logging in or signing up COMPANY LAW PPT FOR MEWAR (1) aquasunilo Download Post to : URL : Related Presentations : Share Add to Flag Embed Email Send to Blogs and Networks Add to Channel Uploaded from authorPOINT lite Insert YouTube videos in PowerPont slides with aS Desktop Copy embed code: Embed: Flash iPad Dynamic Copy Does not support media & animations Automatically changes to Flash or non-Flash embed WordPress Embed Customize Embed URL: Copy Thumbnail: Copy The presentation is successfully added In Your Favorites. Views: 1174 Category: Entertainment License: All Rights Reserved Like it (0) Dislike it (0) Added: March 29, 2011 This Presentation is Public Favorites: 0 Presentation Description No description available. Comments Posting comment... By: divesh.vithal (20 month(s) ago) nice ppt Saving..... Post Reply Close Saving..... Edit Comment Close By: prathapsaran (27 month(s) ago) im working as a lecturer. this presentation is very easy to understand by students and also it is easy to explain.. Saving..... Post Reply Close Saving..... Edit Comment Close Premium member Presentation Transcript COMPANY LAW: COMPANY LAW RAVINDRA S.PUNDHIR LL.M(A.M.U) M.NO:9873287738 E-Mail : email@example.com 1 FEATURES OF COMPANY : FEATURES OF COMPANY Company is a Separate Legal Entity Perpetual Succession It can sue and be sued in its own name The liability of the shareholders are limited to the extent of their shareholdings Separate Management It can hold property in its own name Common Seal One Share One Vote Concept. 2 LIFTING THE CORPORATE VEIL : LIFTING THE CORPORATE VEIL we have already studied once a company is formed and registered as per law, it is a separate legal entity from its members. Further it has been established by the judiciary also that a company is a quite distinct legal personality from the persons who have formed it. House of Lords has also observed it in a very famous case namely Solomon Vs Solomon and Company Ltd . But there are certain exceptions to this fundamental principle of separate corporate personality, where the veil is lifted or pierced and the identity of the members is revealed. It means that where the law disregards the corporate entity and pays regard instead to the individual members behind the legal facade due to certain situations or circumstances, it is known as lifting the veil of corporate personality. 3GROUNDS OF LIFTING CORPORATE VEIL: GROUNDS OF LIFTING CORPORATE VEIL 1. Reduction of Membership below the Statutory minimum [Section 45] If at any time the number of members of a company is reduced, in case of a public company, below seven, or in case of a private company, below two, and the company carries on business for more than six months while the number is so reduced, every continuing member of the company who is aware of the fact, shall be individually liable for the payment of the whole debts of the company contracted during that time, and may be severally sued therefore [Section 45]. It may be observed, thus, that the law pierces the corporate veil under this section and makes those cloaked behind the company personally liable (in spite of their limited liability otherwise) in addition to the liability of the company as a separate legal person. One thing is notable here that the company still remains intact. The creditor of the company may file a suit against the company. He may also choose to ignore the company and file a suit against the members. Not only that, he may file a suit against any member for the whole obligation. 4Slide 5: 2. Misdescription of Name [Section 147(4)(c)] If an officer of a company signs a cheque, bill of exchange, Hundi and promissory note, wherein the name of the company is not mentioned, apart from penal liability, the officer becomes personally liable on those instruments, unless the company duly pays those amounts. The object of this provision is that the third parties should be enabled to know that they are dealing with limited liability companies. We must note here that if the company pays those moneys, the officer will not be personally liable. However, penal liability will be attracted 5Slide 6: 3. Fraudulent Trading [Section 542] This happens in the course of winding up of a company. In the winding up proceedings, it appears that certain persons have carried on the business of the company with the intent to defraud the creditors of the company, or for any fraudulent purpose. Such persons can be made personally liable for all or any of the debts of the company without any limitation as to liability, as the tribunal may direct. An application may be made to the tribunal by the official liquidator or any creditor of the company. 6Slide 7: 4. Company is formed to escape a legal obligation Where a company is formed to escape a legal obligation the courts will not recognize such a company because the corporate device can not be used as a mask to escape a legal obligation. 5. To find out the character of a company A company is not a citizen but it can have nationality and residence. The birth place of the company, that is to say, the country where it is incorporated is its nationality. As we all are aware about the fact that due to the outbreak of war, a contract becomes void due to the enemy alien. But how do we decide whether a company is an enemy alien or not? We have to look behind the company and find out who are controlling the company. This was decided in Daimler & Co. Vs Continental Tyre Co. Ltd 7KINDS OF COMPANIES: KINDS OF COMPANIES Companies Limited by Shares These are the companies which have the liability of their members limited by the Memorandum to the amount, if any, unpaid on the shares held by them. The main feature of these companies is the limited liability of the shareholders, i.e. the liability of a member, in the event of company being wound up, is limited to the extent of the amount that remains unpaid on shares held by them. The companies belonging to this class are, by far, the largest in numbers in India. Companies Limited by Guarantee In a company limited by guarantee, the liability of the share holders to contribute to the assets of the company, in the event of a company being wound up, is limited by the memorandum of Association. The extent, to which the shareholders are liable to contribute, is the amount to which the shareholders have agreed to guarantee. In this category of companies, if the company has a share capital, the shareholders are liable to pay the amount which remains unpaid on their shares plus an amount payable under the guarantee. Such liability arises, because a guarantee is a promise to pay. Unlimited Companies In this class of companies the liability of shareholders depends upon the debts incurred by the company. There is no limit to liability and the shareholders are fully liable for all the debts of the company, how highsoever it may be. [Sec. 12(2)C] 8Slide 9: PUBLIC COMPANY As per Section 3(1)(iv), a public company means a company which– a) is not a private company, b) has a minimum paid up capital of Rs. 5 lakhs or such higher paid up capital, as may be prescribed, c) is a private company which is a subsidiary of a company which is not a private company. Note : The requirement as to minimum paid up capital does not apply to a company registered under section 25 (licensed companies) PRIVATE COMPANY According to Section 3 of the Indian Companies Act, 1956, private company means a company which, by its Article of Association– a) Restricts the right to transfer its shares, if any; b) Limits the number of its members to fifty excluding employee and ex-employee members; c) Prohibits an invitation to the public to subscribe to any shares in or debentures of the company. 9Slide 10: COMPANIES DEEMED TO BE PUBLIC LIMITED COMPANY A private company will be treated as a deemed public limited company in any of the following circumstances: 1. Where at least 25% of the paid up share capital of a private company is held by one or more bodies corporate, the private company shall automatically become the public company on and from the date on which the aforesaid percentage is so held. 2. Where the annual average turnover of the private company during the period of three consecutive financial years is not less than Rs. 25 crores, the private company shall be, irrespective of its paid up share capital, become a deemed public company. 3. Where not less than 25% of the paid up capital of a public company limited is held by the private company, then the private company shall become a public company on and from the date on which the aforesaid percentage is so held. 4. Where a private company accepts, deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such companies shall become public company on and from date such acceptance or renewal is first made. 10Slide 11: Holding and Subsidiary Companies ‘Holding Company’ and ‘Subsidiary Company’ are relative terms. Where two companies are under such terms that one control the other, then the controlling company is called the ‘Holding Company’ and the company which is controlled is called the ‘Subsidiary Company’. Section 4 of the Indian Companies Act, 1956, provides that a ‘Holding Company’ is one which– 1. Controls the composition of the Board of Directors of another company. 2. Where that another company is an existing company, in respect of which the holders of preference shares issued before the commencement of the companies Act of 1956 have the same voting rights in all respects as the holders of equity shares, exercises or controls more than half of the total voting power of such company or 3. Where that another company is any other company, holds more than half in nominal value of its equity share capital. If any one of the above conditions are satisfied, then the former is the holding company of which the later is treated as a subsidiary company. 11Slide 12: SECTION 25 COMPANIES Under the Companies Act, 1956, the name of a public limited company must end with the word ‘limited’ and the name of a private limited company must end with the words ‘Private Limited’. However, under section 25, the Central Government may allow companies to remove the word “Limited/Private Limited” from the name if the following conditions are satisfied– 1. The company is formed for promoting Commerce, Science, Art, religion, charity, or other socially useful objects. 2. The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects. GOVERNMENT COMPANIES Government companies means any company in which not less than 51% of the paid up share capital is held by the central government or any state government or partly by the central government and partly by one or more state governments and includes a company which is a subsidiary of a government company. Government companies are also governed by the provisions of the Companies Act. However, the central government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications or adoptions as may be specified to such government companies. FOREIGN COMPANIES Foreign companies means a company incorporated in a country outside India under the law of that other country and has established the place of business in India. (Section 591 to 597 and 584). 12 DISTINCTION B/W PUBLIC AND PRIVATE COMPANY : DISTINCTION B/W PUBLIC AND PRIVATE COMPANY The main differences between a public and a private company are as under– 1. The minimum number of persons required to form a public company is seven whereas only two or more persons may form a private company. (Section 12) 2. The maximum number of members in case of a public company is not fixed whereas in case of a private company the number of members is limited to fifty. [Section 3(1)(iii)(b)] 3. There is no restriction of transfer of shares in case of a public company, but a private company having a share capital must have in its article, restrictions on the rights of transfer. (Section 27(3)] 4. A public company extends its invitation to public to subscribe to shares whereas a private company can not extend such invitation to the public. 5. Every public company and every private company which is a subsidiary of a public company shall have at least three Directors whereas every private company which is not a subsidiary of a public company shall have at least two Directors [Section 252]. 6. A public company, on the application for registration of the Memorandum and the Articles of the company, should file with the Registrar a list of the persons who have consented to be directors of the company whereas it is not required in case of a private company. [Section 266(4) and (5)(b)]. 7. A public company is required to hold a statutory meeting within a fixed time period after the commencement of its business and to forward statutory report to the members and to file it with the Registrar whereas it is not required in case of a private company [Section 165]. 