exceeding 50 or to such number of people as
are prescribed. This proviso excludes the qualified institutional buyers and employees of the company being
offered securities under a scheme of employee stock option. Thus, this section does not regulate the offer
being made to an existing shareholder of the company. Further, if an offer is made to the people exceeding
the prescribed number, the same is deemed to be a public offer and is governed by the provisions relating to
public issues. Further, no fresh offer/invitation for allotment of securities can be made unless the ones made
earlier have been completed or withdrawn by the company.

Moreover, any offer which is in non-compliance with the provisions of this section is required to be treated as
a public offer and the same has to comply with the requirements of the Securities Contracts (Regulations)
Act, 1956 and SEBI Act, 1992.

The mode of payment towards subscription of securities is only by way of cheque, demand draft or other
banking channels, but in way can it be done by way of cash.

Consequences of default-In case a company fails to allot the securities within sixty days of receipt of the
application money for such securities, the company is obligated to return the money within fifteen days from
the date of completion of sixty days. Further, in case the company is unable to return the money within the
specified period then the company shall be liable to pay the money along with a twelve percent interest rate
from the expiry of sixtieth day.

The company is obligated to keep the money received on application in a separate bank account and the same
can only be used for either adjustment against allotment of securities or for repayment of monies when the
company is unable to allot securities.

[Exemption- As per notification [GSR 08(E)] dated 04/01/2017 and [GSR 09(E)] dated 04/01/2017 , a Specified
IFSC Public company and Specified IFSC Private company respectively is allowed to allot securities within
ninety days of receipt of the application money for such securities.]

Further, any offer made under this section can only be made to such persons whose names are recorded by
the company prior to the invitation to subscribe. Also, such persons should receive the offer by name, and
that a complete record of such offers is required to be maintained by the company in a prescribed manner
and the same is to be filed with the registrar within a period of thirty days of circulation of relevant private
placement offer letter.

A company offering securities under this section is prohibited from using any public platform such as
releasing any public advertisements or to utilize any media etc. to inform the public at large about such an
offer.

A company making any allotment of securities under this section, is required to file with the Registrar a
return of allotment in a prescribed manner including a complete list of all security-holders, with their full
names, addresses, number of securities allotted and other prescribed relevant information.

Penalty for contravention- A company making an offer or accepting monies in contravention of this section,
along with its promoters and directors is liable for a penalty which may extend to the amount involved in the
offer or invitation or two crore rupees, whichever is higher, and the company is also required to refund all
monies to subscribers within a period of thirty days of the order imposing the penalty.

Applicable Rules: (Prospectus and allotment of securities) Rules, 2014-

Rule14- A Company can make an offer or invitation to subscribe to securities through issue of a private
placement offer letter in Form PAS-4.
·A private placement offer letter shall be accompanied by an application form serially numbered and
addressed specifically to the person to whom the offer is made and shall be sent to him, either in writing or in
electronic mode, within thirty days of recording the names of such persons in accordance with sub-section (7)
of section 42.

Proviso- That no person other than the person so addressed in the application form is allowed to apply
through such application form and any application not conforming to this condition shall be treated as
invalid.

·A company cannot make a private placement of its securities unless-

(a) the proposed offer of securities or invitation to subscribe securities has been previously approved by the
shareholders of the company, by a Special Resolution, for each of the Offers or Invitations.
(b) Such offer or invitation is to be made to not more than two hundred persons in the aggregate in a
financial year.
(c) the value of such offer or invitation per person is to be with an investment size of not less than twenty
thousand rupees of face value of the securities;
(d) the payment to be made for subscription to securities is to be made from the bank account of the person
subscribing to such securities and the company shall keep the record of the Bank account from where such
payments for subscriptions have been received.
Proviso- that monies payable on subscription to securities to be held by joint holders shall be paid from the
bank account of the person whose name appears first in the application.
·The company shall maintain a complete record of private placement offers in Form PAS-5. Proviso- that a
copy of such record along with the private placement offer letter in Form PAS-4 shall be filed with the
Registrar with fee as provided in Companies (Registration Offices and Fees) Rules, 2014 and where the
company is listed, with the Securities and Exchange Board within a period of thirty days of circulation of the
private placement offer letter.

·A return of allotment of securities under section 42 shall be filed with the Registrar within thirty days of
allotment in Form PAS-3 and with the fee as provided in the Companies (Registration Offices and Fees)
Rules, 2014 along with a complete list of all security holders containing-
# the full name, address, Permanent Account Number and E-mail ID of such security holder;
# the class of security held;
# the date of allotment of security;
# the number of securities held, nominal value and amount paid on such securities; and particulars of
consideration received if the securities were issued for consideration other than cash

Intermediaries:

In company law, intermediaries refer to individuals or entities that play a role in facilitating various legal and
financial processes for companies. These intermediaries often act as a bridge between a company and
regulatory authorities, shareholders, or other stakeholders. Here are some common intermediaries in
company law:

● Company Secretary: Company secretaries are responsible for ensuring that a company complies
with its legal obligations and regulations. They assist in maintaining corporate records, filing
necessary documents, and ensuring that the company operates within the law.
● Registered Agent: In some jurisdictions, companies are required to have a registered agent who
receives legal documents and official correspondence on behalf of the company. This agent can be an
individual or a registered agent service.
● Corporate Lawyers: Lawyers who specialize in corporate law provide legal advice to companies on
various matters, including mergers and acquisitions, compliance with regulations, contracts, and
other legal issues.
 ● Auditors: Independent auditors are responsible for examining a company's financial statements and
ensuring that they accurately represent the company's financial position. They play a crucial role in
ensuring transparency and accountability.
● Share Transfer Agents: These agents handle the transfer of shares in a company, ensuring that share
transactions are recorded accurately and comply with regulatory requirements.
● Stock Exchanges: In the context of publicly traded companies, stock exchanges act as intermediaries
for buying and selling shares. They facilitate the trading of securities and impose listing requirements
on companies.
● Investment Banks: Investment banks often act as intermediaries in financial transactions such as
initial public offerings (IPOs), mergers, and acquisitions. They help companies raise capital and
navigate complex financial transactions.
● Proxy Advisors: Proxy advisory firms provide recommendations and guidance to shareholders on
voting matters during company meetings, such as annual general meetings. They can influence
shareholder votes on important corporate issues.
● Regulatory Authorities: Government agencies and regulatory bodies, such as the Securities and
Exchange Commission (SEC) in the United States, play a significant role in overseeing and regulating
companies to ensure they comply with relevant laws and regulations.

These intermediaries are essential for maintaining transparency, compliance, and effective corporate
governance in the world of company law. Their roles may vary depending on the jurisdiction and the specific
needs of the company.

Call on shares for future of shares

Transfer of shares

Shares, as defined under Companies Act, means a share in the share capital and includes stock. As per
Companies Act, shares of a member of a company shall be movable property. Moreover, the article of
association provides the manner for the transfer of shares. However, shares of a company are freely
transferable.

Provisions Under Companies Act

The legal provisions related to transfer of shares are:
● Section 56 of Companies Act, 2013.
● Rule 11 of Companies (Share Capital & Debentures) Rules 2014.

Share Transfer Restrictions In AOA

An article of association is the first document which needs to be reviewed prior to starting of share transfer
procedure. As provided under section 2(58), AOA shall restrict the transfer of shares in a private company.
Article of association restricts the transfer of shares in two ways:
● PRE-EMPTIVE RIGHTS: If an article of association provides the option of pre-emption, then the
shareholder must first offer shares to the existing members of the company at a determined price.
Sometimes, the value of the shares needs to be determined by the formula provided itself in the AOA.
If no existing members are willing to purchase the shares, then the shareholder can freely transfer
the same to others.
● REFUSAL BY DIRECTORS: AOA also includes the conditions where director refuses to transfer
shares.
No transfer of shares can be restricted by any agreement between the shareholders, but the AOA may restrict
the same.

Procedure For Share Transfer In Private Company

The following are the steps to transfer shares:
1. CHECK AOA: First step is to scrutinize AOA for the restrictions if provided therein such as rights
of pre-emption etc.
2. NOTICE TO DIRECTOR: A notice in writing shall be provided by the shareholder willing to
transfer their shares to the Director of the company.
3. DETERMINATION OF PRICE: A review of AOA is required to determine the price at which
shareholders can transfer shares to the current shareholders of the company.
4. NOTICE TO OTHER SHAREHOLDERS: The shareholder who is willing to transfer his shares
must then give notice to the other shareholders in the company, and if they are not interested, the
shares can be transferred to the outsiders. Moreover, the notice should mention the last date to
purchase the shares and the price.

How To Transfer Shares Of A Private Limited Company

The person who transfers shares termed as “transferor” and the person who purchases the shares termed as
“transferee.”
INTIMATION TO COMPANY: Transferor should give notice to the company for his intention to transfer
shares. Here comes the duty of a company where the company will notify the existing shareholders about the
price, time limit within which they can purchase the shares, availability of shares, etc.
TRANSFER DEED: To transfer shares the share deed is required, it is a document which needs to be duly
executed both by the transferor and transferee.
Transfer deed is in Form SH-4 which should have been:
● Duly stamped;
● dated;
● Having Father’s name, address, occupation, etc.;
● Number of shares transferred;
● Certificate number of share transferred;
● Consideration i.e. value of shares transferred;
● Executed by both the parties i.e. transferor and transferee.
SHARE CERTIFICATE/LETTER OF ALLOTMENT: Letter of allotment must be submitted to the
company along with transfer deed.
PASSING OF RESOLUTION: Board shall register the transfer of shares after receiving and considering the
deed by passing a resolution.

Legal Provisions For Share Transfer

1. STAMP DUTY ON TRANSFER DEED: Stamp duty is 25 paisa for every Rs.100 or part thereof of
the value of shares.
2. Period FOR DEPOSIT TRANSFER DEED: The transfer deed i.e. Form SH4 shall be submitted to
the company within 60 (sixty) days of its execution by or on behalf of transferor or transferee.
3. TIME FOR ISSUANCE OF CERTIFICATE: As per Section 56(4), the company shall provide a
certificate for transfer of shares within one-month application for registration of transfer of shares.

Exceptions For Restrictions On Transfer Of Shares

1. REPRESENTATIVE: No restrictions can be imposed where the shareholder intends to transfer
his/her shares to their representative.
2. LEGAL REPRESENTATIVE: In the case of death of a shareholder , the legal representative may
register the shares in the name of heirs i.e. on whom the shares have been devolved.
Limitation Period For Appeal After Refusal To Register Transfer By Private Company
As provided under section 58(3), the transferee of shares may appeal to the Tribunal within 30 days from the
receipt of the company and in case no receipt has been received by the company than within 60 days from the
date when transfer deed was delivered to the company.

Limitation Period For Appeal After Refusal To Register Transfer By Public Company
As provided under section 58(4), the transferee of shares may appeal to the Tribunal within 60 days from the
receipt of the company and in case no receipt has been received by the company than within 90 days from the
date when transfer deed was delivered to the company.

Penalty In Case Of Non-compliance

Every company shall be liable if they don’t comply with the rules as provided in the companies act the
company shall be liable for fine not less than 25000 but it may extend to 5 lacs and every officer of the
company who will be found as a defaulter shall be liable to a fine not less than 10,000 but which may be
extended to 1 lac.

The following table illustrates the differences between the transfer of shares and transmission of shares:

Details Transfer of Shares Transmission of Shares

What is it? Voluntary Act Operational by law

Who can initiate? Transferor or Transferee Legal heir or receiver

How is it affected? A deliberate act of parties Insolency, lunacy, death, or

inheritance

Is there a consideration? Yes No

Is a transfer deed Yes No

compulsory?

Is stamp duty Yes. Payable on the market value of No

compulsory? shares
 Who is liable? Liability of transferor ceases to exist Original liability of shares
post the transfer continues to exist

Provisions Under Companies Act, 2013 and Companies (Share Capital & Debenture) Rules, 2014
As per Section 56 of the Companies Act, 2013 read with Rule 11 of Companies (Share Capital & Debenture)
Rules, 2014

Transfer of shares
It will be affected only if a proper instrument of transfer, in Form SH -4, as given in sub-rule 1 of Rule 11 of
Companies (Share Capital & Debenture) Rules 2014 duly stamped, dated, and is executed by or on behalf of
the transferor and the transferee and specifies all the details like name, address, occupation if any of the
transferee. It has to be delivered to the company by either parties within 60 days from the date of execution
along with a certificate of securities or letter of allotment of securities as available. If the transferor makes an
application for the transfer of partly paid shares, then the company gives notice of the application Form SH-5
as given in sub-rule 3 of Rule 11 of Companies (Share Capital & Debentures) Rules 2014, to the transferee
and the transferee must give no objection to the transfer within 2 weeks from the receipt of the notice.

Transmission of shares
It will be affected when the application of transmission of shares along with relevant documents is valid.
Execution of transfer deed is not required. The following are the relevant documents for the transmission of
shares
● Certified Copy of Death Certificate
● Self Attested Copy of PAN
● Succession certificate/ Probate of Will/Will/ Letter of Administration/ Court Decree
● Specimen signature of successor

Time limit for delivery of a certificate in both cases

Every company must deliver the certificates of all securities transferred or transmitted within 1 month from
the date of receipt of the instrument of transfer in case of transfer or intimation of transmission as applicable
unless prohibited by any provision of law or any order of Court, Tribunal, or other authority.

Penalty in case of non-compliance

Where any default is made in complying with the above, the company shall be punishable with a fine not be
less than Rs. 25,000 but which may extend to Rs. 5,00,000, and every officer of the company who is in default
shall be punishable with a fine not be less than Rs.10,000 but which may extend to Rs.1,00,000. While the
transfer of shares and transmission of shares intend a change in ownership of the title of the shares, the
distinction lies in the fact that the transfer of shares is voluntary and initiated by the transferee or transferor
while transmission of shares is operational by law and is initiated by the legal representative or receiver.
Disclaimer: The materials provided herein are solely for information purposes. No attorney-client
relationship is created when you access or use the site or the materials. The information presented on this site
does not constitute legal or professional advice and should not be relied upon for such purposes or used as a
substitute for legal advice from an attorney licensed in your state.

Reduction on transfer of shares:

Restructuring of a company takes place by capital reorganization where the surplus money is given to the
shareholders. There can be many other reasons for reducing the share capital, such as lack of funds. The
reduction of the share capital of a company includes reducing the same amount of shares of the company on
similar terms and conditions offered to all the shareholders whose shares are being reduced by the company.
On the other hand, a ‘selective’ reduction of the share capital of a company means differentiating between
shareholders of the same class by reducing the capital of some shareholders and leaving the remaining
shareholders of the company untouched (i.e., their shares are not reduced). The need to reduce share capital
may arise in several situations, such as assets of reduced value and accumulated business losses. Resultantly,
the company’s share capital is lost, and the company is on its own to find more resources to keep going.
Therefore, in both these cases, the company has to adjust its capital according to the situation. Here’s how
this can be done without the sanction of the Court:

Reasons for reduction of share capital

The need to reduce the share capital may arise for various reasons such as pare off debt, capital expenses,
distributing assets to shareholders, making up for trading expenses etc. Most companies have more reserves
and resources than they can use. Additionally, when the company is suffering losses, the financial position is
not shown appropriately. The balance sheet may have fictitious assets with debit balance in profit and loss
account, and the assets are overvalued. In this situation, to reduce the share capital, this portion will have to
be written off; only then will the balance sheet look good.

Modes of reduction of share Capital

There are three modes for reducing the share capital. They are:
● Extinguish or Reduce the Liability;
● Cancel any Paid-up Share Capital;
● Pay off any Paid-up Share Capital.
1. Extinguish or Reduce the Liability
The company can reduce the share capital by extinguishing or reducing the liability on its partly paid-up
shares. E.g., if the shares are of face value Rs. 100, each of which Rs. 60 has already been paid, it can lower
them down to Rs. 60 fully paid-up shares. Therefore, relieving the shareholders from the liability of the
uncalled capital of Rs. 40 per share.
2. Cancel any Paid-up Share Capital
Another way of reducing the share capital is to cancel the shares which are unrepresented by available assets
or are lost. E.g., the shares are of face value Rs. 100, each fully paid, and these shares are represented by Rs.
75 worth of assets. In this situation, the share capital can be reduced by cancelling Rs. 25 per share and
writing off the same amount of assets.
3. Pay off any Paid-up Share Capital
The company may reduce the share capital by paying off fully paid-up shares that are more than the
company’s wants. E.g. the shares are of face value Rs. 100, each fully paid, can be lowered down to the face
value of Rs. 75 per share by paying back Rs. 25 per share to the shareholders.

Statutory requirements
Section 66 of the Companies Act, 2013 (“Act“) lays down the requirements and provides disclosures for
reducing the share capital. Every company must fulfil these requirements because a company’s share capital
is the only security that the shareholders have; hence, reducing the same leads to diminishing the fund out of
which they are to be paid. Therefore, it is closely guarded by this section, providing a safe route for reducing
it in case it becomes necessary to do so.
This section states that on application, a company limited by guarantee or limited by shares and having a
share capital may be allowed to reduce its share capital by passing a special resolution, subject to the
confirmation of the National Company Law Tribunal (“Tribunal”). [Sub-Section 1]
As mentioned above, the share capital of a company can be reduced by extinguishing or reducing the liability,
cancelling any paid-up share capital and paying off any paid-up share capital. [Sub-Clause a and b of Sub-
Section 1]
This section further states that a company cannot reduce its share capital if it has any arrears and has not
repaid any deposits accepted by it before or after the commencement of the Act or the interest payable
thereon. [Proviso of Sub-Section 1]
On receiving the application of reduction of share capital by a company, the Tribunal must give notice to the
Central Government, Registrar of Companies (“ROC”), Securities and Exchange Board of India, and in case
of listed companies, to the company’s creditors. It shall consider the representations made to it within three
months by the authorities mentioned above from the date of receipt of the notice. [Sub-Section 2]
Suppose it does not receive any representation by them within the said period. In that case, it shall be
assumed that they do not have any objection to the share capital reduction of that particular company.
[Proviso of Sub-Section 2]
If the Tribunal is satisfied that the claim or debt of the company’s creditors has been discharged or secured
or his consent has been obtained, it will confirm the share capital’s reduction on such terms and conditions as
it deems fit. [Sub-Section 3]
Provided that, the Tribunal will not sanction any application until the accounting treatment proposed by the
company conforms with the accounting standards specified in section 133 or any other provision of this Act.
And a certificate to that effect by the company’s auditor has been filed with the Tribunal. [Proviso of Sub-
Section 3]
The company is obligated to publish the order of confirmation given by the Tribunal as it may direct.
Additionally, the company must deliver a certified copy of the Tribunal’s order to the ROC within 30 days of
receiving the copy of the order, who shall register the same and issue a certificate to that effect. The certified
copy must mention the amount of share capital, the number of shares into which it is to be divided, the
amount of each share and the amount, if any, at the date of registration deemed to be paid upon each share.
[Sub-Section 4 and 5]

Implications under the Income Tax Act, 1961

When a company’s share capital is reduced by paying off part of the share capital or reducing the face value
of shares, it extinguishes the shareholders’ rights to the extent of share capital’s reduction. Therefore, it is
known as transfer under Section 2(47) of the Income Tax Act, 1961 (“IT Act“) and would be chargeable to
tax. The income received on capital reduction would be taxable as under:
● The amount distributed by the company on reducing its capital to the extent of its accumulated
profits will be known as deemed dividends under Section 2 (22) (d) of the IT Act. Also, the company
is obligated to pay dividend distribution tax on the same.
● Distribution over the accumulated profits above the original cost of shares’ acquisition would be
chargeable to capital gains tax in the hands of the shareholders.

Reduction of capital without Tribunal’s sanction

As explained above, the reduction of share capital can be carried out by following those requirements.
However, if a company wants to reduce its share capital without following those prerequisites (i.e., without
the sanction of the Tribunal), it can do so by buy-back of its shares. If the Articles of Association of the
company allow, it can forfeit the shares for non-payment of calls by the shareholders. Doing this will enable
the company to reduce its share capital, thus fulfilling the purpose without the sanction of the Tribunal.

Conclusion
Sometimes, it becomes necessary for a company to reduce its capital, and section 66 of the Companies Act,
2013 provides a guarded mechanism for the same. The reduction of the share capital of a company has a
direct impact on its creditors; therefore, a proper procedure has been laid down for the sole purpose of
protecting the creditors from any harm.
Three things must be kept in mind to ensure a successful reduction of capital of the company. They are: the
reduction of the share capital must be fair and equitable, majority of the minority shareholders should
approve the reduction of capital, and a fair methodology must be adopted for valuation of the shares.
It becomes difficult for the courts to figure out the reason behind reducing the company’s share capital (be it
rearranging its balance sheet or inducing to drive out the minority shareholders). In any case, it is the
company’s responsibility to prove that reducing its share capital will not harm the minority shareholders in
any way.
Sec 111A - Rectification of Register on transfer.
(1) In this section, unless the context otherwise requires, "company" means a company other than a company
referred to in sub-section (14) of section 111 of this Act.
(2) Subject to the provisions of this section, the shares or debentures and any interest therein of a company
shall be freely transferable: Provided that if a company without sufficient cause refuses to register transfer of
shares within two months from the date on which the instrument of transfer or the intimation of transfer, as
the case may be, is delivered to the company, the transferee may appeal to the Company Law Board and it
shall direct such company to register the transfer of shares.
(3) The Company Law Board may, on an application made by a depository, company, participant or investor
or the Securities and Exchange Board of India, if the transfer of shares or debentures is in contravention of
any of the provisions of the Securities and Exchange Board of India Act, 1992 (15 of 1992), or regulations
made thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986), or any other
law for the time being in force, within two months from the date of transfer of any shares or debentures held
by a depository or from the date on which the instrument of transfer or the intimation of transmission was
delivered to the company, as the case may be, after such inquiry as it thinks fit, direct any depository or
company to rectify its register or records.
(4) The Company Law Board while acting under sub-section (3), may at its discretion make such interim
order as to suspend the voting rights before making or completing such enquiry.
(5) The provisions of this section shall not restrict the right of a holder of shares or debentures, to transfer
such shares or debentures and any person acquiring such shares or debentures shall be entitled to voting
rights unless the voting rights have been suspended by an order of the Company Law Board.
(6) Notwithstanding anything contained in this section, any further transfer, during the pendency of the
application with the Company Law Board, of shares or debentures shall entitle the transferee to voting rights
unless the voting rights in respect of such transferee have also been suspended.
(7) The provisions of sub-sections (5), (7), (9), (10) and (12) of section 111 shall, so far its may be, apply to the
proceedings before the Company Law Board under this section as they apply to the proceedings under that
section.

Certification and issue of certificate of transfer of shares

Details to be provided in the share certificate

● Every share certificate issued in India must contain the following:
● Name of the Issuing Company
● CIN number (Company ID number) of that Company
● Company registered office address
● The name of the owners of such shares
● Member Folio number
● The number of shares represented by that sharing certificate
● The amount payable on those shares
● Different number of shares

Procedure for the issue of the share certificate

The Board resolution is required to issue a Share Certificate. The procedure for the issue of the share
certificate is as follows-
● Prepare a share certificate form-SH 1
● Every unregistered public company will issue its securities in a dematerialized form.
● Shared Certificates shall be signed-
● by two directors or;
● the director and secretary of the company, wherever there is a company secretary
● If the company has a common seal it will be affixed in front of each person who is required to sign
the certificate.
 ● In the case of an OPC or a One Person Company, the Share Certificate shall be signed by the
director and company secretary or any other person approved by the Board.
● Registration of members on Form MGT-1 within 7 days of allocation.
● Verification of registered entries by CS or an authorized person under the provisions and standards
of rates for that state in the Stamp Act.
● Stamp duty adjudication where the company’s registered office is situated.
● The company submits collateral, distributed, transferred, or transmitted certificates:
● If they are registered for the memorandum – Within 2 months from incorporation.
● In the case of any share’s allocation – Within 2 months from the date of allotment.
● In the case of transmission of securities- Within 1 month from share transfer receipt
● Debenture allotment- Within 6 months from the date of allocation
Note: The public company IFSC will submit certificates of all collateral to the registrants upon submission,
distribution, transfer, or transmission within 60 days.

Time to issue a Share Certificate:

After the company’s incorporation, the company is required to issue shares certificates within two months
from the date of incorporation. When additional shares are allocated to new or existing shareholders, share
certificates must be issued within two months from the date of allocation. In the case of a transfer of shares,
share certificates must be issued to the transferors within one month of receipt of the transfer instrument of
the Company.

Notification and delivery of Share Certificate

The company secretary needs to inform all shareholders that the stock certificates are ready and will be
issued in exchange for share letters and bank receipts confirming the payment of the dividend. Public notice
must be issued with the general information of members. Members submit their assignment letters, the
sharing certificate is sent by registered mail to them. Local shareholders may also voluntarily collect share
certificates at a registered company office or a designated posting center

Penalty for violating the issuance of a share certificate

If a company commits any failure to comply with the provisions relating to the issuance of share certificates,
that company will be penalized with a fine not less than INR 25,000 but up to INR 5,00,000 and every official
who fails to pay that company’s tax will be. may be fined not less than INR 10,000 but may extend to INR
1,00,000.

Final words
Therefore, a share certificate means a document issued by a company proving that the person listed on the
certificate is the shareholder in the Company as stated in the share certificate. The Indian Companies Act
authorizes companies to issue share certificates after their incorporation. Hope you got an insight on the
procedure for the issue of the share certificates and more about it.

Object and effect of share certificate.

Certificate of Shares:
A "Certificate of Shares" is a physical or electronic document issued by a company to its shareholders as
evidence of their ownership of a specific number of shares in the company. It serves as a proof of ownership
and is an essential document for shareholders to establish their ownership rights and participation in the
company. Here are the key points about a Certificate of Shares:
● Ownership Proof: The certificate serves as tangible evidence that the shareholder holds a certain
number of shares in the company. It confirms the shareholder's ownership status and the number of
 shares they own.

● Legal Recognition: The certificate is recognized as legal proof of ownership in many jurisdictions. It
reflects the shareholder's rights, privileges, and entitlements in relation to the company.

● Information Included: A typical certificate of shares includes important information such as the
shareholder's name, the company's name, the class of shares, the number of shares owned, any
unique identification numbers, and the date of issue.

● Transfer of Ownership: When shares are transferred from one shareholder to another, the
certificate is usually endorsed and handed over to the new owner. This signifies the transfer of
ownership and helps maintain a clear record of ownership changes.

● Physical or Electronic Form: Traditionally, certificates of shares were issued in physical form, often
as printed documents with security features. In recent years, many companies have transitioned to
electronic records, storing ownership details in electronic databases rather than issuing physical
certificates.

● Dematerialization: Dematerialization is the process of converting physical share certificates into

electronic form. Many stock exchanges and regulatory bodies encourage or mandate the
dematerialization of shares to enhance transparency and reduce fraud.

● Safety and Security: Physical certificates can be susceptible to loss, damage, or theft. Electronic
records and dematerialization provide a more secure way of maintaining ownership records.

● Trading and Transactions: When shares are traded in the secondary market, ownership is typically
transferred electronically through trading platforms. The actual certificates may not change hands
during such transactions.

● Regulatory Requirements: The issuance of certificates of shares and their maintenance, whether
physical or electronic, often needs to comply with regulatory requirements set forth by securities
regulators and stock exchanges.

● Replacement of Lost Certificates: In case a physical certificate is lost or damaged, shareholders can
request a replacement certificate from the company by following a specific process and paying any
applicable fees.

Certificate of Shares is a document that provides proof of ownership of shares in a company. It plays a
crucial role in establishing a shareholder's ownership rights, entitlements, and participation in the company's
affairs. While the issuance of physical certificates has become less common with the shift to electronic
ownership records, the concept of a certificate of shares remains essential in ensuring the clarity and
legitimacy of ownership in a company.

Object and Effect of Share Certificate.

The object and effect of a share certificate, whether in physical or electronic form, serve to establish and
validate a shareholder's ownership rights in a company. The share certificate serves as a crucial document
that facilitates the transfer of ownership, establishes ownership rights, and outlines the terms and conditions
associated with the ownership of shares.

A. Object of Share Certificate:

1. Proof of Ownership: The primary purpose of a share certificate is to provide tangible evidence that a
shareholder owns a specific number of shares in the company. It serves as a formal acknowledgment
of the shareholder's ownership interest.
 2. Facilitates Transfer: The share certificate makes it easier to transfer ownership of shares. When a
shareholder wants to sell or transfer their shares to another party, they can endorse and deliver the
share certificate to the buyer, enabling the buyer to become the new owner.
3. Recognition of Rights: The share certificate specifies the class of shares, the number of shares owned,
and any specific rights associated with those shares. This includes rights to dividends, voting, and
participation in company decisions.
4. Legal Documentation: The share certificate provides legal documentation of the shareholder's
ownership, which can be presented in legal and regulatory contexts as proof of ownership.

B. Effect of Share Certificate:

1. Establishes Legal Ownership: The issuance of a share certificate establishes the legal ownership of
the shares in the name of the shareholder. It signifies that the company recognizes the individual as a
legitimate owner of the shares.
2. Transfer of Ownership: The share certificate is essential for the transfer of ownership. When a
shareholder sells or transfers their shares, the certificate is endorsed and delivered to the new owner,
effecting the transfer of ownership.
3. Confirms Entitlements: The share certificate outlines the rights and entitlements associated with the
shares, including voting rights, dividends, and participation in the company's affairs. This
information helps shareholders understand their role and benefits as owners.
4. Shareholder Participation: The share certificate enables the shareholder to actively participate in
company decisions, annual general meetings, and other corporate actions where shareholder input is
required.
5. Shareholder Identity: The share certificate confirms the identity of the shareholder, helping prevent
unauthorized transfers or claims of ownership.
6. Legitimacy in Trading: In the case of publicly traded companies, the share certificate or electronic
equivalent serves as evidence of ownership for shareholders trading their shares in the secondary
market.
7. Dematerialization: With the shift to electronic records, the electronic equivalent of a share certificate
facilitates seamless trading and ownership tracking in the modern financial market.
8. Dividend Payments: The information on the share certificate is used to determine the amount of
dividends a shareholder is entitled to receive.

The share certificate's object and effect are centered around providing proof of ownership, facilitating the
transfer of ownership, and outlining the rights and entitlements associated with share ownership. It plays a
vital role in establishing the legal status of shareholders, enabling the transfer of shares, and ensuring
transparency and legitimacy in corporate ownership.

Duplicate Certificate
A "Duplicate Certificate" refers to a replacement share certificate that is issued by a company when the
original share certificate is lost, stolen, damaged, or destroyed. The issuance of a duplicate certificate helps
shareholders regain proof of ownership and their rights in the company's shares.

Here are the key points to understand about a duplicate share certificate:
● Loss or Damage: Shareholders may lose their original share certificates due to various reasons such
as misplacement, theft, damage, or destruction. In such cases, they can request a duplicate certificate.
● Application Process: Shareholders who need a duplicate certificate typically need to submit an
application to the company, explaining the circumstances of the loss or damage. The application may
need to be accompanied by an indemnity bond or an affidavit confirming the loss.
● Verification: The company will verify the details provided by the shareholder and assess the
legitimacy of the request for a duplicate certificate. This is done to prevent fraudulent requests for
duplicate certificates.
● Issuance of Duplicate Certificate: If the company is satisfied with the application and the verification
process, it will issue a duplicate share certificate to the shareholder.
● Endorsement: In some cases, the company might require the shareholder to endorse the duplicate
certificate to prevent multiple claims on the same shares.
 ● Notifying the Registrar: Companies are often required to notify the registrar of companies or
relevant regulatory authorities about the issuance of a duplicate certificate.
● Fees and Charges: Companies may charge a fee for issuing a duplicate certificate to cover
administrative costs. The fee varies depending on the company and jurisdiction.
● Serial Number: The duplicate certificate may have a different serial number than the original
certificate to distinguish it from the lost or damaged one.
● Validity: The duplicate certificate is just as valid as the original certificate and carries the same
rights and entitlements associated with the ownership of shares.
● Preventing Unauthorized Use: Issuing a duplicate certificate requires due diligence to prevent
unauthorized use. Companies must ensure that the original certificate has not been fraudulently used
to claim ownership.
● Reporting Obligations: Companies may need to report the issuance of duplicate certificates to
regulatory authorities and maintain records of such transactions.
● Electronic Records: In cases where shares are held in dematerialized form (electronic records), the
process for obtaining a duplicate statement of holdings may differ, involving interaction with the
relevant depository participant.

A duplicate share certificate is a replacement document issued by a company to shareholders who have lost
or damaged their original share certificates. The process involves verification, application, and issuance of a
new certificate to help shareholders regain proof of ownership and associated rights in the company's shares.

Unit – IV
Directors

Who Are Directors?

Directors are the persons appointed to direct and supervise the affairs of a company. The company's business
is consigned in the hands of directors. Team of directors of the company is collectively known as its Board of
Directors, which wields the supreme executive authority controlling the management and affairs of a
company. In practice it is the Board of Directors which looks after the management and protects the interests
of all the stakeholders of the Company

Basically, Board of Directors is a group of trustworthy and respectable people who looks after the interests of
the large number of shareholders who are not directly involved in the management of the company. They are
entrusted with the responsibility to act in the best interests of the company. The Companies Act, 2013 does
not contain an detailed definition of the term director”. Section 2 (34) of the Act says that director” means a
director appointed to the Board of a company. A director is a person appointed to perform the duties and
functions of director of a company in conformity with the provisions of the Companies Act, 2013. Directors
are at times described as trustees, agents and sometimes as managing partners. Directors are viewed
differently according to circumstances.

According to the provisions of Companies Act, 2013 it is mandatory for every company to have minimum 3
directors in case of public limited companies, at least 2 directors in case of private limited companies and 1
director in case of one-person companies. Maximum a company can have 15 directors. In Case the company
wishes to appoint more directors, it can do so by passing the special resolution in its general meeting (GM).

Types of Directors:
Residential Director
According to provisions of law, every company needs to appoint a director who has been in India and stayed
for at least 182 days in a previous calendar year.

Independent Director
They are non-executive directors of a company and contribute the company by improving corporate
credibility and enhancing the governance standards. That is to say, an independent director is a non-
executive director without a relationship with a company which can impact the independence of his
judgment.
The term of the independent directors is up to 5 consecutive years; however, they are entitled to
reappointment by passing a special resolution with the disclosure in the Board's report. Below mentioned are
the companies that need to appoint minimum two independent directors:

Public Companies having Paid-up Capital of Rs.10 Crores or more,

Public Companies having annual Turnover of Rs.100 Crores or more,

Public Companies having total outstanding loans, deposits, and debenture of Rs.50 Crores or more.

Small Shareholders Directors

A listed company, can after the notice of at least 1000 small shareholders or 10% of the total number of the
small shareholder, whichever is lower, shall have a director which would be elected by small shareholders.

Women Director
As per Section 149 (1) (b) second proviso of the Companies act, it is mandatory for a company, be it a private
company or a public company, to appoint at least one woman director in case it satisfies any of the following
criteria:

The company is a listed company & its securities are listed on the stock exchange.

The paid-up capital of such company is up to Rs.100 crore or more with a turnover of Rs.300 crores or more.

Additional Director
A person could be appointed as an add. director and can occupy his post until next AGM (Annual General
Meeting). In absence of the AGM, such a term would conclude on the date on which such AGM should have
been held.

Alternate Director
Alternate director refers to a person appointed by the Board, in order to fill in for a director who might be
absent from the country, for the period of more than 3 months.

Nominee Directors
Nominee directors can be appointed by a specified category of shareholders, banks or lending financial
institutions, third parties through contracts, or by Central Government in case of oppression or
mismanagement.

Appointment of Directors:
According to the provisions of Companies Act 2013, only an individual can be appointed as a member of the
board of directors. Usually, the appointment of directors is made by shareholders. A company, a legal firm
and an association, with an artificial legal personality can't be appointed as a director. It must to be a real
person.

In a company which is public or a private, a total of two-thirds of directors are appointed by the
shareholders. The remaining one-third members are appointed with regard to prescribed guidelines in the
Article of Association. In case the company is a private company, their Article of Association can authorise
the method to appoint any and all of the directors. In case the Articles are silent, the directors have to be
mandatorily be appointed by the shareholders. The Companies Act also have a provision that permits a
company to appoint two-thirds of the company directors to be appointed through the principle of
proportional representation. This happens if the company has accepted this policy.
Nominee directors shall be appointed by third party authorities or the Government to tackle misconduct and
mismanagement. It is the primary duty of directors to act honestly, exercise reasonable care and skill while
they perform their assigned duties on behalf of the organization.

