1 Companies Act-Part I (2)

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Mallar Law Consulting Ram Mallarwww.mallarlaw.com Prof. of Law & Corporate Governance

14.10.2011

Welingkar Institute of Management

Development & Research

PRIVATE & CONFIDENTIAL

HANDOUT

COMPANY LAW - MMS

CONFIDENTIALITY NOTICE

This Hand-Out is intended solely for the management students of Professor Ram Mallar.

Access to this document by anyone else is unauthorized. If you are not the student, any

disclosure, copying, distribution or any action taken or omitted to be taken in reliance on it, is

prohibited and may be unlawful. Any opinions or advice contained in this document are

subject to the standard terms and conditions of confidentiality.

2008

Mallar Law Consulting

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COMPANIES ACT 1956

Distinctive Features of a company:

The distinctive feature of a company as compared to partnershipunincorporated bodies is that in law it has a status and existence separate fromthat of its members. It is not the more getting together of persons for thepurpose of carrying on business as in the case of unincorporated associations.

This characteristic offers to its members certain advantages. A company cancarry on business as effectively as partnership. Yet unlike a partnership it is not

disturbed by the death of its members. It continues to exist until it is dissolvedin the manner provided by law. This is aptly described in company law here andelsewhere by the expression perpetual succession.

From its characteristics as a corporate body as distinct form itsshareholders, follows another consequences - the company as a legal entity,and not the shareholders are liable for its wrongs or misdeeds. The companyassets are separate and distinct from those of its members and the creditorscannot proceed against the assets of the shareholder; the members liability islimited to their investment into the assets they have undertaken to theircontribution, even on winding up.

The classic case of this point is Salomon V. Salomon & Co. Ltd, 1987. A.C.p.22 where all the shares of the company were owned by one Salomon and hisfamily members who also held secured debentures of the company. On awinding up of the company, it was claimed on behalf of the unsecured creditorsthat the company never had an independent existence. Negativing this House ofLords said when the Memorandum is duly signed and registered, the subscribersof the body corporate are capable of exercising all the functions of anincorporated individual and it is difficult to understand how a body corporate,thus created by statue, can lose its individuality by issuing the bulk, of its capitalaltogether to the subscribers of the memorandum.

At the same time, inspite of its impersonal nature a company has qualitiesalike to those of an individual. A company may enter into a contract like anyother natural person. It may form companies by subscribing to thememorandum of another and enter into partnerships. It can be liable for tortcommitted by its agents or servants in the course of their employment in thesame manner as any other employers would be vicariously liable.

Where a question of knowledge or intention arises, knowledge or intentionmust be found in the minds of its agents. Further, a company can sue forslander affecting its business reputation. Similarly, a company can be guilty ofcriminal act e.g. it can be charged with conspiracy to defraud or may beconvicted for making use of false document with intent to deceive.

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In certain cases where the law wishes to hold the members personallyliable for act of the company, the liability is specifically provided, for examples ofthe attachments are given in Sections 45 and 542 of the Company Act, 1956.Section 45 provides that where the number of members of a public company isreduced to less than seven or of a private company to less than two and thecompany carries on business for more than six months while the number is soreduced, every person who is member for the period beyond six months will beseverally liable for the debts of the company contracted during that period andcan be sued for such debts. Under Section 542 if in the course of winding up theCourt comes to the conclusion that the business of the company has beencarried on with a view to defrauding creditors or any other persons or for anyfraudulent purpose, the liability for fraudulent conduct would attached on any

persons that the Court finds were knowingly parties to the carrying on of thebusiness in fraudulent manner and such person would be personally responsiblewithout limitation of liability for all or any of the debts or other liability of thecompany. The words any person in this section would cover in addition to thedirectors of the company, its officers and shareholders if they were knowingparties to the fraud.

Lifting the Corporate Veil

Apart from the specific provisions indicted above the Courts have in somecases held that it is justifiable to lift the Veil of corporate entity and pay regard

to the economic realities behind the legal facade. This can happen when thecourt is seeking to find out the person who are actually in control if a company tomake them liable. The corporate veil may also be lifted where the question oftrading with the enemy arises, or the nationality of a company is to bedetermined. In other cases the corporate veil may be lifted where the questionof evasion of taxes is involved. One of the earliest case on this point wasDeliminer Co. Ltd. Vs. Continental Type & Rubber Co. 1916 2 A.C. p.307 wherethe question to be decided was whether one company was an Alien enemy. Inthat case, Lord Falmer said the analogy is to be found in control. He held that acompany registered in England may be an alien enemy if its agents or thepersons if defacto control of its affairs are alien enemies and in determiningwhether alien enemies have such control, the number of alien enemy

shareholders is material.

An interesting case in India where the corporate veil was lifted was that ofthe Incom Tax Commissioner, Marcras Vs. Meenakshi Mills, Madurai, A.T.R. 1967S.C. p.800. In this case these mills concerned were engaged in the manufacturein the Princely State. The Madurai Bank was formed, in which coincidentally thethree mills and Mr. Chettar, another bulk shareholder in the Mills, once againheld all the shares. The bank also established a branch at Pudukott into whichthe profits of the three mills were deposited. Against these deposits, the Bankgranted loan facilities to the Mills at Madurai. The question arose whether thisamounted to a transfer of moneys from the princely state into the taxableterritories of British India. Lifting the corporate veil, the Supreme Court held thatthere was a basic arrangement between the Mills Companies and the Bank that

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the money outside taxable to territory and this arrangement was possiblebecause the companies had the controlling voice in the running andmanagement of the Bank, the Pudukkotai was neither a cotton producing areanor had it a market for cotton and there was nothing to recommend the carryingon of business there except that it was a non-taxable territory.

Similarly, in Juggles and Kamapat Vs. Commissioner of Income Tax U. P.A.I.R. 1969 S.C. p.932, the Supreme Court held that the court is entitled to liftthe mask of corporate entity if the concept is used for tax evasion or tocircumvent tax obligation or to perpetrate fraud. In this case, a company, whichwas promoted by the assesses firm, prematurely terminated the ManagingAgency Agreement with the firm and paid compensation for such premature

determination. The Managing Agency was assigned to a new company in whichthe partners of the assessee firm held the controlling shares. The compensationwas disallowed as a capital gains in the heads of the assessee.

Companies Registrable under the Companies Act

Companies registration under the Companies Act, 1956 may be dividedinto the following 3 categories on the basis of the liability of their members :

a) Companies limited by shares.

b) Companies limited by guarantee these may or may not have a sharecapital.

c) Companies having unlimited liability these again may or may not haveshare capital.

Company Limited by Guarantee

The Companies Act is mainly concerned with companies limited by shares.However, brief mention may be made of the other two types of companies. Acompany limited by guarantee in one where the liability of the members islimited by the Memorandum to a fixed amount in the event of the company

being woundup (Sec. 12(2) (B)). Professional associations, trade associationsand research associations favour this form or organisation. Such companiesmay, subject to the approval of the Central Government dispense with the word,Limited under section 25 of the Act. The Memorandum and Articles ofAssociation of such companies are required to be in the form set out in ScheduleI-Tables C and D.

Unlimited Company

An unlimited company is one which does not place any limit on the liabilityof its members (Section 12(2) (c)). Section 11 of the companies Act prohibits theformation of partnerships and unincorporated business association consisting ofmore than ten persons if formed for the purpose of banking, or more than twenty

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persons if formed for carrying on any other business. Persons normally formpartnerships or unincorporated larger form of unlimited company, of theirnumber is larger than ten or twenty as the case may be. The Memorandum andArticles of Association of unlimited companies required to be in the form ofSchedule I-Table E.

