CORPORATE_LAW_NOTES. for LLB law students

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COMPANY LAW
MODULE 1: INTRODUCTION TO BASIC CONCEPTS
 Companies Act, 1956 – 658 Sections; 15 Schedules
 Companies Act, 2013 – 470 Sections; 7 Schedules – 29 Chapters (Under
every Chapter Rules have been made by the Government)
 Both these Acts exist.
 Website – Ministry of Corporate Affairs (MCA).
 The Companies Act, 1956 has now been replaced by The Companies Act,
2013, a more contemporary, simplified and rationalised legislation. The
objective behind this new Act is to bring our company law at par with the
best global practices. (The objective of CA, 2013 is to consolidate and
amend the laws relating to companies.)
Q. What are the salient features of the Companies act, 2013? (REVISION)
Ans:
 The Companies act,2013 was passed on the basis of Companies Bill, 2011,
which was passed by the Lok Sabha on 18.12.2013 and by Rajya Sabha on
8.8.2013.
 It received Presidential assent on 19.8.2013 and came into force w.e.f.
30.8.2013
 The Act consists of: 470 Sections
29 Chapters
7 Schedules
Meaning of ‘Company’
The word ‘Company’ is made up of:
 ‘com’ – means group of people.
 ‘pany’ – means bread.
Thus, company literally means a group of people having their meal together. In
simple terms, a company may be described to mean a voluntary association of
persons who have come together for carrying on some business and sharing the
profits therefrom.

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Corporation: Generally, corporations used to mean big business houses, whose
presence is all over the world. A company which is formed and registered in or
outside India is known as a Corporation. Minimum Authorized Capital ,Rs 5 crores
Definition of ‘Company’
The Companies Act, 2013 does not define a company in terms of its features.
Section 2 (20) of the Act defines “A Company formed and registered under this
Companies Act or under any previous company law”. A company is defined easily
as an association of two or more persons which is formed for doing business
collectively and registered with Registrar of Companies according to the Indian
Companies Act, 2013. There are different types of companies like One Person
Company, Private company and Public Company, etc.
To get registered with Registrar of Companies, the promoters are required to
submit the copies of Articles of Association and Memorandum of Association
which consists of various information relating to internal management and
external management of the company.
As per the Act: [S.2(20)]
5. profit/dividend

4. business/trade 6.members

3. Capital (divided into units- ‘shares’) 7.Share holders

2. Money (or money’s worth) 1.Association of persons
contribute

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Q. What are the views of justice James, Marshall, Haney, Lindley
James, J – “ A company is an association of persons united for a common object.”
Such an association may be in the form of an ordinary firm or a Hindu Joint family
Business, or a strictly registered under the societies’ registration act or Provident
Fund Society or a Trade Union or company incorporated by Royal Charter or by an
Act of Parliament or by some Indian Law or any other relevant act.
Lord Justice Lindley – A company is an association of many persons who
contribute money or money’s worth to a common stock which is called capital.
- The persons who contribute to the capital and share the profit/loss are
members of the company. They own the capital for trade and business. The
proportion of capital/profit/dividend which each member is entitled is his share.
Prof. Haney – A company is an artificial person created by law, having separate
entity, with a perpetual succession and common seal”.
Chief Justice Marshall – A company is an artificial person, invisible, intangible and
it exists only in the eyes of law.
Different Types of Companies
1. Any company incorporated under the Companies act, 2013 or under any
previous Company law
2. Insurance Companies: competent only with the Insurance Act,1938 and
Insurance Regulatory and Development Act, 1999.
3. Banking companies
4. Electricity generation Companies
5. Any other such company governed by any such Act/ Special Act
6. Any such Body Corporate , incorporated by any Act.
# The word “company” has no strictly technical or legal meaning.
Types of Companies
The Companies Act, 2013 provides for the kinds of companies that can be
promoted and registered under the Act. The three basic types of companies
which may be registered under the Act are:

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(a) Private Companies;
(b) Public Companies; and
(c) One Person Company (to be formed as Private Limited).
Difference Between Private and Public Company (IMP)
(a) Private Company
As per section 3 (1), a private company may be formed for any lawful purpose by
two or more persons, by subscribing their names to a memorandum and
complying with the requirements of this Act in respect of registration.
As per Section 2(68) of the Companies Act, 2013, “private company” means
i) Minimum paid-up share capital of 1 lakh rupees
ii) Restricts the right to transfer its shares;
iii) Prohibits any invitation to the public to subscribe for any securities of the
company; It must be noted that it is only the number of members that is limited
to two hundred. A private company may issue debentures to any number of
persons, the only condition being that an invitation to the public to subscribe for
debentures is prohibited.
iv) The words ‘Private Limited’ must be added at the end of its name by a private
limited company.
 Minimum no. of members – 2
 Maximum no. of members – 200
 Minimum no. of Directors – 2
 Maximum no. of Directors – 15
(b) Public Company (for more profit) Section 2(71),
i) Minimum paid-up share capital of five lakh rupees
ii) In principle, any member of the public who is willing to pay the price may
acquire shares or debentures of it.

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iii) The securities of a public company may be quoted on a Stock Exchange. The
company may or may not get listed in the Stock Exchange.
iv) Securities or other interest of any member in a public company shall be freely
transferable.
 Minimum no. of members – 7
 Maximum no. of members – Unlimited
 Minimum no. of Directors – 3
 Maximum no. of Directors – 15
(c) One Person Company and Sole Proprietorship
“One Person Company” (OPC) means a company which has only one person as a
member. A One Person Company is a kind of private company having only one
member.
Both, a One Person Company and a Sole Proprietorship, are business structures
intended for entrepreneurs seeking to run a business single-handedly.
Fundamental differences between the two structures:
One Person Company Sole Proprietorship
1.Registration: must register with the
Registrar of Companies.

not mandatory for starting a
sole proprietorship.
2.Legal Identity O.P.Company is a distinct
legal entity from the
business owner.

not a distinct legal entity from
the proprietor. As per law the
business to be the same legal
entity as the proprietor
himself.
3. Liability of Director
/ Proprietor
In case an OPC incurs a
debt, the Director’s
liability is limited and his
personal assets remain
secure.

unlimited liability in case of
debts/ damages incurred by his
business. if the business is in
debt, even the personal assets
of the proprietor may be used
to recover the debt.
4. Taxes: OPCs have to file A Sole Proprietorship is not

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separate Income Tax
returns.
(separate legal entity)
taxed as a separate entity.
Proprietors file their business
taxes on their personal tax
returns. As part of their net
taxable income.
5. Independent
Existence and
Succession
OPC may be passed on to
a nominee Director
a Sole Proprietorship may only
be inherited through the
execution of a will when the
former owner passes away. (as
not a distinct identity, business
exists as long as owner does)
A sole proprietorship business can be converted into a public company.
Investment Companies
As per explanation (a) to section 186, “investment company” means a company
whose principal business is the acquisition of shares, debentures or other
securities.
If a company is engaged in any other business to an appreciable extent, it will not
be treated as an investment company.
Characteristics of a Company (IMP)
The most important characteristic features of a company are ‘separate legal
entity’ of the company and in most cases ‘limited liability’ of its members. These
and other characteristic features of a company are discussed below
1. Incorporated association
2. Legal entity distinct from its members
3. Artificial person
4. Limited Liability
5. Separate Property (Ownership)
6. Transferability of Shares
7. Perpetual Succession
8. Common Seal
9. Capacity to sue and be sued

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10. Capacity to make contract
11. Sharing the profit as dividends
1. Incorporated Association: The company must be incorporated or registered
under the Companies Act with the Registrar of Companies (RoC).
2. Legal Entity distinct from its members: Unlike partnership, the company is
distinct from the persons who constitute it. Hence, it is capable of enjoying rights
and of being subjected to duties which are not the same as those enjoyed or
borne by its members.
Landmark case: Saloman v Saloman & co. Ltd. (1897)
In this case it was observed that Saloman &co. was a real company complying
with all the legal requirements of incorporation. As such, it was a legal entity
having its independent existence separate from its members.
3. Artificial Person: Being an artificial person, a company is a legal entity different
and separate from its promoters, members, directors, and other stake holders. It
has its own corporate name and work under that name. It
 can hold its assets in its own name,
 can sue or be sued in its own name,
 can borrow/lend funds, open bank accounts, enter into contracts in its own
name
Any of its shareholders or directors or other officers cannot be held liable for the
acts of the company even if he/it holds the entire share capital. Further, the
shareholders or individual directors are not the agents of the company and so
they cannot bind company by their personal acts.
4. Limited Liability: One of the principal advantages of trading through the
medium of a limited company is that the members of the company are only liable
to contribute towards payment of its debt to a limited extent.
According to Section 3(2), a company may be

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(a) a company limited by shares: means the liability of the members towards
the company is limited to amount unpaid on their shares only. He is no
longer liable to contribute anything further. For example, a shareholder
who has paid Rs. 75 on a share of face value Rs. 100 can be called upon to
pay the balance of Rs. 25 only. Companies limited by shares are by far the
most common and may be either public or private.
(b) a company limited guarantee: A company that has the liability of its
members limited (by the memorandum) to such amount as the members
may respectively undertake, , to contribute to the assets of the company in
the event of its being wound-up, is known as a company limited by
guarantee. The members of a guarantee company are, in effect, placed in
the position of guarantors of the company’s debts up to the agreed
amount.
(c) Unlimited Liability Companies: In this type of company, the members are
liable for the company’s debts in proportion to their respective interests in
the company and their liability is unlimited. Such companies may or may
not have share capital. They may be either a public company or a private
company.
But, in none of the above cases, members can be made liable to anyone else
except company for any act of the company or directors.
5. Separate Property: Shareholders are not, in the eyes of the law, part owners of
the undertaking. The Supreme Court held that a shareholder is not the part owner
of the company or its property, he is only given certain rights by law, for example,
to vote or attend meetings, or to receive dividends.
6. Transferability of Shares: According to Section 44 of Companies Act, 2013
 the shares or debentures or other interest of any member in a company
shall be movable property, transferable in the manner provided by
the articles of the company.

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 According to Section 2(68)(i) of Companies Act, 2013, private
company may restrict the right to transfer its shares through its AOA. But
generally, a public company cannot restrict the transfer of its shares.
7. Perpetual Succession: Company being an artificial person cannot be incapable
by illness and it does not have an allotted span of life. According to Section 9,
Being distinct from the members, the death, insolvency or retirement of its
members leaves the company unaffected. Members may come and go but the
company can go for ever. It continues even if all its human members are dead.
Even when during the war all the members of a private company, while in general
meeting were killed by a bomb, the company survived. Not even a hydrogen
bomb could have destroyed it. In the above circumstances, the legal heirs of the
deceased shareholders will become the members.
8. Common Seal: Common seal acts as official signature of the company. Since a
company has no physical existence, therefore it has to act through its agents only.
To put restriction on the misuse of the powers of those agents, contracts entered
into by anyone on behalf of the company may be under the common seal of the
company.
Now, after Companies (Amendment) Act, 2015, it is not compulsory for the
company to have common seal. Thus a company may or may not have common
seal.
9. Capacity to sue and being sued: A company is separate legal entity having its
own corporate name. Therefore, according to Section 9, company may sue or
may be sued in its own name (not in the name of its directors or members).
10. Capacity to make contract: (Contractual Rights) A company is an artificial
person created by law. Therefore like natural person, it can enter into contract in
its own name through its agent (directors or other authorised persons).
11. Sharing the profits as dividends: All members and shareholders can share the
profits as dividends.

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12. Corporate Finances: The shares of an incorporated company are transferable,
so it can raise maximum capital in minimum possible time.
An incorporated company has the privilege of raising capital by public
subscription either by way of shares or debentures. The public financial
institutions willingly lend loan to companies as it is generally secured by floating
charge which is exclusive privilege of an incorporated registered company.
13. Protection to Investors against Loss: An incorporated company affords a
opportunity to even a common man with very small resources to invest a part of
his income in the company’s capital through purchase of shares and debentures
without being exposed to substantial loss in the event of failure of company’s
business.
Some important points
 Every state has one Registrar of Companies (RoC), but Maharashtra and
Tamil Nadu have two RoCs because of huge requirements (as there are a
huge number of companies in these states).
 Register of members (RoM) – When a person becomes a shareholder of a
company, his name has to be there in RoM.
 All shareholders are members of the company but all members may not be
shareholders of the company.
Difference : Company and Corporation (IMP)
Basis Company Corporation
Meaning

A company which is
created and registered
under the Indian
Companies Act, 1956 is
known as a Company.

Body corporate includes companies
registered outside India, under the
legislature of respective company
and corporate or institutes notified
as bodies corporate by the Central
Government or by State
Governments in India.
a)That is, Corporate Bodies have
their own parent act or legislation

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Examples:

Reliance Industries
Limited, Tata Steel Ltd.
Infosys Ltd. etc.
b) Body corporate includes all
companies including companies
incorporated outside India as well
except for Co-operative society.
Examples of BC: Alphabet Inc,
Microsoft Corporation, facebook
Inc, etc. are foreign companies
which are not incorporated in India.
However, a subsidiary of such
companies (body corporate) if
incorporated in India, will be called
as Company as per Companies Act.
Eg; Google India Private Limited,
Pepsico India Private Limited etc.
Thus, it is said that company is a
Body Corporate but Body Corporate
is not company.

Definition
under the
Companies
Act
Section 2 (20) of Indian
Companies Act, 2013
Section 2 (11) of Indian Companies
Act, 2013.
Incorporated

In India In and outside India
Minimum
Authorized
Capital

A minimum authorized
capital of Rs 1,00,000 in
the case of private
company and Rs. 5,00,000
in the case of public
company.
5 crores
Scope Comparatively less Wide

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Size Comparatively small Large

Corporate Personality:
Legally, a company is recognized as a legal entity distinct from its members. A
company with such personality has an independent legal existence separate from
its shareholders, directors, officers and creators. This is famously known as the
veil of incorporation.
Cases relating to a company’s separate legal entity - (i.e. its legal entity distinct
from its members).
Case (1): Salomon v. Salomon & Co. Ltd.(1859)
 This is a landmark case relating to a company’s separate legal entity i.e. its
legal entity distinct from its members.
 Facts: Salomon was a prosperous leather merchant (shoe company). He
converted his sole proprietorship business into a limited Company –
Salomon & Co. Ltd. The Company so formed consisted of Salomon, his wife
and five of his children as members, thus making the total number of
members as 7 which is the mandatory minimum number of members
required for a public company. Salomon was the majority shareholder in
the company and his two sons were directors of the company.
 Salomon became secure creditor (8000 pounds) to the company himself
(through debentures) by selling his property (shoe business). The company
also took money from other sources (16000 pounds).
 The company in less than one year ran into difficulties and liquidation
proceedings commenced. The assets of the company were not even
sufficient to discharge the debentures held entirely by Salomon himself.
And nothing was left for the unsecured creditors.
 When the creditors asked for money, Salomon said that he himself was a
creditor.
 The Court of Appeal held Salomon wholly liable.

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 However, the House of Lords held Salomon not liable. The House of Lords
held that the company is, at law, a different person altogether from the
subscribers. Salmon’s company is a real distinct company. The Court
emphasised the concept of separate legal entity and a corporate
personality.
Case (2): Lee V. Lee’s Air Farming Ltd. (1960)
This too is a case relating to a company’s separate legal entity i.e. its legal entity
distinct from its members.
 Mr. Geoffrey Lee was a qualified Pilot who formed a Public Company
namely Lee’s Air Farming Ltd. The company had a total of 3000 shares.
2999 shares were held in Lee’s name and 1 share was with other
employees of the company.
 The object and purpose of the company was to carry out agricultural
business.
 As a pilot, he was spreading seeds, fertiliser etc. from the helicopter during
working hours. He met with an accident and died.
 Mr. Lee’s wife asked for compensation. The counter argument was that Lee
was the owner and the majority shareholder.
 It was held that the mere fact that someone was the director of the
company was no impediment to his entering into a contract to serve the
company. If the company has a legal entity, there was no reason to change
the validity of any contractual obligations which were created between the
company and the deceased. The contract could not be avoided merely
because Lee was the agent of the company in its negotiations. Accordingly,
Lee was an employee of the company and, therefore, his wife was entitled
to compensation claim.
 A company has no owner existing in the eyes of law.

1.3 Company and Partnership, Company and Corporation

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Partnership: Indian Partnership Act, 1932 defines Partnership as “Partnership is a
relationship between two or more persons who have agreed to share the profits
of a business carried on by all partners or any one partner acting for all”. The
members of the Partnership firm are called as Partners. There are different types
of partners such as Active partner, Sleeping partner, Nominal partner, Minor
partner, etc.
Distinction between Company and Partnership
Basis Partnership Company
Name of the
members
The members of a Partnership
firm are called as Partners.
The members of a company
are called as shareholders of
a company.
Regulating Act Partnership Form of business
is governed by “The Indian
Partnership Act, 1932”.
Company Form of business is
governed by “The Companies
Act, 2013”.
Number of
members
Partnership firm must have
Minimum of 2 partners and
maximum of 20 partners.
A Company must have
Minimum of 2 and maximum
of 200 in the case of private
company. Minimum 7 and
maximum is unlimited
number of members in case
of public company.
Mode of creation Partnership Firm is created by
Contract between two or
more people.
Company is created by Law
i.e. created by incorporation
of a company under company
law.
Regulation
Authority
It is regulated by the Registrar
of Firms which comes under
the State Government.
It is regulated by the Registrar
of Companies which comes
under the Central
Government.
Registration
procedure
The registration of a
Partnership firm is Not
Mandatory.
The registration of Company
with Registrar of Companies
is Mandatory.
Documents
required
Partnership Deed (Agreement
Document) is the mandatory
document for creation of a
Partnership Firm.
Memorandum of Association
(MoA) and Articles of
Association (AoA) are the
main documents for the

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incorporation of the
company.
Separate Legal
Entity
Partnership firm is not a
separate legal entity from
partners. The Partners of the
firm are collectively referred
as a Partnership firm.
A company is a separate legal
entity from its members,
directors, promoters, etc.
Liability of
members
The partners have Unlimited
Liability in all the matters
relating to Partnership Firm.
The Shareholders and
promoters have Limited
liability to Capital of the
company.
Accounts and
Audit
Partnership Firm has to
maintain accounts as per the
conditions stated in
partnership deed.
A Company should maintain
accounts and auditing of
accounts by certified
Chartered Accountant is
Compulsory.
Common Seal A Common Seal is not
required for Partnership Firm.
A Common Seal in the form of
a stamp is required for the
company for legal and
functional purposes.
Management Management of the activities
of a Partnership Firm is
usually done by the working
partners.
Management of the activities
of a Company is done by
Board of Directors.
Change of Name The name of the Partnership
Firm can be changed easily by
having a discussion between
the partners.
The name of the company
cannot be changed easily and
a prior approval of Central
Government is required to
change the name.
Capital The partners can alter the
amount of their capital by
mutual agreement.
The share capital of a
company can be increased or
decreased only in accordance
with the provisions of the
Companies Act.
Transfer of
Interest
A partner cannot transfer his
interest to others without the
consent of other partners.
Shares in a public company
are freely transferable from
one person to another

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Company and Corporation
Corporation: Generally, corporations used to mean big business houses, whose
presence is all over the world. On the other hand, the company has a limited
scope as it indicates the business entity which is present in the country in which it
is registered.
The term Corporation as defined in section 2 (11) of the Indian Companies Act,
2013 as a body corporate, which is incorporated inside or outside the country, but
excludes co-operative society, corporation sole and any corporation which is
formed by the notification in the Official Gazette by the Central Government.
person. In private company
the right to transfer shares is
restricted.
Insolvency/Death A partnership ceases to exist
if any partner retires, dies or
is declared insolvent.
Insolvency or death of a
shareholder does not affect
the existence of a company.
Winding up A Partnership firm is dissolved
by an agreement or by the
order of court. It is also
automatically dissolved on the
insolvency of a partner.
A company comes to an end
only when it is wound up
according to the provisions of
the Companies Act.
Authority of
members
A partner is an agent of a
firm. He can enter into
contracts with outsiders and
incur liabilities so long as he
acts in the ordinary course of
firm’s business.
A shareholder is not an agent
of a company and has no
power to bind the company
by his acts.
Commencement
of Business
A partnership firm is not
required to fulfil legal
formalities.
A company has to comply
with various legal formalities
and has to file various
documents with the Registrar
of Companies before the
commencement of business.

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Similarities between Company and Corporation (Body Corporate)
 Separate Legal Entity
 Perpetual Succession
 Right to sue and be sued
 Limited Liability
 Artificial Legal Person

Difference : Company and Corporation (IMP)
Basis Company Corporation
Meaning

Examples:
A company which is
created and registered
under the Indian
Companies Act, 1956 is
known as a Company.

Reliance Industries
Limited, Tata Steel Ltd.
Infosys Ltd. etc.
Body corporate includes companies
registered outside India, under the
legislature of respective company
and corporate or institutes notified
as bodies corporate by the Central
Government or by State
Governments in India.
a)That is, Corporate Bodies have
their own parent act or legislation
b) Body corporate includes all
companies including companies
incorporated outside India as well
except for Co-operative society.
Examples of BC: Alphabet Inc,
Microsoft Corporation, facebook
Inc, etc. are foreign companies
which are not incorporated in India.
However, a subsidiary of such
companies (body corporate) if
incorporated in India, will be called
as Company as per Companies Act.
Eg; Google India Private Limited,
Pepsico India Private Limited etc.

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Thus, it is said that company is a
Body Corporate but Body Corporate
is not company.

Definition
under the
Companies
Act
Section 2 (20) of Indian
Companies Act, 2013
Section 2 (11) of Indian Companies
Act, 2013.
Incorporated

In India In and outside India
Minimum
Authorized
Capital

A minimum authorized
capital of Rs 1,00,000 in
the case of private
company and Rs. 5,00,000
in the case of public
company.
5 crores
Scope Comparatively less Wide
Size Comparatively small Large

Thus, the difference between Company and Corporation is subtle but still the
scope of the word Corporation is larger than the Company. Corporate Tax is levied
on both the entities as per the Income Tax Act, 1961.
Q. What is meant by statutory company?
Statutory corporations are public enterprises brought into existence by a Special
Act of the Parliament. The Act defines its powers and functions, rules and
regulations governing its employees and its relationship with government
departments. ... It is a corporate person and has the capacity of acting in its own
name.
Example: Reserve Bank of India, State Bank of India, Life Insurance Corporation,
Unit Trust of India, Employees State Insurance Corporation, Oil and Natural Gas
Corporation etc. are some examples of statutory corporations.

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Q. What is meant by Government Company?
A “Government company” is defined under Section 2(45) of the Companies Act,
2013 as “any company in which not less than 51% of the paid-up share capital is
held by the Central Government, or by any State Government or Governments,
or partly by the Central Government and partly by one or more
State Governments, and ...
Example: Hindustan Aeronautics Limited, Steel Authority of India Limited (SAIL),
Bharat Heavy Electricals Limited (BHEL), Maruti Udyog Limited,
Govt. company Statutory corporation
Formation Created under Indian
Companies Act, 1956. It is
governed by provisions of
Companies Act
A corporate body created by
either parliament or State
Legislature by a special act
which defines powers duties
and functions
management By Board of Directors
consisting of members that are
nominated by the govt. and the
elected shareholders
By board of Directors
nominated by the govt.
Capital Govt. pays a minimum of 51%
of capital

Govt. subscribes the full
capital
Operational
autonomy
It runs on commercial
principles like a private
enterprise and enjoys higher
degree of freedom from govt.
interference.
Works as an autonomous
body within the permissions
of the Act. Enjoys
considerable degree of
autonomy with noo
interference of govt. in day-
to-day activities.

20

Very important taught on 4.10 .18
1.8 Doctrine of Lifting or Piercing the Corporate Veil:
One of the main characteristic features of a company is that the company is a
separate legal entity distinct from its members. The most illustrative case in this
regard is the case decided by House of Lords- Salomon v. A Salomon & Co. Ltd.
[1897].
Salomon v. A Salomon & Co. Ltd
 In this case Mr. Solomon had business of shoe and boots manufacture. ‘A
Salomon & Co. Ltd.’ was incorporated by Solomon with seven subscribers –
himself, his wife, a daughter and four sons. All shareholders held shares of
UK pound 1 each. The company purchased business of Salomon for 39000
pounds, the purchase consideration was paid in terms of 10000 pounds
debentures conferring charge on the company’s assets, 20000 pounds in
fully paid 1 pound share each and the balance in cash.
 The company in less than one year ran into difficulties and liquidation
proceedings commenced. The assets of the company were not even
sufficient to discharge the debentures (held entirely by Salomon itself) and
nothing was left to the insured creditors.
 The House of Lords unanimously held that the company had been validly
constituted, since the Act only required seven members holding at least
one share each and that Salomon is separate from Salomon & Co. Ltd. The
entity of the corporation is entirely separate from that of its shareholders; it
bears its own name and has a seal of its own; its assets are distinct and
separate from those of its members; it can sue and be sued exclusively for
its purpose; liability of the members is limited to the capital invested by
them.
Lee v. Lee’s Air Farming Ltd.*1961+

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 Further in Lee v. Lee’s Air Farming Ltd.[1961], it was held that there was a
valid contract of service between Lee and the Company, and Lee was a
therefore a worker within the meaning of the Act. It was a logical
consequence of the decision in Salomon’s case that one person may
function in the dual capacity both as director and employee of the same
company.
Thus, after incorporation, a company becomes a legal person separate and
distinct from its members. It has a corporate personality of its own with rights,
duties and liabilities separate from those of its individual members. Thus, a veil of
incorporation exists between the company and its members and due to this a
company is not identified with its members. In order to protect themselves from
the liabilities of the company, its members often take the shelter of the corporate
veil. Sometimes this corporate veil is used as a vehicle of fraud or evasion of tax
etc. To prevent unjust and fraudulent acts, it becomes necessary to lift the veil of
the corporation or disregard the corporate personality to look into the realities
behind the legal façade and to hold the individual member of the company liable
for its acts or liabilities.
State of UP v. Renusagar Power Co. AIR 1988 SC 1737
The case relates to lifting of corporate veil.
Facts of the case
 Renusagar was a 100% subsidiary company of Hindalco which was mainly
incorporated for the supply of electricity to the holding company which was
an aluminium manufacturing company.
 The agreement between Renusagar and Hindalco indicated that it was not a
normal sale-purchase agreement between two independent persons
(entities). The price of electricity was determined according to the cash
needs of Renusagar.
 It was thus contended that Renusagar must be treated as alter ego
(alternative personality) of Hindalco. The electricity duty must be levied as

22

if it had ‘own source of generation’. ‘Own source of generation’ is an
expression connected with the question of lifting or piercing the corporate
veil.
Appellant’s contention
 The appellant’s contended that in this case there was no ground for lifting
the corporate veil. Urging that there was no reason either in law or in fact
to lift the corporate veil and treat Renusagar’s plant as Hindalco’s own
source of generation.
 Appellant also contended that HC order was in violation of principles of
natural justice.
Held:
 The person generating and consuming energy were the same and the
corporate veil should be lifted.
 Hindalco and Renusagar were inextricably linked up together. Renusagar
had in reality no separate and independent existence.
 These must be treated as one concern and the consumption of energy by
Hindalco must be regarded as consumption by Hindalco from own source of
generation.
 The government did not act in violation either of the principles of natural
justice.
 Appeal dismissed.
Macaura v. Northern Assurance Co.
Facts of the case
 The appellant, Mr. Macaura, formerly owned a timber estate in Northern
Ireland, who consequently sold the timber to a Canadian Milling concern,
agreeing to accept payment in the shares of the company.

23

 The appellant received 42000 fully paid of 1 pound shares, making him the
whole owner (majority shares). He was also an unsecured creditor for
19000 pounds.
 The appellant took out an insurance policy on the timber in his own name,
and shortly afterwards damage was caused by the fire. The appellant
sought to recover from the insurance policy, but Northern Assurance Co.
refused to pay up as timber was owned by the company, and the fact that
company is a separate legal entity.
Issue: Is the Insurance company liable to pay for the damage caused by fire to Mr.
Macaura?
Held: The House of Lords held that insurers were not liable on the contract, as Mr.
Macaura had no insurable interest in the timber, as his relation was to the
company, and not to its goods. Unusually, in this case, request to lift the
corporate veil was made by the corporation’s owner himself, as he contended
that he held the maximum percentage of shares.
However, the Court held that Macaura, even if he holds all the shares, is not the
corporation. Neither he nor any creditor of the company has any legal or
equitable right on the assets of the corporation
Case: Delhi Development Authority v Skipper Construction Company Ltd.
- October, 1980: Highest bidder
- Advertisement for sole : Rs. 9.82
- Deposited : 25%
- 7 Extension default: Jan 1981 – April 1982
- Bid Cancelled: Stay Order from Court in May 1982 + Representation.
- 1990 : Delhi HC : Allowed construction on …..
(2 installments + 1.94 Crore( in 1 month )
- Stalled construction on non-payment
- No inducting 3
rd
party in building or Creating 3
rd
party rights

24

Judgement: The doctrine of Piercing Corporate Veil was brought and the
members were held responsible for every single penny.

Two circumstances where Corporate Veil can be lifted:

1. Statuary Provisions 2. Judicial Interpretations
Statutory provisions:
1. Mis-statement in Prospectus (s 34 ), s. 447
2. Failure to return Application Money (s.39)
3. Mis-description of name (s.12)
4. For facilitating the task of investigation by the Inspector. (s. 210, 212, 213, 214)
5. For investigation of Ownership (s.216)
6. Fraudulent Conduct of business (s.39)
7. Liability under Ultra Vires Act.
8. Liability under other statutes. E.g., [Actio Paulioma] Fraudulent Conveyance.
(The transfer of property to another party in order to defraud a creditor. ...
Legally, fraudulent conveyance requires the intention to defraud a creditor.)
Judicial Interpretation:
1. Protection of Revenue (to prevent evasion of taxes)
Case : Sir Dinshaw Maneckjee Petit , AIR 1927 : That if the family company
carries on any business, it does so solely as the agent of the assesse, and that in
any event the alleged loans are not genuine loans. He consequently claims that
the sums in dispute represent taxable income of the assesse.
In Bacha F. Huzdar v Commissioner of Income Tax, Bombay:

25

Income of a Tea company - 60% from agricultural income. 40% income from sale
and manufacture of tea.
Plaintiff: members of the tea company received certain amount as dividend
through shares held by her in the company. She claimed that 60% of her dividend
income should be exempt from income tax being an agriculture income.
SC rejected the argument and held that although the income in the hands of the
company was partly agricultural yet the same income when received by the
shareholders as dividend could not be regarded as agricultural income.
2. Prevention of fraud or improper conduct: Where the corporate entity has been
used for fraud or improper conduct or to default or circumvent the law, courts
may pierce the corporate veil to look into realities of the situation.
Case: Gilford Motors v Horne, 1933 1 CH935:
 Mr EB Horne was formerly a managing director of the Gilford Motor Co Ltd.
His employment contract stipulated that he would not engage with the
customers of the company if he were to leave employment of Gilford
Motor Co.
 Mr. Horne was fired, thereafter he set up his own business and undercut
Gilford Motor Co's prices. Then to avoid legal action he set up a company,
JM Horne & Co Ltd, in which his wife and a friend were the sole
shareholders and directors. They took over Horne’s business and continued
it with a declaration that the company has no connection with any other
firm.
 Though the company had no agreement with Gilford Motor about not
competing, Gilford Motor brought an action alleging that the company was
used as an instrument of fraud to conceal Mr Horne's illegitimate actions.
Held: the contract that Mr Horne would not compete was broken.
Court of Appeal granted an injunction, Horne was forced to stop competing
through the company.

26

In the case of Singer India Ltd. V Chander Mohan Chaddha, AIR, 2004 SC 4368, the
scheme of amalgamation was sanctioned whereby an undertaking in India of an
American company was amalgamated with Indian company. The corporate veil
was lifted in order to ascertain whether corporate personality was being blatantly
used as a cloak for fraud or improper conduct.
The Apex court , however, clarified that it was not open to a company to ask for
unveiling its own veil / cloak for the purpose of determining whether there was
no sub-letting or parting with possession of American company.
3. Determination of Enemy character of company
Case: Daimler Comp Ltd. V Continental Tyre and Rubber Co. (GB)…, 1916 2 AC
307
Facts:
 Continental Tyre and Rubber Company was incorporated in England, but
the holders of all its shares except one, also all the directors, were
Germans, residing in Germany.
 The company supplied tyres to Dailmer, but Dailmer was concerned that
making payment might contravene a common law offence of trading
with the enemy.
 After the outbreak of the First world War, Continental Tyre Company
brought an action against Daimler to recover trade debt.
Issue: Whether the character of a company’s corporators is relevant to determine
the character of the company; is the company capable of acquiring enemy
character?
Observation: The House of Lords observed that a company though incorporated
in England is not A Natural Person with Mind and Conscience. It can neither be
LOYAL or DISLOYAL. It can neither be Friend or Enemy, but it can assume enemy
character when persons in De-Facto control of its affairs are residents of enemy
country or wherever resident are acting under the influence/control of enemies.

27

Held: The House of Lords held that though the company was incorporated in
England, its effective control was in the hands of Germans and, therefore, the
company had acquired the enemy character.
4. Formation of Subsidiaries to act as agents
5. Where a company acts as an agent for its shareholders.
6. In case of Economic Offences.
7. Where a company is used to avoid Welfare Legislation.
In case where it is found that the sole purpose for the formation of a new
company was to use it as a device to avoid liability under any welfare legislation,
the court may lift the corporate veil to look at the real transaction and purpose
behind it. In Workmen of Associate Rubber Industry Ltd. v The Associated
Rubber Industry Ltd. Bhavnagar AIR 1986 SC 1, the SC found that the creation of
new company intended as a device to reduce the amount of bonus payable to
workmen of the company. And therefore the separate existence of companies be
ignored for calculation of profit of the company.
8. Where a company is used for illegal and improper purpose.
In Delhi Development Authority v Skipper Construction Co. (Pvt. ) Ltd. , the SC
observed that the corporate veil should be lifted to expose those who are
involved in defrauding others by corrupt and illegal means in deliberate defiance
of the court’s order.
In this case the company was defrauding others in the deliberate disobedience of
the SC’s order which amounted to Contempt of Court. Disposing the appeal the
SC observed the imposition of punishment for an attempt would not denude the
court of its power to issue directions and take appropriate orders to grant relief to
the persons aggrieved in order to do complete justice.
9. To punish for contempt of Court.
10. For determination of Technical Competence of Company.
11. Where a company is mere sham or cloak

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MODULE 2: INCORPORATION OF A COMPANY
Meaning of promoter:
According to Securities Exchange Commission, Rule 403(a), the meaning of
promoter is that he/she is a person who alone or in connection with other
persons, directly or indirectly takes the initiative in funding or organising the
business enterprise.
Position of Promoter: A promoter is neither a trustee nor an agent of the
company but he has a fiduciary relationship with the company. Fiduciary relation
means a relation of trust and confidence. Therefore he is liable to disclose all the
relevant facts and any secret profit made by him in relation with the formation of
the company.
Stages of formation of a company (by Promoter): IMP
The whole process of formation of a company may be divided into four stages:
1. Promotion: A business enterprise does not come into existence on its own.
It comes into existence as a result of the efforts of an individual or group of
people or an institution. That is, it has to be promoted by some person or
persons. The process of business promotion begins with the conceiving of
an idea and ends when that idea is translated into action i.e., the
establishment of the business enterprise and commencement of its
business.
2. Registration: It is registration that brings a company into existence. A
company is properly formed only when it is duly registered under the
Companies Act.
3. Floatation: What is 'Flotation', Flotation is the process of converting a
private company into a public company by issuing shares available for the
public. It allows companies to obtain financing externally instead of using
retained earnings to fund new projects or expansion. The term "flotation" is
commonly used in the United Kingdom, whereas the term "going public" is
more widely used in the United States.

29

# Two types of fund i) Internally generated fund (profits)
ii) Third party fund
Financial system:
i) Money Market Corporate market
Security market other means
Sec 23 of the Companies Act, 2013
i) Public company (Issue pub offer+ pub placement )
ii) Private Company (only pvt placement: when you choose your shareholder)
4. Commencement of business
Who is a Promoter of a company?
 He creates the company.
 He has a fiduciary relation with the company. *‘Fiduciary’ means involving
trust, especially with regard to the relationship between a trustee and a
beneficiary]
 He promotes the idea of the company.
 He gives instructions to the directors.
 He makes the Memorandum of Association (MoA) containing the objectives
of the company.
 He creates the prospectus of the company.
 Reimbursement: A promoter is not entitled to recover any remuneration
for his services from the company unless there is a valid contract, enabling
him to do so, between him and the company. Indeed, without such a
contract, he is not even entitled to recover his preliminary expenses or the
registration fees. [Re English & Colonial Produce Company (1906)
In practice, however, recovery of preliminary expenses and registration
fees does not normally present any difficulty. The Articles generally contain
a provision authorizing the directors to pay them.
Duties of a Promoter

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The Companies Act, 2013 contains no provisions regarding the duties of
promoters. It seems, therefore, that the promoter’s duties must be same as those
of a person, who acts on behalf of another without a contract of employment,
namely, to shun from or avoid deception and to exercise reasonable skill and
care.
Thus, where a promoter negligently allows the company to purchase property,
including his own, for more than its worth, he is liable to the company for the loss
it suffers. Similarly, a promoter who is responsible for making misrepresentations
in a prospectus may be held guilty of fraud under section 17, of the Indian
Contract Act and consequently liable for damages under section 19 of that Act.
The Courts, however, have been conscious of the possibility of abuse inherent in
the promoter’s position and therefore laid down that any one, who can properly
be regarded as promoter stands in a fiduciary position towards the company with
all the duties of disclosure and accounting. In particular, the two fiduciary duties
imposed on a promoter are:
1. To disclose the secret profit: The promoter should not make any secret profit
at the expense of the company he promotes without the knowledge and consent
of the company. If he has made any secret profit, it is his duty to disclose all the
money secretly obtained by way of profit. He is empowered to deduct the
reasonable expenses incurred by him.
Company can compel him to account for the profits.

2. Duty of Disclosure of interest
A promoter must disclose to the company (to BOD, and not to his nominees on
his pay rolls) any interest he has in a transaction entered into by it. This is so even
where a promoter sells property of his own to the company, but does not have to
account for the profit he makes from the sale because he bought the property
before promotion began. [Re Lady Forest-(Murchison) Gold Mine Co. Ltd. (1901)]
Disclosure must be made in the way as though the promoter was seeking the
company’s consent to his retaining a profit for which he is accountable.
3. To disclose all the material facts relating to the formation of company.

31

4. The promoter must make good to the company what he has obtained as a
trustee.
5. Duty to disclose private arrangements: It is the duty of the promoter to
disclose all the private arrangement resulting him profit by the promotion of the
company.
6. Duty of promoter against the future allottees: the promoters stand in a
fiduciary position towards not only to the company, they will also stand in this
relation to the future allottees of the shares.
i) For example:
The commonest way in which professional promoters used to make secret
profit was by purchasing property or business themselves and reselling it to
the company at an enhanced price. But the difference between the two prices
in such a case shall be a secret profit only if the promoter has begun to
promote the company at the time he buys the property or business, so that he
owes a duty to the company at the time not to profit on a re-sale to it. [Re
Cape Breton Co. (1885)]
ii) For example, the vendor (supplier) may agree to pay a share of profit to the
promoter. A promoter is not forbidden to make profit but to make secret
profit.
Case 1: Lagunas Nitrate Co. v. Lagunas Syndicate (1899)
The promoters stand in a fiduciary relation to the company they promote and to
those persons, whom they induce to become shareholders in it.
Fact : The promoters were the first directors, so there was no independent board.
Held: They had an interest in the property which they sold to the company, but
disclosed this to the prospective shareholders, which was considered to be
sufficient.
A promoter’s duties do not come to an end on the incorporation of the company,
or even when a Board of directors is appointed. They continue until the company
has acquired the property or business which was formed to manage and has
raised its initial share capital.

32

Case 2: Erlanger v. New Sombrero Phosphate Co.
Duty to disclose to whom?
It is also an important illustration of how promoters of a company stand in
a fiduciary relationship to subscribers.
Facts:
 d'Erlanger was a Parisian banker who bought the lease of
the island for phosphate mining for £55,000.
 He then set up the New Sombrero Phosphate Co.
 Eight days after incorporation, he sold the island to the company for
£110,000 through a nominee.
 One of the directors was the Lord Mayor of London, who was independent
of the syndicate that formed the company. Two other directors were
abroad, and the others were mere puppet directors of Erlanger.
 The board, which was effectively Erlanger, ratified the sale of the lease.
Erlanger, through promotion and advertising, got many members of the
public to invest in the company.
 After eight months, the public investors found out the fact that Erlanger
had bought the island at half the price the company (now with their money)
had paid for it.
 The shareholders remove the old directors and replace them. The new
directors apply to the court to have the original sale rescinded.
Judgment: The House of Lords unanimously held that promoters of a company
stand in a fiduciary relationship to investors, meaning they have a duty of
disclosure. The court ordered the rescission and said that the promoters
should have appointed independent directors and should have made a full
disclosure of the circumstances.
(If the promoter purchases the property or business at a time when he merely has
intention of promoting a company to acquire it, he owes no fiduciary duty to the
company.)