Appointment of Managing Directors

A Managing director (MD) must be an individual i.e. a real person and s/he can be appointed for a maximum
period of five years. A Managing director of a pre-existing company can be appointed as a managing director
of another company as long as the board of directors of the first company approve and are aware of this new
appointment.

Conditions for Appointing Directors

The Companies Act does not prescribe any qualifications for Directors of any company. An Indian company
may, therefore, in its Articles, stipulate qualifications for Directors. However there are certain condition
which needs to be fulfilled to appoint directors.

The following conditions needs to be fulfilled while appointing a director:

1. S/he should not have been sentenced to imprisonment for any period, or a fine imposed under
various laws and statutes.
2. They must not have been detained or convicted for any duration under the Conservation of Foreign
Exchange and Prevention of Smuggling Activities Act, 1974.
3. S/he must have completed 25 years of age, but should be less than 70 years of age. However, this age
limit is not applicable if the appointment is approved by a special resolution passed by the company
in GM or the approval of the Union government is obtained.
4. They should be a managerial person in one or more companies and draws Consideration from one or
more companies subject to the limitations specified in Section III of Part II of Schedule XIII.
5. S/he should be Indian Resident. It means a person who has been staying in India for a continuous
period of not less than 12 months immediately preceding the date of his/her appointment as a
managerial person and who has come to stay in India for taking up employment in India or for
carrying on business or occupation in India.

Powers Of Directors
Corporate body incorporated is artificial person, so it is necessarily needed to be represented by living
person. So, the functioning and the business of any company is entrusted in the hands of directors. Office of
director is that office of the company who handle all the affairs and daily business of the company.

In the case of Bath vs standard land company limited Neville J held that board of directors are the brain of
the company and company acts only in their directions. Though director is such a salient position it is
endowed with various powers to handle the business of the company.

A board of directors is the biggest authority of the company and is vested with the various powers under
section 179 of the companies act 2013. Directors can make any and all of the decisions and can exercise the
power of which the company has authority or is entitled. Directors appointed have all the control over the
operations of the company.

All the powers are not absolute, directors can exercise their power independently but are subject to
memorandum and articles and also board of director are not competent to do the act which are required to
be done by the shareholders in general meetings.

There are certain powers which can be exercised only when resolution has been passed at the board meeting.
Those powers include power to:
● To make calls
● To borrow money
● Issue funds of the company
 ● To grant loans are give guarantees
● To approve financial statements
● To diversify the business of the company
● To apply for amalgamation merger or reconstruction.
● To take over a company or to acquire a controlling interest in another company.
● Shareholders may impose restrictions on exercise of these powers.

Powers to be exercised with general meeting approval

Section 180 of the Companies Act 2013 provides with those powers which can be exercised only if they
approved in general meeting
● To sale, lease or otherwise dispose of the whole or any part of the company's undertakings
● To invest otherwise in trust securities
● To borrow money for the purpose of the company
● To give time or refrain the director from repayment of any debt.

If restrictions which are imposed by this section are breached by the director, the title of lessee or purchaser
is affected. But if person has acted in good faith with due care and diligence then it is not affected. This
section does not apply to the companies whose ordinary business involves the selling of property or to put a
property on lease.

Power to constitutes audit committee

Under section 177 board of director has power to constitute an audit committee. It needs to be constituted of
at least three directors including independent directors. The eligibility of the member of audit committee's
chairman is that he or she appointed should be able to read and understand financial statements. It is in
accordance with the terms of reference specified by board in writing the audit committee shall function.

Power to constitute nomination and remuneration committee and stakeholder relationship committee

Under section 178 of the companies act 2013, board of directors is empowered to constitute nomination and
remuneration committee and stakeholders' relationship committee.

There should be three or more non executive director, out of which half are required to be independent
director in nomination and remuneration committee.

Stakeholder relationship committee can also be constituted by board in which there can be more than 1000
shareholders, debenture holders aur any other security holders. This committee shall resolve grievances of
the shareholders.

Power to make contribution to charitable and other funds

Board of directors can contribute for the genuine and Bonafide cause as a charity under section 181 of the
act. Only condition imposed is that, when contribution is more than 5% of net profit of company, then
permission is required to be taken of company in general meeting.

Power to make a political contribution

Under section 182 of companies act 2013, political contributions can be made by companies but company
making it should not be government company and which has been in existence for less than 3 years. There is
7.5 % of limit imposed that is companies' contribution to political parties shall not exceed this limit. Any of
the contribution should first be sanctioned by board of directors.

Power to contribute to National defence fund

Under section 183 of companies act, directors is empowered to make contribution to National defence fund
and to any of the fund which is made for the purpose of National defence. Any amount of contribution should
be done as may be fit, the only thing needed to be done is that the amount contributed should be disclosed in
the profit and loss account during financial year which it relates to.
Duties Of Director
● Section 166 of the Companies Act, 2013 defines the duties of Directors. A Director of a company
should perform the following duties
● He should act in accordance with the articles of the company.
● He should always Act in good faith for promoting the objects of the company and for the benefit of
its members and act in the best interests of the company, shareholders, its employees and the
community at large.
● Exercise his duties with due and diligence and should exercise independent judgment.
● Should not involve in situations which directly or indirectly conflict with the interest of the company.
● Should not achieve or take undue gain or advantage of his office whether for himself or for his
relatives, associates or partners.
If the director contravenes any provisions of this section, he shall be punishable by a fine of Rs. 1,00,000 or
more, which may extend up to Rs. 5,00,000.

Resignation Of Director
Resignation could be done by director of the company under section 168 (1) of the companies act 2013. A
director has the option to resign from his office by giving notice in writing to the company and board shall on
receipt of such notice take note of the same and company shall intimate this to registrar in the manner as
prescribed. In the immediately following general meeting by the company, it should be laid down in the
reports of director

Within 30 days from the day of resignation. Director shall also forward copy of resignation along with
detailed reason of resignation to the registrar of the company. There is no right provided under companies
act 2013 to any managerial person to reject the resignation of the director. But if any offence has been
committed by director, then he shall be liable even after the resignation.

As per section 168 (2) of companies act 2013 the resignation of director shall take effect from the date on
which the ‘notices received' by the company or 'the date if any specified' by director in the notice whichever
is later.

Removal Of Director
When we talk about directors of the company, they constituted very important position in the company.
Directors are also called brain of the company as they are completely responsible for operating a business of
company. But many times, situations come where management has to Suo Moto remove person from the post
of director. For example, due to negligence, breach of privacy or any other condition etc. It is section 169 of
the companies act 2013 which deals with the removal of directors.

Directors appointed by tribunal cannot be removed from the post of directorship and where the company has
availed itself of option to, appoint not less than two third of the total number of directors according to
principle of proportional representation as per provision of companies act 2013 then also no removal from
post of directorship could be there

Removal by Company Law Board/National Company Law Tribunal

Any of the director of the company is found guilty of misconduct like oppression, harassment, fraud etc then
he could be removed by the National company law tribunal or company law board. There is provision that if
the director is removed by National company law tribunal then he cannot resume the position of director in
any company for the period of next five years

Procedure for Removal of Directors

Firstly, concerned director should be intimated about his removal, board meeting should be done and
resolution for removal of director should be passed. Notice of the meeting should be sent before 14 days of the
general meeting. In meeting director should be allowed to speak and he should be listened, if it's just and
equitable then only the resolution to remove director should be passed. If resolution gets passed then the
documents for such removal should be prepared and the concerned department should be intimated if the
director is independent director, then the consent of two third members of the meeting is necessary.

Summing Up
Directors of company play indispensable role in the functions of company. There are many types of directors
which are appointed by the company and each has it's different functioning. They play vital role in smooth
operation of company and that's the reason they are vested with many powers, at the same time there are
certain restrictions to avoid misuse of powers.

code for independent direcotos–

Introduction

With the introduction of corporate governance in India, the need for independent directors in companies was
realized. The Companies Act 1956, did not have the necessary provisions. In order to bridge the gap, the
Ministry of Corporate Affairs amended the Act in 2013.

Independent directors play an important role in maintaining the balance between the management and the
ownership in a company. Independent directors help in attaining not only profit maximization but also keep a
check on shareholders’ welfare.

In simpler words, an independent director is a third party who is a member of the board of directors, having
an impartial position with a company. The independent director does not participate in the daily functioning
of the company neither he is a part of the executive team of the company.

Who can be an Independent Director?

Chapter XI of the Companies Act 2013, deals with the appointment and qualifications of directors. Provisions
pertaining to who can be an independent director under the Companies Act 2013 are set forth under section
149 subsection (6) of the Act. The section provides that an independent director in regard to a company
means a person other than the managing director, or a whole-time director, or a nominee director:

● Is a person of integrity and a person who has the relevant expertise and experience, in the
opinion of the board.
○ The person should not be the promoter of the company or any of its subsidiaries or
any of its holding or, any of its associate companies.
○ The person should neither be related to the promoters of the company nor the
directors in the company. Including the directors of its holdings, any of its
subsidiaries, or any of its associate companies.
● The person should not have or had any pecuniary relationship with the company (including its
holdings, subsidiaries, or associate companies) during the previous two financial years. However,
the pecuniary relationship mentioned in this clause means the monetary relationship should be
other than the remuneration as director or transaction not going beyond ten percent of his total
income.
● None of whose relative must have had or has any relationship with the company (including its
holdings, subsidiaries, or associate companies) that is in the nature of pecuniary or transactional.
● None of whose relative during the current or two immediately previous financial years is:
 ○ Holding any security or interest. Provided it must not exceed fifty lakhs or two
percent of the paid-up capital;
○ Is indebted; or
○ has provided for a guarantee, or security for the indebtedness of a third party.
● The person neither himself nor any of his relatives:
○ Holds any managerial position of importance or is employed in the company
(including its holdings, subsidiaries, or associate companies) during three
immediately previous financial years.
○ For the three immediately previous financial years has been an employee or,
proprietor or a partner in the:
1. Firm of auditors,
2. The firm of company secretaries,
3. Cost auditors of the company (its holdings, subsidiaries, or associate companies),
4. The legal firm carrying transactions on behalf of the company (its holdings, subsidiaries, or
associate companies) amounting to ten percent or more of gross turnover.
● The person having the hold of two percent or more voting power in the company along with his
relatives.
● Is the head of the Non-profit organization that receives twenty-five percent or more from the
company (its holdings, subsidiaries, or associate companies).
● A person having the prescribed qualifications.

Which companies must or can appoint independent directors

It is obligatory for certain companies to appoint an independent director. Sub-section (4) of Section 149 of the
companies Act 2013 provides that:

● Every Public listed company must have at least 1/3rd of the total number of directors.
● The Union government to prescribe for the minimum number of independent directors for other
classes or classes of public companies.

Rule 4 of the Companies (Appointment & Qualification of Directors) Rules, 2014 provides for the number of
independent directors. It states that the public companies falling under the below-mentioned criteria shall
have at least two independent directors:-

● Having paid-up share capital of INR 10 crores or more.

● Having a turnover of INR 100 crores or more.
● Having in the aggregate, outstanding loans, debentures, borrowings, and deposits, more than
INR 50 crores.

Exceptions to the following clauses:

● Joint venture.
● Wholly owned subsidy.
● A dormant company as defined under the Act.

Limit on the number of Independent Directorships?

According to section 165 of the Companies Act 2013, the maximum number of companies wherein a person
can be appointed as a director shall not be more than 20 companies (including the alternate directors). For
calculating the limit wherein a person can be appointed as a director in a public company, the directorship of
that person in private companies (holdings, subsidiary company) shall be included.

In the case of a public company in which a person can be appointed as a director shall not be more than 10
companies. However, the Companies Act, 2013 is silent regarding any specific limit on the number of
companies where a person can be appointed as an independent director.

Appointment and Re-appointment of Independent Directors

Qualifications

Independent directors are directors of a company. Independent directors are subject to the same general
requirements and disqualifications as any other director. The 2013 Act specifies specific qualification
standards for independent directors in addition to those outlined in the Listing Agreement. An independent
director must be a subject matter expert with the necessary qualifications in the domains of finance, law,
management, research, and corporate governance. He must be a person of moral character, faith, honesty,
and appropriate experience. Additionally, he should not be a promoter of the business or any affiliated
businesses, or even a relative of any promoters or board members. In addition, he must not have any
financial ties to the corporation, its holdings, subsidiaries, or promoters. He must, thus, be a person in order
to be selected as an independent director. He must be qualified to serve as a director and provide assurance
that he is not ineligible. In order to serve as a director, he must also submit his written approval, which must
be filed with the Registrar, and declare his director identification number (DIN).

The New Act prohibits the appointee from being associated with the promoter or directors of the company,
its holding, subsidiary, or associate company, whereas, the listing agreement prohibited the appointment of a
person in relation to the promoters or persons possessing management positions at the board level or one
level below.

The new Act does not require the appointment to be unrelated to someone holding managerial positions at
the board level or one below the board, unlike the listing agreement, and it can be deduced from this.
Companies must adhere to the standards under both until the regulations developed in this respect give
further clarity since the new Act does not supplant or replace the listing agreement. While the Listing
Agreement does not contain any strict rules about the potential appointee’s family, the new Act stipulates
that neither the independent director nor any of his kin may:

1. Hold a significant managerial role or had worked for the business during any of the three
financial years;
2. Has participated in any of the three financial years as an employee, proprietor, or partner;
3. Holds 2% or more of the company’s total voting power;
4. Belongs to any non-profit organisation whose chief executive officer or director obtains 25% or
more of its revenues.

While the new Act stipulates that an independent director must possess honesty, the necessary knowledge,
and the necessary experience, it does not specify the criteria to be used in deciding whether a person satisfies
these requirements. The ultimate effect is that listed corporations eventually nominate independent directors
after using their own discretion. It is important to note that, in contrast to the 2013 Act, the listing agreement
does not define the term “a person with integrity and holding the necessary skills and experience” when
describing the individuals eligible to be selected as independent directors. This provision is not present in the
Listing Agreement. These constraints aim to ensure that independent directors do not act against the
financial or pecuniary interests of the firm. There may be a need to review the selection criteria for
independent directors at many listed companies.

Tenure of Independent Directors

The duration of the term of office for independent directors has been set forth under subsection (10) and
subsection (11) of section 149 of the Companies Act,2013.

According to section 149(10), an independent director can be appointed for a term up to 5 consecutive years.
This was clarified by the Ministry of Corporate Affairs via its General Circular 14/ 2014, stating that the
appointment of an independent director for the term of 5 years or less is permissible. Whether the
appointment is for five years or less, it will be considered as one term.
The independent director under this section shall be eligible for reappointment through the passing of a
special resolution and the disclosure of such information has to be made in the board report.

Furthermore, section 149(11) states that no person shall be appointed as an independent director for more
than two consecutive terms. Although such independent directors shall be eligible for reappointment after the
expiration of 3 years.
The person shall have to resign from the office on completion of two consecutive terms even if the aggregate
number of years is less than 10, as clarified by the Ministry of Corporate Affairs via its General Circular
14/2014.

Remuneration of Independent Directors.

Subsection (9) of section 149 of the Companies Act 2013, expressly prohibits independent directors from
gaining any stock options.

However, the independent director may receive remuneration in the form of a fee. The said fee shall be
decided by the board of directors, and it shall be in the form of a sitting fee to an independent director for
attending meetings of the Board or committees. The amount of the said fee shall however not exceed INR 1
lakh per meeting.

Retirement by Rotation

Unlike other directors, the independent directors shall not be liable to retire on rotation as provided by
subsection (13) of section 149.

Alternate Director

Section 161 of the Act provides for the appointment of alternate directors, nominee directors, and additional
directors. The section states that a person shall be appointed as an alternate director for an independent
director only if he has the said qualifications required to be appointed as an alternate director.

Intermittent director
According to Rule 4 of the Companies (Appointment & Qualification of Directors) Rules, 2014, any company
falling within the ambit of the said rule must appoint an independent director in case of an intermittent
vacancy within 3 months or before the immediate next Board meeting.

Manner and selection of independent directors

Provisions pertaining to the appointment of independent directors are set forth under section 150, section
152, part IV of Schedule IV.

Selection of independent directors

The main aim of appointing an independent director is that the appointed person should be impartial and
help with good corporate governance. The manner in which an independent director shall be appointed has
been laid down under part IV of Schedule IV of the Companies Act 2013.

Part IV clause (1) of Schedule IV states that the appointment of an independent director should be free from
any company management. The board of directors shall appoint an independent director, however, the board
while appointing must ensure that there is a balance between skills, knowledge, and experience in the board.
Doing so will facilitate the board to administer their roles and duties efficiently as provided under section 150
(1).

Therefore the board may nominate the person to be appointed as independent directors. The board has also
been given an option to select an independent director from the data bank that has been maintained. The
data bank might be anybody, associate as notified by the central government. The responsibility of
conducting due diligence before appointing an independent director shall be of the board.

Approval

The board nominates person(s) for the post of independent director. However, the appointment of the
independent director should be approved in the shareholders meeting ad provided under Part IV clause (2) of
Schedule IV.

Section 150(2) states that the appointment of an independent director must be approved in the general
meeting held by the company. Additionally, an explanatory statement must be attached to the notice of the
general meeting. The notice must provide the justification for selecting the said independent director.

Furthermore, Section 152(5) also requires the explanatory statement to specify that in the opinion of the
board, the independent director fulfills the conditions laid down under this Act and its rules.

Appointment Letter

The appointment of the independent directors must be formalized by a letter of appointment. The letter of
appointment shall mention the following things listed below (as specified by Part IV clause (4) of Schedule
IV.):

1. The tenure of the independent director.

 2. Expectations of the board and the board level committee(s) in which the independent director is
expected to serve.
3. The fiduciary duties and the corresponding liabilities.
4. Provisions of director and officer insurance.
5. The code of business ethics to be followed by its directors and employees.
6. List of prohibited actions when functioning as such in the company.
7. The remuneration, periodic fees, provision for reimbursement of expenses and profit related
commissions; if any.

The terms and conditions of the appointment of independent directors must be posted on the company
website and must be made available for inspection at the company’s registered office(during business hours)
as provided under clause IV (5)(6) of Schedule IV.

Consent

Every person who has been appointed to hold an office as an independent director must give his consent to
act as an independent director and the said consent must be filed with the registrar within 30 days as
provided under Section 152 (5) of the Act.

Furthermore, the independent director must furnish the consent in writing on or before his appointment in
Form Dir 2 in conformity with rule 8 of Companies ( Appointment and Qualification of directors) rules, 2014.

Re-appointment

According to clause V of Schedule IV, the independent directors shall be re-appointed based on the
performance evaluation report.

Resignation

For various reasons, an independent director may resign from the position by giving the board written notice
of his intention to do so and providing a plausible explanation for why he is unable to maintain his position.
As per the Companies (Registration Office and Fees) Rules, 2014, he must also give a copy of his resignation
letter and an explanation of his reasons for leaving within 30 days to the Registrar of Companies. Upon
receiving a resignation notice, the board is required to take note of it and notify the applicable stock
exchange, as well as the Registrar of Firms in the case of listed companies. Additionally, they must provide
information on the resignation in the board report that is distributed to the company’s next annual general
meeting. The resignation is effective only on the day the company receives the notice of resignation—or any
later date that may be specified in the resignation letter.

When a director tenders his resignation and the Board of Directors accepts it and takes action on it, the
director is no longer responsible for any liabilities the company may incur after the date of acceptance of his
resignation, with the exception of the liabilities he personally incurred when he bought shares of the
company. Directors who resigned and submitted their resignations to the Registrar of Companies (ROC)
before the relevant time during which the alleged offences occurred should be granted relief.

However, at this time, these explanations must be specific in their resignation letter due to the increased
obligations and consequent responsibilities. The resignation letter of an independent director is a public
record that may be cited as prospective evidence in a lawsuit or an inquiry to establish compelling reasons for
the resignation. It can serve as a useful tool for the director to reduce his exposure and justify his stance
before resigning. A fresh appointment must be made as an independent director within 180 days of the
resignation date.

Resignation may only be withdrawn or revoked, prior to the resignation’s effective date, which is the later of
the day the firm receives the notice of resignation or the date mentioned in the resignation notice. In Union of
India v. Shri Gopal Chandra Misra and Others (1978), the Supreme Court of India ruled that an incumbent’s
written notification to the appropriate authority of his intention or proposal to step down from his post as of
a future specified date may be withdrawn by him at any time before it becomes effective, barring any legal,
contractual, or constitutional restrictions. The case of Yamaha Motors (Pvt) Ltd. v. Labour Court-II and
Another (2012) also adopted a similar approach. It was emphasised that a potential resignation may always be
revoked prior to going into force, although it would always be subject to the employee’s service conditions.

Since just resigning and absolving oneself of duty cannot be done, there should be some guidelines.
Resignations based only on vague personal reasons cannot be accepted in order to leave one firm just to serve
others.

Removal

Like any other director of the corporation, an independent director may be dismissed from the board. They
can be dismissed before their term ends by passing a regular resolution that is supported by the majority of
the members. The independent director must have a fair chance to be heard before being removed. However,
a director chosen by proportional representation cannot be dismissed before the end of his tenure. Specific
notice must be introduced at the meeting when a director is to be dismissed. The resolution voted in the
Extraordinary General Meeting (EGM) to remove the directors was deemed invalid since no particular notice
of the vote to remove the directors was given. To provide the concerned director with a chance to voice his
views, the corporation must also submit a copy of the document to him. The concerned director may also ask
for more time to send his representative or a lawyer. In the event of a time constraint, the director may
address the matter at the scheduled meeting. However, if the company or another individual file a claim with
the National Company Law Tribunal (NCLT) claiming that doing so would amount to securing unwarranted
exposure for defamatory material, such representation may not be read out at the meeting. With a majority
vote, shareholders may also dismiss a director with or without cause. However, if two-thirds of the directors
were chosen by proportional representation, this option would be unavailable. If any compensation or
damages are due to the dismissed director under the conditions of his appointment as director, they might
have to be paid.

Separate meeting

The independent directors of the company shall hold an exclusive meeting at least once in the financial year.
The meeting shall be without the non-independent directors. All the independent directors of the companies
must be present at such meetings.

The agenda of the meeting shall be as follows:

● Reviewing the performance of the board, of the non-independent directors, and the chairperson
of the company.
● Assessing the structure and the flow of information between the board and the company
management is required for the efficient and effective functioning of the board.
Evaluation of the performance of an independent director

Part VIII of the Code for Independent Directors provides that based on the performance evaluation report
term of an independent director may be extended or he may be reappointed. The performance evaluation of
the independent director is to be conducted by the entire board of directors.

Director Identification Number (DIN)

Director Identification Number is a unique 8 digit identification number that is allotted to an individual who
wishes to be a director or a company or someone who already is a director of a company. This number is
allotted by the central government.

Section 152 of the companies Act makes it compulsory for the directors to obtain a unique identification
number. The provisions pertaining to Director Identification Number are set forth under section 153 and rule
9 of the Companies (Appointment and Qualifications of Directors) Rules, 2014.
Director identification numbers facilitate the government in maintaining a database. Every person intending
to be a director or every person who is already a director in a company shall be allotted a single number
irrespective of the number of directorships he holds.

To obtain a Director identification number an individual needs to apply to the Ministry of Corporate Affairs
in the manner prescribed along with the prescribed fee. The central government shall allot the director
identification number to the individuals within a month.

The DIN is valid for a lifetime. After receiving the DIN, the director within a month must inform about the
same, to all the companies where he holds or intends to hold the position of director. The company on
receiving the DIN must inform about the DIN of the director within 15 days to the Registrar of Company.

The detailed procedure and the requirements for the application of DIN are provided under rule 9 of the
Companies (Appointment and Qualifications of Directors) Rules, 2014. While allotting and scrutinizing for
DIN, Rule 10 of the Companies Rules 2014 (Appointment and Qualification of Director) is also considered.

Data Bank of Independent Directors

In order to strengthen good corporate governance, the ministry of corporate affairs launched Databank for
independent directors. The databank maintains a database of the independent directors that are willing to
take up the post of an independent director and is also eligible for the post. The data bank facilities the
selection process of independent directors by the company as can select the per their requirements.

Indian Institute of Corporate Affairs has been authorized by the central government to create and to
maintain a data bank for independent directors. The data bank is an online data bank displayed on the
website of the institute.

The provision relating to the details required by the databank is provided under the companies (creation and
maintenance of databank of independent directors ) Rules 2019. Accordingly, the following details of
individual are required by the databank:

● Director identification number (DIN)

● Full name
 ● Income tax PAN
● Fathers name
● Date of birth
● Gender
● Nationality
● Occupation
● Present and permanent full address along with PIN code
● Phone number
● Email id
● The educational qualifications and professional qualifications
● Details of experience or expertise (if any)
● If any pending criminal proceedings
● Details of the limited liability partnership which he is a part of:
○ List of the limited liability partnerships,
○ The names,
○ Nature of the industry of the limited liability partnership,
○ The duration along with the dates,
● Details of the companies he is part of:
○ The Name of the companies.
○ The nature of the industry.
○ The duration along with dates.
○ The nature of directorship i.e whether he serves as an independent director or an
executive director, or nominee director, or a managing director.

The data shall be provided by the institute on payment of a prescribed fee by the company. Indian Institute of
Corporate Affairs shall not be held responsible for the lack of accuracy of any information. As mentioned
earlier it is the responsibility of the company to conduct due diligence on the prospective independent
directors.

The individual whose name has been included in the databank in the event of any change must inform the
institute within 15 days.

Further, in respect of any person who has been appointed as an independent director or who intends to hold
the position of an independent director, the institute shall comply with the following:

1. Conduct a competency self-assessment test with the curriculum covering subjects such as basic
accountancy, company law, securities law, and other areas relevant to the functioning. The test
would be conducted online.
2. Assemble the required study material for individuals appearing for the above-mentioned
assessment. The study material will be in the form of online lessons or audiovisuals.
3. Provision for individuals to take an advance test for the areas specified above and prepare the
study material for the same.

Code for directors

The standards and professional conduct that is expected by the directors have been laid down under Schedule
IV of the Companies Act,2013. The code for independent director includes guidelines for professional
conduct, the duties of the independent directors, their roles and functions. These are discussed below:
Professional conduct

The independent director according to the part I of the schedule IV must:-

1. Sustain ethical standards.

2. To be impartial while discharging his duties.
3. Perform his responsibilities in the interest of the company.
4. Allocate the necessary time to fulfil his professional obligations so as to facilitate him in an
informed decision making.
5. Not allow any unnecessary considerations that will hamper his independent judgment, while
taking decisions for the benefit of the company.
6. Not to abuse his position.
7. Abstain from actions that would cause him to lose his independence.
8. Assist the company in incorporating good corporate governance.

Duties of Directors

The independent director according to part II of schedule IV has the following roles and functions:

● In case of issues relating to strategic risk management, resources, key appointments, standard of
conduct, and performance, the independent director must facilitate in bringing an independent
judgment.
● The independent director must be impartial when considering the evaluation of the performance
of the management and the board of the company
● He must ensure the financial controls and risk management systems are efficient and effective.
● An independent director must always make sure that he is safeguarding the interest of all
stakeholders especially the minority shareholders.
● In case of conflicting interests of all stakeholders, the independent director must try to maintain a
balance.
● The independent director must facilitate in determining remuneration for different levels of:
○ The Executive directors.
○ Key managerial personnel.
○ Senior management and wherever necessary.
● While adjudicating matters, the independent director must adjudicate keeping in mind the
interest of the company as a whole.

Duties of the independent directors

1. Independent director must update and enhance their skills knowledge and familiarity with the
company regularly.
2. An independent director must aim to attend all the board meetings and the meetings conducted
by the board committee is of which he is a member.
3. The independent director must try to keep himself updated about the company the external
environment under which it operates.
4. Before approving any related party transactions the independent director must ensure death the
transaction is in the interest of the company and has been duly considered.
5. An independent director must report the matters concerning unethical behavior whether it is
actual or suspected fraud of the companies ethics policy for code of conduct.
 6. The independent director must never disclose confidential information except if such disclosure
is required by law.
7. In order to discharge his duties or in order to take any decision independent director may seek
expert opinion or clarifications of the information
8. Must be active and an impartial member of the committees of the board that they are part of.
9. In case of any concerns regarding a proposed plan of action or scheme, the independent director
must convey his concern to the board and make sure that they are duly addressed and resolve.
10. Independent directors are prohibited from unjustly obstructing the functioning of the board
or committee of the board.
11. Independent directors must make sure that there is a proper and efficient vigil mechanism
in place in the company.
12. Independent directors should never overstep their authority. Protecting the interest of the
company, its shareholders, and its employees are the primary duty of an independent director.

Position of independent directors in various committees

The companies Act 2013, requires the independent directors to be a part of certain committees such as the:

Audit committee

According to Rule 6 of the Companies (Meetings of Board and its Powers):

Rules, 2014, the following classes of companies shall constitute an audit committee:-

● Every public listed company

● A public company having paid-up share capital of INR 10 crores or more
● A public company having a turnover of INR 100 crores or more
● A public company having in the aggregate, outstanding loans, debentures, borrowings, and
deposits, more than INR 50 crores.

Section 177 of the Companies Act,2013 provides that the audit committee would consist of at least three
directors. The majority of directors in the audit committee must be independent directors.

Nomination Committee and Remuneration committee

According to Rule 6 of the Companies (Meetings of Board and its Powers):

Rules, 2014, the following classes of companies shall constitute a remuneration committee:

● Every public listed company.,,

● A public company having paid-up share capital of INR 10 crores or more,
● A public company having a turnover of INR 100 crores or more,
● A public company having in the aggregate, outstanding loans, debentures, borrowings, and
deposits, more than INR 50 crores.
According to section 178 of the Companies Act, the nomination committee and the remuneration committee
shall consist of at least three or more non-executive directors. One half of the committee shall comprise of
independent directors.

The chairman of the company cannot chair the remuneration committee or the nomination committee,
irrespective of whether he is an executive or non-executive director. The chairman of the nomination
committee or remuneration committee must be an independent director.

Corporate social responsibility committee

According to section 135 of the Companies Act 2013, a company having a net worth of INR 500 crores or net
profit of INR 5 crore or turnover of INR 1000 crore shall constitute a Corporate Social Responsibility
Committee.

Corporate Social Responsibility Committee shall consist of three or more directors out of which one has to be
an independent director.

Advantages of appointing independent directors

Instead of a board made up of dependent directors, a board with a majority of independent directors would
be more capable of overseeing the CEO. Also, adding additional independent directors typically leads to more
outside counsel and knowledge (due to the executives’ coming from different backgrounds). The directors are
not vulnerable to excessive influence from the management group because they, by definition, have no
material link to the firm. So we can say that independent directors are essential to effective corporate
governance and are typically preferred for appointment to the Board of Directors.

Disadvantages to appointing independent directors

Appointing independent directors has a number of disadvantages as well. Some of which are:

● There is a danger of knowledge asymmetry because independent directors often know less about
the firm than the management team.
● Despite the fact that a director may be independent by definition, this does not guarantee that the
director is working with complete impartiality;
● Independent directors are susceptible to management pressure.
● Additionally, they might not possess the knowledge and abilities needed to serve as the Board of
Directors effectively.

Meetings - kinds of meetings

Have you ever wondered how many types of meetings are held in a company? Or under which Act are such
meetings conducted? Or why exactly are company meetings conducted? This article is an attempt to answer
all such questions.

Numerous meetings are convened in a company, which are generally divided into members’ meetings,
directors’ meetings, and other meetings. These meetings are carried on to attain different goals, and each
meeting has its own distinct set of rules and regulations. These rules have to be abided by the company, and
meetings have to be conducted in accordance with such set meetings. These meetings play a major role in the
decision-making process of the company.

Let us have a look at the types of company meetings along with their salient features, importance, objectives,
and landmark judgements, inter alia.

Company meeting : an overview

A company meeting means two or more individuals coming together to carry out a legitimate business or to
take decisions on the same, like any other group of people flocking together for a particular purpose. Now, in
order to carry out the business of the company properly, it becomes necessary for the directors and
shareholders of companies to meet as often as necessary and to take unanimous decisions based on their
viewpoints and discussions. Simply put, it is crucial for companies to hold meetings for the effective
functioning of the company. These meetings hold great importance in the decision-making process.

Moreover, shareholders, who are the owners of the company, have the right to have proper discussions on the
affairs of the company and to further exercise their rights in matters relating to the ongoing activities and
future of the company. Conducting meetings provides this chance to the shareholders and also gives them an
opportunity to keep a check on the activities of the board of directors, as the directors are obligated to adhere
to the decisions taken in the meetings of shareholders. Also, the management of the company is vested in the
hands of shareholders; hence, it is important that they meet on a regular basis to take unanimous decisions
and function effectively as a team.

Now let us have a look at some of the important aspects of company meetings.

Meaning and definition of company meetings

There is no definition of the term “meeting” per se in the Companies Act, 2013; in plain language, a company
can be defined as two or more individuals coming together, gathering, or assembling either by prior notice or
unanimous decision for discussing and carrying out some legitimate activities related to business. A company
meeting can be said to be a concurrence or meeting of a quorum of members to carry out ordinary or special
business and take decisions on important matters of the company.

Why are company meetings held

Before we read about the types of company meetings, let’s take a look at why exactly company meetings are
conducted.

Control management function

Company meetings play a crucial role in controlling the management functions of a company.

Control the affairs of the company

In a company, the directors are accountable to the shareholders. Directors have been entrusted with the duty
to run the business and manage the day-to-day affairs of the company. By holding meetings, the affairs of the
company are controlled.
Future policies

Through meetings, the past policies and experiences of a company can be discussed, and new future policies
can be fixed. As stated above, directors are answerable to shareholders, so via such meetings, the
shareholders can learn about the affairs of the company. The rights of shareholders include:

1. Inquiring regarding the affairs of the company,

2. Criticising the function of the company,
3. Have effective control on the board.

Important definitions of company meetings

In the case of Sharp v. Dawes (1971), a meeting is defined as “an assembly of people for a lawful purpose” or
“the coming together of at least two persons for any lawful purpose.”

Further, according to P.K. Ghosh, “any gathering, assembly, or coming together of two or more persons for the
transaction of some lawful business of common concern is called meeting.”

Moreover, according to K. Kishore, “a concurrence or coming together of at least a quorum of members by

previous notice or mutual agreement for transaction business for a common interest is a meeting.”

Essence in context with the aforementioned definitions

From the above definitions, we can infer the following:

Number of individuals
In a meeting, there must be two or more individuals. The number of members attending the meeting may be
small, large, or extremely large, depending on the type of meeting. In the case of a committee meeting, the
total count of members may be small, whereas in the case of an annual general meeting of any public
company, the total number may be large, and in the case of public meetings, the total count may be very
huge.

Definite place
There must be a specific place for the meeting. In the case of official meetings, the meeting must be conducted
in the office. Further, in the case of big meetings that entail a huge involvement of members, like the annual
general meeting of a public company, the meeting can be held in a public hall. Also, public meetings can be
held in public halls, on open grounds, or even on roads, if required.

Fixed date and time

While conducting a meeting, it is necessary to decide on a date and time. In the case of official meetings, the
date chosen to conduct the meeting is often a working day, and the time is within office hours; however, there
can be restrictions in matters related to the date and time under the Companies Act.

Discussion
There has to be some discussion while conducting the meeting, meaning the individuals in the meeting must
put forth their viewpoints and opinions on the agenda of the meeting.
Predetermined topics
Usually, in company meetings, the topics or subject matter of the meeting are already notified to the
participants, so they can come prepared with their viewpoints on the same.

Decisions
The decisions for the agenda are generally taken in the meeting itself, as getting to a conclusion is the main
objective of conducting the meeting. The decisions occurring in the meeting are binding on the members of
the company, irrespective of whether they were able to attend the meeting or not, were present or not, or even
if they agree with or oppose the inference thus reached.

The decisions are taken either through votes or in the form of resolutions. Also, there are distinct ways of
voting. Usually, decisions are not taken at public meetings, and if they are, they are not binding in any
manner whatsoever.

Types
Meetings can be of different types, namely:

1. Private,
2. Public, or
3. International (like U.N.O.)

The types of company meetings, which can be private or public, are discussed in depth below.