Company Limited by Shares

A company limited by shares is one where the liability of the members islimited by the Memorandum to the amount, if any, unpaid on the shares held bythem (Section 12(2)(a)). The Articles of Association of such a company arerequired to be in the form set out in Schedule I-Table A. A company limited by

shares obtains its working funds by the issue of shares which may be subscribedby the signatories to the Memorandum of Association, or allotted to applicantsfor cash or for consideration other than cash e.g. for transfer of machinery orknowhow. In a company limited by shares, the shareholders may or may not paythe whole nominal amount to his share to the company when acquiring theshares. The practice is to pay some amount at the time of application, thereafterthe Directors may call upon the shareholders at any time to pay up the unpaidportion of the nominal amount. It is important to remember that the unpaidportion may be made payable either during the existence of the company or onwinding up.

Private Company and Public Company

Companies can also be classified on yet another basis. One category is closer tofamily groups. It does not invite the public to contribute to its capital or join itsactivities. It restricts its memberships to fifty persons and even in respect of thissmall number, the members are prohibited from freely transferring their shares.Such a company is called a private company. Loosely speaking a companywhich is the opposite of such company is a public company.

Private Company

Section 3(1) (iii) of the Companies Act defines a private company as a company

which by its articles.

a) Restricts the right to transfer its shares, if any.b) Limits the number of its members to fifty not including :

i) Persons who are in the employment of the company and

ii) Persons who are having been formerly in the employment of thecompany, were members of the company while in that employmentand have continued to be members after the employment ceasedand

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c) Prohibits any invitation to the public to subscribe for any shares ordebentures of the company.

A public company has not been specifically defined but Section 3(1) (iv) statesthat a Public Company means a company which is not a private company. It isunfortunate that the definition of private company omits one importantdistinguishing features between a private company and a public company, viz.that the minimum number of members that a private company is required tohave is two against seven members required for a public company. This is givenin Section 12.

Only shares and debentures of public companies can be dealt with on the Stock

Exchange. However, the reverse is not true. The shares of all public companiesare not quoted on the Stock Exchange. A company that wishes to have itsshares and debentures to be listed has to obtain permission from the StockExchange to do so. This permission is granted on condition that the rules andregulations of the Stock Exchange will be complied with. These generally involvethe giving of information to the Exchange regarding allotment of shares, closureof books, issue of certificates, bonus shares, dividend declaration, changes in theBoard etc. A listing Agreement would also have to be executed by the companywith the Stock Exchange for this purpose. Violation of any of the conditions ofthe agreement would result in the companys shares being delisted, therestriction imposed by the Stock Exchange are in addition to any statutory

requirements that have to be complied with by a company.

Advantages enjoyed by any Private Company (Including a privatecompany which is a subsidiary of a public company.)

Private companies enjoy certain advantages over Public Companies. The Act,however, treats private companies, which are subsidiaries of public companies,roughly on a par with public companies, and the privileges enjoyed by the otherprivate companies, viz. those that ate not subsidiaries of public companies aredenied to them. The following are the advantages enjoyed by all privatecompanies whether they are subsidiaries of public companies or not :

i) The minimum number of persons required to form private company is twoas against seven person required for a public company (Section 12 (1)).

ii) The prohibition regarding allotment of shares in certain cases unlessstatement in lieu of prospectus is delivered to the Registrar is notapplicable to private companies (Section 10 (3)).

iii) The provisions relating to further issue of capital are not applicable toprivate companies (Section 81).

iv) A private company is not required to comply with the conditions set but inSection 149 relating to commencement of business.

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v) A private company is not required to hold a statutory meeting (Section165).

vi) As against five members required for a public company, in the case of aprivate company, even one member present either in person or by proxyand having the right to vote on the resolution (if not more than seven suchmembers are personally present) or two such members (if more thatseven such members are personally present) is entitled to demand poll(Section 1/9 (1) (b)).

vii) The minimum number of directors required for a private company is twoas against three required for a public company (Section 252).

Advantages enjoyed only by a private company which is not a subsidiary of apublic company in this referred to as purely private company.

Certain advantages are enjoyed only by a private company that is not asubsidiary of public company and are denied to a private company that issubsidiary of a public company. In other words, both a public company and aprivate company that is a subsidiary of a public company would be treated alikein respect of the following matters.

i) Neither public company nor a private company that is a subsidiary of a

public company can provide financial assistance to a part to enable suchparty to purchase share in the company (Sec 77(2)).

ii) Neither public company nor private company that is subsidiary of publiccompany can have preference shares that carry voting rights (Sec.90 (2)).

iii) A person not admitted as a shareholder by a public company can appealto the Central Govt. against such refusal. Not so to a shareholder of apurely private company.

iv) The conditions governing notice for calling general meeting as well asthose governing the manner of conducting such meetings (which are

contained in Section 171 to 186) apply only to a public company and aprivate company that is a subsidiary of a public company not a publiccompany and a private company that is a subsidiary of a public company,not to a purely private company.

v) The overall limit for managerial remuneration does not apply to purelyprivate companies. Further, Govts approval is not necessary foramending any of the provision relating to whole-time directors. Nor is itnecessary to obtain government approval for the payment ofremuneration to the managing directors or managers of purely privatecompanies. (Sections 198, 268, 269, 309 to 311).

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vi) A purely private company is entitled to appoint a firm or body corporate toan office or place of profit for any period of time unlike the other two typesof companies (Action 204).

vii) No person other than a member of a purely private company is entitled toinspect or obtain copies of the profit and loss account of the company. Inrespect of the other two types of companies the balance sheet and profitand loss account have to be filed with the Registrar and any person caninspect them (Section 220 (1) proviso).

viii) A person can be a director of more than twenty purely private companies(Section 273).

ix) The restriction on the powers of directors regarding sale, lease, dispositionof property, investment, borrowing and contributions do not apply to apurely private company (Section 293).

x) The registration on the grant of loans to directors applies only to a publiccompany and a private company that is a subsidiary of a public company(Section 295).

xi) The provision prohibiting a director from participation in the Boardsproceedings, when he is in credit, does not apply to a purely private

company (Section 300 (2)).

xii) A person cannot be a manager/managing director of more than twocompanies or to be appointed for more than five years at a time only inthe case of a public company, or a private company which is a subsidiaryof a public company (Sections 316, 317 (4) and 888 (A)).

xiii) In a purely private company there are no restriction on the companygiving loans or guarantees to other companies or securities for loansgranted to other companies or investing in other companies (Section 370and 372).

xiv) The Central Govt. has no power to present a change in the composition ofthe Board of a purely private company as in the case of a public companyor a private company that is a subsidiaries of public company.

Where a private company makes a default in complying with any of theprovisions required to on included in its Articles under Section 3(1) (iii), it willcease to be entitled to the privilege and exemptions conferred on privatecompanies by the Act unless the Central law Board is satisfied that the failure tocomply with the conditions was accidental or due to inadvertence to some othersufficient cause of that it is just and equitable to grant relief (Section 43).

Section 43 A Company :

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There is one type of company of which mention must be made before the topicrelating to public and private companies is terminated and that is a section 43 Acompany. This company is peculiar to Indian law. Under Section 43 A, a privatecompany is deemed to become a public company in the followingcircumstances :

1) If not less than twenty five percent of the capital of the private company isheld by one or more bodies corporate (Section 43 a(1)).

2) If the average annual turnover of such a company for three consecutivefinancial years is not less than much amount as may be prescribed(Section 43 a(IA)).

3) If such a company holds not less than twenty-five percent of the paid-upshare capital of a public company (Section 43 A(1B)).

4) If such a company accepts, after an invitation is made by anadvertisement or renews deposits from the public, other than itsmembers, directors or their relatives (Section 43 A (1C)).

Within three months of a private company becoming a public company in any ofthe above ways, the company is required to inform the Registrar that it hasbecome a public company and thereupon the Registrar will delete the word

private from the name of the company.

