Company Law (Module i Paper 1)

STUDY MATERIAL

EXECUTIVE PROGRAMME

COM PANY LAW

PAPER 1

ICSI House, 22, Institutional Area, Lodi Road, New Delhi 110 003

tel 011-4534 1000, 4150 4444 fax +91-11-2462 6727

email [email protected] website www.icsi.edu

THE INSTITUTE OF COMPANY SECRETARIES OF INDIA

TIMING OF HEADQUARTERSMonday to Friday

Office Timings 9.00 A.M. to 5.00 P.M.

Public Dealing Timings

Without financial transactions 9.30 A.M. to 5.00 P.M.

With financial transactions 9.30 A.M. to 4.00 P.M.

Phones

4150444,45341000

Fax

011-24626727

Website

www.icsi.edu

E-mail

[email protected]

Laser Typesetting by Delhi Computer Services, Dwarka, New Delhi Printed at M.P. Printers/February, 2013/10,000

EXECUTIVE PROGRAMME

COMPANY LAW In view of increasing emphasis on adherence to norms of good corporate governance,

Company Law assumes an added importance in the corporate legislative milieu, as it deals with structure, management, administration and conduct of affairs of Companies. A thorough study of various provisions of the Companies Act is a must for becoming a competent and efficient Company Secretary. In the light of this, the study material has been published to impart thorough knowledge to the students preparing for the Company Law paper of the CS Executive Programme. The purpose of this study material is to develop an understanding of the regulation of registered companies and to provide thorough understanding of the various provisions of the Company Law as well as Schedules and Rules made thereunder including their interpretation through case laws, departmental clarifications etc. Additionally this study material also provides conceptual understanding of the principles of Cooperatives Law.

Company Secretaryship being a professional course, the examination standards are set very high, with emphasis on knowledge of concepts, applications, procedures and case laws, for which sole reliance on the contents of the study material may not be enough. Besides Company Secretaries Regulations, 1982 requires the students to be conversant with the amendments to the laws made upto six months preceding the date of examination. This study material may therefore be regarded as basic material and must be read along with the Bare Act, Rules, Regulations, Case Law, as well as suggested readings.

The amendments made upto December, 2012 have been incorporated in this study material. However, it may happen that some developments might have taken place during the printing of the study material and its supply to the students. The students are therefore advised to refer to the 'Student Company Secretary', Chartered Secretary and other publications for updation of study material. In the event of any doubt, students may contact the Directorate of Academics and Professional Development in the Institute for clarification.

Although due care has been taken in publishing this study material yet the possibility of errors, omissions and/or discrepancies cannot be ruled out. This publication is released with an understanding that the Institute shall not be responsible for any errors, omissions and/or discrepancies or any action taken in that behalf.

Should there be any discrepancy, error or omission noted in the study material, the Institute shall be obliged if the same are brought to its notice for issue of corrigendum in the 'Student Company Secretary'.

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EXECUTIVE PROGRAMME

SYLLABUS FOR

MODULE 1 - PAPER 1: COMPANY LAW (100 MARKS) Level of Knowledge: Expert Knowledge

Objective: To acquire knowledge and develop understanding of the regulatory framework of companies with reference to various provisions of Companies Act and its schedules, rules, notifications, circulars, clarifications there under including case laws and Secretarial standards.

Detailed Contents:

1. Introduction Historical Development of Concept of Corporate Law in India Company Definition, Meaning, Nature and its Characteristics

Nature and Forms of Business Company vis--vis other Forms of Business Concept of Corporate Personality, Corporate Veil, Limited Liability and Citizenship

2. Incorporation and its Consequences Types of Companies and their incorporation Promoters Meaning, Position, Duties, Rights, Responsibilities and Liabilities Formation of Companies Procedural Aspects Memorandum of Association & Articles of Association and their Alteration

Contracts and Conversion of Companies Commencement of Business Doctrine of Ultra-Vires, Constructive Notice, Indoor Management, Alter Ego

3. Financial Structure Concept of Capital and Financing of Companies Sources of Capital; Classes and Types of

Shares; Equity Shares with Differential Rights; Issue of Shares at Par, Premium and Discount; Forfeiture and Surrender of Shares; Bonus Issues; Rights Issues; Issue of Sweat Equity Shares; Employees Stock Option Scheme; Private Placement; preference shares and other forms of securities Alteration of Share Capital Reduction of Capital; BuyBack of Shares Prospectus Definition; Abridged Prospectus; RedHerring Prospectus; Shelf Prospectus;

Information Memorandum; Contents, Registration; Misrepresentations and Penalties Debt Capital Debentures, Debenture Stock, Bonds; Recent Trends and Dynamics of Corporate

Debt Financing; Debenture Trust Deed and Trustees; Conversion of and Redemption of Debentures Securing of Debts:Charges ; Creation, Modification and Satisfaction of Charges Allotment and Certificates General Principles and Statutory Provisions related to Allotment;

Minimum Subscription; Irregular Allotment; Procedure of Issue of Share Certificates and Warrants

(v)4. Membership in a Company

Modes of Acquiring Membership Rights and Privileges of Members, Register of Members Dematerialisation and Rematerialisation of Securities Transfer and Transmission of Securities in Physical and Dematerialized forms Nomination

5. Management and Control of Companies Directors Types, Directors Identification Number (DIN), Appointment/Reappointment,

Qualifications, Disqualifications, Vacation of Office, Retirement, Resignation and Removal of Managing and WholeTime Directors and Manager Role and Responsibilities of Directors

Powers and Duties Loans to Directors Remuneration of Directors Office or Place of Profit Contracts in which Directors are Interested Board of Directors and its Committees Company Secretary Appointment, Role and Responsibilities Company Secretary as a Key Managerial Personnel Meetings: Meetings of Board and Committees Frequency, Convening, Proceedings, Video Conferencing of

Board/Committee(s); Resolution by Circulation; Minutes and Evidence General Meetings Kinds of Meetings; Law, Practice and Procedure Relating to Convening and

Proceedings at General and Other Meetings; Notice, Quorum, Chairman, Proxy, Voting including Voting through Electronic Means; Resolutions, Circulation of Members Resolution, etc.; Postal Ballot; Recording, Signing and Inspection of Minutes; Distribution of Powers of a Company Division of Powers between Board and General Meetings;

Acts by Directors in Excess of Authority; Monitoring and Management Sole Selling and Buying Agents Meaning, Appointment and Reappointment, Removal; Powers

of Central Government and Rules Framed for the Purpose

6. Investments, Loans and Deposits Law relating to making investments in and granting loans to other bodies corporate and giving

guarantees and providing security Acceptance of Deposits, Renewal, Repayment, Default and Remedies

7. Accounts and Audit Books of Accounts

Financial Statements Auditors Appointment, Resignation and Removal; Qualification and Disqualification; Rights,

Duties and Liabilities Audit and Auditors Report

Cost Audit and Special Audit

(vi)8. Dividends

Profit and Ascertainment of Divisible Profits Declaration and Payment of Dividend

Treatment of Unpaid and Unclaimed Dividend Transfer of Unpaid and Unclaimed Dividend to Investor Education and Protection Fund

Boards Report and Disclosures Contents and Annexure to Boards Report Directors Responsibility Statement Preparation and Disclosures Compliance Certificate Need and Objective; Issue and Signing by Practising Company

Secretary Corporate Governance Report

9. Registers, Forms and Returns Statutory Books and Registers prescribed under various provisions of the Company Law

Maintenance, Authentication Place of Keeping and Inspection Filing of various Forms and Returns with the Authorities Procedure and Penalties for Delayed Filing Annual Return Nature and Significance; Contents; and Certification by Practising Company

Secretary

10. Inspection and Investigation Inspection of Documents Powers of the Inspector

Seizure of Books And Documents Inspectors Report Power of the Registrar of Companies