General notes

1. The meeting does not take place automatically. A meeting has to be called or convened. In simple
words, a notice has to be sent to every individual with the authority to attend the meeting.
2. In the case of a public meeting, general publicity is necessary. Every type of meeting has its own
procedure to be followed.
3. An accidental meeting of two or more individuals will not be referred to as a meeting.
4. The secretary is responsible for calling and informing the members and conducting the meeting.

Importance of company meetings

Meetings hold great value in our daily social lives. This is a democratic process that is quite essential in the
decision making of any organisation, be it a company, a club, or even an association. Further, group
discussions play a major role in:

1. Introducing changes in the company,

2. Decision making, and
3. Improves the relations between an employer and his employee.

The object and methods of conducting different types of meetings are different. Each of them is discussed in
detail in the upcoming passages.
Further, the following are some noteworthy pointers on the importance of holding company meetings:

1. Meetings are a crucial part of managing a company, as stated under the Companies Act, 1956.
2. The consent of the members of the company, commonly known as shareholders, is obtained at the
general meetings held by the company.
3. If any mistake is committed by the board of directors, the shareholders have the authority to
rectify it at the meetings of the company.
4. Shareholder’s meetings are held by the shareholders to give a final say on their decisions on the
measures taken by the board of directors.
5. Meetings help enlighten the shareholders to know about the recent happenings and procedures of
the company and enable them to deliberate on some matters.
6. There are several criteria that have to be fulfilled in matters relating to the calling, convening,
and conduct of the meetings.

Components of a valid company meeting

A company meeting generally consists of the following:

Participants

The first and foremost requirement of a meeting is to have participants. In the case of a private meeting, only
the individuals having the authority to attend the meeting, like the members of the organisation, the
committee, the sub-committee and the people who have received an invitation, can participate. At times, in
the event of the non-availability of such a person, he has the right to send his representative or proxy on their
behalf. Whereas, in the case of public meetings, the general public has the authority to attend them.

Chairman

For a valid company meeting, there has to be a chairman at every meeting who has the authority and duty to
carry on the meeting effectively.

Secretary

The secretary of the organisation, committee, sub-committee etc., is entrusted with several duties right from
the beginning to the very end of the meeting. He plays a crucial role in carrying out such meetings.

Invitees

Apart from those who have the authority to attend the meeting, there are some people who are invited, for
instance, the press reporters.

Material elements

Another major component of the meeting involves material elements. The material elements include:

1. The sitting arrangement,

2. The materials for writing, etc.
General provisions to know about conducting valid company meetings

Proper authority to convene meetings

In order for a meeting to be regarded as valid, it must be called by a proper authority, like the board of
directors. In a valid board meeting, the decision to convene a general meeting and issue notice in this regard
must be taken by passing a resolution.

Notice

For a meeting to be conducted properly, a proper notice must be issued by the proper authority. It means
that such a notice must be drafted properly according to the provisions laid down under the Companies Act,
2013. Also, such a notice must be duly served on all the members who are entitled to attend and vote at the
meeting. Moreover, the valid notice of the company must specifically mention the place, the day, the time, and
the statement of the business to be transacted at the meeting.

Quorum

A quorum is defined as the minimum number of members that are required to be present as mentioned
under the provisions of a particular meeting. Any business transaction carried out at a meeting without a
quorum shall be deemed to be invalid. The main object of having a quorum is to avoid taking decisions by a
small minority of members that may not be accepted by the vast majority. Every company meeting has its
own number of quorum, the same has been discussed under separate headings in the upcoming passages.

Agenda

The agenda can be described as the list of businesses to be transacted while conducting any meeting. An
agenda is important for carrying out a business meeting in a systematic manner and in a proper,
predetermined order. An agenda, along with a notice of the meeting, is usually sent to all the members who
are entitled to attend a meeting. The discussion in the meeting has to be conducted in the same manner as
stated in the agenda, and changes can be made in the order only with the proper consent of the members at
the meeting.

Minutes

The minutes of the meetings contain a just and accurate summary of the proceedings of the meeting. Minutes
of the meetings have to be prepared and signed within 30 days of the conclusion of the meeting. Further, the
minutes books must be kept at the registered office of the company or any place where the board of directors
has given their approval.

Proxy

The term ‘proxy’ can be used to refer to a person who is chosen by a shareholder of a company to represent
him at a general meeting of the company. Further, it also refers to the process through which such an
individual is named and permitted to attend the meeting.

Resolutions

Business transactions in company meetings are carried out in the form of resolutions. There are two kinds of
resolutions, namely:
 1. Ordinary resolution, and
2. Special resolution.

Types of company meetings

Company meetings are majorly divided into three categories, and the three categories are further divided
into subcategories, which are again divided into some categories. Let us have a look at the categories.

1. Meetings of shareholders or members

2. General meeting which is further divided into:
1. Statutory meeting,
2. Annual General Meeting,
3. Extraordinary General Meeting.
4. Class meeting.
5. Meetings of Directors
1. Board of directors meeting,
2. Committee of directors meeting.
3. Other meetings that are categorised as:
1. Debenture holders meeting,
2. Creditors meeting, and
3. Creditors and contributors meeting.

Before we dive deep into the nitty-gritty of each of the categories, here is a pictorial representation of the
types of company meetings for your better understanding-
Now that we have seen the pictorial representation of company meetings, let us have a look at each of the
meetings in a more detailed manner.

Meetings of shareholders or members

The first main type of meeting is a meeting of shareholders or members of the company. It is further divided
into two categories, namely:

1. General meeting, and

2. Class meeting.

The first category is further divided into three subcategories, each of which is discussed in detail below.

General meeting

The general meeting is subdivided into three categories. Let us have a look at the nitty-gritty of each of them.

Statutory meeting

Please note: Before the enactment of the Companies Act, 2013, the requirements laid down for statutory
meetings and reports under Section 165 were legit. However, after its enactment, the same has been dropped.
The following is just for the readers’ information.

What is statutory meeting

A statutory meeting is a type of general meeting that must be held by every company limited by shares and
every company limited by guarantee with a share capital within not less than a month and not more than six
months from the date it was incorporated. Private companies are exempt from conducting a statutory
meeting. In this meeting, a report known as the ‘statutory report’ is discussed by the directors of the
company.

Which companies do not need to conduct a statutory meeting

The following companies do not have any obligation to conduct a statutory meeting:

1. Private company,
2. Company limited by guarantee having no share capital,
3. Unlimited liability company,
4. A public company that was registered as a private company earlier,
5. A company that has been deemed as a public company under Sec. 43 A.

What is notice of the meeting

The board of directors of a company is duty-bond to forward a notice of the meeting to all the shareholders
or members of the company. This has to be done at least 21 days prior to holding the meeting, and an explicit
mention of ‘statutory meeting’ of the company has to be made in the notice. If the board of directors does not
name it the ‘statutory meeting’, it will be a breach of the provision.

What is statutory report

Now that a mention of the statutory report was made above, you might wonder, what exactly is it? Let’s find
out.

The board of directors is obliged to forward a report known as the ‘statutory report’ at least 21 days before
the date of the statutory meeting. A copy of the report has to be forwarded to the registrar for registration.
This report has to be drafted by the board of directors of the company and certified and amended by at least
two of them.

What are the particulars of a statutory report

Under Section 165(3) of the Companies Act, 1956, a prior mention of the contents of a statutory report has
been made; it says the report must contain:

1. The total number of fully paid-up and partly paid-up shares allotted
2. The sum of the amount of cash received by the company with respect to the shares;
3. Information on the receipts, distinguishing them on the basis of their sources and mentioning the
amount spent for commission, brokerage, etc.
4. The names of the directors, auditors, managers and secretaries along with their address and
occupation, and changes of their names and addresses, if any.
5. The particulars of agreements that are to be presented in the meeting for approval, with
suggested amendments, if any.
 6. The justifications in cases where any underwriting agreement was not executed.
7. The arrears due on calls from directors and other individuals.
8. The details on the amount of honoraria paid to the directors, managers and others for selling
shares or debentures.

What is the procedure to carry out a statutory meeting

Now that we know about the statutory report and its particulars, you might wonder what the proper
procedure is for conducting a statutory meeting. The answer is in the below pointers.

The board of directors has to send a statutory report to every member of the company, as mentioned above.
The members who attend this meeting may carry out discussions on matters relating to the formation of the
company or matters that are incorporated in the statutory report. Below are some of the points one must
note:

1. While conducting the statutory meeting, no resolution can be taken.

2. The main motive of conducting such a meeting is to familiarise all the members of the company
with matters relating to the development and origination of the company.
3. The shareholders, perhaps, the members of the company, will receive particulars relating to the
following:
1. Shares taken up,
2. Money received,
3. Contracts entered into,
4. Preliminary expenses incurred, etc.
4. The members or shareholders also have the opportunity to carry out a discussion on several
business ideas and ways to prosper the business, along with the future prospects of the company.
5. Moreover, if a decision is not reached at the statutory meeting, an adjournment meeting is called.
6. According to Section 433 of the Companies Act, 1956, if the company errs in submitting the
statutory report or in conducting the statutory meeting within the specified time, it may be
subjected to winding up.
7. However, the court, instead of directly winding up the company, has the authority to instruct the
company to submit a statutory report and conduct a statutory meeting, along with levying a fine
on the individuals who erred in conducting the meeting.

What will be the effect of non-compliance with the provisions on conducting a statutory meeting
The following are the repercussions of not complying with the provisions on conducting a statutory meeting:

1. If there is any mistake in complying with the provision for holding a statutory meeting under
Section 165, the directors or other officers of the company who are at fault will be liable to pay a
fine that is extendable up to ₹500.
2. Under Section 43(6) of the Companies Act, 1956, in case the company errs in conducting the
statutory meeting or if the statutory report is not in compliance with the provisions of the Act,
the company may be compulsorily wound up if the court orders the same. However, under
Section 443(3) of the Companies Act, 1956, the court may pass an order to conduct a statutory
meeting or to send the statutory report, as the case may be, instead of winding up the company.
Before we study the annual general meeting (AGM) and extraordinary general meeting (EGM), let us have a
look at the key differences between them in a tabular format. This is done for a better understanding of the
topics.

Basis Annual general meeting (AGM) Extraordinary general meeting

(EGM)

What is it? An annual general meeting, commonly An extraordinary general

known as an AGM, is a regular meeting held meeting (EGM), is a meeting
annually. other than an AGM.

Applicability AGMs are applicable to all the companies. Similarly, EGMs are applicable
to all companies.

Time of holding the An AGM has to be held within six months of An EGM can be held at any
meeting the close of the financial year. time.

Purpose An AGM is held to serve the following Whereas, an EGM is to be held

purposes: Electing the directors of the for any matter for which a
company,Passing of annual accounts, proper notice is given.
Declaring the dividends, and Appointing
auditors.

Who may call such a The board of directors has the authority to The board of directors, along
meeting? call such a meeting. with requisitionists, have the
authority to call such a meeting.

Repercussions of The tribunal may call and impose a fine in Similarly, the tribunal may call
default in conducting case a company defaults in holding an AGM and impose a fine in case a
such a meeting in a requisite manner. company errs in holding an
EGM in the prescribed manner.

Annual General Meeting (AGM)

The annual general meeting is defined under Section 96 of the Companies Act, 2013. As the name suggests, an
annual general meeting is one of the general meetings held once a year. As per Section 96 of the Companies
Act, 2013, all companies have to hold an AGM within the stipulated time. An AGM provides a chance for the
members of the company to review the workings of the company and express their opinions on the
management and workings of the company.

Purpose of conducting an annual general meeting

The main purpose of conducting an AGM is to transact the ordinary business of the company. Ordinary
business includes the following:

1. Consideration of financial statements and reports from the directors and auditors.
2. Making declarations on dividends.
3. Appointing a replacement of director or directors in place of those who have retired.
4. Appointing and setting up the amount of remuneration for the auditors of the company.
5. It also includes annual accounts, crucial reports, and audits.

Importance of conducting an annual general meeting

Under corporate law, an annual general meeting is regarded as one of the most important institutions for
protecting the members of the company. It is at this meeting— even though it is held only once in a fiscal
year- that the members of the company get the opportunity to question the management on matters relating
to the following:

1. The affairs of the company,

2. The business of the company, and
3. The accounts of the company.

It is only at this meeting that the members of the company have the chance not to re-elect those directors in
whom they have lost faith or confidence. Further, as auditors also retire at this meeting, members of the
company have another opportunity to think about the re-election of these auditors.

Last but not least, it is at the AGM that members disclose the amount of dividend payable by the company.
While talking about dividends, it may be noted that the board of directors makes recommendations on the
amount of dividend, whereas the members at the AGM declare the dividend. Further, the dividend cannot
surpass the recommended amount by the board of directors.

The three rules of conducting an annual general meeting

1. The meeting must be conducted on an annual basis.

2. A maximum duration of 15 months is permitted between holding two annual general meetings.
3. The meeting must be conducted within six months of preparing the balance sheet.

If any of these rules are not complied with, the same will be said to be an offence under the Companies Act,
2013. It has been discussed in the upcoming passages.

Notice of conducting the annual general meeting

The company has to send a clear 21 days’ notice to its members to conduct the annual general meeting. The
notice must mention the day, date, and location of the meeting, along with the hour at which it is decided to
be held. The notice should explicitly mention the business to be conducted at the AGM. A company is
obligated to send the AGM notice to the following:

1. All the members of the company, including the legal representatives of a deceased member and
the assignee of an insolvent member.
2. The statutory auditors of the company.
 3. All the directors of the company.

The notice can be sent either by speed or registered mail or even through electronic means like email.

Date, time, and place of conducting an annual general meeting

Usually, an annual general meeting can be conducted at any time, provided it is during business hours
(between 9 am and 6 pm) and the day of the meeting is not a national holiday. Now, talking about the location
of the meeting, it can be held either at any pre-decided place within the area of the jurisdiction of the
registered office or at the registered office itself.

Below are some of the noteworthy pointers in context to the date, time, and place of holding an annual
general meeting:

1. A public company or a private company that acts as a subsidiary of a public company may
determine the timing of the meeting as per the articles of association.
2. At a general meeting, a resolution can also be passed for determining the time of holding
subsequent meetings.
3. In the case of private companies, the time and location are determined by passing a resolution at
any of the meetings.
4. For a private company meeting, the location may not be within the area of jurisdiction of the
registered office of the company.

Further, as per Section 101 of the 2013 Act, if any member files an application in case a company errs in
holding an annual general meeting, the time frame for notice to call for the meeting can be reduced to less
than 21 days (21 days is the time frame to send a notice to call for an annual general meeting) with the
agreement of members who are entitled to vote.

First annual general meeting and relaxations

As per Section 96 of the Companies Act, 2013, a general meeting must be held annually, as the name suggests.
It is mandatory that all companies hold such meetings at regular intervals. When the annual general meeting
is held for the first time after the company’s incorporation, it has to be held within a period of nine months
from the date of the closing of the financial year of the company, and in other cases, within six months from
the date of the closing of the financial year. Further, as per Section 96 of the Companies Act, 2013, a company
has no obligation to hold any general meetings until it holds its first annual general meeting. Such a
relaxation is provided so that the company can set up its final reports for a longer duration. Another
provision that is provided under Section 166(1) is that, with proper authorization from the registrar, the
company can postpone the date of the annual general meeting. The registrar has the authority to postpone the
date for a further three months at the most, however, such a relaxation does not apply in the case of the
company’s first annual general meeting. Further, a company may not hold an annual general meeting in a
year provided the registrar has consented to it, however, the justification for such an extension should be
reasonable and genuine.

Gaps between two annual general meetings

According to Section 96 of the Companies Act, the gap between two annual general meetings must not exceed
fifteen months. Further, Section 210 of the Act states that a company must provide a report on the accounts
of all the profits and losses of the company, and if the company does not have any profits, an income and
expenditure report must be submitted.
Furthermore, the following pointers are crucial to note in cases of gaps between two annual general meetings:

1. When a company presents its report on profits and losses incurred, it has to mention all the
profits and losses endured by the company right from the day of incorporation.
2. The account shall have an update of at least 9 months from the date of the last annual general
meeting.
3. A balance sheet along with the account report has to be submitted, as well.

Also, after conducting the first annual general meeting, the next AGM must be held within 6 months from the
end of the financial year. If, due to any unforeseeable circumstance, the company fails to hold the meeting,
the tribunal may grant an extension of 3 months.

Quorum

Public company
The quorum in the case of a public company shall consist of the following:

1. 5 if the company has less than 1000 members,

2. 15 if the members are between 1000 and 5000, and
3. 30 if the number of members exceeds 5000.

Private company
In the case of a private company, only two members who are present will constitute the quorum.

Proxy in annual general meetings

Any member of the company who has the authority to vote at a meeting will be entitled to appoint a proxy,
i.e., another person to attend and vote instead of himself. The appointment of a proxy shall be in Form No.
MGT.11. Further, an individual cannot act as a proxy on behalf of members exceeding a total of 50 and
holding in aggregate not more than 10% of total capital with the authority to vote.

Procedure to be followed after conducting the annual general meeting and penalty if the company fails
After conducting the annual general meeting, a report in the form of MGT-15 within a period of 30 days has
to be filed. Further, under Section 121, the report will include how the meeting was convened, held, and
conducted as per the provisions of the 2013 Act. If the company errs in doing so, a penalty of ₹1 lakh shall be
imposed. Further, on every officer who has erred in following the procedure of the meeting, a penalty of
₹25,000 minimum shall be imposed, and in case the issue persists, a penalty of ₹500 for every day after the
failure persists can be imposed, and the same shall be for a maximum of ₹1 lakh.

Penalty for not holding an annual general meeting

If a company errs in holding an annual general meeting in accordance with Section 99 of the Companies Act,
1956, the act shall be considered a serious offence in the eyes of the law. Every member of the company who is
at fault shall be deemed to be a defaulter.
Further, a fine extendable to ₹100,000 may be levied on the defaulters. Moreover, as per Section 99 of the
Companies Act, if the defaulters persist with the same mistakes, and if the provisions under Sections 96 and
97 are not complied with, a fine of ₹5000 will be imposed on the defaulter until the problem continues.

Power of NCLT (National Company Law Tribunal)

The National Company Law Tribunal, commonly known as NCLT, has the authority to call or direct a
meeting under Section 97 of the Companies Act, 2013, in case an application is filed by a member in matters
relating to the failure to conduct the meeting.

Extraordinary general meeting (EGM)

In a company, there are certain matters that are so crucial to be discussed that they need to be addressed
immediately to the members, which is where an extraordinary general meeting comes into play. Such
meetings are discussed under Section 100 of the Companies Act, 2013. An extraordinary general meeting is
any general meeting apart from the statutory meeting, an annual general meeting, or any adjournment
meeting. Such a meeting is held to discuss special business, especially those businesses that do not fall under
the ordinary business that is discussed at annual general meetings. Such meetings are usually called for
matters that are urgent and for those that cannot be discussed at annual general meetings. Extraordinary
general meetings are usually called by the following:

1. The directors or the board of directors of the company,

2. The shareholders of the company who hold 1/10th of the paid-up shares.

Calling of extraordinary general meeting

While dealing with the above heading, one might wonder when and by whom an extraordinary general
meeting can be called. Let’s find out.

An extraordinary general meeting can be called in the following circumstances:

By the board of directors suo moto

In cases when the board of directors has some urgent matters to discuss and such matters cannot be
postponed until the next general meeting, the board of directors may hold an extraordinary general meeting
if need be. The same is discussed under Section 100 (1) of the 2013 Act.

By the Board on the requisition of members

The board of directors may call an extraordinary general meeting on the requisition of the following number
of members:

1. In case of a company having a share capital

Members who own 1/10th of the paid-up share capital of the company on the date of receipt of the requisition
on the date of exercising the voting rights.

2. In case of a company not having a share capital

Members who own 1/10th of the paid-up share capital of the company on the date of receipt of the requisition
on the date of exercising the voting rights.

By requisitionists
Under Section 100(4) of the Company Act, 2013, if a board does not, within 21 days from the date of receipt
of a valid requisition in relation to any matters thereto, take any steps to call a meeting to consider the
matter not later than forty-five days from the date of receiving such a requisition, then the meeting may be
called upon and conducted by the requisitionists themselves within a time span of three months from the date
of the requisition.

Further, it is important to note the following pointers for a better understanding of the topic:

● Notice

The notice must specify the date, day, time, and place of holding the meeting, and must be held in the same
city as the registered office and on a working day.

● Notice to be signed

The notice has to be duly signed by all the requisitionists or on behalf of those requisitionists who have
permission to sign in place of the requisitionists, provided the permission is in writing. This can also be done
via an electronic request attached to a scanned copy to give such permission.

● No need of an explanatory statement to be attached to the notice

There is no need for any explanatory statement under Section 102 to be attached with the notice of an
extraordinary general meeting that is convened by the requisitionists and the requisitionists.

● Serving notice of the meeting

The notice of the meeting has to be served on all those members whose names are on the list of registered
members of the company. It should be served within three days of the requisitionists depositing a valid
request for conducting an EGM in the company.

● Method of serving the notice

The notice of the meeting can be sent through speed mail, registered mail, or even electronic means like
emails. If there is an issue with serving the notice or if some member does not receive the notice for any
reason, the meeting shall not be invalidated by any member.

By the tribunal
According to Section 98 of the Companies Act, 2013, if it is not possible to conduct a meeting in the company,
the tribunal may either suo moto or through an application submitted by any director or member of the
company who has the authority to vote at the meeting-
 1. Instruct to hold and conduct a meeting in a manner the tribunal thinks fit, and
2. Provide ancillary or consequential instructions as the tribunal deems fit, including any directives
thus amending or supplementing in matters relating to the calling, holding and conducting the
meeting, the operation of the clauses of the Act or articles of the company.

Such instructions may also incorporate any command that a member of the company present in person or via
proxy shall be deemed to compose a meeting. The meeting held pursuant to such orders shall be referred to as
a meeting of the company that is duly called, held, and conducted.

Place of conducting an extraordinary general meeting

An extraordinary general meeting can be held at the registered office or any other location in the city where
such a registered office is located.

Notice for extraordinary general meeting

The notice of an extraordinary general meeting must be served in writing or through an electronic mode in at
least 21 days of conducting such a meeting.

Penalty for not holding an extraordinary general meeting properly

In cases where an extraordinary general meeting is not conducted properly, a fine of ₹10,000 within a
prescribed time can be levied on the defaulters. Moreover, in case the issue persists, a fine of ₹1000 per day
shall be levied. Additionally, the maximum fines in cases of erring in conducting an EGM successfully are:

1. ₹50,000 for a member of the company, and

2. ₹200,000 for the company itself.

Class meeting

Company meetings come under two broad categories, namely:

1. General meetings, and

2. Class meetings.

We have already talked about the different types of general meetings above, let’s now discuss what these class
meetings are!

Class meetings, as the name suggests, are meetings conducted for shareholders of the company that hold a
particular class of shares. Such a meeting is conducted to pass a resolution that is binding only on members of
the concerned class. Also, only members belonging to that particular class of shares have the right to attend
and vote at the meeting. Usually, the voting rules are applicable to class meetings as they govern voting at
general meetings.

Such class meetings can be conducted whenever there is a need to alter or change the rights or privileges of
that class as stated in the articles of association. In order to execute such changes, it is crucial that these
amendments be approved in a separate meeting of the shareholders and supported by passing a special
resolution. Under Section 48 of the Companies Act, 2013, which talks about variations in shareholders’
rights, class meetings of the holders of the different classes of shares must be conducted in case there are any
variations. Similarly, under Section 232, which discusses mergers and amalgamations of companies, where a
scheme of arrangement is proposed, there is a requirement that meetings of several classes of shareholders
and creditors be conducted.

Meetings of directors

Board of directors

Board meetings

As per Section 173 of the Companies Act, 2013, a company has to hold the meeting of board of directors in
the following manner:

1. The first board meeting has to be conducted within a span of thirty days from the date of
incorporation.
2. In addition to the above meeting, every company has to hold a minimum of four board meetings
annually, and there shall not be a gap of more than one hundred and twenty days between
consecutive two meetings.

Please note: With the issuance of Secretarial Standard 1 (SS-1), a circular by ICSI, a clarification was given that
the board shall conduct a meeting at least once every six months with a maximum gap of one hundred and
twenty days between two consecutive board meetings. Further, the SS also specified that it will be sufficient if a
company holds one meeting in every renaming calendar quarter in the year of its incorporation in addition to the
first meeting, which is to be held within thirty days from the date of incorporation.

3. In matters relating to Section 8 of the Companies Act, with an exemption by MCA dated
5.06.2015, it was held that the sub clause (1) of Section 173 will be applicable only to the extent
that the board of directors of such companies hold at least one meeting in every six months.

Purpose of holding a board meeting

Board meetings are held for the following purposes:

1. For issuing shares and debentures.

2. For making calls on shares.
3. For forfeiting the shares.
4. For transferring the shares.
5. For fixing the rate of dividend.
6. For taking loans in addition to debentures.
7. For making an investment in the wealth of the company.
8. For pondering over the difficulties of the company.
9. For making decisions of the policies of the company.

Notice of board meetings

As per Section 173(3) of the Companies Act, 2013-

 1. A notice of not less than seven days must be sent to every director at the address that is registered
with the company.
2. Such notice can be sent either via speed post, by hand delivery, or through any electronic means.
3. The SS-1 (mentioned above) states that if the company sends the notice by speed post, or
registered post, or by courier, an additional two days shall be added to the notice served period.
4. In situations when the board meeting is called at shorter notice, it has to be conducted in the
presence of at least one independent director.
5. Further, if the independent director is absent, the decision occurred at must be circulated to all
the directors, and it shall be final only after ratification of decision by at least one independent
director.
6. Moreover, in cases where a company does not have its own independent director, the decision
shall be said to be final only if it is ratified by a majority of directors, unless a majority of
directors gave their approval at the meeting itself.

Requisites for a valid meeting - Some important pointers on the requirements and procedures for convening
and conducting a valid board meeting

1. Directors can join the meeting-

1. In person,
2. Through video conferencing, or
3. Other audio visual means.
2. Rule 3 of the Companies (Meetings of Board and its Powers) Rules, 2014, has provisions related
to the requirements and procedures, along with the procedures needed for board meetings in
person for matters relating to conveying and conducting board meetings via video conferencing.
3. While conducting virtual meetings, it is necessary that companies make proper arrangements to
avoid any issues at the last moment.
4. The chairperson and the secretary of the company have to ensure that they take necessary
precautions in matters relating to video conferencing, like proper security, recording the
proceedings and preparing the minutes of the meeting, having proper audio visual equipment,
etc.
5. The notice for holding the meeting must be in accordance with the provisions laid under Section
173, subsection 3 of the Act.
6. While beginning the meeting, the chairperson has the duty to roll call every director participating
through video conferencing or other such means to record the following:
1. Name of the director;
2. The place from where the director is participating;
3. An affirmation that the director can completely see, listen, and communicate with the other
participants in the meeting;
4. A confirmation that the director has received the agenda and all the relevant material related to
the meeting;
5. A proclamation that no other individual other than the director is attending or has access to the
proceedings of the meeting at the palace mentioned in pointer (b).
7. After the roll call, the chairperson or the secretary has to inform the board about the names of
the members who are attending the meeting at the request or with the authorization of the
chairman and affirm that the required quorum is complete.
8. There are some matters that must not be dealt with through video conferencing or other
audiovisual means, namely:
1. An approval of the annual financial statements;
2. An approval of the report of the board;
3. An approval of the prospectus;
 4. The audit committee meetings for consideration of statements related to finance, including a
consolidated financial statement, if any, that needs an approval from the board under subsection
(1) of Section 134 of the Act; and
5. An approval on matters related to the amalgamation, merger, demerger, acquisition, and
takeover.

Agenda

The word “agenda” can be described as things to be done. In the case of company meetings, it can be said to
be a statement of the business that must be transacted at a meeting, along with the order in which the
business must be dealt with. Even though there is no explicit mention or provision in the Companies Act,
2013, for the secretary to send an agenda or include the same in the notice of the board meeting, it is
necessary by convention for the agenda to be mentioned with the notice served to conduct the meeting. When
an agenda is attached to the notice, the director is aware of the proposed business and the objects of
conducting the meeting, thus, he can come duly prepared for the discussion to be held in the meeting.

Quorum

As we know, every company needs to have a proper quorum to conduct a valid company meeting. Now, the
quorum for a board meeting under Section 174 of the Act is one third of the total strength or two directors,
whichever is higher. It must be noted that, any director participating through video conferencing or any
other audiovisual means must also be considered to determine the quorum.

Further, if the number of directors is reduced or there is any removal of a director or directors, the directors
who continue may act on behalf of the missing number of directors to fill the missing gap for the quorum or
for summoning a general meeting of the company; however, they shall not act for any other purpose.
Moreover, in cases where the number of directors interested surpasses or is equal to two-thirds of the total
strength of the board of directors, the number of directors who are not interested and are there to attend the
meeting, the number not being below two, shall be the quorum at such times.

It is pertinent to note that the quorum has to be present not only at the time of commencement of the meeting
but also at the time of transacting business with the company.

Committee of directors

The board of directors has the authority to form committees and delegate powers to such committees;
however, it is crucial that such a committee only consist of directors and no other members. Further, it is
mandatory for such committees to be authorised by the articles of association of the company and be in lieu
of the provisions set out in the Companies Act. The meetings of all these committees are held in the same
manner as board meetings.

In large companies, the following routine matters are looked after by the sub-committees of the board of
directors:

1. Allotment,
2. Transfer,
3. Finance.

Other meetings
Debenture holders meeting

A company is entitled to issue debentures, and to further implement the same, a meeting for debenture
holders can be called. This meeting is between the board of directors and the debenture holders. These
meetings are usually called to discuss the rights and responsibilities of debenture holders.

Meetings of debenture holders are conducted in accordance with the provisions laid down in the debenture
trust deed. The rules and regulations mentioned in the trust deed are related to the following:

1. Notice of the meeting,

2. Appointment of a chairman of the meeting,
3. Passing resolutions,
4. Quorum of the meeting, and
5. Writing and signing of minutes of the meeting.

Debenture holder meetings are generally conducted from time to time to discuss matters where the interest of
debenture holders is involved, like at the time of:

1. Reconstruction,
2. Reorganisation,
3. Amalgamation, or
4. Winding up of the company.

Creditors meeting

Meetings of creditors is a term used to describe a meeting setup by the company to conduct a meeting of the
company’s creditors. Under the Company Act, 2013, companies are not only entrusted with the power to
negotiate with creditors but also set up a procedure to do so. Such meetings are always arranged in matters
where a creditor decides to voluntarily wind up.

Moreover, Section 108 of the Companies Act, 2013, discusses the holding of meetings of creditors. It also
states that meetings be held in accordance with the provisions laid down under the following sections of the
said Act:

1. Section 109 that discusses demand for poll,

2. Section 110 that talks about postal ballot, and
3. Section 111 that has provisions in relation to the circulation of members’ resolutions.

In the creditors meeting, the creditors can decide to either approve, amend, or reject the repayment plan.
Further, the resolution professional must make sure that any sort of changes or modifications suggested by
the creditors of the company are approved by the directors of the company before carrying out that
particular change. Furthermore, the resolution professional also has the authority to adjourn the meeting of
the creditors for a period of not more than seven days at a time.

Notice of meetings of creditors

If a company is voluntarily winding up, a meeting of creditors must be called to propose a resolution for
voluntary winding up. Such a meeting has to be called either on the day of taking such a decision or the
subsequent day, and a general meeting must be conducted to propose the resolution.

The notice to creditors must either be sent by post along with the notices regarding the general meeting of the
company for winding up. Additionally, with the notice to the creditors, the company also has to advertise at
least once in the official gazette and once in two newspapers that are circulated in the district where the
company’s registered office or principal place of business is situated.

Procedure for conducting a company meeting

While discussing the procedure for consulting the meeting of the creditors, the following pointers are
noteworthy:

Obligation of the board of directors

While conducting a meeting, the board of directors must submit a statement on the position of the company’s
affairs along with a list of the company’s creditors and the estimated amount of their claims. The director
who is entrusted with the duty to conduct the meeting of creditors or who is in charge of the same must
attend the meeting and hold it at the same time.

Next course of winding up of the company

Based on the decision that occurred at the meeting of creditors, the company shall decide its next course of
action. The decision could be one of the following:

1. The company would wind up on a voluntary basis if all the parties agree to it unanimously.
2. In case the company is not able to repay all the debts from the assets sold in the voluntary
winding up of the company, then a resolution can be passed from winding up the company by
involving the tribunal.

Passing the notice of resolution

When a notice of resolution is passed in the meeting of creditors, the same must be filed with the registrar
within 10 days of passing such a resolution. If the company does not adhere to the set provisions of company
law under the Companies Act, 2013, a penalty with a fine that will not be less than fifty thousand rupees and
extendable up to two lakh rupees shall be imposed. Further, the director of the company who errs in
following the procedure, will also be penalised with an imprisonment for a term extendable to six months or
with a fine not less than fifty thousand rupees and extendable up to two lakh rupees.

Quorum of creditors

A meeting cannot be commenced unless the creditors of the company, known as quorum attend the meeting.
The requisite quorum is as follows:

Quorum in case of creditors

In the case of creditors, at least one creditor entitled to vote must be in the quorum.

Creditors and contributors meeting

Creditor and contributor meetings are usually conducted when the company has gone into liquidation to
calculate the total amount due by the company to its creditors. The main motive of holding such meetings is
to seek the approval of the contributors to the scheme of compromise or rearrangement to save the company
from economic difficulties.

At times, even a court can pass an order to conduct such a meeting. It should be noted that the term
“contributory” encompasses every individual who is accountable for making contributions to the assets of the
company at the time of winding up.

Quorum in case of contributors

In the case of a meeting of contributors, at least one creditor is entitled to vote, or all the contributors if their
number does not exceed two.

Requisites of a valid company meeting

If the business carried on in a company is valid and legally binding, it is necessary that the meeting called to
conduct such business also be held in a valid manner. To understand the same, there are some pointers one
must understand to consider a meeting valid. The following are the requisites for conducting a valid company
meeting:

1. The meeting is convened by proper authority.

2. The announcement of holding the meeting is served through a proper notice. The same has been
discussed under Section 101 and 102 of the Companies Act, 2013.
3. While holding the meeting, it is crucial that a proper quorum is present.
4. To conduct the meeting, it is important that it must be presided over by a proper chairman.
5. At the meeting, business must be validly transacted.
6. It is crucial that proper minutes of the meeting must be prepared.

Relevance of different company meetings

Every company has its own importance. Let’s quickly take a look at each of the company law meetings’
relevance.

Annual general meeting (AGM)

An AGM is conducted to transact the ordinary business of the company. Ordinary business includes the
following:

1. Consideration of financial statements and reports from the directors and auditors.
2. Making declarations on dividends.
3. Appointing a replacement of directors in place of those who have retired.
4. Appointing and setting up the amount of remuneration for auditors of the company.
5. It also includes annual accounts, crucial reports, audits.

Extraordinary general meeting (EGM)

An EGM is conducted to discuss special businesses, usually those that do not fall under the category of
ordinary businesses, which are discussed at AGMs. These meetings are generally called only in cases of
urgent matters or for those matters that are not discussed at AGMs.

Class meetings

Class meetings are conducted for shareholders belonging to a particular class. These meetings are held to
gain approval via a special resolution of all such members belonging to the particular class to seek their
approval on important matters or amends in any field related to their interests.

Board of directors meeting

A board of directors is held for several purposes, namely, for making calls on shares, issuing shares and
debentures, forfeiting the shares, for discussing the difficulties of the company, etc.

Committee of directors meeting

A committee of directors meeting can be held for issues relating to the allotment or transfer of any share or
asset of the company, or even for any issues relating to the finances of the company.

Debenture holders meeting

Debenture holders meetings are conducted to decide upon matters relating to the reconstruction,
reorganisation, amalgamation, or winding up of the company.

Creditors meeting

Creditors meetings are usually conducted for the creditors to either approve, change, or deny the repayment
plans of a company when it decides to wind up voluntarily.

Creditors and contributors meeting

Similar to the aforementioned meeting, a contributors meeting is conducted for the calculation of the total
amount due by the company to repay creditors or contributors when the company has gone into liquidation.

What happens if there is a breach in conducting company law meetings

As discussed under each heading (wherever relevant), in case a company errs in conducting a meeting, a
penalty in the form of fine, is imposed by the tribunal. The penalty is either imposed on the company or its
members, or both. The penalty keeps recurring up to a certain amount in case of continuation of the blunder.