33

Laches: Delay  Decision of contract is nor barred by laches.
Termination of Promoter’s duties
A promoter’s duties do not come to an end on the incorporation of the company,
or when a Board of directors is appointed. They continue until the company has
acquired the property or business which it was formed to manage and has raised
its initial share capital, and the Board of Directors has taken over the
management of the company’s affairs from the promoters. When these things
have been done, the promoter’s fiduciary and contractual duties cease, and he is
thereafter subject to no more extensive duties in dealing with the company than
a third person, who is unconnected with it.
Thus, where a promoter disclosed the profit which he made out of a company’s
promotion to the persons who provided it with the share capital with which it
commenced business, it was held that he was under no further duty to disclose
the profits to persons who were invited to subscribe further capital
Case 3: Emma Silver Mining Co. v. Lewis (1879)
 A firm of metal brokers were selling ore of the Emma Silver Mine in
America, on a commission of 2.5%,
 The firm arranged with Park, one of the owners of the mine, to assist in the
Mine’s sale to a company to be formed by him in England to purchase it.
 Park was to secure the firm’s employment as metal brokers of the
projected company at the usual rate of English commission of 1%, and he
promised to pay them 5,000 for their assistance, and to compensate them
for the reduction in their commission.
 The real motive of Park in large payment to the firm was that he wanted
the firm to hide the facts detrimental to the reputation of the mine.
 After the incorporation, the company bought the mine at a price paid partly
in cash and partly in paid-up shares.
 The firm assisted in purchase and was named in the prospectus of the
company which was answerable to the queries related to the mine. The
firm hid the damaging information.

34

 They were appointed metal brokers of the company at the one per cent,
commission, and were secretly paid the sum promised them by a transfer
of two hundred and fifty paid-up shares out of those received from the
company in payment of the purchase price of the mine.
Held: The owners of the firm were held as promoters because they were in the
position of undisclosed joint adventures. As they were named in the prospectus
and assisted in floating the company by answering the inquiries of persons
proposing to take shares in it.
It was also held that the duties of the promoter go further than the registration of
a company. Even after registration of the company, a promoter is held to owe
fiduciary duties to the company.
Gluckstein v Barnes [1900] AC 240
 Scenario: Mr G and 3 others formed a syndicate and bought a property for
£120,000, but claimed they were paying £140,000.
 They also promote a company of which they become the directors and buy
the property (for the company) for £180,000.
 In order to fund the purchase, the company invited members of the public
to buy shares, for which a prospectus was issued. However, a £40,000
profit was disclosed, whereas the promoters had actually made an
additional £20,000 secret profit. This was not disclosed to the prospective
shareholders, but was instead written in with a vague reference to ‘interim
investments’.
 4 years later the company went into liquidation and the extra £20,000 was
discovered.
 The liquidator brought an action to recover part of this amount from Mr G.
Held: The rescission was no longer possible, however, the promoters had to pay
back to the company for the £20,000 secret profit
Liabilities of Promoters: (IMP)
General liability

35

1. Non-disclosure of contract or material facts:
(i) The company can sue the promoter for an amount of profit and recover the
same with interest.
(ii) The company can rescind the contract and can recover the money paid.
Case about promoter: LynCross v Grand, 1877 (1.11.18 )
Promoter entered into two contracts: i) supply, ii) commission
The fact that the contracts had not been disclosed in the prospectus—Breach of
duty by the promoter
Active concealment of material facts : Liable

2. Liability for mis-statement in the prospectus:
The promoter is liable to pay compensation to every person who subscribes for
any share or debentures on the faith of the prospectus for any loss or damage
sustained by reason of any untrue statement included in it.
Liabilities under
Section 26 (Matters to be Stated in Prospectus.),
S. 34. (Criminal liability for misstatements in prospectus)
S. 35: (deals with Civil liability for misstatements in)
3. Personal liability: The promoter is personally liable for all pre-incorporation
contracts made by him on behalf of the company until the contracts have been
discharged or the company takes over the liability of the promoter. The death of
promoter does not relieve him from liabilities.
4. Liability at the time of winding up of the company:
In the course of winding up of the company, on an application made by the
official liquidator, the court may make a promoter liable for misfeasance (a
transgression, especially the wrongful exercise of lawful authority) or breach of
trust.

36

Ways: 1. Over-valuation; 2. Commission of shares; 3. Lump sum amount
Specific Relief Act, 1963 s 15(h) when the promoters of a company have, before
its incorporation, entered into a contract for the purposes of the company, and
such contract is warranted by the terms of the incorporation of the company:
Provided that the company has accepted the contract and has communicated
such acceptance to the other party to the contract.
Watel land & Sanitation co. v. paulin colliery syndicate (1904): before the Specific
Relief Act the promoters were made liable for the damages personally.
Provisional Contract: Meaning of Provisional Contracts. All those
contracts/agreements, which are entered into by a Company (mainly Public
Company) after its incorporation but before the Certificate of
Commencement(COC) of Business is issued to the Company, is called as
"Provisional Contracts". These contracts are enforceable.
How to remunerate promoter?
1. To ensure remuneration a promoter has to mention in the AoA and he needs to
have a pre-incorporated Contract Relief , 1963[ Sec 16(h) &Sec 19 (e)]
2. Pre-incorporation contract talks about remuneration because he had to enter
in many contracts while formation of the company. (PIC are those contracts which
co. or promoter enter into for the formation of company)
Sec 15(h) Where the promoters of a public co. have made a contract before its
incorporated for the purposes of a company and if the contract is warranted by
the terms of it in the co may enforce it.
Case: Datal land & . . . v Paulin Colliery Syndicate, 1904
Mr. X leased a land owned by him to Association of people called Syndicate.
Afterwads the syndicate incorporated into a company. But, when the was leased,
it was in the name of the Syndicate. That is , it was a pre-incorporated contract by
the Syndicate.

37

Before the Specific Relief Act, the promoters were made liable for the damages
accrued personally.
3 ways of remuneration:
1. Where the promoter will tell his property on over-valuation
2. He can take commission for shareholding or
3. can take lump-sum amount

-------------------------------------------------------------------------------------------------------------
Module 3: CONSTITUTIONAL INSTRUMENTS
## A special resolution of the members (or of a class of members) of a company means
a resolution passed by a majority of not less than 75%.

Memorandum of Association (MOA)
 Memorandum of Association is simply the constitution or charter of the
company and defines the scope of the activities of the company. It defines
the relation of the company with the rights of the members of the company
and also establishes the relationship of the company with the members.
 As per Section 2(56) of the Companies Act,2013 “memorandum” means
the Memorandum of Association of a company as originally framed or as
altered from time to time in pursuance of any previous company law or of
this Act.
Purpose/ Importance of Memorandum of Association
 The memorandum enables all those who deal with the company, be it the
shareholders or creditors, to know the purpose of the company and its
range of activities.
 It limits the company’s capacity to contract, thereby restricting it to the
activities mentioned in the MoA at the time of its formation.

38

Form of MOA
The MOA of a company should be prepared according to the respective forms
specified in Tables A, B, C, D and E of the Schedule 1 of the Companies Act, 2013.
 Form in Table A is applicable to companies limited by shares.
 Form in Table B is applicable to companies limited by guarantee and not
having a share capital.
 Form in Table C is applicable to the companies limited by guarantee and
having a share capital.
 Form in Table D is applicable to unlimited companies, not having a share
capital.
 Form in Table E is applicable to unlimited companies and having share
capital.

Printing and signing of MOA
 The MOA must be printed and signed by each member
 7 members in case of a public company;
 2 members in case of a private company
 1 member in case of One Person Company (OPC)
 In case of One Member Company (OPC), the name of the nominee must be
mentioned in the MOA. In case of death or incapability of the member, the
nominee shall become member of the company.
Contents of MOA
Section 4 of the Companies Act, 2013 states that the Memorandum of Association
of a company shall contain the following;
 Section 4 : Memorandum – 6 Clauses of the Memorandum of Association
Under Section 13 of Companies Act
1. Name Clause: (Name of the company.) A Company is a legal entity. So, it must
have a name to establish its identity. Name Clause in the Memorandum of

39

Association confers protection against subsequent company registration in the
same or closely similar name.
2. Object Clause: (Objectives of the company): It defines and limits the scope of
operations of the company. The object clause determines the purpose for which
the company has been set up and it determines the capacity of the company. A
company is not legally entitled to conduct any business activity that is not
specifically mentioned in its object clause.
It explains to the members the scope of activity of the company where their
capital will be employed.
3. Situation Clause (only state)(Address of Registered Head Office) :
Memorandum of Association must state the name of the State in which the
registered office of the company is to be situated.
4. Subscription Clause: This clause states that the persons subscribing their
signatures at the end of the Memorandum are desirous of forming themselves
into an association in pursuance of the Memorandum. According to this clause,
the memorandum must mention the amount of authorized share capital and the
number of shares taken by each member/subscriber. The following are the
statutory requirements regarding subscription:
 The memorandum must be signed by each subscriber in the presence of at
least one witness who attests the signature.
 Each subscriber must take at least one share; and
 Each subscriber must write the number of shares held by him.
5. Capital Clause: (Capital structure of the company ) (only in case of a company
having share capital, i.e. company limited by shares or company limited by
guarantee having share capital) must also state the amount of share capital with
which the company is to be registered which is usually called authorized or
nominal capital. Further, division of registered share capital into shares of a fixed
amount is also required to be given in the memorandum.
6. Liability Clause: (Liability of its members): Liability clause mentions the liability
of members of the company - In case of a company limited by shares,
Memorandum of Association must have a clause to the effect that the liability of

40

the members is limited to the extent of the amount of the unpaid portion of the
shares held by him.
#Nominee Clause in case of One Person Company

 Memorandum must be:
- Consecutively numbered
- Divided into paragraphs
- Has to be printed
- Witness must be there
- All Subscribers must sign.
Sec 499(1) states that MoA and AoA once registered with RoC becomes public
documents.
Articles of Association (AOA)
 Articles of Association is a document which prescribes the rules and bye-
laws for the general management of the company and for the attainment
of its objectives. (as given in the memorandum of association of the
company). It is a document of great significance in the life of a company as
it contains the regulations for the internal administration of the company’s
affairs and the conduct of business
 It is the basic legal document of the company.
 The articles of association are a subsidiary to the memorandum of
association of the company i.e., AOA is subordinate to MOA
 As per Section 2 (5) AOA is the internal regulation of the company.
 AoA Format prescribed in Sec 5, Schedule I, F, G, H, I, J.
 AOA can be altered from time to time.
 It defines the powers of the officers of the company
 It establishes a contract between the company and its members, and
members inter se. (The phrase is "used to distinguish rights or duties
between two or more parties from their rights or duties to others.)
 It is divided into paragraphs.
 It has to be printed.

41

 It has to be signed by the subscribers of the company.
 It has to be signed by one of the witnesses.
 AOA defines the rights, duties and powers of the governing body and it is
also called by-laws of the company.
 According to the Companies Act 2013, “Articles” means the articles of
association of a company as originally framed or as altered from time to
time. [section 2 (5)]
 Section 5(1) and section 5(2) of the Companies Act, 2013 provide for the
contents of the Articles of Association.
 The following companies must have their own articles of association:
 Unlimited Companies
 Companies limited by guarantee
 Private companies limited by shares
Contents of Articles of Association
Section 5(1) and section 5(2) of the Companies Act, 2013 provide for the contents
of the Articles of Association. The articles must contain the regulations for the
management of the company along with the matters prescribed by the Central
Government. Further, the articles of association must also contain the following:
1. Share capital including sub-division, rights of various shareholders, the
relationship of these rights, payment of commission, share certificates.
2. Lien of shares: Lien of shares means to retain possession of shares in case
the member is unable to pay his debt to the company.
3. Calls on shares: Calls on shares include the whole or part remaining unpaid
on each share which has to be paid by the shareholders on the company’s
demand.
4. Transfer of shares: The articles of association include the procedure for the
transfer of shares by the shareholder to the transferee.
5. Transmission of shares: Transmission includes devolution of title by death,
succession, marriage, insolvency, etc. It is not voluntary but is in fact
brought about by operation of law.

42

6. Forfeiture of shares: The articles of association provide for the forfeiture of
shares if the purchase requirements such as paying any allotment or call
money, are not met with.
7. Surrender of shares: Surrender of shares is when the shareholders
voluntarily return the shares they own to the company.
8. Conversion of shares in stock: In consonance with the articles of association,
the company can convert the shares into stock by an ordinary resolution in
a general meeting.
9. Share warrant: A share warrant is a bearer document relating to the title of
shares and cannot be issued by private companies; only public limited
companies can issue a share warrant.
10. Alteration of capital: Increase, decrease or rearrangement of capital must
be done as the articles of association provide.
11. General meetings and proceedings: All the provisions relating to the general
meetings and the manner in which they are to be conducted are to be
contained in the articles of association.
12. Voting rights of members, voting by poll, proxies: The members’ right to
vote on certain company matters and the manner in which voting can be
done is provided in the articles of association.
13. Directors, their appointment, remuneration, qualifications, powers and
proceedings of the boards of directors meetings.
14. Dividends and reserves: The articles of association of a company also
provide for the distribution of dividend to the shareholders.
15. Accounts and Audits: The auditing of a company shall be done subject to
the provisions of the articles of association of the company.
16. Borrowing powers: Every company has powers to borrow money. However,
this must be done according to the articles of association of the company.
17. Winding up: Provisions relating to the winding up of the company finds
mention in articles of association of the company and must be done
accordingly.

Provisions of Entrenchment in the Articles of Association

43

- The Companies Act, 1956 or earlier Acts did not provide this feature. Section 5
(3) of the 2013 Act provides that the articles may contain provisions for
entrenchment.
- The word ‘entrench’ means to establish an attitude, habit, or belief so firmly
that change is very difficult or unlikely. Thus, an entrenchment clause is the
one which makes certain amendments either impossible or difficult.
- Thus, the entrenchment provisions in the AOA means that certain provisions
of the Articles will not be alterable merely by passing a special resolution.
They will require a more elaborate prescribed procedure to be followed.
- The provisions for entrenchment referred to above shall only be made either
on formation of a company, or by amendment in the articles agreed to by all
the members of the company in case of a private company and by a special
resolution in case of a public company.

Who can be the Regulators?
For:
1. SEBI - Listed Companies
2. RoC – All the companies
3. Central Government
4. CCI – where companies are having merger etc.???
5. TRI – Telecom Regulatory Authority
6. IRTA – Insurance Regulator

Distinction between Memorandum of Association (MOA) and Articles of
Association (AOA)
Basis of
comparison
Memorandum of Association
(MOA)
Articles of Association (AOA)
Definition MOA is a document that AOA is a document

44

contains all the fundamental
data which are required for
the company incorporation.
containing all the internal
rules and regulations that
govern the company. As it
regulates the relationship
b/w company and the
members and members inter
se.
Registration

MOA must be registered at
the time of incorporation.
AOA may or may not be
registered.
Scope The Memorandum is the
charter, which characterizes
and limits powers and
constraints of the
organization.

The articles demonstrate
obligations, rights, and
powers of individuals, who
are endowed with the
responsibility of running the
organization and
administration.
Status Supreme (main)document. It is subordinate to the
memorandum.

Power

The memorandum cannot
give the company power to
do anything opposed to the
provision of the companies
Act.
The articles are constrained
by the Act, but they are also
subsidiary to the
memorandum and cannot
exceed the powers contained
in the MOA.
Contents

A memorandum must contain
six clauses as mentioned in
the Act.
The articles can be drafted
according to the decision of
the Company.
Objectives The memorandum contains
the objectives and powers of
the company. Any act which is
beyond the scope of activities
prescribed in MoA is void
The articles provide the
regulations by which those
objectives and powers are to
be conveyed into impact.
Validity The memorandum is the
dominant instrument and
controls articles.
Any provision, as opposed to
a memorandum of
association, is invalid.
Alteration/change #When MoA has to be altered When AoA alters then special

45

then special resolution is
required as well as ordinary
resolution is required. Besides
these, the permission of the
regulators is needed.

Resolution of the company is
required.
Legality of change Even if all the directors ratify
(signature of consent) MoA , it
cannot be approved unless
and until there is a procedure
followed as per the Company
Act.
It can be changed /altered
with the consent of all the
directors, but it should not be
beyond the conditions as
prescribed in MoA.
The format of MoA is
prescribed in
 Schedule I, A,B,C,D,E
 Sec. 2 (56)
 Se. 4

The format of AoA is
prescribed in
 Schedule I, F, G, H, I, J.
 Sec. 2 (5)
 Sec. 5

How to incorporate a Company
Incorporation of a Company
 Section 3 of the Companies Act, 2013 deals with the formation of a company. It
states that a company may be formed for any lawful purpose by—
(a) seven or more persons, where the company to be formed is to be a
public company;
(b) two or more persons, where the company to be formed is to be a
private company; or
(c) one person, where the company to be formed is to be One Person
Company that is to say, a private company,
by subscribing their names or his name to a memorandum and complying
with the requirements of this Act in respect of registration.
Companies Incorporations Rules, 2014

46

 Section 7 deals with the Incorporation of company. It states that following
documents are required to be submitted to Registrar of Companies (RoC):

 Steps :
 1. Application for incorporation [FORM INC 1] & for, OPC [FORM INC2]; the
Registrar may reserve the same for 60 days Sec 4 (5)(i)
2. The MoA and AoA, if any, duly signed by the subscribers of the memorandum.
[Rule 3 sec 7(1) (a)]
3. Declaration from professionals [FORM INC – 8] {Rule 14, Sec. 7 (1) (b)}
4. Affidavit from the Subscribers [FORM INC-9] {Rule 15, Sec. 7 (1) (c)} : a
declaration in the prescribed form that all the requirements of this Act and the
rules made thereunder in respect of registration etc. have been complied with.
5. The address for correspondence till its registered office is established,
Verification of Registerd office [FORM INC-22] (within 30 days of incorporation)
[Rule 25, Sec 12]
6. Particulars of Subscribers: [FORM INC- 7&2]: name, including surname or family
name, residential address, nationality, etc. with Id proof. [Rule 16, Sec 7 (1)(c)]
7. Particulars of 1st Director [FORM DIR 12 , DIN] {Rule 17,Sec (7)(1)(f)}
8. PoA – Execution of PoA
9. Issue of CoI [Sec.7 (2)] {CoI is in Sec 9}
10. Allotment off CIN [Sec. 7 (3)] : On and from the date mentioned in the
certificate of incorporation issued, the Registrar shall allot to the company a
corporate identity number, which shall be a distinct identity for the company
and which shall also be included in the certificate.
11. Documents of Incorporation has to be presented by RoC [Sec 7(4)]
 Syed Akbar Ali Nanji v UOI. : The court did not allow to challenge the COI as
it was conclusive . . . .

How to apply to Central Govt. for TIN (tax identification no)

47

 # Form M/H GT 14: ( Your Class notes):
- Which rules promoters want not to be changed. It is not that
the rule cannot be changed but it is mentioned that if all
directors want then only it can be changed or any other
condition as may be mentioned by the promoter.
- It is filled at the time of incorporation and it can be amended.
It is infringement
- Infringement provisions should be more restrictive than the
Special Resolutions.
-
# Articles may be amended only if there is special Resolution
1. Consent is granted by some particular Director
2. With approval of all share-holders
3. 90% share-holders vote positively in meeting
# [Sec (5) (4)] Infringement provisions can be added during the formation of
the company. It has to be informed to RoC in a prescribed form and
mentioned in Rule 10 in Companies Incorporation Rules , 2014.

 Section 9 deals with effect of Registration.
It says that from the date of incorporation mentioned in the certificate of
incorporation, such subscribers to the memorandum and all other persons,
as may, from time to time, become members of the company, shall be a
body corporate by the name contained in the memorandum, capable of
exercising all the functions of an incorporated company under this Act.
(Like having perpetual succession with power to acquire, hold and dispose
of property, both movable and immovable, tangible and intangible, to
contract and to sue and be sued, by the said name.)

Certificate of Incorporation:
 Section 7 of the Companies Act deals with incorporation of a company
including the issue of certificate of incorporation.

48

 After scrutinizing the documents filed and on being satisfied that they are
in order, that the requisite fee has been paid and that all other legal
requirements have been duly complied with, the Registrar will enter the
name of the company in the Register of Companies and shall certify under
his hand that the company is incorporated and, in the case of a limited
company that the company is limited.
 The Registrar would then issue a certificate in the prescribed Form No. INC
– 11, under his signature, certifying that the company is incorporated. With
effect from 30.01.2017, the certificate of incorporation shall also contain
PAN of the company issued by the Income Tax Department. The certificate
of incorporation contains:
 Name of the company;
 Date of issue of the certificate;
 Signature of the Registrar with seal.
 Certificate of incorporation constitutes the company’s birth certificate and
the company becomes a body corporate, with perpetual succession and a
common seal. The company comes into existence on the date given in the
Certificate of Incorporation.
 If the Registrar is of the view that there are some minor defects in any
document, he may require that the defects be rectified. But, if there are
some material and substantial defects, the Registrar may refuse to register
the company.
 Allotment of Corporate Identity Number (CIN): As per Section 7 (3), on or
from the date mentioned in the certificate of incorporation, the Registrar
shall allot to the company a Corporate Identity Number (CIN), which shall
be a distinct identity for the company and which shall be included in the
certificate.
 The Ministry of Corporate Affairs has allowed issue of Certificate of
Incorporation electronically under digital signature of Registrar.
 At the time of incorporation of a company where one of the objects is to
carry on the business of Banking, Insurance or to practice the profession of
Chartered Accountancy, Cost Accountancy, Company Secretaries or

49

Architecture, the Registrar shall incorporate the company only on
production of in-principle approval/ NOC from the concerned Regulator/
Professional Institute.

From the date of incorporation mentioned in the certificate, the company
becomes a legal person separate from its shareholders. The legal effect of
incorporation is as under:
1. A company becomes a body corporate distinct from its members. It becomes a
legal person and not a mere aggregate of the shareholders. Thus, where all the
members of a company were killed by a bomb the company was deemed to
survive.
2. A company has a perpetual succession and a common seal it is an immortal
being.
3. A company can sue and be sued in its own name.
4. A company has a right to hold and alienate its own property. The property of
the company belongs to the company itself and not to the individual members.
5. Company’s debts and obligations are the liabilities of the company only and
cannot be enforced against the individual shareholders.
Conclusiveness of the certificate of incorporation:
The certificate of incorporation shall be conclusive evidence that-
i) All the requirements of the act have been complied with in respect of
registration;
ii) All the pre-conditions of registration have been complied with
iii) The company is duly registered, and
iv) That the company came into existence on the date of the certificate.

50

The certificate of incorporation prevents the re-opening of matters prior to the
registration and essential to it. It places the existence of the company as a legal
person beyond doubt. Consequently, even if the seven signatures to a
memorandum were written by one person or were all forged, the certificate
would be conclusive that the company was duly registered. Similarly, if the
signatories were all infants, the certificate would still be conclusive.
Case 4: Jubilee Cotton Mills (J.C.M.) v. Lewis (1924) AC 958
On 6th January, the necessary documents were delivered to the Registrar o C for
registration. Two days later the RoC issued the certificate of incorporation but
dated it 6th January instead of 8th.
Mr. Lewis was also a member.
On 6th January, company allotted shares to Lewis. It was contended to be void
since the company was not in existence on that date.
Lewis filed the case against the company as to the validation of his shares as the
Certificate of Incorporation (CoI) was not issued then.
Issue: Whether the shares allotted to its members are valid or not?
The memorandum and articles of the company were delivered to the Registrar for
registration on the 6th January. On the 8th January the Registrar issued the
certificate of incorporation, and dated it 6th January. On the 6th January and
before the certificate was issued, the company allotted shares to L.
Held, the certificate of incorporation was conclusive as to the date on which the
company was incorporated and consequently the allotment of shares to L. was
not void on the ground that it was made before the company was incorporated.
Thus, certificate date is the final date and it is the conclusive evidence. Any kind of
error may be solved later.
Case 5: Moosa v. Ebrahim (1913)

51

Out of the seven subscribers to the memorandum of association of a company,
five were minors. The guardians of the minors made separate signatures for each
minor on the memorandum of association.
The Registrar, however, issued the certificate of incorporation. The validity of
certificate of incorporation was challenged. It was held that though the Registrar
should not have issued the certificate but the certificate was conclusive for all
purposes.
 If the objective of the company is illegal (e.g. selling drugs) and by error, the
certificate of incorporation is issued, it is not valid.
Performing Right Society Ltd. v. London Theatre of Varieties (1992)??
.
.
.
MoA: Objectives of company
AoA : Rules & regulations of company that govern the management of company’s
internal affairs and the conduct of its business.
Both are public documents: both have to be registered with RoC. In case of any
conflict MoA will prevail.
Contents of MOA
1. Name Clause: According to the first clause, the memorandum must state the
name of the company by which it wants to be known, subject to the following
conditions:
 In case of a public limited company, the name must have the last word
“Limited” and in case of a private limited company, the name must end
with “Private Limited”.
 The name of the company must not be identical with an existing company.

52

 No company will have the name which is undesirable in the opinion of the
government.
 The name must not mislead the public. For example, a company will not be
allowed to use a name, which is prohibited under the Emblems and Names
(Prevention of Improper Use) Act, 1950.
 The company must not use any names which suggest any connection with
the government or state patronage without the prior approval of the
government.
Change in name
 Section 13 – Change of name at the instance of the company: provides that
the name of a company may be changed at any time by passing a special
resolution at a general meeting of the company and with the written
approval of the Central Government.
 However, no approval of the Central Government is necessary if the change
of name involves only the addition or deletion of the word “private” i.e.
when public company is converted into a private company or vice versa.
 Section 16 – Change of name on a direction from the Central Government: If
through inadvertence or otherwise, a company on its first registration or on
its registration by a new name, which in the opinion of the Central
Government, is identical with or too closely resembles the name of an
existing company, the company may change its name within a period of
three months from the issue of such direction by passing an ordinary
resolution and by obtaining the approval of the Central Government.
Effect of change in name
(i) The change of name shall not affect any rights/ obligations of the company or
render the same defective in legal proceedings by or against it.
(ii) Where a company changes its name and the new name has been registered by
the Registrar, the commencement of legal proceedings in the former name is not
competent.
(Not in class notes but for understanding):
[Malhari Tea Syndicate Ltd. v. Revenue Officer (1973)]

53

 However, if any legal proceeding is commenced, after change of name,
against the company, in its old name, it is a case of mere misdescription
and not a case of proceeding against a person not in existence. It is not
an incurable defect and plaint can be amended to substitute the new
name. [Pioneer Protective Glass Fibre (P) Ltd. v. Fibre Glass Pilkington
Ltd. (1986)]
 By change of name, constitution of company does not change: In
Economic Investment Corporation Ltd. v. CIT [1970], it was held that by
change of name, the constitution of the company is not changed. The
only thing that changes is its name; all the rights and obligations under
the law, of the old company pass to the new company. It is not similar
to the reconstitution of a partnership, which in law means creation of a
new legal entity altogether.
Change of registered office
 Change of registered office from one premises to another premises in the
same city/town/village: A company can change its registered office from
one place to another within the local limits of the city, town or village
where it is situated, by passing a resolution of the Board of directors.
However, the company should inform the Registrar of the new address
within 15 days of the change.
 Change of registered office from one town/city/village to another town
/city/ village in the same state: (Form INC 22)
 A special resolution is required to be passed at a general meeting of
the shareholders.
 Notice and Copy of special resolution and confirmation of the
Regional Director has to be filed with Registrar of Companies (ROC)
within 15 days.
 Rule 28 Comp (INC) Rules, 2014: Confirmation of the Regional
Director is to be obtained (Application within 30 days) where the

54

jurisdiction of one Registrar of Companies changes to the jurisdiction
of another Registrar of Companies. (Form INC 23)
 Information to RoC 1 within 60 days & Information to RoC 2 within 30
days
 Form no. INC – 26: Advertisement to be published in the newspaper
for change of registered office of the company from one city to
another (within 30 days)(Effective from 27.07.2017)
As per Rule 28, the shifting of registered office shall not be allowed if any inquiry,
inspection or investigation has been initiated against the company or any
prosecution is pending against the company under the Act.
 Change of registered office from one state to another state: Rule 30 of
Comp(INC),2014
 Passsing a Special resolution: Without issuing notice to its
shareholders holding substantial shares (15.26%) in company,
shifting of office was held illegal [Shabbir Ahmed v. Safedabad Cold
Storage & Allied Industries (P) Ltd. (2017) NCLT Kolkata]
 Settlement of the list of creditors including debenture holders;
 Obtaining the consent of the creditors and in case any creditor (s)
objects, his debt or claim should be discharged or determined or
secured to the satisfaction of the Central Government.
 Section 13 (4), (5), (7) Obtaining confirmation of the Central
Government; (Application to be filed in Form INC 23)
 Documents to be filed along with the application:
- a copy of MoA along with proposed alterations
- A copy of minutes of General Meeting

55

- The company shall be required to advertise in Form INC-
26 in Newspapers both English and Vernacular, within 30 days of filing of
Form INC 23.
 Filing of order of the Central Government with the Registrar.
 Here, New Certificate of incorporation is issued (Form INC 23])
Change in Objects clause
Alteration of objects of the company mentioned in MOA can be divided into two:
 Alteration of objects by a company which has not issued a prospectus: Such
company which has not issued a prospectus may change its objects by
passing a special resolution. The special resolution is required to be passed
by postal ballot except in the case of OPCs and other companies having
members up to 200.
 Alteration of objects by a company which has issued a prospectus: Section
13 read with the Companies (Incorporation) Rules, 2014 provides that a
company, which has raised money from public through prospectus and still
has any unutilized amount out of the money so raised, shall not change its
objects for which it raised money through its prospectus unless a special
resolution through postal ballot is passed by the company. Requirement of
passing of resolution through ballot is not applicable to a company having
members up to 200.
1.8 Doctrine of Lifting or Piercing the Corporate Veil:
One of the main characteristic features of a company is that the company is a
separate legal entity distinct from its members.
The most illustrative case in this regard is the case decided by House of Lords-
Salomon v. A Salomon & Co. Ltd. [1897].
Salomon v. A Salomon & Co. Ltd

56

 In this case Mr. Solomon had business of shoe and boots manufacture. ‘A
Salomon & Co. Ltd.’ was incorporated by Solomon with seven subscribers –
himself, his wife, a daughter and four sons. All shareholders held shares of
UK pound 1 each. The company purchased business of Salomon for 39000
pounds, the purchase consideration was paid in terms of 10000 pounds
debentures conferring charge on the company’s assets, 20000 pounds in
fully paid 1 pound share each and the balance in cash.
 The company in less than one year ran into difficulties and liquidation
proceedings commenced. The assets of the company were not even
sufficient to discharge the debentures (held entirely by Salomon itself) and
nothing was left to the insured creditors.
 The House of Lords unanimously held that the company had been validly
constituted, since the Act only required seven members holding at least
one share each and that Salomon is separate from Salomon & Co. Ltd. The
entity of the corporation is entirely separate from that of its shareholders; it
bears its own name and has a seal of its own; its assets are distinct and
separate from those of its members; it can sue and be sued exclusively for
its purpose; liability of the members is limited to the capital invested by
them.
Lee v. Lee’s Air Farming Ltd.*1961+
 Further in Lee v. Lee’s Air Farming Ltd.[1961], it was held that there was a
valid contract of service between Lee and the Company, and Lee was a
therefore a worker within the meaning of the Act. It was a logical
consequence of the decision in Salomon’s case that one person may
function in the dual capacity both as director and employee of the same
company.
Thus, after incorporation, a company becomes a legal person separate and
distinct from its members. It has a corporate personality of its own with rights,
duties and liabilities separate from those of its individual members. Thus, a veil of
incorporation exists between the company and its members and due to this a

57

company is not identified with its members. In order to protect themselves from
the liabilities of the company, its members often take the shelter of the corporate
veil. Sometimes this corporate veil is used as a vehicle of fraud or evasion of tax
etc. To prevent unjust and fraudulent acts, it becomes necessary to lift the veil of
the corporation or disregard the corporate personality to look into the realities
behind the legal façade and to hold the individual member of the company liable
for its acts or liabilities.
3.4 Doctrine of ultra-vires
 ‘Ultra Vires’ is a Latin term: “ultra” – beyond ; “vires” – power or authority.
In the context of the company, anything which is done by the company or
its directors which is beyond their legal authority or which is outside the
scope of the object of the company is ultra-vires.
 For example, companies have to borrow funds from time to time for
various projects in which they are engaged which is a normal phenomenon.
However, there are certain restrictions while making such borrowings. If
companies go beyond their powers to borrow then such borrowings may be
deemed as ultra-vires.
 Memorandum of Association is the constitution of the company. A
company is authorized to do only that much which is within the scope of the
powers provided to it by the memorandum. A company can also do anything
which is incidental to the main objects provided by the memorandum. Anything
which is beyond the objects authorized by the memorandum is an ultra-vires act.
Difference between an Ultra-Vires and an Illegal act
- Anything which is beyond the objectives of the company as specified in the
memorandum of the company is ultra-vires.
- Anything which is an offence or draws civil liabilities or is prohibited by law
is illegal.
- Anything which is ultra-vires, may or may not be illegal, but both of such
acts are void ab-initio.
The doctrine of ultra-vires in Companies Act, 2013

58

 Section 4 (1)(c) of the Companies Act, 2013, states that all the objects for
which incorporation of the company is proposed and any other matter
which is considered necessary in its furtherance should be stated in the
memorandum of the company.
 Whereas Section 245 (1) (b) of the Act provides to the members and
depositors a right to file an application before the Tribunal if they have
reason to believe that the conduct of the affairs of the company is done in a
manner which is a breach of the provisions of the company’s memorandum
or articles.
Basic principles regarding the doctrine of ultra vires
 Shareholders cannot ratify an ultra-vires transaction or act even if they wish
to do so.
 Where one party has entirely performed his part of the contract, reliance
on the defence of the ultra-vires was usually precluded in the doctrine of
estoppel. *‘estoppel’ – a legal rule that prevents someone from changing
their mind about something they have previously said is true in court;
‘Preclude’ means prevent from happening; make impossible+
 Where both the parties have entirely performed the contract, then it
cannot be attacked on the basis of this doctrine.
 Any of the parties can raise the defence of ultra-vires.
 If an agent of the corporation commits any default or tort within the scope
of his employment, the company cannot defend it from its consequences
by saying that the act was ultra-vires.
 Effects of ultra vires Transactions – Doctrine of Ultra Vires
 Void ab initio: The ultra vires acts are null and void ab initio. These acts are
not binding on the company. Neither the company can sue, nor it can be
sued for such acts. In Ashbury Railway Carriage and Iron Company v. Riche
Case the Doctrine of Ultra Vires evolved. The objective of the company is to
make, sell or lend all kinds of railways carriage construction materials to
carry on the business by mechanical Engineers and general contractors. But

59

the company agreed to give Riche and his brother a loan to build a railway
from in Belgium. Later, the company cancelled the agreement.
 One of the directors of the company was involved and took their consent.
The document was submitted to company by Mr Richie. Then also the
company demanded to fulfil the contract for which Richie filed a case
against the company. Issue was that whether the contract was valid or not.
 The company pleaded the contract ultra Vires as Acc. to MoA any such
decision to give contract was not there
 It was held that the contract was void ab initio and hence, the contract
cannot be enforced against the company. The important principle that
came out of this case is that all the ultra vires acts are void and cannot be
ratified even if the shareholders wish to ratify it and unless and until a
proper procedure is followed as per law.
 Estoppel or ratification cannot convert an ultra-vires act into an intra-vires
act.: Shareholders cannot ratify an ultra-vires transaction or act even if they
wish to do so.
 Injunction: when there is a possibility that company has taken or is about to
undertake an ultra-vires act, the members can restrain it from doing so by
getting an injunction from the court. [Attorney General v. Gr. Eastern Rly.
Co., (1880)].
 Personal liability of Directors: The directors have a duty to ensure that all
corporate capital of the company is used for a legitimate purpose only.
 Criminal action can also be taken in case of a deliberate misapplication or
fraud. However, there is a small line between an act which is ultra-vires by
the directors and acts which are ultra-vires the memorandum. If the
company has authority to do anything as per the memorandum of the
company, then an act which is done by the directors beyond their powers
can be ratified by the shareholders, but not otherwise.

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 If any property is purchased with the money of the company, then the
company will have full rights and authority over such property even if it is
purchased in an ultra-vires manner.
 Relationship of a debtor and creditor is not created in an ultra-vires
borrowing. [In Re. Madras Native Permanent Fund Ltd., (1931)].

3.5 Doctrine of Constructive Notice
 Doctrine of Constructive Notice

- Sec 399 ( MoA & AoA are ‘public documents’ which are accessible to the
people either without any cost through electronic means or on payment of
a nominal amount.)
- Sec 17 (Payment of Nominal fee for viewing AoA & MoA)
- Rule 34
- It is the duty of the third party dealing with the company to check the AoA
and MoA.
- It is presumed that the company has read it.
- The doctrine is in favour of the company.
 Therefore, any person who contemplates entering into a contract with the
company is thus presumed to have inspected such documents and thus to
be aware of the powers of the company and the extent to which the
powers have been delegated to the directors. In other words, every person
dealing with the company is presumed to have read these documents and
understood them in their true perspective. This is known as “doctrine of
constructive notice”. Even if the party dealing with the company does not
have actual notice of the contents of these documents it is presumed that
he has an implied (constructive) notice of them.
Case: Kolta Venkataswamy v. Ramamurthy
- If any mortgage deed is done the MD, Company Secretary, Whole Time
Director must sign.

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- But in this case the deed was signed by only the Whole time Director and
the CS.
- Hence , the company held it as invalid because proper procedure was not
followed and
- therefore, the court held that the company is not liable but the third party
is liable.

3.6 Doctrine of Indoor Management

Company  AoA  If Project is to be of more than 2 crore 75% of the
shareholders have to sanction it in GM.
 Mr. T , an outsider and investor, approached the company; Had knowledge
of AoA &MoA; Approached the company for 3 crore project; Passing of
resolution by the shareholders is the internal matter of the company. 
How will Mr. T know whether the resolution has been passed or not.
 Company says that the project has been sanctioned.
 Mr. T presumed that the resolution has been passed as it is the duty of the
company to get it passed.
 Later on when Mr T asks money from the company , it denies.
 R. T has to prove that he has
Condition:
i) Knowledge of MoA & AoA
ii) No knowledge of Irregularity
So, here the company is liable , Mr. T is not liable.

This doctrine is an antithesis to constructive notice principle.
The rule of constructive notice proved too inconvenient for business transactions.
This is more so when the directors or other officers of the company are
empowered under the articles to exercise certain powers subject only to certain
prior approvals or sanctions of the shareholders. Whether those sanctions and
approvals had actually been obtained or not, could not be practically ascertained
by investors, vendors, creditors and other outsiders. This is because these people

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would not dare ask the directors whether the required sanction had been
obtained or not, or to produce the relevant resolutions.
For example, if one desires to buy a ‘bond’ or ‘debenture’ issued by a company,
quite naturally he will not ask the directors of the company to produce
shareholders’ resolution authorizing them to issue such bonds. Likewise, if a
director approaches one to buy certain goods worth, say a few thousand rupees,
the vendor will not ask him for a power of attorney or other relevant document
authorizing him to make those purchases on behalf of the company. And if the
vendor does so, he may lose a good customer once for all.
 Since there are no means to ascertain whether necessary sanctions and
approvals have been obtained as per articles of the company, those dealing
with the company can assume that the directors or other officers have
obtained the necessary sanctions. This is known as the “the doctrine of
Indoor Management”.
Case: Royal British Bank v. Turquand ; 1856 (TURQUAND RULE)
The foundation of the rule of indoor management was laid down in the case of
Royal British Bank v Turquand,*1856+ and the doctrine of ‘indoor management’
evolved as a partial exception to the doctrine of ‘constructive notice’. In this case,
the directors of a company borrowed money from Mr. Turquand by issuing a
bond. As per the articles of association of the company, they were authorized to
do so subject to a special resolution in that regard. But no such resolution was
passed by the company. Mr. T assumed that Co must have authorised by after
due process as he had read the MoA & AoA
The court held that the director borrowed money without proper authority which
is an irregularity within the company, so the company would still be liable to pay
off the debts incurred, and the bank was entitled to assume that before
borrowing money, the resolution was passed.
Exceptions to the doctrine of indoor management

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Since the scope was widened, the chances of its misuse also increased, so the
courts came up with following exceptions to this rule:
1. Where the outsider had knowledge of irregularity: a person knowing fully well
that the directors do not have the authority to make the transaction but still
enters into it cannot seek protection under the rule of indoor management.
Case: J. R. Pratt Ltd. v E. D. Sassoon & Co. Ltd, AIR 1942
Case: Howard v Patent Ivory manufacturing Company (1888)
2. No knowledge of MoA or AoA : The rule of ‘indoor management’ cannot be
invoked in favour of a person who did not consult the memorandum and articles
and hence did not rely on them.
In Rama Corporation v. Proved Tin & General Investment Co. [1952], T was a
director in the investment company. He, declaring to act on behalf of the
company, entered into a contract with the Rama Corporation and took a cheque
from Rama Corporation. The articles of the investment company did provide that
the directors could delegate their powers to one of them. But Rama Corporation
people had never read the articles. It was found that the directors of Rama
Corporation did not delegate their powers to T. The Plaintiff relied on the rule of
indoor management. It was held that they could not rely on the rule because they
even did not know that the power could be delegated.