Investigation into Affairs of the Company 11. Majority Rule and Minority Rights

Law relating to Majority Powers and Minority Rights Shareholder Remedies Actions by Shareholders; Statutory Remedies; Personal Actions

Prevention of Oppression and Mis-Management 12. Merger, De-merger, Amalgamation, Compromises and Arrangements An Overview

13. Producer Companies

Concept, Formation, Functioning and Dissolution 14. Limited Liability Partnerships

Concept, Formation, Membership, Functioning and Dissolution 15. Application of Company Law to Different Sectors

Banking Insurance Others

(vii)16. Offences and Penalties

Introduction Officer in Default Penalties

17. Compounding of Offences

18. Winding up of Companies An Overview

Concept and Modes 19. Striking Off Name of Companies

20. An Introduction to E-Governance and XBRL

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LIST OF RECOMMENDED BOOKS MODULE I

PAPER 1 : COMPANY LAW

Readings:

1. Dr. Avtar Singh : Company Law; Eastern Book Company, 34, Lalbagh, Lucknow 226 001

2. C.R. Datta : Datta on the Company Law; Lexis Nexis, Butterworths Wadhwa, Nagpur

3. A. Ramaiya : Guide to the Companies Act; Lexis Nexis, Butterworths Wadhwa, Nagpur

4. K.C. Garg, R.C. Chawla, Vijay Gupta

: Company Law; Kalyani Publishers, 1/1, Rajinder Nagar, Civil Lines, Ludhiana 141 001.

5. A.K. Mujumdar, Dr. G.K. Kapoor

: Company Law and Practice; Taxmann, 59/32, New Rohtak Road, New Delhi-110 005.

6. V.S. Datey : Guide to Tax and Corporate Laws; Taxmann, 59/32, New Rohtak Road, New Delhi-110 005.

7. M.C. Kuchhal : Modern Indian Company Law; Shri Mahavir Book Depot, 2603, Nai Sarak, Delhi-110 006.

8. H.K. Saharay : Company Law; Universal Law Publishing Co., C-FF-1A, Dilkhush Industrial Estate, G.T. Karnal Road, Delhi. -110033.

References:

1. D.K. Jain : Company Law Ready Reckoner; Bharat Law House Pvt. Ltd.; T-1/95, Mangolpuri Industrial Area, Delhi-110083.

2. R. Suryanarayanan : Company Law Ready Reckoner; Commercial Law Publishers, 151, Rajinder Market, Opp. Tis Hazari Court, Delhi-110054.

3. Palmer : Company Law (Vol. 1); Stevens & Sons Ltd., London. 4. L.C.B. Gower : Principles of Modern Company Law; Stevens & Sons Ltd.,

London.

5. Taxmanns : Circulars & Clarifications on Company Law; Taxmann, 59/32, New Rohtak Road, New Delhi-110 005.

6. Bare Act : Corporate Laws; Taxmann, 59/32, New Rohtak Road, New Delhi-110 005.

The Companies Act, 1956; Universal Law Publishing Co., C-FF-1A, Dilkhush Industrial Estate, G.T. Karnal Road, Delhi. -110 003.

(ix)Journals:

1. Chartered Secretary : ICSI, New Delhi

2. Student Company Secretary

: ICSI, New Delhi

3. Corporate Law Adviser : Corporate Law Advisers, 613, Metro View Apt., Sector 13, Pocket B, Dwarka, New Delhi-110075.

4. Company Law Journal : Company Law Journal (India) Pvt. Ltd., 53/15, Old Rajinder Nagar, Post Box No. 2844, New Delhi-110060.

Note: The latest edition of all the books referred to above should be read.

(x)ARRANGEMENT OF STUDY LESSONS

PAPER 1: COMPANY LAW (100 Marks)

L

esson No. Subject 1 INTRODUCTION 2 TYPES OF COMPANIES 3 PROMOTION AND INCORPORATION OF COMPANIES 4 MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION 5 CONTRACTS AND CONVERSIONS 6 CONCEPT OF CAPITAL AND FINANCING OF COMPANIES 7 ALTERATION OF SHARE CAPITAL 8 PROSPECTUS 9 DEBT CAPITAL 10 CREATION AND REGISTRATION OF CHARGES 11 ALLOTMENT AND ISSUE OF CERTIFICATES 12 MEMBERSHIP IN A COMPANY 13 TRANSFER AND TRANSMISSION OF SECURITIES 14 INSTITUTION OF DIRECTORS 15 POWERS AND DUTIES OF DIRECTORS 16 MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER 17 COMPANY SECRETARY 18 MEETINGS 19 INTERCORPORATE LOANS AND INVESTMENTS 20 DEPOSITS 21 ACCOUNTS AND AUDIT 22 DIVISIBLE PROFITS AND DIVIDENDS 23 SOLE SELLING AND SOLE BUYING AGENTS 24 BOARDS REPORT AND DISCLOSURES 25 REGISTERS, FORMS AND RETURNS 26 INSPECTION AND INVESTIGATION 27 MAJORITY RULE AND MINORITY RIGHTS 28 MERGER, DE-MERGER, AMALGAMATION, COMPROMISE AND ARRANGEMENTS AN OVERVIEW 29 PRODUCER COMPANIES 30 LIMITED LIABILITY PARTNERSHIPS 31 APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS 32 OFFENCES, PENALTIES AND THEIR COMPOUNDING 33 WINDING UP OF COMPANIES 34 STRIKING OFF NAME OF COMPANIES 35 AN INTRODUCTION TO E-GOVERNANCE AND XBRL 36 SECRETARIAL STANDARDS

TEST PAPERS

EXECUTIVE PROGRAMME COMPANY LAW CONTENTS

LESSON 1

INTRODUCTION

Page Learning Objectives/Lesson Outline 1 Meaning of a Company ... 2 CompanyIts Nature and Characteristics ... 3 Development of Company Law in India and England 10 Brief History of Company Law in England ... 11 Development of Indian Company Law ... 13 Amendments made to the Companies Act by the Depositories Act, 1996 ... 15 The Companies (Amendment) Act, 1999Salient Features ... 16 The Companies (Amendment) Act, 2000Salient Features ... 16 The Companies (Amendment) Act, 2002 and Companies (Second Amendment) Act, 2002Salient Features ... 17 The Companies (Amendment) Act, 2006 18 Highlights of Companies Bill, 2012 20 Distinction between Company and Partnership ... 20 Distinction between Company and Hindu Joint Family Business ... 21 Distinction between Company and Corporation ... 21 Distinction between Company and Limited Liability Partnership 22 Lifting or Piercing the Corporate Veil ... 23 Lifting of Corporate Veil under Judicial Interpretation ... 23 Use of Corporate Veil for Hiding Criminal Activities ... 26 Citizenship 26 Personal Liability of Directors or Members ... 28 Illegal Association ... 29 Lesson Round-Up 31 Glossary 32 SELF-TEST QUESTIONS ... 32

LESSON 2

TYPES OF COMPANIES Learning Objectives/Lesson Outline 35 Classification of Companies ... 36 Private Company ... 37

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Page

Privileges and Exemptions of Private Company ... 38 Special Obligations of a Private Company ... 40 Consequences of Infringement of the Articles of Private Companies ... 41 Public Company ... 41 Limited Company ... 42 Companies Limited by Shares ... 42 Companies Limited by Guarantee ... 42 Unlimited Company ... 43 Association not for Profit ... 44 Government Companies ... 45 Exemption to Government Companies from applicability of notified provisions of Companies Act, 1956 46 Audit in Government Companies ... 47 Foreign Companies ... 47 Holding and Subsidiary Companies ... 49 Determination of Holding-subsidiary relationship and shareholding ... 50 Investment Companies ... 51 Producer Companies 51 Finance Companies ... 52 Public Financial Institutions ... 53 A Brief Study of Statutory Corporations ... 54 Which Corporations are State ... 56 Lesson Round-Up 56 Glossary 57 SELF-TEST QUESTIONS ... 58