13Slide 14: MODE OF FORMING INCORPORATED COMPANY Under Section 12 any seven or more persons in case of a public company and any two or more persons in case of a private company may form an incorporated company for a lawful purpose– i ) Subscribing their names to a Memorandum of Association; and (II) Complying with other requirements in respect of registration. REQUIREMENTS TO BE GONE THROUGH BEFORE INCORPORATION : 1. Before the incorporation of the company the parties subscribing to the Memorandum of Association must file with the Registrar of companies- a. The Memorandum of Association; b. The Articles of Association c. The agreement (if any) which the company proposes to enter into with an individual, firm or body corporate, to be appointed its secretaries and treasurers; d. (except in case of a private company) a list of persons who have consented to be the directors of the company together with the consent in writing of each of such persons to act as such director and pay for his qualification shares. e. A declaration under section 33 by an advocate of the Supreme Court or of a High Court, an attorney or a pleader entitled to appear before a High Court, or a chartered accountant or by any director, manager, or secretary that all the requirements of the Act have been complied with. 2. On the documents mentioned above being filed with the Registrar, the Registrar issues a certificate known as the ‘Certificate of Incorporation’. This certificate is, by Section 35 of the Act, made conclusive proof of the fact that all the requirements regarding registration have been complied with. The company is, however, still not entitled to commence its business. Before it can do so, it has, if a public company, to secure a ‘certificate of commencement of business’ from the Registrar which will be granted by him only after some other legal formalities have been completed. 14 Pre-incorporation Contracts : Pre-incorporation Contracts COMPANY CANNOT BE SUED ON PRE-INCORPORATION CONTRACTS Sometimes contracts are made on behalf of a company even before it is duly incorporated. But no contract can bind a company before it becomes capable of contracting by incorporation. Two consenting parties are necessary to a contract, whereas the company, before incorporation, is a non-entity. A company has no status prior to incorporation. It can have no income before incorporation for tax purposes. Shares cannot be acquired in the name of a company before its incorporation. A transfer form is liable to be rejected where the name of a proposed company is entered in the column of transferee. In English and Colonial Produce Co., a solicitor, on the instructions of certain gentlemen, prepared the necessary documents and obtained the registration of a company. He paid the registration fee and incurred the incidental expenses of registration. But the company was held not bound to pay for those services and expenses. The company could not be sued in law for those expenses, in as much as it was not in existence at the time when the expenses were incurred and ratification was impossible. 15Slide 16: COMPANY CANNOT SUE ON PRE-INCORPORATION CONTRACT A company is not entitled to sue on a pre-incorporation contract. A company cannot by adoption or ratification obtain the benefit of a contract purporting to have been made on its behalf before the company came into existence. This was held in Natal Land & Colonization Co. vs. Pauline Colliery Syndicate . N. Co. entered into an agreement with one C, who acted o behalf of a proposed syndicate. Under the agreement N. Co. was to give the syndicate a lease of coal mining rights. The syndicate was then registered and struck a seam of coal and claimed a lease which N. Co. refused. An action by the syndicate for specific performance of the agreement or in the alternative for damages was held not maintainable as the syndicate was not in existence when the contract was signed. 16Slide 17: RATIFICATION OF PRE-INCORPORATION CONTRACT So far as the company is concerned, it is neither bound by, nor can have the benefit of, a pre-incorporation contract. But this is subject to the provisions of the Specific Relief Act, 1963. Section-15 of the Act provides that where the promoters of a company have made a contract before its incorporation for the purposes of the company, and if the contract is warranted by the terms of incorporation, the company may adopt and enforce it. Warranted by the terms of incorporation means within the scope of the company’s objects as stated in the memorandum. The contract should be for the purposes of the company. In Jai Narain Parasrampuria vs. Pushpa Devi Saraf , the Supreme Court held that the company has to accept the transaction but it is not necessary that the transaction should be mentioned in the company’s articles. Section-19 of the same Act provides that the other party can also enforce the contract if the company has adopted it after incorporation and the contract is within the terms of incorporation. 17Slide 18: PERSONAL RIGHT AND LIABILITY OF CONTRACTING AGENT The contracts which do not fall within the purview of the above provisions, the question arises whether they can be enforced by or against the agent who acted on behalf of the projected corporation? The answer will depend upon the construction of the contract. If the contract is made on behalf of a company not yet in existence, the agent might incur personal liability. For, where a contract is made on behalf of a principal known to both the parties to be non-existent the contract is deemed to have been entered into personally by the actual maker. 18Unit-2 memorandum of association: Unit-2 memorandum of association An important step in the formation of a company is to prepare a document called the Memorandum of Association . It is a document of great importance in relation to the proposed company. A Memorandum of Association is the primary document which sets out the constitution of a company and as such, it is really the foundation on which the structure of the company is based. It is also called the charter of the company . It defines its relation with the outside world and the scope of its activities. In the words of Lord Macmillan , ‘Its purpose is to enable shareholders, creditors and those who deal with the company to know what its permitted range of enterprise is’. 19Slide 20: A statutory definition of the term has been provided under Section 2(28) of the Company Act that “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 laws or of this Act” but this definition does not throw any light on the scope, use and importance of the memorandum in a company. Hence, it is desirable to mention another definition to make it clear, which has been observed in a very famous case by the court. 20Slide 21: In a leading case of Ashbury Railway Carriage Co. Vs Riche , Lord Cairns as far back as in 1875 observed that “The memorandum of association of a company is its charter and defines the limitation of the powers of a company. The Memorandum contains the fundamental conditions upon which alone the company is allowed to be incorporated.” So, it may be summed up that memorandum of Association is a life giving document of a company. 21Slide 22: Contents of the Memorandum Section 13 prescribes the fundamental clauses which the memorandum of every company incorporated under the Act must contain. These are: Name Clause Registered Office Clause Object Clause Liability Clause Capital Clause Association/Subscription Clause 22Slide 23: 1. Name Clause The name of the company is mentioned in the name clause. A public limited company must end with the word ‘Limited’ and a private limited company must end with the words ‘Private Limited’. One is free to choose any name for the purpose but the company cannot have the name which in the opinion of the Central Government is undesirable. A name which is identical with or nearly resembles the name of another company in existence will not be allowed. A company cannot also use a name which is prohibited under the Names & Emblems (Prevention of Misuse Act, 1950) or use a name suggestive of connection of government or state patronage. It is suggested that the word, ‘corporation’ should be used by companies with authorised capital of Rs.5 crores. The words like international, globe universal, continental, intercontinental, Asiatic, Asia etc. as the first word of the name, must have an authorised capital Rs.1 crore and if used within the name, Rs.50 lacs. For the same reason it is further required that such name of the company must be painted on the outside of every place where the business of the company will be carried on. 23Slide 24: Publication of Name by Company (Section 147) Every company is required to paint or affix its name and the address of its registered office, outside every office or place in which its business is carried on, shall have its name engraved on its seal, and shall have its name and address of its registered office mentioned in all its business letters and other documents. The company and its officers who make a default in fulfilling this duty are subject to punishment. 24Slide 25: 2. Registered Office Clause It is also known as the domicile clause . The state in which the registered office of the company is to be situated is mentioned in this clause. If it is not possible to state the exact location of the registered office, the company must state to provide the exact address either on the day on which it commences to carry on its business or within 30 days from the date of incorporation of the company, whichever is earlier . Notice in form 18 must be given to the Registrar of companies within 30 days of the date of incorporation of the company. The registered office of the company is the official address of the company where the statutory books and records must normally be kept.. All communication to the company must be addressed to it’s registered office. 25Slide 26: A company can shift it registered office from one place to another within the same city, town or village. Shifting of the registered office from one state to another is a complicated affair because it involves alteration of the memorandum itself. So, the Memorandum of every company must also mention the State in which the registered office of the company is to be situated. Every company should have registered office, as from the day of commencement of its business, or within 30 days of its incorporation, whichever date is earlier, to which all communications and notices may be addressed. Notice of Situation/Change in Registered Office: Notice of the situation of registered office, and of this record within 30 days after the date of the incorporation of the company or after the date of the change, as the case may be.4 A new Section 17A has been inserted by the Companies (Amendment) Act, 2000 providing for change in the registered office within a State. When the registered office of a company is changed from one place to another within the same State, the change is required to be confirmed by the Regional Director. 26Slide 27: 3. Object Clause This clause is the most important clause of the company. It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on any activity which is not authorised by its Memorandum. The memorandum must state the objects for which the proposed company is to be established. Choice of objects lies with the subscribers to the memorandum and their freedom in this respect is almost unrestricted. The only obvious restrictions are that the objects should not go against the law of the land and the provision of the company’s Act i.e. law prohibited gambling. Obviously, no company can be incorporated for that purpose. The ownership of the corporate capital is vested in the company itself. 27Slide 28: The statement of objects, therefore, gives a very important protection to the shareholders by ensuring that the funds raised for one undertaking are not going to be risked in another. The creditors of a company trust the corporation and not the shareholders and they have to seek their repayment only out of the company’s assets. By confining the corporate activities within a defined field, the statement of objects serves the public interest also. It prevents diversification of a company’s activities in directions not closely connected with the business for which the company may have been initially established. This clause must specify – a) Main objects of the company to be pursued by the company on its incorporation. b) Objects incidental or ancillary to the attainment of the main objects. c) Other objects of the company not included in (a) & (b). 