Judicial pronouncements on company meetings and relevant provisions

There are several cases where the matters relating to company law meetings were approached in the court of
law. Below is an amalgamation of a few of them. A point must be noted that an attempt is made to segregate
each case law on the basis of the type of company meeting or relevant provisions. Each judicial
pronouncement has been added under separate subheadings then.

Annual general meeting (AGM)

T.V. Mathew v. Nadukkara Agro Processing Co. Ltd. (2002)

In this case, the Kerala High Court opined that there is no provision in the law which states that holding the
first AGM of the company can go beyond the set time period, i.e., nine months from the forest financial year
of the company.

Sikkim Bank Ltd. v. R. S. Chowdhury (2000)

In this case, the Calcutta High Court held that any meeting or business conducted at a location other than the
one mentioned in the notice of the meeting will be declared to be prima facie void. If such an issue arises, a
notice declaring the change of location has to be served to each and every member having the authority to
attend the meeting.

M/S. Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwala (1961)

In the case of M/S. Harinagar Sugar Mills Ltd. v. Shyam Sundar Jhunjhunwala (1961), the Hon’ble Supreme
Court held that if a managing director of a company had repeatedly called upon other directors of the
company to hold an AGM, but the efforts are in vain, the managing director could not be considered to be an
“officer in default”.

Re. Brahmanbaria Loan Co. Ltd. (1934)

In Re. Brahmanbaria Loan Co. Ltd. (1934), the Calcutta High Court held that it is no defence for a company
to plead that it was not able to conduct an annual general meeting just because a criminal case was filed
against the secretary of the company and important books of the company had been exhibited in the court for
carrying out the proceedings.

Kastoor Mal Banthiya v. State (1951)

In this case, the Court had a lenient view when a company that had only two members who were brothers,
had to approach the Court for justice. Here, one of the brothers was seriously ill, and hence the company
erred in conducting the meeting. The Court stated that the non-performance of holding the AGM was not a
deliberate, willful defect, and hence no charges were filed against them.

Extraordinary general meeting (EGM)

Life Insurance Corporation v. Escorts Ltd. & Ors. (1986)

The Hon’ble Supreme Court in the case of Life Insurance Corporation v. Escorts Ltd. & Ors. (1985) stated that
every individual holding shares of a company has the right to call/requisition an extraordinary general
meeting subject to the provisions of the Act. Further, the Court said that once the requisition is made in
compliance with the provisions of the Act, the shareholder cannot be restricted from calling any such
meeting. Simply put, the Apex Court stated that an institutional shareholder like that of LIC, too, has the
same right to requisition an EGM as any other shareholder.

Moreover, the Supreme Court in this case made another interesting observation. It said, if an EGM is filed
for the purpose of removing some of the existing directors of the company, one cannot say that the requisition
is invalid just because the reason for their removal was not mentioned.

Ball v. Metal Industries Ltd. (1957)

In Ball v. Metal Industries Ltd. (1957), the Court of Session in Scotland said that the requisition to hold an
EGM must set out the matters for calling such a meeting, that is, apart from the agenda for the meeting, no
other discussion can be carried out in these meetings. For instance, if an EGM is being conducted for the
appointment of three new directors, the chairman cannot add a new item for the removal of one of the
existing directors of the company to the agenda.

B. Sivaraman v. Egmore Benefit Society Ltd. (1992)

In the case of B. Sivaraman v. Egmore Benefit Society Ltd. (1992), the Madras High Court held that an extra
annual general meeting cannot be requisitioned for a declaration that the directors appointed at the last
meetings were not justifiably elected and that the requisitionists should be appointed on their behalf.

Anantha R. Hedge v. Capt. T.S. Gopala Krishna (1996)

In the case of Anantha R. Hedge v. Capt. T.S. Gopala Krishna (1996), the Karnataka High Court opined that
just because a director refused to conduct an extraordinary general meeting when requisitioned, it would not
amount to an offence under the 2013 Act.

B. Mohandas v. A. K. M. N. Cylinders Pvt. Ltd. (1998)

In the case of B. Mohandas v. A. K. M. N. Cylinders Pvt. Ltd. (1998), the Company Law Board opined that the
requisitionists cannot approach the tribunal directly, i.e., when the requisitionists have not made an attempt
to call the meeting themselves as stated under the law, they cannot approach the tribunal for an order
directing the EGM.

Amit Kaur Puri v. Kapurthala Flour, Oil and General Mills C. PVt. Ltd. (1982)

In this case, the High Court of Punjab-Haryana held that when a company has no duly constituted board of
directors, it is not feasible to hold a meeting.

Indian Spinning Mills Ltd. v. His Excellency (1953)

In the case of Indian Spinning Mills Ltd. v. His Excellency (1953), an individual who did not possess a
qualifying share was assigned to be the chairman of the company. Later, some directors transferred their
shares to him to fulfil the requisite necessities of the articles of the company. However, a group of members
objected to this action and filed a suit, claiming such an action to be invalid. Here, the Calcutta High Court
held that when such a situation arises, it is quite impractical to conduct a meeting.

Re. Ruttonjee and Company Ltd. v. Unknown (1968)

In the case of Re. Ruttonjee and Company Ltd. v. Unknown (1968), the Calcutta High Court cautioned the
Tribunal, stating that it should interfere only if it is fully convinced that the application made is filed with
bona fide intentions in the larger interest of the company.

The High Court issued a note of caution against the misuse of application under the Act and stated that, “the
power should be used sparingly and with caution so that the court does not become either a share-holder or a
director of the company trying to participate in the internecine squabbles of the company.”

Board meeting

Sanjiv Kothari v. Vasant Kumar Chordia (2004)

In the case of Sanjiv Kothari v. Vasant Kumar Chordia (2004), an observation was made that in case a meeting
is convened by the managing director on requisition by the director on the same date to have a discussion on
the same matter that was highlighted by the director, the director has to attend the meeting and should not
have any other arrangement for attending a meeting on the same date at some other place.

Dankha Devi Agarwal v. Tara Properties Private Limited

In Dankha Devi Agarwal v. Tara Properties Private Limited (2006), the Hon’ble Supreme Court concluded that
if a decision is reached without due notice of such a meeting for the removal or induction of any individual,
such an act would constitute oppression and mismanagement. It further stated that at least two directors or
one-third of the total strength, whichever is higher, will constitute a quorum for a board meeting. Also,
directors who are attending the meeting in person or through any audio-visual means would be counted for
the purposes of quorum.

Notice of the meeting

Smith v. Darley (1848)

In this case, the Queen’s Bench Division of Ireland held that an accidental omission to give notice to, or the
non-receipt of, such notice by any individual who is entitled to receive it does not invalidate the proceedings
of the meeting; however, if such a notice is deliberately commissioned to be served, it will definitely result in
invalidation.

Kaye v. Croydon Tramways Co. (1898)

In this case, there was a provisional agreement for the sale of an undertaking by one company to that of the
other. So, the company sent out a notice stating that the object of the meeting was to adopt an agreement for
the sale of one of the company’s undertakings to another; however, it failed to reveal the fact that substantial
amounts were payable to the directors of the undertaking that was to be sold to compensate for the loss of
office. Here, the court held that the notice was invalid as it was not adequate and did not disclose all the facts
upon which the members would be exercising their right to vote.

Parker and Cooper Ltd v. Reading (1926)

In this famous English case, the court observed that when the members had been served a notice that was not
in accordance with the set standards but were still present at the meeting, the notice could be made good.
Further, the meeting can also be considered valid irrespective of whether the notice served in the first place
was apt or not.

PNC Telecom v. Thomas (2002)

In this case, the Vice-Chancellor of the Chancery Division of England and Wales held that a notice of a
meeting served via fax is a valid notice.

Quorum of the meeting

Sharp v. Dawes (1876)

In the case of Sharp v. Dawes (1876), a company with several members called a meeting for the purpose of
making a call on the members. However, only one member, who was holding a proxy, was present at the
venue of the meeting. He proceeded to take the chair and pass the necessary resolution for making the
aforementioned call on the members. Furthermore, he even proposed a vote of thanks. When this issue
arrived in court, the Court declared such a meeting to be invalid. In the words of Lord Coleridge, “the word
‘meeting’ prima facie means a coming together of two or more than two persons“.

Chairman

Pena v. Dale (2003)

In this case, it was stated that if an individual is informally invited to act as a chairman of a meeting but no
formal resolution is passed in this regard, the members of the company attending the meeting have the right
to raise an objection contending that there was no valid appointment of a chairman.

Voting

T. H. Vakil v. Bombay Presidency Radio Club (1945)

In a company, business transactions are carried out at meetings in the form of resolutions. Members are
entitled to discuss the contents of a resolution before it is considered to be put up for voting. Further,
amendments that are pertinent to the proposed resolution may be proposed in the meeting and voted upon. In
case the amendment is passed, the amended resolution will be considered for voting. In this case, the Bombay
High Court held that if the chairman wrongfully rules out an amendment to a resolution, the next
proceedings conducted to discuss the same resolution will be deemed as invalid.

Conclusion

Under the Companies Act, 2013, it is important that companies conduct requisite meetings throughout the
year as and when necessary. These meetings play a major role in shaping the company, as major decisions
relating to the company and its future are taken in such meetings.

There are three main categories of meetings in company law, and each meeting has its own significance. Also,
these meetings are further divided into subcategories. For a recap, let us again take a look at the categories.
 1. Meetings of shareholders or members
2. General meeting which is further divided into:
1. Statutory meeting,
2. Annual General Meeting,
3. Extraordinary General Meeting.
4. Class meeting.
5. Meetings of Directors
1. Board of directors meeting,
2. Committee of directors meeting.
3. Other meetings
1. Debenture holders meeting,
2. Creditors meeting, and
3. Creditors and contributors meeting.

Further, for every meeting to be valid, it is integral that it must be duly convened, properly constituted and
effectively conducted under the requisite provisions of the Companies Act and the rules framed thereunder.

4D. Powers and functions of the Chairman and Vice-Chairman.

(1) The powers and functions of the Chairman shall be
(a) to preside over the meetings of the Managing Body and all other Committees set up by the Managing
Body of which he is the Chairman;
(b) to re-appropriate on the advice of the Treasurer of the Society, budgetary allocation from the major head
of account to another major head of account;
(c) to authorise, on the advice of the Treasurer of the Society, expenditure on items not contemplated in the
annual Budget of the Society, subject to the availability of funds;
(d) to institute, if necessary, disciplinary proceedings against officers of and above the rank of Deputy
Secretary of the Society: Provided that the final decision on the basis of the disciplinary proceedings so
instituted shall be taken,
(i) in case of the Secretary-General of the Society, with the previous approval of the President;
(ii) in other cases, with the previous approval of the Managing Body.
(2) The powers and functions of the Vice-Chairman shall be,
(a) to exercise the powers and perform the functions conferred on the Chairman under subsection (1) or
delegated to him under sub-section (3), in the absence of the Chairman on leave or on tour abroad or for any
other similar reasons;
(b) to act as ex officio member in all the Committees or Sub-Committees appointed by the Managing Body.
(3) The Chairman and the Vice-Chairman shall, in addition to the powers exercisable by them under sub-
sections (1) and (2), exercise such other financial and administrative powers as may be delegated to them by
the Managing Body in accordance with rules made by it under section

Unit – V
Accounts and Audit

Meaning of Accounts: Section 128 of the Companies Act 2013

Section 128 of Companies act 2013 stated that every company need to maintain its registered office books of
accounts and other relevant papers and books for every financial year which states the true and fair view of
state of affair of company including its all branches .
According to section 2 [13] of books of account it includes the record which should be mentioned, they are as
follows-
● All the money received by company and matters in respect of which receipts and expenditure takes
place.
● All the purchases and sales of goods by the company.
● All the liabilities and assets of the company.
 ● All the items of cost given under section 148 in case of company which belongs to any class of
companies given under that section.
As it is mentioned that section 128 requires books of account to be kept , however the proviso to section
128[1] allows the company to keep its book of account to any other place in India but it should be decided by
board of directors. In this case , company need to give the notice to registrar in writing within seven days of
decision mentioning the address of other place.
It is required that all the branch offices periodically summarized the returns of company and sent it to the
registered office or any other place referred to section 128[1]. Proviso of section 128[1] states that company
can also maintain the books of account in electronic mode. In this case Rule 3 of companies accounts rules
2014 says that such book of account to remain accessible in India. They must be maintain in that manner in
which they were originally generated, sent or received. The information which was received from branch
office need to be original, there will be no alteration. Company should have proper system where storage,
display and other relevant things are there and as considered by audit board. If the company is using the
service of a third party service provider for maintaining the books and records in the electronic format, the
company shall intimate to registrar , name of service provider and location of service provider.

There must be an inspection of books of account

Section 128[3] says that During business hours any director can inspect the books of account and other
papers.
Section 206[1] says that registrar can call for books of accounts, papers, explanation by giving written notice.
Registrar shall write his reason in writing for giving the notice under section 206. In any special
circumstances, central government can appoint an inspector under section 206[5] for an inspection of books
of accounts, papers.
It is the duty of officers, directors and employees to produce all the documents, statements, information
which was asked by the registrar or inspector during inspection.
The registrar and inspector can take the copies of books of account as a token of inspection having been
made.
Directors have also the Right of inspection- Section 128 [3] says that director can inspect the accounts of
books. Right of inspection is a statutory right , If a director has been prevented from this right , he may
enforce it from the court. Also this Right is not an absolute in nature.
Shareholder has no statutory right of inspection books of accounts, he can only inspect when this right is
given through the article which is very rare.

Financial Statements: Section 129 of the Companies act 2013

Section 129 [1] says that every company need to maintain financial statement at the end of financial year for
the purpose of fair view of state of affairs of company. Section 2[ 40 ] defines the financial statements ,
according to which financial statements include-
● Balance sheet
● Profit and loss
● Statement of changes in equity
● Cash flow statement
Financial statement should be presented by board of directors before the Annual general meeting of
members, under section 129[2]. Financial statement need to be ready within six months of close of financial
year. Financial statement should be prepared for every financial year. Section 2[41] says that financial year is
31st March every year. Also the income tax act 1961 says that all companies need to submit their income tax
returns on 31st March every year.

Reserves and Dividends

It may be cited that the recommendations of the board of directors with regard to the amount of income to be
paid as dividend, and the amount to be transferred to it can also reserves do no longer lend finality to the
matters in these regards. The shareholder are free to reject the suggestions of the directors as regards the
quantity to be declared as dividend. They cannot, however make bigger the amount of dividend endorsed by
using the directors.
Circulation of financial statements
Section 134[7] says that a signed replica of every financial statements which includes consolidated monetary
statements shall be issued, circulated or published with a reproduction of any notes annexed to or forming
section of such financial statements, the auditor’s record and the board’s report.
A copy of the financial statement such as consolidated financial statement, auditor’s document and each and
every different report required by way of regulation to be annexed or connected to the monetary statements
which are to be laid before the annual general meeting of the company, shall be sent not less than 21 days
before the meeting to each and every member of company.
Adoption and filing of financial statement- One of the company to be transacted at an AGM is consideration
and adoption of the monetary statements and the reviews of the board of directors and auditors consisting of
the stability sheet and the profit and loss account [ section 102[2]. Every AGM other than the first AGM is
required to be held within six months of the close of financial year[ section 96 [1].
It may be additionally referred to that the financial statement are required to be placed solely at an AGM,
and now not at any different customary meeting . The blended studying of section 96[1] and section 102[2]
shows that the financial statements shall be ready for placing before the AGM within 6 months of close of
financial year. In case the monetary statements are now not geared up for laying at the appropriate annual
general meeting, the company may adjourn the said annual widespread meeting to a subsequent date when
the annual debts are expected to be equipped for laying .

Accounting standards
Section 129[1] says that financial statement shall comply with accounting standards given under section 133.

Concept of Audit under Companies Act 2013

Business enterprise carries on commercial enterprise with capital provided by persons who are now not in
control of the use of money supplied by them. They would therefore like to see that their investment are safe
are being used for meant purpose and the annual account of the company to know the fair view of state of
affairs of company. For this purpose the debt of the company need to be checked and audited by way of duly
qualified and unbiased individual who is neither employed in the organisation nor is in any way indebted or
in any other case obliged to the company. Originally the audit characteristic was primarily a public function.
Its objective was to become aware of fraud and error. There are some objectives of audit, they are –
● Detection of fraud
● Detection of technical error
● Detection of error of principles.
The ability for success of such an goal was a unique analysis of transactions.

Who can be appointed as an auditor

Section 141[1] says that what are the qualifications and disqualification for being appointed as company
auditor. An Auditor of business enterprise possessing the qualifications prescribed in section 141 of the act is
commonly regarded as the statutory auditor of the company, as he derives his duties, energy and authority
from the statue that is the companies act. It is mentioned in section 141[1] that ‘ Any person can only be
appointed as auditor if that person is chartered accountant. Section 2[17] defines Chartered accountant as a
CA who holds a valid certificates of exercise under sub section [1] of section 6 of chartered accountant act
1949.
Accordingly only a chartered accountant holding a certificate of practice is eligible to be appointed as an
auditor of a company. It is further supplied that a firm. Including a confined liability partnership, whereof
majority of the partners practising India are certified for appointment as auditor , may also be appointed
through its company name be the auditor of a company. In this regard, it might also be referred to that
underneath the chartered accountant act 1949, only a chartered accountants conserving a certificate of
practice can be engaged in the public exercise of accountancy. However the chartered accountants act 1949
additionally lets in the chartered accountants to enter into partnership with other professionals. In such a
case the section 141[2] of the act states that if a company[ including a restricted liability partnership] is
appointed as an auditor solely these companions who are chartered accountants are approved to sign on
behalf of the firm.
Appointment of first auditors
Section 139[6] lays down that the first auditor or auditors of a employer shall be appointed by using the
board of directors within thirty days of the date of registration of the company. The auditor or auditors so
appointed shall keep workplace till the conclusion of the first annual general meeting . If the board of
directors fails to exercising its power , it shall inform the individuals of the company. In such a case the first
auditors are appointed through the members in an extraordinary general meeting within ninety days.
Generally it is observed that the first auditors of a company are named in the articles of association. Such
appointment of auditors cannot be held valid because the act grants it no recognition. The first auditors
would validly appointed only by a resolution of the board of directors or that of company in general meeting.

Auditor’s lien
In the general principles of law, any person having the lawful possession of somebody else’ property, on
which he has worked may retain the property for non payment of the remaining dues on account of the work
that is done on the property. On this premise, auditor can exercise lien on books and files positioned at his
possession by the client for non price of charges for the work has been done on the related books and
documents. The Institute of chartered accountants in England and Wales also says some similar things on
regard on this following situations-
● Document retained must belong to the client who owes the money.
● Documents need to be in possession of the auditor on the authority which was of client. It should not
been received through any irregular or illegal means. In case of company client they must be received
on the authority of the board of directors.
● The auditor can retain the documents only if he has done work on the documents assigned to him.
● Such of the documents can be retained which are connected with the work on which fees have not
been paid.

Limitation of auditor’s duties

No limitation can be placed upon rights or responsibilities of the auditor given under section 143 either done
by any articles of company or done by any other resolution of the members. Where the articles of company
provided:
● Directors shall have power to form an internal reserve which was once no longer to be disclosed in
the balance sheet and which must be utilised in a way that directors thought fit.
● Auditors shall have access to accounts to relating to such reserve fund and that it was once utilised to
the functions of the company as mentioned in the special articles , however that they should no longer
disclose any data with regard to the shareholders or otherwise; such provisions in the articles had
been held to be invalid as being hassle of the statutory responsibilities of the auditors.

Appointment of auditors
In case of a government employer or a company, without delay or not directly owned or managed by using
the central government, state government or partly with the aid of central government and partly by means
of one or greater state government , the first auditor shall be appointed by using the comptroller and auditor
general that is [ CAG ] it should be done within sixty days from the date in which registration of the
company has been done. If the CAG fails to exercise his powers ,the board is approved to appoint the first
auditors within the subsequent thirty days. In case of a failure by the board , the contributors have to be
knowledgeable who shall appoint the first auditor in an extraordinary general meeting within the sixty
days[ Section 139 [7] ].
The subsequent auditor for the company given under section 139[7] shall also be appointed with the aid of
CAG for every financial year. The auditor so appointed shall meet the qualification standards laid down by
the act. The auditor shall be appointed within 180 days of the graduation of financial year and shall preserve
office till the conclusion of annual general meeting. The power to fill any casual vacancy in the company is
vested with the CAG. In case of failure by the CAG to fill the casual vacancy within a period of thirty days,
the board of directors is required to fill the same within the next thirty days.

Joint Audit
The practice of appointing chartered accountant as joint auditors has come to be widespread, particularly in
huge business and corporations. With a view to imparting clear idea of the professional accountability
undertaken by way of the joint auditors, the ICAI had issued a statement on standard auditing and assurance
practices on the responsibility of joint auditors. According to the statement it would no longer be correct to
hold an auditor responsible for the work of every other and every joint auditor will be accountable solely for
the work dispensed to him. In coming to these conclusions, the council regarded that the extent of work to be
carried out is a matter of expert judgment and that no two firms, whatever be their standing and competence,
will always exercise their judgment in an same manner so as to function in the identical volume of work in the
same manner. Where joint auditors are appointed, they need to divide the work of audit between them by
mutual discussion. Such division of work would generally be in terms of identifiable operating gadgets or
targeted areas of work and in such a case, it is good practice to communicate to the client, wherever possible,
the genuine division of work.

Cost Audit
It is an audit process for verifying the charges of manufacture or manufacturing of an article on the basis of
accounts as regards utilisation of material or labour or other items of charges maintained by using the
company. Under the provision of section 148[3] of the Act, such an audit shall be performed by means of a
cost accountant in exercise inside that means of the cost accountant act 1959. The expression cost accountant
skill a price accountant as defined in clause [b] of sub section 1 of section 2 of the cost and works accountants
act 1959 and who holds a valid certificates of practice under sub section 1 of section 6 of that act. [ section
2[28] ].

Inspection and Investigation:

INTRODUCTION

A company is a separate legal entity where the management and shareholders are distinct entities. The
management is elected by the shareholders of the company who are given the power to run the affairs of the
company. However, sometimes there may be abuse of power by directors or officers of company and it may
lead to loss of stakeholders. Therefore it was imperative for the government of India to take on certain
powers to Inspect, Inquire and investigate the affairs of such Companies where there is reason to believe that
the business of the company was being conducted with an intent to defraud its creditors or members or for a
fraudulent or unlawful purpose. Sections 206 to 229 of the Companies Act, 2013; deals with the provisions
concerning Inspection, Inquiry and Investigation into the affairs of company.

POWER TO CALL FOR INFORMATION, INSPECT BOOKS AND CONDUCT INQUIRIES (SECTION
206)

1. Power of the Registrar to call for information, explanation or documents: Where on scrutiny
of any document filed by a company or on any information received by him, the Registrar is
of the opinion that any further information or explanation or documents relating to the
company is necessary, he may, by a written notice require the company to furnish the same
within a specified time.
2. Duty of the company and its officers: On the receipt of a notice under of section 206(1) from
the registrar, it shall be the duty of the company and its officers, whether past or present, to
furnish such information or explanation to the best of their knowledge and power within the
time specified in the notice.
3. Additional written notice by the Registrar: In case no information is provided by the
company or if inadequate information is submitted to the registrar then the Registrar, for
reasons recorded in writing, may by another written notice call on the company to produce
for his inspection such further information.
4. Inquiry by the Registrar: On the basis of information available with him or representations
made to him or grievance of the shareholders not being addressed, the Registrar may call on
 the corporate to furnish in writing any information or explanation on matters laid out in the
order within such time as he may specify therein and undertake such inquiry as he deems fit
after providing the company a reasonable opportunity of being heard.
5. Inspection by Central Government: The Central Government may, if it deems fit, direct
inspection of books and papers of a company by an inspector appointed by it for this
purpose.
6. Failure to furnish information: The Company and every officer of the company, who is in
default shall be punishable with a fine which may extend to 1 lakh rupees and in the case of a
continuing failure, with an additional fine which may extend to 500 rupees for every day.

CONDUCT OF INSPECTION AND INQUIRY (SECTION 207)

Section 207 of the Companies Act, 2013 provides for the conduct of inspection and inquiry as follows:

Duty of director, officer or employee:

1. Where a Registrar or inspector calls for the books of account and other books and papers
under section 206(1), it shall be the duty of every director, officer or other employees of the
company:
2. To produce all such documents; and
3. To furnish with such statements, information or explanations in such form as may require;
and
4. To render all assistance in connection with such inspection.

Powers of the Registrar or inspector:

1. The Registrar or inspector making an inspection or inquiry under section 206 may, during
the course of such inspection or inquiry, make copies of books and papers and place
identification marks there.
2. The Registrar or inspector making an inspection or inquiry shall have all the powers as are
vested in a civil court under the Code of Civil Procedure, 1908, while trying a suit in respect
of the subsequent matters, namely:—
1. The inspection and production of books of account and other documents, at
such place and time as may be specified by such Registrar or inspector making
the inspection or inquiry;
2. Summoning and enforcing the attendance of persons and examining them on
oath.
3. Penalty for Contravention: If any director or officer of the company disobeys the direction
issued by the Registrar or the inspector under this section, the director or the officer shall be
punishable with imprisonment which can reach up to 1 year and with fine between 25,000
rupees to 1 lakh rupees, as may be deemed fit.

CONDUCT OF INSPECTION AND INQUIRY (SECTION 208)

The Registrar or inspector shall, after the inspection of the books of account or an inquiry under section 206
and under section 207, submit a report in writing to the Central Government. The registrar or inspector may
recommend in report that there is the need of further investigation. The said recommendation has to be given
with reasons in support.

SEARCH AND SEIZURE (SECTION 209)

1. Where the Registrar or inspector believes that books and papers relating to the company
may be destroyed, mutilated, altered, falsified or secreted, he can make an application to
Special Court.
2. The Special Court, may, by order, authorize it, to enter into the places or premises where
books and papers are placed, to search the place and to seize the books and papers, after
allowing the company to make copies.
3. Search and seizure must be according to provisions of Code of Criminal Procedure.
4. The seized papers must be returned within 180 days. The Registrar can take copies of any
document or place identification marks on them before returning the books and papers. He
can ask the papers again, if needed, by sending a written order.

Illustration: A group of creditors of Mac Trading Limited makes a complaint to the Registrar of Companies,
Hyderabad alleging that the management of the organization is indulging in destruction and falsification of
the accounting records. The complainants appealed to the Registrar to take immediate steps to seize the
records of the enterprise so as to prevent the management from tampering with the records. The complaint
was received at 10 A.M. on 1st July 2018 and therefore the ROC entered the premises at 10.30 A.M. for the
search. Examine the powers of the Registrar to seize the books of the company.

Answer: Consistent with the provisions, Registrar may enter and search the place where such books or
papers are kept and seize them only after obtaining an order from the Special Court. Since within the said
question, Registrar entered the premises for the search and seizure of books of the concern without obtaining
an order from the Special Court, he’s not authorized to seize the books of the Mac Trading Limited.

INVESTIGATION INTO THE AFFAIRS OF THE COMPANY (SECTION 210)

1. Investigation in the opinion of Central Government: The Central Government may order
and appoint inspectors for investigation into the affairs of the company under the following
three conditions:
2.
● On the receipt of a report of the Registrar or an Inspector under section 208.
● On Intimation of a special resolution passed by the company that the affairs of the company
ought to be investigated.
● Suo-moto in publicly interest.
2. Investigation on the order by a court or the Tribunal: Where an order is issued by a court or
the Tribunal in any proceedings before it that the affairs of an establishment are required to
be investigated, the Central Government shall order an investigation into the affairs of that
company.

ESTABLISHMENT OF SIGNIFICANT FRAUD INVESTIGATION OFFICE (SECTION 211)

The Central Government shall, by notification, establish an office to be called the Serious Fraud Investigation
Office (SFIO), to scrutinize frauds concerning a company. The SFIO shall be headed by a director so
appointed for this purpose and shall also consist of other competent authorities who shall be experts on this
matter.

INVESTIGATION INTO AFFAIRS OF A COMPANY BY SERIOUS FRAUD INVESTIGATION

OFFICER (SECTION 212)

1. Pursuant to section 212 when the Central Government is of the opinion that it’s necessary to
probe into the affairs of a corporate by the SFIO, it may, by order, assign the investigation
into the affairs of the said company to the SFIO.

On receipt of such order, the Director, SFIO may designate such number of inspectors, as he may consider
necessary for the conduction of such investigation.

2. Where any case has been assigned by the Central Government to the SFIO for investigation
under this Act, no other investigating agency of Central Government or any State
Government shall proceed with investigation in such case in respect of any offence under this
Act. However, if any such investigation has already been initiated, it shall not be proceeded
further.
3. Where the investigation into the affairs of a firm are assigned by the Central Government to
SIFO, it shall conduct the investigation within the manner provided in this Chapter (Chapter
XIV- Inspection, Inquiry and Investigation) and submit its report to the Central Government
within such period as may be laid out in the order.
4. The company and its officers and employees, who are or have been in employed by the
company shall be responsible to furnish all information, explanation, documents and
assistance to the Investigating Officer as he may require for conduct of the investigation.
5. Offences covered under section 447 of this Act shall be cognizable and no one accused of any
offence under those sections shall be released on bail or on his own bond unless—
1. The Public Prosecutor has been given a chance to oppose the plea for such
release; and
2. Where the Public Prosecutor opposes the plea, the court is satisfied that there
are reasonable grounds for believing that he’s acquitted of such offence which
he’s unlikely to commit any offence while on bail.

However, a person, who, is under the age of sixteen years or is a woman or is sick or infirm may be released
on bail, if the Special Court so directs.

Provided that the Special Court shall not take cognizance of any offence referred in point 5 above except
upon a complaint in writing made by the Director, SFIO or any officer of the Central Government authorized
by a general or special order in writing in this regard by that Government.
 6. If any officer not below the rank of the assistant director of SFIO, authorized during this
behalf by the Central Government has a reason to believe that a person has been guilty of
any punishable Offence under sections mentioned in sub-section (6), he may arrest such
person and shall inform him of the grounds for such arrest.
7. All persons arrested shall within twenty-four hours, be taken to a Special Court or Judicial
Magistrate or a Metropolitan Magistrate having jurisdiction.
8. The SFIO shall submit the investigation report to the Central Government on completion of
the investigation.
9. On receipt of the investigation report, the Central Government may, after examination of the
report, direct the SFIO to initiate prosecution against the firm and its officers or employees,
past or present or any other person directly or indirectly connected with the affairs of the
company.

Where the report states that fraud has taken place in a company and owing to such fraud, any director, key
managerial personnel, other employee of the company or any other person or entity, has taken undue
advantage or benefit, whether in the form of any asset, property or cash or in any other manner, the Central
Government may file an application before the Tribunal for appropriate orders with reference to
disgorgement of such asset, property or cash and also for holding such director, key managerial personnel,
other officer or any other person liable personally with no limitation of liability.

10. The SFIO shall share any information or documents available with it, with any investigating
agency, State Government, police authority or tax authorities, which can be relevant or
useful for them in respect of any offence or matter being investigated by it under other laws.

INVESTIGATION INTO COMPANY’S AFFAIRS IN OTHER CASES (SECTION 213)

According to this section, NCLT can order investigation in specified cases. Such order can be issued by
NCLT only after giving reasonable opportunity of being heard to the concerned parties.

Cognizance of Offence by Tribunal

1. In event of company having a share capital:

The Tribunal may, order for conduct of investigation on an application made by 100 or more members or
members holding 1/10th of total voting powers.

If the solicitation is supported by such evidences as deemed necessary for the motive of showing that the
applicants have good reasons for seeking an order for conducting an investigation into the affairs of the
company.

2. On account of company having no share capital:

The Tribunal may, order for conduct of investigation on an application made by one fifth or more of the
persons on the company’s register of members if the plea is supported by such evidences as may be essential
for the purpose of showing that the applicants have good reasons for seeking an order for conducting an
investigation into the affairs of the company.

3. In other cases:

The Tribunal may, order for conduct of investigation on an application made by any other person or
otherwise on the circumstances suggesting that –

1. The business of the company is being conducted with intent to defraud its creditors, members
or any other person or for a fraudulent or unlawful purpose, or by a manner oppressive to
any of its members or that the concern was formed for any fraudulent or unlawful purpose
2. Persons concerned with the formation of the company or the management of its affairs have
been guilty of fraud, misfeasance or other misconduct towards the firm or towards any of its
members, or
3. The members of the company haven’t been given the expected information with regards to
the affairs of the company.

After giving a sufficient opportunity of being heard to the parties concerned that the affairs of the firm ought
to be investigated by an inspector(s) appointed by the Central Government and where such an order is
passed by the Tribunal, the Central Government shall appoint one or more competent persons as inspectors
to scrutinize the affairs of the company in respect of such matters and to report them.

4. Punishment in case of guilty:

If after investigation, it’s proven that—

● the business is being conducted with intent to defraud its creditors, members or any other
persons or for a fraudulent or unlawful purpose, or that the corporate was formed for any
fraudulent or unlawful purpose or;
● any person concerned with the formation of the company or the management of its affairs
have in connection therewith been guilty of fraud then –
1. Every officer of the establishment who is in default, and
2. The persons concerned with the formation of the company or the management
of its affairs shall be punishable for fraud in the manner as provided in section
447.

Compromises, Reconstruction and Amalgamation:

With the increasing magnitude of the companies business and the commercial activities, there had also been
an increase in the diversities of the people who deal with them. Occasions of clashes and conflicts frequently
arise which needs to be resolved amicably. And to resolve such conflicts the companies generally have to
resort to arbitration or compromises to settle such clashes.

Further, value creation, diversification, and for increasing the financial capacity of the companies or for
survival, one company may have to join hands with another company either by way of amalgamation or by
the takeover. So the companies act provides for the provisions relating to various methods for the
reorganization of a company. Thus is becoming vital to discern the provisions of the Companies Act in
relation to Mergers and Acquisition, and the procedure thereof.

Scheme of mergers, acquisitions and arbitration under the company law

Mergers and Acquisition

Before 2013, Section 391 to 394 of The Companies Act, 1956 dealt with the Mergers and acquisitions of a
company. But after 2013, due to some backdrops in the old legislation, these provisions were amended by
virtue of sections 230-240 of The Companies Act 2013. So now these sections govern any type of arrangement
or mergers and acquisitions. All of these sections were notified on 15th December 2016 except Section 234
which was notified on 13th April 2017. These provisions were amended to bring more transparency to the
laws relating to M&A. The amendment empowered the Tribunal (NCLT) to sanction the entire process. The
provisions under the Companies Act, 2013 deal with the substantive part only, while the procedural aspects
relating to M&A are given under the Companies (Compromise, Arrangements, and Amalgamation) Rules,
2016.

Arbitration

Prior to 1960, Section 389 of the Companies Act empowered them to enter into arbitration as per the
provisions of the Arbitration Act, 1940. But the Arbitration act did not provide for foreign arbitrations as a
result of which the Indian Companies could not enter into an arbitration agreement with foreign companies.
In order to remove this lacuna, the Companies Amendment Act, 1960 dropped section 389 from the
companies act as a result of which the Indian companies were free to enter into arbitration agreements with
foreign companies, provided that such agreements are allowed by the Memorandum.

Compromise and arrangement distinguished

The word compromise has nowhere been defined in the Companies Act. It basically connotes the settlement
of a conflict by mutual consent and agreement or through a scheme of compromise. Thus, for a compromise,
there has to be some dispute or conflict. On the other hand, the word arrangement has been defined under
section 230(1) of the companies act. The arrangement has a wider connotation than compromise. The
arrangement means re-organizing the right and liabilities of the shareholders of the company without the
existence of some dispute. A company may enter into a compromise or arrangement to take itself out from
the winding-up proceedings.

Situations under which a company may call for a scheme of compromise:

1. If in the normal course of business, it becomes impossible to pay all the creditors in full.
2. Subsidiaries/Units cannot work without incurring losses.
3. Where liquidation of the company may prove harsh for the creditors or members.
Situation under which a company may enter into arrangements:

1. For the issue of new shares.

2. For any variation in property.
3. Conversion of one class of share to another.
4. For reorganizing the share capital of the company.