LESSON 3

PROMOTION AND INCORPORATION OF COMPANIES Learning Objectives/Lesson Outline 59 Definition of the term Promoter ... 60 Promoters contract - Ratification thereof 61 Legal Position of a Promoter ... 61 Duties of a Promoter ... 62 Termination of Promoters Duties ... 63 Remedies available to the Company against the Promoter ... 63 Liabilities of Promoters ... 64 Rights of Promoters ... 66 Formation of Companies 67 Application for Availability of Name of Company ... 67 Preparation of Memorandum and Articles of Association ... 68

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Vetting of Memorandum and Articles, Printing, Stamping and Signing of the same ... 68

Page Power of Attorney ... 69 Additional Documents Required ... 69 Payment of Registration Fees ... 70 Certificate of Incorporation ... 70 Conclusive Evidence ... 70 Online Incorporation of Companies within 24 Hours 71 Lesson Round-Up 71 Glossary 72 SELF-TEST QUESTIONS ... 72

LESSON 4

MEMORANDUM OF ASSOCIATION AND ARTICLES OF ASSOCIATION Learning Objectives/Lesson Outline 73 Memorandum of Association ... 74 Purpose of Memorandum ... 75 Form of Memorandum of Association ... 75 Contents of Memorandum ... 75 Name Clause ... 76 Situation Clause ... 78 Objects Clause ... 78 Doctrine of Ultra Vires ... 80 Shareholders right in respect of ultra vires acts 83 Effects of ultra vires Transactions ... 83 Liability Clause ... 84 Capital Clause ... 84 Association Clause and Subscription ... 85 Printing and Signing of Memorandum 85 Alteration of Memorandum of Association ... 85 Alteration of Name Clause ... 86 Effect of Change ... 87 Alteration of Registered Office Clause ... 87 Alteration of Objects Clause of the Company ... 90 Registration of Alteration ... 92 Alteration of Liability Clause ... 94 Alteration of Capital Clause ... 94 Articles of Association ... 95 Registration of Articles ... 96 Statutory Requirements ... 97 Contents of Articles ... 97

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Provision in articles as regards expulsion of a member 98 Alteration of Articles of Association ... 98

Page Effect of altered Articles 100 Distinction between Memorandum and Articles ... 100 Legal Effect of Memorandum and Articles ... 101 Constructive Notice of Memorandum and Articles ... 102 Money Payable by Members is a Debt ... 103 Interpretation of Memorandum and Articles ... 103 Doctrine of Indoor Management ... 104 Exceptions to the Doctrine of Indoor Management ... 105 Doctrine of Alter Ego 107 Lesson Round-Up 107 Glossary 108 SELF-TEST QUESTIONS ... 108

LESSON 5

CONTRACTS AND CONVERSIONS Learning Objectives/Lesson Outline 111 Preliminary Contracts ... 112 Pre-incorporation contracts ... 112 Provisional Contracts ... 113 Contracts made after issue of Certificate of Commencement of Business in the case of Public Company, and after Incorporation in the case of Private Company ... 114 Common Seal ... 114 Conversion of a Private Company into a Public Company ... 115 Private Company (which is a subsidiary of public company) deemed to be a Public Company ... 116 Conversion of a Public Company into a Private Company ... 116 Commencement of Business ... 116 Commencement of New Business by an Existing Company ... 118 Lesson Round-Up 118 Glossary 119 SELF-TEST QUESTIONS ... 119

LESSON 6

CONCEPT OF CAPITAL AND FINANCING OF COMPANIES Learning Objectives/Lesson Outline 121 Meaning of the term Capital ... 122 Use of the word Capital in different senses ... 122

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Meaning and Nature of a Share ... 124 Kinds of Shares ... 125 Preference Shares or Preference Share Capital ... 126 Types of Preference Shares ... 127

Page Preference Shares Compared with Equity Shares ... 128 Issue of Sweat Equity Shares ... 129 Sources of Capital ... 130 Public Issue of Shares ... 131 SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 ... 131 Preferential Issue by Existing Listed Companies ... 134 Issue of Shares at a Premium ... 136 Issue of Shares at a Discount ... 137 Further issue of shares ... 139 Judicial Pronouncement relating to further issue of shares 140 Bonus Shares ... 141 Employee Stock Option Scheme ... 142 Lesson Round-Up 143 Glossary 144 SELF-TEST QUESTIONS ... 144

LESSON 7

ALTERATION OF SHARE CAPITAL Learning Objectives/Lesson Outline 145 Alteration of Share Capital ... 146 Judicial Pronouncement ... 147 Nature of Stock ... 148 Difference between Share and Stock ... 148 Reduction of Share Capital ... 149 Judicial Pronouncement on reduction of share capital 150 Reduction of share capital without sanction of the Court ... 151 Difference in Alteration in Share Capital and reduction of share capital 152 Creditors Right to Object to Reduction ... 152 Confirmation and Registration ... 153 Conclusiveness of certificate for reduction of capital ... 153 Diminution of share capital is not a reduction of capital ... 153 Liability of Members in respect of Reduced Share Capital ... 154 Company Prohibited to Buy its Own Shares or to Finance their Purchase ... 154 Power of Company to Purchase its Own Securities ... 155 Conditions for Buy-back ... 156 Prohibition for Buy-Back in Certain Circumstances ... 158

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Lesson Round-Up 158 Glossary 159 SELF-TEST QUESTIONS ... 159

Page LESSON 8

PROSPECTUS Learning Objectives/Lesson Outline 161 Meaning and Definition of Prospectus ... 162 Invitation to Public ... 162 When Prospectus is not required to be issued ... 163 Statement in lieu of Prospectus ... 164 Dating and Registration of Prospectus ... 164 When Registrar Must Refuse Registration ... 165 Shelf Prospectus ... 166 Information Memorandum ... 167 Red-Herring Prospectus 167 Manner of Disclosures in the Offer Documents 168 Application with Prospectus ... 168 Abridged Prospectus ... 168 Voluntary Statement in Prospectus ... 169 The Golden Rule or Golden Legacy ... 169 Liability for Untrue Statement ... 170 Remedies for Misrepresentation in Prospectus ... 170 Remedies Against Directors or Promoters ... 171 Criminal Liability for Mis-statement in Prospectus ... 174 Who is Entitled to Remedies ... 174 Penalty for Fraudulently Inducing to Invest Money ... 175 Prohibition of Allotment of Shares in Fictitious Name ... 175 Lesson Round-Up 176 Glossary 176 SELF-TEST QUESTIONS ... 177

LESSON 9

DEBT CAPITAL Learning Objectives/Lesson Outline 179 Borrowing ... 180 Power of Company to Borrow ... 180

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Unauthorised or Ultra Vires Borrowing ... 180 Intra vires Borrowing but Outside the Scope of Agents Authority ... 181 Judicial pronouncement relating to borrowing powers of company 181 Types of borrowing 183 Borrowing on Security of Property ... 184 Charge on Uncalled Capital ... 185 Debentures 185

Page Judicial pronouncement about debentures 186 Pari passu clause in case of debentures 187 Kinds of Debentures ... 187 Regulatory framework for debt securities 189 Debentures Trust Deed ... 191 Appointment of Debenture Trustees and Duties of Debenture Trustees ... 192 Liability of Company to Create Security and Debenture Redemption Reserve ... 193 Debenture Redemption Reserve (DRR) 193 Register of Debentureholders ... 194 Remedies Open to Debentureholders ... 194 Debenture-holders claim ... 197 Distinction Between Debentures and Shares ... 197 Redemption of Debenture ... 198 Re-issue of Redeemed Debentures ... 198 Public Sector Bonds ... 198 Foreign Bonds ... 199 Recent Trends in Corporate Debt Financing ... 199 New Instruments in Money Market ... 201 Lesson Round-Up 201 Glossary 201 SELF-TEST QUESTIONS ... 202