28Slide 29: 4. Liability Clause The fourth particular in a memorandum of association of a limited company is the mention of the fact that the liability of the company is limited notwithstanding the fact that the company is limited by guarantee or shares. The Memorandum of a company limited by guarantee shall further state the maximum limit of the amount that each member undertakes to contribute in the event of the winding up of the company. When the company is limited by shares, it means that the liability of its members is limited to the amount, if any, unpaid on the shares respectively held by them. In case of fully paid shares held by any member, he has no further liability. When the company is limited by guarantee, the liability of the members becomes limited to such amount as the members may respectively undertake by the Memorandum to contribute to the assets of the company in the event of its being wound up. 29Slide 30: 5. Capital Clause The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share capital mentioned in this clause without altering the memorandum. For instance, in this clause, it may be mentioned that the share capital of the company is Rs. 2, 00,000/- divided into 1,000 shares of Rs. 200/- each. It is to be noted that there are to be at least 7 subscribers to the Memorandum in the case of a public company, and at least 2 in the case of a private company. It is further necessary that each subscriber must take at least one share, and each subscriber shall write against his name the number of shares he takes. 30Slide 31: 6. Association/Subscription Clause This is the last clause of the memorandum of Association wherein a declaration by the persons for subscribing to the Memorandum that they desire to form into a company and agree to take the shares place against their respective name must be given by the promoters. Apart from these clauses of the memorandum of association, there are other formal requirements . According to Section 15 these are– a) The memorandum shall be printed. b) Divided into paragraphs consecutively numbered. c) Signed by each subscriber in the presence of at least one witness and shall give his address, description and occupation, if any. d) The Shares taken by each subscriber to be mentioned opposite his name etc. 31Slide 32: 32 ALTERATION THEREIN Sections 16 to 23 of the Act prescribe the mode of affecting alterations in respect of all the clauses of the memorandum of association as below– Change of Name a) A company may change its name by passing a special resolution to that effect and having the consent of the Central Government prior to the passing of such resolution. b) If a company (without obtaining the consent of the other company), is through inadvertence or otherwise, registered under a name identical with that of a company in existence, which is already registered or which so nearly resembles it, as to be calculated to deceive the first company, it may, with the approval of the Central Government and by passing an ordinary resolution, change its name (Section 22). Changes of Registered Office A company may by passing a special resolution, and obtaining confirmation of the court, change the place of its registered office from one state to another. The procedure is by petition to the court, after the special resolution has been passed. The court sees whether sufficient notice, of the proposed alteration, has been given to all persons likely to be affected. Certified copy of the court’s order sanctioning the change, and a copy of memorandum must be filed with the Registrar within three months.Slide 33: Change of Objects The objects of a company can be altered by a special resolution but only to the extent allowed by Section 17 of the act . The Act permits the company to make the alteration in the objects in order to enable the company to – a) Carry on its business more economically or more efficiently; b) Attain its main purpose by new or improved means; c) Enlarge and change the local area of its operations; d) Carry on some business which under existing circumstances may conveniently or advantageously be combined with the business of the company; e) Restrict or abandon any of the objects specified in the memorandum; f) Sell or dispose of the whole, or any part of the undertaking, or any of the undertakings, of the company; g) Amalgamate with any other company. Before changing the objects, a special resolution is to be passed and then a petition is to be made to the court to confirm the alterations. 33Slide 34: DOCTRINE OF ULTRA-VIRES Any transaction which is outside the scope of the powers specified in the objects clause of the Memorandum of Association and is not reasonable incidentally or necessary to the attainment of the objects is ultra vires or beyond the powers of the company and therefore null and void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it. It means simply an act beyond the object clause of the Memorandum is an ultra-vires act of the company. 34Slide 35: The application of Doctrine of ultra-vires was first explained by the House of Lords in a leading case of Ashbury Railway Carriage & Iron Co. Ltd. Vs Riche in this case, the company’s objects as stated in the Memorandum were – a) to make and Sell, and lend on hire railway carriages and wagons, and all kinds of railway plants, fittings, machinery and rolling stock; b) to carry on the business of mechanical engineers and general contractors; c) to purchase, lease, work and sell mines , minerals, land and buildings, and d) to purchase and sell as merchants, timber, coal, metals or other materials and to buy and sell any such materials on commission or as agents. 35Slide 36: The directors entered into a contract with Riche, for financing the construction of a railway line in a foreign country and the company subsequently purported to ratify the act of the directors by passing a special resolution at a general meeting. The company, however, repudiated the contract. Riche thereupon sued the company for breach of contract. The House of Lords held that the contract, being of a nature not included in the company’s objects, was void as being ultra-vires not only of the directors but of the whole company, and could not be made valid by ratification on the part of the shareholders, and therefore the company was not liable to be sued for breach. So, the consequences of an ultra-vires transaction are– a) The company cannot sue any person for enforcement of any of its rights. b) No person can sue the company for enforcement of its rights. c) The directors of the company may be held personally liable to outsiders for ultra-vires acts. 36Slide 37: However, the doctrine of ultra-vires does not apply in the following cases– a) If an act is ultra-vires of powers of the directors but intra-vires of company, the company is liable. b) If an act is ultra-vires the articles of the company but it is intra-vires of the Memorandum, the articles can be altered to rectify the error. c) If an act is within the powers of the company but is irregularly done, consent of the shareholders will validate it. 37Slide 38: ARTICLES OF ASSOCIATION An Article of association is the second document which has, to be registered along with the memorandum. This document contains rules, regulations and bye-laws for the general administration of the company. Schedule I of the Companies Act, 1956, contains various model forms of memorandum and articles . The schedule is divided into several tables. Each table serves as a model for one kind of company. According to Section 30 of the Act that it should be printed, divided into paragraphs numbered consecutively and signed by each signatory of the memorandum in the presence of at least one attesting witness. The main provisions regarding the Article of Association are given in sections 26 to 31, 36 and 38 of the Act. The document must not conflict with the provisions of the Act. Any clause which is contrary to the provisions of the Act or of any other law for the time being in force, is simply inoperative and void. 38Slide 39: The important items covered by the Articles of Association include– 1. Powers, duties, rights and liabilities of members and directors. 2. Rules for meetings of the company. 3. Dividends. 4. Borrowing powers of the company. 5. Calls on shares. 6. Transfer and transmission of shares. 7. Forfeiture of shares and 8. Voting powers of the members, etc. 39Slide 40: Effect of Memorandum and Articles Section 36 contains provision regarding the binding force of the Memorandum and the Articles on the company and its members. According to that provision the Memorandum and Articles of a company, when registered, bind the company and its members to the same extent as if they respectively had been signed by the company and by each member, and contained agreement on the part of the company and the members that all the provisions of the Memorandum and the Articles would be observed. It means that the company and the members are bound towards one another, and if either a member or the company does not observe the provisions of the Memorandum or the Articles, he can made liable for the same. 40Slide 41: Doctrine of Indoor Management Memorandum of Association and Articles of Association, both these documents on registration assume the character of public documents and every person dealing with the company is deemed to have the notice of their contents. An outsider dealing with a company is presumed to have read the contents of the registered documents of a company. The further presumption is that he has understood them in proper sense. This is known as rule of constructive notice. So, constructive notice is a presumption operating in favour of the company against the outsider. There is, however, one exception to this rule of constructive notice. This is known as the doctrine of Indoor management. It is also popularly known as the Rule in Royal British Bank Vs Turquand or Turquand case. 41Slide 42: Indoor management means that the outsiders dealing with a company are entitled to assume that everything has been regularly done, so far as its internal proceedings are concerned. In this case, a company has powers to borrow money provided a proper resolution was passed. The company borrowed money and issued bonds. The resolution was not in fact passed. The court held that company was bound. Hence, doctrine of indoor management is intended to protect an outsider against the company. But as this is a rule of presumption there are certain exceptions of this rule of indoor game. These are – 1. This rule of indoor management does not protect those persons who have the actual knowledge of the irregularity. 2. This is again inapplicable to the persons who have purported to act as a director in the transaction. 3. If there is any forgery , indoor management is a rule of presumption. By a presumption, a forgery cannot be converted into a genuine transaction. 4. When your suspicions are aroused, you should investigate. If you fail to investigate , you can not presume that things are rightly done. 42Slide 43: Doctrine of Constructive Notice Memorandum of Association and the Articles of Association are required to be registered with the Registrar as pre-requisite to the formation of a company. Both these documents are public documents and are, therefore, open to inspection. They can be inspected by any person. Every person dealing with a company, having a right to know the contents of the Memorandum and the Articles, is deemed to have known them, or, in other words, there is a presumption that the person dealing with the company has the notice of the contents of these documents. As a result of the notice (constructive notice) of the contents of these documents, if a person enters into a contract with a company which is not permitted by the Memorandum or the Articles, i.e., it is ultra vires of the company; the company cannot be made liable for the same. The person dealing with the company is bound by the law of estoppel, and he cannot be allowed to say that he had no actual notice of the contents of these documents. 43Slide 44: Prospectus According to Section 2(36) , a prospectus means any document described or issued as prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate. In essence, it means that a prospectus is an invitation issued to the public to take shares or debentures of the company or to deposit money with the company any advertisement offering to the public shares or debentures of the company for sale is a prospectus. Application forms for shares or debentures cannot be issued unless they are accompanied by a memorandum containing such salient features of a prospectus as may be prescribed. 