3. Forgery: The rule of indoor management does not extend to transactions
involving forgery (in which the person relies on a document which has been
forged) or otherwise void or illegal ab initio. The doctrine of internal management
cannot be used to validate transactions in which the person relies on a document
which has been forged. The leading case on this point is of Shri Kishan Rathi v.
Mondal Brothers and Co. (P.) Ltd. [1967]. In this case, the plaintiff was the
transferee of a share certificate issued under the seal of the defendant company.
The certificate which was issued contained the seal of the company and forged
signatures of two directors, and such forgery was done by the company’s

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secretary. It was being argued by the plaintiff that the matter regarding the
genuineness of the signature is a part of internal management, and thus, such
forgery of the signature cannot be contended by the company. But the court held
that the doctrine of indoor management cannot be extended to validate and
cover forgery cases. The court also said that this doctrine applies to irregularities
which might affect a genuine transaction and not to forgery.
Ruben v. Great Fingall Consolidated, [1906] A. C. 439. The secretary issued a
share certificate which apparently complied with the company's articles, being
signed by two persons, one of the directors of the company and the company
secretary, and having the company's seal affixed. The secretary had forged the
directors' signatures and affixed the seal without authority.
Held, The certificate was not binding on the company, and the Secretary was
personally liable.
4. Negligence: The person cannot invoke this doctrine if the person, who is
entering into a contract with the company, has not enquired prudently and has
not made proper inquiries, because of which he is not aware of the irregularity. If
he would have conducted proper inquiries, then would have known that
irregularity exists, and hence it is because of his own fault that he is unaware of
the irregularity. This exception also covers the situation where the situations
surrounding the contract were so suspicious that a prudent person would have
made an inquiry, but the concerned person has not done so and hence is not
entitled to claim the benefit of the doctrine.
This exception could be better understood while referring to the case of Anand
Bihari Lal v. Dinshaw & Co.[1946]. In this case, the plaintiff accepted a transfer of
a company’s property from its accountant. The court held that the transaction
entered by the accountant was clearly beyond the scope of his authority, and
hence the transfer was void. The plaintiff was reasonably expected to see the
power of attorney executed in favour of the accountant before accepting such
transfer by the accountant on behalf of the company.

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5. Acts outside the scope of apparent authority: (Ultra Vires) This exception covers
situations wherein, if an officer of a company enters into a contract with a third
party and if the act of the officer is beyond the scope of his authority, the
company is not bound by such act of the officer. So, in these situations, the
plaintiff cannot claim the protection of the doctrine of indoor management
merely because under the Articles the power to do the act could have been
delegated to him. The plaintiff can sue the company only if the power to act has
in fact been delegated to the officer with whom he has entered into the contract.
Summary:
Doctrine of Ultra Vires: any action which is beyond MoA is void
Doctrine of Constructive Notice: MoA & AoA being a public document, everyone
can access it. Sec. 17 –Nominal fee to RoC (to check) Rule 34:  Company
not liable.
Doctrine of Indoor management: conditions have to be fulfilled , knowledge of
AoA & MoA
 IMP
Mod 3 : Co. characteristics, Promoter, MoA, AoA, Ultra Vires, Constructive
Notice, Doctrine

MODULE IV: EQUITY AND DEBT CAPITAL
4.1 Capital: Meaning and Types

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4.2 Share: Meaning, Nature and Kinds of shares & share capital
4.3 Raising of Equity Capital/ Issue of shares
4.4 Issue of shares at premium [Section 52]
4.5 Share certificate and Share warrants
4.6 Debentures, Debenture stock & Bonds
4.7 Conversion of and Redemption of debentures
** Authorised, Issued, Subscribed, Called up, Paid up, Unpaid, Uncalled (IMP)

Authorised Capital of a Company: The authorised capital of a company is the
maximum amount of share capital for which shares can be issued by a
company. The initial authorised capital of the Company is mentioned in
the MoA of the Company. For example, A company has authorised capital
of Rs. 900000, it can issue shares worth upto Rs.5 lakhs to its investors and
not more than that.
Eg, 500000 = 50000 shares of the value of Rs.10

Issued Share Capital
Issued Capital is issued by the company from time to time. The issued share
capital is either equal to or less than the authorized capital. It can never be
more than the authorized capital of the company.
Eg, Initial issued share is Rs. 100000 i.e., 10000 x Rs.10
Subscribed Share Capital
Subscribed capital is that part of the issued capital which is subscribed
(accepted) by the public. Subscribed share capital should also be equal to or
less than the issued share capital. The un-allotted capital out of the
subscribed share capital is called unsubscribed share capital.
Let 5,000 out of 10000 shares are subscribed
Paid up Capital of a Company
In simple terms a Paid up share capital of a company is the amount of
money for which shares were issued to the shareholder for which payment

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was made by the shareholder. Hence, the capital allotted and paid by
shareholders is called paid-up capital.
- The companies Act, 2013 earlier mandated that all Private Limited
Companies have a minimum paid up capital of Rs.1 lakh. After the
Companies Amendment Act, there is now no requirement for any minimum
capital to be invested to start a private limited company.

Called up share capital:
The amount of share capital owed by shareholders, but has not yet been
paid, is referred to as called-up capital. Shares are issued to investors,
under the understanding that the shares will be paid for at a later date or in
installments. Shares may be issued in this manner in order to sell shares on
relaxed terms to investors, which may increase the total amount of equity
that a business can obtain.

Unpaid share capital
is where none of the monies due for an allotment of shares which have
been issued has been paid. It is quite common in smaller companies for the
share capital to be unpaid and remain due to the company indefinitely.

Uncalled share capital
is that part of subscribed share capital which has not been called for
payment by a company. A company calls for only a part of share's price at
the time of allotment. The remaining part is called up at a later date.
This uncalled or remained part is known as uncalled share capital.
Joint shareholder ? (Pvt. Com) Joint shareholding
 When a person holds one or more shares jointly with one or more person(s)
in a Company, he/she is called Joint shareholder.
 Since a Joint Shareholder is different person, but in relation to private
limited companies, joint shareholders are considered as a member, while
counting number of members 200.

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 In case of joint shareholders , each of joint shareholder is a separate
member of the Company except where the Act provides that the Joint
Shareholders would be treated as single member as provides in Section
2(68)(ii) of the Companies Act, 2013 in case of a private limited Company.
 The rights and obligation of each Joint Shareholder will be governed by the
provisions of Clauses of Articles of Association of a private limited Company.
 All Joint Holders are members of the Company in general law, but provisions
of the Act and Clauses of Article of Association of the Company may provide
that the first named shareholder will be treated as member of the Company
to the exclusion of others. The First Named Joint Shareholder will be treated
as member and all correspondences or transactions will be done with him
only.
 As we know every person who holds shares in a Company, whether singly or
jointly and whose name is appear on the Register of Members of the
Company, will be treated as member of the Company.
 If a joint shareholder dies, the shares pass automatically to the
remaining jointholder(s) rather than, as with any property not held jointly,
4.4 Issue of shares at premium [Section 52]
Section 52 of the Companies Act, 2013 provides that where a company issues
shares at a premium, whether for cash or otherwise, a sum equal to the aggregate
amount of the premium received on those shares shall be transferred to a
“Securities Premium Account” and shall be treated as the paid-up share capital of
the company.
Firstly, the premium, cannot be treated as profit and, therefore, cannot be
distributed as dividend. However, the same can be capitalized and distributed in
the form of bonus shares.
The Section further provides that the securities premium account may be utilized
by the company only towards the following:
(a) towards the issue of unissued shares of the company to the members of
the company as fully paid bonus shares;

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(b) in writing off the preliminary expenses of the company;
(c) in writing off the expenses of, or the commission paid or discount allowed
on, any issue of shares or debentures of the company;
(d) in providing for the premium payable on the redemption of any
redeemable preference shares or of any debentures of the company; or
(e) for the purchase of its own shares or other securities under section 68.
4.5 Share certificate and Share warrants IMP
Share Certificate
A share certificate is an instrument in writing, that is a legal proof of the
ownership of the number of shares stated in it. Every company, limited by shares,
whether it is public or private must issue the share certificate to its shareholders
except in the case where the shares are held in dematerialisation system.
Share Warrant
A share warrant is a negotiable instrument, issued by the public limited company
only against fully paid up shares. It is also termed as a document of title because
the holder of the share warrant is entitled to the number of shares mentioned in
it.
The following are the major differences between Share Certificate and Share
Warrant:
1. A share certificate is the documentary evidence which proves the
possession of the shares. A share warrant is the document of title which
states that the holder of the instrument is entitled to the shares.
2. The issue of share certificate is compulsory for every company limited by
shares but the issue of a share warrant is not compulsory for every
company.
3. A Share Certificate is issued against the shares, regardless of the fact that
the shares are fully paid up or partly paid up. Conversely, Share Warrant is
issued by the public company only against fully paid up shares.

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4. Share Certificate can be issued by both public and private companies,
whereas Share Warrant is issued only by the public limited company.
5. Share Certificate is to be issued within 3 months of the allotment of shares,
but there is no such time limit specified in the Companies Act for the issue
of Share Warrant.
6. A share certificate is not a negotiable instrument. As opposed to share
warrant, is a negotiable instrument.
7. For the issue of a share warrant, prior approval of Central Government is a
must. On the other hand, Share Certificate does not require such type of
approval.
8. A share certificate can be originally issued, but a share warrant cannot be
issued originally.

Debenture: Debenture is most important instrument to raise capital for a
company. A company uses debenture to raise debt capital. Popularly, debenture
issued by public sector companies with government approval is called bonds.

Section 2 (30) of the Companies Act, 2013 define inclusively debenture as
“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. It is an acknowledgement of debt.
Section 71 extensively deals with debentures.
 A company may issue debentures with an option to convert such debentures
into shares, either wholly or partly at the time of redemption.
 No company shall issue any debentures carrying any voting rights.
 Where debentures are issued by a company, the company shall create
a debenture redemption reserve account out of the profits of the company
available for payment of dividend and the amount credited to such account shall
not be utilized by the company except for the redemption of debentures.
4.3 Raising of Equity Capital/ Issue of shares (IMP)
Invitation of subscribers to subscribe for securities

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Companies limited by shares have to issue shares to raise the necessary capital
for their operations. Issue of shares may be made through following four ways:
(1) By private placement of shares; Sec. 42
(2) By allotting entire shares to an ‘Issue House’, which in turn, offers the
shares for sale to the public; and
(3) By inviting the public to subscribe for shares in the company through a
prospectus.
(4) Issue of shares to existing shareholders
(1) Private Placement of Shares
 A private placement of shares is a capital raising event that involves the
sale of shares to a relatively small number of select investors.
 A private placement is different from a public issue in which shares are
made available for sale on the open market to any type of investor.
 As per Explanation II to Section 42 (1) of the Companies Act, 2013, Private
Placement means any offer of securities or invitation to subscribe securities
to a select group of persons by a Company (other than by way of public
offer) through issue of a private placement offer letter and which satisfies
the conditions specified in this section.
 Private Placement is governed by Section 42 of the Companies Act, 2013.
- The maximum number of persons to which allotment can be done in
a year shall not exceed 200 (Excluding Qualified Institutional Buyers
and Employees who have been given securities under ESOP Scheme)
in a financial year.
- If the same exceeds the prescribed limit then it will be deemed to be
a public issue and the Company has to follow the procedure of Public
issue.
- As per the present scenario, if a Company, listed or unlisted, makes
an offer of Securities to more than 200 persons during a year,
whether it receives money or not, to any person whether in India or

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abroad and intends to get its Securities listed on a recognized stock
exchange whether in India or abroad, shall be deemed to be a Public
issue and the Company has to Comply with the provisions of Public
issue.
(2) By allotting entire shares to an ‘Issue House’, which in turn, offers the shares
for sale to the public
Under this arrangement, the company allots or agrees to allot shares or
debentures at a price to a financial institution or an Issue-House for sale to the
public.
- The Issue-House publishes a document called an offer for sale, with an
application form attached, offering to the public, shares or debentures for
sale at a price higher than what is paid by it or at par
***
.
- This document is deemed to be a prospectus.
- On receipt of applications from the public, the Issue-House announces the
allotment of the number of shares mentioned in the application in favour of
the applicant purchaser who becomes a direct allottee of the shares.
***Par value of shares: SEBI Regulations permit the companies to issue shares of
any par value subject only to the value being not less than Re. 1 or being other
than multiple of Re. 1. Thus, different companies may issue shares of different par
value. Further, companies whose shares are dematerialized are eligible to alter
the par value of shares indicated in the Memorandum of Association. However, at
any given time there shall be only one denomination for the shares of a company.
(3) By inviting the public to subscribe for shares in the company through a
prospectus:
- This is the most common method by which a company seeks to raise capital
from the public.
- The company invites offers from members of the public to subscribe for the
shares or debentures through prospectus.
- An investor is expected to study the prospectus and if convinced about the
prospects of the company, may apply for shares.

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(4) Issue of shares to existing shareholders: Further capital is also raised by issue
of rights shares to the existing shareholders (Section 62). In this case, the shares
are allotted to the existing equity shareholders in proportion to their original
shareholding e.g. one share against every two shares held by a member.
Issuing Shares:
 At Par: Nominal value (as per Capital Clause in MoA)
 At Premium: Both for shares and debentures – Above par but not to
be considered as profit.
 At Discount: Less than the nominal value –Sec 53; Sweat/Sweet
Equity shares u/s 54 is the only share which can be sold at discount
Cases related to Public Offer and Private Placement & Prospectus
1. Nash v. Lynde (1929): Invitation to offer and offer
 Nash applied for certain shares in a company on the basis of a document
sent to him by Lynde, the managing director of the company. The
document was marked “strictly private and confidential.”
 He Subscribed to the shares of the company
 The document did not contain all the material facts required by the Act to
be disclosed. Nash filed a suit for compensation for loss suffered by him by
reason of the omissions.
 The suit was dismissed.
The House of Lords held that where a prospectus was not issued to the public but
was shown privately to a person, it could not be regarded as a prospectus.
u/s 2(14) A prospectus is not an offer itself from the company to the public.
Section 67: lays down two-way criteria as to what shall constitute an invitation to
the public. These are:
Propositions: Public offer and Private Placement

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1. Invitation shall not be an invitation to the public if it cannot be calculated to
result directly /indirectly, in the shares or debentures becoming available for
subscription or purchase by persons other than those receiving the invitation
2. Offering shares to the relatives of the director is not an invitation to the public
to buy shares. Determination of the question of an offer being made to the
public depends on the facts and language of the notice and the particular
circumstances of each case.
3. An offer to the shareholders of an existing company ‘A’ , of shares in a new
company ‘B’ in exchange for existing shares of company ‘A’, is not an offer to
the public. The test is not who receives the circular , but who can accept the
offer put forward.
2. Pramatha Nath Sanyal v Kali Kumar Dutt: Advertisement in Newspaper
In the case, an advertisement was inserted in a newspaper stating, “Some shares
are still available for sale according to the terms of the prospectus of the company
which can be obtained on application”.
 This was held to be a prospectus as it invited the public to purchase the
shares.
 The prosecution was accordingly launched on the Directors for non-
compliance.
 “Public” is a general word, and includes any section of the public.
 This means that if a document inviting persons to buy shares is issued for
example to all advocates or to all doctors, or to all foreigners living in India
or to all Indian citizens or to all shareholders in a particular company, it will
still be deemed to be issued to the public.
The offending matter in this case is an advertisement offering to the public some
shares of the Company for sale. It, therefore, clearly comes within the definition
of “prospectus” as contained in Section 2, Clause (14) of the Act.
3 Propositions: for private Placement

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1. if you are not entertaining people other than those who have received
information then it is Private Placement
2. Language of the document
3. Exchange of shares will be limited to the shareholders of 2 merged companies ,
therefore it is Private Placement
S. 28: Offer for sale of shares by certain members of company: Where certain
members of a company propose, in consultation with the Board of Directors to
offer, in accordance with the provisions of any law for the time being in force,
whole or part of their holding of shares to the public, they may do so in
accordance with such procedure as may be prescribed.
Any document by which the offer of sale to the public is made shall be treated as
if this is a prospectus issued by the company.
Offer of Sale: selling the share of a member

Procedure of making Public Offer :
BOD meeting
Drafting of Prospectus ( Mrchant Banker + Directors)
Prospectus: SEBI Review
ROC – for Registration of Prospectus (2/3 days – within 90 days)
Public (Bid open; closing : with in max 10 days)
Allotment
Listing
Date of public Co. endorsing the prospectus
IMP:
Process of issuing shares
Case: SEBI v Sahara (IMP)
Nov. 2010: SEBI restrains Sahara India Real Estate Company Ltd. & Sahara Housing
investment Company Ltd. From raising funds through OFCDs
Dec 2010: Sahara gets SEBI’s order stayed in Allahabad High Court

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Jan 2011: Allahabad H. C. vacates stay Sahara goes to SC
May2011: SC asks SEBI to proceed with OFCD’s probe
June 2011: SEBI directs the company to refund the investors
July 2011: Sahara appeals to SC; SEBI has no jurisdiction; SC asks Sahara to
approach SAT
Oct 2011: SAT upholds SEBI order
Nov 2011: Sahara challenges SAT order and obtains Stay
Jan 2012: Court asks Sahara to furnish details of assets and reserves
Aug 2012 : verdict delivered
Observations of SC: The Supreme Court went on to hold that although the
intention of the companies was to make the issue of OFCDs look like a private
placement, it ceases to be so when such securities are offered to more than 50
persons. Section 67(3) specifically mentions that when any security is offered to
and subscribed by more than 50 persons it will be deemed to be a Public Offer
and therefore SEBI will have jurisdiction in the matter and the issuer will have to
comply with the various provisions of the legal framework for a public issue.
Thus the Supreme Court concluded that the actions and intentions on the part of
the two companies clearly show that they wanted to issue securities to the public
in the garb of a private placement to bypass the various laws and regulations in
relation to that.
Section 73(1) of the Act casts an obligation on every company intending to offer
shares or debentures to the public to apply on a stock exchange for listing of its
securities.
Capital  money 1. Equity (Share capital)
2. Debt ( If you have /issue too much debt, co will have to go
through compulsory winding up. That’s why they maintain the ratio.)

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 Tangibility ? Shares are not tangible; certificates are tangible proof of
your shares: / stake (Any interest)
 Sec 43: Kinds of share capital
What is Preference Shares ?
A preference share contains features of equity and debt as the dividend payments
to preference shareholders are fixed. Preference shares are offered preference in
relation to ordinary shares, where the preference shareholder receives dividends
before ordinary shareholders are paid out. Preference shareholders are paid a
fixed dividend and have the first claim on the assets and earnings. As such,
preference shareholders receive their share of the firm’s residual value before
ordinary shareholders in the event of liquidation. Preference shareholders do not
have voting rights.
What is the difference between Ordinary Shares and Preference Shares ?
Both ordinary and preference shares illustrate a claim in the corporate earnings
and assets. Dividends for ordinary shares may be irregular and indefinite, whereas
preference shareholders will receive a fixed dividend which will accrue usually if
the payments are not made in one term. Ordinary shareholders are in a riskier
position than preference shareholders since they are the last to receive their
share in the event of liquidation; however, they also are open to the possibility of
a higher dividend during times when the firm is doing well. The ownership of
preference shares offer advantages and disadvantages in terms of higher claims
on earnings and assets and fixed dividends as opposed to limited voting rights and
limited possibility for growth in dividends in times when the company is
financially sound.
U/S 67: A company cannot purchase its own share back (Buy back) cannot give
loan for purchase of its share or give guarantee or security for such purchase of its
share.

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Exception :Restriction does not apply on banking company ; employees stock
option when the comp gives loan to employees other than director or kymp for
fully paid up shares not more than his six months salary
S. 68 Section 68 of the Companies Act, 2013 permits a company, both private and
public, to buy back its shares or other specified securities in accordance with the
conditions prescribed under Section 68 and the Companies (Share Capital and
Debentures) Rules, 2014. Further, listed companies are permitted to buy back its
securities in accordance with the conditions prescribed by the Securities and
Exchange Board of India (SEBI) (Buy-back of Securities) Regulations, 1998 and the
relevant sections of the Companies Act.
Two Rights : Cash flow Right & Voting Rights
Redemption : Discharging ; Giving back all your loan
2013 Act : you cannot issue irredeemable Preference Share
You can also issue redeemable preference share
Debenture Redemption: 1. Lump-sum payment/ Annual payment
Pre-emptive Rights:
In a Share Purchase Agreement we generally come across certain terms which do
result in providing parties to the agreement with certain pre-emptive rights in
respect of selling of shares. It is an accepted principle that such pre-emptive rights
are valid as far as the private companies are concerned if incorporated in the
Articles of Association.
Right Of First Refusal (ROFR): It is a pre-emptive right given to the non-selling
shareholder to receive an offer [Right Of First Offer (ROFO)] to purchase the
shares at a certain price proposed to be sold by the selling shareholder to any
third party. Upon refusal of the non-selling shareholder to purchase the shares,
the selling shareholder is free to sell the shares to any third party but not at terms
more favourable than those that were offered to the non-selling shareholder.
Right to refusal of shares

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ABCDE – co.
E no longer wants to be part of company – he can sell his shares to the existing
shareholders—ABCD have the first right of refusal, if they do not want to
subscribe then E can sell to F
Reason of the Article: If we look at them from a private equity investor’s
perspective as they provide these strategic investors with an exit option and to
liquidate their profits.
Unlisted : shares not available among public
MODULE V: INVESTMENTS, LOANS, DEPOSITS AND DIVIDENDS
5.1 Investments
The word ‘investments’, in its natural connotation, would include any property or
right in which money or capital is invested.
However, here the word ‘investments’ shall be used in a limited sense to mean
the investing of money by a company in shares, stocks, debentures or other
securities.
The Act provides that inter-corporate investments not to be made through more
than two layers of investment companies.
Loan and Investment by the Company [Section 186] (29.10.18)
 Inter-corporate Investment not through more than two layers of investment
companies [Section 186 (1)]:
This section provides that a Company shall make investment through not more
than two layers of investment companies.
‘Layer’, according to explanation (d) of Section 2(87) of the Act in relation to a
holding Company means its subsidiary or subsidiaries. (A has 50% shares of B; b is
the subsidiary of A)

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‘Investment Company’ means a Company whose principal business is the
acquisition of shares, debentures or other securities. (def. in Assistant Registrar v
H. C. Kothari , 1992. )
Investment for the purposes of section 186(1) would mean as used in section
186(2) of the Act, 2013. Thus, the following will be counted as “investments”:
 Subscription or purchase of shares
 Subscription or purchase of share warrants
 Subscription or purchase of debentures bonds or similar debt
securities
The following will not be counted as investments:
 Making of loans or advances
 Any other financial transactions such as leases, purchase of
receivables, or other credit facilities

 Limits on loans/ guarantee/ security/ investment [Section 186 (2)]
Section 186 (2) provides that no company shall directly or indirectly
 give any loan to any person or other body corporate,
 give any guarantee or provide security in connection with a loan to
any other body corporate or person, and
 acquire by way of subscription, purchase or otherwise, the securities
of any other body corporate exceeding 60% of its paid-up share
capital plus free reserves plus securities premium account or 100% of
its free reserves plus securities premium account, whichever is more.
Key Notes:
Since Section 186(2)(c) provides for acquisition by way of subscription, purchase
or otherwise, the securities of any other body corporate. It is not necessary that
the target entity into which investment flows must be a company. It can be any

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type of body corporate. But it is to be kept in mind that the intermediary
company through which investments are made must have to be a company.
This section mandates:
a company to make investment only through two layers of investment
companies. If ABC Ltd. makes an investment in XYZ Ltd and further XYZ Ltd.
makes an investment in PQR LLP whereas PQR LLP holds shares of SSB Ltd., there
is no violation of Section 186 (1) of the Act as there are not more than two layers
of investment companies. It is the investor company which shall be held liable in
case of any violation of the section; therefore, It is prudent and advisable that the
investee company to seek a declaration from the investor company whether the
investment made by the investor is coming from more than two layers up.

2 layer concept came in 2013 because it was vry efficient for regulation to track
where the company was investing.
Approval from members [SECTION 186(3)]
Though the Section 186(2) makes restriction as above, Section 186(3), empowers
a Company to give loan, guarantee or provide any security or acquisition beyond
the limit but subject to prior approval of members by a special resolution passed
at a general meeting.
Limitation
Case: Assistant Registrar of Companies v. D. C. Kothari (Investment Company)
Body Corporate: Section 2(11): A corporate entity which has a legal existence.
According to Section 2(11) of the Companies Act, 2013 "body corporate" includes
a private company, public company, one personal company, small company,
Limited Liability Partnerships, foreign company etc. “Body corporate” or
“Corporation” also includes a company incorporated outside India.
However, body corporate does not include—

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(i) a co-operative society registered under any law relating to co-operative
societies; and
(ii) any other body corporate (not being a company as defined in the Companies
Act 2013), which the Central Government may, by notification, specify in this
behalf;
The above definition is different from the provisions existed in the erstwhile
companies Act 1956, which had excluded a “corporation sole” also from the
definition of body corporate which was, however, not defined in the Act of 1956.
Free Reserves: S. 2(43): In case of inadequate or no profits, dividend could be
paid out of free reserves only.
Free reserves means reserves which are available for distribution as dividend
as per the latest audited balance sheet of a company.
Paid-up Capital : Capital by Equity shareholders, that is, Paid-up capital is the
amount of money a company has received from shareholders in exchange for
shares of stock. Paid-up capital is created when a company sells its shares on the
primary market, directly to investors. (Equity share + Preference shares)
Security Premium Account (SPA): The security/share premium account is an
equity account found on a company’s balance sheet. The amount in the account
represents the additional amount shareholders paid for their issued shares that
was in excess of the par value of those shares.
For instance, if ABC Corporation issues 1 million shares with a par value of Rs.1,
but the actual purchase price is Rs.10 per share, then ABC’s share premium
account will have a Rs. 9 million balance.
((Rs.10 purchase price - Rs1 par value) x 1 million shares)
 Note that share premium only occurs when the company issues and sells
shares above the par value of the stock.
 A shareholder selling his shares above par value in a secondary market does
not affect the share premium account.

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 The share premium account is often referred to as a restricted account,
because corporate bylaws and government business regulations limit how
it can be used.
 For instance, dividends cannot be paid out of the share premium
account. In addition, this account may not be used to offset operating
losses.
 However, corporations may use the share premium account to record the
issuance of bonus shares and write off expenses associated with equity-
related transactions like investment banking underwriting fees.

Procedures involved in giving loan, giving guarantee and providing security:
Following procedures may be adopted by the company while giving loan to any
other body corporate, providing guarantee or security in connection with a loan
or acquisition by way of subscription, purchase the securities of any other body
corporate. (notes sent on college Group and only mentioned in class about 12
points procedure)
1. It is to be done through Board resolution up to 60% of its paid up capital, free
reserves and security premium account or 100% of its free reserves and
security premium whichever is more.
2. Meeting of Board of Directors is to be convened after giving proper notice and
proposals of giving loan, etc. are to be discussed.
3. It shall be made only after the resolution is sanctioned at a meeting of the
Board with the consent of all the directors present at the meeting.
4. There should be no existing loan from any public financial institution, If so, prior
approval of that public financial institution is also required for any subsequent
loan from any other source. However, prior approval of Public Financial
Institution is not required if the aggregate loan, investment, etc. is within the
limits under section 186(2) and there is no default in repayment of loan or
interest thereon to the Public Financials Institution.

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5. After deciding the source of fund and quantum of requirement, the Board shall
apply for the concerned public financial institutions for approval.
6. A general meeting of shareholders is convened after giving proper notice and
to pass special resolution therein, where the giving of any loan etc. exceeds the
specified limits. (i.e 60% of its paid up capital, free reserves and security
premium account or 100% of its reserves and security premium whichever is
more.)
7. File the copy of special resolution in Form No. MGT-14 with necessary
documents along with the fee as provided in Companies (Registration of offices
and fees) Rules, 2014 with the Registrar within 30 days of passing the
resolution.
8. Registers are to be maintained in Form MBP-2 by every company with
particulars of giving loan or giving guarantee of providing security or making an
acquisition shall, from the date of its registration.
9. Entries in the register shall be made chronologically in respect of each such
transaction
10. It is to be ensured that no loan shall be given at a rate of interest lower than
the prevailing RBI rates.
11. The company shall disclose to the members in the financial statement the full
particulars of the loans etc., given, and how it is proposed to be utilized by the
recipient of the loan or guarantee or security.
12. Scrutinize the repayment history of the company with regards to repayment
of any deposits or interest thereon. No company which is in default in the
repayment of any deposits or in payment of interest thereon shall give any
loan, investment, etc. through acquisition of another company till such default
is subsisting ( remain in force or effect).
5.2 Loan to directors
Section 185 – Loan to directors (Companies (Amendment) Act, 2017 )

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Section 185 of the Companies Act, 2013 provides that a Company shall not,
directly or indirectly, advance any loan, give any guarantee or provide security to
any of its directors or to any other person in whom the directors are interested.
 One of the outcomes of the expression ‘person in whom director is
interested’ was that a company could not give a loan even to its subsidiary,
associate or joint venture companies.
This created significant challenges for many groups, particularly cases where
investee companies are significantly dependent on the investor for financing.
To address these issues comprehensively, the 2017 Amendment Act replaces the
current requirement of section with a completely new section 185.
No company can directly or indirectly
i) give loan to its directors
ii) Relatives : 2(77)
iii) Partners of directors
iv) Any firm in which the director is a partner or his relative is a partner
v) Any Private company in which the Director is a Director or member
vi) Body corporate in which the Director has 25% of shares (voting Rights), that
corporate will not get loan
vii) Body corporate is accustomed to work under the direction of the Director.
# Who are Relatives: Section 2(77) of the Companies Act, 2013 defines the
word relative as : if
- they are members of a Hindu Undivided Family;
- they are husband and wife;
- or a person is related to the other in the following manner, namely:

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Father (includes step-father). 2. Mother ( includes step-mother). 3. Son
(includes step-son). 4. Son’s Wife. 5. Daughter. 6. Daughter’s husband. 7.
Brother( includes step-brother). 8. Sister (includes step-sister).

If the above rules are breached, Penalty to the company as well as Director also
with 6 months of imprisonment
 XYZ & co firm in which X, M, Y are partners
 Will M get loan? No - clause (ii)
 Will XYZ & co. get loan? No – Clause (iv)
 Will X and Y get loan ? Yes ( but individually)
XYZ Pvt. Ltd XLM Ltd PQR Pvt Ltd LMN Ltd
A  5% 5% 28% 30%
M  2% 1% 5% 20%

1. A – If he is a member
 XYZ will not get loan Clause (v) & A is a member
2. XLM will get loan- Public company even though A is a member (therefore, no
clause is satisfied)
3. PQR will not get loan -- Clause (vi)
4. LMN will not get loan -- Clause (vi)
M: 1. XYZ will get loan (Clause v) No clause is satisfied
2. XLM Ltd. ; 3. PQR Pvt. Ltd; 4. LMN Ltd.  will get loan
Exceptions to S. 185
1. A lending company whose principal business is giving loan, provided that
interest rate will be as per RBI rate or more / government Bonds.

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2. Any other company can give loan to its Managing Director and Whole time
Director, provided that (i) every employee gets loan (ii) If employees are not
getting loan, then also WTD, MD will get loan but by passing Special
Resolution in General Meeting
3. After Amendment (2015) Private Companies are not subject to S. 185, provided
that :
a) No body corporate shall have invested money in the share capital of that
particular private company.
b) The borrowings from the Banks and Financial institution is less than 2
times of Paid-up share capital or 50 Crores, whichever is lower.
c) Borrowing should not be defaulted in repayment.
4. The borrower should not be the defaulter in re-payment
4. Holding Company can give loan, guarantee and Security to its wholly owned
subsidiary company (WOSC)
- What is Holding Company : (Section 2(46) of the Companies Act), The
company is said to be the holding company if that
particular company holds/owns at least 50% or more shares in the WOSC
and has the authority to make management decisions, influences and
controls the company's board of directors.
5. Holding Company can give guarantee, Security to its Subsidiary Company (less
than 90% and more than 50% shares held by HC)
5.3 Deposits: Meaning, Definition, Acceptance from public & Restrictions
Deposit: Section 2 (31) “deposit” includes any receipt of money by way of deposit
or loan or in any other form by a Company, but does not include such categories
of amount as may be prescribed in consultation with the Reserve Bank of India.
Interest and brokerage on deposit: Interest on deposit and payment of brokerage
to authorized person shall not exceed the maximum rate prescribed by the
Reserve Bank of India.

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5.4 Repayment of Deposits, Damages for Fraud
Redemption of deposit
5.5 Dividend–Meaning, Profit v. Divisible Profits
Dividend S.2(35):
 Dividend means the portion of the profit received by the shareholders from
the company’s net profit which is legally available for the distribution
among the members.
 Therefore, dividend is a return on the share capital subscribed for and paid
to the shareholder by a company.
 Dividend is paid to the Equity Preferential shareholders, where Preferential
shareholders will get the dividend first and the Equity Shareholders have
voting Rights. The PS does not have voting Rights.
Bacha F Guzdar v CIT
In this case, it is said that right to claim dividend arises only after the declaration
made by the company.
S. 2 (35): two types of dividends
 Interim dividend – declared btw 2 AGM
Annual dividend declared by the recommendation of BOD in each financial year
and it is enforceable.
Commissioner Income Tax v Girdhar Das& co. 1967
In this case SC held that dividend means “as applied to a company which is a
groing concern, it ordinarily the portion of the profit of the company which is
allocated to the holders of shares in the company. In case of winding up, it means
a division of the realized assets among creditors and contributories according to
their respective rights.
S. 123 : Sources of Dividend

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As per Section 123, dividends may be paid out of the following three sources only:
1. Out of current profits, after providing for depreciation; But no dividend
shall be declared/paid by a company from its reserves other than free
reserves.
2. Past reserves created out of profits (Out of profits for any previous financial
years)
3. Out of any fund provided by the Central or State Government for the
payment of dividend.
Accordingly, dividends are not allowed to be declared out of capital. If the
memorandum or articles give power to the company to pay dividends out of
capital, such a power will be invalid.
S. 124 & S. 125: Unpaid Dividend (IMP)
 Declaration of Dividend Section 124 (1) : of the Act, where a dividend has
been declared by a company but has not been paid/claimed within 30 days
from the date of declaration to any shareholder -- transfer the total
amount of dividend which remains unpaid or unclaimed to a special
account in any scheduled bank -- called “Unpaid Dividend Account”.
 124(7) Penalty
 According to the provisions of Section 124(5) of the Companies Act, 2013, if
dividend which remains unpaid or unclaimed for a period of 7 years from
the date of its transfer to unpaid dividend account is required to be
transferred by the Company to Investor Education and Protection Fund
(IEPF), established by the Central Government under the provisions of
Section 125 of the Companies Act, 2013.
 The details of unpaid dividend amounts as per Section 125(2) of the
Companies Act, 2013 have to be identified and uploaded on the website of
the Company.
 Any person claiming to be entitled to any money transferred under sub-
section (1) to the Unpaid Dividend Account of the company may apply to
the company for payment of the money claimed.

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Section 127: Punishment for Failure to Distribute Dividends:
If a company fails to comply with Section 124, the company shall be punishable
with fine - not be less than 5 lakh rupees, which may extend to 25 lakh rupees
and every officer of the company who is in default shall be punishable with fine
which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees.

Related Party Transaction : Transactions with relatives of Directors, MD ,etc
Special Resolution is required
Mod 5: (IMP)
Sec 185
Sec 186 Investment /Loan
Non applicability to Sec 185 &186 ( Not applicable to Investment company)
Dividend : what will happen to unclaimed dividend?

MODULE VI: PROSPECTUS
 A public company limited by shares, generally issues shares to the public for
which it has to issue a prospectus.
 In general parlance, prospectus refers to an information booklet or offer
document on the basis of which an investor invests in the securities of an
issuer company.
As per Section 2 (70) of the Companies Act,
“prospectus” means any document described or issued as a prospectus and
includes
- a red herring prospectus referred to in section 32 or

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- shelf prospectus referred to in section 31 or
- any notice, circular, advertisement or other document inviting offers from
the public for the subscription or purchase of any securities of body
corporate.
Red herring Prospectus: (Explanation to section 32) a prospectus which does not
include complete particulars of the quantum or price of the securities included
therein.
Shelf Prospectus: (Explanation to section 31) a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one
or more issues over a certain period without the issue of a further prospectus.
The definition clarifies that any notice, circular, advertisement or any other
document inviting offers from public for the subscription or purchase of securities
shall be included in the definition of Prospectus.
A document shall be called a prospectus if it satisfies two things. (To qualify a
document as a prospectus)
1. It invites subscription to, or purchase of, shares or debentures or any other
security of a body corporate.
2. The aforesaid invitation is made to the public.

Nash v. Lynd , 1929
Nash applied for certain shares in a company on the basis of a document sent to
him by Lynde, the managing director of the company. The document was marked
“strictly private and confidential.”
The document did not contain all the material facts required by the Act to be
disclosed. Nash filed a suit for compensation for loss suffered by him by reason of
the omissions.

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The suit was dismissed. The court observed, “The public is of course a general
word. No particular numbers are prescribed. Anything from two to infinity may
serve. The point is that the offer as such is to be open to anyone who brings his
money and applies in due form, whether the prospectus was addressed to him on
behalf of the company or not. A private communications is not thus open and
does not construe to be a prospectus”.
16.11. 18 ANP Mis –statement
SEBI v DLF, 2014
(“SEBI”) has restrained DLF Limited (“DLF”), its 5 directors and CFO
(“Noticees”) from accessing the securities market and prohibited them from
dealing in securities for the period of 3 years on the ground of active and
deliberate suppression of material information in its red herring prospectus
(“RHP”)/
Prospectus so as to mislead and defraud the investors in the securities market
in connection with the issue of shares of DLF in its IPO, thereby violating the
provisions of the SEBI Act, the SEBI (Prohibition of Fraudulent and Unfair
Trade Practices relating to Securities Market) Regulations, 2003 (“PFUTP
Regulations”), the SEBI (Disclosure and Investor Protection) Guidelines, 2000
(“DIP Guidelines”) and the SEBI (Issuance of Capital and Disclosure
Requirements) Regulations, 2009 (“ICDR Regulations”).
Key Conclusions in SEBI’s order
SEBI oncluded that non-disclosure/omission of material information in
Prospectus makes the Issuer, its directors and CFO liable for violation of
DIP guidelines/ICDR regulations. Active and deliberate suppression of material
information in RHP/Prospectus amounts to fraud in terms PFUTP Regulations and
consequently
restraining access and prohibiting dealing by Issuer, its directors and CFO in
securities
market.

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However,
DLF has filed an appeal before the Securities Appellate Tribunal (“SAT”)
against the order of SEBI which is pending.

Progressive Aluminium Ltd v Registrar of Companies(1997) :
Mis-statement about experience of company
Section 30: Specifications required in Prospectus when published for
advertisement for invitation (Content of Prospectus):
Information; Reports to be set out (includes statements of experts); Declaration;
Other matters. Such as ,
1. Objects of MoA (contents mentioned)
2. Liability of members
3. Amount of share capital of company
4. Name of signatories to the MoA and the number of shares held by them
5. Capital Structure of the company.

Statutory Registration of prospectus
The prospectus must be issued within 90 days of its registration. A prospectus
issued after the said period shall be deemed to be a prospectus, a copy of which
has not been delivered to the Registrar for registration.
The company and every person who is knowingly a party to the issue of the
prospectus without registration shall be punishable with fine ranging from Rs
50,000 to Rs 3,00,000.
S. 27 a company must not vary terms of a contract referred to in the prospectus
or objects for which the prospectus was issued except by way of special
resolution.
Remedies:
Section 34: criminal liability for misstatements in prospectus

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Section 35: Civil liability for misstatements in prospectus – misleading is enough
Section 36: Punishment for fraudulently inducing persons to invest money
-------------------------------------------------
MODULE VII: DIRECTORS AND DELEGATION
Corporations – have separate Acts
Company - Shareholders
- Directors (any person appointed as director to Board of Company)
- Promoters

Meaning of Director: a director is one of those persons, who are responsible for
directing, governing and controlling the policy or management of a company.
All directors collectively are called as Board of Directors. They are the top
administrative organ and the company can operate only through them. They are
the brain of the company responsible for all policy making and decision making
activities.
1. Qualifications of directors. Generally no formal or special education,
experience, or skill is required to qualify to hold the office of a firm's director. But
if a director possesses special expertise or knowledge, he or she is expected to
employ it to the firm's advantage.
- Any person who is not disqualified u/s 164
- In some cases the articles of association of the firm impose a
shareholding qualification for the directors which must be complied
with.
- Qualification Shares: Directors had to buy shares in order to ensure
loyalty to the company, but after 2013, they are selected and aoA
can have internal regulations.