LESSON 10

CREATION AND REGISTRATION OF CHARGES Learning Objectives/Lesson Outline 203 Definition of a Charge ... 204 Kinds of Charges ... 204 Judicial pronouncements ... 205 Crystallisation of Floating Charge ... 206 Postponement of a Floating Charge ... 207 Registration of Charges ... 208 Particulars to be filed with the Registrar in case of series of Debentures ... 210 Effect of Registration ... 211

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Conclusive Nature of the Certificate of Registration ... 212 Consequences of non-registration ... 213 Register of Charges ... 214 Extension of Time and Rectification of Register of Charges ... 215 Modification of Charges ... 216 Satisfaction of Charges ... 216 Purchase or Acquisition of a Property Subject to Charge ... 217 Properties Situated Abroad and Subject to Charge ... 217

Page Difference between Mortgage and Charge ... 218 Lesson Round-Up 218 Glossary 219 SELF-TEST QUESTIONS ... 219

LESSON 11

ALLOTMENT AND ISSUE OF CERTIFICATES Learning Objectives/Lesson Outline 221 Allotment of Shares ... 222 Notice of Allotment ... 222 General Principles Regarding Allotment ... 222 Statutory Provisions regarding Allotment ... 223 Effect of Irregular Allotment ... 226 Revocation by applicant/allottee ... 228 Ultra vires allotment ... 228 Allotment Procedure ... 228 Return of Allotment ... 229 Judicial pronouncement 230 Share Certificate ... 231 Share Warrant ... 236 Share Certificate and Share Warrant Distinguished ... 237 Personation of Shareholder ... 238 Calls and Forfeiture ... 238 Forfeiture of Shares ... 241 Re-issue of Forfeited Shares ... 243 Surrender of Shares 243 Lesson Round-Up 244 Glossary 244 SELF-TEST QUESTIONS ... 245

LESSON 12

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MEMBERSHIP IN A COMPANY

Learning Objectives/Lesson Outline 247 Who are Members ... 248 Modes of Acquiring Membership ... 249 Who may become a Member ... 250 Joint Members ... 252 Registration of Shares in the name of Public Office ... 253 Minimum Number of Members ... 254 Cessation of Membership ... 254

Page Expulsion of a Member ... 255 Personation and Penalty ... 255 Register of Members ... 256 Judicial pronouncement 256 Place of Keeping and Inspection of the Registers ... 257 Remedy if inspection is refused ... 258 Register prima facie evidence ... 258 Rectification of a register of Members ... 258 Closing of Register of Members ... 260 Foreign Register ... 261 Preservation of Registers, etc. ... 261 Power of the Central Government to Investigate into the Ownership of Shares ... 262 Declaration by Persons not holding Beneficial Interest in any Share ... 262 Rights of Members ... 263 Individual Rights ... 263 Collective Membership Rights ... 264 Voting Rights of Members ... 265 Shareholders Pre-emptive Rights ... 265 Variation of Members Rights ... 266 Rights of Dissentient Members ... 266 Liability of Members ... 266 Lesson Round-Up 267 Glossary 267 SELF-TEST QUESTIONS ... 268

LESSON 13

TRANSFER AND TRANSMISSION OF SECURITIES Learning Objectives/Lesson Outline 269 Introduction ... 270 Provisions under Companies Act regulating transfer of securities 270

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Nomination of shares/debentures 270 Power to refuse registration and appeal against refusal 272 Statutory Remedy against refusal under Section 111 ... 272 Transfer of Securities of a Public Company (Section 111A) ... 272 Stamp Duty Payable and Affixation/Cancellation of Stamps ... 273 Lost Transfer Deeds ... 274 Delegation of Powers for Transfer ... 274 Transfer of Debentures ... 274 Transfer of Shares to a Minor ... 274 Transmission of shares ... 275 Distinction between Transfer and Transmission ... 276

Page Compliance with Section 108 A mandatory provision 283 Certification of Transfer ... 285 Blank Transfer ... 285 Transfer of Shares during winding up ... 286 Forged transfer 287 Transposition of Name ... 288 Death of transferor or transferee before registration of transfer ... 289 Rights of Transferor ... 289 Effects of Transfer ... 291 Companys lien on shares ... 292 Transfer and Transmission of Debentures ... 293 Transfer of Shares registered with Depository Mode ... 294 Legal Framework for Depository System 294 The Depositories Act, 1996 : An Analysis ... 295 Safeguards on transfer of securities in demat form 301 Lesson Round-Up 304 Glossary 305 SELF-TEST QUESTIONS ... 305

LESSON 14

INSTITUTION OF DIRECTORS Learning Objectives/Lesson Outline 307 Concept of Director ... 308 Definition of Director ... 308 Types of Directors ... 309 Legal Position of Directors ... 311 Qualifications of Directors ... 313 Companies [Disqualification of Directors under Section 274(1)(g) of the Companies Act, 1956] Rules, 2003 315

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Qualification Shares ... 316 Number of Directors ... 318 Appointment of Directors ... 319 Restriction on Appointment or Re-appointment of Directors ... 320 Director Identification Number 320 Appointment of First Directors ... 321 Appointment of Directors by Members in General Meeting ... 322 Appointment of Person other than Retiring Director ... 324 Appointment of Directors to be voted individually ... 325 Principle of Proportional Representation ... 326 Appointment of Directors by the Board ... 326 Appointment of Directors by Central Government ... 330

Page Application to the Company Law Board to Prevent Oppression and Mismanagement ... 331 Appointment of Directors by Third Parties (Nominee Directors) ... 332 Appointment of a Director by Small Shareholders ... 333 Removal of Directors ... 334 Retirement of Directors ... 338 Resignation of Directors ... 338 Penalty for Wrongful Withholding of Companys Property ... 340 Vacation of Office of Directors ... 343 Remuneration of Directors ... 345 Remuneration of non-executive directors 348 Office or Place of Profit ... 356 Important Clarifications ... 359 Lesson Round-Up 362 Glossary 363 SELF-TEST QUESITONS ... 364

LESSON 15

POWERS AND DUTIES OF DIRECTORS Learning Objectives/Lesson Outline 365 Distribution of Powers of a Company ... 366 Exercise of Powers ... 366 Powers to be Exercised only at Board Meetings ... 368 Other Powers to be Exercised at Board Meetings ... 369 Powers Which Must be Exercised by Unanimous Vote ... 370 Powers of the Board Exercisable with the Approval of the Company in General Meeting ... 370 Borrowings ... 373 Prohibitions and restrictions regarding political contributions ... 374 Loans to Directors ... 375 Application for ApprovalInformation to be Stated therein ... 377

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Boards sanction for contracts in which Directors are Interested ... 378 Disclosure of Interest by Directors ... 382 Position of Interested Director ... 383 Duties of Directors ... 383 Liabilities of Directors ... 387 Directors Liability for Acts of Co-directors ... 392 Criminal Liability ... 392 Liability as an Officer in Default ... 394 Courts Power to grant Relief in Certain Cases ... 396 Compounding of certain OffencesSection 621A ... 398 Monitoring and Management ... 399 Lesson Round-Up 400 Glossary 401 SELF-TEST QUESTIONS ... 401

Page LESSON 16

MANAGING DIRECTOR, WHOLE-TIME DIRECTOR AND MANAGER Learning Objectives/Lesson Outline 403 MANAGING DIRECTOR 404 Appointment of Managing Director ... 405 Qualifications of Managing Director ... 410 Powers of Managing Director ... 411 Duties of a Managing Director ... 413 Liabilities ... 413 EXECUTIVE DIRECTOR/WHOLE-TIME DIRECTOR 413 Appointment ... 414 Role and Powers of Executive/Whole-time Director ... 414 Duties of a Whole-time Director ... 415 Liabilities ... 415 MANAGER 416 Number of Managers in a Company ... 416 Director as Manager ... 416 Appointment ... 417 Disqualification ... 417 Term of Office ... 417 Restriction on the Number of Companies of Which a Person may be Appointed Manager ... 417 Restriction on Appointment of Manager ... 417 Distinction between Manager and Managing Director ... 417 Remuneration ... 418 Powers ... 418 Duties ... 418 Liabilities ... 419 Relationship with the Board of Directors ... 419 Compensation for loss of office ... 423