44Slide 45: Statement in Lieu of Prospectus (Sec. 70) One of the great advantages of promoting a company is that the necessary capital for business can be raised from the general public. This advantage is, however, enjoyed only by a public company A private company is, by its very constitution, prohibited from inviting monetary participation of the public. But even a public company need not necessarily go to the public for money. The promoters may be confident of obtaining the required capital through private contacts. In such a case, no prospectus need be issued to the public. The promoters are only required to prepare a draft prospectus containing the information required to be disclosed by Schedule III of the Act. This document is known as a Statement in Lieu of Prospectus. 45Slide 46: Contents of Prospectus 1) Every Prospectus to be Dated (Section 55) 2) Every Prospectus has to be Registered (Section 60) 3) Experts’ Consent (Section 58) 4) Disclosures to be made (Section 56) Remedies for Misrepresentation 1) Damages 2) Compensation under Section 62 3) Rescission for Misrepresentation 4) Liability under Section 56 46UNIT – III SHARE AND DEBENTURES: UNIT – III SHARE AND DEBENTURES Shares A share in a company is one of the units into which the total capital of the company is divided. It is an interest of a member in a company measured by a sum of money usually the nominal value of the share and also by the rights and obligations belonging to it. Statutory definition of the term share has been given under section 2(46) of the Company Act that share is the share capital of a company, and includes stock except where a distinction between stock and share is expressed or implied’. 47Slide 48: The term along with other things may be understood from a very nice definition given by Lord Justice Lindley . According to him ‘by a company is meant an association of many persons who contribute money or money’s worth to a common stock and employ it for a common purpose. The common stock so contributed is denoted in money and is the CAPITAL of the company. The persons who contribute it or to whom it belongs are MEMBERS. The proportion of capital to which each member is entitled is his SHARE’. As far as the legal nature of a share is concerned it has been declared as a movable property under section 82 of the company Act. Shares are included in the definition of goods under the provisions of Sale of Goods Act, 1930 Section 2(7) . In case of Arjun Prashad Vs Central Bank of India , court has also regarded a share as goods in India. 48Slide 49: Preference Shares Such shares enjoy preferential rights as to the payment of dividend at a fixed rate during the life of the company, and as to the return of capital on winding up of the company as per section 85(1). If any shares carry only one of these two preferential rights, they will be treated as equity shares. The holder of this type of shares enjoys only preferential rights over the equity shareholders. The preference shareholders do not enjoy normal voting rights like the equity share holders with voting rights. They are, however, entitled to vote only in these two conditions– 1. When any resolution directly affecting their rights is to be passed; and 2. When the dividend due (whether declared or not) on their preference shares or part thereof has remained unpaid. There may be different kinds of preference shares depending upon the terms of issue which are either defined in the Articles of Association or in the prospectus of the company. A company may issue the following types of preference shares– 49Slide 50: Cumulative Preference Shares They carry the right to cumulative dividends if the company fails to pay the dividend in a particular year. The accumulated arrears of dividends shall be paid, if any dividend is declared in subsequent years, before any dividend is paid to the equity share holders. If the company goes into liquidation, no arrears of dividends are payable unless either the Articles contain an express provision to this effect or such dividends have been declared. Of course, the arrears of undeclared dividends shall be payable, even if the Articles are silent, out of any surplus left, after returning in full the preference and equity share capital. It must be remembered that all preference shares are always presumed to be cumulative unless the contrary is stated in Articles or the terms of issue. 50Slide 51: Non-Cumulative Preference Shares Such shares don't carry the right to receive the arrears of dividend in a particular year, if the company fails to declare dividend in previous year or years. If no dividend is paid in any particular year, it lapses. Participating Preference Shares These are preference shares which receive their fixed dividends e.g. 11%, in the normal way, but which then participate further in the distributed profits along with the equity shares after a certain fixed percentage has been paid on them as well. The holder of such shares may also be entitled to get a share in the surplus assets of the company on its winding up if specific provision exists to that effect in the Articles. 51Slide 52: Non Participating Preference Shares These shares are entitled to only a fixed rate of dividends and do not participate further in the surplus profits irrespective of the magnitude of such profit. If the Articles are silent, all preference shares are deemed to be non-participating unless otherwise stated in the terms of issue. Convertible Preference Shares The holder of these shares is given the right of conversion of his shares into equity shares at a later date. 52Slide 53: Non-Convertible Preference Shares Here, the preference shareholder is not given the right of conversion of his shares into equity shares. If the Articles are silent, all preference shares are deemed to be non-convertible unless provided otherwise in the terms of issues. Redeemable Preference Shares Ordinarily capital received on the issue of shares can be returned on the winding up of the company only, because if the company is allowed to return it any time it so wished, the creditors could not rely on the company having any money at all. But section 80 of the Act authorises a company limited by shares to issue “redeemable preference shares”. Capital received on such shares can be paid back to the holders of such shares during the life time of the company. The paying back of the capital is called redemption. 53Slide 54: Irredeemable preference shares The repayment of such shares is possible on winding up of the company only. After the commencement of the Companies (Amendment) Act- 1988, issue of any further irredeemable preference shares is prohibited. 54Slide 55: Equity Shares According to Section 85(2) , ‘Equity shares’ means those shares which are not preference shares’. These shares carry the right to receive the whole of surplus profits after the preference shares, if any, have received their fixed dividend. If no profits are left after paying fixed preference dividends, the holders of such shares get no dividends. Same is the case with regard to the return of capital on winding up of the company. Further, directors have the sole right of recommending dividends to such shares and as such they may not get any dividends in case the directors so choose, in spite of huge profits. It is why in financial terminology the share capital raised through such shares is called ‘Risk Capital’. The fortune of equity shareholders is tied up with the ups and downs of the company. If the company fails, the risks fall mainly on them and if the company is successful they enjoy great financial rewards. 55Slide 56: Equity shares are of two kinds. These are– 1. Equity Shares with Voting Rights: According to section [87(1)(a)], the holders of any such equity shares have normal voting rights on every resolution placed before the company at any general meeting. Further, Section 87(1) (b) provides that his voting right on a poll shall be in proportion to his shares of the paid up equity capital of the company. 2. Equity Shares with Differential Rights: The holders of any such shares shall have differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed by the Central Government. Please study the Companies (Issue of share capital with Differential Voting Rights) Rules, 2001, passed by the Central Government for the purpose, for further knowledge and understanding of the subject. 56Slide 57: 57 Debentures The term debenture is neither a technical, nor a term of Art but it was very commonly used as early as the time of Henry V, 1414 as observed by Chitty, J., in case of Levy Vs Abercorris Co. It is a very wide term but now generally used to signify a security for money, called on the face of it debenture, and providing for the payment of specified sum at a fixed date. It is an instrument under seal and evidencing a debt, the essence of it being the admission of indebtedness. The issuance of the debentures by the company is perhaps the most convenient method of long term borrowings. Section 2(12) of the Act gives statutory definition of the word ‘debenture’. “Debentures include debenture stock, bonds any other securities of a company whether constituting a charge on the assets of the company or not.” So, a debenture is a document acknowledging the loans borrowed by a company issued under its authority and embodying the terms and conditions as to repayment of money, rate of interest, etc. In brief, a debenture is a certificate of loan issued by a company and it has nothing to do with security or lack of it.Slide 58: The characteristics of a debenture are – 1. They are generally issued in series. 2. They are generally under the common seal of the company. 3. They provide for payment of a specified sum with interest at a specified date by a specified rate. 4. They are generally secured by charge on any part of the company’s property. 5. They must be payable either to the registered holder or to the bearer. A debenture, usually consists of two parts, namely – 1. The body of the instrument containing the bond and the charge, and 2. The conditions endorsed thereon. Debentures in company law may be, secured debentures, unsecured, registered debentures, bearer debentures, redeemable debentures, irredeemable and convertible debentures. 58Slide 59: SHARE CAPITAL The term share capital denotes the amount of capital raised or to be raised by the issue of shares by a company. ‘Capital’ says Shah, ‘usually means a particular amount of money with which a business is started’ but, in company law this word is used in the following different senses– 1. Nominal or Authorised Capital : Means the nominal value of the shares which a Company is authorised to issue by its memorandum. This kind of Capital must be stated in the memorandum and also each year in the annual return. Where any notice, advertisement, or other official publication or any business letter, bill head or letter paper of a company contains a statement of the amount of its authorised capital, it must also contain a statement of the amount of capital which has been subscribed and the amount paid up (Sec. 148). 59Slide 60: 2. Issued or Subscribed Capital : Issued or subscribed capital means nominal value of the shares actually issued and subscribed for. 3. Paid up Capital : Paid up capital means the amount paid up or credited as paid up on the shares issued, and 4. Capital Assets : Means the actual property of a company 5. Called up Capital : Called up capital denotes the total amount which a company has asked its shareholders to pay up by means of call, and 6. Uncalled Capital : Uncalled capital denotes the amount unpaid on the shares which has not been called up but which the company is entitled to call by means of calls. 60Slide 61: MEMBERS OF A COMPANY According to Section 41 , the following are the members of the company – 1.The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the company, and on its registration, shall be entered as members in its register of members. 2.Every other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company. However, there are other ways also to become a member of the company. These are– 61Slide 62: 1. By subscribing the memorandum : A person becomes a member of a company by subscribing the memorandum before its registration. [Sec. 41(1)] 2. By allotment: Here the share application offers to subscribe for shares in the company. By accepting the offer, the shares are allowed to him. However, he becomes a member only when his name is entered into the register of members. 3. By transfer: As we all know by virtue of Section 82, shares are easily transferable. Hence the transferee becomes a member when his name is entered in the register of the members. A transfer may take place either by sale, gift or otherwise. 