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- Companies can also apply for further corrections in AoA.
- The director must have attained the valid age to enter into any
contract.
- Under the Companies Act, only an individual can be appointed as a
Director; a corporate, association, firm or other body with artificial
legal personality cannot be appointed as a Director.
 Director Identification Numbers: All Directors of Indian companies are
required to obtain Director Identification Numbers ("DINs"). Primarily, DINs
are required to authenticate any electronic filings made by the company.
- After 2017 amendment: DIN could be any other Identification
number.

2. Legal Position of Director: As Agent, Trustee, Managing Director
Director  Agent : The company being an artificial person, has to act through
some human agency and directors act as that necessary agent. So the relationship
between the company and its directors is that of the principal and agent. As
agents, directors must conduct business with reasonable care abiding by the
company’s MoA and AoA. They enter into contract and put their signature on
behalf of the company. But directors are not completely like agents. Agents are
appointed by the principal but the directors are elected by the shareholders and
do not work for reward.
Director  Trustee : They are the guardians or custodians of the money and
properties of the company. They stand in a fiduciary capacity to protect the
interests of the company. Almost all the powers of directors are like powers in
trust which have to be exercised in good faith for the benefit of the company as a
whole.
The directors are trustees of the company and not of individual shareholders or
the third parties who have made contracts with the company.

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But directors are not trustees in the true sense of the term because the the
ownership of the property held in trust by them does not vest in them as in case
of an ordinary trustee.
Director Managing Partner: The directors who manage the company , do so for
themselves as well as for the benefits of others. They are also elected
representatives. Their position is similar to that of a managing partner because
they are appointed to their posts by an arrangement between them and all the
shareholders. Being important shareholders, they are partners with shareholders.
But their liability is restricted to the amount unpaid on their shares.
 To sum up, we can say that the directors are neither agents, nor trustees or
managing partners in the strict sense of the term. They combine in
themselves all these positions. They stand in a fiduciary position towards
the company in respect of their powers and capital under their control.

Q. Whether a director can be an employee of the company?
A. Director is not an employee of the company by virtue of being the director.
But, the company may offer employment based on educational qualification.
A directorship is an office, not necessarily an employment. If, however, the
company enters into a service contract with the director, the terms of which
make the director an employee under the usual common law test, then the
director becomes an employee. Many company directors are in this position.
Policy Making  Board of Directors
Policy Execution  Management
• One person can be the director in twenty companies at the same time.
Provided that the maximum number of public companies in which a person can
be appointed as a director shall not exceed ten. Can be specified in the AoA.
• Shareholders and directors have two completely different roles in a company.
The shareholders (also called members) own the company by owning its shares

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and the directors manage it. Unless the articles say so (and most do not) a
director does not need to be a shareholder and a shareholder has no right to be a
director.
 Section 149(1) of the Companies Act, 2013 requires that every company
shall have a minimum number of 3 directors in the case of a public
company, two directors in the case of a private company, and one director
in the case of a One Person Company. A company can appoint maximum 15
fifteen directors.

 Ratification: Validating a past act.
 Regulatory Authorities: MCA, CG, RoC, SEBI, ….

S. 164 Disqualification for Appointment of Directors
 any Individual can be appointed as Director of the Company if he does not
possess the disqualification mentioned under the provisions of Companies
Act, 2013
1. A person shall not be eligible for appointment as a director of a company, if–
(a) he is of unsound mind (declared by a competent court);
(b) he is an un-discharged insolvent;
(c) he has applied to be adjudicated as an insolvent and his application is
pending;
(d) he has been convicted by a court of any offence, and sentenced for
imprisonment of not less than six months and a period of five years has not
elapsed from the date of expiry of the sentence.
- if convicted of any offence and sentenced to imprisonment for a
period of seven years or more, he shall not be eligible to be
appointed as a director in any company;
(e) an order disqualifying him for appointment as a director has been passed by
a court or Tribunal and the order is in force;
(f) he has not paid any calls for six months in respect of any shares of the
company held by him

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(g) he has been convicted of the offence dealing with related party transactions
under section 188 at any time during the last preceding five years; or
 Even if the appeal is pending  considered to be disqualified

2. No person who is or has been a director of a company which–
(a) has not filed financial statements or annual returns for last 3 financial years;
(b) has failed to repay the deposits accepted by it or pay interest thereon or to
redeem any debentures on the due date or pay interest due thereon or pay any
dividend declared and such failure continues for one year or more.
He shall not be eligible to be re-appointed as a director of that company or
appointed in other company for a period of five years from the date on which the
said company fails to do so.
 A private company may by its articles provide for any disqualifications for
appointment as a director in addition to those specified in sub-sections (1)
and (2):
Appointment of Directors :
 Generally, in a public company or a private company subsidiary of a public
company, two-thirds of the total numbers of Directors are appointed by the
shareholders and the remaining one-third is appointed in accordance with
the manner prescribed in AoA failing which, the remaining one-third of the
Directors must be appointed by the shareholders.
 Private companies may have their own procedures. In a private company,
which is not a subsidiary of a public company, the Articles can prescribe the
manner of appointment of any or all the Directors. In case the Articles are
silent, the Directors must be appointed by the shareholders.
Retirement of Directors :
In any public company or a private company that is a subsidiary of a public
company, one-third of the Directors must retire at every AGM. However, every

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retiring Director is eligible for re-appointment. If the vacancy is not filled and the
meeting has not expressly resolved to fill such vacancy, he or she shall be deemed
to have been re-appointed until the next election meeting, unless he or she is not
otherwise disqualified or is unwilling to so act as a Director or no resolution for
such appointment has been put to the meeting and lost.
Retirement by Rotation: 2/3
rd
of the Board of Directors would be liable for
retirement out of which 1/3
rd
will retire. (determination by lot)
In the same meeting, there is also an option of re-appointment of such directors.
Adjournment of meeting --. Next week same day, same time
Deemed Re-appointment  After the /two adjournment no decision taken, then
this happens.
Except
a) No consent
b) voted against the resolution
c) Not qualified
d) If specified that special resolution is needed
e) Same meeting (2 resolutions will come under 1) . . . . .

S. 152, 167
Appointment of a Director by the Board itself: Appointment of a new person
(1.) S. 160 + Rule 13 of Company (Appointment and Qualification of Directors)
Rule , 2014: Right of persons other than retiring directors to stand for
directorship.
Q.: What is the intention behind such provision in the Act?
Ans.: As a general rule, directors are appointed by members at a general meeting.
As an exception, Board can also appoint directors in some specified cases. Section
160 provides for right of any person to stand for the position of a director in a
company in a general meeting in a democratic way. However, provision for

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deposit has also been made to avoid abuse of this right by some persons with bad
motive. The amount of deposit which was merely Rs.500/- under 1956 Act has
been drastically increased to Rs.1 lac under 2013 Act.

(2.) Section 161 of the Companies Act,2013 deals with the Appointment of
Additional Director, Alternate Director and Nominee Director
i) Additional Director
AoA may empower the Board of Directors the power to appoint any person, other
than a person who fails to get appointed as a director in a general meeting,
(cannot be someone who had been put to vote in GM but has lost) as an
Additional Director at any time. He shall hold office up to the date of the next
Annual General Meeting or the last date on which the annual general meeting
should have been held, whichever is earlier.
- Can opt out himself upon completion of task. In GM , if shareholders
disapprove, the post will be held invalid from the date of
appointment, but his acts would be valid acts of the company. If
approved, he becomes any other director. (Sec. 161)

ii) Filling up of Casual Vacancy: (Amended in 2018)
Casual vacancy  A casual vacancy occurs in the Board of Directors when the
office of a Director appointed by the shareholders is vacated before the expiry of
his term. Although the Companies Act, 2013 doesn't define what constitutes this
vacancy, it would mean vacancy arising due to death of the Director, his
resignation, or insolvency / disqualification and not by efflux of time or retirement
by rotation. Failure of an elected Director to accept the office may also constitute
a casual vacancy.
 Such vacancy will need to be filled up in terms of the AOA of the Company.

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 Such director will hold office till the expiry of the term of original director.
The person appointed cannot be rejected by the members in the
immediate GM.

iii) Alternate Director:
- The Board of Directors of a company may appoint a person to act as
an alternate director for a director during his absence for a period of
not less than 3 months.
- if authorised by AoA or by a resolution passed by the company in
general meeting )
- The person must not hold any alternate directorship for any other
director in the company,
- The person must be qualified to be appointed as an independent
director under the provisions of this Act.
- Holds office only till the expiry of the term of the original director
and shall vacate the office when the original Director returns back
- If the term of office of the original director expires before he returns
to India, any provision for the automatic re-appointment of retiring
directors in default of another appointment shall apply to the
original, and not to the alternate director.

iv) Nominee Director:
Subject to the articles of a company, the Board may appoint any person as a
director nominated by any institution under the provisions of any law or of any
agreement or by the Central Government or the State Government by virtue of its
shareholding in a Government company.

 Resident Director:

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Section 149(3), C A, 2013 : Every company shall have at least one director who
has stayed in India for a total period of not less than 182 days in the previous
calendar year.
 Woman director:
As per Section 149(1) read with Rule 3 of The Companies (Appointment and
Qualification of directors) Rules, 2014(Chapter 11), the following class of
companies are required to appoint at least one Woman Director-
(i) every listed company;
(ii) every other public company having – According to latest audited financial
statements
(a) paid–up share capital of 100 crore rupees or more; or
(b) turnover of 300 crore rupees or more.
- Time Frame for appointment: Further as per interpretation other existing
Companies were required to appoint Women Director within a period of 1
year as mentioned under Section 149(2).
- Intermittent Vacancy: In case of any intermittent vacancy of woman
director the same has to be filled-up by the Board at the earliest but not
later than immediate next Board meeting or three months from the date of
such vacancy whichever is later
Independent Director
Independent Director [ 149(6)]: Qualification, who can be? ID type of executive
director (involved in day to day business of company) IMP
The provisions relating to appointment of Independent directors are contained in
Section 149 of the Companies Act, 2013 should be read along with Rule 4 and
Rule 5 of the Companies (Appointment and Qualification of Directors) Rules,
2014.

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we can say that an independent director is a non-executive director of a company
who helps the company in improving corporate credibility and governance
standards. He/ She does not have any kind of relationship with the company that
may affect the independence of his/ her judgment.
(a) who, in the opinion of the Board, is a person of integrity and possesses
relevant expertise and experience;
(b) who is or was (or his relatives)not a promoter of the company or its holding,
subsidiary or associate company;
c) who is (or his relatives are )not related to promoters or directors in the
company,
• Section 149(6)(c) requires that an ID should. have no pecuniary
relationship (for monetary benefit) with a company, its holding, subsidiary or
associate company, or their promoters, or directors, during the current and two
preceding financial years.
 The Companies Act, 2013 as well as Clause 49 of the Listing Agreement
emphasize that having a pecuniary relationship with the company, either
through themselves or their firms, affects the independence of the
Independent Directors.
 The Amendment Act, 2017 : Transactions outside the scope of pecuniary
relationship for an independent director: The Amendment
Act, 2017 specifically excludes the amount of remuneration received by an
independent director and any transaction up to 10 per cent of his/her total
income from the definition of pecuniary relationship.
 (e) who, neither himself nor any of his relatives—
(i) holds or has held the position of a key managerial personnel or is or has been
employee of the company
2(51) Company’s Act , 2013: Definition of Key managerial personnel
 the Chief Executive Officer or the managing director or the manager;

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 the company secretary;
 the whole-time director;
 the Chief Financial Officer; and.
 such other officer as may be prescribed;

(ii) is or has been an employee or proprietor or a partner, in any of the three
financial years immediately preceding the financial year in which he is proposed
to be appointed, of—
Who are Relatives: 2 (77) , Related party: 2(76)
Required No. of IDs in companies :
Every listed public company --> 1/3 rd of Board should comprise of ID –if
chairman is not non-executive ; If Chairman Executive then ½ ID minimum
 Any fraction contained in that one-third shall be rounded off as one.
 The Central Government may prescribe the minimum number of
independent directors in case of any class(es) of public companies.
 As per Rule 4 of the Companies (Appointment and Qualification of
Directors) Rules, 2014, the following classes of companies shall have at
least 2 directors as independent directors.
- Public Companies with paid-up share capital of Rs. 10 crores or more.
- Public Companies with turnover of Rs. 100 crore or more.
- Public Companies with aggregate outstanding loans, debentures, and
deposits, exceeding Rs. 50 crore
Role of an Independent Director:
Independent Director acts as a guide, coach, and mentor to the Company. The
role includes improving corporate credibility and governance standards by
working as a watchdog and help in managing risk. Independent directors are
responsible for ensuring better governance by actively involving in various
committees set up by company
Appointment of Independent Director :

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Section 150 of Companies (Appointment and Qualification of Directors) Rules,
2014 provides the manner of selection of ID’s. It states that-
i) An ID may be selected from a databank containing names, addresses and
qualifications of persons who are eligible and willing to act as ID’s maintained by
any body, institute or association as prescribed by the Central Government
[Section 150 (1)].
ii) The appointment of ID’s shall be approved by the company in the general
meeting [Section 152(2)]
Independent Directors’ Meetings:
 1 Meeting per year with all the IDs and members of the management, with
non IDs not attending the meeting.
 To review the performance of non-independent directors and the Board as
a whole;
 review the performance of the Chairperson of the company, taking into
account the views of executive directors and non-executive directors;
Remuneration:
The Companies Act, 2013 expressly disallows independent directors from
obtaining stock options and remuneration other than sitting fees and
reimbursement of travel expenses for attending the board and other meetings.
Sitting fees for attending the Board Meetings (Section 197(5) ): maximum of
Rs.1,00,000/- per meeting is to be decided by the Board.
Profit related commission may be paid to independent director subject to the
approval of the shareholders.
Term Of Office Of Independent Director: S. 149(10) &(11):
An independent director shall hold office for a term up to 5 consecutive years on
the Board of a company, but shall be eligible for reappointment on passing of a

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special resolution by the company and disclosure of such appointment in the
Board’s report.
No independent director shall hold office for more than 2 consecutive terms,
Retirement of directors by rotation shall not be applicable to appointment of
independent directors.
-----------------------------------------------------------------------------

Managing Director:
S. 2(54) defines MD
Head of Executive  Governing Authority
Who appoints the MD of a company?
Meaning of Managing Director: It is a common practice that the Board of
Directors appoints one of its members to manage the affairs of the company as a
whole time officer and calls him the Managing Director. He acts as the chief
executive. He occupies a position of dual authority and responsibility.
Whether MD is an employee or not:
MD has a dual identity, performs duties over and above ordinary Directors, and
therefore somehow can be called an employee, but not for all purposes.
Powers and Duties of Managing Director:
Managing Director is entrusted with substantial powers of company management
subject to the superintendence, control and direction of the Board of Directors.
But he is not entrusted to do the administrative acts of a routine nature such as
the following:
(i) To affix the common seal of the company to any document, or
(ii) To draw and endorse any cheque on account of the company in any bank, or

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(iii) To draw and endorse any negotiable instrument, or
(iv) To sign any certificate of shares, or
(v) To direct registration of transfer of any share.

The substantial powers of management consist of
(i) Laying down broad policies and objectives of the company, and
(ii) Executing such policies and objectives.
 Substantial powers of management imply the ability to take a decision to
do or not to do a thing.
 It is not necessary that the managing director should be entrusted with the
management of the whole affair of the company as is the case with the
manager.
 He is the liaison officer between the Board of Directors and the rest of the
organisation.
 He is the director-cum-executive and as a member of the board of directors
he shares the objectives and policies of the company, though he is
subordinate to the Board.
Check and balance is maintained in order to ensure transparency and
accountability that is why it has been provided under the Act that, the same
person should not act as both Chairman and Managing Director or Chief Executive
Officer of the Company, unless the company AoA provides otherwise or the
company has multiple businesses. [S. 196 (1)]
Can a company have two Managing Directors?
Ans: As per third proviso to section 203 of the COMPANIES ACT, 2013 a company
may appoint or employ a person as its MD, if he is the MD or Manager of one and
not more than one other company with the consent of all directors present at
meeting.
Can a person be MD in two companies? S. 203(3), Companies Act, 2013

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A company may appoint or employ a person as its MD, if he is the MD or Manager
of one and not more than one other company with the approval of all its directors
for such appointment. Such person should not be MD in more than one
Company at the time of appointment. But he can be Director in any no.
of Company.
The titles MD, and CEO, typically mean the same thing. Both refer to the
operational leader of the business.

Manager :
S. 2(53) defines
A company can appoint either the Managing Director or Manager, not both. {Sub
– section (1)}
Appointment etc of Key Managerial Persons:
Appointment of MD, WTM or Manager :
Board of Directors in its meeting shall appoint MD, WTM or Manager subject to
the approval of the company in its next General Meeting. This appointment
should be in accordance with the provision of Section 197 and Schedule V. Where,
such appointment is at variance to the conditions specified in the schedule, this
appointment shall also be subject to the approval of the Central Government.
{Sub – section (3)}
Disqualifications of MD, WTM or Manager:
 The appointee should not be an un-discharged insolvent nor has any time
been adjudged as an insolvent.
 The appointee has not any time suspended payment to his creditors
 has made a composition with them.
 The appointee should not be a convict of any offence or acts mentioned in
Schedule 5 , Part 1 or fined not more than Rs. 1,000.

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 sentenced for a period of more than six months.
 Not detained under COFEPOSA (Conservation of Foreign Exchange and
Prevention of Smuggling Activities Act , 1974: enacted by Indira Gandhi to
retain foreign currency and prevent smuggling)

Age Limit of MD, WTM or Manager: {Sub – section (3)}
 21 year and normal retirement age is 70 years.
 However, a company may appoint a person on these positions, who has
attained the age of 70 years. An explanatory statement justifying such
appointment shall be there in the notice for the motion of appointment.

Remuneration payable by a public company to MD, WTM or Manager
 Total managerial remuneration shall not exceed 11% of net Annual profit of
the company.
 Any remuneration exceeding 11% of net profit limit will be subject to the
approval of Central Government.
 The remuneration of anyone MD, WTM or Manager shall not exceed 5% of
net profit.
 If there is more than one Managing Director or Whole Time Director, the
overall limit is 10% of net profit.
 If MD of 2 companies, the combined remuneration should not exceed 5% of
net profit.
 If a non-resident of India, Central Government approval is needed for any
remuneration.
 The remuneration may exceed this limit only after approval by the
company in general meeting.
 The remuneration to other directors shall not exceed 3% of net profit,
where there is no MD, WTD or Manager. In any other case, remuneration
shall not exceed 1% of net profit. {Second Proviso to Section 197(1)}

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The percentage as mentioned in subsection (1) shall be exclusive of remuneration
popularly known as sitting fee.
Sitting Fee: Company Directors can be paid ‘sitting fee’. They can be paid up to Rs
1 lakh per board meeting or a committee meeting. (S.197)
Tenure of MD, WTM or Manager
 must be less than five years.
 However, This means the company may re-appoint them for next term in
last one year of the current term. {Sub – section (2)}
Disclosure of interest by Director - S. 184, (1 & 2):
Every director shall disclose his concern or interest in any company or companies
or bodies corporate, firms, or other association of individuals which shall include
the shareholdings, at
i) First meeting attending as a Director
ii) First meeting in every financial year.
iii) First meeting after any change in the previous disclosure.

Contract Voidable and Director Punishable (Section 184, Sub – Section 3, 4):
 A contract entered into by the company without disclosure/with
participation by a director who is interested in any way, directly or
indirectly, in the contract, shall be voidable at the option of the company.
 Non-disclosure of interest shall be punishable with imprisonment for a term
up to 1 year or with fine of minimum fifty thousand rupees but may extend
to one lakh rupees, or with both.
Vacation of Office s.167
Disqualification leads to vacation of office and there are some other factors also.
1. If he incurs disqualification
2. If the company is defaulting, he would vacate in other companies.

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3. If he has not attended even a single meeting in 12 months, he has to vacate.
(Regardless of leave of absence)
4. If he has not disclosed his Position of interest (S.184)
5. Disqualification by Court or Tribunal
6. Punished for moral turpitude
7. Imprisonment for more than 6 months  Vacation + disqualification
8. Holding subsidiary agreement conditions
 If all Directors vacate the office, the Promoter would appoint the Directors
 The Central Government may intervene in case of public companies.

Removal of Directors: (S. 169, Companies Act, 2013)
1. by shareholders
2. by Tribunal
Removal by shareholders
 Shareholders can remove any director before the expiry of his tenure , in
the General Meeting through Ordinary Resolution.
 except
- any director appointed by Tribunal for prevention of oppression and
mismanagement u/s 242 and a director appointed under principle of
proportional representation u/s 163.
- Appointed by NCLT / NCLAT: (The National Company Law Tribunal
(NCLT) is a quasi-judicial body in India that adjudicates issues relating
to Indian companies.); NCLAT( The National Company Law Appellate
Tribunal)
 Shareholders have a legal right which cannot be damaged or taken away by
MOA, AOA or any other documents or Agreement.
 A company MAY, by ORDINARY RESOLUTION, remove a director after giving
him a reasonable opportunity of being heard.
Reasonable Opportunity of being heard- (Two modes)
1. The director concerned may make representation in writing to the company
and requests its notification to members of the company.

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2. The Director may request to send his representations along with the notice to
the members and to be heard at the meeting.
However, the rights may not be available, if the action is on the application either
of the Company or of any other person who claims to be aggrieved. The company
can satisfy the Tribunal that the removed Director should not be enabled to the
Right of being Heard.
Appointment of director in place of removed director- A vacancy created by the
removal of a director under this section may, (if he had been appointed by the
company in general meeting or by the Board) be filled by the appointment of
another director in his place at the meeting at which he is removed, provided
special notice of the intended appointment has been given.
- A director so appointed shall hold office till the date up to which his
predecessor would have held office if he had not been removed.
- If the vacancy is not filled, it may be filled as a casual vacancy.
- The director who was removed from office shall not be re-appointed as a
director by the Board of Directors.
Compensation for Loss of Office: S. 202
 A company may make Compensation payment to MD, WTM or Manager
but not to any other director,
 No payment shall be made in the following cases, where
1. The director resigns from his office as a result of the reconstruction of the
company, or of its amalgamation with any other body corporate and is appointed
as the WTD, MD or Manager of the conglomerate.
2. The director resigns from his office
3. The office is vacated under section 167(1)
4. The company is being wound up due to the negligence or default of the
director

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5. The director has been guilty of fraud or breach of trust, gross negligence or
mismanagement in relation to company
6. The director has instigated the termination of his office.
7. If the Director is removed in less than three years and the Winding up
commences within 12 months of from the termination of Director, and the
company does not have enough capital to repay its shareholders.
Compensation Cap: Any payment shall not exceed the remuneration which he
would have earned if he had been in office for the remainder of his term or for
three years, whichever is shorter.
Removal by Tribunal: Section 241 of the Act, provides the circumstances in which
any member of a company or the Central Government can apply to the National
Company Law Tribunal (“NCLT/Tribunal”) for relief in cases of oppression and
mismanagement. The MD,, manager or any of the directors of the company can
be removed by Tribunal under Section uS.242, S. 243
Resignation of Directors S. 168
The resignation becomes effective upon submission of such resignation letter and
the filing of the necessary form with the RoC.
1. The Director intending to resign shall send notice in writing to the Company
with a mention of the Reason for Resigning. The resignation of a director shall
take effect from:
 The date on which the Notice Is Received by the company or
 The Date, specified by the Director in the notice, whichever is later.
2. The director who has resigned shall be liable even after his resignation for the
offences which occurred during his tenure.
 The director shall also forward a Copy of His Resignation Along With
Detailed Reasons for the resignation to the RoC within 30 (Thirty) days of
resignation through filing of Form DIR.11 under his Digital Signature.

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 Whereas Filing of Form DIR.12 with RoC is the responsibility of Company.
The only exception are employees of the company, and where the terms of their
respective service contracts will ordinarily refer to resignations, notice periods
and / or compensation in lieu thereof.
IMP:
Director: Sec 2 Qualification of Director? Who can become a director?
Q. A single person can become director in how many companies?
Ans : 20 companies out of which max 10 need to be public companies
Disqualification of Director (Sec. 164); if in appeal not disqualified in 2013 but
now even if pending charge disqualified after 2017 amendment besides ther
thing : not complied with S 352 (not complied with TIN?)
Whether Directors can be shareholder of the company? A ; yes if he wants

Mod 8 :
Meeting : A meeting is a gathering of two or more people that has been convened
for the purpose of achieving a common goal through verbal interaction, such as
sharing information or reaching agreement.
1. Meeting of Share Holders
i) Statutory meeting: Statutory meeting is the first meeting which company
conducts after its commencement. Conduction of statutory meeting is
compulsory. Public limited company is required to hold such meeting within a
period not less than 1 month and not more than 6 months from the date of
commencement.

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The directors make statutory report. Every member must be given a copy of
report at least 21 days before the date of the meeting and a copy is also to be
sent to the Registrar for registration.
A private company or a public company having no share capital need not conduct
a statutory meeting.
ii) Annual General Meeting: S. 96; every company shall hold a general meeting as
annual general meeting every year. Except one person company. There should
not be a gap of more than fifteen months between two AGM.
Section 101deals with ‘notice of meeting’: Notice of GM can be either in writing
or also in electronic form. The member should get the notice at least fore 21 clear
days.
 The notice should consist of place, day, date and the proper hour of the
meeting. It should also contain agenda of meeting.
 Every member of the company, legal representative of deceased and
assignee of insolvent member, auditor and every director of the company
should get notice.
 S. 101 provided that a GM may be called after giving a shorter notice if
consent is given in writing or by electronic mode by not less than 95% of
the members entitled to vote at such meeting.
iii) Extraordinary G M : S.100:
Schedule 1, Table F Clause 42 EGM: All general meetings other than annual
general meeting shall be called extraordinary general meeting.
Extra – ordinary general meeting called on requisition of members. To summon
such a meeting is the privilege of the Board of Directors.
However, S.100 makes provisions with respect to an EGM being held other where
sub-section 4 of Section 100 of the Act binds the Board of Directors to call an EGM
after receiving required requisition from members.

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An extraordinary general meeting may be convened by the directors if some
business of special importance requires approval from members and it cannot
wait till the next annual general meeting. The Act itself provides instances where
EGM will have to be convened by the Board to transact businesses which cannot
wait till next AGM
For example, to fill any casual vacancy in the office of an auditor
iv) Class Meetings: are held by the shareholders of a particular class of shares
when it is proposed to alter, vary or affect the rights of a particular class of
shareholders. e.g. preference shareholders or debenture holders. The matter is
to be approved at the meeting by a special resolution. In case of such a class
meeting, the holders of other class of shares have no right to attend and vote.
2. Directors meeting
i) Board Meeting: S. 173
The directors of a company exercise most of their powers in a joint meeting called
the meeting of the Board. These must be held:
 At least once in every three months, and
 At least four such meetings shall be held in every year. [Sec. 285]
 The participation of directors in a meeting of the Board may be
either in person or through video conferencing or other audio visual
means, as may be prescribed,
 A meeting of the Board shall be called by giving not less than seven
days’ notice in writing to every director at his address registered
with the company
 Every officer of the company whose duty is to give notice under this
section and who fails to do so shall be liable to a penalty of twenty-
five thousand rupees.

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The directors of most companies frame rules concerning how, where and when
they shall meet and how their meetings would be regulated. These rules are
commonly known as Standing Orders.
ii). Committee meeting: The Board of Directors may form certain committees and
delegate some of its powers to them. These committees should consist of only
directors. The delegation of powers to such committees is to be authorised by the
Articles of Association and should be subject to the provisions of the Companies
Act.
In a large company routine matters like Allotment, Transfer, Finance are handled
by sub-committees of the Board of Directors. The meetings of such committees
are held in the same way as those of Board Meetings. Audit Committee meeting
for considering Financial Statement.
3. Meeting of Creditors: Strictly speaking, these are not meetings of a company.
They are held when the company proposes to make a scheme of arrangements
with its creditors. The Court may order a meeting of the creditors on the
application of the company or of liquidator in case of a company being wound-up.
4. Meeting of Debenture Holders: Meetings of the debenture holders are held
according to the conditions contained in the debenture trust deed.
These meetings are called from time to time where the interests of debenture
holders are involved at the time of reconstruction, reorganisation, amalgamation
or winding up of the company.
5. Meeting of Creditors & Contributors in Winding up: The main purpose is
obtain consent of creditors and contributories to the scheme of rearrangement or
compromise. It is to save the company from financial difficulties. Sometimes, the
Court may also order to conduct meeting. The term “contributory” covers every
person who is liable to contribute to the assets of the company when the
company is being wound-up.
Section 99 of Companies Act, 2013 deals with Punishment for default in
complying with provisions of sections 96 to 98.

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S. 96: Annual general meeting
S. 97: Power of Tribunal to call annual general meeting
S. 98 : Power of Tribunal to call Meetings of Members, etc.

S. 103: Section 103.Quorum for meetings.
(1) Unless the articles of the company provide for a larger number,—
(a) in case of a public company ,—
(i) 5 members personally present if the number of members not more
than1000;
(ii) 15 members - 1000 – 5000 members
(iii) 30 members  more than 5000

(b) private company , two members personally present,
(2) If the quorum is not present within half-an-hour from the time appointed for
holding a meeting of the company—
(a) the meeting shall stand adjourned to the same day in the next week at
the same time and place, or as the Board may determine; or
(b) the meeting, if called by requisitionists under section 100, shall stand
cancelled unless 3 days prior notice is given to the members.
(3) If at the adjourned meeting also, a quorum is not present within half-an-hour
from the time appointed for holding meeting, the members present shall be the
quorum.
Section 174 of Companies Act 2013- Quorum For Board Meeting. Quorum here
means the minimum number of directors to be present at the board meeting in
order to hold the board meeting.
A quorum refers to the minimum number of board members entitled to vote who
must be present at a meeting before any business can be transacted legally. The

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principle behind setting a quorum is to prevent a non-representative action by a
very small number of board members present.
The quorum for a meeting of the Board of Directors of a company shall be one
third of its total strength or two directors, whichever is higher, and the
participation of the directors by video conferencing or by other audio visual
means shall also be counted for the purposes of quorum under this sub-section.
(i) any fraction of a number shall be rounded off as one;
(ii) “total strength” shall not include directors whose places are vacant.
S. 105: PROXIES: Any member of a company entitled to attend and vote at a
meeting of the company shall be entitled to appoint another person as a proxy to
attend and vote at the meeting on his behalf. A proxy shall not have the right to
speak at such meeting and shall not be entitled to vote except on a poll.
A member of a company not having a share capital shall not be entitled to appoint
proxy unless articles provide so. Central Government may also specify companies
whose members shall not be entitle to appoint a proxy.
A person appointed as proxy shall not act as proxy for more than fifty members or
for more than prescribed number of shares.
S. 102: Explanatory Statement to the Notice As per Section 102, every special
business to be transacted at a general meeting should contain following
information in the explanatory statement:-
1. Concern or interest, financial or otherwise of every Director, KMP and their
relatives.
2. Any other information and facts that may enable members to understand the
meaning, scope and implication of the proposed resolution.
3. Shareholding interest of every Promoter, Director and KMP in any other
company exceeding 2% of paid-up share capital of such company, if the
resolution to be passed relates to that another company.

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Note: If any document is referred which is to be considered at the meeting, the
time and place where such document can be inspected shall be specified in the
explanatory statement.
Rule 3 of company (Meeting of Board and its Powers),Rules, 2014 : Video
Conferencing
Rule 4(iv) have been amended to the effect that a meeting of Audit Committee
through Audio Visual means shall not deal with “consideration of financial
statement including consolidated financial statement,

25.10. 18 REVISION
Kind of companies:
1. Public (sec 3) , private s. 2(68)
2. Statutory companies
3. Registered companies
4. Govt companies
5. Ltd Liability
6. Association not for profit
7. Foreign company
8. Public Financial Institutions
9. Producer Companies

Public company: ( Members: min. 7; Max unlimited)
No minimum share capital (2015 Amendment)

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Which is not a Pvt. Company ; holding company of 50%
subsidiary
Pvt. Company: No min share Capital
Articles:
i) Restricts the right to transfer its shares
ii) Except in case of OPC, limits the on. of its members to 200
Provided:
1. If you are employee of a company the co gives you shares, then you
are not members of the co. Thus, you can give shares to 200 persons
but ou can also give shares to employees, who will not be counted as
members.
2. If you are a former employee, then also you are not a member.
iii) Prohibits any invitation to the public to subscribe for any securities of the
company; They have right to prohibit any person from buying its shares
OPC : Perpetual succession Q. If a person died, what will happen? Ans; You make
a person nominee.
Statutory companies :
Formed under any Act
It may or may not be registered under Company Act. : Sec 1(4)
 Company’s regulation  Ministry of Corp. Affairs
Banking Company regulation  RBI, SEBI
Insurance Company  IRDA
For example:
Company Act  General

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Insurance Act  Special Act  Applicable over General Act
RBI Act, 1934
1. Body corporate
2. Perpetual succession
3. common seal
4. Sued
RBI is a company governed by RBI Act, 1934. The Company Act also governs RBI
only to the extent that it does not violate RBI Act of 1934
Govt. Company:
Registered under Company Act
This is the co. in which govt has majority of shares
Govt. companies are liable to pay tax. Exception Nalco exempted from paying
taxes
Registered co. : Companies which are registered under C Act
Ltd. Liability Co. : Unlimited
liability limited by shares
26. 10. 18
Limited Liability Companies Sec. 3 (20
A company formed by either a) limited by share
b) limited by Guarantee
c) an unlimited company
A company liability is unlimited. The liability of members is limited

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However, Unlimited liability does not mean that you dissolve the Corp. Veil
1. Limited by shares: authorized Capital : max. Capital you keep
Issued capital : the share capiatal that has been issued to shareholders
Capital Clause;
Company incorporate --. 1 lakh of 10,000 shares of 10 each
Partly paid shares – Issued, refiuse the Expenditure of company in issuing new
shares
Drawback: Not listed
For example, Cost of share Rs 10 but you buy it in only rs 5
When the company winds up the company calls up partly paid shre holders to pay
the rest amount
Limited by Guarantee: share + Guarantee
EG, -- Rs. 100 shares + I took guarantee of Rs. 200
Then I have to [ay value of shares + guarantee
Unlimited Liability: Why the concept? Ans: It is one of the ways to reflect your
credibility
Eg., I started a company . I go to bank for loan. But bank does not have faith in
your company. The bank then asks you to become an Unlimited guarantor so that
Bank get back its loan.
Association not for Profit: Companies which are incorporated under Sec 8 of
Company Act
If you also want to get a license from . . . 3 things are required
Object Clause should be
1. To encourage art, commerce, science, etc
2. You will use your profit to encourage art, commerce etc.
3. You will prevent the payment of any dividend to its members

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Foreign Company: Incorporated outside India - Sec. 2 (42)
a) Place of business in India
b) Conducts business activity in any other manner.

Company Law – Module : 1
Duties of Director: Statutory Duties & General Duties
General Duties: Section 166 of the 2013 Act provides for fiduciary duties of
directors such as the duty to act in good faith, the duty to act in the best interests
of the company, its employees, the shareholders, and the community and for the
protection of the environment, etc.
1. Duty of good faith
i) To work in best interest of the company and its present & future
members
ii) No secret profit
ii) Director must not use Corporate opportunities for self : For example,
Using opportunities/resources for setting up his own company/business after
retirement by compromising the interest of present company)
2. Duty of care: To be aware of the activities including the co-directors in the
company for the general interest of the company. s. 63(1), CA ‘13
3. Duty not to delegate: statutory duties should not be delegated to others.
Unless and until AoA has any particular provision for any alternative delegation,
one can’t do so.
As per Section 166(5) a director is prohibited from making any undue gain or
advantage by virtue of its directorship in the company and is liable repay any
undue gains to the company.
Case: Global Cinemas, Calcutta to be done
Case: Cook v. Deeks
The resources of the company must not be used by the directors and the officers
for their personal benefit. If a director or officer contravenes this fiduciary duty, a
breach has been executed.
Case Facts:

The directors of Toronto Construction Company had a disagreement with another
director, who is Cook. The majority of the directors were able to carry out a
project using the name of the company. After which, they then diverted the
project to another company in order to exclude Cook from the project, and the
new company itself. The shareholdings of the directors were then put to use by
carrying out a resolution that Toronto Construction Company does not have
anything to do with the new project, which then automatically excluded Cook out
from the project.
Case Issue: Was there a breach of the fiduciary duty of the directors by diverting
the business endeavour of Toronto Construction Company to another company?
Case Decision: The court ruled that indeed the majority directors and the
shareholders breached their fiduciary duty making the resolution they have made
to invalidated.
The reason was the majority directors and shareholders must always bear in mind
that even though they are in control of most of the business activities of the
company, they are not free to forgo the company’s interests.
Case Significance: The case is significant as it exemplifies that there is a limitation
on the powers of the majority members of an enterprise especially in the process
of exploiting the business endeavours of the enterprise
➢ Burland v. Earle 1902 AC 83:
Appropriation of corporate property by majority
• Y Company was winding up, the directors sold its property in 3
installments to X company; One installment was sold at 3 times the
Face value.
The plaintiff: The Director of X Company and the Shareholders and the creditors
of the Y Company were the plaintiff.
Shareholders sued to compel the directors to declare a dividend and to account
for a secret profit. What if the majority are “endeavouring directly or indirectly to
appropriate to themselves money, property or advantages which belong to the
company.

Held: However, The court did not interfere with the internal matter of company
as the decision was taken by majority.
Statutory Duties:
(1) S. 39(4) – Whenever a company having a share capital makes any allotment
of securities, it shall file with the Registrar a return of allotment in such
manner as may be prescribed.
In case of any default the company and its officer shall be liable to a
penalty, for each default, of one thousand rupees for each day during
which such default continues or one lakh rupees, whichever is less.
• Subscription money first goes to Escrow A/c – Bankers to the issue – to
facilitate public offer. Money has to be returned first duty of the
director.
(2) S. 184 – Duty to disclose interest: In a company, if you have 3% share, then
you have to disclose it every single time that you are getting 3% share.
S. 184(1) – Continued disclosure: Disclosure u/s 184 (1) is required to be given by
every director on 3 occasions : At the first Board Meeting in which he
participates as a Director post appointment; every financial year; the first
Board Meeting held after any change in the interest or concern in the
disclosures already made earlier.

S. 184(5) – Nothing in S 184 shall restrict any director to have any interest in any
contract or arrangement with the company. Director or Directors taken
together of a company entering into contract with another company
must not hold more than 2% of paid up share in the other company.
#Cannot restrict an individual to trade in shares [article 19(1) (g)]
(3) Sec. 191: Payment to director for loss of office, etc., in connection with
transfer of undertaking, property or shares

Any such proposal /payment will have to be disclosed to the members of the
company and the proposal has to be approved by the company in general
meeting.
Meaning : suppose there are 3 public companies :
Coal India NTPC Jindal
• Jindal wants NTPC shares – Coal India has a controlling stake in NTPC. –
Coal India’s Managing Director, is a director in NTPC.
• If Coal India sells a portion of property (shares) to Jindal, Then Jindal will
try to appoint its director to NTPC.
• So, MD of Coal India may sell the shares to JD at a throwaway price and will
take compensation for loss of office of Director of NTPC.
• Suppose according to an understanding, The more Jindal makes profit, the
CMD, Coal India gets more compensation, but this is affecting the
shareholders of Coal India.
• So, it has to be disclosed and approved in the General meeting.
• Even though the CMD is not selling the share at throwaway price, he has to
disclose and the compensation has to be approved at the General meeting.
Not affecting s. 202: As per the provisions of Section 202 of Companies Act
2013, compensation for loss of office/consideration for retirement from
office may be paid to MD/WTD or manager subject to specified limits and
except in some specified cases.
(4) S. 167 – S. 167(1)(b) Duty to attend Board Meetings: mandates a director to
attend at least one meeting of Board of Directors held during the period of
twelve months otherwise his absence from all meetings of Board of
Directors held during above mentioned period results in vacation of Office
of Director
(5) i) S. 96: Convene AGM : The AGM must be held within six months from the
closing date of financial year.
ii) S. 100: Convene EGM on requisition of members.