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CHAIRMAN 424 Election of Chairman ... 424 Appointment of Chairman ... 424 Removal of Chairman ... 425 Role of Chairman ... 425 Whole-time and part time Chairman ... 426 Duties and Responsibilities ... 426 Chairmans Power under Common Law ... 428 Amendments to Resolution ... 428 Adjournment of Meetings ... 428 Chairmans Declaration as to result to voting ... 429 Liabilities ... 429 Lesson Round-Up 429 Glossary 430 SELF-TEST QUESTIONS ... 430

Page LESSON 17

COMPANY SECRETARY Learning Objectives/Lesson Outline 431 Who is a Secretary ... 432 Who is a Company Secretary ... 432 Statutory Requirement ... 433 Importance of Secretary ... 434 Position of the Secretary ... 434 Companies (Appointment and Qualifications of Secretary) Rules, 1988 ... 436 Appointment of a Secretary ... 438 Dismissal of a Secretary ... 439 Powers of a Secretary ... 440 Duties of a Secretary ... 440 Statutory Duties ... 441 General Duties ... 442 Liabilities of Secretary ... 443 Rights of Secretary ... 445 Role of Company Secretary ... 446 COMPANY SECRETARY IN PRACTICE 454 Who can Practice as a Company Secretary ... 454 Areas of Practice ... 455 Professional Duties and Code of Conduct ... 461 Rules Applicable to a Company Secretary in Practice ... 461 Professional Misconduct ... 462 Quality Review Board 463 Peer Review 463

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LESSON 18

MEETINGS Learning Objectives/Lesson Outline 467 Introduction ... 468 Meaning of a Meeting ... 468 Kinds of Company Meetings ... 469 Statutory Meeting ... 469 Statutory Report ... 470 Annual General Meeting ... 471 Extension of Validity Period of AGM 472

Page Time and Place for holding an Annual General Meeting ... 473 Participation by shareholders or directors in meetings through electronic mode 474 Default in holding Annual General Meeting ... 475 Consideration of Accounts of more than One Year at AGM 477 Canceling/Postponing of Convened General Meeting ... 477 Object of holding an Annual General Meeting ... 477 Business transacted at an Annual General Meeting ... 478 Applicability of Provisions of Sections 171 to 186 ... 478 Extraordinary General Meetings ... 478 Types of Business Transacted at Extraordinary General Meeting ... 478 Who May Convene Extraordinary General Meetings ... 478 Calling of Extraordinary General Meeting on Requisition ... 479 Calling of Extraordinary General Meeting by Company Law Board ... 480 Class Meetings ... 482 Meetings of Debentureholders ... 482 Meeting of Creditors ... 482 Meeting of Board of Directors ... 482 Notice of Board Meetings ... 484 Time and Place of Board Meetings ... 485 Agenda ... 486 Resolution Passed by Circulation by Directors ... 487 Minutes of Board Meetings ... 488 Quorum of Directors ... 490 Disclosure of Interest ... 491 Chairman of Board Meeting ... 492 Meetings of Committee of Directors ... 492

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Provisions of relating General Meetings 493 Requisites of Valid Meeting ... 493 General Meetings to be Convened by Directors ... 494 Notice of Meeting ... 494 Venue of the Meeting ... 497 Notice of Adjourned Meeting ... 498 Agenda ... 498 Quorum ... 498 Proxy ... 500 Voting at General Meeting ... 504 Voting and Demand for Poll ... 504 Chairman ... 507 Duties and Role of Chairman ... 508 Motion ... 509 Amendment ... 509 General Rules Regarding Amendments ... 510 Methods of Exercising Shareholders Rights with regard to Voting ... 510

Page Resolutions ... 511 Resolution Requiring Special Notice ... 512 Resolutions Passed at Adjourned Meeting ... 512 Circulation of Members Resolution ... 512 Registration of Resolutions and Agreements ... 513 Passing of Resolutions by Postal Ballot ... 514 Companies (Passing of the Resolution by Postal Ballot) Rules, 2011 515 Adjournment ... 516 Postponement ... 517 Dissolution ... 518 Minutes of Proceedings of Meetings ... 518 Lesson Round-Up 520 Glossary 521 SELF-TEST QUESTIONS ... 522

LESSON 19

INTERCORPORATE LOANS AND INVESTMENTS Learning Objectives/Lesson Outline 523 Introduction ... 524 Inter-corporate Loans and Investments ... 524 No blanket permission from shareholders ... 526 Circular 526 Register of loans made, guarantees given, securities provided and investments made ... 527

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Inspection of Register ... 527 Penalties ... 527 Exemptions ... 528 Investments to be held in Companys own name ... 528 Register of Investments not held in company own name ... 530 Penalty 531 Lesson Round-Up 531 Glossary 532 SELF-TEST QUESTIONS ... 532

LESSON 20

DEPOSITS Learning Objectives/Lesson Outline 533 Invitation and Acceptance of Deposits ... 534 Application of Provisions of Section 58A to Guarantee Companies and Section 25 Companies ... 535 Non-Banking Non-Financial Companies ... 535 Exemptions from applicability of Section 58A ... 536

Page Nomination by Depositors ... 537 Companys Right to Reject Application ... 538 Deposit from NRIs ... 538 Provisions Relating to Prospectus Apply to Issue of Advertisement ... 540 Companies (Acceptance of Deposits) Rules, 1975 ... 540 Deposits and Loan ... 543 Deposit and Debenture ... 544 Depositor ... 544 Ceiling Limits for Acceptance of Deposits ... 544 Ceiling on Rate of Interest ... 546 Rate of Brokerage ... 546 Maintenance of Liquid Assets ... 546 Constitutional Validity of Section 58A of the Act and Rule 3A of Deposit Rules ... 547 Form and Particulars of Advertisement ... 549 Delivery of the Text of Advertisement to the Registrar ... 550 Statement in Lieu of Advertisement ... 551 Signing of Advertisement ... 551 Form of Application for Deposits ... 551 Furnishing of receipts to Depositors ... 552 Register of Deposits ... 552 General Provisions regarding Premature Repayment of Deposits ... 552 Exemption ... 553 Power of the Central Government ... 553

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Return of Deposits ... 553 Renewal of Deposits ... 554 Repayment of Deposits 554 Penalties ... 556 Defaults in Repayment of Deposits to Small Deposit holders ... 557 Remedy if the Company Fails to Repay on Due Date ... 558 Powers to Grant Extension of Time and Exemption ... 559 Guidelines for filing Statutory Application under Section 58A(8) of Companies Act, 1956 559 Lesson Round-Up 560 Glossary 560 SELF-TEST QUESTIONS ... 560

LESSON 21

ACCOUNTS AND AUDIT Learning Objectives/Lesson Outline 563 ACCOUNTS 564 Requirement of Keeping Books of Account ... 564 Place of Keeping Books of Account ... 565

Page Books of Accounts in Respect of Branch Office ... 565 True and Fair View ... 565 Preservation of Books of Accounts ... 565 Inspection of Books of Accounts ... 565 Maintenance of Costing Records and Stock Records ... 567 Persons Responsible for Keeping Books of Accounts ... 567 Statutory Books ... 568 Statistical Books ... 569 Annual Accounts: Balance Sheet and Profit and Loss Account 570 Meaning of Balance Sheet 570 Preparation of Balance Sheet and Profit and Loss Account 571 Form of Balance Sheet 571 Meaning of Profit and Loss Account 573 Form of Profit and Loss Account 574 Annual Accounts to Comply with Accounting Standards ... 575 IND AS 575 National Advisory Committee on Accounting Standards ... 575 Laying of Accounts ... 577 Default in Laying of Accounts ... 577 Approval and Signing of Balance Sheet and Profit and Loss Account ... 578 Penalty 579 Authentication of Annual Accounts by Secretary 579