62Slide 63: 4. By transmission: Here, the ownership is transferred by operation of law and not by act of parties . Transmission takes place in two cases namely, (1) death of the member , or (2) insolvency of the members . In case of death, his legal representatives will become the members. In case of insolvency, his assignee will become the member. Under Sec. 109A and 109B, every holder of shares may at any time nominate in the prescribed manner, a person to whom his shares in the company shall vest in the event of his death. Under Section 172, they are entitled for notice of General Meetings. The nominee may elect to be registered himself as a holder of the shares, in which case he becomes a member. 63Slide 64: 5. By estoppels : Estoppel is a rule of evidence. By permitting his name to be entered in the register of members he is stopped from denying that he is a member. It may be that his name is wrongly or improperly entered in the said register. When he comes to know of it, he shall take steps to have his name struck off the register. If he knows and assents to have his name in the register of member, he becomes a member by acquiescence. It is to be noted that the terms ‘members’ and ‘shareholder’ have the same meaning in this Act. 64Slide 65: METHODS OF CEASING TO BE A MEMBER 1. By transferring his shares. 2. By forfeiture of his shares. 3. By a valid surrender of his shares. 4. By death of a member. 5. In case of insolvency, 6. On winding up of a company, and 7. On rescission of the contract of membership on the ground of misrepresentation or mistake. 65Slide 66: DIVIDENDS The term ‘dividend’ is not defined in the Act. Further the Act does not mention any specific power to the companies registered under it to declare and pay dividends. The power to pay dividend is, however, inherent in every company and therefore it need not be given either in the Act or in memorandum or Articles. Dividends are profits of a trading company divided amongst members in proportion to their shares. Such proportion may be determined by the articles; if not, dividends may be paid on each share in proportion to the nominal value of that share without reference to the amount actually paid up thereon, for members are ‘prima facie’ entitled to participate in the profits of a company in proportion to their respective interest therein, and the nominal amount of capital held by each is the measure of such interest. Hence, in brief, a dividend is that portion of the distributable amount of profit to which each member is entitled when it is formally declared in the Annual General Meeting of members. It follows from it that if no profits are made or if none are made available for distribution, no dividend will be declared. 66Slide 67: You are requested to study carefully the legal provisions relating to dividends as laid down in Sections 93, 205, 205(2B), 205A, 206, 206A and 207 for full knowledge and understanding about dividends. Hence, dividend means the profit that is divided amongst the members of the company on the basis of the shares held by them. Dividend to be paid to Registered Shareholders Only (Section 206): According to section 206, no dividend shall be paid by a company in respect of any shares except to the registered shareholder or to his order or to his bankers. It may also be paid to the holder of a share warrant or to his banker in respect of the shares specified in the warrant. 67Slide 68: Dividend to be paid only Out of Profits (Section 205): No dividend shall be declared or paid by a company except out of profits. It means that the dividend cannot be paid out of capital. It may be paid out of the profits of that particular year or out of the profits for any previous year. Only such profits can be distributed as dividend which has been arrived at after providing for depreciation. The Central Government may, if it thinks necessary in public interest, allow any company to declare or pay dividend for any financial year out of the profits of the company for that year or any previous financial year or years without providing for depreciation. 68Slide 69: According to section 205 (1), proviso cl. (b), if the company has incurred some loss in any previous financial year or years, then the amount of that loss or an amount equal to the amount provided for depreciation for that year or those years, whichever is less, shall be set off against the profits of the company for the year for which dividend is proposed to be declared or paid, or against profits for any previous financial year or years, after providing for necessary depreciation. Further, The Companies (Amendment) Act, 1974 has introduced a new provision which requires every company to transfer to the reserves of the company such percentage of profits for that year, not exceeding 10%, as may be prescribed, before the dividend is declared or paid by a company for any financial year. 69Slide 70: Interim Dividend: Sub-sections (1A), (1B) and (1C) to section 205 have been inserted by the Companies (Amendment) Act, 2000. They prescribe for the procedure for declaration of interim dividends. Section (14A), which has also been inserted by the Companies (Amendment) Act, 2000 defines dividend and states that “dividend” includes interim dividend. The (Amendment) Act, 2000 has also amended section 205, so as to make the following provisions regarding the interim dividend– 1. The Board of Directors may declare interim dividend, and the amount of dividend including interim dividend shall be deposited in a separate bank account within 5 days of the declaration of such dividend. 2. The amount of dividend so deposited above, shall be used for payment of interim dividend. 3. Different provisions contained in the Companies Act, applicable to ‘dividend’, such as sections 205, 205A, 205C, 206, 206A and 207 shall also apply to ‘interim dividend’. 70Slide 71: Investor Education and Protection Fund (Section 205C) A new section 205C has been inserted in the Companies Act by the Companies (Amendment) Act, 1999. It provides for the establishment of a “Fund” by the Central Government, to be known as the Investor Education and Protection Fund. It aims at utilisation of the Fund for promotion of investors’ awareness and promotion of the interests of the investors in accordance with such rules as may be prescribed. The Central Government shall specify an authority or a committee to administer the “Fund”, who will administer the Fund for carrying out the objects for which the Fund has been established. 71Slide 72: There shall be credited to the Fund the following amounts a) Amounts in the unpaid dividend accounts of companies; b) The application moneys received by companies for allotment of any securities and due for refund; c) Matured deposits with companies; d) Matured debentures with companies; e) The interest on the amounts referred to in clauses (a) to (d); f) Grants and donations given to the Fund by the Central Government, State Governments, companies or any other institutions for the purposes of the Fund; and g) The interest or other income received out of the investments made from the Fund; Provided that no such amount referred to in clauses (a) to (d) shall form part of the Fund unless such amounts have remained UNCLAIMED AND UNPAID FOR A PERIOD OF SEVEN YEARS FROM THE DATE THEY BECAME DUE FOR PAYMENT. 72Slide 73: RECONSTRUCTION AND AMALGAMATION There is reconstruction of a company when the company’s business and undertaking are transferred to another company formed for that purpose, so that as regards the new company substantially the same business is carried in it as in the case of the old company. There is amalgamation when two or more companies are joined to form a third entity or one is absorbed into or blended within another. The effect is to wipe out the merging companies and two fuse then all into the new one created. The new company comes into existence having all the property, rights and subject to act the duties and obligations, of both the constituent companies. The word amalgamation has not been defined in the Act. The ordinary dictionary meaning of the expression is ‘construction’. The primary object of amalgamation of a company with another is to facilitate reconstruction of the amalgamating companies and this is the matter which is entirely left to the body of shareholders and essentially an affair relating to the internal administration of the transferor company. 73Slide 74: There should be power in the company’s memorandum to amalgamate. If it is not there it should be acquired by altering the memorandum. It is not necessary that the company adopting the scheme should be in financial difficulties or that it should not be an affluent company. A reconstruction or amalgamation may take any of the following forms i.e., (1) By sale of shares, (2) By sale of undertaking, (3) By sale and dissolution, (4) By a scheme of arrangement. Sale of Shares is the simplest process of amalgamation or take over. Shares are sold and registered in the name of the purchasing company. The selling shareholders acquire either compensation or shares in the acquiring company. The mode to carry out schemes of the reconstruction and amalgamation is provided in Sections 394 and 395 of the Indian Companies Act – 1956. The term ‘Reconstruction’ implies the formation of a new company to take over the assets of an existing company with the idea that the persons interested and the nature of business substantially remain the same. 74Slide 75: The term ‘Amalgamation’ is taken to mean the union of two or more companies, so as to form a third entity or one company is absorbed into another company. Thus, the formation of a new company is not absolutely necessary for amalgamation. The words ‘reconstruction and amalgamation’ do not have any precise legal meaning. Reconstruction means internal arrangement of a Company’s capital structure, while amalgamation means merger of two or more companies. Both have practically the same effect: in both cases original company loses its independent existence. Both the above stated sections lay down two modes for carrying out of a scheme of reconstruction and amalgamation. These are – 1. By transfer of undertaking and 2. By transfer of shares. Although besides the usual modes of amalgamation under Sections 394 & 395, Central Government may also order for amalgamation in public/national interest under Section 396 . 75Slide 76: Amalgamation in National Interest (Section 396) : Where the Central Government is satisfied that it is essential in the public interest that two or more companies should amalgamate the Central Government may by order notified in the official gazette provide for the amalgamation of those companies into a single company. The order may provide for the continuation of legal proceedings by or against original companies in the name of resulting company. Every member, debenture-holder and the creditor of the original company shall have as far as possible the same interest in the resulting company as they had in the original companies. Central Government shall not pass an order providing amalgamation unless the following requirements have been complied with– 1. Where any appeal has been preferred until such appeal has been disposed of or where no such appeal by any person aggrieved by the assessment in case of compensation for less interest, has been preferred until the time for preferring the appeal has expired. 2. A copy of the proposed order or draft has been sent to the companies concerned and they shall be given not less than two months’ time to give their suggestion and objections. 3. The central government should have considered the suggestions and objections and made such modifications in the light of these suggestions and objections. Copies of the order shall be laid before both the Houses of Parliament. 76Slide 77: UNIT – IV DIRECTORS – POSITION A company is treated as an artificial person, it carries out its affairs by human agent. It is invisible and intangible. It has neither a mind nor a body of its own. This makes it necessary that the company’s business should be entrusted to human agents. These human agents are called directors, managers and governors of the company. The directors are superintendents of the company. According to Section 2(13) of the Companies Act, the expression “director” includes any person occupying the position of director by whatever name called. Section 252 of the Companies Act provides that every public company shall have a minimum of three directors & Every other company i.e., private company shall have a minimum of two directors. A director is a manager, controller of the company. He cannot be treated as an employee of the company. 