(6) S. 167 – vacation of office in case
• absence from meeting
• in contravention of S.184 (entering into contracts for self- interest);
• failure to disclose interest;
• disqualified by any Tribunal;
• Convicted by court
(7) S. 192 – Restriction on non-cash transactions involving directors: No
company shall enter into an arrangement by which—
(a) a director of the company acquires assets for consideration other
than cash, from the company; or
(b) the company acquires or is to acquire assets for consideration
other than cash, from such director unless prior approval for such
arrangement is accorded by a resolution of the company in general
meeting .
(8) S. 134 – Should Authenticate financial statements
(9) S. 139 – appointment of company auditor.
(10) S. 148 – to maintain cost records and which will be subject to cost audit.
[Companies (Cost Records and Audit) Rules, 2014]
(11) S. 305 – Declaration of solvency in case of proposal to wind up voluntarily

Liabilities of a Director
Generally speaking, directors are not personally liable for the debts, liabilities or
obligations of a company except for those debts, liabilities or obligations which
arise out of the negligence, fraud or breach of fiduciary duty on the part of an
individual director, or an action not within his authority and not ratified by the
company.
The analysis of directors' liability is assessed under two separate heads:
1. liability to the company and its shareholders; and where the director provides
negligent advice or acts negligently with the result that the company's assets

are diminished and as an indirect consequence the market value of the shares
falls.
The general principle laid down by the English case of Foss v
Harbottle (1843) 2 Hare 461 would apply in that the directors' duties are
taken to be to the company and not to its individual shareholders.
the directors have voting control of a company and use that control to
block any action by the company against them. There are, however, several
exceptions where the shareholders can bring action against the directors
but this action (called a "derivative action") is raised by the shareholders (or
one or more of them) acting on behalf of the company.
1. Liability to the company
2. Liability to the 3
rd
Parties
3. -----for breach of Statutory duties
4. ------ Acts of co-directors
5. Criminal Liability
1. Liability to the company:
i) Breach of fiduciary duty
ii) ultra vires acts: Director is said to be in ultra vires the power when they
act out of their powers which are not mentioned in the articles. This
may include buying property or entering into a contract without the
consent of other directors and shareholders.
iii) Negligence: Globe Cinema Case
iv) mala fide acts: Secret profit
2. Liability to the 3
rd
Parties:
i) Through Prospectus (S35) Section 34 – Issue of Prospectus with untrue or
misleading statements: minimum 6 (six) months to 10 (ten) years.
ii) through allotment of shares
iii) s. 339 & s. 447 (Fraudulent business)
3. Liability for statutory Duties

4. Criminal liability
4. Liability for Co-directors: The mere fact that one director is liable to the
company for a breach of duty does not of itself render the remaining
directors also liable.
Thus, for example, in the absence of negligence, the director is not liable for
a breach of duty by other directors of which he was ignorant. However, a
director will be liable if he has failed to supervise the activities of a guilty
director in circumstances where his duty of care obliges him to do so, or
where he has knowingly participated in or has sanctioned conduct which
constitutes a breach of duty – and in these circumstances a comparatively
slight degree of participation is sufficient to create liability.

4 Committees
1. Audit Committee (S 177)
2. Nomination and Remuneration Committee
3. Stakeholders Relationship Committee
4. CSR Committee

Audit Committee : Charged with the principal oversight of financial reporting and
disclosure,
Audit Committee is one of the main pillars of the corporate governance
mechanism in any company. The Audit Committee aims to enhance the
confidence in the integrity of the company’s financial reporting, the internal
control processes and procedures and the risk management systems.
(1). Section 177 , CA read with Rule 6 of Companies Rule, 2014: every listed
company must have an Audit Committee.
(2) i) all public companies with a paid-up capital of 10 crore rupees or more;
ii) all public companies having turnover of 100 crore rupees or more;

iii) all public companies, having in aggregate, outstanding loans or
borrowings or debentures or deposits exceeding 50 crore rupees or more
based on last audited financial statement.
(3) Must meet at least four times in a year and not more than four months
shall elapse between two meetings.
(4) The quorum shall be either two members or one third of the members of
the audit committee whichever is greater, but there should be a minimum
of two independent members present.
(5) The Audit Committee shall consist of a minimum of three directors with
independent directors forming a majority. Two-thirds of the members of
audit committee shall be independent directors.
(6) All members of audit committee shall be financially literate and at least one
member shall have accounting or related financial management expertise
(7) The Chairman of the Audit Committee shall be an independent director.
(8) The Chairman of the Audit Committee shall be present at Annual General
Meeting to answer shareholder queries.
(9) The Company Secretary shall act as the secretary to the committee.
Functions of the Audit Committee (not in class notes but relevant)
Section 177(4) of the Act provides that every Audit Committee shall act in
accordance with the terms of reference specified in writing by the Board. Terms
of reference as prescribed by the board shall inter alia, include, –
(a) the recommendation for appointment, remuneration and terms of
appointment of auditors of the company;
(b) review and monitor the auditor’s independence and performance, and
effectiveness of audit process;
(c) examination of the financial statement and the auditors’ report thereon;

(d) approval or any subsequent modification of transactions of the company with
related parties;
(e) scrutiny of inter-corporate loans and investments;
(f) valuation of undertakings or assets of the company, wherever it is necessary;
(g) evaluation of internal financial controls and risk management systems;
(h) monitoring the end use of funds raised through public offers and related
matters.
Corporate Social Responsibility Committee
What is Corporate Social Responsibility (CSR)?
• The term ‘Corporate Social Responsibility' (CSR) is not defined in the
Companies Act, 2013.
• CSR has many interpretations but can be understood to be a concept
imposing a liability on the Company to contribute to the society towards
environmental causes, educational promotion, social causes etc. along with
the reinforced duty to conduct the business in an ethical manner.
Section 135 seeks to provide that every company having specified net worth or
turnover or net profit during any financial year shall constitute the Corporate
Social Responsibility Committee of the Board.
• The composition of the committee shall be included in the Board’s Report.
The Committee shall formulate policy including the activities specified in
Schedule VII.
• The Board shall disclose the content of policy in its report and place on
website, if any, of the company. [s.134(o)]
• Sec 135 (1) read with rule 3 of Companies (Corporate Social Responsibility
Policy) Rules, 2014, mandates every company (which may include a holding
company or a subsidiary company) having:
(a) net worth of rupees 500 crore or more, or;

(b) turnover of rupees 1000 crore or more or;
(c) a net profit of rupees 5 crore or more
during any financial year to constitute a Corporate Social Responsibility
(CSR) Committee of the Board.
• Any financial year has been clarified as to imply any of the three preceding
financial years.
• Further, a foreign company defined under clause (42) of section 2 of the Act
having its branch office or project office in India which fulfills the criteria
specified above is required to comply with the provisions of section 135 of
the Act and the rules made thereunder. The net worth, turnover or net
profit of a foreign Company for the purpose of this section, shall be
computed in accordance with balance sheet and profit and loss account of
such company in respect of its Indian business operations.
• ‘Net Profit’ means the net profit of a company as per its financial
statement, but shall not include the following:
➢ any profit arising from any overseas branch or branches of the
company whether operated as a separate company or otherwise;
and
➢ any dividend received from other companies in India, which are
covered under and complying with the provisions of section 135 of
the Act.
• It has also been clarified in the Rules that every company which ceases to
satisfy the criteria mentioned above for three consecutive financial years
shall not be required to –
(a) constitute a CSR Committee; and
(b) comply with the provisions contained in section 135, till such time it
meets the criteria specified in sub section (1) of section 135

Composition of CSR Committee:
• The CSR committee shall consist of three or more directors, out which one
director shall be an independent director. The presence of an Independent
Director shall ensure that the Committee is not just a quasi-committee

addressing the whims of the Board, but is in fact, taking up an initiative. The
composition of such Corporate Social Responsibility Committee shall have
to be disclosed in the Board’s Report as required under Section 134(4).
• An unlisted public company or a private company which is not required to
appoint an independent director shall have its CSR Committee with
independent director.
• A private company having only two directors on its Board shall constitute
its CSR Committee with two such directors.
• With respect of foreign company, the CSR Committee shall comprise of at
least two persons of which one-person resident in India and another person
shall be nominated by the foreign company.
• The CSR Committee shall Institute a transparent monitoring mechanism for
implementation of CSR projects or programs or activities undertaken by the
company.

Functions of Corporate Social Responsibility Committee:
• formulating and recommending to the Board, a CSR Policy which shall
indicate the activities to be undertaken by the company as specified in
Schedule VII;
• recommending the amount of expenditure to be incurred on the CSR
activities.
• monitoring the Corporate Social Responsibility Policy of the company from
time to time.
• Further the rules provide that the CSR Committee shall institute a
transparent monitoring mechanism for implementation of the CSR projects
or programs or activities undertaken by the company.

Stakeholder Relationship Committee (s.178) Function, composition
Stakeholder Relationship Committee

Sub-Section (5) of section 178 provides that the Board of Directors of a company
which consists of more than 1000 shareholders, debenture-holders, deposit-
holders and any other security holders at any time during a financial year shall
constitute a Stakeholders Relationship Committee.
Composition of Stakeholder Relationship Committee
• shall consist of a chairperson who shall be a non-executive director and
such other members as may be decided by the Board.
• The chairperson of the committees or, in his absence, any other member of
the committee authorized by him in this behalf is required under the
section to attend the general meetings of the company.
Functions of Stakeholder Relationship Committee
The main function of the committee is to consider and resolve the grievances of
security holders of the company.
Revised clause 49 of the listing agreement provides that a committee under the
Chairmanship of a non-executive director and such other members as may be
decided by the Board of the company shall be formed to specifically look into the
redressal of grievances of shareholders, debenture holders and other security
holders. The grievances of the security holders of the company may include
complaints related to transfer of shares, non-receipt of balance sheet, non-receipt
of declared dividends, which shall be handled by this committee.
The current requirement under the Listing Agreement clause 49 is for the
constitution of a board committee i.e. ‘Shareholders/Investors Grievance
Committee’ under the chairmanship of a non-executive director to specifically
look into the redressal of shareholder and investors complaints like transfer of
shares, non-receipt of balance sheet, nonreceipt of declared dividends etc. The
main function of this committee is to expedite the process of share transfers.
Penal Provisions under the Companies Act, 2013
In case the company does not comply with the constitution of Audit Committee,
Nomination and remuneration Committee and Stakeholder Relationship

Committee, wherever required, the company shall be punishable with fine which
shall not be less than one lakh rupees but which may extend to five lakh rupees
and every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to one year or with fine which shall
not be less than twenty-five thousand rupees but which may extend to one lakh
rupees, or with both:
It has been further provided that non-consideration of resolution of any grievance
by the Stakeholders Relationship Committee in good faith shall not constitute a
contravention of this section.

MODULE II: CORPORATE ABUSE AND REMEDIES
2.1 Majority and Minority Rights
Shareholders are part of a company. A “Shareholder” denotes a person who holds
or owns the shares. In most of the cases, shareholders are also the members of
the company. Usually an unlimited company or a company limited by guarantee
has no shareholders. But the limited company has its own shareholders. A more
broad definition of Shareholder is:
A limited company has two types of Shareholders:
• Majority Shareholder
• Minority Shareholder
A single shareholder who owns & controls more than half of a corporation’s
outstanding shares, or sometimes, a small group of shareholders who own &
collectively control more than half of a company’s outstanding shares is known as
majority shareholder.

In other words, when a person or company owns the majority of the shares (50
%+) in a limited company, he has the outright control of the company’s
operations, especially the election of its board of directors. Usually they are the
founder of the company.
The majority shareholder is most commonly the company’s parent but may also
be an individual or a group of connected shareholders. This is more common with
smaller companies and in emerging market.
On the other hand, Minority shareholders are shareholders who own minimum
percentages shares in a company that is controlled by majority shareholder. They
have only certain basic rights.
These shareholders are granted extra privileges. It also includes the rights of the
voting for example, election to the board of directors, the rights to buy new
shares issued by the company, the right to a company’s assets during a liquidation
of the company, the rights to share in distribution of the company’s returns.
In the corporate world, all decisions and management of a company are made
with the majority rule which is deemed to be fair and justified. The Courts
generally do not intervene in matters of internal administration of its Board of
Directors so long as they are acting according to the articles of the company.
It follows that the majority shareholders generally control the affairs of the
company and the minority shareholders have to concede to the majority decision.
There is a possibility that the majority may tend to be oppressive towards the
minority shareholders misusing their majority strength.
To overcome this problem faced by the minority, the Companies Act, 2013 came
up with the solution to tackle the problems which are usually faced by the
minority shareholders.
Powers of Majority
According to section 47 of the companies act, 2013, holding any equity shares
shall have a right to vote on every resolution placed before the company. Where
the act or the articles require a special resolution for any purpose, a 3/4th

majority is necessary and a simple majority is not enough. The resolution of a
majority of shareholders passed at a duly convened and held general meeting, is
binding upon the minority and consequently upon the company.

MAJORITY RULE AND MINORITY PROTECTION: (sent by college)

- Management of affairs of Company is done primarily by majority shareholders
Foss vs. Harbottle:
Plaintiffs alleged that the property of the company had been misapplied and
wasted by the majority shareholders of the company and sought relief from the
Court. The plaintiffs asked to penalise the guilty party and appointment of
receiver.
The Court dismissed the claim and held that when Company had been wronged,
only a Company had the locus to sue. However, since the Company is a separate
legal personality, it can sue through its majority shareholders only. Also if the
allged wrong can be ratified or confirmed by simple majority of members in
general meeting, the Court will not interfere.
The Principle of Non-interference (Rule in Foss v. Harbottle)
• The principle that the will of the majority should prevail over the will of the
minority in matters of internal administration of the company was founded
in the case of Foss v. Harbottle (1843) which is today known as the rule in
Foss v. Harbottle.
• According to this principle, the courts will not, interfere at the instance of
the shareholders, in the management of a company so long as they are
acting within the powers conferred on them by the articles of the company.
• The court will not interfere in the internal affairs of a company at the
instance of the minority if the irregularities complained of could be legally
done or rectified by the majority.

• The restrictive character of the Rule in Foss v/s. Harbottle has led to the
creation of statutory remedies for minority shareholders. The most
impressive thing about this is the permission to go to the court for
prevention of oppression or mismanagement. The minority shareholders
are protected under:
➢ The common law
➢ The provision of the Companies Act, 2013

Exceptions to Foss vs Harbottle Rule:
1) Ultra vires and illegal acts cannot be ratified by majority
2) Breach of fiduciary duties
3) Fraud or Oppression against minority
4) Inadequate notice of a Resolution passed at a meeting of members
5) Qualified majority
6) Personal rights of individual members when infringed
Statutory Exceptions:
1) Variation of class rights (Section 48)
2) Request for investigation under Section 213
3) Scheme of compromise or arrangement under Section 230
4) Oppression and mismanagement under Section 241
5) Rights of Dissentient Shareholders in a take-over bid (section 235)
6) Class Action under Section 245

2.2 Protection against Oppression & Mismanagement
In Companies Act, 1956, the protection for the minority shareholders from
oppression and mismanagement have been provided under section 397 (An
Application to be made to company law board for relief in cases of oppression)

and 398 (An Application to be made to company law board for relief in cases of
oppression).
• According to Section 397(1) of Companies Act, 1956, the term ‘oppression’
has been defined as “when affairs of the company are being conducted in a
manner prejudicial to public interest or in a manner oppressive to any
member or members”.
• The term ‘mismanagement’ has been defined under Section 398(1) as
“conducting the affairs of the company in a manner prejudicial to public
interest or in a manner prejudicial to the interests of the company or there
has been a material change in the management and control of the
company, and by reason of such change it is likely that affairs of the
company will be conducted in a manner prejudicial to public interest or
interest of the company”.
• Right to apply: Section 399 provides for a meeting of 10% of shareholders
or hundred members or one-fifth of the total members. However, central
government under their discretionary powers has allowed any numbers of
shareholders to apply for the company board for the relief under Sections
397 and 398.
• Under Companies Act, 2013, the relief from the oppression and
mismanagement has been provided under Section 241-246 where the relief
can be sought from the tribunal in case of mismanagement and oppression
through section 244(1) which provides the right to apply to tribunal. The
tribunal, while exercising discretionary powers, may allow any numbers of
shareholders to be considered as minority.
• Further, under Section 245, Companies Act, 2013, the new concept of class
action has been introduced which was non-existent in Companies Act, 1956
wherein it provides for class action suits to be instituted against the
company as well as against the auditors of the company.
Prevention of Oppression and Mismanagement (sent by college)
Definition of Oppression- A visible departure from the standards of fair dealing
and a violation of the conditions of fair play on which every shareholder who
entrusts his money to the company is entitled to rely.

Complaining Member must show that he/she is suffering in his capacity as a
member.
Some of the principles evolved over the years and instances considered by the
courts as ‘oppression’ are briefly: (from materials sent by college) * Better one.
1. The act or omission should not only be prejudicial but also unfair, harsh and
burdensome to the minority shareholders
2. It is not unfair prejudice to the minority if it is equal prejudice to all
members of the company;
3. There has to be an advantage to one at the cost of the other for being
unfair prejudice;
4. There should be lack of probity and good faith
5. The act which otherwise in accordance with the law and procedure but
mala fide with intent to deny legitimate expectations of minority is
oppression; and
6. Mere technical irregularity or illegality would not by itself amount to
oppression.
Corporate world continues to suffer from the much prevalent disputes between
shareholders. Throughout the world allegations by the minority shareholders
against the majority shareholders in different courts are very common.

Case- Kalinga Tubes Ltd. Vs Shanti Prasad Jain [1964] 1 Comp LJ 117IMPORTANT]
The case was a consequence of fight between two groups of business magnates
for the control of Messrs Kalinga Tubes Limited.
The main point raised by the appellant (S.P. Jain): The affairs of the Company
were being conducted in a manner oppressive to him and his group of members.
Allegations: in the High Court under Section 397 and 398 of the Companies Act,
1956, complained that the issue of new shares was in furtherance of a continuing
oppression of the appellant’s minority group;

- that by allotting such shares to benamidars of majority shareholders in
disregard of earlier agreement of not allot shares to outsiders, it was
intended to exclude S. P. Jain from all control of the affairs of the company;
- that the resolutions passed on the manner of allotment of new shares
contravened s. 81 of the Companies Act, 1956 and this resolution as well as
the hasty allotment to outsiders were oppressive of the minority.
The petition was allowed by the single Judge but this decision was reversed in
appeal by a Division Bench of the High Court.
HC held: u/s 397 and 398 no case of oppression of minority shareholders.
On appeal to the Supreme Court HELD :
(i) On the facts no case had been made out of oppression within the meaning of
section 397.
- For a petition under section 397 to succeed, it is not enough to show
that there is just and equitable cause for winding up the company,
though that must be shown as preliminary to the application of section
397.
- It must further be shown that the conduct of the majority shareholders was
continuously oppressive to the minority as members till the date of petition
and not in isolation.
- The conduct must be burdensome, harsh and wrongful and mere lack of
confidence between the majority shareholders and the minority
shareholders would not be enough unless lack of confidence springs from
oppression of the minority by a majority in the management of the
company’s affairs, and such oppression must involve at least an element
of lack of probity or fair dealing to a member in the matter of his
proprietary rights as a shareholder.
(ii) As the company was not bound by the agreement, the mere fact that it was
decided at the meeting to offer the new shares to outsiders and not the
existing shareholders did not necessarily amount to an oppression of the
minority shareholders.

- The majority shareholders were not bound to accept a proposal of the
minority shareholders that the new shares should be allotted only to the
existing shareholders.
- Furthermore the general meeting having decided that new shares should
not be issued to the existing shareholders but to others, there was no
contravention of s. 81 of the Companies Act 1956 and the resolution was
in accordance with law as it stood at the time.
(iii) There is no evidence that the allottees of new shares were benamidars or
stooges of the majority group and that by allotment of shares to them,
the majority shareholders were oppressing the minority.
(iv) The haste in issuing new shares could not be held to be a part of the design to
oppress the minority. The company was in need of money for expansion and
its ability to obtain a loan from the Finance Corporation depended upon the
increase of its subscribed share capital. The haste in the allotment of shares
arose out of circumstances brought about by the appellant’s conduct.
Held also, that no case had been made out for action under section 398 on the
ground that the affairs of the company were being conducted in a manner
prejudicial to its interests.

Case- Needle Industries vs Needle Industries Newey (India) Holding Ltd. [1981] 3
SC 333 [IMPORTANT}

The case is related to Minority shareholders buying out the majority shareholders.
It is a landmark case on the subject and the SCs decision in this case continues to
be an authority on the subject. In this case, the foreign majority alleged
oppression by the Indian Minority shareholders as the minority appointed
additional directors and issued further shares.
• The Company Law Board (CLB) and the High Court held such acts of the
minority shareholders as oppressive.

• In appeal, however, the SC observed that even if a case of oppression fails,
the court has power to do substantial justice in the matter and therefore on
the facts and circumstances of the case. The Supreme Court while rejecting
the plea of oppression, directed the minority Indian shareholders to
purchase shares held by the majority foreign shareholders.

Acts held as oppressive:
1. Not calling a general meeting and keeping shareholders in dark.
2. Non-maintenance of statutory records and not conducting the affairs of
Company according to Companies Act
3. Depriving a member of right to dividend
4. Transfer of shares held by a company to some shareholders otherwise than by
making an offer to all
5. Allotment of shares by directors in a manner by which an existing majority of
shareholders is reduced to a minority
6. Continuous refusal by company to register shares with ulterior motive of
retaining control over affairs of the company

Acts not held as oppressive:
1. An unwise, inefficient or careless conduct of a director
2. Non-holding of meeting of the directors would not amount to oppression of
minority shareholders
3. Denial of inspection of books to a shareholder and lack of details in notice of a
meeting is not oppressive

Section 241- Application to Tribunal for relief in cases of Oppression, etc.:
1) Any member of a company who complains that—
(a) the affairs of the company have been or are being conducted in a
manner prejudicial to public interest or in a manner prejudicial or oppressive to
him or any other member or members or in a manner prejudicial to the interests
of the company; or

(b) the material change, not being a change brought about by, or in the
interests of, any creditors, including debenture holders or any class of
shareholders of the company, has taken place in the management or control of
the company, whether by an alteration in the 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 its interests or its members or any class of members, may apply to
the Tribunal , provided such member has a right to apply under section 244, for an
order under this Chapter.
(2) The Central Government, if it is of the opinion that the affairs of the company
are being conducted in a manner prejudicial to public interest, it may itself apply
to the Tribunal for an order under this Chapter.

Section 242 - Powers of the Tribunal: see in mod 6
Section 244 - Who can apply under Section 241: In order to maintain an
application under section 241 of the Act, the petitioner should hold either 10% or
more shares of the issued capital or should constitute 1/5
th
or more of the
members of the Company or the application shall be filed by at least one hundred
members of the Company.

Besides Members the following may apply for relief:
1) Section 241 (2): Central Government or any person authorized by Central
Government
2) Legal Representative of a deceased member on whom title to shares devolves
by operation of law, even if not registered as member
3) Trustees of a shareholder/member may make petition
4) Under Section 224 any person authorised by Central Government pursuant to
report of Inspector.

Who cannot Apply:
1) Member whose calls are in arrears
2) Holder of a letter of allotment of partly paid up shares

3) Holder of a share warrant
4) Transferee who has not lodged shares for transfer, with the company

Appeals against the orders of the Tribunal and variation of the order of Tribunal:

Section 430: Civil Court has No Jurisdiction in matters in respect of which Power
has been conferred on NCLT. In several cases SC has ruled the same.

Section 421: Appeal from orders of Tribunal, Notified on 01-06-2016
(1) Any person aggrieved by an order of the Tribunal may prefer an appeal to the
Appellate Tribunal.
(2) No appeal shall lie to the Appellate Tribunal from an order made by the
Tribunal with the consent of parties.
(3) Every appeal under sub-section (1) shall be filed within a period of forty-
five days from the date on which a copy of the order of the Tribunal is made
available to the person aggrieved and shall be in such form, and accompanied
by such fees, as may be prescribed:
Provided that the Appellate Tribunal may entertain an appeal after the expiry
of the said period of forty-five days from the date aforesaid, but within a
further period not exceeding forty-five days, if it is satisfied that the appellant
was prevented by sufficient cause from filing the appeal within that period.
(4) On the receipt of an appeal under sub-section (1), the Appellate Tribunal
shall, after giving the parties to the appeal a reasonable opportunity of being
heard, pass such orders thereon as it thinks fit, confirming, modifying or
setting aside the order appealed against.
(5) The Appellate Tribunal shall send a copy of every order made by it to the
Tribunal and the parties to appeal.

Section 420: Orders of Tribunal, Notified on 01-06-2016
(1) The Tribunal may, after giving the parties to any proceeding before it, a
reasonable opportunity of being heard, pass such orders thereon as it thinks
fit.

(2) The Tribunal may, at any time within two years from the date of the order,
with a view to rectifying any mistake apparent from the record, amend any
order passed by it, and shall make such amendment, if the mistake is brought
to its notice by the parties:
Provided that no such amendment shall be made in respect of any order
against which an appeal has been preferred under this Act.
(3) The Tribunal shall send a copy of every order passed under this section to all
the parties concerned.

CLASS ACTION: Section 245: minority shareholder protection in the form of
class action. [important]
• Section 245 provides that such number of member or members, depositor
or depositors or any class of them, may file an application before the
National Company Law Tribunal (NCLT) on behalf of the members or
depositors for relief.
• There will be a lead applicant representing the members.
• It is also pertinent to note that a class action may also be brought by
depositors of a company whereas only members have access to the remedy
against oppression and mismanagement.
• A class action may be brought against:
(a) the company;
(b) the directors of the company for any fraudulent, unlawful or
wrongful act or omission;
(c) the auditor including audit firm of the company for any improper or
misleading statement of particulars made in his audit report; and
(d) any expert or advisor or consultant or any other person for any
incorrect or misleading statement made to the company.
• Any company which fails to comply with an order of the Tribunal is liable to
be punished with a fine not less than 5 lakh rupees and may extend to up to
25 lakh rupees and every officer of the company who is in default is liable
to be punished with imprisonment for a term extending up to 3 years and
also be subjected to a fine of up to 1 lakh rupees.

• Another significant feature of the provision is that the cost or expenses
connected with the application for class action shall be defrayed (provide
money to pay) by the company or any other person responsible for any
oppressive act.

Case: Chetan G. Cholera v Rockwool India Ltd.
The court took the Minority friendly observation in this case by stating that
foreign companies often with the sole idea of making profits for the promoter
group obtains majority control in Indian companies and squeezes out the
scattered minority public shareholders. Thus, an Indian company goes into the
hands of these promoters groups that amass wealth without sharing profits with
the small shareholders. The court should scrutinize the scheme of amalgamation
beyond the substantive and procedural aspects and keep in mind that all
regulatory bodies have been set up to protect the interest of the investors, retail
investors in particular.
Case: Mafat Lal v Mafat Lal (details in mod 5)

Other Protections to minority shareholders under the Companies Act, 2013

• Reconstruction and Amalgamation: Section 235 grants the power to acquire the
shares of shareholders dissenting from the scheme approved by the majority,
not less than 9/10 in value of the shares and the transferee company may give
notice to dissenting shareholder for acquiring his shares.
- Therefore, under Section 235 it is made mandatory for the shareholders to
notify the company regarding their intention of buying the remaining
equity shares or by a group of persons holding 90% consent of the
registered holder of the company.
- The Companies Act, 2013 further provides the shares need to be acquired
at a price determined on the basis of valuation by a registered valuer in
accordance with the rules and the regulations.

• Appointment of Small shareholders’ Director: Under Section 151 of the
Companies Act, 2013, listed companies are now required to appoint directors
who are elected by the small shareholders i.e. shareholders holding shares of a
nominal value of not more than twenty thousand rupees.
* small shareholders: individual shareholding which can be less than INR 20,000
whereas
*minority shareholders: are collectively ascertained as by having non-controlling
stake in the company.

Corporate Criminal Liability Under Companies Act, 2013 [not done in class room]
Companies Act, 2013 which has replaced the Companies Act, 1956 has increased
the corporate liability of the directors. The Act has also increased the monetary
penalties and imprisonment. Not only corporate criminal liability under
Companies Act, 2013 is recognized but the act also recognizes civil liabilities. The
Companies Act, 2013 not only makes the director criminally liable but also include
officers in default under the concept of corporate criminal liability in India.
The corporate criminal liability is recognized under the following sections of the
Companies Act, 2013: (not in class)
• Section 53 - Prohibition on an issue of shares on discount - The company will be
fined for the amount not less than one lakh but which may extend up to five
lakhs. Further, the officer in default may be imprisoned for up to six months or
fine of minimum one lakh which may extend to five lakhs or both.
• Section 118(12) - Minutes of proceedings of general meeting, meeting of
Board of Directors and other meeting and resolutions passed by postal ballot- If a
person is found tampering with the minutes of meeting then such an officer in
default may be imprisoned for the term which may extend to 2 years or with fine
of not less than twenty-five thousand but may extend to one lakh.

• Section 128(6) - Books of account, etc., to be kept by Company - Officer in
default- Maximum imprisonment of 1 year or Fine- Not less than Rs. 50,000 and
may extend to Rs. 5 lakhs or with both.
• Section 129(7) - Financial statement - Officer in default- Maximum
imprisonment of 1 year or Fine- Not less than Rs. 50,000 and may extend to Rs. 5
lakhs or with both.
• Section 134 - Financial statement, Board’s report, etc.- Company-Fine- Not
less than Rs. 50,000 and may extend to Rs.25 lakhs and Officer in default-
Maximum imprisonment of 3 years or Fine- Not less than Rs. 50,000 and may
extend to Rs. 5 lakhs or with both.
• Section 188(5) - Related party transactions- In case of unlisted Company, be
punishable with fine which shall not be less than 25,000 rupees but which may
extend to 5 lakh rupees.
• Section 57 - Punishment for personation of shareholder- Such person in
default- Minimum 1 year to Maximum 3 years imprisonment or Fine- Not less
than Rs. 1 lakh and may extend to Rs. 5 lakhs.
• Section 58(6) - Refusal of registration and appeal against refusal- Such
person in default- Minimum 1 year to Maximum 3 years imprisonment or Fine-
Not less than Rs. 1 lakh and may extend to Rs. 5 lakhs.
• Section 182(4) - Prohibitions and restrictions regarding political
contributions - Company-Fine- 5 times of the amount of contribution in
contravention and Officer in default- Maximum imprisonment of 6 months and
Fine- 5 times of the amount of contribution in contravention.
• Section 184(4)- Disclosure of interest by the director - Such person in
default- Minimum 1-year imprisonment or Fine- Not less than Rs. 50,000 and may
extend to Rs. 1 lakh or both.
• Section 187(4)- Investments of Company to be held in its own name -
Company-Fine- Not less than Rs.25,000 and may extend to Rs.25 lakhs and Officer

in default- Maximum imprisonment of 6 months or Fine- Not less than Rs. 25,000
and may extend to Rs. 1 lakh or with both.
• Section 447- Punishment for fraud - Any person who is found to be guilty of
fraud- Maximum imprisonment of 6 months may extend to 10 years. Such person
also liable to fine which may extend up to 3 times the amount involved.

REPRESENTATIVE AND DERIVATIVE ACTION: (sent by college)
Derivative Action
Derivative action means a lawsuit brought by a shareholder of a corporation on
behalf of the corporation to enforce or defend a legal right or claim. It is popularly
known as Stockholder’s Derivative Suit. This suit is usually brought by
shareholders against insiders such as the directors, management, and other key
managerial personnel, when there is a fraud, mismanagement, dishonestly and
corruption while dealing in the company’s affairs.

Individual member may bring an action to remedy a wrong done to his Company
or to compel his Company to conduct its affairs in accordance with its constitution
and rules of law governing it, even though personal wrong has not been done to
him and even when the majority does not want it. Company can be made party to
suits if relief is sought on behalf of himself and fellow members. Therefore, if a
claim is to be enforced for the Company’s benefit by making the Company a co-
plaintiff, then it amounts to a derivative action.
The derivative action evolved as an exception to the general rule of law, also
known as the rule in Foss vs. Harbottle. The rule says that it is the company alone
that can sue to enforce rights of action vested in it. The rule was the result of
refusal of courts, and rightly so, to interfere in the management of the company
at the instance of a minority of its members who are dissatisfied with the conduct
of the company’s affairs by its board of directors.

However, the Delhi High Court in ICICI vs Parasrampuria Synthetics Ltd., [1998]
acknowledged the importance of the exceptions to the rule in Foss vs. Harbottle
by cautioning against a mechanical application of the rule.
The derivative action as a remedy for minority shareholders in India is established
but it is surprisingly not very common because of procedural constraints, costs,
and lack of clearly defined duties of directors and controlling shareholders.
Representative action
However, a company can be made a co-defendant in a suit if corporate rights of
members are violated. This amounts to representative action.
Though at one point of time derivative and representative actions were used as
interchangeable expressions, there is yet another form of action other than
personal and derivative action that a shareholder may bring against the company.
A shareholder (or even a debenture-holder) may sue the company (and its
directors or persons in control) for a perceived wrong done to a particular class to
which the plaintiff belongs. Such form of action is now regarded as a
representative action in corporate jurisprudence.

Distinction between Derivative Action & representative Suit
The distinction between personal and representative action on the one hand and
derivative action on the other appears to be that for a derivative action to be
brought or to succeed the wrongdoing complained of and ultimately to be
established has to be a wrong done to the company. In the purest form of
derivative action, no personal benefit would accrue to the plaintiff shareholder
upon a decree being passed save as a member of the company. It is the company,
notwithstanding it being shown as a defendant, that gets a voice through the
plaintiff shareholder and the action is solely for the company's benefit. A personal
cause of action, or even a representative action, may be combined with a
derivative action, with or without leave of court, but subject to the distinct causes
of action pertaining to the same transaction or series of transactions.

A decree in a derivative action is binding on all members of the company. A
decree in a representative action binds all whom the plaintiff seeks to represent,
unless fraud or collusion is urged against the plaintiff. In both the derivative
action and the representative action, the plaintiff will invariably sue upon
obtaining leave under Order 1, Rule 8 of the Code of Civil Procedure. But while in
the classical form of derivative action the plaintiff will sue on behalf of all the
shareholders of the company except the recalcitrant shareholders who are
impleaded as defendants, in the representative action the plaintiff has to identify
the class that he seeks to represent.

Module 3
1.1 Membership – modes of acquiring membership
According to Section 2(55) of the Companies Act, a “member”, in relation to a
company, means—
There are three categories of members:
(i) the subscriber to the memorandum of the company who shall be deemed
to have agreed to become member of the company, and on its registration,
shall be entered as member in its register of members;
(ii) every other person who agrees in writing to become a member of the
company and whose name is entered in the register of members of the
company;
(iii) every person holding shares of the company and whose name is entered as
a beneficial owner in the records of a depository;
(“Depository”, as defined under the Depositories Act, 1996, means a company formed
and registered under the Companies Act, 1956 and which has been granted a certificate
of registration under sub-section (1A) of section 12 of the Securities and Exchange Board
of India Act, 1992.)
• Thus, the term “Member” includes:

➢ the subscriber to the memorandum of the company;
➢ any person who agrees in writing to become a member of the
company; and
➢ any person who holds the shares of the company.
# Subscriber: subscribing to a certain number of shares.
Prerequisites for subsequent membership to a company:
i) Agreement in writing to take shares of the company and
ii) Registration of his name in the register of members

Difference between a member and a shareholder:
A “shareholder” denotes a person who holds or owns the shares. On the other
hand, a “member” denotes a person whose name appears on the Register of
Members.
• companies limited by guarantee or unlimited companies having no share
capital will have only members but not shareholders. Companies limited by
share, so shareholders are members. It depends on the type of company.
• Contrarily, a holder of a share warrant is a shareholder but not a member
as his name is removed from the register of members immediately after the
issue of such share warrant.
• Similarly, a transferee or the legal representative of the deceased may be a
shareholder but he may not be member until he gets his name entered in
the register of members.
• On the other hand, the transferor or the deceased person is a member so
long as his name is on the register of members whereas he cannot be
termed a share-holder.
Member Shareholder
meaning A person whose name is
entered in the register of
members of a company.
A person who owns the shares
of the company.
Definition Companies Act, 2013
defines ‘Member’ under
Shareholder is not listed under
the Companies Act, 2013

section 2(55)
Sale Selling or registration of
transfer of shares. Transfer
deed should be registered.
Person who sold the share

Person who bought the share
death Deceased person until
transmission
The person gets the share being
legal heir
Insolvent Person who has become
insolvent
Legally appointed assignee
Subscriber to
MoA
A person who signs the
memorandum of
association with the
company becomes a
member. Even when shares
have not yet been allotted
After signing the memorandum,
a person can become a
shareholder only if shares are
allotted to him.
Share warrants The holder of the share
warrant is not a member.
The holder of the share warrant
is a Shareholder.
company Every company must have a
minimum number of
members.
The Company limited by shares
can have shareholders

• The minimum requirement of no. of members are:
➢ Public Company – 7
➢ Private Company – 2
➢ One Person Company (OPC) – 1

Mode of acquiring membership of a Company [IMPORTANT]
A person may become a member of the company in any one of the following
ways:
1. By subscribing to the Memorandum of Association: On the registration of the
company, such person’s name is entered as member into the Register of
Members.

2. By Agreement in writing: (Upon application and allotment) A person can
become a member of a company by an agreement in writing. In Sree Ayyanar
Spinning & Weaving Mills Ltd. case (1973), it has been held that there cannot be
an oral application and application in writing has to be submitted by a person
willing to be a member of a company.
The following situations describe the modes in which a member can acquire
membership through agreement in writing:
• Upon application and allotment of shares
• Transfer of shares: By transfer, i.e., one may acquire shares from an existing
member by sale, gift or some other transaction. Till the name of the
transferee is entered into the Register of Members, the transferor shall
remain the holder of such shares.
• By transmission of Shares: On the death/insolvency/lunacy of a member of
a company, following category of persons can have title to his interest in
the shares:
→ In case the member was a joint holder, then the survivor or survivors
as the case may be.
→ In case the member was a sole holder, then his nominee or nominees
and in case there are no nominees then his legal representatives.
• By Estoppel or Acquiescence: Where the name of a person as a member in
the Register of Member is there, and he allows his name to be on record,
then he cannot afterwards contend that he is not a member of the
company. He is bound by the rule of estoppel.

Who can become a member? (Eligibility) [IMP]
According to the provisions of the Indian Contract Act, 1872, a person who is
capable of entering into a contract can only become member of the company.
• As per MoA and AoA .
• As per sui juris (law of eligibility ): i) Major ii) Competent

(a) Whether a minor can be a member (minority as age: under 18)
Same as in Indian Contract Act, 1872, in case of gift, death or insolvency of
fully paid up shareholders, the legal guardian is the member, Minor is only the
beneficiary through transfer or transmission.
• As per the section 10 of Indian Contract Act, for the purpose of purchase of
shares there is no bar to the minor, with regard to fully paid up share,
provided that name of guardian, not that of Minor’s shall be entered in the
register of members. (decided w.r.t. a FICCI query)
→Circular 8/18(41)/63 dated 2.11.1963
• A member who is not a sui juris e.g., here, a minor, is wholly incompetent
to enter into a contract and as such cannot become a member of a
company. Consequently, an agreement by a minor to take shares is void ab-
initio.
• If the directors, not aware of the fact of minority, allot shares (partly paid)
to a minor and enter his name in the register of members, the company can
repudiate (cancel) the allotment and remove his name from the register on
discovery of his minority.
• The minor can also repudiate during his minority.
• In either case company has to return all money received from the minor for
the allotment.
• If neither party repudiates the allotment, the minor's name remains on the
company's register of members, but he does not incur any liability during
his minority. A minor can be a member so as to enjoy the benefits of
membership without being liable as a contributory.
(Fazalhboy Jaffer v. The Credit Bank of India A.I.R. 1914 Bom. 128)

(b) Whether a Company can become a member of another company ?
1) S. 186 permits a company to make investment in another company, or
even acquisition of another company. Since a company is a separate

legal artificial person, it can become member of another company, if it
is so authorised by its AoA and MoA, or if it takes the shares of another
company by way of a compromise or arrangement.
• A subsidiary company cannot become a member of its holding company.
# Holding company holds more than 50% of shares of its subsidiary company,
• Sec. 19. Subsidiary company, either by itself or through its nominees, not to
hold shares in its holding company.
- no holding company shall allot or transfer its shares to any of its
subsidiary companies and any such allotment or transfer of shares of a
company to its subsidiary company shall be void.
Exceptions:
a) When subsidiary is a legal representative of deceased member of holding
Company.
b) When subsidiary is concerned in shares as trustee.
c) Investment held before the Company became subsidiary can continue, but
in that case, subsidiary has no voting right in holding Company.