The Articles of Association of a 43A company may include provisions containingrestriction on the transfer of shares and the number of its members may at anytime be reduced to less than seven. The number of members necessary to forma quorum in such a company may have only two directors as against threerequired for a public company. For all other purposes, however, such company istreated as a public company and the restrictive conditions which Govern publiccompanies such as obtaining Governments approval for appointment of whole-time directors, payment of remuneration to them, etc. apply to such company.

The rationale behind the section is that the privileges and exemptions granted to

purely companies which are more in the nature of family concerns and there thepublic is not interested should not be extended to companies in which publicmoney is invested, or which throughout their investment in public companiesinfluence such public companies.

It has been stated in Ramaiyas Guide to the Companies Act (Eight Edition) atpage 100 that after the enactment of this section there can exist no suchcompany as private company which is subsidiary of a public company and thatexpression used in several section has no meaning. It is respectfully submittedthat this view is incorrect. A company may be subsidiary of another companyeither by virtue of the later company holding the interest in the shares or byvirtue of the later being able to control the composition of the Board of Directors.It is quite possible that a company may hold less than twenty-five percent of the

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capital of another company whose turnover may be less than rupees five croresand yet the first company may be able to control the composition of the Boardof Directors of the second company. In such a case, the later company would bea subsidiary of the first company. It is, therefore still possible to have a privatecompany which is a subsidiary of a public company in terms of the definition ofsubsidiary in Section 4 of the Act.

While dealing with this topic it would be useful to keep in mind the distinctionbetween a company and a body corporate. A body Corporate is defined bySection 2(7) and a company by Section 3. A body corporate is a much widerterm than a company and includes not only a company which is only one class ofbody corporate i.e. the registration by the required number of persons under the

Companies Act, but other bodies which are incorporated under a statute in Indiaor abroad. Examples of bodies corporate in India are the Industrial FinanceCorporation, the Industrial Development Bank of India, which are incorporatedunder their own Act. A body corporate also includes a company incorporatedoutside India whereas a Company under the Act means only an Indiancompany.

Many of the restrictive provisions of the Act are so worded as to cover not onlycompanies but bodies corporate also. The prohibition against lending in Section372 extends to bodies corporate also. A contravention of the Act is likely if thisaspect is not kept in mind all the time.

Is the Company a Citizen ?

This is an interesting question in the context of fundamental rights grantedunder the constitution. Under part III of the Constitution, certain fundamentalrights are conferred on any person which others are conferred on citizens alone.For example, Article 14 provides that the State shall not deny to a personequality before the law or the equal protection of the law. Article 15 states thatthe State shall not discriminate against any citizens on ground of only religion,race, caste, sex etc. and Article 16 states that there shall be equality ofopportunity for all citizens in matters relating to employment to any office underthe State. Until the passing of the Citizenship Act, 1955, there were conflicting

decisions of the different High Courts whether a company was a citizens. InJupiter General Insurances Co. Vs. V. A. Rajagopalan, 1952, Pune, p.11, the courtheld that Articles 5 (a) and (b), 6, 8 and 19 (c) to (e) could not apply tocorporations, that the expression citizen meant men and women andconsequently a corporation was not a citizen. In a Bombay case, the state ofBombay Vs. R.M.D. Chamarbagwalla 1955 Bom. p. 630 C. J. Chagla struck a newline in holding that a company, the majority of whose shareholders were Indiancitizens, was a citizen. In 1955 the Citizenship Act was passed. This prescribesthe conditions under which a person can be a citizen, and it expressly providesthat a person does not include a corporation.

Incorporation of a Company

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The different kinds of companies that may be formed have been describedearlier. Whatever the type of company proposed to be promoted, the mode offorming the company is the same, viz., it is formed, when even or more persons(in the case of a public company) by or two or more persons (in the case ofprivate company) subscribe their names to the Memorandum of Association. TheMemorandum is the constitution or the fundamental document or charter of thecompany. In sets cut, inter-alia the liability of the members depending on thetype of company that is proposed to be formed, viz. whether it is limited byshares, limited by guarantee, or an unlimited company (Section 32).

Who can be a Subscriber ?

Anyone may be a subscriber. A bankrupt may be a subscriber so can acompany, provided it has the necessary power. Several persons may jointly besubscribers. However, a firm is not person, and therefore cannot be asubscriber; if it wishes to subscribe, the individual partners would have to do so.A person resident outside India (whether a Citizen of India or not) or a personwho is not citizen of India, but is resident in India cannot be a subscriber to theMemorandum without the permission of the Reserve Bank of India in terms ofSection 29 (1) (b) of the Foreign Exchange Regulation Act, 1973.

A subscriber may subscribe the Memorandum in his own hand or through anagent duly authorised by him. In addition to the name and the signature of the

signatory, his address and occupation must also be mentioned. It is advisable topay great attention to details when registering the Memorandum. If thehandwriting is not clear or all the requisite details are not given, the registrarmay return the document for rectification.

Attestation

The signature of cash subscriber to the Memorandum has to be attested by atleast one witness. It would be in order for one person to witness the signature ofall subscribers, in which case, the attestation clause would read as follows :

Witness to the above signatures

The address and occupation of the witness or witnesses must also be mentioned.

Articles

The Articles of Association contain the detailed regulations for the conduct of thebusiness of the company. Section 28 states that the Articles of Association ofcompany limited by shares may adopt all or any of the regulations contained inSchedule I Table A. Three courses are therefore open to a company (i) to adopt

Table A wholly. In this case all that is necessary is for the Articles to state thatTable A shall be the Articles of the company, (ii) to have a set of Articles whichare complete by themselves and exclude Table A wholly. In this case it iscapable forthwith or exercising the functions of an incorporated company and

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having perpetual succession and contribute to the assets of the company in theevent of its being wound up as is mentioned in the Act, Section 33 (3) and 34.

Section 35 states that a certificate of incorporation shall be conclusive evidencethat all the requirements of the Act have been complied with in respect ofregistration and matters precedent and incidental thereto. This means that it isnot open to a subscriber, after the certificate is obtained, to allege that he wasinduced to subscribe to a memorandum by mispresentation or fraud. Before thegrant of the certificate, a subscriber would have usual remedies for hisrepresentation of the company. But after the certificate is obtained, would notbe affected by any irregularity in connection with subscription such as that lessthan the prescribed number of persons have subscribed to the memorandum.

Even if the company ceases to carry on business it continue exist as a corporateentity. In fact, in some cases, it is deliberately decided to retain the share of anotherwise defunct company rather the wind it up in the event of the company atsome future time undertaking some business. This would obviate having to payregistration charges once again.

It must be noted that Section II prohibits more than ten persons carrying on thebusiness of banking unless the body of persons whether a company associationor partnership is registered under the Act. The same section also prohibits morethat twenty persons from carrying on any other business the object of which is

the acquisition of gain by the company, association on partnership, unless suchbody is registered under the Act. This being so, and taking into account some ofthe disadvantages that attach to partnerships, the favoured vehicles of businessin the future will in all probability be a company registered under the CompanyAct.

MEMORANDUM OF ASSOCIATION

As mentioned earlier, the Memorandum of Association is the charter of thecompany. The Memorandum, however, cannot or can the Articles (which in anycase are subordinate in status to the Memorandum) override the provisions ofthe Act, an any provision void (Section 9).

Salient features of Memorandum

In view of its importance, it is worth describing the salient features of theMemorandum and Making mention of some important aspects relating to it.

The Memorandum of Association should be in one of the forms set out inSchedule to the Companies Act depending on the kind of company that is beingpromoted viz. whether it is a company limited by shares or guarantees or anunlimited company (Section 14).

Section 13 and 15 set put the essential features of a Memorandum. Section 15which describes its format states that

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a) The Memorandum must be printed :b) It should be divided into paragraphs numbered consecutively;c) It should be signed by the requisite number of persons whose signatures

must be attested,.