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Authentication of Annual Accounts when only one Director is available 580 Time Gap between authentication of accounts and signing by auditor 580 Approval of Annual Accounts by Delegation 581 Circulation of Balance Sheet and Auditors Report ... 581 Adoption of Accounts at Annual General Meeting ... 584 Filing of Annual Accounts with the Registrar ... 585 Clarifications issued by MCA with respect of filing of Annual Accounts 586 Investor Education and Protection Fund 588 Inspection of Annual Accounts in case of Private Companies ... 588 Duty of officer to make Disclosure of Payments ... 588 Accounts of Holding and Subsidiary Company 589 AUDIT 592 Appointment of Auditor ... 593 Qualifications and Disqualifications of Auditors ... 593 Method of Appointment of Auditors ... 594 Appointment of First Auditors ... 594 Subsequent Appointment of Auditors ... 595 Ceiling on Appointment as Auditor ... 595 Reappointment of Auditors ... 596 Appointment of Auditor Other Than a Retiring Auditor ... 596 Rights of Retiring Auditors ... 597

Page Filling of Casual Vacancy ... 597 Power of Central Government to Appoint Auditors ... 597 Appointment of Auditors by Special Resolution ... 597 Remuneration of Auditors ... 599 Term of Office ... 599 Resignation by an Auditor ... 600 Removal of Auditors ... 600 Status of the Auditors ... 601 Auditors of Government Companies ... 601 Rights and Powers of Auditors ... 603 Duties of Auditors ... 604 Judicial pronouncements on the duties of auditors 605 Liabilities of an Auditor ... 608 Audit of Branch Accounts ... 609 Special Audit ... 610 Cost Audit ... 611 Cost Audit Report 612 Social Audit 613 Proper Books of Accounts ... 614 True and Fair View ... 615 Notes on Accounts ... 615

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Guidelines for Filing Statutory Applications 616 Annexure: Companies (Auditors Report) Order, 2003 618 Lesson Round-Up 621 Glossary 622 SELF-TEST QUESTIONS ... 623

LESSON 22

DIVISIBLE PROFITS AND DIVIDENDS Learning Objectives/Lesson Outline 625 Definition and Meaning of Dividend ... 626 Difference between Dividend and Interest ... 626 Types of Dividend ... 626 Final Dividend ... 626 Interim Dividend ... 626 Dividend on Preference Shares ... 627 Dividend on Equity Shares ... 627 Restrictions on Declaration of Dividend and Purpose Behind it ... 627 Ascertainment of Divisible Profits and Dividends ... 628 Depreciation ... 628 Loss of Previous Year(s) to be Set off against Profits of Current Year or Previous Years ... 630

Page Transfer of Profits to Reserves ... 630 Dividend in case of Absence or Inadequacy of Profits ... 631 Declaration of Dividend ... 632 Revocation of Declared Dividend ... 632 Payment of Dividend in Cash or in Kind ... 633 Liability of Directors, Shareholders and Auditors for improper Dividend ... 633 Shareholders Right to Dividend ... 633 Who is eligible to receive dividend ... 633 When dividend is Payable ... 634 Establishment of Investor Education and Protection Fund ... 636 Dividend Warrants ... 636 Dividend Mandate ... 637 Use of Information Technology in Cash Transaction of Listed Companies for Payment of Dividends ... 637 Can Dividends be Paid out of Capital ... 637 Payment of Interest out of Capital ... 638 Payment of Dividend out of Capital Profits ... 639 Remittance of Dividend or Interest or Sale Proceeds to NRIs, Foreigners and Foreign Companies ... 639 Rate of Dividend on Preference Shares ... 639

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LESSON 23

SOLE SELLING AND SOLE BUYING AGENTS Learning Objectives/Lesson Outline 643 Sole Selling Agents-Meaning ... 644 Appointment of Sole-selling Agents ... 644 Powers of the Central Government to Investigate Terms of Appointment ... 645 Companys Duty in Investigation ... 647 Penalty ... 647 Power of the Central Government to Prohibit the Appointment of Sole Selling Agent in Certain Cases ... 647 Re-appointment of Sole Selling Agents ... 650 Duties of a Secretary ... 650 Condition to form part of Agreement 651 Remuneration of Sole Selling Agents ... 651 Sole Buying or Purchasing Agents ... 651 No Compensation to Sole Selling Agent for Loss of Office ... 652 Meaning of Relative ... 652 The Companies (Appointment of Sole Agents) Rules, 1975 ... 653

Page Guidelines for filing statutory applications under Section 294AA of the Companies Act, 1956 655 Lesson Round-Up 655 Glossary 656 SELF-TEST QUESTIONS ... 656

LESSON 24

BOARDS REPORT AND DISCLOSURES Learning Objectives/Lesson Outline 659 Introduction 660 Disclosures under Companies Act 660 Disclosure under Section 217(1) 660 Disclosure under Section 217(2) 662 Particulars in respect of certain employees [Section 217(2A)] 662 Directors Responsibility Statement [Section 217(2AA)] 663 Comment on Auditors Report [Section 217(3)] 665 Other Disclosures 664 Disclosures pursuant to the Listing agreement of Stock Exchanges 664

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Disclosures pursuant to employee stock option and employees stock purchase schemes 667 Disclosures pursuant to Directions of RBI 667 Approval of the Boards Report 668 Signing and dating of the Boards Report 668 Filing of the Boards Report 669 Right of Members to copies of Balance Sheet, Boards Report, etc. 670 Liability for Mis-statement 670 Chairmans Speech 671 Compliance Certificate under Section 383A 671 Need for Compliance Certificate 672 Scope of Compliance Certificate 673 Penalty for Non-Compliance 673 Mode and period of Appointment of PCS 673 Certification with Qualification 674 Penalty for false compliance certificate 674 Professional Responsibility 675 Lesson Round-Up 675 Glossary 676 SELF-TEST QUESTIONS ... 676

LESSON 25

REGISTERS, FORMS AND RETURNS Learning Objectives/Lesson Outline 677 Statutory Books/Registers ... 678 Secretarial Standards ... 679

Page Statutory Books ... 679 Register of Investments not held in Companys name 679 Register of deposits 679 Register of Securities bought back 681 Register of Charges 681 Register of Members 682 Index of Members 684 Register of debenture holder 684 Index of debenture holders 684 Register and Index of beneficial owners 685 Foreign register of members and debentureholders 685 Annual Return 686 Minutes Book 689 Register of Postal Ballot 691 Books of Account 691 Cost Records 692

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Register of Particulars of Contracts in which directors are interested 692 Register of Directors 693 Register of Directors Shareholding 694 Register of Investment, Loan made, guarantee given or security provided to other body corporate 694 Register of renewed and duplicate certificate 695 Register of records and documents destroyed 695 Register of Sweat Equity Shares 696 Procedure for Keeping Registers and Returns at a Place other than the Registered Office ... 696 Other Registers ... 697 Electronic Forms 709 Filing of Various Forms/Returns with Registrar of Companies ... 710 Preparation and Filing of Returns with the Registrar of Companies ... 713 Returns on Occurrence of Certain Events ... 716 Filing Fee for Companies Registered in India ... 719 Filing Fee by Foreign Companies ... 719 Payment of fees ... 720 Company Secretarys Role in Filing and Filing Returns and Forms ... 720 Guidelines for Preparing/Filing Forms, Documents, Returns etc. ... 721 Defective Forms/Documents ... 722 Condonation of Delay 722 Procedure for Condonation of Delay by Central Government in Relation to Filing of Documents with Registrar of Companies ... 723 Penalty for Filing False Documents/Statements with Registrar ... 723 Lesson Round-Up 723 Glossary 724 SELF-TEST QUESTIONS ... 724