#Transfer of 10% shares will be allowed, if it is prior to the date of the Subsidiary and
Holding relationship. (to be confirmed)
( c) Partnership firms as members:
A Firm cannot be a Member: Since a partnership firm is not a separate legal
entity having a separate entity from that of the partners, therefore it cannot
become a member of a company.
- Partners can have individual or joint membership. In firms the partners
bear liability not the firm.
Exceptions:
• u/s S. 8 (3) A firm may be a member of the company registered under
section 8 ( Formation of companies with charitable objects, etc.)
• Section 25 company : A non-profit making company licensed under Section
25 of the Companies Act can become a member of another company if it is
authorised by its MoA to invest into shares of the other company.

(d) Whether Foreigners as members?
A foreigner may take shares in an Indian company and become a member
subject to the provisions of the Foreign Exchange Management Act, 1999,
and RBI Guidelines, but in the event of war with his country, he becomes an
alien enemy and his power of voting and his right to receive money or
notices are suspended.
(e) Public Offices: e.g., PMO, etc.
If a company where Govt. holds more than 50% of shares, Public office
becomes the member. Nominee or representatives will come to the
meetings. Profit will go to state treasury, Govt. fund etc.
Department of Company affairs in a circular no. 15/32/65 – IGC dated
September 30th, 1966, it was declared that shares can be held by the
President or the Governor in Government Companies.
(f) Trade union: A trade union registered under the Trade Union Act, can be
registered as a member and can hold shares in a company in its own
corporate name.
(g) Hindu Undivided Family: Can become a member through its ‘Karta’ (Head).
(h) Joint Shareholding: (Joint membership: Up to 3 people can jointly hold shares)
Joint holders are counted as one and not 2/3. However if the AoA of
company allows it can be.)
- One share certificate holders are jointly or separately liable. The Senior
person (the first name mentioned in the application form) shall be liable.
- In case of transfer, the consent of all the shareholders required.

Impersonation as shareholder: S. 57
Deceitfully personates another person to acquire /attain//receive any
shares/money , he is to be punished ; 5 lakhs & 3 years imprisonment.

1.2 Rights and Privileges of members
In the ordinary commercial usage, the term ‘Member’ denotes a person who holds
shares in a company. The members or the shareholders are the real owners of a
company. They collectively constitute the company as a corporate body.
Rights of Members: [IMPORTANT]
a) Individual: individual damage more than others & Corporate: Collective
shareholders’ rights -
b) Contractual: Out of Contract, Statutory
Contractual Rights with explanation:
1. right to enter name in register of shareholders
2. Pre-emptory rights
3. Right to vote
4. Right to receive dividends
5. Return of capital on winding up or of redemption of share capital of the
company
6. Right to bring an action to restrain the company from doing an ultra vires
act
7. To attend and take part in the meetings and right to move amendments to
MoA and AoA.
Statutory Rights with Explanation
1. right to vote at all meetings except B. M. (s. 47)
2. Right to requisition an EGM of Company (s.100)
3. Right to receive notice of a GM (s.101)
4. Right to appoint proxy and inspect proxy register(s.105)
5. In case of body corporate as a member, right to appoint a representative to
attend a General meeting on his behalf. (s. 113)
6. Right to require the company to circulate resolutions (s.111)
7. Right to have certificate of shares held ready for delivery to him within 2
months from the date of allotment. (s. 56)
8. To transfer shares subject to provisions of the Act and AoA (s.44)

9. To inspect the register of debenture holders and get extracts there from (s.
94)
10. To obtain on request the minutes of the proceedings at GM also to inspect
the minutes.
11. To apply to the Tribunal to have any variation in the shareholders. Rights
set aside (s. 48)
12. To participate in the removal of directors by passing an ordinary resolution
(s. 169)
Apart from these rights, (in case like LIC v Escorts Ltd. ) some other rights are
interpreted like:
1. To elect directors and thus to participate in management through them
2. To enjoy the profits of the company in shape of dividends.
3. To apply on the Tribunal for relief in case of oppression and
mismanagement.
4. To apply to the tribunal for winding up for the company.
5. To have share in the surplus on winding up (not an exhaustive list)
Duties and Liabilities of Members:
1. Payment in cash
2. Partly paid up shares
3. Past member (B-List) & Present member (A- List)
4. Debt existing – Winding up: Contributing to pay up
5. Members bound by AoA.
6. Company Limited by Guarantee - Contributory
1.3 Termination of Membership [IMPORTANT]
Just as there is a process to add a member of the company, there’s a process to
terminate that member. Terminating a member of the company can result in
removal from the ‘Register of Members’.
When membership is terminated:
(1) Transfer of Membership: Here, the shares of a member are transferred to
another person by the company in the name of the transferee. The name of
the transferor is removed from the Register of Members.

(2) Transmission of Membership: On the death of a shareholder/member of the
company, his/her legal heir or representative becomes a member.
(3) Selling to 3
rd
party: When the member dies ad his legal representative or
nominee gets his name registered with the Register of Members and then
sells his shares to the 3
rd
party, and the 3
rd
party gets his name registered
with the company.
(4) Surrender of Membership: A person surrenders his shares to the company
and the Board accepts the surrender.
(5) Forfeiture of Membership: If Shares are forfeited by the company for non-
payment of calls, the member is terminated from the company.
(6) Share Buy-back u/s 242: If his shares have been purchased by any other
member of the company or by the company itself under Buy Back scheme
or an order from the Tribunal.
(7) Member rescinds (withdraws) membership on account of fraud or
misrepresentation.
(8) Adjudged insolvent : adjudged insolvent and the official receiver or the
official assignee transfers the hare to 3
rd
party who gets his name
registered as a member or disclaims the shares.
(9) Redeemable Preference Shares: when the company redeems the
Redeemable Preference Shares from the holder.
(10) On the Commencement of Winding up.

Expulsion of a member: [IMP]
The Department of Company Affairs following the judgment of Bajaj Auto ltd. v
N. K. Firodia, 1971 (41 Comp. case 338) has expressed the view that the company
cannot by its own amend the Article of Association and give itself a power to
expel a member. Such an amendment of AoA is opposed to the fundamental
principle of Company’s jurisprudence and is ultra vires the company. Such a
provision is repugnant to the various provisions in this Act pertaining to the rights
of a member in a Public Limited Company and cuts across the scheme of the Act
as it has the effect of rendering nugatory the very powers of Central Govt. (Now

Tribunal) u/s 58, 48 of the C Act and 235 of the Act and is therefore void by the
operation of the provisions of the Section 6 of the Act.
However, many authors are in disagreement with the above views expressed by
the Department of Company Affairs on the subject. According to them, the
department’s view does not give due weightage to the contractual aspect of the
AoA. If the right of expulsion of a member has been obtained in accordance with
the procedure laid down by law of agreement, then it can only be set aside by the
Tribunal on proof of mala fide exercise of power by the majority shareholders or
Board of Directors. It is of the view that if Articles authorize the Directors to expel
a member under certain circumstances such power may be exercised bona fide
and in the general interest of the company. So far as the property right is
concerned the company should arrange that the expelled member gets
appropriate price for his shares.
Similarly, Ramaikah has observed that on a careful consideration of the subject in
all of its aspects, it would appear that there is nothing illegal or ultra vires in the
exercise of a power of expulsion of the shareholder, if it exercised bona fide to
protect the interest of the company where the shareholder’s act or conduct is
considered to be detrimental or injurious to the instrument of company. An
article giving such power is not necessarily invalid or ultra vires.

MODULE IV: ACCOUNTS AND AUDIT (Acc to class notes)
4.1 Books of Account
The shareholders provide capital to the company for running the business. They
are in a way, the owners of the company. But, all of them cannot take part in
managing the affairs of the company as their number is usually much more. But
they have every right to know as to how their money has been dealt with by the
directors in a particular period. This is why perhaps compulsory disclosure
through annual information to the shareholders by the directors about the
working and financial position of the company enables them to exercise a more
intelligent and purposeful control over the affairs of the company. For
preparation of annual accounts, the maintenance of proper books of account is a
must. Section 128 of the Companies Act, 2013 contains the provisions for books
of account etc. to be kept by a company.
Section - 338, Companies Act, 2013: Liability where proper accounts not kept
(1) Where a company is being wound up, if it is shown that proper books of
account were not kept by the company throughout the period of two years
immediately preceding the commencement of the winding up, or the period
between the incorporation of the company and the commencement of the
winding up, whichever is shorter, every officer of the company who is in default
shall, unless he shows that he acted honestly and that in the circumstances in
which the business of the company was carried on, the default was excusable, be
punishable with imprisonment for a term which shall not be less than one year
but which may extend to three years and with fine which shall not be less than
one lakh rupees but which may extend to three lakh rupees.
(2) For the purposes of sub-section (1), it shall be deemed that proper books of
account have not been kept in the case of any company,—
(a) if such books of account as are necessary to exhibit and explain the
transactions and financial position of the business of the company, including
books containing entries made from day-to-day in sufficient detail of all cash
received and all cash paid, have not been kept; and

(b) where the business of the company has involved dealings in goods, statements
of the annual stock takings and, except in the case of goods sold by way of
ordinary retail trade, of all goods sold and purchased, showing the goods and the
buyers and the sellers thereof in sufficient detail to enable those goods and those
buyers and sellers to be identified, have not been kept.

Requirement of keeping Books of Account (Section 128)
“Books of account” as defined in Section 2(13) of the Act includes records
maintained in respect of—
(i) all sums of money received and expended by a company and matters in
relation to which the receipts and expenditure take place;
(ii) all sales and purchases of goods and services by the company;
(iii) the assets and liabilities of the company; and
(iv) the items of cost as may be prescribed under section 148 in the case of a
company which belongs to any class of companies specified under that
section.
According to Section 128 of the Companies Act, 2013, maintenance of books of
account would mean records maintained by the company to record the specified
financial transaction and every company shall keep proper books of account. The
Section specifies the main features of proper books of account as under:
(i) The company must keep the books of account with respect to items
specified in clauses (i) to (iv) of sub-section 2(13) of the Companies Act,
2013 hereinafter referred as Act, which defines “books of account”.
(ii) The books of account must show all money received and expended, sales
and purchases of goods and the assets and liabilities of the company.
(iii) The books of account must be kept on accrual basis and according to the
double entry system of accounting.
(iv) The books of account must give a true and fair view of the state of the
affairs of the company or its branches.

Place of Keeping Books of Account
Section 128(1) requires every company to prepare and keep the books of account
and other relevant books and papers and financial statements at its registered
office.
Maintenance of Books of account in electronic form
The maintenance of books of account and other books and papers in electronic
mode is permitted and is optional. Such books of accounts or other relevant
books or papers maintained in electronic mode shall remain accessible in India so
as to be usable for subsequent use [The Companies (Accounts) Rules, 2014].
There shall be a proper system for storage, retrieval, display or printout of the
electronic records as the Audit Committee, if any, or the Board may deem
appropriate and such records shall not be disposed of or rendered unusable,
unless permitted by law.
Inspection of Books of Accounts:
Inspection by directors
As provided in sub-section (3) of Section 128, any director can inspect the books
of accounts and other books and papers of the company during business hours.
s. 128(4): Where an inspection is made under sub-section (3), the officers and
other employees of the company shall give to the person making such inspection
all assistance in connection with the inspection which the company may
reasonably be expected to give.
Section 206 of Indian Companies Act 2013 "Power to call for information,
inspect books and conduct inquiries"
(1) Where on a 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 any further documents relating to the company is
necessary, he may by a written notice require the company -

(a) to furnish in writing such information or explanation; or
(b) to produce such documents, within such reasonable time, as may be specified
in the notice.
Penalty:
If a company fails to furnish any information or explanation or produce any
document required under this section, the company and every officer of the
company, who is in default shall be punishable with a fine which may extend to
one lakh rupees and in the case of a continuing failure, with an additional fine
which may extend to five hundred rupees for every day after the first during
which the failure continues.
Period for which books to be preserved
The books of accounts, together with vouchers relevant to any entry in such
books, are required to be preserved in good order by the company for a period of
not less than eight years immediately preceding the relevant financial year. The
provisions of Income Tax Act shall also be complied with in this regard.
Persons responsible to maintain books
According to Section 128 (6), the person responsible to take all reasonable steps
to secure compliance by the company with the requirement of maintenance of
books of accounts etc. shall be:
(i) Managing Director,
(ii) Whole-Time Director, in charge of finance
(iii) Chief Financial Officer
(iv) Any other person of a company charged by the Board with duty of complying
with provisions of section 128.
Penalty
In case the aforementioned persons referred to in sub-section (6) (i.e. MD, WTD,
CFO etc.) fail to take reasonable steps to secure compliance of this section and

thus, contravene such provisions, they shall in respect of each offence,-
imprisonment 1 year or with fine 50,000- 5 lakh rupees or both.
s. 207: "Conduct of inspection and inquiry"
Where a Registrar or inspector calls for the books of account and other books and
papers under section 206, it shall be the duty of every director, officer or other
employee of the company to produce all such documents to the Registrar or
inspector and furnish him with such statements, information or explanations in
such form as the Registrar or inspector may require and shall render all assistance
to the Registrar or inspector in connection with such inspection.
Punishment for violation of Section 207 of Companies Act 2013 for disobeys the
direction issued by the Registrar or Inspector
(4) (i) 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 may extend to one year and with fine
which shall not be less than twenty-five thousand rupees but which may extend
to one lakh rupees.
(ii) If a director or an officer of the company has been convicted of an offence
under this section, the director or the officer shall, on and from the date on which
he is so convicted, be deemed to have vacated his office as such and on such
vacation of office, shall be disqualified from holding an office in any company.
Section 129. Financial statement [IMP]
(1) The financial statement shall give a true and fair view of the state of
affairs the company or companies, comply with the accounting
standards notified under section 133 and shall be in the form (format provided)or
forms as may be provided for different class or classes of companies in Schedule
III (Part I: Balance Sheet Format; part II: Profit-Loss Format.:
The items contained in such financial statements shall be in accordance with the
accounting standards.

Exemptions: the financial statements shall not be treated as not disclosing a
true and fair view of the state of affairs of the company under this sub-section,
merely by reason of the fact that they do not disclose which are not required to
be disclosed under various relevant regulations of their respective area of work,
like insurance or banking company or any company engaged in the generation or
supply of electricity, or to any other class of company for which a form of financial
statement has been specified in or under the Act governing such class of
company:
(2) At every annual general meeting of a company, the Board of Directors of
the company shall lay before such meeting financial statements for the financial
year
(3) Where a company has one or more subsidiaries or associate company , it shall,
in addition to financial statements provided under sub-section (2), prepare a
consolidated financial statement of the company and of all the subsidiaries and
associate companies. That is, the company shall also attach along with its financial
statement, a separate statement containing the salient features of the financial
statement of its subsidiary company or subsidiaries and associate companies or
companies in such form as may be prescribed:
(4) The provisions of this Act applicable to the preparation, adoption and audit of
the financial statements of a holding company shall, mutatis mutandis, apply to
the consolidated financial statements referred to in sub-section (3).
(5) The company shall disclose in its financial statements, the deviation from the
accounting standards, the reasons for such deviation and the financial effects, if
any, arising out of such deviation.
(6) The Central Government may, on its own or on an application by a class or
classes of companies, by notification, exempt any class or classes of
companies from complying with any of the requirements of this section or the
rules in the public interest.
(7) Penal Provisions for non-compliance of section 129 of CA, 2013: If any
company contravenes with the provisions of section 129 of CA, 2013, the

following officials viz., a) Managing Director b) Whole Time Director in charge of
finance c) Chief Financial Officer d) Any other person authorized by Board with
the duty of complying with this provision. e) In the absence of any of the officers
mentioned above, all the Directors shall be punishable.
Details of Punishments:
(i) Imprisonment for a term which may extend to one (1) year or
(ii) Fine which shall not be less than Rs. 50,000/- but which may extend to Rs.
5,00,000/- or (iii) With both. (According to 468(2) (b) of Cr PC)

Approval of Annual Account: s. 134(1)
The Department of Company Affairs in its letter no. 27
th
Oct. 1976 had clarified (i)
that in absence of any specific provisions in S. 215 of CA, 1956 (now S.134, CA
2013), the power of the directors to approve the annual accounts cannot be
delegated to a committee of Directors or some of the Directors.
(ii) That the approval of annual Accounts which are to be ultimately placed before
the shareholders of the company is not to be treated as a routine work or part
of day-to-day work. Hence, the BoDs must consider the Annual accounts and
approve them as per s 134 before the accounts are handed over to the
statutory auditor of the company
Authentication of Accounts [s.134(1)]: The financial statement, including
consolidated financial statement shall be approved by the Board of Directors and
signed by the chairperson of the company, or by two directors, MD or the CEO,
the CFO and the Company Secretary of the company, or in the case of One Person
Company, only by one director, for submission to the auditor for his report
thereon.
In case of Banking Co. if it is incorporated in India, the manager or principal
Officer of India and in case of Banking company incorporated outside India,
manager or principal officer outside India.

Board Report and Corporate Disclosures (also in Mod 1 syllabus) [IMPORTANT]
Board’s Report: [s.134(3)]: it is a Responsibility Statement signed by the BoD that
they are bound by all their duties. Details like Web address, Annual Returns,
details of reported fraud if any, report on CSR, evaluation Report of the individual
or Board etc. of Board of Directors are to disclosed in the Board’s report.
Explanation clarification was issued by the department of Company Affairs,
Ministry of Corporate Affairs.
Under Accounts Rule no. 8(1), it requires that the Board’s report shall be prepared
using the Financial Statements of the company on a stand-alone basis. The
performance and financial position of each of the subsidiaries, joint venture
companies and associates included in the consolidated Financial Statement shall
be reported separately in the Board’s Report.
Sec 134 (3) (l) says about the items of the Board’s Report. The expression
“material changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year would
include events such as
(i) Disposal of substantial part of the undertaking
(ii) Profit or loss, whether of the capital or revenue nature
(iii) Changes in the Capital structure
(iv) Alteration in the wage structure arising out of trade union negotiations
(v) Reduction of or incurring of long term indebtedness
(vi) Awards in litigation
(vii) Entering into or cancellation of contracts
(viii) Refund of taxes or completion of assessment
(ix) Status Report on Corporate Social Responsibility: Companies having net
worth of Rs. 500 crores or more or turnover of Rs. l,000 crores or more or net
profit of Rs. 5 crores or more during any financial year shall constitute a CSR
Committee of Board comprising of 3 or more directors, one of whom shall be
an independent director.

(x) Listed companies have to give a Corporate governance report under
regulation 34 of SEBI (Listing Obligations and Disclosure Requirement), 2015.
Additional information to be provided under Rule 8(5) under the Companies
Account Rules, 2014
Signatories: All the annexures will be signed by at least two directors if there are
two or more directors where on has to be managing director and for one director
company, he has to sign in the annexures.

Case: W. B. Anderson & Sons Ltd. v Rhodes (Liverpool) Ltd. 1967
Ratio: The plaintiff and defendants traded in fruit and vegetables. The defendant
did business with the third party. Initially there were cash transactions but after
sometime the third party started business on credit and Rhodes began to accept
credit orders from a third party, but after initial business he was tardy in
payment.
The plaintiffs asked information from Rhodes regarding the third party, and
representations were made that the company was ‘alright’ and based on that
information the plaintiffs themselves granted credit to the third party. The third
party became insolvent, and the plaintiff claimed damages from the defendants,
the company manager and two others, for the misleading report by Rhodes.
Held: A duty of care existed to the plaintiffs and damages were recoverable from
the company defendant. The need for care in answering the enquiry was clear.
The defendant company was vicariously liable for the negligent answers given by
its employees.

International Financial Reporting Standards (’IFRSs‘) it is followed by European
Union Companies
S.134 (3) (c): Director’s Responsibility Statement: [IMP]
It is a kind of undertaking that the director gives to the company. Under company
law, the Directors must not approve the accounts unless they are satisfied that
they give a true and fair view of the state of affairs of the Company and of the
profit or loss of the Company for that period.

Circulation of Financial Statement
Section 134 (7) A signed copy of every financial statement, including consolidated
financial statement, if any, shall be issued, circulated or published along with a
copy each of—
(a) any notes annexed to or forming part of such financial statement;
(b) the auditor’s report; and
(c) the Board’s report .

Section 136: Provides for right of members, debenture holders to have copies of
audited financial statement. As per sec 136(1) of CA, 2013, a copy of the financial
statements which are to be laid: before a company in its GM shall be sent in not
less than 21 days before the date of the meeting to the following:
a) Every member of the company
b) Every trustee for the debenture-holder of any debentures issued by the
company
c) All persons other than such member or trustee, being the person so
entitled.
d) In case of listed company of net worth of 1 crore and turnover of more
than 10 crore, the Financial Statement can be sent electronically. Rule 11 of
the Companies (Accounts) Rules, 2014 provides that Financial Statement will
be sent in dematerialized form through e-mail.
For default of 136 there is a civil liability of company for worth Rs 25,000 and Rs
5,000 for every officer who is in default.
S. 135: Section 135 seeks to provide that every company having net worth of Rs.
500 crores or more/ turnover of Rs. l,000 crores or more / net profit of Rs. 5
crores or more during any financial year shall constitute a CSR Committee of
Board comprising of 3 or more directors, one of whom shall be an independent
director.
• The composition of the committee shall be included in the Board’s Report.

• The Board shall disclose the content of policy in its report and place on
website, if any, of the company. [s.134(o)]
• The section further provides that the Board shall ensure that at least two
per cent of average net profits of the company made during three
immediately preceding financial years shall be spent on such policy every
year.
• If the company fails to spend such amount the Board shall give in its report
the reasons for not spending.

Adoption and Filing of Financial Statement with ROC: [IMPORTANT]
The Companies Act, 2013 mandate on Companies to file duly adopted financial
statement with ROC within 30 days of date of Annual General Meeting.
1. As stated in Section 137(1) A copy of the financial statements, including
consolidated financial statement, if any, along with all the documents which are
required to be or attached to such financial statements under this Act, duly
adopted at the annual general meeting of the company, shall be filed with the
Registrar within thirty days of the date of annual general meeting in such
manner, with such fees or additional fees as may be prescribed within the time
specified under section 403: [Form AOC-4].
• Adoption can only happen in AGM and Adjourned AGM.
• Sec. 403(1) Additional 270 days is provided.
• If after additional (270+30=300 days) period also lapses and the company
defaults then the company will be declared a default company. And every
officer responsible for default will be paying a fine of Rs. 1 lakh to 5 lakh
and imprisonment extended upto 6 months or both.
• Extensible business reporting language.
• Companies listed on any of the stock exchanges in India and including its
Indian subsidiaries.

• Companies having paid up capital of Rs 5 crore and above and turnover of
Rs 100 crore and above.
• Companies which are covered under the Companies (filing of documents
and forms in XBRL) Rules, 2011.
• Exempted companies are Banking, Insurance, Power sector, non-banking
financial companies and Housing Finance Companies.
Internal Audit: (Sec 138 read with Rule 13) of Companies Acounts Rules, 2014
requires the following class of companies to appoint internal auditor or a firm of
auditors.
Every unlisted public company having:
(i) Paid up share capital of Rs 50 crore or more during the preceding financial
year.
(ii) Turnover of Rs 200 crore or more during preceding Financial Year.
(iii) Outstanding loans or borrowing from banks and public financial
institutions exceeding 100 crore at point of time during financial Year.
(iv) Outstanding deposits of Rs. 25 crore and more at any point of time during
preceding financial year
(v) Every private company turnover of Rs 200 crore or more and outstanding
loan of 100 crore or more.
Qualification of Auditors [Section 141 (1) and (2)]
1. A person shall be eligible for appointment as an auditor of a company only
if he is a chartered accountant.
2. However, a firm whereof majority of partners practising in India are
qualified for appointment as aforesaid may be appointed by its firm name
to be auditor of a company.
3. Where a firm including a Limited Liability Partnership (LLP) is appointed as
an auditor of a company, only the partners who are chartered accountants
shall be authorized to act and sign on behalf of the firm.

Disqualification of Auditors [Section 141 (3)]
The following persons shall not be eligible for appointment as an auditor of a
company, namely:
(a) a body corporate other than a limited liability partnership (LLP) registered
under the Limited Liability Partnership Act, 2008 (6 of 2009);
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or
employee of the company;
(d) a person who, or his relative or partner—
(i) Holding securities or interest in the company/ its subsidiary/ its
holding/ associate company. However, the relative can hold
securities or interest in such company not exceeding Rs. 1,00,000
(ii) Indebted to the company/ its subsidiary/ its holding/ associate
company in excess of Rs. 5,00,000
(iii) Has given Guarantee for any third person to the company/ its
subsidiary/ its holding/ associate company in excess of Rs. 1,00,000.
(e) A person/Firm having business relationship with such company
(f) A person whose relative is Director or Employee of Director in such
Company
(g) A person/partner in full time practice elsewhere or holding appointment as
auditor in more than 20 companies
(h) A person convicted by court and 10 years has not elapsed from date of such
conviction
(i) A person/ his relative/ whose any entity is engaged in providing following
services to the company as per section 144:
• Accounting and book keeping
• Internal audit
• Design and implementation of any financial information System
• Actuarial services (to assess risk in insurance, finance and other
industries and professions)
• Investment advisory

• Investment banking services
• Rendering of outsourced fin. Services
• Management services
Appointment of Auditors (Section 139)
1. The first Auditor of a company shall be appointed by Board within 30 days from
registration of the company or otherwise by members/shareholders within 90
days at an Extraordinary General Meeting (EGM), who shall hold office till the
conclusion of first Annual General Meeting (AGM). At the first AGM, an auditor
shall be appointed to hold office till the conclusion of the 6th AGM.
2. Section 139(9): A retiring auditor may be re-appointed if he is not disqualified
and no other auditor is appointed. However, if ratification is not given, then Board
shall appoint another auditor following procedure for appointment.
3. In Govt. Company, the CAG will appoint the Auditor (within 60 days)
4. If CAG fails then Board have to appoint within next 30 days and if board fails,
members will appoint within next 60 days.
Section 142: Remuneration of auditors
142(1): The remuneration of the auditor of a company shall be fixed in its general
meeting or in such manner as may be determined therein. The Board may fix
remuneration of the first auditor appointed by it.
Removal of an auditor: An auditor could be removed before expiry of his/her
term by passing a special resolution and after obtaining prior approval of the CG
in the manner prescribed.
144. Auditor not to render certain services
An auditor appointed under this Act shall provide to the company only such other
services as are approved by the Board of Directors or the audit committee, as the
case may be, but which shall not include any of the following services (whether
such services are rendered directly or indirectly to the company or its holding
company or subsidiary company, namely:—

(a) accounting and book keeping services;
(b) internal audit;
(c) design and implementation of any financial information system;
(d) actuarial services;
(e) investment advisory services;
(f) investment banking services;
(g) rendering of outsourced financial services;
(h) management services; and
(i) any other kind of services as may be prescribed:

Corporate Social Responsibility (Section 135) [IMP]
What is Corporate Social Responsibility (CSR)?
• The term ‘Corporate Social Responsibility' (CSR) is not defined in the
Companies Act, 2013.
• CSR has many interpretations but can be understood to be a concept
imposing a liability on the Company to contribute to the society towards
environmental causes, educational promotion, social causes etc. along with
the reinforced duty to conduct the business in an ethical manner.
Section 135 seeks to provide that every company having specified net worth or
turnover or net profit during any financial year shall constitute the Corporate
Social Responsibility Committee of the Board.
• The composition of the committee shall be included in the Board’s Report.
The Committee shall formulate policy including the activities specified in
Schedule VII.
• The Board shall disclose the content of policy in its report and place on
website, if any, of the company. [s.134(o)]
• The section further provides that the Board shall ensure that at least two
per cent of average net profits of the company made during three
immediately preceding financial years shall be spent on such policy every
year.

• If the company fails to spend such amount the Board shall give in its report
the reasons for not spending.
• The CSR Policy is expected to normally cover following core elements:
a) Care for all stakeholders
b) Ethical functioning
c) Respect for workers' rights and welfare
d) Respect for human rights
e) Respect for environment
f) Activities for social and inclusive development

Application of Provision
Companies having net worth of Rs. 500 crores or more or turnover of Rs. l,000
crores or more or net profit of Rs. 5 crores or more during any financial year shall
constitute a CSR Committee of Board comprising of 3 or more directors, one of
whom shall be an independent director.
Composition of CSR Committee
• The CSR committee shall consist of three or more directors, out which one
director shall be an independent director. The presence of an Independent
Director shall ensure that the Committee is not just a quasi-committee
addressing the whims of the Board, but is in fact, taking up an initiative. The
composition of such Corporate Social Responsibility Committee shall have
to be disclosed in the Board’s Report as required under Section 134(4).
• An unlisted public company or a private company which is not required to
appoint an independent director shall have its CSR Committee with
independent director.
• A private company having only two directors on its Board shall constitute
its CSR Committee with two such directors.
• With respect of foreign company, the CSR Committee shall comprise of at
least two persons of which one-person resident in India and another person
shall be nominated by the foreign company.

• The CSR Committee shall Institute a transparent monitoring mechanism for
implementation of CSR projects or programs or activities undertaken by the
company.

Company Law: Module 5
Corporate Restructuring – Compromise, Arrangement, Amalgamation &
Acquisition
* The 2013 Act has established National Company Law Tribunal which will handle
all the matters related to company law and replace the HCs.
*Merging is done to expand business, alteration of capital base of company,
reorganization of share capital, for optimum economic benefit, de-risking strategy
and cost reduction and diversification etc.
*Arrangement and Compromise is a wider term than Merger.
*Purchasing out: Shareholders of company A need to get the shares of company B
and the surviving shareholders. It is similar to acquisition and is also a kind of
merger under listed Company of Take Over Contract, 2011. Listed companies are
usually public companies and not Private companies.
Mergers and Acquisitions
• Without strictly defining the term ‘merger’, The Companies Act, 2013
explains the concept: A ‘merger’ is a combination of two or more entities
into one; the desired effect being not just the accumulation of assets and
liabilities of the distinct entities, but organization of such entity into one
business.
• All the matters relating to Compromises, Arrangements, and
Amalgamations will be dealt as per provisions of Companies Act, 2013 and
The Companies (Compromises, Arrangements, and Amalgamations) Rules,
2016.

• the petition for Compromise, Arrangement and Amalgamation shall pray
for appropriate orders and directions under section 230 read with section
232 of the Act.
Merger and Amalgamation
• A merger is an agreement that unites two existing companies into one new
company. Mergers and acquisitions are commonly done to expand a
company’s reach, expand into new segments, or gain market share.
• Amalgamation is the combination of one or more companies into a new
entity. An amalgamation is distinct from a merger because neither of the
combining companies survives as a legal entity; a completely new entity is
formed to house the combined assets and liabilities of both companies.
This sense of the term amalgamation has generally fallen out of popular
use, and the terms "merger" or "consolidation" are often used instead.
Mergers and Acquisition (M&A)
Distinction between Mergers and Acquisition:
• The terms merger and acquisition mean slightly different things, though
they are often used interchangeably. When one company takes over
another and clearly establishes itself as the new owner, the purchase is
called an acquisition. From a legal point of view, the target company ceases
to exist, the buyer absorbs the business and the buyer's stock continues to
be traded while the target company’s stock does not.
• Merger happens when two firms, often of about the same size, agree to go
forward as a single new company rather than remain separately owned and
operated. Both companies' stocks are surrendered and new company stock
is issued in its place.
For example, both Daimler-Benz and Chrysler ceased to exist when the two
firms merged, and a new company, Daimler Chrysler, was created.
• The distinct advantages of mergers and acquisition are:
→ Increases shareholder base
→ Increases Capital base

→ Reduces competition
→ Economies of scale.
→ Tax benefits.
→ Financial resources.
→ Entry in global markets.
→ Growth and expansion.
→ Helps to face competition.
→ Increase in market share.
→ Increases goodwill.
→ Research and development (R&D)
Reverse Merger and Spin off
• Reverse Merger: A reverse merger is a way for private companies to go
public and while they can be an excellent opportunity for investors for
Restructuring of a company’s capital. Reverse mergers are typically through
a simpler, shorter, and less expensive process than that of a conventional
Initial Public Offering (IPO), in which private companies hire an investment
bank to underwrite and issue shares of the new soon-to-be public entity.
They are also commonly referred to as reverse takeovers or reverse IPOs.
• Spin off: When a corporation spins off a business unit that has its own
management structure, it sets it up as an independent company under a
renamed business entity. The company that initiates the spinoff is referred
to as the parent company. A spinoff retains its assets, employees, and
intellectual property from the parent company, which gives it support in a
number of ways, such as investing equity in the newly formed firm and
providing legal, technology or financial services.
Thus, spinoff is the creation of an independent company through the sale
or distribution of new shares of an existing business or division of a parent
company.
The spun-off companies are expected to be worth more as independent
entities than as parts of a larger business.

When a corporation spins off a business unit that has its own management
structure, it sets it up as an independent company under a renamed
business entity.
Section 230-231 of the Companies Act, 2013 deals with compromise or
arrangements. [IMPORTANT]
Section 232 of the Companies Act, 2013deals with mergers and amalgamation
including demergers.
Compromise or Arrangement with Members or Creditors (Section230)
Section 230 of Companies Act, 2013: deals with Power to Compromise or Make
Arrangements with Creditors and Members. The provision contains the powers of
the Tribunal on the filing of application for the compromise or arrangement.
Step 1: Application to Tribunal:
Section 230(1): Power of Tribunal: Where a compromise or arrangement is
proposed between a company and its creditors/members; the Tribunal may, on
the application of the Company/Creditor/Member of the company order a
meeting of the creditors/members/ held and conducted as the Tribunal directs.
Step 2: Disclosures by applicant [Section 230(2)]
The company or any other person, by whom an application is made, shall disclose
to the NCLT by affidavit –
• all material facts relating to the company, such as the latest financial
position of the company, the latest auditor’s report, and the pendency of
any investigation or proceedings against the company;
• reduction of share capital of the company, if any, included in the
compromise or arrangement;
• any scheme of corporate debt restructuring consented to by not less than
75% of the secured creditors in value

Step 3: Notice of meeting conducted on order of Tribunal [Section 230(3)]

Where a meeting is proposed to be called a notice of such meeting shall be sent
to all the creditors/members/the debenture-holders of the company, and
Sectoral regulators u/s 230(5) with Annexure disclosing the:
• details of the compromise or arrangement
• a copy of the valuation report,
• the effect of the compromise or arrangement on any material interests of
the directors of the company or the debenture trustees, and
• such other matters as may be as prescribed under Rule 6 of the Companies
(Compromises, arrangements and amalgamations) Rules, 2016.
Step 4 : Publication/Advertisement of notice
Such notice and other documents shall also be placed on the website of the
company, if any, and in case of a listed company, these documents shall be sent
to the Securities and Exchange Board (SEBI) and stock exchange.
- Time period for the receipt of the free copies of the compromise or
arrangement from company office should be mentioned.
Step 5: Vote to the adoption of the compromise or arrangement [Section 230
(4)]
• A notice shall be sent to the persons who may vote in the meeting either
themselves/through proxies/postal ballot to the adoption of the
compromise or arrangement within one month from the date of receipt of
such notice.
• Any objection to the compromise or arrangement shall be made only by
persons holding not less than 10% of the shareholding or having
outstanding debt amounting to not less than 5% of the total outstanding
debt as per the latest audited financial statement.
Mafatlal v. Mafatlal Industries Ltd. (AIR 1997 SC 506)

Here, the scheme of arrangement or compromise was entered into b/w the
companies and its members and therefore other persons interested in company
like preferential creditors as land lords were not eligible to vote for the scheme.
Step 6: Sectoral Regulators [Section 230 (5)]
A notice along with all the documents in such form as may be prescribed shall also
be sent to(within 30 days):
• 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
Step 7: Binding order of Tribunal [Section 230 (6)]
Where, at a meeting held, majority of persons representing 3/4th in value of the
creditors/members, voting agree to any compromise or arrangement and is
sanctioned by the Tribunal by an order, it shall be binding
- on the company/ creditors/members,
- in case of a company being wound up, on the liquidator
- the contributories of the company.
Step 8: Filing of order of tribunal with the Registrar [Section 230 (8)]
The order of the Tribunal shall be filed with the Registrar by the company within
thirty days of the receipt of the order.
Calling of meeting of creditors when not required [Section 230 (9)]
The Tribunal may dispense with calling of a meeting of creditor/s having at least
ninety per cent value, agree and confirm, by way of affidavit, to the scheme of
compromise or arrangement.

JVA Trading Pvt. Ltd. and C&S Electric Ltd [IMP]
Facts: The prayer was to dispense with the requirement for convening the
meeting of Equity shareholders of the Transferor Company and also to dispense
with the requirement of issue and publication of notices for the same.
The Tribunal held that it does not have the power to dispense with the meeting of
the members and Section 230(9) will not be applicable to members in relation to
a scheme of arrangement or compromise, even if the said members have
consented to the same in writing.
Power of the Tribunal in relation to buy-back of the securities [Section 230 (10)]
No compromise or arrangement in respect of any buy-back of securities under
this section shall be sanctioned by the Tribunal unless such buy-back is in
accordance with the provisions of section 68.
Section 68 of the Act deals with the power of company to purchase its own
securities. It says that a company may purchase its own shares or other specified
securities (hereinafter referred to as buy-back) out of—
(a) its free reserves;
(b) the securities premium account; or
(c) the proceeds of the issue of any shares or other specified securities.
Section 68 provides a ceiling of 25% to the buy-back of securities in a particular
year by the Company.
Lotte Engineering and Construction Pvt. Ltd. case [IMP]
Facts: A company namely Lotte Engineering and Construction Pvt. Ltd. company
proposed the scheme of arrangement providing for buy-back of its equity shares
up to 99.86%. The petition was originally filed under Section 391 of the 1956 Act
before the Hon’ble High Court of Delhi and later the matter got transferred to the
National Company Law Tribunal (NCLT) under the new enacted provisions of
Section 230-232 of the Companies Act, 2013 governing compromise,
arrangements, mergers and reconstructions.

Issue no. 1: For the matters transferred from High Court to NCLT, whether NCLT
has to deal with them under the 1956 Act (under which they were filed) or under
the 2013 Act?
The counsel for the petitioner company pleaded that NCLT should consider the
matter under the provisions of 1956 Act and since under the said Act, compliance
requirement with the Section dealing with the buy-back was not provided, the
applicant company was not required to comply with the provisions laid under
Section 230(10) of 2013 Act.
NCLT held that the scheme of compromise and arrangement transferred from
High Court to NCLT shall have a prospective (future) effect and they will be guided
under the new provisions of 2013 Act.
If a proceeding is pending u/s 231 of CA,1956 and during the pendency , Chapter
15, i.e., s. 230-240 of CA, 2013 is enforced, then the company does not have the
vested right under CA,1956 to operate in a manner inconsistent to CA, 2013. The
inconsistency in this particular case was in relation to s. 230(10) of CA, 2013, since
there was no such provision under the CA, 1956. The repeal of statute operates to
divest all the rights occurring under the repealed statute and to hold all
proceedings if not concluded prior to such repeal.
Issue No. 2: Whether a company can buy-back the shares exceeding the statutory
limit prescribed under section 68 of the Act?
Judgment: Since the proposed scheme in the matter with contemplated buy-back
of securities up to a level of 99.86% of the entire issued capital, NCLT observed
that the same is not in compliance with the provisions of Section 68 of 2013 Act.
Section 68 provides a ceiling of 25% to the buy-back of securities in a particular
year by the Company. The legal position of the later enactment being already
settled above, NCLT took the view that the transaction provided under the
Scheme shall not be allowed.
Conclusion: Having the ratio of the above order, it can be concluded that the
schemes filled under the erstwhile provisions of 1956 Act and which got

transferred from High Court to Tribunal shall be treated in terms of the provisions
of 2013 Act by the NCLT. NCLT has also decided other matters which were on the
same lines which followed the Lotte case.
Re R. S. Live Media Pvt. Ltd.: Similar to previous case issue no. 1
Power of Tribunal to enforce compromise or arrangement (Section 231)
• Where the Tribunal makes a sanctioning order under section 230, it shall
have power to supervise the implementation of the compromise or
arrangement.
• The Tribunal may give to make modifications in the compromise or
arrangement for the proper implementation of the compromise or
arrangement.
• If the Tribunal is satisfied that the compromise or arrangement sanctioned
under section 230 cannot be implemented satisfactorily with or without
modifications, and the company is unable to pay its debts as per the
scheme, it may make an order for winding up the company.
• The provisions of this section shall also apply to a company in respect of
which an order has been made before the commencement of this Act
sanctioning a compromise or an arrangement
Case: Concast Steel & Power Ltd. v Regional Director, eastern Region & Others
The appellant, transferee company, filed application u/s231 of CA, 13 in NCLT for
the direction to rectify the errors crept in the order passed by HC, Calcutta.
Held: the Tribunal in exercise of power conferred by Sec. 231(3) , can modify the
orders passed by the HC.
Any order passed by the HC in relation to a scheme of compromise on
arrangement before the commencement of CA, 13 can be rectified if due to error
by NCLT.
Case: MBS IT Institute Pvt ltd. v ROF Infratech and Housing Ltd.