77Slide 78: In reference to the management of company sometimes the directors are described as agents , managers and trustees , but these expressions are not the exact indications of their powers and responsibilities. In view of the Supreme Court as expressed in Ram Chand & Sons Sugar Mills v. Kanhayalal the position that the directors occupy in a corporate enterprise is not easy to explain. In reality, the directors are professional men, hired by the company to control, supervise and manage the affairs of company . They are regarded as the officers of the company. “A director is not a servant of any master. He cannot be described as a servant of the company or of anyone.” Directors as Organs of the Company : In the eyes of law there are two types of persons–i.e., artificial person and natural person. A company being an artificial person has to be managed and controlled by natural persons. These natural persons are directors of company. They are the brain and mind of the artificial person i.e., the company. 78Slide 79: Thus, the board of directors represents the mind or will of the company. “When the brain functions the corporation is said to function.” The Calcutta High Court in Gopal Khaitan v. State , had put emphasis on the organic theory of corporate life. The Court said that “a theory which treats certain officials as organs of the company, for whose action the company is to be held liable just as a natural person is for the action of the limbs.” In other words, the board of directors of a company is recognised as the most important part of the company. The modern directors of company are mere clerks or servants of the company as they have extensive duties and responsibilities and have authorities to sign contracts on behalf of the company and are liable for the entire machinery of the corporate body. 79Slide 80: Lord Justice Denning rightly said in Bolton (Engineering) Co. Ltd. v. Graham & Sons –“A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such.” This, it was held that it was sufficient to show that the board of directors was the mind of a corporate body indeed. 80Slide 81: Directors as Agents of Corporate Body : It is a well settled legal principle that the directors are agents of the company. They act on behalf of the principal i.e., the company. A clear illustration is Ferguson v Wilson , wherein the directors allotted certain shares to the plaintiff. But, the allotment of shares could not be made as the company had exhausted its shares and consequently, the plaintiff sued the directors for damages.It was held that the directors were not liable. In the instant case Cairns L.J. said– “Directors are merely agents of the company. The company itself cannot act in its own person, for it has no person, it can only act through directors and the case, as regards those directors, is merely the ordinary case of principal and agent. Wherever an agent is liable those directors would be liable, where the liability would attach to the principal, and the principal only, the liability is the liability of the company.” Thus, the directors incur no personal liability, if they acted within the scope of their authority while entering into a contract on behalf of the company. 81Slide 82: Directors as Trustees of the Company : The directors are described as trustees of the company in respect of property and money of the company. They are also entrusted with the powers to deal with the company’s money and property. For example in Joint Stock Discount Co. v. Brown , wherein the directors had misapplied funds of the company, it was held that they had committed a breach of trust and were jointly and severally liable. Similarly, in York and North Midland Railway v. Hudson , the directors who had improperly dealt with the funds of the company were held liable as trustees. The Madras High Court in Ramaswamy Iyer v. Brahmayya & Co ., observed that–It is the settled view that for the company the directors of a company are trustees. The directors, with reference to their entrusted power of applying money and property of the company and for misuse of the power, the directors could be rendered liable as trustees and on their death, even the cause of action survives against their legal successors.It is to be made clear that the directors are trustees of the company and not of individual shareholders. 82Slide 83: Whether Directors are Quasi-Trustees : The directors are regarded as trustees of the company but they are not trustees in reality. It is to be seen that the trust property invests in the trustees, but on the other hand the company’s property and money are not vested with the directors of the company but in company itself. The duties of directors are not the same as the duties of trustees. According to Romer J. in Re, City Equitable Fire Insurance Co. Ltd. , “It is sometimes said that directors are trustees. If this means no more than that directors in the performance of their duties stand in a fiduciary relationship to the company, the statement is true enough. But, if the statement is meant to be an indication by way of analogy of what those duties are, it appears to me to be wholly misleading. I can see but little resemblance between the duties of director and the duties of a trustee of a will or of a marriage settlement. It is indeed impossible to describe the duty of directors in general term, whether by way of analogy or otherwise.” 83Slide 84: Thus, the directors of a company are not the trustees of that company in absolute term. But, the directors are trustees of the money and property of the company and also agents in the deal which they perform on behalf of the company. Section 2(13) of the company Act defines ‘director’ thus : “director” includes any person occupying the position of director, by whatever name called but this is not a satisfactory definition of director. In fact, directors are the select body of persons upon whom lies the responsibilities of the management of the company as well as the business run by the company. In brief ‘a person having the direction, conduct, management or superintendence of the affairs of the company is a director. Directors of a company are collectively referred to in the Act as the ‘board of directors’ or ‘Board’ under section 252(3) of the Act. 84Slide 85: Legal Position of Directors : It is very difficult to precisely define the true legal position of directors. They are sometimes agents of the company and sometimes trustees of the company. At any rate they are not employees of the company. But in any case they stand in a fiduciary position towards the company. In Ferguson Vs Wilson , Cairns L.J., observed as follows –“What is the position of directors of a public company? They are merely agents of a company. The company itself can not act in its person, for it has no person; it can act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent.” In York & North Midland Rly Vs Hudson , directors who had improperly dealt with the funds of the company were liable as trustees. The learned judge observed as follows:“The directors are selected to manage the affairs of the company for the benefit of the shareholders. It is an office of trust which, if they undertake, it is their duty to perform fully and entirely.” Both characters of directors were summed up in G.E. Rly Vs Turner . “The directors are the mere trustees or agents of the company-trustees of the company’s money and property-agents in the transactions which they enter into on behalf of a company.” 85Slide 86: POWERS The powers of directors are generally contained in the articles and there is usually a clause giving them the powers of management of the company and all other powers which are not otherwise dealt with. Thus directors of a company have no other authority other than that which is given to them by the articles of association; these are open and supposed to be known to all persons who have dealings with the company. The directors of a company can do whatever the company can do, subject to the restrictions imposed in articles of the company. Apart from the power of management and general supervision of the company’s affairs, the directors also exercise the following powers and rights – 1. To appoint and dismiss officers; 2. To declare dividends; 3. To issue shares and debentures; 4. To make calls; 5. To inspect corporate books; and 6. To delegate powers to sub-committee or other officers, etc. 86Slide 87: The present Act lays down some specific provisions in this regard and certain powers are to be exercised by the Board of Directors only at a meeting. These are– 1. The power to make calls on shareholders in respect of money unpaid on their shares; 2. The power to issue debentures; 3. The power to borrow moneys otherwise than on debentures; 4. The power to invest the funds of the company; and 5. The power to make loans. The company in general meeting may impose further restrictions and conditions on the exercise by the board of any of the powers mentioned above (Section 292) 87Slide 88: Besides the powers specified in section 292, there are certain other powers also which are required to be exercised only at the meetings of the board, such as – 1. The power of filling casual vacancies in the board (Section 262); 2. Sanctioning or giving consent to contracts of or with any director [Section 297(4)]; 3. Receiving of notice of disclosure of interest (Section 299); 4. Unanimous consent of all directors present at board meeting necessary for appointing as managing director or manager of a person who is already managing director or manager of another company [Section 316(2) and 286(2)]. 5. Sanction by unanimous consent of all the directors present at a Board meeting necessary for making investments in the companies in the same group [Section 37(5)]; and 6. Receiving notice of share-holdings of directors (Section 308). 88Slide 89: DUTIES Directors hold the most important office in the company’s administration. This very fact is sufficient to indicate how onerous the duties of directors may be. Directors perform multifarious duties of varying significance. “Directors”, says Lindley, M.R., “if act within their powers, if they act with such care as is reasonably to be expected from them having regard to their knowledge and experience, if they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company.” The general duties of directors may be summarised as follows– 89Slide 90: 1. Duty to Exercise Reasonable Care, Skill and Diligence : It is the first and foremost duty of directors to carry out their duties with such care as is reasonably expected from persons of their knowledge and status. “A director needs to exhibit in the performance of his duties a greater skill than may be expected from a person of his knowledge or experience.” Romer J., in Re City Equitable Fire Insurance Co. 2. Duty to Act Honestly : Lindley M.R., in the above cited case observed that, “If they act honestly for the benefit of the company they represent, they discharge both their equitable as well as their legal duty to the company.” 3. Duty to apply company’s fund for company’s business . 4. Duty to prevent misappropriation and breach of trust . 5. Duty when Selling Shares Company : Directors are duty bound to dispose of their company’s shares on the best terms obtainable and must not allot them to themselves or their friends at a lower price in order to obtain a personal benefit. 6. Duty When Making Call : The duty of director, when a call is made, is to compel every share holder to pay to the company the amount due from him in respect of that call; and they are guilty of a breach of their duty to the company if they donot take all reasonable means for enforcing that payment. 90Slide 91: Apart from these general duties, the directors have some specific duties laid down by the companies Act itself under various sections. These are – a) Duty to certify annual returns (Sec. 161) b) Duty to make statutory reports (Sec. 165) c) Duty to call general meetings (Sec. 166) d) Duty to call extraordinary meetings (Sec. 169) e) Duty to lay before the company annual accounts and balance sheet (Sec. 210) f) Duty to attach Board’s report (Sec. 217) g) Duty to assist the Inspector (Sec. 240) h) Duty to assist the prosecution (Sec. 242) i) Duty to acquire share qualifications (Sec. 270) j) Duty to disclose age (Sec. 282) k) Duty to disclose interest (Sec. 299) l) Duty to disclose holding of office in other body corporate (Sec. 305) m) Duty to make disclosure of share holdings (Sec. 308) and n) Duty in winding up of a company (Sec. 454) .These are only illustrative and not the exhaustive duties of the directors. 