Reconstruction

Reconstruction is a situation where a new company is formed and the assets of the old one are transferred to
the newly formed company. Reconstruction is the key technique used for changing the capital structure of a
firm. There are a number of reasons due to which a company may go for reconstruction. A few of them are:

1. By reconstruction, the company can simplify the capital structure.

2. It can eliminate all the past losses.
3. Helps in raising working capital, adjusting cumulated dividends.
4. May result in a reduction of fix charges.

A reconstruction of a company may be done internally or externally. In external reconstruction, the old
company is dissolved and a new one is incorporated and the assets of the older one are transferred to the new
one. Whereas in internal restructuring, the old company continues, only its capital structure is changed.

Procedure for compromise and arrangement under the company law

After the enactment of the Companies Act, 2013, the procedure for mergers, acquisitions, amalgamations and
restructuring has been simplified by the new provisions. The Act of 2013 has removed all the backdrops of
the older legislation and is aimed to bring more transparency. It allowed cross border mergers as well,
increasing the horizons for the industries and making it easier for them to expand. In order to speed up the
process and to bring more transparency the assistance of tribunal was invoked under the 2013 Act. So below
is the stepwise procedure for the scheme of compromise and arrangement:

1. Preliminary Stage (Preparation of Scheme): This is the first stage, in which a detailed scheme is
prepared by the members of the creditors. This scheme must contain all the matters that are of
substantial interest, it must also explain or show how the scheme is going to affect the members,
creditors and all the other companies. The scheme must also disclose the material interest of the
director.
2. Application to Tribunal: Any member or a creditor of the company (in case the company is
winding up, its liquidator) can make an application to the Tribunal i.e. to NCLT proposing the
scheme of merger or acquisition between two or more companies. The tribunal can also make the
application on a suo moto basis.
3. Tribunal looks into the application: Once an application proposing the scheme is made, the
tribunal will take a look as to whether the application is within the ambit of Section 230-240. It is
pertinent to note here that in this stage the tribunal is not concerned with the merits of the
application, it will only look as to whether the application is within the ambit of the act or not. It
will also see that the application is accompanied by an explanatory statement.
4. Conveyance of Meeting: Once the tribunal sees the application, it issues a notice for the
conveyance of the meeting of the creditors and the members of the company within 21 days. It
must be noted that, if the scheme is not going to have any adverse effect on any party, then the
 tribunal can also avoid the call for the meeting. If the meeting is conveyed then the scheme must
be approved by a majority of three fourth members present and voting.
5. Presentation of the outcome of the Meeting before the Tribunal: Once the scheme is approved by
the members or creditors or the liquidator (in case of a winding company) in the meeting, the
report of the meeting must be presented before the tribunal within seven days of the meeting. The
report must show the confirmation of the scheme of compromise or arrangement.
6. Commencement of Hearings: After the submission of the report the tribunal shall fix a date for
hearing. Such data must be notified in the newspaper through advertisement. Such
advertisement must be notified before 10 days of the hearing.
7. Sanction of Cases: The tribunal shall after hearing all the objections and concerns of all the
parties, if it is deemed fair and reasonable to the tribunal then the tribunal may sanction the
compromise or arrangement.
8. Registration of the Scheme with Registrar: Once the scheme is sanctioned by the Tribunal, a
certified copy of the order shall be filed with the ROC (Registrar of Company) within 14 days
from such sanction order.

Powers and duties of the tribunal

Before understanding the powers and duties of the tribunal (National Company Law Tribunal), it must be
understood as to why be the sanction of tribunal important. There are several reasons which necessitate the
sanction of the Tribunal; a few of them are listed below:

1. Once the scheme is approved by the Tribunal, the company is bound to abide by it, any
avoidance or deviance from the same may bring legal consequences.
2. If the tribunal won’t have interfered, the majority might have suppressed the minority’s right; so
Tribunal ensures adequate representation of the minority.
3. Tribunal also has supervisory power, so at any time if NCLT is of the view that the scheme is not
in the interest of the member, it may order to modify the scheme or may order winding-up.

The tribunal is empowered with a wide range of powers by the virtue of Section 231. The tribunal has the sole
authority either to approve or to reject the scheme of compromise or arrangement. If the tribunal approves
the compromise or arrangement, in such a case it further has the following powers:

1. To supervise/monitor the carrying out of the proposed scheme.

2. To modify/amend the scheme to achieve the best result.
3. To order winding up of Company, if it is deemed to the tribunal that the scheme is not workable
in the interest of the Company or its member.

Apart from the above powers, the tribunal is also bound by certain duties: So, whenever the tribunal
sanctions a scheme, it must make sure that the following factors had been complied with.

1. That the scheme is within the provisions of the Companies Act.

2. The tribunal must make sure that the class of people, who were to be adversely affected by the
scheme, are fairly being represented in the meeting.
3. The proposed scheme must be reasonable; it should not have any adverse effect on society.

Mergers and acquisitions of certain companies – the fast track merger

Under the 1956 act, every company has to follow the same lengthy and time-consuming procedure for
compromise and arrangement. The process under the 1956’s act was long and time-consuming because of the
intervention of the High Court. So, it may not be economically feasible for ‘certain’ companies to go through
such a long procedure. In order to remove this lacuna, the 2013 act introduced the process of Fast Track
Mergers. So, Section 233 of the Companies Act covers the substantive part and Rule 25 of the Companies
(Compromise, Arrangements, and Amalgamation) Rules, 2016, covers the procedural aspect for the Fast
Tack Mergers. This rule 25 of the CAA Rules, 2016 was notified by the Ministry of Corporate Affairs on 15th
December 2016.

As per section 233 of the Companies Act, 2013, there are three classes of companies who are not required to
go through the regular merger process, but can prefer the fast track method, those companies are:

1. Holding and Subsidiary Companies: The Holding companies are defined under Section 2(46) of
the Companies Act, and Section 2(87) of the Companies Act, defines a subsidiary company.
2. Small Company: Small company has been defined under Section 2(85) as a company other than a
public company, having a paid-up capital not exceeding 50 Lakh Rupees or any such amount as
prescribed by the government, but shall not, at any time exceed 10 crores.
3. Other Classes: As prescribed by the Government in the CAA Rules, 2016.

This fast track merger eliminates the sanction of the NCLT and brings a more speedy process. The steps
involved in Fast track merger are mentioned below:

1. The proposed scheme is served to the Registrar of Company.

2. Holding of the meeting of Creditors or members.
3. Declaration of solvency must be filed by both the companies to their respective Registrar.
4. Filing of the report of the meeting with the Registrar of the Companies, and if the Registrar has
no objection then he shall register the company and must issue a confirmation notice.
5. If, in case there are any objections, then those objections must be presented before the NCLT,
and the tribunal shall decide on it.

There are a lot of advantages that this fast track merger process has brought with it, a few of which are: It
has simplified the process, no compulsory requirement of NCLT’s approval, short time, Less expensive, it has
removed all the secondary opportunities to raise objection which makes the process more expedient, further
there are no need to issue public advertisements, it helps in avoidance of serried of hearings, etc. So now if a
person/company goes through this fast track merger, the entire process would last for 90-100 days only.

Amalgamation of companies by central government in public interest

Section 237 of the Companies Act, 2013 deals with the M&A in Public Interest, this provision is similar to
Section 356 of the Companies Act of 1956. The change brought through the amendment enlarges the scope of
government power for amalgamation in the public interest.

Since Mergers and Acquisitions affect the revenue of the Companies and ultimately the economy of the
nation, so these mergers can have both positive and negative impacts on the economy. So at any time, if the
central government feels that it is important and expedient in the public interest to amalgamate certain
companies, the government may order mergers of such companies.

A few of the provisions relating to M&A in the public interest are as follows:
 1. The central government may at any time order for the merger of a company, by notification in
the official gazette.
2. Generally there are some background checks in mergers, but when M&A is in the public interest,
then the central government may avoid such checks.
3. The government will make sure that the protection of rights of minority shareholder.
4. If any person is aggrieved by compensation then they can within 30 days from the publication in
the gazette appeal to the tribunal.
5. The section further inserts few more provisos that curtail the above rights under 237(5).
6. Copy of such M&A must be laid before the parliament.

Protection of the dissenting shareholder’s rights

As a general presumption, the majority members enjoy supreme authority in controlling the affairs of the
company. And the minority is forced to concede the decision of the majority. Thus, there might be a
possibility that the majority oppresses the minority. In order to protect the interest, the 2013’s act introduced
Section 235 and 236. Both of these sections were notified in 2016.

As per the Majority’s Rule and Minority’s Right rule as laid in the case of Foss vs. Harbottle (1843) the will
of the majority shall prevail and even the court should not interfere in such case, but such rules must be
within a reasonable limit. So, Section 236 introduces the concept of Squeezing out Minority Shareholder. So,
this means squeezing out the minority shareholder to free the dissenting shareholders. So how these minority
shares are purchased is provided under Section 236.

Minority Shareholders are the ones whose issued capital doesn’t exceed 10%. The majority will offer a price
to the minority that is reasonable; such an amount needs to be deposited in a separate bank account. The
amount from that separate bank account is to be transferred to minority shareholders within 60 days.

Now, after the Ministry of Corporate Affair’s Notification of 2020, as notified on 3rd February, the scope of
minority shareholders is now increased from 10% to 25%. And now if the majority (75%) wants to purchase
minority shareholders then they need to go to SEBI (in case of listed Company) or to NCLT (if unlisted).

Majority rule and Rights of minority share holders:

Majority and minority define who has the power to rule. The structure of democracy is as such, where the
majority has the supremacy. In the corporate world, also the rule and decisions of the majority seem to be
fair and justifiable. The power of the majority has greater importance in the company, and the court tries to
avoid interfering with the affairs of the internal administration of the shareholders. With the superiority of
the majority, there is always inferiority among the minority, which shows an unbalance in the company. The
Companies Act, 2013 reduces the inferiority of the minority. This article details the rules of the majority and
also the rights of the minority in a company.

Powers of Board of Directors

The Companies Act distributes the power between the board of directors and the shareholders. The board
and the shareholders exercise their powers through meetings in a democratic way. The meetings include the
meetings of the board of directors and the general meetings. The shareholders entrust certain powers on the
board of directors, which is through the Memorandum of Association (MoA) and Articles of Association
(AoA). The board of directors have all the powers and can to do all the things and acts just the same as the
company exercises its powers. But the Act restricts the board of directors from the powers that only the
shareholders can do in the general meetings.

Majority Powers
A company stands as an artificial entity. The directors run it but they act according to the wish of the
majority. The directors accept the resolution passed by the majority of the members. Unless it is not within
the powers of the company. The majority members have the power to rule and also have the supremacy in the
company. But there is a limitation in their powers. The following are two limitations:

Limitations

● The powers of the majority of the members are subject to the MoA and AoA of the company. A
company cannot authorise or ratify any act legally outside the memorandum. This will be regarded
as the ultra vires of the company
● The resolution made by the majority should not be inconsistent relating to The Companies Act or
any statutes. It should also not commit fraud on the minority by removing their rights.
Principle of Non-Interference
The general rule states that during a difference among the members, the majority decides the issue. If the
majority crushes the rights of the minority shareholders, then the company law will protect it. However, if the
majority exercises its powers in the matters of a company’s internal administration, then the courts will not
interfere to protect the rights of the majority.

Foss Versus Harbottle

Foss v. Harbottle lays down the basics of the non-interference principle. The reasons for the rule is that, if
there is a complaint on a certain thing which the majority has to do if there is something done irregularly
which the majority has to do regularly or if there is something done illegally which the majority has to do
legally, then there is no use to have a litigation over such thing. As in the end, there will be a meeting where
the majority will fulfil their wishes and make decisions.

Benefit and Justification

The benefit and the justification of the decision of the case are:

● Recognises the country’s legal personality

● Emphasises the necessity of the majority making the decisions
● Avoid the multiplicity of suits
Exceptions to the Rule
The rule is not absolute for the majority; the minority also have certain protections. The Non-interference
principle does not apply to the following:

Ultra Virus Act

An individual shareholder can take action if they find that the majority has done an illegal act or ultra virus
act. The individual shareholder has the power to restrain the company. This is possible by the injunction or
the order of the court.
Fraud on Minority
If the majority commits fraud on the minority, then the minority can take necessary action. If the definition
of fraud on the minority is unclear, then the court will decide on the case according to the facts.

Wrongdoer in Control
If the company is in the hands of the wrongdoer, then the minority of the shareholder can take representation
act for fraud. If the minority does not have the right to sue, then their complaint will not reach the court as
the majority will prevent them from suing the company.

Resolution Requiring Special Majority

If the act requires a special majority, but it passes by a simple majority, then an individual shareholder can
take action.

Personal Action
The majority of shareholders always oblige to the rights of the individual membership. The individual
member has the right to insist on the majority on compliance with the statutory provisions and legal rules.

Breach of Duty
If there is a breach of duty by the majority of shareholders and directors, then the minority shareholder can
take action.

Prevention of Oppression and Mismanagement

To prevent the majority of shareholders from oppression and mismanagement, the minority can take action
against them.

Prevention of oppression and mismanagement:

Oppression
Oppression is the exercise of authority or power in a burdensome, cruel, or unjust manner.[1] It can also be
defined as an act or instance of oppressing, the state of being oppressed, and the feeling of being heavily
burdened, mentally or physically, by troubles, adverse conditions, and anxiety.

The Supreme Court in Daleant Carrington Investment (P) Ltd. v. P.K. Prathapan[2], held that increase of
share capital of a company for the sole purpose of gaining control of the company, where the majority
shareholder is reduced to minority , would amount to oppression. The director holds a fiduciary position and
could not on his own issue shares to himself. In such cases the oppressor would not be given an opportunity to
buy put the oppressed.

Prevention of oppression
Section 397(1) of the Companies Act provides that any member of a company who complains that the affair
of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to
any member or members may apply to the Tribunal for an order thus to protect his /her statutory rights.

Sub-section (2) of Section 397 lays down the circumstances under which the tribunal may grant relief under
Section 397, if it is of opinion that :-
(a)the company’s affairs are being conducted in a manner prejudicial to public interest or in a manner
oppressive to any member or members ; and
(b) to wind up the company would be unfairly and prejudicial to such member or members , but that
otherwise the facts would justify the making of a winding up order on the ground that it was just and
equitable that the company should be wound.
The tribunal with the view to end the matters complained of, may make such order as it thinks fit.
Who can apply
Section 397 of the Companies Act states the members of a company shall have the right to apply under
Section 397 or 398 of the Companies Act. According to Section 399 where the company is with the share
capital, the application must be signed by at least 100 members of the company or by one tenth of the total
number of its members, whichever is less, or by any member, or members holding one-tenth of the issued
share capital of the company. Where the company is without share capital, the application has to be signed by
one-fifth of the total number of its members. A single member cannot present a petition under section 397 of
the Companies Act. The legal representative of a deceased member whose name is again on the register of
members is entitled to petition under Section 397 and 398 of the Companies Act.[3]
Under Section 399(4) of the Companies Act, the Central Government if the circumstances exist authorizes
any member or members of the company to apply to the tribunal and the requirement cited above, may be
waived. The consent of the requisite no. of members is required at the time of filing the application and if
some of the members withdraw their consent, it would in no way make any effect in the application. The
other members can very well continue with the proceedings.

Conditions for Granting Reliefs

To obtain relief under section 397 the following conditions should be satisfied:-
1. There must be “oppression”- The Punjab and Haryana High Court in Mohan Lal Chandmall v. Punjab
Co. Ltd[4] has held that an attempt to deprive a member of his ordinary membership rights amounts to
“oppression”. Imposing of more new and risky objects upon unwilling minority shareholders may in some
circumstances amount to “oppression”.[5]However, minor acts of mismanagement cannot be regarded as
“oppression”. The Court will not allow that the remedy under Section 397 becomes a vexatious source of
litigation.[6] But an unreasonable refusal to accept a transfer of shares held as sufficient ground to pass an
order under Section 397 of the Companies Act, 1956.[7]Thus to constitute oppression there must be unfair
abuse of the powers and impairments of the confidence on the part of the majority of shareholders.

2. Facts must justify winding up- It is well settled that the remedy of winding up is an extreme remedy. No
relief of winding up can be granted on the ground that the directors of the company have misappropriated
the company’s fund, as such act of the directors does not fall in the category of oppression or
mismanagement.[8]To obtain remedy under Section 397 of the Companies Act, the petitioner must show the
existence of facts which would justify the winding up order on just and equitable ground.

3. The oppression must be continued in nature – It is settled position that a single act of oppression or
mismanagement is sufficient to invoke Section 397 or 398 of the Companies Act. No relief under either of the
section can be granted if the act complained of is a solitary action of the majority. Hence, an isolated action of
oppression is not sufficient to obtain relief under Section 397 or 398 of the Act. Thus to prove oppression
continuation of the past acts relating to the present acts is the relevant factor , otherwise a single act of
oppression is not capable to yield relief.

4. The petitioners must show fairness in their conduct-It is settled legal principle that the person who seeks
remedy must come with clean hands. The members complaining must show fairness in their conduct. For ex-
Mere declaration of low dividend which does not affect the value of the shares of the petitioner ,was neither
oppression nor mismanagement in the eyes of law.[9]
5. Oppression and mismanagement should be specifically pleaded- It is settled law that , in case of oppression
a member has to specifically plead on five facts:-
a) what is the alleged act of oppression ;
b) who committed the act of oppression;
c) how it is oppressive;
d) whether it is in the affairs of the company;
e) and whether the company is a party to the commission of the act of oppression.[10]

Prevention of Mismanagement
The present Company Act does provide the definition of the expression ‘mismanagement’. When the affairs
of the company are being conducted in a manner prejudicial to the interest of the company or its members or
against the public interest, it amounts to mismanagement.

Section 398(1) of the Companies act provides that any members of a company who complain:-
that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner
prejudicial to the interests of the company; or a material change has taken place in the management or
control of the company, whether by an alteration in its Board of directors, or manager or in the ownership of
the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever,
and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner
prejudicial to public interest or in a manner prejudicial to the interests of the company; may apply to the
Company Law Board for an order of relief provided such members have a right so to apply as given below.

If, on any such application, the Company Law Board is of opinion that the affairs of the company are being
conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of
the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a
view to bringing to an end or preventing the matters complained of or apprehended, make such order as it
thinks fit.

Right to Complain mismanagement-

1. The following members of a company shall have the right to apply as above:-

a) in the case of a company having a share capital, not less than one hundred members of the company or not
less than one tenth of the total number of its members, whichever is less, or any member or members holding
not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants
have paid all calls and other sums due on their shares;
b) in the case of a company not having a share capital, not less than one-fifth of the total number of its
members.
2. Where any share or shares are held by two or more persons jointly, they shall be counted only as one
number.
3. Where any members of a company, are entitled to make an application, any one or more of them having
obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of
them.
4. The Central Government may, if in its opinion circumstances exist which make it just and equitable so to
do, authorize any member or members of the company to apply to the Company Law Board, notwithstanding
that the above requirements for application are not fulfilled.
5.The Central Government may, before authorizing any member or members as aforesaid, require such
member or members to give security for such amount as the Central Government may deem reasonable, for
the payment of any costs which the Court dealing with the application may order such member or members
to pay to any other person or persons who are parties to the application.
6. If the managing director or any other director, or the manager, of a company or any other person, who has
not been impleaded as a respondent to any application applies to be added as a respondent thereto, the
Company Law Board may, if it is satisfied that there is sufficient cause for doing so, direct that he may be
added as a respondent accordingly.

Notice to be given to Central Government of application

The Company Law Board must give notice of every application made to it as above to the Central
government, and shall take into consideration the representations, if any, made to it by that Government
before passing a final order.
Right of Central Government to apply
The Central Government may itself apply to the Company law Board for an order, or because an application
to be made to the Company Law Board for such an order by any person authorized be it in this behalf.
Powers of Tribunal
Under Section 402 of the Companies Act ,1956 the powers of the Tribunal under Sections 397 and 398 are
very wide .These are :-
1. the regulation of the conduct of the company's affairs in future;
2. the purchase of the shares or interests of any members of the company by other members thereof or by the
company;
3. in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share
capital;
4.the termination, setting aside or modification of any agreement, howsoever arrived at, between the
company on the one hand, and any of the following persons, on the other namely:-
a) the managing director;
b) any other director;
c) the manager;

Upon such terms and conditions as may, in the opinion of the Company Law Board, be just and equitable in
all the circumstances of the case ;the termination, setting aside or modification of any agreement between the
company and any person not referred to in clause (d), provided that no such agreement shall be terminated,
set aside or modified except after due notice to the party concerned and provided further that no such
agreement shall be modified except after obtaining the consent of the party concerned; the setting aside of
any transfer, delivery of goods, payment, execution or other act relating to property made or done by or
against the company within three months before the date of the application, which would, if made or done by
or against an individual, be deemed in his insolvency to be a fraudulent preference. Any other matter for
which in the opinion of the Company Law Board it is just and equitable that provision should be made.
Effect of alteration of memorandum or articles of company by order:
Where an order makes any alteration in the memorandum or articles of a company, then, notwithstanding
any other provision of this Act, the company shall not have power, except to the extent, if any permitted in
the order, to make without the leave of the Company Law Board, any alteration whatsoever which is
inconsistent with the order, either in the memorandum or in the articles. The alterations made by the order
shall, in all respects, have the same effect as if they had been duly made by the company in accordance with
the provisions of this Act.A certified copy of every order altering or giving leave to alter, a company's
memorandum or articles, must within thirty days after the making thereof, be filed by the company with the
Registrar who shall registrar the same.If default is made in complying with the above provisions, the
company, and every officer of the company who is in default, shall be punishable with fine which may extend
to five thousand rupees.
Consequences of termination or modification of certain agreements:
Where an order terminates, sets aside or modifies an agreement:-
the order shall not give rise to any claim whatever against the company by any person for damages or for
compensation for loss of office or in any respect, either in pursuance of the agreement or otherwise; no
managing or other director or manager whose agreement is so terminated or set aside, shall for a period of
five years from the date of the order terminating the agreement, without the leave of the Company Law
Board, be appointed, or act, as the managing or other director or manager of the company. Any person who
knowingly acts as a managing or other director or manager of a company in contravention of the above
provision, every director of the company, who is knowingly a party to such contravention shall be punishable
with imprisonment for a term which may extend to one year, or with fine which may extend to five thousand
rupees, or with both. The Company Law Board will not grant leave for appointment as managing director or
director or manager of the company unless notice of the intention to apply for leave has been served on the
Central Government and that Government has been given an opportunity of being heard in the matter.

Powers of Central Government to prevent oppression or mismanagement:

The Central Government may appoint such number of persons as the Company Law Board may, by order in
writing, specify as being necessary to effectively safeguard the interests of the Company or its shareholders or
public interests, to act as directors thereof for such period not exceeding 3 years on any one occasion[11] as it
deems fit if the Company Law Board:-
On a reference being made to it by the Central Government ; or on an application of not less than one
hundred members of the company or of members of the company holding not less than one-tenth of the total
voting power therein, is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the
appointment or appointments in order to prevent the affairs of the company being conducted either in a
manner which is oppressive to any members of the company or in a manner which is prejudicial to the
interests of the company or to public interest.
However, in lieu of passing order as aforesaid, the Company Law Board may, if the company has not availed
itself of the option given to it of proportional representation to minority shareholders on the Board of the
company, direct the company to amend its articles in the manner provided section 265 and make fresh
appointments of directors in pursuance of the articles as so amended within such time as may be specified in
that behalf by the Company Law Board.
In case the Central Government passes such an order it may, if thinks fit, direct that until new directors are
appointed in pursuance of the order aforesaid, not more than two members of the company specified by the
Company law Board shall hold office as additional directors of the company. The Central Government shall
appoint such additional directors on such directions.
The person appointed as a director by the Central Government in accordance with the above provisions, need
not hold any qualification shares or need to retire by rotation. However, his office as director may be
terminated at any time by the Central Government and another person appointed in his place. No change in
the constitution of the Board of Directors can take place after an additional director is appointed by the
Central Government in accordance with these provisions unless approved by the Company Law Board. The
Central Government in such cases may also issue such directions to the company as it may consider necessary
or appropriate in regard to its affairs.
Power of the Tribunals to prevent change in Board of Directors :
Where a complaint is made to the Company Law Board by the managing director or any other director or
the manager of a company that, as a result of a change which has taken place or is likely to take place in
ownership or any shares held in the company, a change in the Board of directors is likely to take place which
(if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied,
after such inquiry as it thinks fit to make that it is just and proper to do so, by order direct that no resolution
passed or that may be passed or no action taken or may be taken to effect a change in the Board of directors
after the date of the complaint shall have effect unless confirmed by the Company Law Board.
Any such order shall have effect notwithstanding anything to the contrary contained in any other provision of
this Act or in the memorandum or articles of the company, or in any agreement with, or any resolution
passed in general meeting by, or by the Board of directors or, the company. The Company Law Board shall
have power when any such complaint is received by it, to make an interim order to the effect set out above,
before making or completing the inquiry aforesaid. Nothing contained above shall apply to a private
company, unless it is a subsidiary of a public company.[12]
Powers of Inspectors [S.240]:
Where an inspector investigating the affairs of the company thinks it necessary to investigate the affairs of
another company in the same management or group , he is empowered to do so. However as mentioned in
section 239(2), he has to obtain prior approval of the Central Government for that purpose.[13] Section 240
has been amended by the Amendment of 2000 .Sub-section (1) was substituted. The new sub-section provides
that it shall be the duty of all officers and other employees and agents of the company and those of any other
body corporate whose affairs are being investigated under Section 239:
a) to preserve and to produce to an inspector or any other person authorized by him in this behalf with the
previous approval of the Central Government, all books and papers of or relating to the other body
corporate, which are in their custody or power; and
b) otherwise to give to the inspector, all assistance in connection with the investigation which they are
reasonable able to give.
For facilitating the task of the inspector it is the duty of all officers in charge of the management of the
company to produce to the inspector all books and papers of the company which are in the custody and
power and to give to the inspector all assistance in connection with the investigation which they are
reasonably able to give.[14]The inspector may examine on oath any such person and for this purpose require
his personal attendance.[15]If a person required to appear or to produce books, makes a default that is a
punishable offence.[16]Where an inspector finds a person, whom he has no power to examine on oath, ought
to be so examined the inspector may do so with the previous approval of the Central Government. Notes of
any such examination are to be taken in writing and signed by the person examined and may be used in
evidence against him [17].A refusal to answer any question is also punishable.
Conclusion
Oppression and mismanagement are part and parcel of business. During the course of business, oppression of
small/minority shareholders takes place by the majority shareholders who are in control of the company.
Similarly, mismanagement of business is not uncommon. When we talk of mismanagement we mean
mismanagement of resources. Mismanagement could mean siphoning of funds, causing losses due to rash
decision, not maintaining proper records, not calling requisite meetings. Finer version of mismanagement
could arise where the management does not act/react to a business situation leading to downfall of business.
The concept of oppression and mismanagement is more relevant or common to family owned concerns. The
reasons are very obvious. Family owned concerns are owned by family members who over time develop
vested interest in business vested interest in their own heirs being the most common - thereby leading to
oppression of other family members. Here typically, the controlling member of the family appropriates the
family holdings by means of either a fresh issue or fraudulent transfers in his favor or reconstitutes the board
in such a manner as to alienate the other family members. The result is the other family members get
oppressed.
Secondly, the family owned concerns are not professional managed and their system of functioning is usually
personal. They lack probity and fair play. They generally do business in a manner where they begin to benefit
personally to the exclusion of other members. This leads to oppression of other family
members/mismanagement of companies.
In order to check all these discrepancies the need was felt to have any measure to prevent the Oppression and
mismanagement and thus under Chapter 6th of Part 6th of Companies Act , 1956 provides for the judicial as
well as administrative remedies to check Oppression and mismanagement. It is a powerful tool which
provides such power that even a singer member can approach Company Law Board if any of his right has
been infringed or in order to prevent the Oppression and mismanagement in the company.

class action :

The introduction of class action suits is one of the major changes introduced by the Companies Act, 2013. The
major objective behind the provision of class action suits is to safeguard the interests of the minority
shareholders. So, class action suits are expected to play an important role to address numerous prejudicial
and abusive conduct committed by the Board of Directors and other managerial personnel as it has been
statutory recognized under the Companies Act, 2013.

What is class action suit?

● A class action suit is a lawsuit where a group of people representing a common interest may
approach the Tribunal to sue or be sued.
● It is a procedural instrument that enables one or more plaintiffs to file and prosecute litigation on
behalf of a larger group or class having common rights and grievances.

Who are entitled to file class action suits?

1) Members:

a) In case of a company having share capital, member or members:

● not less than 100 members of the company or

● not less than 10% of the total number of its members, whichever is less or
 ● any member or members singly or jointly holding not less than 10% of the issued share capital of
the company.

Provided that the applicants have paid all calls and other sums due on their shares.

b) In case of a company not having a share capital, member or members:

● not less than 1/5th of the total number of its members.

2) Depositors:

● The number of depositors shall not be less than 100 or

● not less than 10% of the total number of its depositors, whichever is less or
● any depositor or depositors singly or jointly holding not less than 10% of the total value of
outstanding deposits of the company.

Who may be sued through class action suits?

A class action suit may be filed against the following authorities:

● A company or its directors for any fraudulent, unlawful or wrongful act or omission;
● an auditor including audit firm of a company for any improper or misleading statement of
particulars made in the audit report or for any unlawful or fraudulent conduct.
● an expert or advisor or consultant for an incorrect or misleading statement made to the
company.

Which reliefs may be claimed through class action suits?

Any member or depositor on behalf of such members or depositors may file a class action suit before the
National Company Law Tribunal (NCLT) to:

A) restrain the company from committing an act which is beyond the powers of the articles or memorandum
of association of the company;

B) restrain the company from committing breach of any provision of company’s memorandum or articles;

C) to declare a resolution as void for altering the memorandum or articles of the company or passed by
suppression of the material facts or obtained by mis-statement to the members or depositors;
D) to restrain the company and its directors from acting on such resolutions;

E) restrain the company from committing any acts which is contrary to the provisions of the Act or any other
law for the time being in force;

F) restrain the company from taking action contrary to any resolution passed by its members;

G) claim damages or compensation on demand any other suitable action against :

i) the company or its directors for any fraudulent, wrongful or unlawful act;

ii) an auditor including audit firm of a company for any improper or misleading statement of particulars
made in the audit report or for any unlawful or fraudulent conduct.

iii) an expert or advisor or consultant for an incorrect or misleading statement made to the company.

Considerations by NCLT on receipt of an application [Section 245(4)]

On receipt of an application, the NCLT shall take into account:

● whether the member or depositor has acted in good faith while making the application to seek an
order;
● any evidence which identifies the involvement of any person other than the directors or officers of
the company on matters claimed as reliefs;
● whether the cause of action could be pursued by the member or the depositor in his own right
than through an order;
● any evidence relating to the views of members or depositors who have no personal interest
directly or indirectly in the matter;
● whether the cause of action is an act or omission that is yet to occur or already occurred and in
the circumstances is likely to be:

a) authorized by the company before it occurs or

b) ratified by the company after it occurs.

Publication of notice by NCLT on admission of a class action suit [Section 245(5)]:

The Tribunal shall-

I. serve a public notice on admission of the application to all the members or depositors of the class in
prescribed manner;
II. all similar applications may be consolidated into a single application and a lead applicant be
appointed who shall be in charge of the proceedings on the applicants side;

III. two class action application for the same cause of action shall not be allowed;

IV. cost or expenses connected with the class action suit will be paid by the company and any other
persons responsible for the oppressive act.

Penalties for non-compliance with NCLT order

1) An order passed by the NCLT shall be binding on the company, members, depositors, auditors including
audit form, consultant or advisor or any other person associated with the company [Section 245(6)]

2) A company, which fails to comply with the order of the NCLT under Section 245(7):

● shall be punishable with a minimum fine of INR 5 lakh which may extend to INR 25 lakh and
● every officer of the company who is in default shall be punishable with imprisonment which may
extend to 3 years with fine of minimum INR 25 thousand which may extend up to INR 1 lakh.

3) If an application is found to be frivolous or vexatious, NCLT may reject the application by recording the
reasons in writing and order the applicant to pay a compensation not exceeding INR 1 lakh to the opposite
party [Section 245(8)].

4) No provision relating to class action suit under Section 245 of the new Act shall be applicable to banking
company [Section 245(9)].

Conclusion

It may be concluded that class action suits will be an apt platform for members and depositors to raise their
grievances against the management of a company including directors, advisors, consultants, auditors etc for
acts or omission that is prejudicial, unlawful or wrongful to the interest of the company. Class action suits
may be undertaken as a redressal tool by minority shareholders having common interest for promotion of
transparent corporate governance.

Revival and rehabilitation of sick industrial companies

Chapter XIX of the Companies Act, 2013 deals with revival and rehabilitation of sick companies. It
exclusively covers the provisions for the determination of sickness, application for revival and rehabilitation,
appointment of interim administrator, committee of creditors, appointment of administrator, powers and
duties of company administrator, scheme for revival and rehabilitation, sanction of scheme, implementation
of scheme, winding up of company on the report of certain administrators, punishment for certain offences,
assessment of damages against delinquent directors, etc. Thus, the present article shall deal with the certain
provisions related to revival and rehabilitation of the sick companies in detail
Determination of Sickness

Section 253 of the Companies Act, 2013 talks about the determination of the sickness of a company.
According to it any secured creditor of a company representing 50% or more of outstanding amount of debt,
the company has failed to pay the debt within a period of thirty days of the service of the notice of demand or
to secure or compound it to the reasonable satisfaction of the creditors, then any secured creditor shall file an
application to the tribunal in a prescribed manner along with references of all such evidence for such default,
non-payment, etc.

On the receipt of the application from the secured creditor, then the tribunal shall decide within sixty days on
to the merit of the application that whether a company has become sick or not.

Once the tribunal is satisfied that a company has become a sick company, and it is in a position to repay its
debts, within a reasonable time, it shall order the company to repay its debts.

On satisfaction, the tribunal shall give a reasonable time to the company to make payment of its debts.

Application for revival and rehabilitation

Section 254 of the Companies Act, 2013 talks about the application for revival and rehabilitation and
according to which any company that has been determined as sick company under section 253 of the Act can
make an application to the tribunal to order for necessary steps to be taken for its revival and rehabilitation
and the application shall be accompanied by-

1. Audited financial statements of the company relating to the immediately preceding financial
year;
2. Such particulars and documents, duly authenticated in such manner, along with such fees as may
be prescribed.
3. A draft scheme for revival and rehabilitation of the company in such manner as may be
prescribed.

The application shall be made to the tribunal within sixty days from the date of determination of the
company as a sick company by the tribunal under section 253 of the Companies Act, 2013.

Appointment of Interim Administrator

According to section 256 of the Act, as soon as an application is made under section 254 of the Act, the
Tribunal shall fix a date of hearing and appoint an interim administrator who shall within 45 days of his
appointment fix a meeting with the creditors of the company and prepare a draft scheme for revival and
present it before the tribunal within sixty days from the meeting.

Where no draft scheme is provided the tribunal shall direct the interim administrator to take over the
management of the business and where an interim administrator is directed to take over the management of
the company, the director and the management of the company shall provide full assistance and cooperation
to the interim administrator.

Committee of Creditors
According to section 257, an interim administrator shall appoint a committee of creditors such number of
creditors as he may determine but shall not exceed seven and these members shall meet in all the meetings
and the interim administrator may direct all the promoters, directors, key managerial personnel of the
company to come in any meeting and furnish such information as is required and necessary.

Order of tribunal

On the date of hearing fixed by the tribunal, if the resolution is passed by the three-fourth members of the
company that it is impossible to revive and rehabilitate the sick company or by adopting such measures the
sick company shall be revived and rehabilitated, the tribunal shall pass such orders and where necessary may
appoint a company administrator who shall discharge his functions as enumerated in the Act.

Scheme of Revival and Rehabilitation

A scheme for revival and rehabilitation shall be prepared by the company administrator as per the provision
of section 261 and it shall include measures like financial reconstruction of the sick company, proper
management of the sick company, amalgamation of the sick company with other company or other company
with the sick company, takeover of the sick company by solvent company, sale or lease of a part of any assets,
rationalization of managerial personnel, such other preventive measure as may be necessary.

The scheme shall be sanctioned as per section 262 of the Act and shall be binding on the party and shall be
implemented by the tribunal by taking all necessary steps.