Page LESSON 26

INSPECTION AND INVESTIGATION Learning Objectives/Lesson Outline 727 INSPECTION 728 Introduction 728 Nature of Inspection 728 Inspection by whom 728 Directors right to make inspection 729 Right of Members to make inspection 729 Time and Place of Inspection 730 Inspection of Books of Account and other books and papers 730 Notice for Inspection 730 Duties of Directors, other Officers and Employees 730

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Powers of Inspector 730 Inspection Report 730 Follow-up Action on the Report of Inspecting Officer 732 Penalty for Default 732 Note on Strategy on Inspection 732 Preparation by Company Secretary to face Inspection 735 Powers of Registrar to call for Information or Explanation 736 Reports of Registrar 738 Seizure of documents by Registrar 738 INVESTIGATION 738 Meaning and Object 738 Kinds of Investigation 739 Investigation of the Affairs of a Company by the Central Government 739 Only Individual to be appointed as Inspector 743 Powers of Inspectors 743 Penalty for Default 745 Inspectors Report 746 Follow-up Action on the Report 746 Expenses of Investigation 748 Preparation by a Company Secretary to face Investigation 748 Investigation of the Ownership of Company 750 Restrictions on Shares and Debentures 751 Saving for disclosure by Legal Advisor or Banker 752 Protection of the Employees of Company during Investigation 752 Lesson Round-Up 753 Glossary 754 SELF-TEST QUESTIONS ... 754

Page LESSON 27

MAJORITY RULE AND MINORITY RIGHTS Learning Objectives/Lesson Outline 757 SHAREHOLDER'S DEMOCRACY 758 MAJORITY POWERS AND MINORITY RIGHTS 759 Powers of Majority ... 759 The Principle of Non-interference (Rule in Foss v. Harbottle) ... 760 Justification and Advantages of the Rule in Foss v. Harbottle ... 761 Exceptions to the Rule in Foss v. Harbottle Protection of Minority Rights and Shareholders Remedies ... 762 Actions by Shareholders in Common Law ... 762 Statutory Remedies (under the Companies Act) ... 765

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PREVENTION OF OPPRESSION AND MISMANAGEMENT 766 Prevention of Oppression ... 767 Meaning of Oppression ... 767 Oppression must be of a continuous Nature ... 769 Prejudicial to Public Interest ... 770 Winding up Order under Just and Equitable Clause ... 770 Winding up Would Unfairly Prejudice the Petitioners ... 770 Prevention of Mismanagement ... 771 Persons Entitled to Apply ... 772 Powers of the Company Law Board ... 774 Consequences of Termination or Modification of Agreements ... 775 Powers of the Central Government to Prevent Oppression or Mismanagement ... 775 Power to Prevent Changes in the Board ... 778 Lesson Round-Up 778 Glossary 779 SELF-TEST QUESTIONS ... 779

LESSON 28

MERGER, DE-MERGER, AMALGAMATION, COMPROMISE AND

ARRANGEMENTS AN OVERVIEW Learning Objectives/Lesson Outline 781 Concept of Merger and Amalgamation 782 Demerger under the Companies Act, 1956 783 Section 390 provides the interpretation of section 391 and 393 783 Scope of Section 391 784 Sanctioned Arrangement binding on all Concerned Parties 785 Need for Reports from Registrar of Companies 785 When Courts do not sanction a Scheme 786

Page Explanatory statement to the notice of meeting 787 Powers of the Court to Supervise the Implementation of the Scheme 788 Powers of the Court to Sanction Modification of the Terms of a Scheme 789 Powers of the Court to order a Winding up while considering a Scheme 789 Powers of the Court to make Consequential Orders 789 Powers and Duty to acquire Shares of Shareholder dissenting from Scheme or Contract Approved by Majority 790 Lesson Round-Up 793 Glossary 793 SELF-TEST QUESTIONS ... 794

LESSON 29

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PRODUCER COMPANIES

Learning Objectives/Lesson Outline 795 Genesis 796 Objects of Producer Company 796 Formation of Producer Company and its Registration 797 Membership and voting rights of members of Producer Company 798 Benefits to Members 798 Memorandum of Association, Articles of Association 798 Contents of Memorandum of Producer Company 799 Contents of Articles of Association of Producer Company 799 Amendment to Memorandum and Articles 801 Option to Inter-State Co-operative Societies to become Producer Companies 801 Vesting of undertaking in Producer Company 802 Concession, etc. to be deemed to have been granted to Producer Company 802 Provisions in respect of Officers and other employees of Inter-State Co-operative Society 802 Number of Directors 802 Appointment of Director 803 Vacation of Officer by Directors 803 Powers and functions of Board 803 Matters to be transacted at the General Meeting 804 Liability of Directors 804 Committee of Directors 805 Meetings of the Board and Quorum 805 Chief Executive and his functions 805 Secretary of Producer Company 805 Quorum of the General Meeting 806 Voting Rights 806 Annual General Meetings [Section 581ZA] 806 Share Capital 807 Transferability of shares and attendant rights 807 Surrender of shares 807

Page Books of account 807 Internal Audit 808 Donation or Subscription by Producer Company 808 General and other reserves 808 Issue of Bonus Shares 809 Loan, etc., to Members [Section 581ZK] 809 Investment in other companies, formation of subsidiaries etc. [Section 581ZL] 809 Amalgamation, merger or division, etc., to form new Producer Companies 809 Disputes 810 Striking off name of Producer Company 810

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Re-conversion of producer company to Inter-State Co-operative Society 810 Lesson Round-Up 810 Glossary 812 SELF-TEST QUESTIONS ... 812

LESSON 30

LIMITED LIABILITY PARTNERSHIPS Learning Objectives/Lesson Outline 813 Introduction 814 Salient Features 814 Distinction between LLP and Partnership 815 Distinction between LLP and Company 816 Comparison of LLP with Private Limited Company 816 Incorporation of Limited Liability Partnership 817 LLP agreement 818 Partners and Designated Partners 819 Responsibilities of Designated Partners 821 Partners obligation 821 Advantage and Disadvantages of LLP 822 LLP for the Professionals 822 Valuation of Capital Contribution 822 Maintenance of Books of Account 822 Audit of Limited Liability Partnership Accounts 823 Filing of Annual Returns 823 Electronic Filing of Documents 824 Investigation of the Affairs of LLP 824 Foreign LLP 825 Winding up of LLP 825 Foreign Direct Investment in LLP 826 Lesson Round-Up 827 Glossary 827 SELF-TEST QUESTIONS ... 827

Page LESSON 31

APPLICATION OF COMPANY LAW TO DIFFERENT SECTORS Learning Objectives/Lesson Outline 829 Application of Companies Act to different sectors 830 Banking Companies 830 Insurance Companies 831 Insurance Regulatory and Development Authority (IRDA) 832

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Exception of Public Financial Institution from Section 211 832 Lesson Round-Up 833 SELF-TEST QUESTIONS ... 833

LESSON 32

OFFENCES, PENALTIES AND THEIR COMPOUNDING Learning Objectives/Lesson Outline 835 Introduction 836 Officer in default 836 Types of Penalty 837 Compounding of offences under Section 621A of Companies Act, 1956 837 Procedure for Compounding 838 List of Sections Imposing Penalty 839 Lesson Round-Up 853 Glossary 853 SELF-TEST QUESTIONS ... 853

LESSON 33

WINDING UP OF COMPANIES Learning Objectives/Lesson Outline 855 Introduction 856 Individual Insolvency vs. Corporate Insolvency 856 Winding up and Dissolution 857 Modes of winding up 857 Winding up by the Court 858 Grounds on which a company may be wound up by the Court 858 Who may file petition for winding up 860 Jurisdiction of Court for entertaining winding up petition 861 Voluntary winding up 861 Kinds of voluntary winding up 862 Members voluntary winding up 862