Section 13, which deals with the essential components, provides thatMemorandum must state :

a) The name of the company. If the company is a public limited company,the name must have the word Limited as the last word of the name; if itis a private limited company, the name must be followed by the words

Private Limited.

b) The state in which the registered office of the company is situated;

c) The objects to be pursued by the company. Where the company is formedafter the commencement of the Company Act, 1956, the object have to bedivided into (i) the main objects and objects incidental or ancillary to theattainment of the main objects and (ii) other objects;

d) Where the objects extend to more that one state the Memorandum mustmention the States to which the objects extend. This does not apply to

trading corporations.

e) Where the liability of the members if limited by guarantee thememorandum must state (1) that the liability of the members is limitedand (2) the amount to which it is limited.

f) In the case of a company having a share capital and limited liability, thememorandum must in addition to stating that the liability of the membersis limited also state the amount of share capital with which the companyis to be registered and the division of the capital into shares of a fixedamount. Further, each subscriber must be indicated against his name hisshare.

Alteration of Memoranum

While the Articles of Association can be altered by a mere Special resolution(except where the effect of the altering is to convert a public company into aprivate company with further approval of the Central Government is necessary),the Memorandum approval of the Central Government is necessary), theMemorandum of Association cannot be altered in its essentials excepts inaccordance with prescribed procedure. Section 18 states that those conditionswhich are required by Section 18 or by any other specific provision in the Act tobe set out in the Memorandum can only be altered in the mode and to theextent for which express provision is made in the Act. The other provisions can

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be altered in the same manner as the Articles of Association, viz. by specialresolution.

The procedure for alteration is set out in Sections 17 and 18. Briefly, theprocedure is that a special resolution has to be passes, approving of thealternations and the further approval of the company Law Board must beobtained which approval the board will give only if it is satisfied that notice hasbeen given by the company to the debenture holders and creditors of thecompany as well as to those person whose interests would be effected by thealteration and that such persons have no objection to the alteration. The Boardon its part is also required to give notice to the Registrar to ensure that he hasno objection to the company Law Board confirming the alteration, as well as the

printed copy of the Memorandum as latered must be failed by the company withthe Registrar.

It is important to note that it is not enough that the procedure for amendment isfollowed. The alteration must be affected for any one of the reasons mentionedin Section 17 (1) viz. to enable the company to (a) carry on its business moreeconomically or more efficiently or (b) to attain its main purpose by new orimprovements or (c) to enlarge or some business which may conveniently becombined with the business of the company or (d) to restrict or abandon any ofthe objects specified in the memorandum or (e) to sell or dispose of the whole orany part of the undertaking of the company or (g) to amalgamate with any other

company or body of persons.

The above seven situations together encompass a wide field and a prime faciecase could therefore generally be made out that the alteration of theMemorandum is for one of these reasons. However, the discretionary powers ofthe Company Law Board under this Section are very wide and the Board mayrefuse to confirm the alteration, or confirm it only in part or only subject to suchterms and conditions as it thinks fit. Before confirming the alteration, the Boardwould have to be satisfied not only that the interest of the creditors and themember will not be affected but that the interest of the other category ofpersons mentioned above will not suffer. In exercising its discretion theCompany Law Board would also have regard to considerations of business,

morality, national interest, etc.

Object Clause and its Construction

The object Clause is obviously the most important clause of the Memorandum forit has a two fold purpose ( I ) It define the powers of the company and (ii) it limitsthe powers of the company to those that are specifically set out in theMemorandum. Further, linked with the object clause is the ultra vires doctrine.A company exits the only for the particular purpose of its incorporation asdefined in its object clause. An Act which is ultra vires, neither the company northe other contracting party can act on it. The main purpose of this doctrine inearly times was to protect the investor against a misuse of funds of company, bypreventing the company from frittering them on objects unrelated to the

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authorised objects. In the word of professor Gower, "Would not be dissipected inauthorized enterprises. However this inaudible object can result in greatdisadvantages if the object clause is interpreted too strictly.

A distinction must be made between acts which are ultra vires the company andacts which are ultra vires the directors. An act which is ultra vires the companyis null and void, an act ultra vires the directors may be regularized. For example,Articles may place certain restrictions on the powers of directors and suchpowers are nevertheless exercised by the directors, it is open to theshareholders to ratify them not if the acts are ultra vires the company.

ARTICLES OF ASSOCIATION

Essential Features and Provision Governing Articles

The essential features of the Articles of Association have been dealt with atseveral different places earlier whenever a reference to such features wasnecessary. It has been mentioned that the Articles of Association are thedetailed regulation of the company relating to the internal management of thecompany and the conduct of its business. This document will therefore, definethe respective powers of the shareholders and the directors as also the rights ofthe company in relation to its shares such as forefeiture, lien etc. Forconvenience, those essential features and the relevant provisions relating to the

articles are recaptitulated and summarized below :-

1) The Articles of Association cannot overide the provisions of the Act,(Section 9).

2) It is not necessary for a company limited by shares to have a separate setof Articles of Association, where such a company does not have its ownset of articles, the provisions of Table A would apply (Section 28).

3) Where the company does have its own Articles of Association, they mustbe in the form mentioned in section 80 and be registered (Section 28).

4) Even where a company has its own set of articles, it may adopt some ofthe provisions of Table A in Schedule I. In fact, if there is no specificationthat Table 'A' is excluded, then Table A will apply to the extent thatprovision is not made in the articles in respect to the matters dealt with in

Table A (Section 28 (2) ).

5) The Memorandum and the Articles, when registered bind the company andthe members as if they had been signed by the company and by eachmember separately (Section 36).

6) The Articles of Association of a private company must contain therestrictions set out in section 3 (1) (iii).

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7) This articles of Association may be altered by a special resolution wherethe alteration result in a public company becoming a private company inwhich case further approval of the Central Government is necessary(Section 81).

Contents of Articles

The matters dealt with in the Articles of Association are generally the following :-

i) Capital and shares : The amount of capital of the company method ofincreasing and reducing capital, rights of different classes of shareholders,rights of the company vis--vis shareholders, frequency of calls, lien onparty paid shares, forfeiture of shares, conversion of shares into stock,

procedure for transfer and transmissions.

ii) General meetings : Manner of convening general meetings, length andmanner of giving notice, preocedure for conducting meetings, viz.,appointment of the Chairman, manner of voting, i.e. form of proxy, etc.

iii) Directors : The number of directors, their qualification remuneration.Powers, method of appointment and removal, procedure to be followed atBoard meetings, any special provision for appointment of nomineesdirector, provisions relating to wholetime directors.

iv) Accounts : Provisions relating to dividends books of accounts where theyare to be kept, right of inspection of such books, manner of signingaccounts, capitalization of reserves stc.

v) Common Seal : The manner of affixing the common seal.

vi) Audit : Provision relating to audit of accounts, appointment, qualifications,remuneration, rights and duties of auditors, etc.

vii) Miscellaneous provisions : Indemnity to officers of the company,authentication and service of documents, etc.

Relating of the Articles to the Memorandum

The articles of a company are subordinate to and controlled by the Memorandumof Association, which is the dominant instrument. The Memorandum containsthe conditions upon which the company is granted incorporation, conditionswhich are fundamental, but some of which are alterable by the correctprocedure. The articles are the internal regulations of the company, and overthese the members have full control, and may alter them from time to time asthey think fit, subject only to this, that they keep within the limits specified bythe Memorandum of Association and the Act.

PROCEDURE OF REGISTERATION OF COMPANY

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Commencement of Business

While a private company can commence business, immediately after it isincorporated, a public company having a share cannot commence businesscompany or exercise any borrowing powers unless it has obtained from theRegistrar the "certificate to commence business". This certificate is grantedafter the company issues a prospectus or a statement in lieu of prospectus andhas complied with the further conditions laid down in section 149 (section 149).