Winding up of Company on the report of company administrator

As per the provisions of the section 263of the Act, the company shall be wound up if the scheme is not
approved by the creditors and the administrator shall submit the report within fifteen days and the tribunal
shall order for the winding up of the company.

Rehabilitation and Insolvency Fund

A fund shall be formed under section 269 of the Act which shall be called as the Rehabilitation and
Insolvency Fund for the purposes of revival, rehabilitation, and liquidation of the sick companies.

Conclusion

Thus, the Companies Act provides exhaustive measures for the revival and rehabilitation of the sick
companies and the tribunal is vested with powers to take all necessary measures for the revival and
rehabilitation of the sick companies.

Mergers, Amalgamation and Takeover -

Merger:
Merger is defined as combination of two or more companies into a single company where one survives and
the others lose their corporate existence. The survivor acquires all the assets as well as liabilities of the
merged company or companies. Generally, the surviving company is the buyer, which retains its identity, and
the extinguished company is the seller.
Amalgamation:
Merger is also defined as amalgamation. Merger is the fusion of two or more existing companies. All assets,
liabilities and the stock of one company stand transferred to Transferee Company in consideration of
payment in the form of:

Equity shares in the transferee company,

Debentures in the transferee company,
Cash, or
A mix of the above modes.

Acquisition:
Acquisition in general sense is acquiring the ownership in the property. In the context of business
combinations, an acquisition is the purchase by one company of a controlling interest in the share capital of
another existing company.

Takeover:
A 'takeover' is acquisition and both the terms are used interchangeably.

Takeover differs from merger in approach to business combinations i.e. the process of takeover, transaction
involved in takeover, determination of share exchange or cash price and the fulfillment of goals of
combination all are different in takeovers than in mergers.

Types of Mergers
Based on the offerors' objectives profile, combinations could be vertical, horizontal, circular and
conglomeratic as precisely described below with reference to the purpose in view of the offeror company.

(A) Vertical combination:

A company would like to takeover another company or seek its merger with that company to expand
espousing backward integration to assimilate the resources of supply and forward integration towards
market outlets. The acquiring company through merger of another unit attempts on reduction of inventories
of raw material and finished goods, implements its production plans as per the objectives and economizes on
working capital investments.

In other words, in vertical combinations, the merging undertaking would be either a supplier or a buyer
using its product as intermediary material for final production.

The following main benefits accrue from the vertical combination to the acquirer company:

(1) It gains a strong position because of imperfect market of the intermediary products, scarcity of resources
and purchased products;
(2) Has control over products specifications.

(B) Horizontal combination:

It is a merger of two competing firms which are at the same stage of industrial process. The acquiring firm
belongs to the same industry as the target company. The mail purpose of such mergers is to obtain economies
of scale in production by eliminating duplication of facilities and the operations and broadening the product
line, reduction in investment in working capital, elimination in competition concentration in product,
reduction in advertising costs, increase in market segments and exercise better control on market.
(C) Circular combination:
Companies producing distinct products seek amalgamation to share common distribution and research
facilities to obtain economies by elimination of cost on duplication and promoting market enlargement. The
acquiring company obtains benefits in the form of economies of resource sharing and diversification.

(D) Conglomerate combination:

It is amalgamation of two companies engaged in unrelated industries like DCM and Modi Industries. The
basic purpose of such amalgamations remains utilization of financial resources and enlarges debt capacity
through re-organizing their financial structure so as to service the shareholders by increased leveraging and
EPS, lowering average cost of capital and thereby raising present worth of the outstanding shares. Merger
enhances the overall stability of the acquirer company and creates balance in the company's total portfolio of
diverse products and production processes.

Purpose of Mergers and Acquisitions

The basic purpose of merger or business combination is to achieve faster growth of the corporate business.
Faster growth may be had through product improvement and competitive position.
1) Procurement of supplies: To safeguard the source of supplies of raw materials or intermediary product

2) Revamping production facilities: To achieve economies of scale by amalgamating production facilities

through more intensive utilization of plant and resources;

3) Market expansion and strategy: To eliminate competition and protect existing market;

4) Financial strength: To improve liquidity and have direct access to cash resource;

5) Strategic purpose: The Acquirer Company view the merger to achieve strategic objectives through
alternative type of combinations which may be horizontal, vertical, product expansion, market extensional or
other specified unrelated objectives depending upon the corporate strategies

6) Desired level of integration: Mergers and acquisition are pursued to obtain the desired level of integration
between the two combining business houses. Such integration could be operational or financial.

Advantages of Mergers and Takeovers

Mergers and acquisitions are caused with the support of shareholders, managers and promoters of the
combining companies.

From the standpoint of shareholders

Investment made by shareholders in the companies subject to merger should enhance in value. The sale of
shares from one company's shareholders to another and holding investment in shares should give rise to
greater values i.e. the opportunity gains in alternative investments. Shareholders may gain from merger in
different ways viz. from the gains and achievements of the company i.e. through
(a) realization of monopoly profits;
(b) economies of scales;
(c) diversification of product line;
(d) acquisition of human assets and other resources not available otherwise;
(e) better investment opportunity in combinations.

From the standpoint of managers

Managers are concerned with improving operations of the company, managing the affairs of the company
effectively for all round gains and growth of the company which will provide them better deals in raising
their status, perks and fringe benefits. Mergers where all these things are the guaranteed outcome get support
from the managers. At the same time, where managers have fear of displacement at the hands of new
management in amalgamated company and also resultant depreciation from the merger then support from
them becomes difficult.

Promoter's gains
Mergers do offer to company promoters the advantage of increasing the size of their company and the
financial structure and strength. They can convert a closely held and private limited company into a public
company without contributing much wealth and without losing control.

Benefits to general public

Impact of mergers on general public could be viewed as aspect of benefits and costs to:
(a) Consumer of the product or services;
(b) Workers of the companies under combination;
(c) General public affected in general having not been user or consumer or the worker in the companies
under merger plan.

Mergers are pursued under the Companies Act, 1956 vide sections 391/394 thereof or may be envisaged
under the provisions of Income-tax Act, 1961 or arranged through BIFR under the Sick Industrial
Companies Act, 1985

Minority Shareholders Rights

Section 395 of the Companies Act, 1956 provides for the acquisition of shares of the shareholders. According
to section 395 of the Companies Act, if the offerer has acquired at least 90% in value of those shares may give
notice to the non-accepting shareholders of the intention of buying their shares. The 90% acceptance level
shall not include the share held by the offerer or it's associates. The procedure is laid down in this section.

Escrow Account
To ensure that the acquirer shall pay the shareholders the agreed amount in redemption of his promise to
acquire their shares, it is a mandatory requirement to open escrow account and deposit therein the required
amount, which will serve as security for performance of obligation.

Payment of Consideration
Consideration may be payable in cash or by exchange of securities. Where it is payable in cash the acquirer is
required to pay the amount of consideration within 21 days from the date of closure of the offer. For this
purpose he is required to open special account with the bankers to an issue (registered with SEBI) and
deposit therein 90% of the amount lying in the Escrow Account, if any.

He should make the entire amount due and payable to shareholders as consideration. He can transfer the
funds from Escrow account for such payment. Where the consideration is payable in exchange of securities,
the acquirer shall ensure that securities are actually issued and dispatched to shareholders in terms of
regulation 29 of SEBI Takeover Regulations.

Dissolution of a company

Effects of Dissolution
After the dissolution of a company, the firm stops carrying on business. They do not accept any new business
either. But the firm does not automatically wrap up all their business overnight. The whole process of
winding up takes time. So let us see what the effects of dissolution of a company are.ments of Partnership
Effects of Dissolution of Company
Continuing Authority of Partners
The partners need to wind up the business. For this, they need to carry out some functions, perform some acts
etc. The partners will continue to have the authority to perform such acts as necessary. And the firm is bound
by these actions of the partners. Insolvent partners, partners of unsound mind etc. are the exceptions here.
Also, according to Section 46 of the Act, every eligible partner has a lien over the assets of the firm. So a
partner has the authority to forbid any unfair distribution of assets or funds by getting an injunction.
However, these authorities are only for all actions and transactions regarding the winding up of the business.
It is not for any new transactions or business of the firm.

Continuing Liabilities of Partners

Public notice of the dissolution of the firm has to be given by the firm. If such a notice is not given, all the
partners continue to be liable for the actions of the other partners with respect to the firm.
For example, if one partner enters into a contract with the third party after the firm was dissolved but no
public notice was given, the partners will be liable to perform this contract or bear the losses.

Right to Return of Premium

In certain cases, a partner has to pay a premium to the partners to be introduced in the firm. But if a
partnership for a fixed term is terminated before the fixed period then the partner can demand that a
proportionate portion of this premium be paid back to him. This will not apply if
i. The dissolution was by mutual consent
ii. Caused by the misconduct of the partner that paid the premium
iii. Death of a partner

Settlement of Accounts
Section 48 deals with the settlement of accounts after the dissolution of the partnership firm. Let us see the
rules,
1] The losses of the firm and the deficiencies of the capital will be first paid out, particularly from
undistributed profits. If these fall short, then we shall utilize capital accounts and lastly, the partners will
contribute the funds in their share profit ratios.
2] The assets of the firm and the contributions of the partners will be applied in the following order,
i. Payment to creditors (outside creditors only)
ii. Repayment of Loans and advances of partners
iii. Payment of partner’s capital accounts
iv. Then divide remaining profits in the profit sharing ratio
3] If one of the partners is insolvent, then the settlement is done in the following way as per the case study of
Garner vs. Murray
i. Solvent partners contribute their share of the deficiency if any
ii. The assets of the firm are distributed only amongst the solvent partners
iii. The deficiency of the insolvent partner is distributed among the solvent partner, specifically in their
capital ratios

Solved Example on Dissolution of Company

Question: A agreed to join the firm but had to pay a premium. The firm was subsequently dissolved due to
the death of another partner. Does A have the right to be paid back his premium as one of the effects of
dissolution?
Answer: No, in this case, dissolution of a company due to the death of the partner, A does not get a
proportionate portion of his premium back

Winding up of companies-Modes of winding up of companies

Section 361 of the Companies Act, 2013 specifies a short process for the dissolution of corporations. The
Central Government appoints an Official Liquidator to oversee the liquidation procedures. The summary
procedure specifies a mechanism for winding up other than insolvency due to incapacity to pay debts. Let us
briefly discuss Procedure of Modes of Winding up of a Company

The Principles of Modern Company Law outlines A company’s winding up and it is the process by which its
life can be terminate. Further, its assets can be handling for the benefit of its creditors and members. An
administrator will act as a liquidator, and he takes control of the firm, collects its assets, pays its obligations,
and eventually distributes any excess among the members in line with their rights.” During the winding up of
a company, the dissolution does not occur immediately, but Bachawat J held in Pierce Leslie & Co Ltd v.
Violet Ouchterlong Wapshare that “winding up precedes dissolution.” “Winding Up” is a provision in
Chapter XX of the Companies Act, 2013, ranging from Section 270 to Section 365.

Winding up of a company

The liquidation of the Company’s assets, which are collected and sold in order to satisfy the obligations
accrued, is referred to as winding up. When a corporation is wind up, the debts, expenditures, and charges
are first paid off and dispersed among the shareholders. When a company is subject to liquidation, it
dissolves officially and ceases to exist.

Winding up is the legal process of closing down a firm and ceasing all operations. After the winding up of
Company, the Company’s existence ends, and the assets are subject to supervision to ensure that the
stakeholders’ interests are not jeopardised.

A Private Limited Company is an artificial judicial entity that requires numerous compliances. If the
company fails to maintain these compliances, fines and penalties may be impose against them, as well as
disqualification of the Directors from subsequent incorporation of a Company. It is usually preferable to
wind up a firm that has become dormant or has no transactions. The Company’s shareholders have the
authority to initiate the company’s dissolution at any moment. If there are secured or unsecured creditors or
workers on the books, all outstanding debts must be paid. After clearing the debts, all of the company’s bank
accounts must be closed. In the event that the company is dissolved, the GST registration must likewise be
relinquished.

Once all registrations have been submitted, a winding-up petition can be filed with the Ministry of Corporate
Affairs.

Procedure of Modes of Winding up of a company- Modes

According to Section 270 of the Companies Act, 2013, a company can be wind up in two ways. They are:

● Compulsory Winding up of Company by Tribunal

● Voluntary Winding up of Company

Compulsory Winding up of Company by Tribunal

According to Section 271 of the Companies Act, a Tribunal may issue an order to wind up a company in the
following circumstances, as detailed in Section 271(1) of the Companies Act, 2013.

● Sick Company
● Special Proposal
● Acts against the State
 ● Fraudulent Conduct of Business
● Failure to file financial statements with the Registrar
● It is just and equitable to wind up.

Let us discuss them one by one in detail.

● Sick Company: If the firm is in a position where creditors have a dominating position, with debt
dues, the Committee of Creditors shall appoint an administrator to hold up the winding up of the
Company, in accordance with the Tribunal’s ruling. This occurs when the company is in a sick
state, i.e. the firm is unable to pay its obligations and it is not feasible to resuscitate and rehabilitate
such opinion and order that the Company may be wind up.
● Special Resolution: If the Company has agreed, by a special resolution that it will wind up by the
Tribunal then the said winding up is at the discretion of the Tribunal. This exempts the Tribunal’s
ability to wind up a corporation if it is contrary to the public interest or the company’s interest.
● Acts against the State: If the Company commits an act that is detrimental to India’s sovereignty
and integrity, the security of the State, cordial relations with other states, public order, decency, or
morals, the Tribunal may ask company to wind up the company.
● Fraudulent Conduct of Business: If the Tribunal believes that the Company’s affairs have taken
place by way of fraud or that the reason for forming the company is for fraudulent or unlawful
purpose, the Tribunal has the ultimate discretion to wind up the company only after receiving an
application from the Registrar of Companies or any other person authorised by the Central
Government.
● Failure to file financial statements with the Registrar: If the Company has failed to file its financial
statements or annual reports with the Registrar for the last five consecutive fiscal years, as
required by Section 271(1) (f) of the Act.
● It is just and equitable to wind up: Section 271(1) (g) of the Act states that if the Tribunal believes
that it is just and equitable that the company be wind up, it must consider the interests of the
company, its employees, creditors, shareholders, and the general public interest, as well as all other
remedies to resolve the circumstance that led to the Tribunal’s decision to wind up. Under this
premise, winding up the firm necessitates a strong ground to liquidate that company.

Procedure of Modes of Winding up of a Company-Compulsory Winding up of Company by Tribunal

A petition is use to make an application to the Tribunal in the winding up of a company under Section 272 of
the statute.

The following individuals are entitled to file this petition:

● The Company;
● Any creditor or creditors, including any contingent or potential creditors;
● Any Contributors to that company;
● The Registrar; and
● Any person authorised by the Central Government to do so.

Procedure
The following is the procedure for compulsory winding up of company by tribunal:

● Appointment of a Liquidator to the Company under Section 275 to examine the Company’s debts
and credits in order to verify the Company’s eligibility for forced winding up by the Tribunal.
● Following the appointment, Liquidators as per section 281 of the Act to make a report to the
Tribunal.
● The Tribunal issues orders to the liquidators in dissolving the Company under Section 282 of the
Act. And according to which, the company’s property undergo shift into custody in order to satisfy
the creditors and contributors first.
● Finally, the Court issues the order for dissolution under Section 302 of the Act, after carefully
reviewing the audits and reports provided by the liquidator to the Court in the interest of resolving
the obligations owed to creditors and other contributors.

Voluntary Winding up of Company

Section 304 of the Companies Act, 2013, specifies two statutory conditions in which a company may be
voluntarily wind up. They are;

● If the company’s general meeting approves a resolution requiring the company to be wind up
voluntarily as a consequence of the expiration of the time for its duration, if any, as per its articles,
or the occurrence of any event for which the articles prescribe that the company may be dissolve;
or
● If the board of directors approves a special resolution requesting that the firm is wind up
voluntarily.

Procedure of Modes of Winding up of a Company- Voluntary Process

The following are the procedure for winding up of company voluntarily:

● Convene a board meeting with the directors and approve a resolution with a statement by the
directors that they have inquired into the accounts of the business and that the company has no
obligations or that the company will pay from the proceeds of the assets sold in the voluntary
winding up of the company.
● Notices calling for the general meeting of the Company proposing the resolutions should be in
writing. In addition with a relevant explanatory statement.
● Pass the ordinary resolution for the Company’s winding up by a simple majority in the general
meeting; or the exceptional resolution by a 3/4 majority. The Company’s liquidation will begin on
the date the resolution.
● A creditors’ meeting should take place on the same day or the following day after the resolution to
wind up passes. If two-thirds of the creditors agree that winding up the company is in the best
interests of all stakeholders, the company can be wind up voluntarily.
● A notification for appointment of liquidator must be file with the registrar within 10 days. After
passing the resolution for company winding up.
● Certified copies of the ordinary or extraordinary resolutions passed at the Company’s general
meeting for winding up must be sent within 30 days after the meeting.
 ● The company’s affairs must be subject to wind up, and the liquidators’ account of the Winding up
account should be prepare and audit.
● When the company’s affairs have been entirely wound up and it is going to be dissolved; a specific
resolution should be enacted to dispose of the company’s books and documents.
● Within two weeks following the Company’s general meeting; applicant may file a copy of the
accounts and an application to the tribunal for an order of dissolution.
● Within 60 days after receiving the application, the tribunal must issue an order dissolving the firm.
● The company liquidator must file the copy of order with the registrar.
● After obtaining a copy of the Tribunal’s ruling, the registrar will issue a notice in the official
gazette. This takes place to indicate the status of Company.

Endnote

A Private Limited Company is a legal organisation which acts in accordance with the Companies Act. As a
result, a corporation must maintain frequent compliances throughout its life cycle. The process of winding up
is for a company that is no longer active and wishes to avoid compliance obligations. In addition, a company
can be down by filing an application with the Ministry of Corporate Finance in 3 to 6 months.

consequences of winding up of a company:

Kinds, Consequences and Reasons to wind up a company

2.1 Modes to wind up

A Company can wind up in 2 modes, as given under Act. They are, a. Compulsory wind up b. Voluntary wind
up.

A. Compulsory winding up by Tribunal

The Tribunal has the power to pass a decree for winding up a firm under the following cases:

i. Sick Company

If the firm is unable to pay its debts and creditors have a commanding position with respect to the dues to be
collected, the Committee of creditors will choose a person as administrator for Company, in accordance with
the Tribunal’s order for winding up process. This occurs when a corporation is in a sick state, i.e., it is not
able to pay off its debts and cannot be revived or rehabilitated. In such a circumstance, the court may order
the firm to wind up.

ii. Special Resolution

If the Corporation has agreed to go for wind up by the Tribunal through a special resolution, the Tribunal’s
decision on the winding up is final. This exempts the Tribunal’s power to wind up a corporation if it is
contrary to the general public interest or the interest of the corporation.

iii. Acts Against State

If a firm violates the integrity and sovereignty of territory of India, the security of the state, relations with
overseas countries, morality, public order, or decency, then the Tribunal may pass an order for the company
to be wound up.

iv. Fraudulent Conduct of Affairs

If the Tribunal has reasons to believe that the working of the company has been carried out fraudulently or
that the purpose for which the company was started is fraudulent or for any illegal purpose, then the tribunal
has been granted the authority to pass an order to wind up the corporation after receipt of an application
from the Registrar or any other person who is authorised by the Central Government.

v. Default in filing Financial Statements If the corporation has not filed its annual returns or finance
statements with the Registrar for the previous five 5 years.

vi. Just and Equitable to wound up If the Tribunal determines that winding up the company is just and
equitable after looking into the interests of the company, its various shareholders & stakeholders, and the
interest of the public, as well as all other remedies available to resolve the situation, the Tribunal will wind up
the company. Winding up a firm on this ground necessitates a solid foundation to liquidate the firm.

Procedure involved in Compulsory winding up by Tribunal

An application has to be submitted to the Tribunal to wind up a firm, which has to be made by a petition. The
people who are eligible to make this petition are:

a. Company

b. Creditor’s

c. Contributories

d. Registrar

e. Any person who is authorised by the Central Government

i. Appointment of a Liquidator to examine the firm’s debts and creditors in order to determine if the
Company is eligible for compulsory winding up by the Tribunal.

ii. Liquidators have a duty to make a report and submit it to the Tribunal following the above appointment.

iii. The Tribunal issues directives to the liquidators in dissolving the company, according to which the
property of the firm is taken into custody in order to first satisfy the creditors and contributories.

iv. Finally, following careful evaluation of audits and reports filed by the liquidator to the Court, the Court
issues an order for dissolution in order to settle the debts owed to the firm’s creditors and other contributors.

B. Voluntary winding up

There are 2 situations where a corporation can wind up voluntarily. They are:

i. If the corporation decided to pass a resolution to wind up voluntarily in its general meeting which maybe
because of cessation of the period for its duration, if any, anchored by its articles or on the happening of any
such event in respect of which the articles of the company provide the company to wind up or,

ii. If the corporation has decided to pass a special resolution for voluntary winding up.
Procedure involved in Voluntary winding up

1. A declaration has to be passed by the members of the company including the directors, to be delivered to
registrar within 5 weeks of date of passing of resolution for winding up.

2. The director, directors or in case there are more than 2 directors, the majority of directors have to make a
declaration verified by an affidavit in a board meeting to the effect that a full inquiry into the company
affairs has been made and the company has no debt or whether it has the capacity to pay off the debts from
proceeds of sale of assets if they decide to voluntarily wind up the company.

3. A company meeting will be called where the resolution for voluntary winding up will be proposed and
another meeting of the creditors of the company shall also be called on the same or the next day and a notice
of such meetings has to be sent to the creditors via a registered post.

4. The resolution which has been passed has to published in the Official Gazette or the local vernacular
newspaper which is prevalent in that district within 14 days of such declaration.

5. The company will appoint a Company Liquidator in its general meeting where the resolution of such
winding up is passed. The Liquidator appointed must be from the panel prepared by the Central government
and will take care of the winding up affairs.

6. A notice has to be given to the Registrar about the appointment of the Liquidator, with the name and other
required details of the liquidator, of any opening which has occurred in his office, and of the name of the such
Liquidator which has been hired to fill such vacancies within 10 days of this hiring or the arising of vacancy.

7. A quarterly progress report has to be sent by the Company Liquidator in a prescribed manner to all the
members and creditors. Also, at least 1 meeting per quarter of each creditors and members has to be called to
update them about the progress of winding up process. If the Liquidator fails to perform such duty then he
may be punished with a fine which may extend to Rs.10,00,000.

8. Finally, a last meeting will be called by the Liquidator, where he shall present the report about the winding
up showing the disposition of assets and the amount of debts discharged and a general meeting will be called
for the information regarding the final winding up of accounts and offer any explanation thereof.

9. Within 2 weeks of such meeting, the Liquidator has to, send a copy of the final wound up accounts to the
registrar, along with copies of resolutions passed in these meetings. It also has to file an application relating to
winding up of the firm, which has to be presented before the tribunal.

2.2 Consequences of winding up

The major repercussions after the firm is wound up are as follows:

With respect to the Company

• Wind up of the company does not lead to end of a firm completely.

• The firm will continue to exist as a separate legal entity until it is completely dissolved.

• While the company is going through the phase of liquidation, all the business activities are administered by
the liquidator.

With respect to the Shareholders

• Contributors ? a new statutory liability comes into existence.

• Every transaction of share during the liquefaction done without the approval of the liquidator is considered
void.

With respect to the Creditors

• Creditors are not allowed to file a suit against the firm without court’s consent

• If the creditors already have some pending decrees, they are not allowed to go ahead with its
implementation.

• Creditors have to explain and account for their claims to the liquidator.

With respect to the Management

• When a liquidator is appointed, all the authority of the chief executives, directors, and other officers cease to
exist.

• The members only have the power to send notice of resolution and the power to appoint a liquidator during
the firm’s winding up.

With respect to the Disposition of Property

• The disposition of the companies property must be approved by the court or the liquidator otherwise it will
be considered void.

2.3 Circumstances in which a company can wind up

A company can wind up by a tribunal if a petition is submitted under the given situations:

• The corporation passed a special resolution directing the tribunal to pass an order to wind up the firm.

• The company failed to file a statutory report with the registrar.

• Non-commencement of business activity by the firm within 12 months after its incorporation.

• The number of members in a public corporation has decreased below 7 and in a private firm has decreased
below 2.

• The company’s debts are beyond its ability to pay.

• The tribunal’s decision to wind up the corporation is just and equitable.

• For the past five financial years, the company has not been filed its balance sheet or annual return.

• The company has violated the integrity and sovereignty of the territory of India.

Application to wind up

The following entities must file an application for winding up with the petition for winding up:

• Company

• Creditors

• Contributory company
• Any person who is authorized by the central government

• Central government or State government Upon receipt of the petition, the tribunal will proceed according to
the processes outlined in section 439-481 of Act.

The circumstances in which a court may wind up a firm based on a petition presented to a court are justified
by Section 305 of the Act.

• If the company decides that it should wind up through a special resolution by the court.

• If the company is deemed to have missed two consecutive years of delivering required reports to the
registrar, hold statutory meetings, or hold 2 annual general meetings.

• If the corporation does not begin operations within one year of its establishment or if its operations are
suspended for one year.

• If the members of the private, public, or listed firm is reduced to less than 2, 3, or 7, the company will be
considered private, public, or listed.

• If it is discovered that the corporation is no longer able to pay off its dues.

• If the corporation is –

o Engaging in or abiding with fraudulent and unlawful activities;

o Engaging in such activities which are not permitted by its MOA.

o Engaging in business in an oppressive manner towards its members concerned with the company’s
promotion.

o Managed and run by people who are not able to maintain proper accounts or are involved in fraud or any
other corrupt activities.

o Managed by individuals who do not work in accordance with the company’s MOA or with registrar and the
law.

• If the company, even though it’s a listed company, it cease to act like one.

• If the court is of the opinion the company should wind or

o Complete deadlock in the management

o Failure of firm to meet its main objectives

o Recurring losses

o Oppressive policies of the major stakeholders

o Incorporation of a company for unlawful, fraudulent or any other illegal purpose

o Protection of interest of public

• If the corporation ceases to have even a single member.

3. Conclusion
The Act has taken a wonderful initiative in establishing a prudent corporate governance structure in India.
The Act clearly prescribes the modes by which a firm can wind up. A company can wind up by compulsory
mode or voluntary mode. Then, we talked about the procedure by which a company maybe wound up
compulsorily, the parties which can file a petition for such winding up on occurrence of certain
circumstances. We also talked about the procedure for voluntary winding up of a company. Then, we dealt
with the consequences of such winding of various parties comprising of creditors, shareholders, company and
management. Finally we talked about the circumstances in which a corporation can be wound up by a
tribunal in case a petition has been filed. Thereby, we have talked in brief about the kinds, consequences and
reasons for winding up of a company under Act in detail and in a summarized form.

4. Suggestions

Shutting down the company is not as simple as letting go off employees and repaying investors. Regulations
prescribe the manner in which payments need to be made and procedure to be followed. As a result of which
company which may have already been shut down may be be forced to continue to operate as a zombie until
finally it is dissolved. Though the provisions of the Act are clear about the processes for winding up of a
company yet the processes are so time consuming that it may take anywhere from6 months to infinity to fully
dissolve a company. “Ease of exit is as important as ease of setting up a business”. Though the time for
minimum time required for winding up a company has been significantly brought down from2 years to 6
months further improvements in the act is needed to bring out the mountain of formalities and simplify the
procedures of winding up. Which in turn will help in attracting more companies to set up operations in India
and contribute towards the nation’s econom

The insolvency and Bankruptcy Code, 2016 in relation to winding up of companies

After the introduction of the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha on 21st December
2015, it was referred to the Joint Committee. On such a referral the Committee had presented its
recommendations and a modified Bill based on its suggestions. In May 2016 both the Houses of Parliament
passed the Insolvency and Bankruptcy Code, 2016. The major objective of this economic reforms is to focus
on creditor drove insolvency resolution.

Shifting existing regime ‘Debtor in possession’ to a ‘ Creditor in control’

In India, the Insolvency and Bankruptcy Code, 2016 is one matured step towards settling the legal position
with respect to financial failures and insolvency. To provide easy exit with a painless mechanism in cases of
insolvency of individuals as well as companies, the code has significant value for all stakeholders including
various Government Regulators. Introduction of this Code has done away with overlapping provisions
contained in various laws –

● Sick Industrial Companies (Special Provisions) Act, 1985

● The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
● The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002
● The Companies Act, 2013.

Before the enactment of this Code, there were multiple agencies dealing with the matters relating to debt,
defaults, and insolvency which generally leads to delays, complexities and higher costs in the process of
Insolvency resolution. The ‘Board for Industrial and Financial Reconstruction (BIFR)’, one of the Insolvency
Regulators, has been a phantasm for sick industrial companies. It is expected that the Insolvency and
Bankruptcy Code, 2016 will expedite the cases pending for a long time and resolve them within 180 days with
a further period of 90 days.

Applicability of the Code

The provisions of the Code shall apply for insolvency, liquidation, voluntary liquidation or bankruptcy of the
following entities:-

● Any company incorporated under the Companies Act, 2013 or under any previous law.
● Any other company governed by any special act for the time being in force, except in so far as
the said provision is inconsistent with the provisions of such Special Act.
● Any Limited Liability Partnership under the LLP Act 2008.
● Any other body being incorporated under any other law for the time being in force, as
specified by the Central Government in this regard
● Partnership firms and individuals

Moreover, this code shall apply only if minimum amount of the default is Rs. 1 lakh. However, by placing the
notification in Official Gazette, Central Government may specify the minimum amount of default of higher value
which shall not be more than Rs. 1 crore.

Exceptions: There is an exception to the applicability of the Code that it shall not apply to corporate persons
who are regulated financial service providers like-

● Banks;
● Financial Institutions; and
● Insurance companies.

Objectives of the Code

A sound legal framework of bankruptcy law is required for achieving the following objectives:-

Improved handling of conflicts between creditors and the debtor

It can provide procedural certainty about the process of negotiation, in such a way as to reduce problems of
common property and reduce information asymmetry for all economic participants.

Set a limit between malfeasance and business failure

It can also provide flexibility for parties to arrive at the most efficient solution to maximize value during
negotiations. The bankruptcy law will create a platform for negotiation between creditors and external
financiers which can create the possibility of such rearrangements.

Macroeconomic downturns losses to be allocated

An infirm insolvency regime leads to the stereotype of “rich promoters of defaulting entities” generating
theories such as:

● misconduct is the reason for all the defaults made

● ultimately it is the promoters who should personally and financially be held responsible for
defaults of the firms which are under their control.

Macroeconomic downturns losses to be allocated

Clear allocation of these losses is a result of a well-defined bankruptcy framework. Taxes, inflation, currency
depreciation, expropriation, or wage or consumption suppression are the common practices of loss allocation.
These could affect foreign creditors, small business owners, savers, workers, owners of financial and non-
financial assets, importers, exporters.

Key Objectives of the Code

The sole intention of the Insolvency and Bankruptcy Code, 2016 is to provide a justified balance between-

● an interest of all the stakeholders of the company, so that they enjoy the availability of credit
● the loss that a creditor might have to bear on account of default

The objective behind Insolvency and Bankruptcy Code, 2016 are listed below-

● To consolidate and amend the laws relating to re-organization and insolvency resolution of
corporate persons, partnership firms, and individuals.
● To fix time periods for execution of the law in a time-bound settlement of insolvency (i.e. 180
days).
● To maximize the value of assets of interested persons.
● To promote entrepreneurship
● To increase the availability of credit.
● To balance all stakeholder’s interest (including alteration). Balance to be done in the order of
priority of payment of Government dues.
● To establish an Insolvency and Bankruptcy Board of India as a regulatory body for
insolvency and bankruptcy law.
● To establish higher levels of debt financing across a wide variety of debt instruments.
● To provide painless revival mechanism for entities.
● To deal with cross-border insolvency.
● To resolve India’s bad debt problem by creating a database of defaulters.

Department of Company Affairs

The Ministry of Corporate Affairs (“MCA”) is entrusted with the responsibility of administering the
Companies Act, 2013 (“2013 Act”). To this end, it has issued many a circulars to clarify the provisions of the
2013 Act and the rules made thereunder from time to time. On important matters like CSR, the ministry has
issued detailed FAQs in the form of clarificatory circulars. Till date, the MCA has issued more than 210
clarificatory circulars under the 2013 Act.

There are provisions in several legislations that specifically empower the relevant ministry/ statutory
authority to issue circulars for effective administration of the said statute. For instance, Section 119(1) of the
Income Tax Act, 1961, empowers the Central Board of Direct Taxes to issue orders, instructions, and
circulars. SEBI issues circulars vide its powers conferred inter alia under Section 11(1) and Section 11A of the
Securities and Exchange Board of India Act, 1992, and the enabling provision is specifically mentioned in the
text of most of the SEBI circulars.

However, no such express provision exists in the 2013 Act, which empowers the MCA to issue clarificatory
circulars. Further, there is no mention of any specific provision in the circulars issued by the MCA, which
establishes its statutory power/ enabling provision to issue such circulars. It is relevant to note that no such
specific provision existed even under the Companies Act, 1956, which established the statutory power of
MCA for issuing circulars.

In this article, the authors have examined the constitutionality of those powers and the limitations of such
executive circulars.

Analysis of the Constitutional provisions

a. The Executive power of the Union under the Constitution:

Article 53 of the Constitution lays down the constitutional framework dealing with the executive power of the
Union. Article 53(1) of the Constitution provides that “the executive power of the Union shall be vested in the
President, and shall be exercised by him either directly or through officers subordinate to him, in accordance
with this Constitution”. The executive functions comprise the whole corpus of authority to govern and
connotes the residue of government functions that are not either legislative or judicial[1]. While exercising the
executive powers for and on behalf of the President under Article 53(1) of the Constitution, the subordinate
officials are strictly bound by the limits imposed by the Constitution. Therefore, one may take the view that
MCA officials are subordinate to the President, and would be regarded as performing their functions for and
on behalf of the President, within the meaning of Article 53(1) of the Constitution.

Further, Article 73(1)(a) of the Constitution lays down the cardinal principle that the Union Government’s
executive powers are coextensive with the Parliament’s legislative powers, and extends to all matters on
which Parliament is empowered to make laws. The Union Government’s exclusive executive power
accordingly extends to the fields of legislation provided in List I of the Seventh Schedule (“Union List”) of the
Constitution, enacted pursuant to Articles 245 and 246 of the Constitution, providing for the scheme for
distribution of legislative powers between the Union and the State Governments.

In Ram Jawaya Kapur v. State of Punjab[2], the Supreme Court of India (“SC”) held that “Ordinarily the
executive power connotes the residue of governmental functions that remain after legislative and judicial
functions are taken away… The executive Government, however, can never go against the provisions of the
Constitution or of any law…The executive function comprises both the determination of the policy as well as
carrying it into execution.”

In J&K Public Service Commission v. Narinder Mohan[3], the SC observed that executive power could be
exercised only to “fill in the gaps”, and executive instructions “cannot and should not supplant the law, but
would only supplement the law”.

Accordingly, the exercise of executive power cannot be in contravention of the Constitution, or any other law.
While executive power is circumscribed by the limits imposed by the Constitution, and by any other law, this
does not imply that executive power can be exercised only when there is a law already in existence. The
executive’s powers are not restricted solely to carrying out the laws passed by Parliament. It includes other
functions such as supervising general administration, formulation, and execution of policy, etc.

Furthermore, in a series of judicial decisions[4], the SC has consistently held that such clarificatory circulars
cannot amend or substitute principal legislation. But if the principal legislation made thereunder is silent,
then the Government can issue clarifications to supplement principal legislation by issuing instructions.

b. Source of MCA’s power to issue circular:

Entries 43 and 44 of the Union List (List I of the Seventh Schedule of the Indian Constitution) confer
exclusive power to Parliament, to legislate on the following matters:

“incorporation, regulation and winding up of trading corporations, including banking, insurance and financial
corporations but not including cooperative societies” [Entry 43]

&

“incorporation, regulation and winding up of trading corporations, whether trading or not, with objects not
confined to one State, but not including universities” [Entry 44]

Given that Article 73(1)(a) provides that the Union’s executive power is co-extensive with Parliament’s
legislative power, one may take a view that the Union has exclusive executive power for ‘regulating’ trading
and non-trading corporations. In this context, Article 77(3) of the Constitution of India, provides that “The
President shall make rules for the more convenient transaction of the business of the Government of India, and
for the allocation among Ministers of the said business.”