91Slide 92: APPOINTMENTS OF DIRECTORS Directors may be appointed in the following ways– 1. By the Articles (First directors) (Section 254) 2. By the Company (Section 255, 261) 3. By the Directors (Section 260, 262, 313) 4. By the Managing agent (Section 377) 5. By third parties (Section 255) 6. By the Central Government (Section 408) 92Slide 93: 1. Appointment of Directors by Articles (First Directors) : The first directors are usually named in the article. The articles may, instead of naming the first directors, confer a power upon the subscribers of the memorandum or a majority of them to appoint them as in clause 64 of table A. If there are no articles, or there is no such provision, the subscribers of memorandum or a majority of them may appoint them by virtue of clause 64 of table A. On the other hand, where there are articles which neither name the directors nor contain any provision for appointing them and table A is excluded, the subscribers of the MOA, who are individuals, shall be deemed to be the directors of the company until the directors are duly appointed under section 255. (Section 254) 93Slide 94: 2. Appointment of Directors by Company: Unless the articles provide for the retirement of all directors at any annual general meeting, not less than two-thirds of the total number of directors of a company shall, a) be persons whose period of office is liable to determination by retirement of directors by rotation, and b) save as otherwise expressly provided in this Act, be appointed by the company in general meeting. The remaining directors in case of any such company shall in default of and subject to any regulation in the article of the company, also shall be appointed by the company in general meeting. (Section 255) 3. Appointment of Directors by Directors : Directors may appoint– a) Additional directors (Section 260); b) Directors in casual vacancies (Section 262) and c) Alternate directors (Section 313). 94Slide 95: 4. Appointment of Directors by Managing Agent : The managing agent of a company, if so authorized by its articles, appoints not more than two directors where the total number of the directors exceeds five, and one director where the total number does not exceed five. The managing agent may, at any time, remove any director so appointed and appoint another director in his place or in the place of director so appointed. Managing agent can, in no case, appoint the chairman of the board of directors (Section 377). 5. Appointment of Directors by Third Parties : The Article of a company may empower debenture – holders or other creditors of the company to appoint their nominees in the board. 95Slide 96: 6. Appointment of Directors by Central Government : Section 408 empowers the central government to appoint not more than two persons to hold office as directors in a company for a period not exceeding three years on any occasion as it thinks fit. Such an appointment will be made if the central government on application of not less than one hundred members or members holding not less than one tenth of the voting power of the company , is satisfied that it is necessary to make the appointment in order to prevent the affairs of the company being conducted in a manner oppressive or prejudicial to any member of the company. Hence, these are the modes of appointment of directors but it is to be noted that only individuals with their consent can be appointed as directors (Sec. 253). 96Slide 97: 97 VACATION OF OFFICE The office of a director shall become vacant if– 1. He fails to obtain within the time specified in Section 270, or at any time thereafter ceases to hold, the share qualification, if any required of him by the articles of the company; 2. He is found to be of unsound mind by a court of competent jurisdiction; 3. He applies to be adjudicated as an insolvent; 4. He is adjudged an insolvent; 5. He is convicted by a court of any offence involving moral turpitude, and sentenced in respect thereof to imprisonment for not less than six months;Slide 98: 6. He fails to pay any calls in respect of shares of the company held by him whether alone or jointly with others within six months from the last date fixed for the payment of the call unless the central government has by notification in the official gazette, removed the disqualification incurred by such failure; 7. He absents himself from three consecutive meetings of the board of directors, or from all meetings of the board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the board; 8. He (whether by himself or by any person for his benefit or on his account), or any firm in which he is a partner or any private company of which he is a director, accepts a loan, from the company in contravention of Section 295; 9. He does not disclose his interest in any contract or proposed contract as required under section 299; 10. He becomes disqualified by an order of the court under section 203; 11. He is removed in pursuance of Section 284. 98Slide 99: REMOVAL The removal of a director can be done (1) by share holder, (2) by the Union Government and (3) by the Company Law Board. Section-284 provides that a company may, by ordinary resolution, remove a director before the expiration of his period of office. A special notice of a resolution to remove a director is required, that is, notice of the intention to move the resolution should be given to the company not less than fourteen days before the meeting. This is to enable the company to inform the members beforehand. As soon as the company receives the notice, it must furnish a copy of it to the director concerned who will have the right to make a representation against the resolution and to be heard at the general meeting. If the director submits a representation and requests the company to circulate it among the members, the company should, if there is time enough to do so, send a copy of the representation to every member of the company to whom notice of the meeting is sent. If this is not possible, the representation may be read out to the members at the meeting. 99Slide 100: A director may also be removed at the initiative of the Central Government. A special Chapter of the Companies Act enables the Central Government to remove managerial personnel from office on the recommendation of the Company Law Board. The Government has the power to make a reference to the CLB against any managerial personnel. When, on an application to the CLB for prevention of oppression or mismanagement, the CLB finds that a relief ought to be granted, it may terminate or set aside any agreement of the company with a director or managing director or other managerial personnel. When the appointment of a director is so terminated he cannot, except with the leave of the CLB, serve any company in a managerial capacity for a period of five years. 100Slide 101: MEETINGS There are three types of meetings of a company. These are– 1. Statutory Meeting : It is the first official general meeting of the shareholders. All public companies having a share capital except unlimited companies are required to hold a statutory meeting compulsorily. It implies that private companies, unlimited companies are not required to hold such a meeting. Statutory meeting must be held after one month but within six months of obtaining the certificate to commence business. [Section 165(1)]. Unlike other types of general meetings, this meeting is held only once in the lifetime of a company. The object of statutory meeting is to provide an opportunity to the members, as early as possible, of acquainting themselves with the assets and properties of the company and for the same a Statutory Report is to be prepared by the directors and sent to every member at least 21 days before the meeting. 101Slide 102: STATUTORY REPORT contains following information : a) Total number of shares allotted. b) An abstract of the receipts and payments up to date. c) Names, addresses and occupations of the directors. d) Particulars of the contracts, if any. e) The details of arrears due from directors and managing director or manager. f) The particulars of the commission etc. paid or to be paid to the directors, managers in connection with the sale of shares or debentures of the company etc. 102Slide 103: 2. Annual General Meeting : According to Section 166(1), every company shall in each year hold in addition to any other meetings, a general meeting as its annual general meeting. Every general meeting must be held during the business hours, on a day which is not a public holiday and at the registered office of the company. Annual general meeting is sometimes called ‘ordinary general meeting’ as usually it deals with the so called ‘ordinary business’. The following ordinary business must be transacted at the annual general meeting of a public company. [Section 173(1)(A)] a) The consideration of the annual accounts, balance sheet and the reports of the board of directors and auditors; b) The declaration of dividends; c) Appointment of directors in place of those retiring and d) The appointment of, and the fixation of the remuneration of the auditors etc. 103Slide 104: 3. Extraordinary General Meeting : All general meetings other than statutory and annual general meetings are called extraordinary general meetings. [Regulation 47 of ‘Table A’]. These meetings may be convened by the company at any time. The business transacted at an extra ordinary general meeting comprises anything which can not be postponed till the next annual general meeting, e.g. changes in the memorandum and article of association, reduction and reorganisation of share capital etc. All business transacted at this meeting is called special business [Section 173(1)(B)]. Extraordinary meetings may be called – 1. By the directors; 2. By the directors on requisition of members having 1/10 of total voting rights. 3. By the requisitionists themselves (Section 169) and 4. By the tribunal (Section 186). Apart from the above three kinds of meeting the court also has the power to convene the meeting of the company in the circumstances mentioned in Section 186 of the Act. 104Slide 105: UNIT – V MAJORITY RULE AND MINORITY PROTECTION The protection of the minority shareholders within the domain of corporate activity constitutes one of the most difficult problems of modern company law. The main aim must be to strike a balance between the effective control of the company and the interests of the small individual shareholders. A proper balance of rights of majority and minority shareholders is essential for the smooth functioning of the company. The modern Companies Acts, therefore, contain a large number of provisions for the protection of the interests of investors in companies. The main aim of these provisions is to require from those, who control the affairs of the company, to exercise their powers according to certain principles of natural justice and fair play. The management of a company is based on the majority rule. Like any democratic set up, the majority has its way in a company though due provision must also be made for the protection of the interests of minority. This principle that the will of the majority should prevail and bind the minority is known as the principle of majority rule. 105Slide 106: ‘Majority must prevail’ is the principle of company management. Except the powers delegated to the Board of Directors, the overall powers of controlling the affairs of a company rest with the shareholders which they exercise through general meetings. We also know that the decisions at general meetings are taken by the majority of shareholders which may consist of either a simple majority or a special majority depending upon the provisions of the companies Act or the Articles of the company. Under this set up of management and decision taking, it is evident that in all matters, except those delegated to the directors, the wish of the majority of shareholders will prevail in the administration of a company. The rule of Supremacy of the Majority : The rule of supremacy of the majority was judicially recognised in the year of 1843 in a leading case namely Foss Vs Harbottle. 106Slide 107: In this case Foss and Turton, two shareholders of the ‘Victoria Park Company’, brought an action on behalf of themselves and the other shareholders (except the defendants) against the five directors, the solicitor and architect of the company, charging them with “Concerting and effecting various fraudulent and illegal transactions, whereby the property of the company was misapplied, alienated and wasted.” The plaintiffs prayed that the defendants might be ordered by the court to make good to the company the losses caused by the wrongful acts complained of. The court dismissed the action holding that the conduct with which the defendants are charged is an injury not to the plaintiffs exclusively, it is an injury to the whole corporation and therefore the corporation alone, and not the plaintiffs, could bring the action at law. Otherwise, the court might be acting vainly, for the alleged breach of duty could be ratified by the company (Majority shareholders) in general meeting. 