Prospectus means "Any document described or issued as a prospectus andincludes any notice, circular, advertisement or other document inviting deposits

from the public or inviting offers from the public for the subscription or purchaseof any shares or debentures.

A Company issue a prospectus when it invites offers from the public forsubscription or purchase of shares or debentures. However, where a companyhas made arrangements for its shares or debentures to be taken up by privateparties or financial institution, so that it is not necessary to make an offer to thepublic, the company will not issue a prospectus but will file a statement in lieu ofprospectus with the Registrar. The statement is required to be in the form setout in Schedule III of the Act.

Section 67 of the Act describes what constitutes an offer of shares or debenturesto the public. An offer to a section of the public can also be deemed to be anoffer to the public. However, if the offer or invitation does not result in theshares or debentures being available for subcription or purchase by personsother than those receiving the offer, or can otherwise be treated purely asdomestic concern of the persons making and receiving the offer, the offer is notdeemed to be made to the public. This subject, as the circumstances underwhich it is necessary to file a prospectus, will be discussed in detail late whichdeals exclusively with prospectus.

After the company has issued a prospectus or filed a statement in lieu ofprospectus, the company has issued a prospectus or filed a statement in lieu of

prospectus, the company can commence business only after the followingconditions are fulfilled. (Section 149).

A prospectus is issued, (a) after the minimum subscription laid down in theprospectus has been received and shares have been allotted. (b) every directorof the company has paid to the company in respect of the shares taken orcontracted to be taken by him for which he is liable to pay in cash, the amountpayable on application and allotment. (c) permission has been obtained from therelevant stock exchange for dealing in the shares or debentures and (d) therehas been filed with the Registrar a declaration by one of the directors or thesecretary or where the company has not appointed a secretary, a secretary inwhole time practice, that the above conditions have been complied with. Wherea company has not issued a prospectus but filed a statement in lieu of

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prospectus only conditions (b) and (d) mentioned above have to be compliedwith.

The declaration to the Registrar must be filed in Form 19 or Form 20 dependingon whether a prospectus is issued or a statement in lieu of prospectus is filed.

The minimum subscription is that the amount which in the opinion of thedirectors is necessary to provide the money for the following (unless part of theexpenditure is proposed to be defrayed in any other manner).

i) The Purchase price of any property.

ii) Preliminary expenses and commission payable for subscribing to theshares of the company.

iii) Re-payment of money borrowed for the above two.

iv) Working Capital.

v) Any other expenditure of which the nature and purpose must be stated(section 69).

On complying with the conditions mentioned above, the registrar will certify that

the company is entitled to commence business and such certificate will beconclusive evidence that the company is so entitled. (Section 149 (3)). Until thecompany received such a certificate, any contract made by the company isprovisional only and not binding on the company. After the receipt of such acertificate, the contract is binding on the company.

The following matter may be kept in mind in connection with the commencementof business by a company :

i) Registered office : A company must have registered office from theday on which it begins to carry on business or from the thirteenth day after itsincorporation, whichever is earlier and the notice of the situation of the

registered office must be given to the Registrar (Section 146). The Memorandumof Association merely mentioned the State in which the Registered office will besituated. The decision regarding actual location of the office may thereforetaken later on, but before the expiry of the period mentioned above. Theregistered office has some importance and status in as much as certaindocuments are required to be kept under the Act at the Registered Office only.Some of the documents which are required to be kept at the Registered Officeare :-

a) Register of Members,b) Index of Membersc) Register and Index of Debenture holders.d) Register of charges

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e) Copies of annual returns under section 159 and 160 (section 163).

ii) Appointment of the first directors ; Generally the first directors of theCompany are named in the Articles of Association. If this has not been done thesubscribers to the Memorandum of Association would appoint the first directors.In the alternative the subscribers, who are individuals, shall be deemed to bedirectors until the directors are appointed.

iii) Appointment of solicitors : It is customary to appoint a firm of solicitors towhom all the legal work of the company would be referred.

iv) Appointment of Baanners ; The Company would have to decide in which

bank it will open its accounts. Further such bank will have to be intimated thenames of officers who will be operating the accounts on behalf of thesecompany. The company will also probably have overdraft facilities with certainbanks and the Boards approval would be required for this purpose also.

v) Common Seal : The design of the common seal would have to be approvedby the Board and arrangements would have to be made for its safe custody.

vi) Execution of agreement previously entered into by promoters ; It has beenmentioned above that until the company obtained a certificate to commencebusiness any agreement entered into by the company. It is customary to

place such agreements before the Board and have them confirmed after thecertificate to commence business has been obtained.

vii) Statutroy book : It may be descriable to obtain the Boards approval to theforms of the various registers and books that are required to be maintainedunder the Act. Such as the register of investment, register of charges,minutes book, register of contracts, register of directors etc.

P R O S P E C T U S

I have mentioned earlier that company which invites offers from the public forsubscription or purchase of any shares is required to issue a prospectus.

The provision relating to a prospectus, are some of the most confusing in theCompanies Act, and present difficulty in their interpretation not only to thestudents but sometimes to the lawyers also. It may be some consolation toknow that the provision of the English law on the subject are very similar.

When Necessary to issue prospectus

Prospectus is defined by section 2(30) as any document described or issued as aprospectus and includes any notice, circular advertisement or other documents,inviting deposits from the public or inviting offers from the public for subscriptionor purchased of any share in, or debentures of, a body corporate.

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The question that naturally arises for consideration is when is it necessary toissue a prospectus ? or When is and document deemed to be a prospectus ? The answer to that question is found in section 64, which sets out thecircumstances under which this liability arises. Section 64 states Where acompany allots or agrees to allot any of these shares or debentures beingoffered to be a prospectus of any company .

Provision Covering Prospectus.

The provisions governing prospectus are summarised below :-

1. A prospectus is required to be dated and the date on the prospectus will

be assumed to be the date of publication of the prospectus. (Section 55).The date of publication of the prospectus must be construed as the date ofissue of the prospectus. The date of issue is the date on which theprospectus first appears as in advertisement.

2. A prospectus is required to state the matters specified in Part I of ScheduleII and to set out the reports specified in Part II Schedule II and is furthersubject to the conditions in Part III of that Schedule (Section 56 (1)).

3. Every form of application of shares or debentures must be accompaniedby a memorandum containing such salient features of a prospectus as

may be prescribed. However copy of prospectus will be required to befurnished on a request being made be any person before closing of thesubscription list. The provision of this section does not apply where theapplication form is issued (a) in connection with an invitation to a personto enter into an underwriting agreement with respect to the shares ordebentures or (b) in relation to share or debentures not offered to thepublic (Section 56 (3)).

4. The application need not be accompanied by a prospectus and theprospectus need not comply with the requirement mentioned above, ifissued to existing members or debenture-holders of the company or (b)the issue of the prospectus or application related to shares or debentures

which will be in all respects uniform with the shares or debenturespreviously issued, and are dealt with an a stock exchange. (Section 56(5)).

5. Where the prospectus includes a statement purporting to be made by anexpert, the expert must be a person who is not connected with orinterested in the promotion or the management of the company. Anexpert includes an engineer, a valuer, or an accountant and any otherperson whose profession gives authority to statement made by him.(Section 57 and 59 (2)). A statement purporting to be made by an expertcan be included in a prospectus only if the expert has approved the formof the statement and the context in which it is included and had given hiswritten consent to the issue of the prospectus with the statement in such

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form, and further statement appears in the prospectus that the expert hasgiven his consent and has not withdrawn it. (Section 53).

6. If the company issue the prospectus knowing that the expert is connectedwith the formation of the management of the company or the statement isnot in the form approved by him or he was withdrawn his consent to theissue of the prospectus, the company and every person who is a party tothe issue is punishable with a fine which may extent the rupees fivethousand (Section 59).