Pursuant to the powers conferred by Article 77(3), the Government of India (“GoI”) has notified the GoI
(Allocation of Business) Rules, 1961 (“Allocation of Business Rules”), which provides that the business of the
GoI shall be transacted by the Ministries, Departments, Secretariats, and Offices specified in Paragraph 8B
of the Second Schedule of the Allocation of Business Rules.

Entry 1 and Entry 21 of the business items allocated to the MCA deal with “Administration of the Companies
Act, 1956” and “Administration of the Companies Act, 2013”. Further, under the powers conferred by Article
77(3), the GoI has also notified the GoI (Transaction of Business) Rules, 1961 (“Transaction of Business
Rules”), which provides that all business allotted to a department under the Allocation of Business Rules shall
be disposed of by, or under the general or special directions of the Minister-in-charge.

Therefore, Articles 53(1), 73(1), 77(3), 245 and 246 of the Constitution, read with Entries 43 and 44 of the
Union List and the Allocation of Business Rules confirm that the MCA is the appropriate ministry (also
called the concerned administrative ministry in government parlance) for the purpose of exercising executive
functions relating to the ‘administration’ of the 1956 Act and the 2013 Act – and all business in relation to the
same have been allocated to the MCA.

The SC in Jamal Uddin Ahmad v. Abu Saleh Najmuddin[5] held that the “conferment of power implies
authority to do everything which could be fairly and reasonably regarded as incidental or consequential to the
power conferred”.

Further, in ITO Cannanore v. M.K. Mohammed Kunhi[6], it was observed that “an express grant of statutory
power carries with it by necessary implication the authority to use all reasonable means to make such grant
effective”.
Therefore, one may take the view that the MCA’s executive power with regard to regulation of trading and
non-trading corporations implies an authority to do everything that could fairly and reasonably be regarded
as incidental or consequential to the power conferred. According to the authors, the authority to issue
circulars (for the purpose of administering the provisions of the statute, or giving directions to subordinate
authorities such as the RoC) can be regarded as incidental and consequential to the MCA’s executive power
to regulate trading and non-trading corporations – pursuant to Articles 53, 73, 77(3), 245 and 246 of the
Constitution, read with Entries 43 and 44 of the Union List.

Ambiguity relating to the binding nature of circulars

There is conflicting judicial opinion on the binding nature of such executive circulars. This assumes
prevalence when parties rely on the circulars that have been later repealed by the ministry/ department. The
Gujarat High Court in the case of Neeraj Kumarpal Shah v. C2R Projects LLP[7] and the Delhi High Court in
the case of S.K. Bhattacharya v. Union of India[8] have held that the instructions/ guidelines prescribed in
circulars issued by the MCA are binding on the RoC, and have to be mandatorily followed. However, in
Bhagwati Developers v. Peerless General Finance and Investment Company[9] (“Bhagwati Developers”) , the
SC, with reference to a circular issued by the erstwhile Department of Company Affairs on September 6,
1994, held that the said circular does not have any mandatory effect, and observed that “these circulars are
merely advisory in character”. In the view of the authors, since the decision in the Bhagwati Developers case
was rendered in a specific context to a particular MCA circular, it does not lay down any general rule
relating to the nature and scope of circulars issued by the MCA.

Are the circulars issued under the 1956 Act still valid?

Given the drafting lacunae in the 2013 Act, on many occasions, it is helpful to rely on circulars issued under
the 1956 Act, for the purpose of interpretative guidance. However, are the circulars issued under the 1956 Act
still valid? The legal position is analysed below.

The ‘repeal and savings’ clause of the 2013 Act is contained in Section 465. Section 465 of the Act provides for
the “repeal of certain enactments and savings”, and was notified by the MCA on January 30, 2019. Section
465(1), inter alia, provides that the 1956 Act shall stand repealed.

Section 465(2)(a) of the 2013 Act provides that:

“Notwithstanding the repeal under sub-section (1) of the repealed enactments,—

anything done or any action taken or purported to have been done or taken, including any rule, notification,
inspection, order or notice made or issued or any appointment or declaration made or any operation undertaken
or any direction given or any proceeding taken or any penalty, punishment, forfeiture or fine imposed under the
repealed enactments shall, insofar as it is not inconsistent with the provisions of this Act, be deemed to have been
done or taken under the corresponding provisions of this Act”

Further, Section 465(2)(b) of the 2013 Act provides that:

“subject to the provisions of clause (a), any order, rule, notification, regulation, appointment, conveyance,
mortgage, deed, document or agreement made, fee directed, resolution passed, direction given, proceeding taken,
instrument executed or issued, or thing done under or in pursuance of any repealed enactment shall, if in force
at the commencement of this Act, continue to be in force, and shall have effect as if made, directed, passed,
given, taken, executed, issued or done under or in pursuance of this Act;”

In accordance with Sections 465(2)(a) and 465(2)(b) of the 2013 Act, any direction given under the 1956 Act
shall, insofar as it is not inconsistent with the provisions of the 2013 Act, be deemed to have been done or
taken under the corresponding provisions of the 2013 Act, and shall have effect as if it were directed or issued
in pursuance of the 2013 Act. The said provisions should be read in conjunction with Sections 6 and 24 of the
General Clauses Act.

Section 6 of the General Clauses Act provides that where any Central Act or regulation repeals any
enactment hitherto made or hereafter to be made, then, unless a different intention appears, the repeal shall
not:

a. revive anything not in force or existing at the time at which the repeal takes effect; or

b. affect the previous operation of any enactment so repealed or any thing duly done or suffered thereunder; or

c. affect any right, privilege, obligation or liability acquired, accrued or incurred under any enactment so
repealed; or

d. affect any penalty, forfeiture or punishment incurred in respect of any offence committed against any
enactment so repealed; or

e. affect any investigation, legal proceeding or remedy in respect of any such right, privilege, obligation, liability,
penalty, forfeiture or punishment as aforesaid;

and any such investigation, legal proceeding or remedy may be instituted, continued or enforced, and any such
penalty, forfeiture or punishment may be imposed as if the repealing Act or Regulation had not been passed.”

Section 24 of the General Clauses Act provides that where any Central Act or Regulation is, after the
commencement of this Act, repealed and re-enacted with or without modification, then, unless it is otherwise
expressly provided, any appointment, notification, order, scheme, rule, form or bye-law, made or issued
under the repealed Act or Regulation, shall, so far as it is not inconsistent with the provisions re-enacted,
continue in force, and be deemed to have been made or issued under the provisions so re-enacted, unless and
until it is superseded by any appointment, notification, order, scheme, rule, form or bye-law made or issued
under the provisions so re-enacted.

The elements of the ‘repeal and savings clause’ contained in Sections 465(2)(a) and 465(2)(b) of the 2013 Act
incorporate the principles prescribed under Sections 6 and 24 of the General Clauses Act, and provide that
any “directions” given under the 1956 Act shall, insofar as they are not inconsistent with the provisions of the
2013 Act, continue to have effect under the 2013 Act.

In Sudheer C.B. v. State of Kerala[10], in the context of a communication issued by a Government Secretary
for modifying an Executive Order issued in the name of the Governor, the Kerala High Court has held that
“a circular is a letter, addressed to several persons simultaneously. So, a circular is also a letter issued by the
Government/ Government Secretary, bringing a particular decision to the notice of several persons
simultaneously”.

Given that even the circulars issued under the 1956 Act provide direct instructions to the RoC and the
Regional Directors relating to a decision taken by the ministry in exercise of its executive power, the circulars
issued under the 1956 Act may be construed as “directions” given by the MCA, for the purpose of Sections
465(2)(a) and 465(2)(b) of the 2013 Act. Hence, in accordance with Sections 465(2)(a) and 465(2)(b), the
circulars issued under the 1956 Act will continue to have effect, if they are not repugnant to any provision of
the 2013 Act.
The key test to be applied is whether a circular issued under the 1956 Act is repugnant/ inconsistent to any
provision of the 2013 Act. In the absence of any repugnancy/ inconsistency, circulars issued under the 1956
Act will continue to be valid – and can be relied upon for assessing the legal position on a specific aspect.

Concluding Thoughts

It is pertinent to note that the Government’s power to issue such circulars is circumscribed by the 2013 Act
and the Rules framed thereunder – and the MCA Circulars cannot be in conflict with the provisions of the
2013 Act and the rules framed thereunder. In the event of a conflict, the provisions of the 2013 Act and the
rules framed thereunder will prevail, vis-vis the provisions of the executive circular. Hence, the MCA
Circulars can only ‘supplement’ the provisions of the 2013 Act and the rules framed thereunder, and cannot
‘supplant’ the parent statute.

Circulars issued by MCA can “fill in the gaps” in the law passed by Parliament – but cannot be repugnant to
the 2013 Act. In the case of Palaru Ramkrishnaiah v. Union of India[11], it was held that such circulars and
clarifications cannot be contradictory to the principal legislation. If a circular issued by the MCA is
repugnant to any provision of the 2013 Act or the rules framed thereunder, then such a circular shall not be
enforceable, to the extent of such repugnancy.

In India, where the rule of law prevails, an administrative action must be judged by the standard of legality.
Therefore, the meaning of a statutory provision can never be overridden by any circular. In effect, it is the
function of the courts to interpret the law. Hence, no judicial authority can be bound by such executive
circulars – and Courts can independently interpret the provisions of the 2013 Act and the rules framed
thereunder, basis well-established principles of statutory construction.

Further, given the number of circulars issued by the MCA and the ambiguity related to the binding nature of
such circulars, it would be safe to conclude that companies should be cautious while exclusively relying on
such clarificatory circulars for any major decision-making, particularly when such circulars are not in
conformity with the provisions of the 2013 Act or the rules framed thereunder.

NCLAT, NCLT,

National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”)
were established as a part of reforms in India’s Company Law and as a part of reforming Companies Law.
On June 01, 2016, the Ministry of Corporate Affairs (“MCA”) published a notification regarding the
constitution of the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal
(NCLAT) with effect from June 01, 2016. It came as a big-ticket reform as the Companies Act, 1956 was
enacted prior to India opening its markets in 1991 and the periodic amendments to the 1956 Act could not
satisfy the current needs of Industry, market regulators. NCLT and NCLAT were established as per powers
granted to MCA under Section 408 and Section 410 of Companies Act, 2013, respectively. These sections
explain the meaning of NCLT and NCLAT in a clear way and we can look at these sections to get an overview
of NCLT and NCLAT.

Section 408 of Companies Act, 2013 defines NCLT and it specifies that the Central Government shall constitute a
Tribunal to be known as the National Company Law Tribunal composing of President and other Judicial and
Technical members, to exercise and discharge powers and functions as prescribed by the Act or any other power
delegated to them by way of any other enactment or a Notification by Ministry Of Corporate Affairs. Similar to
NCLT, NCLAT was established as per Section 410 of Companies Act which states that the Central Government,
by way of notification shall constitute an Appellate Tribunal to be known as the National Company Law
Appellate Tribunal comprising Chairperson and Judicial and Technical members, for hearing appeals against
the orders of the Tribunal.
However, it provides a Condition that technical members of NCLAT shall not exceed 11 members. Initially
NCLT and NCLAT were given Jurisdiction over the Following matters:

● Board for Industrial and Financial Reconstruction. (“BIFR”)

● The Appellate Authority for Industrial and Financial Reconstruction. (“AAIFR”)
● Jurisdiction and powers relating to winding up restructuring and other such provisions, vested in
the High Courts.
● Company Law Board (“CLB”).

It is important to note that the Company Law Board would cease to exist after the establishment of NCLT
and NCLAT as per Section 466 of Companies Act, 2013.

Difference between NCLT and NCLAT

Though NCLT and NCLAT were established by the virtue of same Companies Act but there is some
difference between them which is explained in the following table:

S. NCLT NCLAT
No

1 NCLT is established as per Section NCLAT is established as per Section 410 of Companies
408 of Companies Act, 2013. Act, 2013.

2 NCLT is a body having original NCLAT is a body having Appellate Jurisdiction.

Jurisdiction.

3 Cases can come to NCLT directly. No case can come to NCLAT directly, it must either come
from NCLT under Section 421 of Companies Act, 2013 or
any other body given in Section 410 of Companies Act,
2013.

4. NCLT does not deal with cases NCLAT is designated as appellate forum for orders passed
involving Competition law or appeals by the National Financial Reporting Authority (“NFRA”)
from the National Financial and Competition Commission of India as per powers
Reporting Authority. (“NFRA”) granted to it under Section 410 (a) and 410 (b) of
Companies Act, 2013 respectively.
 5 NCLT has not replaced the NCLAT as per part XIV of chapter VI of the Finance Act,
Competition Appellate Tribunal. 2017, (which amended Section 2(ba) and 53A of the
(“COMPAT”) Competition Act, 2002 and Section 410 of the Companies
Act, 2013) has replaced the Competition Appellate
Tribunal. (“COMPAT”)

6 NCLT has 16 benches throughout NCLAT has two benches throughout India one at New
India. Delhi and another at Chennai. The Chennai bench of
NCLAT has been notified[1] on 15/03/2020 but is yet to be
functional.

Background of NCLT

The need for a uniform code for adjudicating corporate disputes was first suggested by the Justice Eradi
Committee which was set up by Central Government in the year 1998 for reforming the law related to
insolvency of companies and winding up. The Committee submitted its report in the year 2000 and as per the
recommendation of the Committee, Companies (Second Amendment) Act, 2002 was passed and the
amendment stated that there is a need to constitute National Company Law Tribunal and National Company
Law Appellate Tribunal which will act as a Uniform body for Adjudicating Corporate Disputes. There were
various legal challenges to it and the constitution of NCLT and NCLAT under Companies (Second
Amendment) Act, 2002 were challenged on ground that it is unconstitutional.

However, the constitution bench of Supreme Court in the case of Union of India v. R. Gandhi[2] upheld the
constitutionality of NCLT and NCLAT by giving guidelines relating to number of judicial members, number
of technical members and tenure of members to be followed during the constitution of NCLT and NCLAT.[3]
Though the Union Government did not notify the Constitution of NCLT and NCLAT and instead
incorporated it by way of Companies Act, 2013, even then another legal challenge came in way of
establishment of NCLT and NCLAT in the case of Madras Bar Association vs. Union of India & Anr[4] where
the petitioners challenged the constitution of NCLT and NCLAT under Companies Act,2013 on ground that
the constitution of NCLT and NCLAT does not incorporate and follow the guidelines given by Hon’ble
Supreme Court in the case of Union of India v. R. Gandhi. The Supreme Court of India upheld the
constitutionality of NCLT and NCLAT and stated that following Guidelines needs to be followed while
constituting NCLT and NCLAT:

(i) Qualifications and other terms of the President and Members of the NCLT

The Supreme Court was concerned with the qualifications of the technical Members of the NCLT as the
court in the case of Union of India v. R. Gandhi stated that “only officers who are holding the ranks of
Secretaries or Additional Secretaries alone should be considered for appointment as technical members of the
NCLT” whereas Section 409(3) of Companies Act, 2013 Act states that Secretary to the Government of India
or equivalent officers are eligible for appointment as technical members of NCLT and NCLAT. Therefore,
SC stated that corrections need to be made to Section 409(3) of Companies Act,2013 so that it follows
guidelines made in Union of India v. R. Gandhi.

(iii) Structure of selection committee for the appointment of members

Supreme Court was concerned with selection committee and powers granted to it under S. 412 (2) Of 2013 act
which provided for a 5-member selection committee without a casting vote to the Chief Justice of India (or
nominee) as it was against observations made by SC in sub-para (viii) of para 120 of Union of India v. R.
Gandhi where it stated a 4-member committee to be headed by the Chief Justice of India (or nominee) with a
casting vote. And it thus it held Section 412(2) of the Act, 2013 were not valid and issued direction is issued to
remove the defect.

Transition from CLB to NCLT and NCLAT

As seen earlier the Journey from Company Law Board (“CLB”) to National Company Law Tribunal
(“NCLT”) has not been smooth and has been full of legal challenges in various cases as well as procedural
bottlenecks. Even after legal challenges were overcome by the Judgement of Supreme Court in the case of
Madras Bar Association vs. Union of India & Anr[5] where the Apex Court held that constitution of both
NCLT and NCLAT is constitutionally valid and under Indian Constitution, it is open for the legislature to
establish tribunals as alternatives to the courts as a forum for adjudication on specialized matters, provided
the tribunal in question has all qualitative trappings and competence of the court sought to be replaced. Even
then there were questions regarding the status of pending matters before CLB, BIFR, AAIFR and matters
relating to company’s accounts, freezing of assets, class action suits, conversion of a public company to a
private company which were pending at different High Courts, when their jurisdiction was transferred to
NCLT, the power from existing bodies to NCLT and NCLAT was transferred gradually by the way of
notification. However, cases initiated before the CLB under Companies Act, 1956 were immediately
transferred to the NCLT.

● Proceedings pending before the Board for Industrial and Financial Reconstruction (BIFR), Sick
Industrial Companies (Special Provisions) Act, 1985 (SIC Act”) and Appellate Authority for
Industrial and Financial Reconstruction (AAIFR)would be abated and need to be referred to
NCLT within 180 days of the formation of NCLT for the continuance of old proceedings.
● Competition Appellate Tribunal (“COMPAT”) which used to deal with the appeal of orders
passed by the Competition Commission of India which has been bestowed upon NCLAT by the
passage of Part XIV of Chapter VI of the Finance Act, 2017. This exercise was done with an
intention to rationalise the working of tribunals. Though there have been concerns over
increasing load over NCLAT, the government has gone ahead with it. A possible solution could
be having a dedicated bench at NCLAT to oversee appeals from the Competition Commission of
India.

The below chart explains the how proceedings before old courts would be transferred to NCLT in a Phased
matter:
The above chart briefly explains the system of adjudication of corporate disputes prior to the establishment
of NCLT and after the establishment of NCLT.

Conclusion

NCLT and NCLAT have been established to act as a uniform forum for adjudicating disputes relating to
working of companies where adjudicating it in a timely manner will help in smooth running of the economy.
The earlier regime of the Company Law Board failed miserably because they were not useful in adjudicating
disputes in an effective and time bound manner. The earlier regime had a lot of bottlenecks which did not
help to revive Sick Companies and instead led to prolongation of cases. Though NCLT and NCLAT are doing
great work in streamlining the system, a lot more needs to be done. There is a need for improving the
infrastructures at these Tribunals, increasing the Number of Benches as well as sanctioning of judges which
will help in deciding cases in a time bound and effective manner and thus would reduce precious time and
resources of companies which can be used by companies in growth of economy of India.

Company Law Board,

National Company Law Tribunal was established on July 1, 2016, on the outcome of the Eradi Committee
which was constituted in 1991 under Justice V. Balakrishna Eradi (committee) for examining the existing
laws on the insolvency of companies and winding up of companies with the aim of suggesting reforms to avoid
delay in the proceedings. The constitutional validity of the tribunal was challenged before the supreme court
in the case of Madras Bar Association v. Union of India(2015). The contention raised by the petitioners that
the constitution of NCLT was violative of Article 14 of the Constitution of India, but the supreme court
rejected the petition filed by petitioners and said that legislatures have the power to enact a law which
transfers the cases from courts to tribunals.

Company Law Board

Establishment of Company law board

● Company Law Board was established in May 1991 under Section 10E of Companies Act 1956.
● The powers, function and procedures were governed by the Central Government.
● In the CCompanies Amendment Act, 1998, Companies act authorised the central government to
constitute a board which will be called as the board of the company law which is administered as per
provision of Section 10E of Companies Act, 1956.
● It shall discharge all the powers and functions as conferred on it by the Companies Act, 1956 and by
the central government or any other law.
● But all the powers as discharged by the Company Law Board were ceased with the introduction of
the National Company Law Tribunal in 2002.

Constitution of Company Law Board

The board shall consist of members not more than nine members appointed by the Central Government.
Among the members, one member is appointed by the Central Government and shall be the chairman of the
board.

Powers of Company law board

● The members were given exclusive powers and any acts done by the board cannot be called in
question on the grounds of defect in the constitution, the existence of any vacancy among the
members of the board as per Section 10E(4) of Companies Act, 1956.
● Company law board shall have the same powers as Civil Procedure Code, 1908 while deciding any
proceedings such as:
1. Discovering and inspection of documents or other material objects producible as evidence;
2. Enforcing the attendance of witnesses and requiring the deposits of their expense;
3. Compelling the production of documents;
4. Examining the witnesses on oath;
5. Granting of adjournments;
6. Reception of evidence on affidavits.
● Members of the board were given power under Companies act, 1956 to provide the relief to the
shareholder against the oppression and mismanagement.
● Members of the board were given execution powers and the orders which have been executed by the
board shall be enforceable in the same way as if a court has been executed.
● Member’s of the board shall have the power to regulate its own procedure but they were guided by
the principles of natural justice.

Appeals against the orders of Company Law Board

● Any person who has been aggrieved by the order of the company law board within sixty days (may
extend time period on certain circumstances) from the date of order of CLB shall file an appeal to
the high court.
 ● The essential point to take into consideration is that an appeal cannot be filed to the high court if the
appeal is related to question in fact.
● An appeal would lie in a high court in whose jurisdiction the registered office of the company is
situated.

Enforcement of orders of Company Law Board

As per Section 634A of the Companies Act, 1956 the orders which have been passed by the board is
enforceable in the same way as it has been enforced by the courts. When the board is unable to execute its
orders it may send to the court which has the jurisdiction over the party against whom the order is to be
enforced.

National Company Law Tribunal

Background of National Company Law Tribunal

● High courts were burdened with a huge number of pending cases before NCLT was established and
there was too much of delay in deciding winding up matters, matters on mergers or amalgamations,
complaints filed by the shareholders against oppression and mismanagement all such reasons felt the
need for establishing a special court.
● On Companies (Amendment) Act, 2002 NCLT was formed.
● All the matters which are pending before the high courts now shall stand transferred to NCLT.

Constitution of NCLT
● NCLT was constituted by the Central Government under Section 408 of Companies Act, 2013.
● The members of the tribunal consist of the President of the tribunal, judicial and technical members
of the tribunal.
● The president of the tribunal should be the person who has been a judge of the high court for the
term of five years as per provision of Section 409 of Companies Act, 2013.

Constitution of National Company Law Appellate Tribunal and appeals from orders of the tribunal
● National Company Law Appellate Tribunal shall be constituted by the Central Government under
Section 410 of Companies Act, 2013.
● All the appeals from NCLT shall be filed with NCLAT within forty-five from the date of order of the
tribunal and tribunal shall send copies of an order to the tribunal and also to the parties to appeal as
provided under Section 421 of Companies Act, 2013.

Benches of Tribunal
● Section 419 of Companies Act, 2013 states there shall be a number of benches of the tribunal and
while the principal bench shall be in Delhi.
● NCLT currently has fourteen benches.
● When there is any disagreement of decision among the benches it shall be decided according to the
majority of members opinion.

Civil Court has no jurisdiction

● Section 430 of Companies act, 2013 states that no civil court shall have jurisdiction to decide the
cases in which the tribunal has the right to decide the case.
Need for the replacement of CLB with NCLT
National company law tribunal and National company law appellate tribunal was constituted as a result of
Companies (second amendment) 2002 to replace the existing Company law board and Board for Industrial
and financial reconstruction.
The following are some of the reasons for the replacement of CLB with NCLT:
1. The primary reason is to reduce the burden of high courts.
2. The establishment of NCLT and NCLAT helps in solving disputes faster which in turn helps the
businessman in doing their business at ease.
3. Aggrieved parties who are dissatisfied with decisions and orders were given by the company law
board can appeal to NCLAT.
4. Businessmen and individuals felt there need to be standard jurisdiction to resolve the dispute within
concerned time and with less cost.
5. With replacing NCLT the shareholders and other individuals were of the opinion along with
resolving the dispute faster, it also helps in having an efficient free flow of management.

Explaining the Impact of Replacement of Company Law Board with National Company Law Tribunal
through Case laws
In MAIF investment India PTE. Limited v. Ind Bharath Power Infra Limited and ors , an appeal was filed
against the NCLT( Hyderabad) where NCLT refused to entertain the petition seeking a rectification in the
register of members as per Section 58 of companies act, 2013. It stated the reason for its dismissal that issues
raised were to be decided as per the Arbitration Act, 1956 and Insolvency and Bankruptcy Code.
But in the case of Shashi Prakash Khemka v. NEPC Micon and ors Supreme Court held that all the disputes
which arose after the Companies Act, 2013 civil courts would be declined to render the remedy and the power
would be vested in the NCLT. So in the above case, NCLT shall decide the case as per Companies Act, 2013.

Class Action
Section 245 of Companies Act, 2013 an application may be filed to the tribunal by either the members of the
company or by the depositors or on the behalf of the members or the depositors stating that affairs have been
conducted in the manner which is prejudicial to the interest of the company and tribunal shall pass such
orders which is binding on the company, members, depositors, audit firm, advisors and all the persons
associated with the company.

Oppression and mismanagement

Section 241 of companies act, 2013 states that any member of the company who has the right to complain to
the tribunal as per Section 244 of Companies Act, 2013 shall file a complaint to tribunal stating that:
● Affairs of the company are conducted in such a manner which is prejudicial to the public interest or
oppressive to him or to any member of the company or which is prejudicial to the company.
● A material change which has been brought by the company which is against the interest of creditors
of the company, debenture holders, shareholders of the company and it has brought significant
change in the management or control of the company.
● And the tribunal shall decide the matter on filing the application.

Deregistration of companies
Section 7(7) of companies act, 2013 states if tribunal comes to the notice that the company at the of
incorporation of the company furnished false or incorrect information or by suppressing any material facts,
information or any declarations is filed by the company the tribunal may pass any one of the orders as
mentioned below:
Pass such orders as it thinks fit.
● Pass orders for winding of the company.
● Direct the liability unlimited.
Refusal to transfer shares
Section 58 of Companies act, 2013 states a Private company which is limited by the shares or the public
company which refuses to register the transfer of shares of the transferor, the company shall within thirty
days of transfer send a notice to the transferor, a transferee of such refusal.
● The transferee in return shall file the appeal to the tribunal within thirty days from the date of
receipt of the notice and in case no notice is sent by the company to the transferee, the transferee
shall file an appeal to the tribunal within sixty days from the date of the instrument of the transfer.
● The tribunal shall hear the orders and after hearing such order shall either reject the appeal or order
the company.
1. To transfer the shares within ten days of order.
2. Direct rectification of the register and also direct the damages to be paid if any sustained by the
aggrieved party.

Amicus curiae
Rule 61 of National Company Law Tribunal Rules, 2016 states:
● It is the discretion of the tribunal to permit any person or professional to communicate its views on a
tribunal or on any points or any legal issues as assigned to such amicus curiae.
● Tribunal also permits amicus curiae to have access to the pleading of the parties and they may also
submit timely observation.
● Tribunal shall direct either of the party to proceedings involving on a point on which the opinion of
amicus curiae has sought.
● Judgment and any opinion made by the judge shall be transferred to the parties and amicus curiae.

Advantages of NCLT
Advantages of NCLT are as follows:

Resolving the disputes at ease and speedier

NCLT is not bound to follow the procedure of CPC, they are guided by the rules law down in Companies act,
2013 and while rendering any decision they are bound to follow the principles of Natural justice principles
which helps to resolve disputes at ease and speedier.

Establishment of various benches across India

NCLT currently has fourteen benches with the principal bench at Delhi. By establishing various branches
across India it helps in providing justice in a Fastrack manner.

Specialisation of courts
NCLT and NCLAT are specialised courts which have exclusive jurisdiction and which is established by the
Ministry Of Corporate Affairs to deal only with corporate affairs. It has reduced the burden on various
courts and forums.

Single forum to decide the cases

On the introduction of special courts( NCLT and NCLAT) it reduced the litigation procedures pending
before various courts like on high courts, company law board, board for industrial and financial
reconstruction and appellate authority for industrial and financial reconstruction, and which are now to be
heard and decided by the NCLT and NCLAT.
Winding up of Companies
Companies which want to wound up can do so within a limited period of time.

Class action claims can be filed

When the shareholders of a company are of the opinion that affairs of the company have been conducted in
the manner which is prejudicial to the interest of the company then shareholders can file a class action to the
NCLT.

Opening employment opportunities to professionals

It opened numerous opportunities to company secretaries to appear before NCLT and to help in advising and
assisting the parties and companies.

Conclusion
Over the years it has been proved that the National Company Law Tribunal has played a significant role in
resolving corporate issues. By providing speedier remedies to the parties and by opening employment
opportunities to professionals it has gained a significant scope.

Regional Directors:

Section 458 of the Companies Act, 2013 (hereinafter referred to as “Act, 2013”) empowers the Central
Government to delegate its powers and functions to the Regional Director or the Registrar of Companies
wherever required. In exercise of its powers under Section 458, the Central Government vide notification
S.O. 4090(E) dated 19th December 2016, has delegated the powers and functions vested in it under certain
sections of the Act, 2013 to the Regional Directors based at Mumbai, Kolkata, Chennai, New Delhi,
Ahmedabad, Hyderabad and Shillong. This is subject to the condition that the Central Government may
revoke such delegation of powers or may itself exercise the powers under the said sections, if in its opinion
such a course of action is necessary in the public interest. The notifications issued by the Ministry of
Corporate Affairs (‘MCA’), , dated 10th Ju 2012 and 21st May 2014 shall accordingly be superseded. The
effective date of notification S.O. 4090(E) dated 19th December 2016 is 19th December 2016 when the said
notification got published in the Official Gazette. The sections for which the Central Government has
delegated its powers and/ or functions have been listed below:- Serial No. Section No. Particulars of power of
Central Government Remarks 1. 8(4)(i) A company registered under this section shall not alter the provisions
of its memorandum or articles except with the previous approval of the Central Government. A Section 8
Company will need previous approval of the Regional Director before making alterations in its memorandum
or articles. The license is however currently granted by the Registrar of Companies.Power to grant license of
Section 8 company by Registrar of Companies comes vide MCA Notification dated 21st May, 2014. Under the
present Notification dated 19th December, 2016, only the alteration in memorandum or articles of Section 8
company will be permitted for the prior approval of the Regional Director. (Previously, vide MCA
notification dated 21st May, 2014; the previous approval of Regional Director was required in order to make
alteration of memorandum for conversion of Section 8 company to another kind of company. If the
memorandum of Section 8 company was to be altered for any other reason, then the previous approval of
Registrar of Companies was required.) However, the license of incorporation of Section 8 company will still
be granted by Registrar of Companies. 2. 8(6) The Central Government may, by order, revoke the licence
granted to a company registered under this section if the company contravenes any of the requirements of
this section or any of the conditions subject to which a licence is issued or the affairs of the company are
conducted fraudulently or in a manner violative of the objects of the company or prejudicial to public
interest, and without prejudice to any other action against the company under this Act, direct the company to
convert its status and change its name to add the word “Limited” or the words “Private Limited”, as the case
may be, to its name and thereupon the Registrar shall, without prejudice to any action that may be taken
under sub-section (7), on application, in the prescribed form, register the company accordingly: Provided
that no such order shall be made unless the company is given a reasonable opportunity of being heard:
Provided further that a copy of every such order shall be given to the Registrar. The license of a Section 8
Company will be revoked by the Regional Director if the company contravenes any of the requirements of
Section 8 of the Act, 2013. Further, Regional Director has the power to direct the company to convert its
status and change its name to add the word “Limited” or the words “Private Limited”, as the case may be, to
its name. After the order of Regional Director, the Registrar will register the Company accordingly. The
grant of license is however made by the Registrar of Companies. Power to grant license of Section 8 company
by Registrar of Companies comes vide MCA Notification dated 21st May, 2014. The license of incorporation
of Section 8 company will still be granted by the Registrar of Companies. 3. Section 13(4) The alteration of
the memorandum relating to the place of the registered office from one State to another shall not have any
effect unless it is approved by the Central Government on an application in such form and manner as may be
prescribed. In order to shift the registered office from one state to another, an approval from the Regional
Director is required. The same is in line with the current powers to the Regional Director. 4. Section 13(5)
The Central Government shall dispose of the application under sub-section (4) within a period of sixty days
and before passing its order may satisfy itself that the alteration has the consent of the creditors, debenture-
holders and other persons concerned with the company or that the sufficient provision has been made by the
company either for the due discharge of all its debts and obligations or that adequate security has been
provided for such discharge. Though the time limit for disposal of application for such shifting has been
prescribed to be 60 days, practically it takes much longer than thatin spite of obtaining the requisite NoCs.
This is only due to administrative delays which need to be improved upon at the offices of the Regional
Directors. 5. Section 16 Rectification of name of company- If, through inadvertence or otherwise, a company
on its first registration or on its registration by a new name, is registered by a name which,— (a) in the
opinion of the Central Government, is identical with or too nearly resembles the name by which a company in
existence had been previously registered, whether under this Act or any previous company law, it may direct
the company to change its name and the company shall change its name or new name, as the case may be,
within a period of three months from the issue of such direction, after adopting an ordinary resolution for the
purpose; (b) on an application by a registered proprietor of a trade mark that the name is identical with or
too nearly resembles to a registered trade mark of such proprietor under the Trade Marks Act, 1999, made to
the Central Government within three years of incorporation or registration or change of name of the
company, whether under this Act or any previous company law, in the opinion of the Central Government, is
identical with or too nearly resembles to an existing trade mark, it may direct the company to change its
name and the company shall change its name or new name, as the case may be, within a period of six months
from the issue of such direction, after adopting an ordinary resolution for the purpose. Regional Director has
the power to order a company to rectify its name in case the name of the company is identical with or too
nearly resembles the name by which a company in existence had been previously registered, whether under
the Act, 2013 or any previous company law. Regional Director has the power to order rectification of name of
the company, if an application by a registered proprietor of a trade mark is made to him that the name is
identical with or too nearly resembles to a registered trade mark of such proprietor under the Trade Marks
Act, 1999. 6. Section 87 Rectification by Central Government in register of charges– 87. (1) The Central
Government on being satisfied that— (i) (a) the omission to file with the Registrar the particulars of any
charge created by a company or any charge subject to which any property has been acquired by a company
or any modification of such charge; or (b) the omission to register any charge within the time required under
this Chapter or the omission to give intimation to the Registrar of the payment or the satisfaction of a charge,
within the time required under this Chapter; or (c) the omission or mis-statement of any particular with
respect to any such charge or modification or with respect to any memorandum of satisfaction or other entry
made in pursuance of section 82 or section 83, was accidental or due to inadvertence or some other sufficient
cause or it is not of a nature to prejudice the position of creditors or shareholders of the company; or (ii) on
any other grounds, it is just and equitable to grant relief, it may on the application of the company or any
person interested and on such terms and conditions as it may seem to the Central Government just and
expedient, direct that the time for the filing of the particulars or for the registration of the charge or for the
giving of intimation of payment or satisfaction shall be extended or, as the case may require, that the omission
or mis-statement shall be rectified. ADVERTISEMENT Ads by The Regional Director has the power to grant
extension of time for filing of the particulars or for the registration of the charge or for the giving of
intimation of payment or satisfaction of charges so that the omission of the same can be rectified. The same is
in line with the current powers of the Regional Director. 7. 111(3) The company shall not be bound to
circulate any statement as required by clause (b) of sub-section (1), if on the application either of the
company or of any other person who claims to be aggrieved, the Central Government, by order, declares that
the rights conferred by this section are being abused to secure needless publicity for defamatory matter.
Regional Director may pass an order on an application made either by the company or any other aggrieved
person and direct the company not to circulate the members resolution if he is satisfied that such right
granted by Section 111 of Act, 2013, is abused to receive needless publicity for defamatory matter. The same
is in line with the current powers to the Regional Director. 8. 140(1) The auditor appointed under section 139
may be removed from his office before the expiry of his term only by a special resolution of the company,
after obtaining the previous approval of the Central Government in that behalf in the prescribed manner:
Provided that before taking any action under this sub-section, the auditor concerned shall be given a
reasonable opportunity of being heard. An auditor may be removed from his office before expiry of his term
after obtaining previous approval of Regional Director. Before granting approval for removal of auditor,
Regional Director shall ensure whether a reasonable opportunity of being heard is given to the concerned
auditor. The same is in line with the current powers to the Regional Director. 9. 230(5) (Yet to be enforced) A
notice under sub-section (3) along with all the documents in such form as may be prescribed shall also be sent
to the Central Government, the income-tax authorities, the Reserve Bank of India, the Securities and
Exchange Board, the Registrar, the respective stock exchanges, the Official Liquidator, the Competition
Commission of India established under sub-section (1) of section 7 of the Competition Act, 2002 (12 of 2003),
if necessary, and such other sectoral regulators or authorities which are likely to be affected by the
compromise or arrangement and shall require that representations, if any, to be made by them shall be made
within a period of thirty days from the date of receipt of such notice, failing which, it shall be presumed that
they have no representations to make on the proposals. When a meeting of creditors or class of creditors and
members or class of members or the debenture-holders of the company is organised pursuant to an order of
Tribunal with regard to compromise or make an arrangement with creditors and members; the notice of
meeting along all other relevant documents shall be sent to Regional Director. Regional Director shall make
representations on the proposed compromise or arrangement within a period of thirty days from the date of
receipt of notice of the meeting. 10. 233(2) (Yet to be enforced) The transferee company shall file a copy of the
scheme so approved in the manner as may be prescribed, with the Central Government, Registrar and the
Official Liquidator where the registered office of the company is situated. In case of merger or amalgamation
of two or more small companies or between a holding company and its wholly-owned subsidiary company or
such other class or classes of companies as may be prescribed, the transferee company shall file a copy of the
scheme to the Regional Director. 11. 233(3) (Yet to be enforced) On the receipt of the scheme, if the Registrar
or the Official Liquidator has no objections or suggestions to the scheme, the Central Government shall
register the same and issue a confirmation thereof to the companies. The scheme of merger or amalgamation
shall be registered by Regional Director in case the Registrar or the Official Liquidator has no objections or
suggestions to the scheme. Regional Director shall issue a confirmation of registration of scheme once it the
same is registered by him. 12. 233(4) (Yet to be enforced) If the Registrar or Official Liquidator has any
objections or suggestions, he may communicate the same in writing to the Central Government within a
period of thirty days: Provided that if no such communication is made, it shall be presumed that he has no
objection to the scheme. Any objections or suggestions on the scheme of merger or amalgamation shall be
communicated in writing to Regional Director by Registrar or Official Liquidator within a period of thirty
days. 13. 233(5) (Yet to be enforced) If the Central Government after receiving the objections or
suggestions or for any reason is of the opinion that such a scheme is not in public interest or in the interest of
the creditors, it may file an application before the Tribunal within a period of sixty days of the receipt of the
scheme under sub-section (2) stating its objections and requesting that the Tribunal may consider the scheme
under section 232. Regional Director shall file an application before the Tribunal in case he is of the opinion
that the proposed scheme is not in public interest or in the interest of the creditors within a period of sixty
days of the receipt of the scheme stating its objections and requesting that the Tribunal may consider the
scheme under section 232. 14. 233(6) (Yet to be enforced) On receipt of an application from the Central
Government or from any person, if the Tribunal, for reasons to be recorded in writing, is of the opinion that
the scheme should be considered as per the procedure laid down in section 232, the Tribunal may direct
accordingly or it may confirm the scheme by passing such order as it deems fit: Provided that if the Central
Government does not have any objection to the scheme or it does not file any application under this section
before the Tribunal, it shall be deemed that it has no objection to the scheme. Tribunal on receipt of an
application from Regional Director is of the opinion that the scheme should be considered as per the
procedure laid down in section 232, the Tribunal may confirm such scheme by passing such order as it deems
fit. In case no application is received by the tribunal from Regional Director, it shall be presumed that the
Central Government has no objection to the scheme. 15. First proviso to 272(4)[In notification erroneously
written as first proviso to Section 272(3)] (Yet to be enforced) Provided that the Registrar shall not present a
petition on the ground that the company is unable to pay its debts unless it appears to him either from the
financial condition of the company as disclosed in its balance sheet or from the report of an inspector
appointed under section 210 that the company is unable to pay its debts: Registrar of Companies has the
power to present a petition for winding up of company on the ground that the company is unable to pay its
debts when he is satisfied either from the financial condition of the company as disclosed in its balance sheet
or from the report of an inspector that the company is unable to pay its debts. 16. Second proviso to 272(3)[In
notification erroneously written as first proviso to Section 272(3)] (Yet to be enforced) Provided further that
the Registrar shall obtain the previous sanction of the Central Government to the presentation of a petition:
Before filing petition of winding up of company, the Registrar will require the prior sanction of Regional
Director. 17. 348(1) (Yet to be enforced) 348. (1) If the winding up of a company is not concluded within one
year after its commencement, the Company Liquidator shall, unless he is exempted from so doing either
wholly or in part by the Central Government, within two months of the expiry of such year and thereafter
until the winding up is concluded, at intervals of not more than one year or at such shorter intervals, if any,
as may be prescribed, file a statement in such form containing such particulars as may be prescribed, duly
audited, by a person qualified to act as auditor of the company, with respect to the proceedings in, and
position of, the liquidation,— (a) in the case of a winding up by the Tribunal, with the Tribunal; and (b) in
the case of a voluntary winding up, with the Registrar: Provided that no such audit as is referred to in this
sub-section shall be necessary where the provisions of section 294 apply. The information as to pending
liquidations when the winding up of a company is not concluded within one year after its commencement, the
Company Liquidator shall, unless he is exempted from so doing either wholly or in part by Regional Director
shall file a statement duly audited by an auditor of the company stating the proceedings and position of
liquidation to tribunal in the case of a winding up by the Tribunal or Registrar in the case of a voluntary
winding up. 18. 361 (Yet to be enforced) Summary procedure for liquidation- 361. (1) Where the company to
be wound up under this Chapter, — (i) has assets of book value not exceeding one crore rupees; and (ii)
belongs to such class or classes of companies as may be prescribed, the Central Government may order it to
be wound up by summary procedure provided under this Part. (2) Where an order under sub-section (1) is
made, the Central Government shall appoint the Official Liquidator as the liquidator of the company. In case
of winding up of company whose book value of assets is less than one crore rupees or such company belongs
to such class or classes of companies as may be prescribed, the Regional Director may pass an order that such
company be wound up by summary procedure as specified under Section 361 of the Act, 2013. 19. 362 (Yet to
be enforced) Sale of assets and recovery of debts due to Company- 362. (1) The Official Liquidator shall
expeditiously dispose of all the assets whether movable or immovable within sixty days of his appointment. (2)
The Official Liquidator shall serve a notice within thirty days of his appointment calling upon the debtors of
the company or the contributories, as the case may be, to deposit within thirty days with him the amount
payable to the company. (3) Where any debtor does not deposit the amount under sub-section (2), the Central
Government may, on an application made to it by the Official Liquidator, pass such orders as it thinks fit. In
case of winding up of company mentioned under Section 361 of Act, 2013, the official liquidator appointed by
Regional Director shall serve a notice within thirty days of his appointment calling upon the debtors of the
company or the contributories, as the case may be, to deposit within thirty days with him the amount payable
to the company. If any debtor does not deposit the amount due to him, then Regional Director shall on an
application made to him by the Official Liquidator, pass such orders as it thinks fit. 20. 364 (Yet to be
enforced) Appeal by creditor- 364. (1) Any creditor aggrieved by the decision of the Official Liquidator under
section 363 may file an appeal before the Central Government within thirty days of such decision. (2) The
Central Government may after calling the report from the Official Liquidator either dismiss the appeal or
modify the decision of the Official Liquidator. (3) The Official Liquidator shall make payment to the
creditors whose claims have been accepted. (4) The Central Government may, at any stage during settlement
of claims, if considers necessary, refer the matter to the Tribunal for necessary orders. An aggrieved creditor
may file an appeal before Regional Director within thirty days of decision taken by Official Liquidator.
Regional Director may after calling the report from the Official Liquidator either dismiss the appeal or
modify the decision of the Official Liquidator. 21. 365 (Yet to be enforced) Order of dissolution of company-
365. (1) The Official Liquidator shall, if he is satisfied that the company is finally wound up, submit a final
report to— (i) the Central Government, in case no reference was made to the Tribunal under subsection (4)
of section 364; and (ii) in any other case, the Central Government and the Tribunal. (2) The Central
Government, or as the case may be, the Tribunal on receipt of such report shall order that the company be
dissolved. (3) Where an order is made under sub-section (2), the Registrar shall strike off the name of the
company from the register of companies and publish a notification to this effect. Regional Director or
Tribunal (in case reference was made under 364(4) of Act, 2013,) on receipt of final report of Official
Liquidator, shall order dissolution of company. 22. clause (i) of the proviso to 399(1) Inspection, production
and evidence of documents kept by Registrar Provided that the rights conferred by this sub-section shall be
exercisable— (i) in relation to documents delivered to the Registrar with a prospectus in pursuance of section
26, only during the fourteen days beginning with the date of publication of the prospectus; and at other times,
only with the permission of the Central Government; and When any person requires inspection of any
documents delivered to the Registrar with a prospectus, at any other time other than during 14 days
beginning with the date of publication of the prospectus, then such person is required to obtain the
permission of the Regional Director. 23. 442 Mediation and Conciliation Panel- 442. (1) The Central
Government shall maintain a panel of experts to be called as the Mediation and Conciliation Panel consisting
of such number of experts having such qualifications as may be prescribed for mediation between the parties
during the pendency of any proceedings before the Central Government or the Tribunal or the Appellate
Tribunal under this Act. Regional Director will be responsible for maintaining a panel of experts to be called
as the ‘Mediation and Conciliation Panel’ for mediation between the parties during the pendency of any
proceedings before the Central Government or the Tribunal or the Appellate Tribunal under this Act.
Conclusion The delegation of powers by Central Government is done in order to ensure smooth functioning
of business. The administrative responsibilities can be decentralised in order achieve specialisation of work
and remove bottlenecks from the system. The Central Government has been also empowered under Section
458 to revoke such delegation of powers or to exercise the powers itself if it is of the opinion that it is for the
betterment of the public and stakeholders at large. In the aforementioned table few sections of the Act, 2013
has not yet been enforced. We need to wait for the notification enforcing such sections. As soon as such
sections are enforced the powers of Central Government will be delegated to the Regional Director, until then
the powers and functions will be vested upon the Central Government.

ROC

The Registrar of Companies ( ROC ) is an office under the Ministry of Corporate Affairs (MCA), which is the
body that deals with the administration of companies and Limited Liability Partnerships (LLPs) in India. At
present, Registrar of Companies (ROCs) are operating in all the major states/UT’s.

However, states like Tamil Nadu and Maharashtra, have more than one ROC. Some ROCs have jurisdiction
of two or more states/UT like Chennai ROC has jurisdiction of Tamil Nadu state and UT of Andaman and
Nicobar Islands.

As per section 609 of the Companies Act, 1956, the ROCs are tasked with the principal duty of registering
both the companies and LLPs across the states and the union territories. Currently, after the introduction of
Companies Act, 2013, the same powers conferred under section 609 is provided under section 396 of the
Companies Act, 2013 to the ROCs.

The Registrar of Companies also certifies that LLPs (Limited Liability Partnerships) comply with the legal
requirements contained in the Limited Liability Partnership Act, 2008.

Registrar of Companies maintains a registry of records concerning companies which are registered with them
and allows the general public to access this information on payment of a stipulated fee. The Central
Government preserves administrative control over the Registrar of Companies with the help of Regional
Directors. As of today, there are seven Regional Directors, supervising the operations of ROCs within their
relevant regions.

Functions of ROC
 ● The ROC takes care of registration of a company (also referred to as incorporation of the
company) in the country.
● It completes regulation and reporting of companies and their shareholders and directors and
also administers government reporting of several matters which includes the annual filing of
numerous documents.
● The Registrar of Companies plays an essential role in fostering and facilitating business
culture.
● Every company in the country requires the approval of the ROC to come into existence. The
ROC provides an incorporation certificate which is conclusive evidence of the existence of
any company. A company, once incorporated, cannot cease unless the name of the company is
struck off from the register of companies.
● Among other functions, it is worthy to note that the Registrar of Companies could also ask
for supplementary information from any company. It could search its premises and seize the
books of accounts with the prior approval of the court.
● Most importantly, the Registrar of Companies could also file a petition for winding up of a
company.

Jurisdiction of ROC

The ROCs are located in different states/UTs and the companies must file registration applications with the
ROCs under whose jurisdiction their principal place of business is located. All companies must subsequently
file annual forms only with the ROC from where they have obtained company registration. You can find the
details of all the ROCs here.

Company Registration by ROC

No company can come into existence by itself. It requires a certificate of incorporation issued by the Registrar
of Companies after the finalization of several statutory requirements. As part of the statutory process, the
promoters need to submit several documents to the Registrar of Companies.

The documents to be submitted to the ROC include Memorandum of Association (MoA), Articles of
Association (AoA), the pre-incorporation agreement for appointing directors/ managing directors and the
declaration by an authorized person confirming that requirements relating to registration have been adhered
to.

After authenticating the documents, the ROC inputs the company’s name in the register of companies and
releases the certificate of incorporation. The Registrar together with the certificate of incorporation also
issues a certificate of commencement of business. A public limited company is required to get this certificate
prior to commencing business.

ROC Refusal for Company Registration

ROC can refuse to register a company on various grounds. The Memorandum of Association (MOA) which is
filled with the registrar comprises five clauses viz. name clause; objects clause; registered office clause;
capital clause and liability clause.
The registrar needs to ensure that no registration is allowed for companies having an objectionable name.
The registrar could also decline to register any company which has unlawful objectives.

Role of ROC After the Registration of a Company

There is no end to the association of the ROC and a company. For instance, a company might require
changing its name, objectives or registered office. In every such instance, a company would have to intimate
the ROC after completion of the formalities.

Filing Resolutions With ROC

As per the provisions contained in section 117 of the Companies Act, 2013, every resolution is required to be
filed with the ROC within 30 days of being passed. The Registrar of Companies needs to record all such
resolutions. The Companies Act, 2013, has also laid down the penalty in case of failure to file the resolutions
with the registrar within the stipulated time.

In other words, a company is required to intimate the Registrar of Companies concerning all of its activities
which includes appointing directors or managing directors, issuing prospectus, appointing sole-selling agents,
or the resolution regarding voluntary winding up, etc.

Filing Forms With ROC

The companies must file annual forms with the ROC as specified under the Companies Act and Rules. The
compliance of the company after its establishment includes filing forms with the ROC within the specified
due dates. They will have to pay a huge penalty when they do not file forms within the due dates.

The annual forms to be filed with the ROC include filing the reconciliation of share capital audit report,
return of deposits, submission of director KYC for DIN holders, annual company accounts, annual company
returns, etc.

ROC Filing Fees

The fees to file forms and various documents with the ROC differs based on the authorised share capital of
the company. The ROC fees for filing forms, including AOC-4 and MGT-7, are stated below:

Nominal Share Capital Fee applicable

 Less than 1,00,000 Rupees 200 per document

1,00,000 to 4,99,999 Rupees 300 per document

5,00,000 to 24,99,999 Rupees 400 per document

25,00,000 to 99,99,999 Rupees 500 per document

1,00,00,000 or more Rupees 600 per document

The ROC fees for ROC services are as follows:

Particulars Fees

File Inspection Rupees 100

 Charge Inspection Rupees 100

Certificate of Incorporation Rupees 100

Other certified copies Rupees 25 per page

Public Trustee or Advisory Committee & SFIO -Their powers andfunctions-

Introduction to Serious Fraud Investigation Office (SFIO)

Serious Fraud Investigation Office (SFIO), like the name suggests, is a fraud investigation agency set up to
solve serious, complex frauds under the Companies Act, 2013. It is a statutory institution meant to resolve
frauds in the central services and others.

Understanding Serious Fraud Investigation Office (SFIO)

The statutory was set up in 2003 after a resolution that resolves frauds under the Companies Act of 2003,
under the Ministry of Corporate Affairs. The experts at the SFIO are responsible for detecting and resolving
crimes while working in tandem with the Income Tax Department and the Central Bureau of Investigation.
The Office came into force in the aftermath of the stock market scams throughout the 1990s until 2000s, that
had cost the public and the government’s money, leading to the closure of many small and budding businesses
too. The role of non-banking financial companies too was negligent, which the SFIO helped establish order in.
To tackle these whitecollared crimes, Naresh Chandra Committee on Corporate Governance recommended
the establishment of SFIO under the Vajpayee Government. SFIO is a multidisciplinary organization that
has experts on forensic auditing, technology and IT, law and company law, taxation, capital markets,
accountancy and more. The Director of the Office is close to the rank of a Joint Secretary to the GOI. Even
when the company has no visible fraud, the SFIO looks into whether the Board is equitable, that there is no
oppression on the minority shareholders.

Highlights of Serious Fraud Investigation Office (SFIO)

SFIO cannot, by its own virtue, take up a case. The body only acts upon the order given by the Union
Government. When the SFIO is active on the case, the investigation is stringent and vicious. SFIO also has
the powers of arrest to arrest people from and involved in the fraud, though they’re specific to Director,
Additional Director and Assistant Director. The prime cases handled by SFIO include the Satyam Scam and
the Deccan Chronicle Holding Ltd (DCHL).

Jurisdiction of Courts

Jurisdiction has not been explained in the Code of Civil Procedure. In simple words, it can be described as
the power of the court to settle the matter. The Indian Judiciary has invoked the ancient legal maxim ‘Ubi jus
Ibi Remedium’, which means that where there is a right there is a remedy. The judicial forum must have
jurisdiction to deal with the matter. Hence, the Jurisdiction commonly rests where the crime is committed.

Meaning of jurisdiction

Jurisdiction is defined as the limit of judicial authority or extent to which a court of law can exercise its
authority over suits, cases, appeals etc. A 1921 Calcutta High Court judgement in the case of Hriday Nath
Roy Vs Ram Chandra sought to explain the meaning of the term ‘Jurisdiction’ in detail. An investigation of
the cases in the texts shows several attempts to explain the word Jurisdiction which has been declared to be
the power to hear and determine the issues of law and the fact or the authority by which their judicial powers
take knowledge of facts and decide causes or the authority to hear and decide the legal dispute or the power
to hear and determine the subject matter in the dispute among the parties to a suit and to adjudicate or
exercise any judicial power over them or the ability to hear, determine and declare judgement on issues
before the court or the power or authority which is given to a court by government to understand and learn
causes between parties and to give a judgement into the effect or the power to enquire into the facts to apply
the law to pronounce the Judgement and put it into execution.

Lack of jurisdiction and irregular exercise of jurisdiction

Whenever the suit is made before the court the initial issue is to decide whether the court has jurisdiction to
deal with the matter. If the court has all the three territorial, pecuniary or subject matter jurisdiction then
simply the court has the power to deal with any of the cases. If the court does not have any of the jurisdiction
then it will be recognised as lack of jurisdiction and irregular exercise of jurisdiction. When the court does
not have jurisdiction to decide the case then such decision will be regarded as void or voidable depending
upon the circumstances.

The basis to determine jurisdiction

Jurisdiction is determined mainly on the grounds of:

1. Fiscal value;
2. Geographical boundaries of a court;
3. The subject matter of court.

So, the Court, before accepting notice of crime, need to take into consideration the following characteristics:

● The Fiscal value of the trial.

● The specialities of the case.
● The regional limits of the court.

It is not only suitable that panel should have any right to deal with the issue or that the court has a pecuniary
jurisdiction of the court has a local jurisdiction, but the court must be able to grant the compensation in such
matter. In the case of Official Trustee Vs Sachin Nath, the court held that in order to deal with the topic the
court must not be the only jurisdiction to decide a specific matter but also the court has the ability to give the
order for which it is examined.

Courts and Tribunals

Basis for Tribunal Court

comparison

Meaning Tribunal can be defined as minor Courts refer to the part of a legal system
courts that resolve conflicts arising which is organised to give their judgement
in special cases. on civil and criminal cases.
 Decision Official payment Acquittal, judgement, Decree, conviction.

Deals with Particular cases Different types of cases

Headed by Chairperson and other judicial Judges or panel of judges or magistrate

members.

Jurisdiction of foreign courts

A foreign court is described as a court outside India and not authorised or continued by the authority of the
Central Government, and a foreign judgement means a judgement of a foreign court. In other words, a
foreign judgement means an adjudication by a foreign court upon a matter before it. The following
conditions would give power to the foreign courts to adjudicate a matter presented before it:

1. When the person is a subject of a foreign country in which the judgement has been obtained.
2. If he was a resident of a foreign country when the action was commenced and the summons was
served on him.
3. When the person is in the character of plaintiff chooses the foreign court as the forum for taking
action in which forum he issued later.
4. When the party on summons voluntarily appeared.
5. When through an agreement, a person has agreed to present himself to the forum in which the
judgement is obtained.

Kinds of jurisdiction

Territorial or local jurisdiction

Under this territorial or local jurisdiction, the geographical limits of a court’s authority are clearly delineated
and specified. It cannot exercise authority beyond that geographical/ territorial limit. For example, if a
certain crime is committed in Madhya Pradesh, only the courts of law within the borders of Madhya Pradesh
can hear and decide the case. Furthermore, Section 16 of the Code of Civil Procedure explains the territorial
jurisdiction on the grounds of the location of the immovable property. In the case of Harshad Chiman Lal
Modi Vs D.L.F Universal Ltd , the court interpreted Section 16 that the suit pertaining to immovable
property should be brought to the court. The court does not have the power to decide the rights of property
which are not situated. However, the court can still pass a relief if the opposite party agrees to try the suit in
such a case.

Pecuniary jurisdiction

Pecuniary means ‘related to capital.’ It approaches the question of whether the court is competent to try the
case of the financial value. The code allows analysing the case unless the suit’s value exceeds the financial
limit of the court. Section 15 of the Code of Civil Procedure commands the organisation of the suit in the
court of the low grade. It refers to pecuniary jurisdiction of Civil court. It is a course of the method and it
does not affect the jurisdiction of the court. The main objective of establishing pecuniary jurisdiction is to
prevent the court of a higher level from getting burdened and to provide assistance to the parties. However,
the court shall interfere if it finds the judgment to be wrong. For example, ’A ’wants to accuse ‘B’ due to a
violation of the contract to obtain Rs 5000 in Bombay. The Bombay High Court has original jurisdiction and
small causes court with the jurisdiction up to Rs 50000. So, a suit to obtain Rs 5000 should ideally be dealt
with small causes court. In the case of Karan Singh Vs Chaman Paswan the plaintiff filed a suit in the
subordinate court involving an amount of Rs 2950, but the court rejected the case. Later his next appeal was
allowed by the High Court, but it ordered him to pay the deficit amount. The appellant contested that the
decision of the district court will be a nullity, but the High Court dismissed the claim. Later the Supreme
Court confirmed the decision of the High Court declaring that the decision of district court won’t be void.

Jurisdiction as to the subject matter

The subject matter can be defined as the authority vested in a court to understand and try cases concerning a
special type of subject matter. In other words, it means that some courts are banned from hearing cases of a
certain nature. No question of choices can be decided by the court which do not have subject matter
jurisdiction. Section 21 of the Code of Civil Procedure is related to the stage challenging the jurisdiction. For
Example, “Ranveer”, a resident of Sonipat bought a food item of ‘AA’ brand that was plagued with pests. He
should prosecute ‘ZZ’ company in Sonipat District forum rather than District Civil Court of Sonipat.

Original and appellate jurisdiction

Appellate jurisdiction refers to the court’s authority to review or rehearsal the cases that have been already
decided in the lower courts. In the Indian circumstances, both the High Court and Supreme Court have the
appellate jurisdiction to take the subjects that are bought in the form of appeals.

Original Jurisdiction refers to the court’s authority to take notice of cases that could be decided in these
courts in the first instance itself. Unlike appellate jurisdiction wherein courts review the previously decided
matter, here the cases are heard afresh.

Exclusive and concurrent jurisdiction

In Civil Procedure, exclusive jurisdiction means where a single court has the authority to decide a case to the
rejection of all the courts. This jurisdiction is decided on the basis of the subject matter dealt with by a
specific court. For example, the U.S District courts have particular jurisdiction on insolvency topics.

Concurrent jurisdiction exists where two or more courts from different systems simultaneously have
jurisdiction over a particular case. In this situation, parties will try to have their civil or criminal case heard
in the court that they perceive will be most favourable to them.

General and special jurisdiction

General jurisdiction means that general courts do not limit themselves to hearing only one type of cases. This
type of jurisdiction means that a court has the power to hear all types of cases. So the court that has general
jurisdiction can hear criminal, civil, family court case and much more.

Specific jurisdiction is the ability of the court to hear a lawsuit in a state other than the defendant’s home
state if that defendant has minimum contacts within the state where the suit will be tried.

Legal and equitable jurisdiction

Equitable jurisdiction belongs to the authorities of the courts to take specific actions and pass some orders in
order to deliver an equitable and reasonable outcome. These judgments are usually outside the purview of
law, in the sense that support provided by the courts may not be necessarily confirmed by the statue. In the
case of K.K.Velusamy Vs N.Palanisamy, the Supreme Court of India held that Section 151 does not give any
special jurisdiction to civil courts, but only presents for the application of discretionary power to achieve the
ends of justice. This suggests that the court cannot give any such order which may be denied under any law in
such an order that may be prohibited under any law in order to achieve the ends of justice. This would lead to
the conclusion that such equitable jurisdiction is secondary to the authority of the courts to implement the
law.

Expounding and expanding jurisdiction

Expounding jurisdiction means to describe, clarify and explain jurisdiction. Expanding jurisdiction means to
develop, expand or prolong jurisdiction. It is the duty of the court to clarify its jurisdiction and it is not
proper for the court to extend its jurisdiction.

Jurisdiction of civil court

Section 9 of CPC

Section 9 of the Code of Civil procedure deals with the jurisdiction of civil courts in India. It declares that the
court shall have jurisdiction to try all lawsuits of civil nature accepting suits of which their cognizance is
either expressly or impliedly barred.

Conditions

A Civil court has jurisdiction to decide a suit if two requirements are fulfilled:

1. The suit must be of a civil nature.

2. The cognizance of such a suit should not have been expressly or impliedly barred.

i) The suit of civil nature

Meaning

‘Civil Suit’ has not been explained in any act. Any suit that is not criminal in nature can be termed as a suit of
a civil nature. Any suit that pertains to determination and implementation of civil rights may be defined as a
civil suit. In the case of Kehar Singh Nihal Singh Vs Custodian General, the court elaborated the concept of
Civil proceeding. It was defined as a grant of private rights to individuals or corporations of society. The
objective of the action is the reward or recovery of private rights. In other words, the civil action may be
described as the proceeding between two parties for implementation or redressal of private rights.

Nature and scope

The expression ‘suit of civil nature’ will cover the private rights and obligations of the citizens. The political
and religious question is not covered by a suit of a civil nature. A suit in which principal question is related to
caste or religion is not of a suit of a civil nature. But if the main question in a suit of civil nature involves the
decision relating to caste question or to religious rites and ceremonies it does not terminate to be a suit of a
civil nature. The court has jurisdiction to decide those questions also, in order to decide the important
question which is of civil nature.

Explanation of doctrine

Each phrase and description assigns a duty on the court to apply jurisdiction for the accomplishment of
rights. No court can decline to examine if it is of the information mentioned in Section 9 of the Code of Civil
Procedure. The word civil according to the dictionary suggests, associating to a citizen as an individual. The
word nature has been called the primary qualities of a person or thing. The word civil nature is prevalent
than the word civil proceeding. The doctrine described the theory of the jurisdiction of civil courts under
section 9 of the Code of Civil Procedure in PMA Metropolitan Vs M.M. Marthoma the Supreme Court
observed that:

● The phrases used in section 9 has a positive and negative intent.

● The original part has a broader sense as it includes all the problems of civil nature; on the other
hand, the latter part has a wider sense as it refuses the topic which is impliedly or expressly
barred.
● The two reasons mentioned in Section 9 reveals the legislative purposes.
● It designated duty on the court to perform the jurisdiction for the implementation of private
rights
● No court has the benefit to refuse the matter which introduces under this section
● It is necessary to take the knowledge of matter because the word “shall” is used, which means
that it is a compulsory section.

In the case of Shankar Narayanan Potti vs K. Sreedevi, the Supreme Court held that the ‘Civil Court has
primary jurisdiction in all types of civil matters as per Section 9 of CPC unless the action is expressly or
impliedly barred.” This means that Legislature can defeat the jurisdiction of the civil court by adding a
provision or clause in any Act itself. In the case of Shri Panch Nagar Park vs Purushottam Das it was held
that if there are no specific terms in any statute the court needs to look into design, plan and suitable
provisions of the Act in order to find implied dismissal of the jurisdiction of a civil court.

Test

A suit in which the right to property or to an office is struck is a suit of a civil nature, notwithstanding that
such right may depend only on the choice of a question as to religious rituals or ceremonies.

ii) Cognizance not barred

A claimant having a complaint of a civil nature has the power to begin a civil suit unless its cognizance is
barred, either expressly or impliedly.

Suits expressly barred

A suit is said to expressly barred when it is prohibited by the statute for the time being in force. It is subject
to the competent legislature to bar the jurisdiction of civil courts with regard to a specific class of suits of civil
nature, provided that, in doing so it retains itself within the scope of legislation given to it and does not
contradict any terms of the constitution.

Suits impliedly barred

A suit is said to be impliedly barred when it is said to be excluded by general principles of law. When a
specific remedy is given by statute, it, therefore, denies a person who requires a remedy of any different form
than is given by statute. When an act formed an obligation and made its performance in a specified manner
that performance cannot be implemented in any other manner.

Presumption as to jurisdiction

In dealing with the subject whether a civil court’s jurisdiction to analyse a suit is barred or not, it is necessary
to bear in mind that every opinion should be made in support of the jurisdiction of a civil court. The rejection
of the jurisdiction of a civil court to entertain civil causes should not be easily inferred unless the appropriate
law contains express terms to that effect or points to a significant and inevitable implication of nature.

Burden of proof

It is well proved that it is for the party who tries to dismiss the jurisdiction of the civil court to establish it. It
is uniformly well established that the statue dismissing the jurisdiction of a civil court must be strictly
explained. In the case of doubt as to jurisdiction, the court should lean towards the theory of jurisdiction. A
civil court has original authority to determine the issue of its own jurisdiction although as a consequence of
such query it may become that it has no jurisdiction to consider the suit.

Exclusion of jurisdiction: Limitations

The common assumption is that the civil court has the jurisdiction to try the case. The prosecution has a case
of a civil nature has, independent of any statute, a power to initiate a suit in a civil court unless its notice is
expressly or impliedly barred yet it cannot be said that the jurisdiction is entirely eliminated. In the case of
Secretary of State Vs Mask & Co, the Privy Council rightly mentioned that it is established law that the
exclusion of jurisdiction of the civil court is not to be readily inferred but that such prohibition is either
impliedly barred or explicitly expressed. It is also established that civil court has jurisdiction to examine into
the cases which have not complied with fundamental principles of judicial procedure. In the case of State of
A.P. Vs Majeti Laxmi Kanth Rao, the apex court has analysed to decide the elimination of jurisdiction of the
Civil Courts. Firstly, the legislative intent to remove the suit is to be decided. It could be either directly or
implicitly. The court needs to find and deduce the causes for the exclusion of the Civil courts and the
explanation for it but the reason is not directed for judicial examination. After the court is convinced with the
grounds, the court must find out whether the statute that prohibits the jurisdiction grants for an alternative
remedy. In case there is no alternative remedy possible, the civil court’s jurisdiction cannot be eliminated.
But it was ruled in Balawwa v. Hasanabi, Civil court’s jurisdiction is terminated with regard to a tribunal
established by a statute only to the extent that the support granted by the tribunal in question. In this aspect,
the Allahabad High court in various judgements has held that the suit is decreased from the jurisdiction of
civil courts of the knowledge of the complete suit is forbidden. It means that for some suits wherein some
parts are not decided by the civil court because of implied or express prohibition, it does not mean that the
entire suit will be prohibited. As the additional points of law are exceeding the purview of the tribunal or even
if it is within its scope of the particular tribunal regulated under the act, civil court’s jurisdiction is not
restrained as it could still pass judgement as it still has the original jurisdiction to consider the suits. The
situation remains obscure whether the appropriate tribunals under the act can give the order with regard to
the part of the trial wherein the jurisdiction of the civil court is obstructed.

Principles of exclusion of jurisdiction of civil court

Dhulabhai v. state of MP
Hidyatullah summarized the following principles relating to exclusion of jurisdiction of civil courts:

1. When a statute provides finality to the orders of particular tribunals, the civil court jurisdiction
must be kept to be prohibited. Such a provision does not eliminate those cases where the terms of
the act have not complied with fundamental laws of judicial method.
2. When there is an express bar of jurisdiction of the court, an examination of a scheme of a
particular act to find the adequacy or sufficiency of remedies provided may be important but this
is not crucial for maintaining the jurisdiction of a civil court
3. It examines the terms of a specific act as ultra vires cannot be brought before tribunals
constituted under the act. Even the High Court cannot go for revision or reference from the
decision of the tribunal.
4. When the terms are already stated illegal or declared the constitutionality of any terms is to be
challenged, then a suit is open. A writ of certiorari may introduce a direction to refund but it is
not a necessary remedy to compensate a suit.
5. When the particular Act includes no method for a return of tax collected in excess of
constitutional goals, a suit lies.
6. Prohibition of the jurisdiction of a civil court is not ready to be inferred unless the conditions
above set down apply.

Premier automobiles v. K.D Wadke

The Supreme Court laid down the following principles as relevant to the jurisdiction of civil courts in
association with industrial disputes:

1. If a conflict is not an industrial conflict, nor does it correlate to the enforcement of any other
right under the industrial dispute act, the remedy lies only in civil court.
2. If a conflict is an industrial conflict emerging out of a right or liability under the general or
public law, the jurisdiction of the court is an alternative left to the person involved to decide his
remedy for the support which is sufficient to be given in a particular remedy.
3. If an industrial dispute relates to the implementation of the right or a duty organised under the
act, then the only remedy available is to get adjudication under the act.

Rajasthan SRTC v. Krishna Kant

The Supreme court summarized the following principles applicable to industrial disputes:

1. When the conflict originates from the common law of contract, a suit registered in civil court is
not maintainable even though such conflict establish industrial dispute within the definition of
Section 2(k) of Industrial Disputes Act, 1947.
2. When a dispute involves the recognition or enforcement of rights created by an enactment which
is called sister enactments and do not provide a forum for the resolution of such dispute, the only
remedy is to approach the forum created, provided they constitute industrial dispute within
Section 2(k) of Industrial Disputes Act, 1947.
3. It is not right to say that the assistance provided by Industrial dispute act are not equally useful
for the ground that entrance to forum depends upon a recommendation being made by the
relevant government.
4. The power given is the power to suggest and not the power to decide, though it may be that the
government is allowed to examine.
 5. It is consistent with the policy of law aforesaid i.e command to parliament and state legislature to
declare a provision allowing a workman to address the labour court- i.e., without the need of a
recommendation by the government in case of industrial dispute included by Section 2-A of the
Industrial Disputes Act.

Conclusion

Civil court has jurisdiction to investigate whether tribunal and quasi-judicial bodies or legal executive acted
within their jurisdiction. It can be presumed that section 9 essentially deals with the issue of the civil court’s
jurisdiction to consider a matter. Civil court has jurisdiction to consider a suit of civil nature except when it’s
notification is expressly barred or bared by significant suggestion. Civil court has jurisdiction to resolve the
problem of its jurisdiction

Corporate governance and certain relaxations in the light of pandemic.

COVID-19 Pandemic has impacted not only human but significant commercial impact being felt globally. It
has come with inherent commercial risks impacting on business operations due to disruptions to Meetings,
Dividend, Liquidity, Disclosure, Capital Allocation, Risk Management and Internal Control. Regulators
should allow companies to conduct a hybrid AGM. It has compelled Companies to step up on building their
technology infrastructure. Management should review of their share buyback programmes during such
financial crisis. Remuneration committee should emphasize on Executive Pay matters. Government has
initiated relief measures under Companies Act, 2013 and LLP Act, 2008 and relaxations from compliance
with provisions of the SEBI (LODR) Regulations, 2015 due. Major initiative is contribution for COVID-19 is
eligible CSR activity and introduction of schemes of Companies Fresh Start and revised the LLP Settlement
to provide a opportunity to make good any filing related defaults and make a fresh start on clean slate.

Originality/value: Drawing on such analytical framework, this research provides further directions to amend
and inculcate various corporate Governance practices for Government, Regulators, Companies and other
stakeholders during such crisis. It also addresses the current policy issues that may have a significant effect
on Corporates strategies.