Scheme of amalgamation would be effected from the appointed date as per
S.230(6) and not a prospective date.
Case: Sovereign Life Insurance Co. v DUDD. (What do you mean by Class of
Creditors?)
The court, while defining Class of Creditors, maintained that it must be confined
to those persons whose rights are a bit dissimilar so as to make impossible for
them to consult together with a view to their common interest. A group of
persons would thus contribute to a class if it is shown to them that all their
converged interest and claims can be ascertained by common system of
valuation. Class should be homogeneous and should have commonality of interest
and the scheme of compromise and arrangement offered to a particular class of
members/creditors must be identical to all constituting the class.
Mafatlal v. Mafatlal Industries Ltd. (AIR 1997 SC 506) [IMP]
Issue: Whether the Court has jurisdiction like an appellate authority to minutely
scrutinize the scheme and to arrive at an independent conclusion whether the
scheme should be permitted to go through or not when the majority of the
creditors or members or their respective classes have approved the scheme as
required by section 391 Sub section (2).
SC held: The court certainly would not act as a court of appeal and sit in judgment
over the commercial wisdom of the parties to the scheme who have taken
informed decision about the usefulness and propriety of the scheme. The only
obligation of the court is to be satisfied that the scheme for amalgamation or
merger was not contrary to public interest and is backed up by the majority vote
as per 391 (2).
A Meeting of shareholders of the company for amalgamation was convened and
the scheme of amalgamation was approved by the overwhelming majority of
shareholders.
The appellant, who raised several objections to the amalgamation later on, was
one of the directors of the transferor company as well as 5% shareholder of

transferee company. He did not object to the scheme of amalgamation as a part
of transferor company, but when the scheme was filed with the court by the
transferee company, he filed an appeal against the approved scheme.
One contention of the appellant was that he represented a distinct class within
the class of equity shareholders as part of family arrangement in the respondent
transferee company and so a separate meeting should have been convened by
the Company Court.
SC held: Where Scheme of Compromise or arrangement is proposed between a
company and its members or any class of them, a meeting of same members of
class has to be convened. This presupposes that if a separate Scheme is offered to
any sub-class of members which has a separate interest then a separate meeting
should be called.
No question of convening a separate meeting in order to offer a separate Scheme
to that particular sub-class should arise in this particular case. The Scheme of
Compromise/Arrangement was affecting all the existing equity shareholders of
the company alike to which the appellant belonged. Thus, no sub-classification of
equity shareholders or by family arrangements is needed when the commercial
interest are essentially common to them all.
The Key takeaways of this case are:
• The Court can intervene in matter only when it is not just and fair or
prejudicial to the interest of shareholders. Court can only go through
scheme and examine whether it has complied requirements under Section
391 (2) and was passed by requisite majority or not.
• Individual personal interest of minority shareholders is of no concern unless
it is affecting class interest of such equity shareholders.
• The majority decision of the concerned class of voters is just and fair to the
class as whole so as to legitimately bind even the dissenting members of
that class.

In Ray Maneckshaw and Ahmedabad Manufacturing Co., NCLT followed the
same ratio. The court held that in case of persons with heterogeneous interests
clubbed together into a class, the majority having common interests will rule over
the minority having distinct interest.
Case: Mansukh Lal v M V Shah, 1975 (s. 231)
The court held that the power of HC u/s 391-392 of CA, 1956
u/s 391(1) the court has power only to convene a meeting of the creditors or
members to whom a compromise or arrangement is offered. and ensure that
those who are asked to attend a given meeting have a like interest. In other
words, while convening a meeting of the creditors, it is to be classwise: such as
secured creditors, unsecured creditors, creditors having a specified claim or a
specified class of creditors or members.
If the scheme has been approved by those to whom it is offered by the majority
as prescribed in section 391(2), the company has to file an application within
seven days of the filing of the report by the Chairman for confirmation of the
compromise or arrangement.
But before according sanction to the scheme approved by majority, the court
needs to be satisfied on three points:
(i) whether the statutory provisions have been complied with
(ii) whether the class or classes affected by the scheme have been fairly
represented; and
(iii) whether the arrangement is such as a man of reason would reasonably
approve.
(iv) the offered Scheme must have economic and financial feasibility or viability
with a view to ascertain its smooth implementation.

Merger and amalgamation of companies (Section 232)
Tribunal’s power to call meeting of creditors or members, with respect to
merger or amalgamation of companies [Section 232 (1)]

When an application is made to the Tribunal under section 230 for the
sanctioning of a compromise or an arrangement proposed between a company
and any such persons u/s 230, and it is shown to the Tribunal—
The Tribunal may order a meeting of the creditors/ members of both the
companies, i.e., transferor and transferee, to be held and conducted under the
direction of the Tribunal.
In the matter of JVA Trading Pvt. Ltd. and C & S Electric Ltd., the Tribunal held
that it does not have power to dispense with the meeting of members of the
companies in relation to a scheme of compromise or arrangement even if the
members have consented to the same in writing.
In Mafat Lal v Mafat Lal , the Court observes that in case related to Scheme of
Compromise or Arrangement, the court cannot sit and exercise supervisory
jurisdiction so as to minutely scrutinize the deed. The commercial wisdom of the
shareholders/creditors who approved the scheme in a meeting is to be respected.
The court will only have to see if the reporting technicality and other procedural
regularities under chapter 15 of CA, 2013, have been adhered to.
Circulation of documents for members’/creditors’ meeting [Section 232 (2)]
Section 232(2) states that when an order has been made by the Tribunal under
sub-section (1), merging companies or the companies in respect of which a
division is proposed, shall also be required to circulate the following for the
meeting:
• the draft of the proposed terms of the scheme drawn up and adopted by
the directors of the merging company;
• confirmation that a copy of the draft scheme has been filed with the
Registrar;
• a report adopted by the directors of the merging companies explaining
effect of compromise on each class of shareholders, key managerial
personnel, promoters and non-promoter shareholders laying out in

particular the share exchange ratio, specifying any special valuation
difficulties;
• the report of the expert with regard to valuation, if any;
Sanctioning of scheme by Tribunal [Section 232 (3)]
Section 232(3) states that the Tribunal, after satisfying itself that the procedure
specified in sub-sections (1) and (2) has been complied with, may, by order,
sanction the compromise or arrangement and make necessary provisions for the
same.
Transfer of property or liabilities [Section 232 (4)]
Section 232(4) states that if an order provides for the transfer of any property or
liabilities, then the property/liabilities shall be transferred and shall become the
liabilities of the transferee company.
Certified copy of the order to be filed with the Registrar [Section 232 (5)]
Every company shall file a certified copy of the order with the Registrar for
registration within thirty days of the receipt of the order.
Effective date of the scheme [Section 232 (6)]
The scheme under this section shall clearly indicate an appointed date from which
it shall be effective and the scheme shall be deemed to be effective from such
date and not at a date subsequent to the appointed date.
Annual statement certified by CA/CS/CWA to be filed with Registrar every year
until the completion of the scheme [Section 232 (7)] indicating whether the
scheme is being complied with in accordance with the orders of the Tribunal or
not.
Punishment [Section 232 (8)]
Section 232(8) states that if a transferor company or a transferee company On
contravention of the provisions of this section, the transferor company/ the
transferee company, shall be punishable with fine not less than 1 lakh rupees

which may extend to 25 lakh rupees and every officer of such transferor or
transferee company who is in default, shall be punishable with imprisonment for
a term up to 1 year or with fine not be less than 1 lakh rupees but which may
extend to 3 lakh rupees, or with both.

Section 233 : Special case of Merger and Amalgamation (not done in detail in
class)
A – (Small companies , Holding company) + Wholly owned subsidiary
a scheme of merger or amalgamation may be entered into between 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,
subject to a set of procedures.
Section 234: deals with Merger or amalgamation of company with foreign
company. (not done in detail in class)
(*’Foreign company’ means any company or body corporate incorporated outside
India whether having a place of business in India or not.)
- The newly notified Section 234 provides that the provisions of Chapter XV
(Compromises, Arrangements and Amalgamations) of the Companies Act,
2013 (s.230-s.240) shall apply, mutatis mutandis (with appropriate
changes), to an inbound or outbound cross-border merger, subject to
approval by the RBI.
- The provision envisages a scheme of amalgamation providing for, amongst
others, payment of consideration, including by way of cash or depository
receipts or a combination of those.
- Section 234 also empowers the Central Government to frame rules in
consultation with the RBI to deal with such mergers. The requirement of
approval by the RBI is expected to ensure regulatory supervision over the
proposed mergers including safeguarding of interest of the concerned
stakeholders.

Application to NCLT:
After obtaining the approval of the RBI and complying with the provisions of the
above mentioned sections and the related Rules, the concerned company may file
an application with the NCLT for approval of the merger.

S. 235: Power to acquire shares of shareholders dissenting from scheme or
contract approved by majority. That is, Power to buy the shares of the dissenting
shareholders. Where a scheme/contract involving the transfer of shares or any
class of shares in a company (the transferor company) to another company (the
transferee company) has been approved by 90% (of the number of shares to be
transferred) of the shareholders holders, the transferee company may, at any
time within two months (after the expiry of the acquisition notice of 4 months),
give notice to any dissenting shareholder that it desires to acquire his shares.
Section 236: Minority Squeeze Out [IMPORTANT]
Though not defined in the Act, for sec. 236, Minority shareholding means not
more than ten %.
‘Squeezing Out’ is a situation where the majority shareholders force the minority
shareholders to give up their shareholding to majority shareholders. Squeeze Out
refers to a transaction where the acquiring party is the controller of the firm to be
acquired.
The term squeeze out implies compulsory acquisition of equity share of a
company from minority shareholders through cash compensation. This method
helps shareholders holding 90% or more shareholding in a company to acquire
the shares in the company from minority shareholders.
- The Companies Act, 2013 under Section 236 (Section 395 of Companies Act,
1956) provides for the concept of squeezing out which categorically
mentions situations whereby minority shareholders can be bought out by
the majority shareholders.

- Section 236 provides that a majority shareholder of a company holding at
least 90% of equity shareholding has a right to notify its intention to buy
out minority shareholders who may sell their shares to the majority
shareholders.
- Majority shareholders shall offer to the minority shareholders of the
company for buying the equity shares held by such shareholders at a price
determined on the basis of valuation by a registered valuer.
- The section also gives opportunity to the minority shareholders to offer
their holding to the majority shareholders.
- There is no provision for holding a separate meeting of the minority
shareholders to vote against the buy-out.
- Section 236 does not make it clear as to whether the minority shareholders
can be forced to give up their shareholding or whether their consent is
required
- Section 66 of the Companies Act, 2013 provides that the paid up capital of a
company can be reduced by paying off the minority shareholders. The
reduction in such capital is subject to a special resolution which has to be
further confirmed by the National Company Law Tribunal (NCLT) of the
concerned jurisdiction.
- Judicial precedents suggest scenarios where selective reductions have been
approved, allowing certain members to retain their shares unreduced while
shares of others are extinguished.
Typical reasons for selective reduction provided are:
(1) Due to delisting and consequent loss of tradability, reduction provides an
opportunity to public shareholders to liquidate their shareholding at an
attractive price and realize a return on their investment.
(2) Company has received requests from non-promoters to provide them with
an exit opportunity (in the context of loss f liquidity and tradability).
(3) Due to a large promoter coming through takeover offers, to protect
minority shareholder from impairment of assets and change of business by
promoters, the capital of minority shareholders is to be returned
(4) The company finds it administratively prohibitive to service small
shareholders and it is not cost effective.

The question of squeezing out minority shareholders (also known as freeze-outs
in some jurisdictions) is always a vexed question. This is because the law in certain
circumstances allows minority shareholders to be forcibly bought out by the
majority shareholders or the company such that they are forced out of the
company. The controversy arises because this might amount to a deprivation of
property rights of the minority shareholders.
Due to the inability of companies to effectively utilise Section 395, they and their
advisors have resorted to other provisions in the Companies Act to achieve an
outcome that mirrors a squeeze out.
Case: SEBI v Sterlite Industries Ltd.
Sterlite Industries Limited proposed a scheme of arrangement under Section 391
to 394 of the Companies Act whereby it made an offer to the shareholders to buy
back their shares.
- The peculiarity of the offer was that the shares of all shareholders would be
bought back unless they specifically intimated the company otherwise in
writing.
- In other words, silence of the shareholders amounted to consent of
shareholders. This scheme was approved by the single judge of the Bombay
High Court
- SEBI and the Central Government filed an appeal before the division bench
of the Bombay High Court challenging the single judge’s order.
- The court in effect held that SEBI had no power to challenge such a scheme
of arrangement. Further, the court held that there was nothing wrong in
the scheme as proposed by Sterlite and that the scheme should stand
- This was despite the fact that the scheme virtually required the
shareholders to sell their shares in the absence of specific intimation
provided in writing. Although this was not exactly a squeeze out, the
difficulty of shareholders in exercising the option to remain in the company
turned it almost into a non-option.

This ruling in favour of Sterlite resulted into, SEBI obtaining jurisdiction
( provisions in the listing agreement (sub-clauses (f), (g) and (h) of clause 24) to
determine whether such schemes are contrary to the listing guidelines as well as
various regulations and guidelines issued by SEBI.
Sandvik Asia Limited v. Bharat Kumar & Ors.
In this case a ‘selective reduction’ (squeezing out) has been approved under
which some members retain their shares unreduced while shares of others are
extinguished resulting in extinguishment of a class.
Initially, the single judge of the Bombay High Court in 2003 regarding the
proposal, the court held that such a proposal of squeezing out the minority
shareholders without even providing any option to remain in the company (as
Sterlite had provided) was highly inequitable, unjust and unfair because the
promoter group (controlling shareholders) could virtually bulldoze minority
shareholders. Hence, the company petition was dismissed.
But, the division Bench of HC Bombay overturned the decision of single bench and
approved the squeezing out of minority shareholders as the minority
shareholders were adequately and fairly compensated for their share value and
the resolution of taking up the step was approved by even non-promoter majority
shareholders.
In the case the Court laid down the guiding principles in this option:
i) Whether non-promoter shareholders are paid fair value; and
ii) Whether overwhelming majority of the non-promoters voted in favour
of the resolution.

Case: Hindustan Lever Employees Union v Hindustan lever Ltd. , 1994
Merger under the Companies Act, 1956 of the two big companies
1. Hindustan lever Limited (HLL), a subsidiary of Unilever (UL), London based
multinational company.

2. Federation of Employees Union of both Tata Oil Mills Company Ltd. (TOMCO) &
HLL. etc.
• The attacks varied from statutory violation, procedural irregularities of the
provisions of the Act, under-valuation of shares, its preferential allotment
on less than the market price to the multinational, failure to protect the
interests of employees of both the companies and above all being negative
of public interest.
• The High Court was not satisfied that either the merger was against public
interest or that the valuation of the shares was prejudicial to the interest of
the shareholders of TOMCO or that the interest of the employees was not
adequately protected. It was held that there was no violation of Section
391(l)(a) of the Act.
• The SC on SLP held: The High court does not exercise an appellate
jurisdiction. It exercises a jurisdiction founded on fairness. It is not required
to interfere only because the figure arrived at by the valuer was not as
better as it would have been if another method would have been adopted.
What is imperative is that such determination should not have been
contrary to law and that it was not unfair for the shareholders of the
company which was being merged.
• The court held that the petitioner failed to establish any fraud or prejudice
on the part of the management.
• On valuation of share for exchange ratio: the court found that the
valuation was done by a well reputed chartered accountant and director of
TOMCO which was approved by two other independent bodies and could
not be shown by the petitioner to be vitiated by fraud and mala fide.
• That service conditions of TOMCO, the transferor company, having been
protected could not claim to be prejudicial either because they were not
assured of same service condition as was operative in HLL., or that there
was no similar provision of protecting the interests of HLL employees.
• The apprehension of retrenchment of already surplus of HLL employees
could be raised in Labour Court as and when necessary.

• On preferential allotment of shares to UL on less than market value: The
court agreed that when the court is concerned with a scheme of merger with
a subsidiary of a foreign company then the test is not only whether the
scheme shall result in maximising profits of the shareholders or whether
the interest of employees was protected but it has to ensure that merger
shall not result in impeding promotion of industry or shall obstruct growth
of national economy. The court held that HLL was holder of 51% shares
prior to any allotment, therefore the allotment which placed them on par
with the same holding was neither illegal nor violative of public interest.
• The court did not find much merit in the claim of the employees that their
interest had not been protected.
• But since admittedly more than 95% of the shareholders who are the best
judge of their interest and are better conversant with market trend agreed
to the valuation determined it could not be interfered by courts as to
whether it could have been better. The company court’s obligation is to be
satisfied that valuation was in accordance with law and it was carried out
by an independent body.
• The Court maintained that the internal management, business activity or
institutional operation of public bodies cannot be subjected to inspection
by the court.
• A scheme of amalgamation cannot be faulted on apprehension and
speculation as to what might possibly happen in future.
• The appeal was dismissed.

Case: Chetan Cholera v. Rockwool India Ltd.
The High Court of Hyderabad took a contrarian view in Chetan Cholera v.
Rockwell India Ltd. and categorically observed that companies in India often
adopt this method to selectively oust the non-promoter minority.
The Court was critical of the proposal and observed that a company that achieved
high growth and high net-worth and in a position to share its profits among all the

small investors can go into the hands of few individuals or a group helping them
to amass wealth, using the procedure of reduction.
It further observed that it is important for Courts while protecting the rights of
workman/employees/shareholders/promoters to not only adhere to the
procedural and substantive aspects of scheme of arrangement, the Courts should
also take into consideration Articles 38 and 39 of the Constitution which assures
and secures the citizens a socialist state.
The Court emphasized upon the duty of regulators like SEBI to safeguard the
interests of the investors.
Case: In res Cadbury India Limited
The Court approved a squeeze out through reduction of capital at a price
determined by the valuer appointed by the Court. The Court denied the
objections raised by the dissenting minority shareholders. The Court held that
before it could object to a scheme of sanction, the objector must show that the
valuation is ex-facie unreasonable. The Court relied on the judgment of Mafatlal v
Mafatlal and observed that ‘Courts do not have the expertise, the time or the
means to do this. The Court’s approach must be to examine whether or not a
valuation report is so unjust, so unreasonable and so unfair that it could result
only in inequity or injustice.
Merger: Meaning & Types
A merger is a corporate strategy of combining different companies into a single
company in order to enhance the financial and operational strengths of both
organizations.
Chapter XV of the 2013 Act, Sections 230 to 240 deal with “Compromises,
Arrangements and Amalgamations.” Though, the Act does not define “merger”,
the concept is suggested:
Merger means combining of two or more entities into one, which results in
merger of all the assets, liabilities of the entities under one business.

The dissolution of company/companies involved in a merger takes place without
winding up.
The possible objectives of mergers are manifold- economies of scale, acquisition
of technologies, access to sectors / markets etc.
Procedure (not in syllabus)
The memorandum of association of the companies seeking to merge, should give
power to companies to amalgamate. Also, the creditors of the companies must
approve the merger scheme. Notice of merger along with merger proposal and
valuation report etc. needs to be served upon creditors, shareholders, and various
regulators (MCA, RBI, CCI, Stock exchanges of listed companies, IT authorities and
other sector authority likely to be affected by merger.)
Board of Directors need to approve the draft proposal after which application will
be made to NCLT. After the approval mentioned above, the scheme will have to
be filed with the Official Liquidator, RoC and the Central Government. In the
event of there being “no objection,” this will be deemed as approve.
After the order, its certified true copies will be filed with the Registrar of
Companies.
Types of Mergers
There are generally five different types of mergers:
1. Horizontal merger: A merger between companies that are in direct
competition with each other in terms of product lines and markets
2. Vertical merger: A merger between companies that are along the same
supply chain (e.g., a retail company in the auto parts industry merges with a
company that supplies raw materials for auto parts.)
3. Market-extension merger: A merger between companies in different
markets that sell similar products or services

4. Product-extension merger: A merger between companies in the same
markets that sell different but related products or services
5. Conglomerate merger: A merger between companies in unrelated business
activities (e.g., a clothing company buys a software company)

Demerger: Meaning and Types [IMP]
What is a De-Merger?
A demerger is a corporate restructuring in which a business is broken into
components, either to operate on their own, to be sold or to be liquidated. A de-
merger (or "demerger") allows a large company, such as a conglomerate, to split
off its various brands or business units to invite or prevent an acquisition, to raise
capital by selling off components that are no longer part of the business's core
product line, or to create separate legal entities to handle different operations.
The term ‘demerger’ is not defined under the Companies Act, 2013. However, the
explanation to section 230(1) of the Companies Act, 2013, prescribes
arrangement as including a re-organization of the company’s shares capital by the
consolidation of shares of different classes or by division of shares of different
classes or by both of these methods.
‘Demerger’ is defined in section 2(19AA) of the Income-Tax Act, 1961 in relation
to companies, means the transfer, pursuant to a scheme of arrangement
under sections 391–394 of the Companies Act, 1956, by a demerged company of
its one or more undertakings to any resulting company in such a manner that:
1. all the property of the undertaking/liabilities, being transferred by the
demerged company, immediately before the demerger, becomes the
property/liabilities of the resulting company by virtue of the demerger
2. the property and the liabilities are transferred at values appearing in its
books of account immediately before the demerger
3. the resulting company issues, in consideration of the demerger, its shares
to the shareholders of the demerged company on a proportionate basis

except where the resulting company itself is a shareholder of the demerged
company
4. the shareholders holding not less than 75% of the shares in the demerged
company become shareholders of the resulting company.
A demerged company is said to be one whose undertakings are transferred to the
other company, and the company to which the undertakings are transferred is
called the resulting company. The demerger can take place in any of the following
forms:
1. Spin-off: It is the divestiture strategy wherein the company’s division or
undertaking is separated as an independent company. Once the undertakings are
spun-off, both the parent company and the resulting company act as separate
corporate entities.
Generally, the spin-off strategy is adopted when the company wants to dispose of
the non-core assets or feels that the potential of the business unit can be well
explored when operating under the independent management structure and
possibly attracting more outside investments.
Wipro’s information technology division is the best example of spin-off, which got
separated from its parent company long back in 1980’s.
2. Split-up: A business strategy wherein a company splits-up into one or more
independent companies, such that the parent company ceases to exist. Once the
company is split into separate entities, the shares of the parent company is
exchanged for the shares in the new company and are distributed in the same
proportion as held in the original company, depending on the situation.
The company may go for a split-up if the government mandates it, in order to
curtail the monopoly practices. Also, if the company has several business lines
and the management is not able to control all at the same time, may separate it
to focus on the core business activity.
Case: In res Indo Rama Textile Ltd. (IRTL) (Spentex Industries Ltd. v Indo
Rama Synthetics Ltd.)

• Company application was filed by Spentex Industries Ltd. for modification
of the sanctioned scheme of demerger.
• The company now called Spentex ; earlierIRTL
• The company sought for a direction to the respondent (now …. ) to transfer
certain assets including a part of housing colony occupied by the erstwhile
IRTL employees or pay the value of the said asset.
• Contention of the appellant: As the said assets were the part of the
Undertaking of the spinning business, the Scheme did not mention the said
assets and the thus the Scheme was liable to be modified to make it Section
2(19AA) of Income tax Rules compliant.
Held: That a reading of the Scheme of Arrangement sanctioned in 2003, as a
whole showed that the housing colony as well as common utilities were
specifically agreed to be retained and owned by the respondent.
That the requirement of Section 2 (19AA) would be satisfied if an Undertaking
that is being demerged/hived off is a going concern, i.e., it constitutes a business
activity capable of being run independently in a foreseeable future and for which
purpose the Court can examine whether essential and integral assets like plant,
machinery and manpower without which it would not be able to run as an
independent unit have been transferred to the demerged company or not.
That Sec 2(19AA) does not require all the properties of the Undertaking being
transferred to become the property of the transferee company and non-transfer
of some of the previous common assets will not affect the status of IRTL as a
going concern.
That before the demerger aforesaid, the respondent company was carrying on
both polymer and spinning business and the housing colony and utilities were
being used in common for both businesses;
that for the scheme to be section 2(19AA) compliant cannot be read as
mandatory requirement for all the schemes of
amalgamation/arrangement/demerger under Sections 392,393 and 394 of the
companies Act.

The Section 2(19AA) is relevant only for the purpose of determining whether the
Scheme is tax neutral which has otherwise also relevance only for the respondent
company.
When the Scheme was sanctioned in 2003, the respondent as well as IRTL were
both managed by the same group and the position has now changed and that
now modification of /amendment to the Scheme is not to be considered.
Case: KBD Sugar Distilleries ltd. V Assistant commissioner of Income Tax
It was contended in the case that the demerged entity was not transferred as a
going concern as most of it was not under operations.
It was also contended that just as the court received approval it did not mean that
it was tax efficient demerger u/s 2(19AA).
The court rejected this contention and held that the undertaking to be demerged
does not have to be a going concern but the transfer has to be made in a manner
which is similar to as the going concern is to be transferred. Additionally the
court’s approval under the Companies Act for the Scheme of demerger clearly
states that the demerger is on a going concern basis.
Case: In the matter of Uma Enterprises Pvt. Ltd.:
Petition for sanction of a scheme of demerger of real estate division of a
company: Company having no operative real estate business “objective of
petitioner seems to be a plain transfer of land to avoid tax, capital gain and stamp
duty.
Held: The company does not appear to have/had any pre-existing real estate
division since its inception. It is evident that the petitioner company was all along
engaged in business of manufacturing, processing and sale of vegetable oil alone
and hence, question of demerger of its unit does not arise.
The petition for demerger was dismissed.
a civil liability of company for worth Rs 25,000 and Rs 5,000 for every officer who
is in default.

Module 6
6.5 National Company Law Tribunal (NCLT) & Appellate Tribunal
Though both courts and Tribunals exercise judicial power and discharge similar
functions, there are some well recognized differences b/w courts and tribunals. In
Union of India (UOI) Vs. R. Gandhi and Ors., 2010 the SC has elaborately discussed
the difference:
The courts are established by the State and are entrusted with the state’s
inherent power for administration of justice in general. Tribunals are established
under a statute to adjudicate upon disputes arising under the said statute, or
disputes arising out of any administrative law.
Courts refer to Civil Courts, Criminal Courts and High Courts, Tribunals can be
either constituted or authorized under the constitution or they can be constituted
under some statute. Some tribunals have only judicial officers like Rent Tribunal,
Labour court, Industrial Tribunal etc.
Difference b/w Courts and Tribunals
BASIS FOR COMPARISON TRIBUNAL COURT
Meaning Tribunals can be
described as minor
courts, that adjudicates
disputes arising in special
cases.
Court refers to a part of
legal system which are
established to give their
decisions on civil and
criminal cases.
Decision Awards Judgement, decree,
conviction or acquittal
Deals with Specific cases Variety of cases
Party A tribunal may be a party
to a dispute
Court judges are impartial
arbitrators and not a
party
Headed by Chairperson and other
judicial members
Judge, panel od judges or
magistrate
Code of procedure No such code of
procedure
It has to follow the code
of procedure very strictly

Union of India (UOI) Vs. R. Gandhi and Ors., 2010
Madras Bar Association (`MBA') raised the following contentions:
(i) Parliament does not have the legislative competence to vest intrinsic judicial
functions that have been traditionally performed by the High Courts for nearly a
century in any Tribunal outside the Judiciary.
(ii) The constitution of the National Company Law Tribunal and transferring the
entire company jurisdiction of the High Court to the Tribunal which is not under
the control of the Judiciary, is violative of the doctrine of separation of powers
and independence of the Judiciary which are parts of the basic structure of the
Constitution.
The SC considered the following points
(i) To what extent the powers and judiciary of High Court (excepting judicial
review under Article 226/227) can be transferred to Tribunals?
(ii) Is there a demarcating line for the Parliament to vest intrinsic judicial functions
traditionally performed by courts in any Tribunal or authority outside the
judiciary?
(iii) Whether the "wholesale transfer of powers" as contemplated by
the Companies (Second Amendment) Act, 2002 would offend the constitutional
scheme of separation of powers and independence of judiciary so as to
aggrandize one branch over the other?
The SC upheld the decision of the High Court that the creation of National
Company Law Tribunal and National Company Law Appellate Tribunal and vesting
in them, the powers and jurisdiction exercised by the High Court in regard to
company law matters, are not unconstitutional.
However, the court suggested some structural amendments to the provisions in
the Companies Act, 2002, so that the constitutionality of the Tribunals are
maintained. The suggestions are incorporated into the companies Act, 2013.

According to Section 2 (90) of the Companies Act, 2013, “Tribunal” means the
National Company Law Tribunal constituted under section 408.
Sections 407 – 434 of the Act deal with National Company Law Tribunal (NCLT)
and the Appellate Tribunal, also known as National Company Law Appellate
Tribunal (NCLAT)
Section 407 contains definitions as follows:
• “President” means the President of the Tribunal;
• “Chairperson” means the Chairperson of the Appellate Tribunal;
• “Member” means a member, whether Judicial or Technical of the Tribunal
or the Appellate Tribunal and includes the President or the Chairperson, as
the case may be;
• “Judicial Member” means a member of the Tribunal or the Appellate
Tribunal appointed as such and includes the President or the Chairperson,
as the case may be;
• “Technical Member” means a member of the Tribunal or the Appellate
Tribunal appointed as such.
Section 408: Constitution of National Company Law Tribunal — The Central
Government shall, by notification, constitute, with effect from such date as may
be specified therein, a Tribunal to be known as the National Company Law
Tribunal consisting of a President and such number of Judicial and Technical
members, as the Central Government may deem necessary, to be appointed by it
by notification, to exercise and discharge such powers and functions as are, or
may be, conferred on it by or under this Act or any other law for the time being in
force.
Section 410: Constitution of Appellate Tribunal — The Central Government shall,
by notification, constitute, with effect from such date as may be specified therein,
an Appellate Tribunal to be known as the National Company Law Appellate
Tribunal consisting of a chairperson and such number of Judicial and Technical
Members, not exceeding eleven, as the Central Government may deem fit, to be

appointed by it by notification, for hearing appeals against the orders of the
Tribunal.
• The constitution of the NCLT and NCLAT is a paradigm shift with the
intention of establishing a specialized forum to adjudicate all
disputes/issues pertaining to companies in India. The primary objective of
constituting these tribunals is to provide a simpler, speedier and more
accessible dispute resolution mechanism.
• The Government of India has constituted the National Company Law
Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT)
under the Companies Act, 2013 (Companies Act) to provide for a single
judicial forum to adjudicate all disputes concerning the affairs of Indian
companies. The tribunals have been made effective from 1 June 2016.
• The NCLT has eleven benches initially, two at New Delhi and one each at
Ahmedabad, Allahabad, Bengaluru, Chandigarh, Chennai, Guwahati,
Hyderabad, Kolkata and Mumbai. The NCLT will comprise a president and
judicial and technical members, as necessary.
• The NCLAT, the appellate body, will consist of a chairperson and a
maximum of eleven judicial and technical members.
• Thus, NCLT & NCLAT are quasi-judicial bodies that adjudicate issues relating
to Indian Companies. The constitution of the aforesaid Tribunals is in
exercise of the powers conferred by Sections 408 and 410 respectively of
the Companies Act, 2013.
• The genesis of setting up of specialized tribunals can be traced in the
Supreme Court judgment in Sampath Kumar case. In this case while
adopting the theory of alternative institutional mechanism, the Supreme
Court refers to the fact that since independence, the population explosion
and the increase in litigation had greatly increased the burden of pendency
in the High Courts. Therefore, to reduce the burden of High Courts and to
fulfill the growing need for empowering the Company Law Board (CLB),
they felt the need to constitute a high-power Tribunal, which could take up
all matters relating to Company Law and other Corporate Laws at one
Forum.

• It is to be noted that earlier there was Company Law Board (CLB) and Board
for Industrial and Financial Reconstruction (BIFR) in place under the
Companies Act, 1956 to adjudicate upon the company matters.
• The NCLT and NCLAT were constituted by the Central Government in
exercise of powers conferred under Section 408 and 410 of the new
Companies Act, 2013. The Ministry of Corporate Affairs vide notification
dated 1
st
June 2016 constituted NCLT and NCLAT.
• The NCLAT was constituted under Section 410 of the Companies Act, 2013
for hearing appeals against the orders of NCLT(s), with effect from 1st June,
2016.
• The NCLAT is also the Appellate Tribunal for hearing appeals against the
orders passed by NCLT(s) under Section 61 of the Insolvency and
Bankruptcy Code, 2016 (IBC). with effect from 1st December, 2016 and also
Appellate Tribunal for hearing appeals against the orders passed by
Insolvency and Bankruptcy Board of India under Section 202 and Section
211 of IBC
• The NCLAT is also the Appellate Tribunal to hear and dispose of appeals
against any direction issued or decision made or order passed by the
Competition Commission of India (CCI) with effect from 26th May, 2017.
Need for NCLT and NCLAT
The constitution of NCLT & NCLAT was a step towards improving and easing all
the judicial matters relating to the Company law under one roof. Some of the
most important reasons for the birth of NCLT & NCLAT are as follows:
• Single Window: The most important benefit that the tribunals will act as a
single window for settlement of all Company law related disputes
effectively. It shall avoid unnecessary multiplicity of proceedings before
various authorities or courts.
• Speedy Process: The NCLT and the NCLAT are under a mandate to dispose
of cases before them as expeditiously as possible. In this context, a time
limit of 90 days has been provided to dispose of cases, with an extension of
further 90 days for sufficient reasons to be recorded by the President or the

Chairperson, as the case maybe. The speedy disposal of cases will save
time, energy and money of the parties.
• Reduction of Work of High Courts: The number of pending cases with High
Courts is too high and now the matters in respect to compromise,
arrangement, amalgamations and winding-up stand transferred to NCLT.
Accordingly, NCLT and the NCLAT will reduce the work of overburdened
High Courts.
Hence, with the constitution of NCLT & NCLAT, it is hoped that not only the
Corporate entities but also all the stakeholders associated with those entities are
benefitted.
Composition of NCLT – Qualification of President and Members of NCLT
• The President shall be a person, who is or has been a Judge of a High Court
for five years
• Judicial Member: The qualification for being appointed as the Judicial
Member shall be:
→ He is, or has been, a judge of a High Court; or
→ He is, or has been, a District Judge for at least five years; or
→ He has, for at least ten years been an advocate of a court
• Technical Member: The qualification for being appointed as the Technical
Member shall be: -
→ He has been a member of the Indian Corporate Law Service or Indian
Legal Service, for at least fifteen years, out of which at least three
years he should have been in the pay scale of Joint Secretary to the
Government of India or equivalent or above in that service; or
→ He has been, in practice as a chartered accountant for at least fifteen
years; or
→ He has been, in practice as a cost accountant for at least fifteen
years; or
→ He has been, in practice as a company secretary for at least fifteen
years; or

→ He is a person of proven ability, integrity and standing having special
knowledge and experience, of not less than fifteen years, in law,
industrial finance, industrial management or administration,
industrial reconstruction, investment, accountancy, labour matters,
or such other disciplines related to management, conduct of affairs,
revival, rehabilitation and winding up of companies; or
→ He has been, for at least five years, a presiding officer of a Labour
Court, Tribunal or National Tribunal constituted under the Industrial
Disputes Act, 1947.
Tenures of the President and members of the NCLT
• The President and every other Member of the Tribunal: 5 years, but shall be
eligible for re-appointment for another term of 5 years.
• A Member of the Tribunal shall hold office as such until he attains;
(a) in the case of the President, the age of 67 years
(b) in the case of any other Member, the age of 65 years
• A person who has not completed 50 years of age shall not be eligible for
appointment as Member.
• The Member may retain his lien with his parent cadre or Ministry or
Department, as the case may be, while holding office as such for a period
not exceeding one year.
Composition of NCLAT – Qualification of Chairperson and Members of NCLAT
• The Chairperson shall be a person who is or has been;
→ Judge of the Supreme Court; or
→ The Chief Justice of a High Court.
• Judicial Member: A Judicial Member shall be a person who is or has been;
→ Judge of a High Court; or
→ Judicial Member of the NCLT for five years
• Technical Member: A Technical Member shall be a person of proven ability,
integrity and standing having special knowledge and experience, of not less
than 25 years, in law, industrial finance, industrial management or
administration, industrial reconstruction, investment, accountancy, labour

matters, or such other disciplines related to management, conduct of
affairs, revival, rehabilitation and winding up of companies.
• The number of members shall not exceed 11.
Tenures of Chairperson and members of the NCLAT
• The chairperson or a Member of the Appellate Tribunal : 5 years, shall be
eligible for re-appointment for another term of 5 years.
• A Member of the Appellate Tribunal shall hold office as such until he attains
(a) in the case of the Chairperson, the age of 70 years;
(b) in the case of any other Member, the age of 67 years
• A person who has not completed 50 years of age shall not be eligible for
appointment as Member
Powers of the NCLT
In light of the provisions under the Companies Act which have been made
effective, the NCLT has jurisdiction to:
• To entertain any claims of oppression and mismanagement of a company
and to pass any order that the NCLT may deem fit in this regard;
• To adjudicate proceedings and cases initiated before the CLB under the Old
Act, which now stand transferred to the NCLT; and
• To exercise powers under various sections of the Companies Act which
have been notified and made effective by the Government of India,
including
(a) power to pass any order against a company incorporated by
providing false information or by fraud,
(b) power to grant approval for alteration of articles of a company, if
such alteration changes its nature from public to private, and
(c) power to provide approval for issuance of redeemable preference
shares by a company under certain circumstances.
All appeals against any order of the NCLT may be filed by the aggrieved parties
with the NCLAT. Any appeal against the orders of the CLB before the constitution
of the NCLT would continue to lie before the relevant High Court and not the
NCLAT. Currently, for matters pertaining to the winding up of companies and sick

companies, parties would have to continue to approach either the concerned
High Courts, the BIFR or the AAIFR.
The formation of the NCLT and the NCLAT is a significant step towards attaining
fast and efficient resolution of disputes relating to affairs of the Indian corporates.
These tribunals provide holistic solutions to issues being faced by companies,
including those of winding up, oppression/mismanagement and insolvency. Being
the sole forum dealing with company related disputes, these tribunals would also
eliminate any scope for overlapping or conflicting rulings and minimize delays in
resolution of disputes, thus, proving to be a boon for litigants.
Jurisdiction of the NCLT
The Tribunal is bound by the rules laid down in the Code of Civil Procedure Code
and is guided by the principles of natural justice, subject to the other provisions of
this Act and of any rules that are made by the Central Government. The Tribunal
and the Appellate Tribunal has the power to control its own procedure.
Further, no civil court has the jurisdiction to consider any suit or proceeding with
reference to any matter which the Tribunal or the Appellate Tribunal is
empowered to decide.
The jurisdiction of the NCLT are as follows:
• Class Action (Section 245): Class Action comes under Section 245 of the
Indian Companies Act, takes action against frauds and improprieties where
the shareholders and depositors are the main victims. There has been a
long chain of cheating where the companies registered under the law drain
dry the investments and savings of their investors and shareholders. The
Companies Act, 2013 has presented measures to effectively bring down the
offenders by subjecting the guilty to punishment, wherein they ought to
give compensations to the victims for the losses on account of the
fraudulent practices.
One or more plaintiffs can file a lawsuit on behalf of a large group and
accelerate the procedure, thereby representing a whole group of, perhaps,
geologically dispersed class of people: shareholders or depositors, who are

being wronged. Section 245 has brought great relief to the investors,
protecting their assets and safeguarding their rights. Class Action can be
filed against both private and public run companies with an exception for
banking companies.
• Refusal to Transfer Shares (Sections 58 & 59): Under Sections 58 and 59, if a
company refuses to register a transfer or does any malpractices leading to
dissatisfaction of the transferor or transferee, the latter is entitled to
appeal to the National Company Law Tribunal, after a period of two
months. The two Sections, in effect, give importance to contracts or
arrangements for transferring securities entered into by two or more
people with respect to valid conditions.
• Oppression and Management (Section 241): The Tribunal, under Section
241 grants any member permission to find justice for past and present
instances of oppression and mismanagement. Thus, the provision sets forth
remedies for any member or ex-member of a company or Central
Government subjected to the crime under scrutiny. A member can file an
application to the Tribunal upon the grounds that the affairs of the
company are run in a way prejudicial to public interest, prejudicial and
oppressive towards members of the company or prejudicial to the very
interest of the company.
• Reopening of Accounts and Revision of Financial Statements (Section 130,
131, 447 & 448): Section 130 and 131 read along with Section 447 and 448
provide for measure taken against the menace of falsification of company
accounts. These Sections refrain companies from suo muto opening their
accounts and revising their financial statements. Section 130 gives the
Tribunal power to direct a particular company to reopen its accounts under
certain given circumstances. The company is allowed to revise its financial
statement under Section 131 but prohibits the reopening of any accounts.
• Deregistration of Companies (Section 7): Section 7 of the Act preserves
power upon the Tribunal to deregister or dissolve companies that are found
to have attained ‘registered’ status through illegal and wrongful manner. In
essence, the procedural errors of registration of companies can be

investigated or questioned by the Tribunal, if found suspicious. Also, the
Tribunal can declare the liability of members unlimited.
• Deposits: Deposits under the Companies Act, 2013 includes any receipt of
money in the form of loan or deposit in any other form by a company. It is
also to be noticed that deposits are not inclusive of such categories of
amounts that may be prescribed in consultation with the Reserve Bank of
India (RBI). Chapter V of the 2013 Act and the Companies (Acceptance of
Deposits) Rules, 2014 deals with deposits and defines the regulations of
deposits. Deposit Rules provide aggrieved depositors with the remedy of
class actions so that they can seek justice for the omissions of the
companies which hurt their depositor rights.
• Power to Investigate: Chapter XIV of the Companies Act, 2013 confers upon
the Tribunal the power of investigation. The Tribunal can authorize an
investigation into the affairs of any company if or when an application is
filed against the particular company by 100 members. The investigation can
be extended to the ownership of companies. Also, if a person outside the
company is able to provide conditions acceptable to NCLT, the latter holds
power to authorize an investigation. The court can in course of action
freeze company assets under given conditions and place restriction orders
on securities.
• Conversion of Public Company to Private Company: The Tribunal in
accordance with Section 13-18 has a say in the conversion of public
companies to private companies. This authority not only includes the
consent and confirmation for the conversion, it goes further. Section 459 of
the Act maintains that NCLT can impose certain terms and restrictions or
can grant approval with certain conditions.
• Convening General Meetings: ‘Annual general meetings’ (AGM) or
‘extraordinary general meetings’ (EOGM) are to be held to revise the
opinions of shareholders and provide a general outline of the company
workings. These meetings ought to follow procedures provided under the
Companies Act, 2013. If for some extraordinary reasons the AGM or EOGM

cannot be called, the Tribunal under the provisions of Sections 97 and 98 is
empowered to convene a general meeting.
Jurisdiction of NCLAT
• The National Company Law Appellate Tribunal is headed by the
Chairperson and consists of not more than eleven members. It is a higher
law governing forum than NCLT.
• The Appellate Tribunal hears appeals filed against the Tribunal court orders.
The appeal can be placed within 45 days from the date on which NCLT
announces its decisions. The Appellate Tribunal goes through the evidence
transferred from the Tribunal, making changes or confirming the order
given by the latter. This process happens within a time span of 6 months.
• If a group or an individual is dissatisfied with the orders passed by the
Tribunal Court it is obvious to move in appeal to the Appellate Court where
the decisions of NCLT are reviewed and checked from the point of law and
facts.
• The NCLT is in charge of finding and gathering evidence while the NCLAT
decides cases based on the already collected evidence. If the outcome is
not satisfactory even then, one may approach the Supreme Court.