7. A Prospectus cannot be issued unless before its publication there has beendelivered to the Registrar, for registration a copy of the prospectus signed

by every person who is named in the prospectus as a director or proposeddirector of the company or by the agent of such director and unlessfurther the following documents are attached.a)The consent of the expert to the issue of the prospectus. This consentmay be either attached to the prospectus or endorsed on it (Section 60191) (a)).

b) The consent of every person named in the prospectus as an advisor,legal advisor, attorney, solicitor, banker, or broker of the company(Section60 (3))

c) A copy of every material contract entered into by the company in thelast two years, not being a contract in the ordinary course of Business, anda copy of every contract appointing or fixing the remuneration of amanaging director or manager (Section 60 (1) (b) (1)).

d) Where any adjustments have been indicated by auditors or accountantin their report a written statement signed by such persons setting out theadjustments and indicating the reasons for such adjustments (Section 60(1) (b) (ii)).

8. The prospectus must on the face of it state that a copy has been deliveredto the Registrar and specify the documents which are attached to the copy

(Section 60 (2)).

9. Register the prospectus after being satisfied that all the requirementshave been complied with (Section 60 (3)).

10. A prospectus cannot be issued more than 90 days after the copy isdelivered for registration to the Registrar. (It will be noted that the EnglishAct contains no such time limits). The reason for imposing the limit isthat if the issue of the prospectus is delayed too long, conditions mayalter and what is stated in the prospectus may no longer be valid.(Section 60 (4)).

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11. The various reports and contracts referred to in the prospectus can beinspected by any member of the public, at the office of the Registrar for aperiod of 14 days beginning with the date of publication of the prospectus(Section 610).

12. The term of any contract referred to in the prospectus cannot be varied bya company except with the concept of the shareholders in generalmeeting (Section 61).

13. A prospectus shall be deemed to include an unture statement if (a) thestatement is misleading in the form and context in which it is included or(b) there is an admission in the prospectus of any matter and such

admission is calculated to mislead the public (Section 65).

CIVIL AND CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS

Section 62 states that if there is any untrue statement included in theprospectus, the following persons, are liable to pay compensation to everyperson who subscribed to any shares or debentures on the faith of theprospectus for any loss or damage he may have sustained by reason of anyuntrue statement :

a) Every person who is a director of the company at the time of the issue of the

prospectus or has authorised himself to be named as a director or as havingagreed to become a director.b) Every promoter of the company.c) Every person who has authorised to issue of the prospectus.

It is to be noted that liability for compensation is only towards those persons whosubscripted for the shares or debentures on the faith of the prospectus and doesnot extend to any person who may have purchased shares in the market. UnderSection 63 criminal liability attached for any untrue statement to every personwho authorised the issue of the prospectus. These two sections also set out thegrounds on which the person mentioned above may escape liability.

ALLOTMENT OF SHARES

The application for and allotment of shares is equivalent to an offer andacceptance in a contract and generally the same provision that apply to acontract would apply to the application for and allotment of shares.

Under the English law an application for shares can be oral, However, the IndianLaw in terms of section of 41 (2) a person must agree in writing to become amember of the company. As in the case of a contract, a person may withdrawhis offer (Application) provided the withdrawal is made before the allotment ofshares. Similarly, a person may apply through his agent and the allotmentwould be as effective as if the application were made personally. The applicationform issued by companies are so worded that the offer is that of a certain

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number of shares, or any smaller number of share by the company that appliedfor may amount to a refusal of the offer. In other words, the acceptance must beunconditional.

PROVISIONS GOVERNING ALLOTMENT

The following relating to allotment may be summarized as follows :-

1) No allotment of shares offered to the public can be made by a companyunless the minimum amount intended to be raised by the issue has beensubscribed and the sum payable on application for the amount so statedhas been paid to and received by the company. (Section 69 (1)).

2) The amount payable on application must be not less than five percent ofthe nominal value (Section 89 (3)).

3) All the moneys received from the applicants must be kept in a schedulebank until (a) the certificate to commence business has been obtained or(b) if the certificate has already been obtained, until the minimumsubscription has been received (Section 69 (4)).

4) If the company has not obtained the certificate to commence business ornot received the amount payable on shares in respect of the minimum

subscription within one hundred and twenty days after the issue of theprospectus, it must return the money without interest. If the money is notreturned within one hundred and thirty days after the issue of theprospectus, interest at six percent would be payable on such moneys fromthe expiry of the one hundred and thirtieth day (Section 69 (5)).

It should be noted that the above conditions apply only to shares and notto debentures. Further, these conditions (Except condition (2) do notapply to the allotment of shares subsequent to the first allotment offeredto the public for subscription.

5) No allotment shall be made of shares or debentures until the beginning of

the fifth day after the issue of the prospectus. If however, before suchday, any person associated with the prospectus (director or promoter)gives a public notice limiting or excluding his responsibility, the five dayswill be counted from the day of such notice. The prospectus is deemed isto be issued on the day of such notice. The prospectus is deemed is to beissued on the day on which it first appears as a newspapersadvertisement, and the fifth day after the issue of the prospectus or anylater date specified in the prospectus is the day of opening of thesubscription list. (Section 72).

6) An application for shares or debentures in pursuance of a prospectus canbe revoked only on the expiry of 5 days after the opening of thesubscription list. (Section 72 (5)).

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7) A person who makes an application for acquiring shares in fictitious nameor induces a company to allot or register a transfer of shares to him in afictitious name would be punishable with imprisonment. (Section 68 A).

8) A company has to file a return to allotment within thirty days of theallotment of its shares, and where shares have been allotted as fully orpartly paid up otherwise than in cash, it has to file with the Register copiesof the contract in terms of which the allotment was made (Section 75 (1)(b)).

9) Allotment to non-residents and foreigners would be subject to the

approval of the Reserve Bank Of India.

10) A company limited by shares and a company limited by guarantee andhaving a share capital cannot buy its own shares.

11) A public company and a private company which is a subsidiary of a publiccompany cannot give financial assistance to any person for purchase of itsown shares of its holding company (Section 77 (22)).

12) In computing the various time limits mentioned above, any day which isa holiday under the negotiable Instruments Act, 1881, should be excluded.

(Section 7).

Special Provision When Shares Or Debentures Are To Be Dealt

In on a Stock Exchange (Section 73).

1. Every company intending to offer shares or debentures to the public forsubscription by issue of prospectus is required to make an application toone or more recognized stock exchange for listing permission.

2. Where a prospectus states that an application has been made forpermission for the shares or debentures to be dealt in on the stock

exchange the prospectus must mention the name of the exchange orexchanges.

3. The permission so applied for listing in one or more recognized stockexchanges must be obtained within ten weeks from the closing of thesubscription list. If these conditions are not complied with, any allotmentmade will be void.

4. Where an appeal against decision of any recognized Stock Exchangerefusing permission for the shares or Debentures to be dealt in on thatStock Exchange has been preferred under section 22 of the SecuritiesContracts (Regulation) Act, such allotment shall not be void until thedecision of the appeal.

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5. Where company has not applied for listing permission to Stock Exchange/shas stated in (1) above or such permission having been applied for has notbeen granted (As stated in (3)) above the company must forthwith repayall the moneys received on application and if the company does not do sowithin eight days, the directors of the company will be jointly and severallyliable to repay such moneys with interest ranging from 4% to 15% as maybe prescribed having regard to the length of the period of delay in makingpayment.

6. All the moneys received on application must be deposited in a separatebank account maintained with a schedule bank. The moneys in this

account are to be utilized only after allotment of shares or repayment ofmoney where permission has not been applied for or where it has beenapplied for but refused.

The provisions of section 73 requiring permission for compulsory listing of allpublic issues with recognized stock exchanges, the making of any allotment isvoid if such permission is not obtained.