107Slide 108: The judgement in Foss Vs Harbottle case established that on a suit filed by the minority, the court will not interfere with the internal management of companies acting within their powers even though negligence and inefficiency on the part of the management is proved. For, it is pointless to have legal actions based on matters which can be ratified by a general meeting. It was further expounded in this case that if any injury is done to the company, it is logical that the company itself should bring an action to get it redressed and individual members can not assume to themselves the right of suing in the name of the company, because in law a company is separate legal person from the members who compose it. Moreover, there will be no use in permitting the minority to bring a suit for any injury done to the company, if the majority of shareholders do not object to that, for, in such a case a meeting can be called and the injury be authorised by a majority vote. The rule laid down in Foss Vs Harbottle, has been followed in many other cases since then. For instance –1. Mac Dougall Vs Gardiner, 2. Parlides Vs Jenson, (1956) 3. Rajahmundry Electric Supply Corporation Ltd. Vs A. Nageshwara Rao, (1956). 108Slide 109: From the rule in Foss Vs Harbottle, it becomes clear that the majority decisions are binding upon the company and a minority has no voice in the control and management of company’s affairs. But in the strict application of this rule, suppose the majority are not acting bonafide for the benefit of the company as a whole, the minority could be exploited by the majority against which the minority could take no legal action, it would be shocking thing indeed. Therefore, certain exceptions have been admitted for the protections of the minority and in the interest of justice to the rule of supremacy of the majority of shareholders. Exceptions to the Rule of Supremacy of the Majority of Shareholders : In the below mentioned situations, the ‘will’ of the majority shall not prevail and individual shareholders or minority shareholders may bring an action against the company to protect their interest. 109Slide 110: 1. Where the Act Done is Ultravires the Company or Illegal : The rule in Foss s Harbottle case does not apply to acts which are ultra vires the company or which are illegal because no majority of shareholders can ratify such acts. As such every shareholder has a right of preventing the company from doing such acts by filing a suit of injunction [Bharat Insurance Company Ltd. Vs Kanhaya Lal, 1935 AIR Lah. 792]. 2. Where the Act Done is Supported by a Resolution Passed by Insufficient Majority : The Act itself modifies the above primary principle in certain cases by requiring two-thirds or three-fourths majority for the validity of the resolution. In such cases a bare majority is insufficient. Certain resolutions, e.g., to alter the objects clause in the memorandum require a three fourth majority. If any such resolution has been passed by the simple majority, any shareholder may institute an action to restrain the company from acting on the resolution [Nagappa Chettiar Vs Madras Race Club, 1949, 1 M.L.J. 662]. 110Slide 111: 3. Where the act complained of constitutes a fraud on the minority and those responsible for it are in control of the company, in such situation any member of the minority can file a suit and the rule in Foss Vs Harbottle does not apply in such situation. 4. Where the Personal Membership Rights of an Individual Shareholder have been Infringed: No majority of votes can deprive a shareholder of his individual membership rights, which have been conferred upon him either by the companies Act or by the Articles of the company (Nagappa Chettar Vs Madras Race Club). Any individual shareholder can, therefore, sue the company in his own name where for instance, he is prevented from exercising his right to vote or his name has been removed illegally from the register of members. 5. Where the Provisions of Section 397 to 409 of the Companies Act, 1956, Apply : The Companies Act itself contains provisions which protect minority in the case of oppression and mismanagement. These provisions are discussed in detail in the next topic namely prevention of oppression and mismanagement. 111Slide 112: PREVENTION OF OPPRESSION AND MISMANAGEMENT Sections 397 to 409 of the companies Act, 1956 lay down specific provisions whereby both the national Company Law Tribunal and the Central Government are empowered to interfere in the affairs of the company for preventing ‘oppression and mismanagement’. According to Section 397 and 398 the specified minimum number of members of a company, may make an application to the Tribunal for appropriate relief on either on the ground of oppression or mismanagement. Oppression Oppression may be understood, for the purpose of company law, as observed by Wanchoo J. of the Supreme Court in case of Shanti Prasad Jain Vs Kalinga Tubes Ltd. (1965), 35 Companies Case 351 in the words “The essence of the matter seems to be that the conduct complained of should at the lowest involve 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.” 112Slide 113: There must be continuous acts on the part of the majority shareholders, continuing up to the date of petition, showing that the affairs of the company were being conducted in a manner oppressive to some part of the members. An unreasonable refusal to accept a transfer or transmission of shares has been held to be oppressive. In Kanika Mukherji vs. Rameshwar Dayal Dube, 1955 cal., it has been held by Justice Sinha that the principle embodied in Sections 397 & 398 of the Indian Companies Act which provide for prevention of oppression and mismanagement, is an exception to the rule in Foss vs. Harbottle which lays down the sanctity of the majority rule. 113Slide 114: In case of Hindustan Co-operative Insurance Society Ltd. case2, the company was carrying on life insurance business which was acquired by the Life Insurance Corporation of India on payment of compensation. The directors, who had the majority voting power, refused to distribute the compensation amount among the shareholders and instead passed a special resolution changing the objects of the company to undertake more risky activities. The unwilling minority made a petition to the court. It was held that this amounted to an oppression of the minority. The court observed: “The majority exercised their authority wrongfully in a manner burdensome, harsh and wrongful. They attempted to force the minority shareholders to invest their money in a different kind of business against their will. The minority had invested their money in a life insurance business with all its safeguards and statutory protections. But they were being forced to invest where there would be no such protections or safeguards.” 114Slide 115: Mismanagement In case of mismanagement as per Section 398, there must be an unfair abuse of power and the persons incharge of management of the company must be guilty of fraud or misappropriation. The term misappropriation implies misapplication of the funds of the company, e.g., to appropriate dishonestly for one self or to apply the funds of the company to the ultra-vires purposes. In both the cases of oppression and mismanagement, the persons who can apply to the Tribunal for relief have been discussed in Section 399 and 401 of the Act. Apart from these provisions discussed in the topic, Section 408 empowers the Central Government to interfere for preventing oppression and mismanagement. Hence, in brief, the provisions under sections 397 to 409 are of very vital importance to protect the members of a company specially in case of oppression and mismanagement by the majority of the shareholders or directors. 115Slide 116: NOTE TO THE NEXT TOPIC We all know that a company is an artificial legal person and it cannot die a natural death like a human being. So, whenever it is desired to put an end to the life of a company, anyone of these below mentioned legal processes must be followed– 1. Through a scheme of ‘reconstruction’ and amalgamation’ under section 394, where the undertaking of one company is transferred to another company and the court orders for the dissolution of the transferor company without undergoing the process of winding up; or 2. Through the removal of its name from the register of companies by the registrar; or 3. Through the WINDING UP process. 116Slide 117: WINDING UP Winding up is a method of putting an end to the life of a company. According to Gower, winding up of a company is the process whereby its life is ended and its property administered for the benefit of its creditors and members. 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. Winding up of a company differs from insolvency of an individual in as much as a company cannot be made insolvent under the insolvency laws. Moreover, a perfectly solvent company may be wound up. The company is not dissolved immediately at the commencement of winding up. Its corporate status and powers continue. When the affairs of the company are completely wound up, the company is killed with surprisingly little ceremony. The legal status comes to an end. This is called dissolution. Since a company is created by the process of law, it can only be destroyed by the process of law. When the affairs of a company are completely wound up, there is no purpose in keeping it alive. It shall be dissolved. However, a company may be dissolved without being wound up. In other words, there can be dissolution without winding up. As we have seen earlier, this can happen in the case of amalgamation. The transferor company is dissolved without being wound up. Again under Section 560, the name of a defunct company may be struck off the register by the Registrar. 117Slide 118: Winding Up Only a company can be wound up. Even a solvent company may be wound up. Winding up may end in surplus assets. Company ceases to be a legal person Assets continue to be with the company but the administration is taken over by the liquidator. There is no such discharge. When winding up has been completed the company will be killed, DISTINCTION BETWEEN INSOLVENCY AND WINDING UP 118 Insolvency Only an individual can be adjudged an insolvent Only a debtor can be adjudged as an insolvent. Insolvency always results deficiency. When a person is adjudged as insolvent he continues to be a legal person Assets vest with the Official Assignee. When the insolvency proceedings are completed the insolvent will be discharged i.e. freed from all his debts.Slide 119: OFFICIAL LIQUIDATOR The liquidator is a person who helps the tribunal to complete the liquidation proceedings. According to Section 448 an official liquidator may be appointed from a panel of professional firms of CA, advocates, company secretaries etc. which the central government shall constitute for the tribunal; or may be a body corporate consisting of such professionals as may be approved by the central government from time to time; or may be a whole time or part time officer appointed by the central government. POWERS OF OFFICIAL LIQUIDATOR The following powers may be exercised only with the sanction of tribunal– 1. To institute or defend any suit, other civil or criminal proceedings in the name and on behalf of the company. 2. To carry on the business of the company so far as may be necessary for the beneficial winding up of the company. 3. To sell movable or immovable property of the company – wholly or in parcels either privately or through public action. 4. To raise money on the security of the assets of the company. 5. To do all such other things as may be necessary for the winding up of the affairs of the company and distributing its assets. 119Slide 120: There, are however, some other powers as well which may be exercised by him even without the sanction of the tribunal. These are– 1. To do all acts and to execute all deeds, receipts and other documents in the name and on behalf of the company and for that purpose to use the company’s seal. 2. To prove, rank and claim the insolvency of a contributory. 3. To draw, accept, make and endorse any bill of exchange or promissory note in the name and on behalf of the company. 4. To appoint an agent to do any business which the liquidator is unable to do himself, etc. 5. Appoint security guards, valuer, CA etc. 6. Publish an advertisement inviting bids for sale of the assets of the company etc. 120Slide 121: DUTIES OF OFFICIAL LIQUIDATOR His main duties are as follows– 1. To conduct the proceedings in winding up (Section 451). 2. To submit preliminary report to the Tribunal after the receipt of the ‘statement of Affairs’ (Section 454 & 455) 3. Custody of company’s property (Section 456) 4. To give regard to the resolutions of the creditors or contributories. 5. To summon meetings of creditors and contributories [Section 460(3)]. 6. To maintain proper books (461). 7. To present an account of his receipts and payments to the tribunal (Section 462) 8. To submit information as to pending liquidation (Section 463). 121Slide 122: THANKYOU 122 You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.