Module 7
7.1 Concepts: Winding up, Dissolution, Bankruptcy & Insolvency

Winding up of a Company
• Winding up of a company is the process through which life of a company
comes to an end and its property is administered for the benefit of its
members & creditors. An Administrator, called a liquidator is appointed
and he takes control of the company, collects its assets, pays its debts and

finally distributes any surplus among the members in accordance with their
rights.
• As per Section 2(94A) of the Companies Act, 2013, “winding up” means
winding up under this Act or liquidation under the Insolvency and
Bankruptcy Code, 2016.
• Section 270 of the Companies Act 2013, lays down the procedure for
winding up of a company. It provides two ways of winding up:
 By the Tribunal
 Voluntary
• Winding up by the Tribunal: As per the Companies Act 2013, a company can
be wound up by a Tribunal, if:
→ It is unable to pay its debts.
→ The company has by special resolution resolved that the company be
wound up by the Tribunal.
→ The company has acted against the interest of the sovereignty and
integrity of India, the security of the State, friendly relations with
foreign states, public order, decency or morality.
→ If the Tribunal is of the opinion that it is just and equitable that the
company should be wound up.
→ The Tribunal has ordered the winding up of the company under
Chapter XIX.
→ If the company has not filed financial statements or annual returns
for the preceding five consecutive financial years.
→ If the affairs of the company have been conducted in a fraudulent
manner or the company was formed for fraudulent and unlawful
purposes or the persons concerned in the formation or management
of its affairs have been guilty of fraud or misconduct.
• Voluntary Winding up: The winding up of a company can also be done
voluntarily by the members of the Company, if:
→ The company passes a special resolution for winding up of the
Company.

→ The company in general meeting passes a resolution requiring the
company to be wound up voluntarily as a result of the expiry of the
period of its duration, if any, fixed by its articles of association or on
the occurrence of any event in respect of which the articles of
association provide that the company should be dissolved.

Dissolution of a Company
• The entire procedure for bringing about a lawful end to the life of a
company is divided into two stages –
➢ ‘winding up’, and
➢ ‘dissolution’.
• Winding up is the first stage in the process whereby assets are released,
liabilities are paid off and the surplus, if any, distributed among its
members. Dissolution is the final stage whereby the existence of the
company is withdrawn by the law.
• Winding up in all cases does not culminate in dissolution. Even after paying
all the creditors there may still be a surplus. The company may earn profits
during the course of beneficial winding up. There may be a scheme of
compromise with creditors while company is in winding up and in all such
events the company will in all probability come out of winding up and hand
over back to shareholders/ old management.
• Dissolution is an act which puts an end to the life of the company. Winding
up is only a process while the dissolution puts an end to the existence of
the company.
• Thus, Dissolution and Winding Up are two different but related concepts.
Winding Up is a process led by a liquidator under the Tribunal where he
settles and distributes the assets of the companies amongst its creditors
and shareholders before the company is dissolved. After the winding up
process is complete then NCLT may pass the order of dissolution of the
company, that is, the company ceases to be in state of existence and its

name shall be struck off from the register of Registrar of Companies and
this shall be published in the Official Gazette.
Difference between Winding up and Dissolution
Sl.
No.
Winding up Dissolution
1. Winding Up is the first stage where
assets are realized, liabilities are
paid-off and surplus, if any, is
distributed amongst the
shareholders.

Dissolution is final stage where
company ceases to exist. In other
words, the legal existence of a
company is brought to an end by
dissolution.
2. Winding up precedes the
dissolution.
Dissolution is the final stage where
the existence of company is
withdrawn by law.
3. Winding up is carried on by
liquidator appointed by company/
court.
Order for dissolution is always given
by the court.
4. Creditors can prove their debts in
winding up proceeding.
It is not possible on dissolution.
5. The liquidator can represent the
company during winding up
proceeding till its dissolution.
Once the order of dissolution is
made by the Court, liquidator
cannot represent the company.
6. Winding up proceeding can be
started without the intervention of
the court.
For the dissolution of the company,
order of the court is essential.
7. Any person can proceed against the
company which is being wound up.
No proceedings can be started
against the company which has
been dissolved.

Insolvency and Bankruptcy
• Insolvency is a state when a person, company or organization’s liabilities
exceeds its assets and is unable to pay off his creditors. Insolvency can be
defined as a financial condition, where an individual or entity is unable to

meet the financial obligations as they are due for payment. It is often
confused with the term bankruptcy, but they are different.
• Bankruptcy is a situation when the court of law has declared the insolvency
of a person or entity and passed orders for its resolution, i.e. the property
of the bankrupt is disposed of, so as to pay creditors.
• In other words, the fundamental difference between insolvency and
bankruptcy is that the former refers to a state when the debtor is not able
to pay the debts due to excessive liabilities over the assets, whereas the
latter implies a legal scheme, wherein the court determines insolvency, and
the bankrupt seeks relief.
• Insolvency is a financial state however bankruptcy is a legal procedure to
help people facing insolvency resolves their financial state with help of
government.
Insolvency
Insolvency is a situation which arises due to the inability to pay off the
outstanding debts on time to the creditors because the assets are not enough to
cover up the liabilities.
In the case of a company, this condition is caused due to the continuous fall in
sales, and it doesn’t have enough cash to meet out its day to day expenses of the
business, for which it takes loans from the creditors or banks or any other
financial institution. This results in the insolvency of the company in the form of
liquidation, voluntary administration, and receivership.
In legal terms, insolvency is a state where the liabilities of an individual or an
organization exceeds its asset and that entity is unable to raise enough cash to
meet its obligations or debts as they become due for payment. Technically
insolvency could be a financial state when the value of total assets of an individual
or a group exceeds its liabilities.
When an individual is unable to pay off his liabilities and debts then he generally
files for bankruptcy. Here he asks for help from government to pay off his debts
to his creditors. Bankruptcy could of two types, namely, reorganization

bankruptcy and liquidation bankruptcy. Usually people tend to restructure the
repayment plans to pay them easily under reorganization bankruptcy. And under
liquidation bankruptcy, the debtor tends to sell off certain of their assets to pay
off their debts for their creditors.
A person facing insolvency needs to take corrective actions to rectify its situation
to avoid possible bankruptcy. This can be done in many ways like generating
surplus cash or by minimizing the overhead cost. This can also be done by
negotiating the repayment terms with your lenders.
Bankruptcy
Bankruptcy is a situation in which an individual/organization sends an application
to the relevant court; wherein he declares himself as insolvent due to his inability
to pay off debts and expenses, seeking to be declared as a bankrupt. Now, the
court may decide the appropriation of the personal property of the insolvent
among his various creditors. It is the last stage of insolvency and gives a new lease
to the insolvent to start afresh, i.e. it relieves the individual or a company from all
the debts and other disadvantages of insolvency.
One must follow a legal procedure to declare themselves bankrupt and get aid
from government to deal with their creditors. To do this, debtor must apply for
bankruptcy in a relevant court. Or else, one of his creditors files an application in a
relevant court to declare that entity or person as bankrupt. This can also be result
of a special resolution passed by Registrar of Companies for the entity to be
declared bankrupt.
Often an entity facing state of insolvency can be declared bankrupt. However, the
opposite is not true. Bankruptcy is a legal procedure which could be one of the
ways to solve insolvency. Also, insolvency could be temporary and can be fixed
with time. Often people may just ask for some legal protection from its creditors
for said period to allow him pay off its debts easily. In other words, all insolvent
entities might not be declared bankrupt however all bankrupt’s entities are said
to be insolvent.

Insolvency and Bankruptcy Code, 2016 defines the complete legal procedure
which governs the bankruptcy and insolvency related matters. It also intends to
ensure that bankruptcies are governed in fair manner and are not misused to
ditch the fellow creditors.
Difference between Insolvency and Bankruptcy
1. Insolvency is the inability to pay debts when they are due. Fortunately,
there are solutions for resolving insolvency, including borrowing money or
increasing income so that the company can pay off debt. The company
could negotiate a debt payment or settlement plan with creditors.
Bankruptcy is usually a final alternative when other attempts to clear debt
fail.
2. An individual or company can be insolvent without being bankrupt —
especially if the insolvency is temporary and correctable — but not the
opposite.
3. Insolvency is a state of economic distress, whereas bankruptcy is a court
order that decides how an insolvent debtor will deal with unpaid
obligations. That usually involves selling assets to pay the creditors and
erasing debts that can’t be paid. Bankruptcy can severely damage a
debtor’s credit rating and ability to borrow for years.
4. The Bankruptcy refers to a legal state in which an individual/company
becomes bankrupt, whereas the Insolvency relates to a financial state
where an individual/company becomes insolvent.
5. Bankruptcy is caused due to the inability of paying off the outstanding
debts while the Insolvency arises due to the non-payment of financial
obligations.
6. The Insolvency may not necessarily lead to bankruptcy while all bankrupt
individual/company are insolvent.
7. In Bankruptcy, the person/company goes to the court and voluntarily
declares himself as an insolvent.
8. Bankruptcy is initiated by the individual himself, wherein the
person/company goes to the court and declares himself as an insolvent,

therefore, the process is voluntary. On the other hand, insolvency is
involuntary.
9. Bankruptcy is the final stage of insolvency, resulting in winding up of an
individual or entity’s assets. Conversely, Insolvency is for a particular time
period only, until the business reaches a stage where it is ready to pay off
outstanding debts.
Similarities between Insolvency and Bankruptcy
• Both arise due to the non-payment of debts.
• In both the cases, liabilities exceed assets.

Liquidation under Insolvency and Bankruptcy Code 2016
1. Voluntary: Now dealt with under IBC, 2016
2. Compulsory: Sec. 271 (Unable to pay debts)
• Section 271(1)(a) of 2013 Companies Act, which dealt with the winding up
by Tribunal on account of inability to pay debts has been omitted by The
Insolvency and Bankruptcy Code, 2016.
• Under the Companies Act, 2013, winding up applications could be made on
account of “inability to pay debts”. The expression “inability to pay debts”
has been interpreted by Andhra Pradesh High Court in the case of Reliance
Infocomm Limited v. Sheetal Refineries Private Limited, to mean a situation
where a company is commercially insolvent, i.e. the existing and provable
assets would be insufficient to meet the existing liabilities.
• Therefore, a remedy to initiate winding up proceedings against financially
solvent companies that had defaulted in payment of debts was not
available under the earlier regime. However, this is now feasible under The
Insolvency and Bankruptcy Code, 2016.
• It must be noted that, if a petition is made to NCLT with a ground under
s.271(1)(a), the procedures which NCLT will adopt will be according to the
Insolvency and Bankruptcy Code, 2016, and not only according to the
Indian Companies Act, 2013.

• The Insolvency and Bankruptcy Code, 2016 relates to re-organization and
insolvency resolution of companies, partnership firms and individuals in a
time bound manner.
• The Insolvency and Bankruptcy Code, 2016 applies to matters relating to
the insolvency and liquidation of a company where the minimum amount
of the default is Rs. 1 lakh (may be increased up to Rs.1 cr by the
Government, by notification).
• The Code lays down two stages:
➢ Insolvency Resolution Process: It is the stage during which financial
creditors assess whether the debtor’s business is viable to continue
and the options for its re-organization and re-structuring are
suggested. (180 days are given to recover itself when it is in financial
distress. (Resolution Plan)
➢ Liquidation: In case the insolvency resolution process fails, the
liquidation process shall commence in which the assets of the
company are realized to pay off the creditors.
Thus, the process of winding-up of a company is not very simple, it includes within
it many complexities and technicalities. Earlier there was only one act, which
generally governed this area, but now with the enactment of the Insolvency and
Bankruptcy Code, 2016, it has become more difficult to apply these provisions
simultaneously and to decide precedence.
Case: Hindustan Development Corporation, Ltd. v Shaw Wallace???
Held: The contention that the creditors were entitled to Interest at the agreed
rates till the entire payment was made was quite untenable. It was a settled
principle of law, that as regards Interest after the date of presentation of the
winding-up petition, it was the discretion of the Court as to what interest it would
allow.
Since the Company was, as at present, agreeable to pay its creditors, in a manner
as they would have received payment of their debts, had their respective
winding-up petitions been disposed of by an order of the Court, it is my

considered view that no further interest should be allowed to accrue on their
principal dues as and from the date when payment is made.

Module 8:
*Going concern: means that the business has neither the intention nor the need
to liquidate or to materially curtail the scale of its operations. Simply stated,
a going concern is the ability of a business to meet its financial obligations when
they fall due.
*OC: Operational Creditor: Who gives Operational debt (is a debt given to the
debtors for the purposes of the operations of the company.)
For instance, the employee of the company is to be counted among the
operational creditor. The same goes for:
1. Suppliers of the company
2. The service providers
3. The Electricity department
4. The other utility department
*Financial Creditor (FC): Who provides financial debt to the company. means any
person to whom a financial debt is owed and includes a person to whom such
debt has been legally assigned or transferred to;
*Corporate debtor: A debtor is a company or individual who owes money. If the
debt is in the form of a loan from a financial institution, the debtor is referred to
as a borrower, and if the debt is in the form of securities, such as bonds, the
debtor is referred to as an issuer.
Insolvency and Bankruptcy Code (IBC/Code) is a time-bound process for
restructuring and revival of a Debtor Company, which involves the Committee of
Creditors (CoC), Interim Resolution Professional (IRP) / Resolution Professional
(RP) and the Adjudicating Authority (AA). IBC is a welcoming legislation, which
has brought in a positive perspective of improving credit culture in India by
creating a 'creditor driven regime'

Insolvency and Bankruptcy Code, 2016 (“IBC, 2016”) was notified by the
Government of India on 28th May 2016. IBC, 2016 basically consolidates the
insolvency laws for various entities under a single legislation.
It is equally applicable to companies, partnership firms, and limited liability
partnership firms. Insolvency and Bankruptcy Code, 2016 has empowered to
creditors to have time-bound resolution to their insolvency process rather than
dwelling for years to get their money back from a company going on a bad debt.
This Code empowers creditors and thus gives them the freedom to lend money to
Indian entrepreneurs with ease.
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-
1. To consolidate and amend the laws relating to re-organization and
insolvency resolution of corporate persons, partnership firms, and
individuals.
2. To fix time periods for execution of the law in a time-bound settlement of
insolvency (i.e. 180 days).
3. To maximize the value of assets of interested persons.
4. To promote entrepreneurship
5. To increase the availability of credit.
6. To balance all stakeholder’s interest (including alteration). Balance to be
done in the order of priority of payment of Government dues.
7. To establish an Insolvency and Bankruptcy Board of India as a regulatory
body for insolvency and bankruptcy law.

8. To establish higher levels of debt financing across a wide variety of debt
instruments.
9. To provide painless revival mechanism for entities.
10. To deal with cross-border insolvency.
11. To resolve India’s bad debt problem by creating a database of defaulters.
Under the Code :“Corporate applicant” means—
(a) corporate debtor ; or
(b) a member or partner of the corporate debtor who is authorized to
make an application for the corporate insolvency resolution process
under the constitutional document of the corporate debtor; or
(c) an individual who is in charge of managing the operations and
resources of the corporate debtor; or
(d) a person who has the control and supervision over the financial
affairs of the corporate debtor;

Meaning of Insolvency Professional
An Insolvency Professional is one who is registered with the Insolvency and
Bankruptcy Board of India (IBBI). They are enrolled with an Insolvency Agency and
they are involved in the dissolution process of an insolvent individual, companies,
LLPs or partnerships. These professionals are authorized to act on behalf of such
insolvent individual, companies etc. During the bankruptcy situation, the
insolvency professionals play a vital role in liquidating the entity assets and other
settlement processes. This process has gained momentum with the government
bringing in strict norms through Insolvency and Bankruptcy Code.

Cases sent by college:
Cases; Alpha and Omega diagnostics India Ltd. v Asset Reconstruction Co. of
India ltd.

An application of CIRP was filed by the Corporate debtor under Section 10 of IBC.
The main question before the NCLT was whether the personal properties of the

promoter given to banks as security for loan will be exempt from Moratorium
under Sec. 14(1) (c).
14(1)(c) any action to foreclose, recover or enforce any security interest, created
by the corporate debtor in respect of its property including any action under the
Securitisation and Reconstruction of financial Assets and Enforcement of
Security Interest Act, 2002. . .
NCLT interpreted Sec 14 (1) (c) stating that the word ‘its’ denotes the properties
owned by the corporate debtor itself. Thus, the contention of the debtor that
moratorium should take its course on all subject matter and assets (personal flats)
relating to matters pending . . . under SARFAESI was rejected
The property not owned by the Corporate Debtor do not fall within the ambits of
the Moratorium.
the SARFAESI Act may come within the ambits of Moratorium if an action is to
foreclose or to recover or to create any interest in respect of the property
belonged to or owned by a Corporate Debtor, otherwise not.
Sec 14 will thus have no application to properties not owned by the corporate
debtor including personal properties belonging to any director or promoter.

2. Binani Industries Ltd. v Bank of Baroda (case study)
Binani Industries was the Corporate debtor against whom CIRP was initiated.
Rajputana Properties was one of the Resolution applicants along with Ultratech
Cement Ltd. The question before NCLT was whether the resolution plan
submitted by them was discriminatory in nature on the ground that that it does
not fairly represent the interest of all the creditors and Stakeholders.
The Tribunal agreed to the contentions that there was prima facie discrimination
in the Resolution Plan submitted by Rajputana Properties.
Therefore, the NCLT held that the Resolution Plan submitted by Rajputana
Properties Pvt. Ltd was discriminatory and contrary to the scheme of I&B Code
and while rejecting the same, directed the CoC to consider other Resolution plans
including the revised plan submitted by Ultratech Cement Ltd.

The NCLT issued guidelines in that regard stating the objective of CIRP and what is
expected from committee of Creditors during a CIRP.
ISSUES BEFORE NCLAT
The issues for consideration before the Appellate Tribunal were:
• Whether the Committee of Creditors discriminated between the eligible
Resolution Applicants while considering the Resolution Plan of Rajputana
Properties Private Limited.
• Whether the Resolution Plan submitted by Rajputana Properties Private
Limited was discriminatory and in contravention to the provisions of the I&B
Code.
NCLAT while deciding this case, summarized the object of the I&B Code and the
Object of a Resolution Plan.
The objective of the Code can be summarized as below:
• Resolution
• Maximization of Value of Assets
• Promoting Entrepreneurship, availability of credit and
• Balancing the interests.
Objective of Resolution Plan
The I&B Code defines Resolution Plan as a plan for insolvency resolution of the
Corporate Debtor as a going concern. Resolution is not a sale or an auction, or a
recovery or liquidation; it is the resolution of the Corporate Debtor as a going
concern.
The present case can be held as a landmark decision by NCLAT as the decision
focused to extract maximum value from resolution of stressed assets and ensure
that interests of operational creditors (who are not part of COC) are also well
served.
It is equally pertinent to note that our IBC is based on the UK model and the main
intention is that the company should be pushed as a going concern during CIRP
but shutting it down and opting for liquidation is the last resort under the
compulsion of IBC.

Above all, the real intent and purport of IBC should not be frustrated due to any
lacuna left at any end as after all balance has got to be maintained between all
the stakeholders.
3. Canara Bank v Deccan Chronicle Holdings Ltd.
Moratorium: Appeal against prohibition of institution of or continuation of
pending suits against corporate debtor
Issue: Whether moratorium would affect any suit pending before SC or HC
Sec 14 (1) (i) specifically bars initiation of suits/ continuing of pending litigation/
execution of decree or order during the period of Moratorium.
• But, Moratorium would neither affect any suit or case pending before the
SC under Art. 32 or an order passed under A.136 nor affect the power of HC
under A. 226.
• However, the suit if filed before any HC under original jurisdiction which is a
money suit or suit for recovery, against the corporate debtor such suit
cannot proceed after declaration of moratorium under Section 14 of the IB
Code.
• Financial creditor Bank filed application under Section 7 against corporate
debtor for initiation of corporate insolvency resolution process.
• The Tribunal admitted the application and passed order of moratorium
under Section 14, prohibiting institution of or continuation of pending suits
against the corporate debtor.
• Thus, the bank challenged the impugned order on the ground that NCLT
could not exclude any court from purview of Moratorium for purpose of
recovery of amount or execution of any judgment or decree, including
proceeding, if any, pending before the HCs and SC against the corporate
debtor.
Hence the appeal was dismissed.

4. Case: Devendra Padamchand Jain v SBI

VNR Infrastructure Industries (Corporate debtor)
D. P. Jain was the IRP appointed by CoC, however, after the liquidation order was
passed under Section 33, he was removed by NCLT and Mr. TSN Raja was
appointed as the liquidator by the NCLT.
D. P. Jain challenged this removal stating that NCLT had no jurisdiction to do so
except under Sec 34(4) and only the CoC could replace an IRP under Sec 27 or Sec
22(2).
NCLT, however, did not agree to the said contention and held that NCLT is
empowered to replace the IRP if the Resolution Plan submitted under Sec 30 is
rejected for failure to meet the requirements of Sec 30(2) of IBC (RP is required to
examine each resolution plan regarding repayment issues before finalizing the
Plan) and may appoint a new liquidator if the IRP fails to meet the criteria under
Sec 34(4). [(4) The Adjudicating Authority shall by order replace the resolution
professional. . . . ]

5. Case: Innoventive Industries v ICICI Bank, 2017
Corporate Debtor: Innovative Industries had CDR (Corporate Debt Restructuring)
arrangements with 19 companies including ICICI bank.

Brief about the dispute- what led to it
1. Earlier, ICICI Bank had taken Innoventive Industries to NCLT for the recovery
of its due as the company had defaulted on loan repayment.
2. The NCLT had given a verdict in favour of the ICICI Bank, which Innoventive
Industries challenged in the National Company Law Appellate Tribunal
(NCLAT), where it received yet another setback.
3. The company later filed an appeal in the Supreme Court seeking relief
under the Maharashtra Act, which states that if a company is facing
bankruptcy, protection needs to be provided for the employees.
NCLT’s verdict
NCLT had struck down the company’s plea and admitted the case and an interim
resolution professional (IRP) was appointed for the company.

The company’s promoters had also approached the Bombay high court and the
Supreme Court but their pleas were rejected.
Supreme Court’s rulings
• The judgement of the Supreme Court, in the case of Innoventive
Industries vs ICICI Bank is a shot in the arm for the regime established
under the Insolvency and Bankruptcy Code, 2016.
• This case related to the first-ever application filed for initiating
insolvency proceedings under the new Code.
• The case involved contradictory provisions in the Code and a state
law of Maharashtra state, Maharashtra Relief Undertakings (Special
Provisions) Act, 1958. This state law provided for overtaking of
industries by the state by declaring them ‘relief undertakings’. This is
done to protect employment of the people who are working in such
an undertaking.
• The Code instead provides for overtaking of an undertaking’s
business by an ‘Insolvency Professional’ through a committee of
creditors. In the instant case, insolvency application was filed against
Innoventive Industries which later claimed to be a relief undertaking
under the Maharashtra Act. This brought the two legislation on a
collision course, for the simple reason that enforcement of one will
hinder the enforcement of the other.
• Therefore, the Court dealt with the classical constitutional law
doctrine of repugnancy.
• (Article 254) As per this doctrine, whenever central and state laws
are framed on the same subject and are contradictory to each other,
it is the central law which prevails and the state law is rendered void.
• In the instant case, The NCLT had ruled that Innoventive Industries
can’t claim any relief under Maharashtra Act.
The SC held that the central law will always prevail if it comes in conflict with the
state law. The state law therefore was held inoperable to the extent that it was in
contradiction to the Code.

6. Macquarie Bank Ltd. v Shilpi Cable Technologies, 2017
The court was faced with the question as to whether Sec. (3)(c) of IBC was a
mandatory provision and was a condition precedent for an operational
creditor (OC) to file for a CIRP application under Sec 9. Under Sec. 9(3)(c),
an OC needs to provide a certificate from the FI in which its account is
maintained and that certificate needs to state that there is no payment of
operational debt to creditor by the corporate debtor. The SC held that sec.
9(3)(c) is not a mandatory provision since an OC’s account might be with a
foreign bank or a non scheduled bank which is outside the definition of a FI
under Sec 3(14). Such impossibility of non-compliance would not prevent
an OC to maintain an application of CIRP.

Case: K. Sashidhar V Indian Overseas Bank & Ors., 2018

The Supreme Court’s decision addressed a critical issue in the corporate
insolvency resolution process (CIRP) – i.e. the scope of judicial scrutiny over a
commercial decision taken by the committee of creditors (“CoC”) to approve or
reject a resolution plan.

The Supreme Court passed a common judgment in appeals arising out of the
decisions of the National Company Law Appellate Tribunal (NCLAT) in the matters
of Innoventive Industries Limited and Kamineni Steel & Power India Pvt. Limited
and re-emphasised the CoC’s autonomy in matters of approval or rejection of a
resolution plan based on their commercial decision/judgment.

• In Innoventive the resolution plan had garnered approval of only 66.57% of
the CoC by voting share. The erstwhile management of Innoventive sought
to set aside the rejection of the resolution plan by certain members of the
CoC on the grounds of it being malicious and without valid reasons. The
National Company Law Tribunal (NCLT) ordered liquidation in this case.
• In Kamineni, the NCLT approved a resolution plan, holding that 78.63% of
the CoC by voting share had approved the same. It did not, however, take
into account the votes of the CoC who had abstained/not participated in
the voting.

• The NCLAT directed liquidation in both cases as the respective resolution
plans had not been approved by the requisite majority of 75% (as then
applicable) of the CoC.

Judgement of the Supreme Court
• held that the NCLT’s jurisdiction is limited to the NCLT being satisfied that
the resolution plan meets the requirements specified in Section 30(2) of the
Insolvency and Bankruptcy Code, 2016 (Code).

• That is, the Resolution Plan contains provisions in relation to (i) priority of
payments (as prescribed), (ii) management of the corporate debtor, (iii)
implementation and supervision of resolution plan, and (iv) compliance
with applicable law, and nothing more. Hence, the role of the NCLT while
considering a resolution plan has been clearly circumscribed.

• Thus, the judgement outlines and limits the scope of challenges that can be
taken against the decision made by the financial creditors/CoC in approving
or rejecting a resolution plan. The decision has put the issue of primacy of
CoC beyond doubt that the commercial decision of the CoC is non-
justiciable and will not be open to scrutiny by the NCLT.

• However, as the control of a corporate debtor shifts to the creditors in
insolvency, the decisions taken by the CoC in the course of the resolution
process impact and affect the rights of all stakeholders. The role of the CoC
in the resolution process must therefore balance responsibilities and duties
towards all such stakeholders.

The recent decisions of the Supreme Court in Arcelor Mittal India Pvt. Ltd. v Satish
Kumar Gupta & Ors. and Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India have laid
emphasis on the responsibilities of the CoC to inter alia:
• ascertain the legality of a resolution plan and the eligibility of the resolution
applicants;
• make all endeavors for insolvency resolution with liquidation being the last
resort;

• safeguard interests of other creditors
• that resolution plans must provide fair equitable treatment to operational
creditors.
• While the commercial decision of the CoC in evaluating a Resolution Plan is
protected from judicial scrutiny, the decisions taken while performing such
other responsibilities by the CoC in the course of the resolution process
remain subject to challenge under Section 60 of the IBC.
Case: Swiss Ribbons Pvt. India v UOI, 2018

The Supreme Court's decision in Swiss Ribbons v. Union of India upholding the
constitutionality of the provisions of the Insolvency and Bankruptcy Code, 2016
(IBC or the Code) is a landmark in the development of the Code.
→ The Supreme Court has concluded that the IBC is a beneficial legislation and
is for the benefit of the corporate debtor and therefore the admission of a
company into Corporate Insolvency Resolution Process (CIRP) cannot be
seen from the traditional lens of adversarial proceedings.
→ The Supreme Court judgment will have a significant impact on a number of
stakeholders in insolvency resolution. It will aid in early identification and
resolution given that the admission process as contemplated in Section 7 of
the Code as interpreted by the Supreme Court in Innoventive has been
validated after the constitutional test.
→ By upholding the constitutionality of the statute, the judgment in Swiss
Ribbons has laid the foundation for implementation of the IBC. It brings
back focus on the intent of the IBC to resolve and revive a corporate debtor
and thereby significantly reinforces the efforts of the creditors and other
stakeholders to achieve such end.
→ This judgement will also boost the confidence of investors and bidders in
acquiring assets through IBC as well as generally improve ease of doing
business in India.

Concept of CIRP (Corporate Insolvency Resolution Process) (class??)

8.2 Stages of CIRP [Not done in detail in class]
When an Individual or an Entity is unable to meet its outstanding debts to the
investors, creditors or lenders is termed as Insolvent and this state is called
Insolvency. Insolvency can be resolved by two ways as mentioned below:
1. Modifying the repayment plan to the creditors or investors.
2. Selling off the assets of the company and paying back to the creditors or
investors from the sale proceeds of the assets.
It would be more precise to understand and the Company Insolvency Resolution
Process stage wise in detail as laid out in the code.
• Where any corporate debtor commits a default, a financial creditor, an
operational creditor or the corporate debtor itself may initiate corporate
insolvency resolution process in respect of such corporate debtor. (Section
6)
• In case a corporate debtor makes a default in repayment of dues of the
creditors, the financial creditor/s, an operational creditor or the corporate
debtor through Corporate applicant or any authorized member, a person
who has the controlling capacity over the financial affairs of the corporate
debtor, has the power to start the insolvency resolution process.
• In order to initiate the resolution process, an application has to be made to
National Company Law Tribunal (NCLT) under (Section 10, IBC, 2016 in case
of Corporate Debtor, Section 7 and 9 of IBC, 2016 in case of Financial
Creditors and Operational Creditors).
• A ten days demand notice under (Section 8(2) of IBC, 2016 in case of
Operational Creditors) has to be given to the corporate debtor by the
Operational Creditors before he approaches the NCLT under Section 9 of
IBC, 2016). However, an operational creditor can directly approach the
NCLT if the corporate debtor does not repay the outstanding dues or fails
to show any existing difference.
• The Code states that the insolvency process of a Corporate Debtor must be
concluded within 180 days from the date of initiation in the NCLT (Section

12, IBC of 2016). The claims of the Creditors shall be frozen for a period of
six months on admission of application by NCLT. During this time, the NCLT
shall listen to the options to revive and decide the future course of action.
It is further clarified that unless a resolution plan is made or liquidation
process is initiated, no legal claim shall be sought against the corporate
debtor in any other forum or Court (Section 14 of IBC, 2016). “Resolution
plan” means a plan proposed by any person for insolvency resolution of the
corporate debtor as a going concern in accordance with Part II of the Code.
• When the application for insolvency is accepted under Section 7/9/10 of
IBC, the NCLT within 14 days appoints an Interim Resolution Professional
(IRP) on receiving a confirmation from the Insolvency and Bankruptcy Board
of India (IBBI). The appointed IRP then takes up the responsibility of the
debtor’s properties and functioning. He also collects all the information
that is relevant with regard to the financial condition of the debtor from
information utilities. IRP is appointed for a term of 30 days only, within
which he does all the necessary scrutinization (Section 18, IBC, 2016).
• The next step is to make a public announcement about the commencement
of corporate insolvency process so that claims from any other creditors can
also come forward, if any. A creditor’s committee is constituted by the IRP
post receiving any claims by public announcement (Section 13 of IBC,
2016).
• In the event any financial creditor is a related party of the defaulting
debtor, such a creditor will not have the right to represent, participate or
vote in the committee of creditors so constituted by the IRP.
• In order to be a part of the Creditor’s Committee, the average dues of the
operational creditors must be at least ten percent of the debt.
• The Committee of Creditors shall within first seven days of its incorporation
decide through seventy five percent votes whether the interim IRP should
be used as a Resolution Professional or should be replaced with someone
else.
• After the Creditor’s Committee finalizes the Resolution Professional, he is
appointed by the NCLT (Section 16 of IBC, 2016). The Resolution

Professional so appointed can be replaced anytime by the Creditor’s
Committee with a majority of seventy five percent votes. In the interim, i.e.
till the appointed of any new Resolution Professional, the Creditor’s
Committee can take decisions with regard to insolvency resolution by
seventy five percent majority voting.
• In the event majority (75%) of the financial creditors are of the view that
the case is very complex and more time extension is required, the NCLT
may grant a one-time extension of up to a maximum of 90 days over and
above the pre decided tenure of 180 days. It shall be the sole responsibility
of the Resolution Professional to manage and conduct the corporate
insolvency resolution procedure during such a term (Section 18 of IBC,
2016).
• To enable the resolution applicant for preparing a resolution plan, the
Resolution Professional shall compile a statistics note. A resolution
applicant can be defined as an individual who has the duty and
responsibility to submit a resolution plan to the Resolution Professional. The
Creditor’s Committee further receives the plan from the Resolution
Professional for its approval.
• On the resolution plan being approved, the next step by the Creditor’s
Committee is to come up with options on restructuring which can be either
coming up with a modified repayment plan or to simply liquidate the
properties of the company in order to recover dues.
• If the Creditor’s Committee fails to take any binding decision with regard to
the repayment by the debtor, the debtor’s assets are liquidated in order to
pay back the creditors. If there is a plan prepared for resolution, the same
shall be sent to NCLT for approval and implementation.
• The liquidation process commences only if:
➢ The Creditors Committee fails to submit the Resolution Plan within
the provided time frame to the NCLT.
➢ The Resolution Plan is rejected because of non-adherence to the
Code.

➢ The Creditor’s Committee takes a decision for liquidating the assets
by a majority vote.
➢ The Resolution Plan is flouted by the debtor
• No suit can be instituted by or against the corporate debtor during
liquidation process (Section 14 of IBC, 2016). The only exception, in this
case, can be through the liquidator representing the corporate debtor
based on the permission of the NCLT.
• The liquidator shall be the same person as the Resolution Professional lest
replaced. The liquidator so appointed shall constitute the liquidation estate
which shall comprise of all the properties, whether financial or immovable,
of the corporate debtor. The claims of the creditors may be received,
verified, admitted or rejected based on the final decision of the liquidator
within a prearranged time.
• In order to appeal to the adjudicator, the creditor gets a total of fourteen
days.
• Based on the priority, a security creditor may receive the proceeds from
sale of assets or realize the security interest by enforcing or dealing with
the secured asset as per the applicable laws related to him. He may either
relinquish his security interest or realize it based on his intent. Any
supplementary sum so realized shall be submitted to the liquidator.
• Although the security creditors will be paid by the liquidator on priority
basis out of the corporate debtor’s assets, his claim shall be considered
subordinate to the unsecured creditors to the extent of deficit. The
distribution shall be in manner laid down in the Code.
• All those persons who have any sort of individual rights over the assets of
the debtor shall also form a part of the liquidation procedure.
• There are certain funds which cannot be attached to the estate of the
debtor for recovery of debts. Such funds are provident fund, gratuity fund
and the pension fund because this amount belongs to the employees and
workmen and hence, they are given the priority with regard to these funds.
• Once all the assets of the corporate debtor are liquidated, the NCLT passes
an order to finally liquefy the corporate debtor.

8.3 Role of Insolvency Resolution Professional (not done in detail in class room)
According to Section 2 (19) of the IBC, 2016, “Insolvency Professional" means a
person enrolled under section 206 with an insolvency professional agency as its
member and registered with the Board as an insolvency professional under
section 207;
According to Section 2 (20) of the IBC, 2016, “Insolvency Professional Agency”
means any person registered with the Board under section 201 as an insolvency
professional agency.
The IBC provides for the appointment of an interim resolution professional. The
Code states that the Adjudicating Authority (i.e. the NCLT) can request the Board
(i.e. Insolvency and Bankruptcy Board of India, IBBI) to recommend an insolvency
professional who will act as interim resolution professional.
Section 16(1) of the Insolvency and Bankruptcy Code, 2016 requires the NCLT to
appoint an interim resolution professional within 14 days from the insolvency
commencement date. As the name suggests Interim resolution professional is
appointed for a very short period not exceeding 30 days from the date of his
appointment.
Duties/Roles/ Functions of an Insolvency Professional [not done in detail]
Section 18 of the Code prescribes Duties of Interim Resolution Professional (IRP)
as under:
(1) The IRP shall have to collect all information relating to the assets, finances
and operations of the corporate debtor for determining the financial
position of the corporate debtor, including information relating to:
(i) business operations for the previous two years;
(ii) financial and operational payments for the previous two years;
(iii) list of assets and liabilities as on the insolvency initiation date; and
(iv) such other matters as may be specified;

(2) The IRP shall receive and collate all the claims submitted by creditors to him
pursuant to the public announcement made.
(3) IRP shall constitute a committee of creditors;
(4) The IRP shall monitor the assets of the corporate debtor and manage its
operations until a resolution professional is appointed by the committee of
creditors;
(5) The IRP shall file the information collected with the information utility, if
necessary; and
(6) The IRP shall take control and custody of any asset over which the
corporate debtor has ownership rights as recorded in the balance sheet of
the corporate debtor, or with information utility or the depository of
securities or any other registry that records the ownership of assets
including:
(i) assets over which the corporate debtor has ownership rights which
may be located in a foreign country;
(ii) assets that may or may not be in possession of the corporate debtor;
(iii) tangible assets, whether movable or immovable;
(iv) intangible assets including intellectual property;
(v) securities including shares held in any subsidiary of the corporate
debtor, financial instruments, insurance policies;
(vi) assets subject to the determination of ownership by a court or
authority;
(7) It is obligatory on party of IRP to perform such other duties as may be
specified by the Board.

8.5 Role of Insolvency and Bankruptcy Board of India (IBBI) (not in detail in class
notes)
The board has following three key functions:
- Registers and regulates the Service Providers
- Lays down regulations related to insolvency and bankruptcy process

- Statistical and Research Activities
The Insolvency and Bankruptcy Board of India (IBBI) was established on 1st
October, 2016 under the Insolvency and Bankruptcy Code, 2016 (Code).
Section 196 of the Code provides for the powers and functions of the Board.
[not done in detail in class]
As per class notes: IBC,
Sec 2,
Sec. 3(8),(10),(11),(11),(12),(19),(20),(21),
Sec. 4
Sec 5 (1),(4),(5),(5a),
Sections:(6),(7),(8),(10),(11),(12),(14),(18),(20),(21),(24),6,7,8,9,10,11,12.12A,14,1
5,16,17,18,20,21,22,24,29,29A,30,31,33,188,196,206,208,209,214, cases

CORPORATE_LAW_NOTES. for LLB law students

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