In union India V. Allies International Product Ltd., and other A.I.R. 1981 S.C.P.251, the Court held that if the company makes applications to several exchangesand is unable to obtain permission for enlistment from any exchange, the

allotment will be invalid. But if permission is secured from any exchange, theallotment will not be invalid just because another exchange has not granted thepermission.

The Act does not indicate anywhere when the subscription list should be closed.It is therefore left to the company concerned to set out in the prospectus thenumber of days for which the list will remain open. The general practice it tokeep it open for atleast three days.

IrregularAllotments

It is important to remember that an irregular allotment does not automatically

make an allotment void. It would be possible to distinguish three kinds ofirregular allotments.

a) An allotment made before the minimum amount is subscribed or thecertificate to commence business has been received or the statement inlieu of prospectus is filed is voidable at the instance of the applicant. Theallotment however must be avoided within the time-limit prescribed. i.ewithin two months of the holding of the statutory meeting or where themeeting is not required to be held or the allotment is made after suchmeeting, within two months after the date of the allotments. (Section 71).

b) Where the allotment is made before the beginning of the fifth day afterthe issue of the prospectus. The validity of the allotment is not affected,

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although every officer of the company who is in default is liable to fine forviolating the provisions.

c) Where no application has been made to the exchange or the application isrejected, the allotment is void.

Issue of Shares to Exiting Shareholders.

What has been described above applies to the issue of shares to the public,Section 81 however, stipulates that where the subscribed capital of acompany is increased by allotment of further shares at any time after theexpiry of two years from the formation of the company for one year from the

allotment of its shares made for the first time after its formation, whichever isearlier. The shares should be offered to the existing shareholders inproportion to their share holding unless the article/s provide otherwise. Theoffer would include a right to resource the share in favour of any otherperson. It is, however open to the shareholders to waive this right granted tothem by law by passing a special resolution to this effect, or by passing anordinary resolution and obtaining government confirmation that it would be inthe interest of the company that the shares should be offered to one otherthan the existing shareholders. The shares are however, not required to be ofcredit to the existing shareholders. Preference shares are those of a privatecompany where the increase in the capital results from the conversion of

loans or debentures granted to the company into shares of one company.The conditions laid down in section 81 would have to be followed whether theissue is that of equity shares or preference shares.

Issue of Shares and offer for Sale of Shares

An issue of shares must be distinguished from an offer for sale of shares. Anissue of shares is by the company itself. An offer for sale of shares envisagesthe case of bulk shareholders offering part of his shares to the public eitherwith the intention of increasing public participation in the capital of thecompany to qualify it for listing on the stock exchange or in order to complywith guidelines laid down under the Foreign Exchange regulation Act. In this

case, the offer in reality is made by the shareholder although in most casesfor the sake of convenience, the company appoints the agent for carrying outthe sale.

SHARE CAPITAL AND DEBENTURES

Reduction of Capital

Reduction of capital may involve a reduction in the nominal capital, or issuedcapital, or paid up capital. The reduction must be authorized by the articles,and a special resolution is necessary to effect the reduction. Further thereduction is not effective until it has been confirmed by the court, the intent

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being that of the court will before giving its approval ensure that the interestof the creditors is safe guarded.

Transfer and Transmission of shares

The procedure for the transfer of shares in a company is set out in section108 of the Act. Since the prevalent practice in both large and smallcompanies is to have this work done by specialized agencies, the subject isnot dealt with in detail.

Briefly, the procedure is that the transfer must be executed in the PrescribedForm. The prescribed form is form 78 of the companies (Central

Governments) General Rules & Forms, 1956, before the form is executed bythe transferor and transferee, it has to be stamped by the prescribedauthority (the Registrar of Companies) and after execution by both, deliveredto the company long with the share certificates. In the case of share listed onthe Exchange, the form must be presented to the company within twelvemonths of presentation to the prescribed authority or before the closing ofthe registrar of members for the first time after it is presented to theprescribed authority (whichever is after) and in the case of shares not listed,within two months from the date of presentation. The following otherconditions are complied with which are set out in section 108 ( C)a) The qualification shares of a director who is a nominee of another

company :b) Any shares deposited by any person with the State Bank, or any scheduleBank, or banking company or financial Institution approved by theGovernment or the Central or State Government or any corporation ownedor controlled by such Government as security for the repayment of anyloan or advance.

c) Any share held in any company by the Central or State Government in thename of its nominee, except that the instrument of the transfer shall be inthe prescribed form.

The application for transfer may be made either by the transferor or thetransferee and where the application is made by the transferor and relates to

partly-paid shares, the transfer is not to be registered unless the companygives notice of the application to the transferee and he makes no objection tothe transfer within two weeks from the receipt of the notice, (Section 11A).

A transfer is incomplete until it is registered and the transferee becomes thelegal owner only when his name is entered on the register. It should be notedhowever that Section 108 prescribes the conditions that have to be compliedwith before a company registered any transfer of shares. Non-compliancewith these formalities does not nullify a sale which becomes complete as soonas the property in the shares is intended to be transferred and whichintention has to be gathered from the facts of each particular case, See Unitycompany limited V. Diamond Sugar Mills and another, ATR 1971 Cal 18.

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The company is required to complete and have ready for delivery thecertificate of shares or debentures within three months of allotment of theshares and debentures of within two months of the application for registrationof transfer. However, Company Law Board has been empowered to extendthe time limit for issue of debentures certificate, up to period of nine monthson an application made by the company on this behalf (Section 113).

This particular condition is today observed more in the breach. Any personwho has purchased shares recently will vouch for the fact that he doesreceived the certificate for the share purchased sometime for period as longas six months or one year. The broker puts the blame on the companyconcerned and the companies when contacted do not give satisfactory

explanation. It is fit matter to be taken up by the shareholders as a body.

Where shares pass by transmission by operation of law, these provisionsrelating to transfer do not apply although it would be necessary for the legalrepresentative to establish proof of his title and follow the procedure laiddown by the company for this purpose. A transfer of shares by a legalrepresentative would be as valid as if made by a member (Section 108 (1)second provision and section 109).

Boards Power to Refuse Transfer

The question is often raised In what circumstances is the Board of Directorsof a company is justified in refusing to register the transfer of share ? Thepower given to the directors under the Articles to refuse to register a transfermust be exercised reasonably and in good faith. In Bajaj Auto Limited V.N.A.Firodia reported in A.I. R. 1971 S.C. at page 321 their Lordships of theSupreme Court have laid down the following three broad tests for decidingthis question

a) Whether the directors acted in the interest of the company.b) Whether the directors acted on a wrong principles or with corrupt motive.c) Whether they acted with an oblige motive or for an collateral purpose.

Where the directors bonafide decide, that in the interest of the company itwould not be desirable to register a transfer , the decision would be justified.

Publication of Authorised and Subscribed Capital

Where any notice, advertisement or official publication mentions theauthorized capital of a company, it must also mention its subscribed andpaid-up capital.

SealoftheCompany

Section 34 states that from the date of incorporation mentioned in theCertificate of Incorporation of a Company, the subscribers of the

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memorandum and other persons who are members shall be a body corporateby the name contained in the memorandum capable of exercising all thefunctions of an incorporated company and having perpetual succession and acommon seal. The seal, therefore is an essential feature of a company. Onthis seal, as mentioned earlier, the name of the company must be engraven.A document may be executed on behalf of a company either under thecommon seal of the company or under the authority of any person authorizedto exercise such document. Where a document is executed under the seal, itis necessary to check that the seal is affixed in the manner set our inARTICLES. The Articles will describe in detail the manner in which the seal ofthe company is to be affixed e.g. that it should be affixed only under theauthority of the Board in the presence of one or two Directors, with or without

any other counter signature. Where it is executed by an officer acting onbehalf of the company, it may be necessary to verify the authority of theperson unless the status of the person carries with it an implied authority toexecute the document e.g. the managing director may be assumed to havethe power to execute documents.

Under section 50, a company which carries on business outside India, alsomay if authorized by its articles, have an official seal for us outside Indiawhich is a facsimile of the common seal. An authority to affix the additionalseal must be granted by the company. A document executed under theofficial seal is an authentic as a document executed under the common seal.

GENERAL MEETING AND PROCEEDING

The Provisions relating to meeting are covered by sections 165 to 197 or theCompanies Act.

It is important to remember, however, that apart from the Statutoryprovisions, the meetings of a company are governed by its articles ofassociation. Thus, while the articles cannot contain provisions which wouldmake an invalid meeting valid, they would contain provisions on matters thatthe law leaves a for passing resolutions on matters like borrowinginvestments, or the quorum necessary for constituting a meeting. It is

possible that the Articles of Association may impose on the companyconditions, stricter than these provided under the law, e.g. they may providethat a resolution should be passed by a special majority when the Actrequired it to be passed by an ordinary majority.

Meeting of members may be classified into the following :1. Statutory meetings.2. Annual General meeting.3. Extra ordinary General meeting.4. Meetings of classes of shareholders.

A D M I N I S T R A T I O N

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Under section 146, a company is required to have a registered office from theday it begins to carry on business or from the thirtieth day after itsincorporation which ever is earlier. While the registered office may be movedwithin the limit of the city or down in which it is situated, it cannot be movedoutside such city or town without the sanction of the shareholders obtainedby a special resolution. Further intimation must be given to the Registrar ofthe initial situation of the registered office and thereafter of every change inthe office. The notice is required to be given in form no. 18 of the companies(Central Governments) General Rule and Forms, 1956.

The registered office has significance as all communication addressed to acompany at such office. Further the following important registers are

required to be maintained at this office.

1) The Registers of members and debentures of holders and the index ofmembers and debentures holders as well as copies of annual returnstogether with the certificates and documents required to be attached tosuch annual returns (section 163). These may, however, approve of theirmaintenance elsewhere by an intention to remove them elsewhere isgiven to the registrar.

2) The Registers containing the contracts or arrangements in which Directorsare interested (Section 301).

3) The Register of directors, managing directors, manager and secretary

(section 303).4) The Register of charges (section 143).5) The books containing the minutes of the general meeting (Section 198)6) Books of Accounts (Section 209).

However, by a resolution of the Board, the Directors may decide to keepthe books at some other place in India in which case the decision to keep thebooks elsewhere must be intimated to the Registrar within seven days.

Where inspection of documents is permitted e.g. of Register of members,register of charges and minutes of meetings, the inspection must take placeat the registered office.

Publication of the Company

The name of the company and the address of the registered office is requiredto be painted or affixed outside every office or place where the business ofthe company is carried out in the locality. Further the name of the companyis engraved in legible characters on the seal, as well as bills, hundies,promissory notes, cheques and orders for money of goods. Failure to observethese provisions make the company and every officer in default liable to fine(Section 147)

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StatutoryMeetings

Every public company limited by shares and every public company limited byguarantee is required to hold a meeting known as The Statutory Meetings,within a period of not less than one month, and not more than six monthsfrom the date on which it is entitled to commence business (section 165). Asthis requirements applied only to public companies and not to privatecompanies, the articles of incorporating a company initially as a privatecompany and converting it into a public company after six months issometimes resorted to. The object of the statutory meetings is to put theshareholders is possession of all important facts relating to the new companyat an early date. The notice calling the Statutory Meeting must refer to the

meeting as a Statutory Meeting (section 165 (1)).

A report known as the Statutory Report certified by atleast two of theDirectors of the company is required to be sent to every member of thecompany, at least twenty one days before the meeting unless all themembers agree to have it forwarded later (Section 165 (2)). The matters thatare required to be contained in this report are set out in sub-section (3) of thissection. The report is required to be forwarded to the Registrar immediatelyafter it has been forwarded to the members (section 165 (5)). It may benoted that if the Statutory Re[ort is not delivered to the Registrar, the courtmay order a winding of the company. The Statutory Report has to be made

out in Form 22 of the Appendix I of the companies (Court) Rules 1959.

At the meeting, a list of members including their addresses andoccupation and the shares held by them is to be kept available for theinspection of members. It is interesting to note that at Statutory Meeting,members are at liberty to discuss any matters relating to the formation of thecompany or arising out of the Statutory Report whether previous notice hasbeen given or not although no resolution may be passed of which notice hasnot been given in accordance with the Act, (section 165 (7)). The StatutoryMeeting may be adjourned from time to time. Further, at such adjournedmeeting any resolution may be passed even if such resolution was notintended to be passed at the first proposed Statutory Meeting provided

requisite notice of such resolution had been given during the period betweenon adjourned meeting and the next (section 165 (8)).

The notice required for such a meeting is also twenty one days as in the caseof any other general meeting.

AnnualGeneralMeeting

Section 166 of the companies Act provided that in addition to any othermeeting that may be held, a company shall held each year a general meetingas its Annual General Meeting. These are two cumulative conditions to besatisfied in this connection.

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1) One meeting at least must be held in a calendar year, and (section 166(1)).2) There must not be a gap of more than fifteen months between one

meeting and another (section 166 (1)).

Therefore, it would be a contravention of the section if the meeting isheld in consecutive calendar years, but there is a gap of more than fifteenmonths between one meeting and another; equally there would be acontravention if the Meeting is not held in each calendar year e.g. if onemeeting is held in October 1977, and the next is held in January, 1979.

There are two exception of the above, viz. a) the first Annual General

Meeting of Company may be held within a period of not more than eighteenmonths from the date of its incorporation. In that case it would not benecessary for the company to be held any Annual General Meeting in the yearof its incorporation or in the following year e.g. a company incorporated in themonth of August of any year need not held meeting in that year or in thesubsequent year; (this provision enables a company to draw up its accountsfor a period of more than one year and present them to the first AnnualGeneral Meeting and (b) the Registrar may extend the period of fifteen mothsby a further period of three months.

This section must be read together with section 210 (3) in terms of which are

the period for which the accounts are submitted to a meeting should notprecede the day of the meeting by more than six months or six months plusthe extension of time granted by the Registrar. It may, therefore, happenthat an Annual Meeting may have to be held before the expiry of the period offifteen months from the previous meeting in order to comply with theprovisions of section 210. Equally it may be possible that the accounts maynot be ready to be held to comply with the condition that one meeting mustbe held per year. In such a case the meeting should nevertheless be heldwithin one statutory time limit, but adjourned to a date when the accountswill be ready.

If default is made in calling the meeting in accordance with section 166,

the Central Government may on the application of member call the meetingor direct that the meeting be called. Default under section 166 is punishablewith a fine upto five thousand rupees which can be imposed separately on thecompany and the office in default. (section 167 & 168).

The question is sometimes raised in this connection what is theconsequence of holding a meeting after the expiry of the time limit prescribedby the law? Would the resolutions passed at such a meeting be valid and theappointment of directors be effective? The legal position would be that whilepenalty would undoubtedly be levied in view of the violation of the law, theresolution passed would be valid.

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The point that would arise for consideration, however when a meeting isheld in the year following the year of default would be, whether the meetingis the meeting of the year of default, or that of the year in which it is actuallyheld.

Palmers view is that the proper course would be for the shareholders toresolve at the meeting that the meeting will be treated as the annual generalmeeting for both years and unless this is done the meeting will be treated asthe annual meeting of the year of the default and a second meeting have tobe held for the year in which it is actually held.

Annual General Meeting must be called for a time during business hours,

on a day that is not a public holiday, and must be held eith

Documents

1 Companies Act-Part I (2)