Page Creditors voluntary winding up 863 Distinction between Members and Creditors voluntary winding up 863 Powers of the Court to Intervene in voluntary winding up 863 Commencement of winding up 864 Lesson Round-Up 865 SELF-TEST QUESTIONS ... 865

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LESSON 34

STRIKING OFF NAME OF COMPANIES Learning Objectives/Lesson Outline 867 Meaning of Striking off 868 When a Company is still in operation 868 Procedure for Striking off a company 869 Fast Track Exit Mode by MCA 870 Restoration of the Companies Name 871 The rights of person aggrieved by the company having been struck off the register 872 Effect of Restoration Order 872 Mode of Sending Letter/Notice 873 Who can apply? 873 Lesson Round-Up 874 SELF-TEST QUESTIONS ... 874

LESSON 35

AN INTRODUCTION TO E-GOVERNANCE AND XBRL Learning Objectives/Lesson Outline 875 Introduction 876 Organisation of ROC offices under MCA-21 876 Front office 876 Virtual front office 876 Physical Front office 877 Back office 877 Important features of e-filing of Documents under MCA21 System 877 Director Identification Number 877 Corporate Identity Number 878 Digital Signature Certificate 878 Other Features of e-filing of documents under MCA21 System 879 Mode of payment 879 Service Request Number 880 Payment of stamp duty 880 Categories of e-forms 880

Page Annual filing 883 Pre-certification of e-forms 884 Terms used while e-fling the e-forms 884 Online Inspection of Documents 885 Introduction of New e-form 68 886

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Key benefits of MCA21 Project 886 Clarifications issued by MCA 886 General structure of an e-form and e-filing process 887 Responsibility of Professionals Digitally Signing the e-forms 889 XBRL 889 Benefits of XBRL 890 Lesson Round-Up 891 SELF-TEST QUESTIONS ... 891

LESSON 36

SECRETARIAL STANDARDS Learning Objectives/Lesson Outline 893 Secretarial Standards - issued for the first time in any country- a unique and pioneering effort 894 Secretarial Standard on Meetings of the Board of Directors (SS-1) 894 Secretarial Standard on General Meetings (SS-2) 895 Secretarial Standard on Dividend (SS-3) 895 Secretarial Standard on Registers and Records (SS-4) 895 Secretarial Standard on Minutes (SS-5) 895 Secretarial Standard on Transmission of Shares and Debentures (SS-6) 896 Secretarial Standard on Passing of Resolutions by Circulation (SS-7) 896 Secretarial Standard on Affixing of Common Seal (SS-8) 896 Secretarial Standard on Forfeiture of Shares (SS-9) 896 Secretarial Standard on Boards Report (SS-10) 897 Guidance notes 897 Refrencer on Secretarial Audit 897 Procedure for Issuing Secretarial Standards 898 Conclusion 898 TEST PAPERS 2013 Test Paper 1/2013 ... 901 Test Paper 2/2013 ... 903 Test Paper 3/2013 ... 906

Lesson 1 INTRODUCTION

Company as a business medium Meaning and definition of term company Nature and characteristics of a company Historical Development of Concept of

Corporate Law in India Development of Company Law in India and

England Highlights of Companies Bill, 2012 Companies vis--vis other Forms of business Concept of Corporate Personality Lifting of Corporate Veil Citizenship Personal liability of directors or members Illegal association

LEARNING OBJECTIVES

The concept of Company or Corporation in business is not a new phenomenon, but was dealt with, in 4th century BC itself during Arthashasthra days. Its shape got revamped over a period of time according to the tunes of business dynamics.

Company form of business has certain distinct advantages over other forms of businesses like Sole Proprietorship/Partnership etc. It includes features such as Limited Liability, Perceptual Succession etc.

After reading this lesson, you would be able to understand the historical development in evolution of corporate law in India and England, emerging regulatory aspects including Companies Bill, 2012, besides dealing with basic characteristics of company and how it differs from other forms of businesses.

The great problem of having corporate citizens is that they aren't like the rest of us. As Baron Thurlow in England is supposed to have said, "They have no soul to save, and they have no body to incarcerate." Robert Monks

LESSON OUTLINE

EP-CL 2

1. COMPANY AS A BUSINESS MEDIUM Meaning of a Company The word company is derived from the Latin word (Com=with or together; panis =bread), and it originally referred to an association of persons who took their meals together. In the leisurely past, merchants took advantage of festive gatherings, to discuss business matters. Now a days, the business matters have become more complicated and cannot be discussed at length at festive gatherings. Therefore, the word company has assumed greater importance. It denotes a joint stock enterprise in which the capital is contributed by a large number of people. Thus, in popular parlance, a company denotes an association of like minded persons formed for the purpose of carrying on some business or undertaking. A company is a corporate body and a legal person having status and personality distinct and separate from that of the members constituting it. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law and clothing it with legal personality. The word corporation is derived from the Latin term corpus which means body. Accordingly, corporation is a legal person created by the process other than natural birth. It is, for this reason, sometimes called artificial legal person. As a legal person, a corporate is capable of enjoying many of the rights and incurring many of the liabilities of a natural person. The incorporated company owes its existence either to a special Act of Parliament or to company legislation. The public corporations like Life Insurance Corporation of India, SBI etc., have been brought into existence through special Acts of Parliament, whereas companies like Tata Steels Ltd., Reliance Industries Limited have been formed under the Companys Legislation i.e. Companies Act, 1956. The trading partnership which is governed by Partnership Act is the most apt example of an unincorporated association. Definition of Company In the legal sense, a company is an association of both natural and artificial persons incorporated under the existing law of a country. In terms of the Companies Act, 1956 (Act No. 1 of 1956) [hereinafter referred to as the Act] a company means a company formed and registered under the Companies Act, 1956 or under the previous laws relating to companies" [Section 3(1)(ii)]. In common law, a company is a legal person or legal entity separate from, and capable of surviving beyond the lives of its members. However, an association formed not for profit also acquires a corporate life and falls within the meaning of a company by reason of a licence under Section 25(1) of the Act. But a company is not merely a legal institution. It is rather a legal device for the attainment of any social or economic end. It is, therefore, a combined political, social, economic and legal institution. Thus, the term company has been described in many ways. It is a means of cooperation and organisation in the conduct of an enterprise. It is an intricate, centralised, economic and administrative structure run by professional managers who hire capital from the investor(s). Lord Justice James has defined a company as an association of many persons who contribute money or moneys worth to a common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The common stock so contributed is denoted in money and is the capital of the company. The persons who form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is his share. From the foregoing discussion it is clear that a company has its own corporate and legal personality distinct and separate from that of its members. A brief description of the various attributes is given here to explain the nature and characteristics of the company as a corporate body.

Lesson 1 Introduction 3

NATURE AND CHARACTERISTICS OF A COMPANY Since a corporate body (i.e. a company) is the creation of law, it is not a human being, it is an artificial person (i.e. created by law); it is clothed with many rights, obligations, powers and duties prescribed by law; it is called a person. Being the creation of law, it possesses only the properties conferred upon it by its Memorandum of Association which is the charter of the company. Within the limits of powers conferred by the charter, it can do all acts as a natural person may do. The most striking characteristics of a company are: (i) Corporate personality The company incorporated under the Act is vested with a corporate personality quite distinct from individuals who are its members. Being a separate legal entity it bears its own name and acts under a corporate name. It has a seal of its own. Its assets are separate and distinct from those of its members. It is also a different person from the members who compose it. As such it is capable of owning property, incurring debts, borrowing money, having a bank account, employing people, entering into contracts and suing or being sued in the same manner as an individual. Its members are its owners but they can be its creditors simultaneously as it has a separate legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The shareholders are not the agents of the company and so they cannot bind it by their acts. The company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its rights, nor can they be sued in respect of its liabilities. Thus, incorporation is the act of forming a legal corporation as a juristic person. A juristic person is in law also conferred with rights and obligations and is dealt with in accordance with law. In other words, the entity acts like a natural person but only through a designated person, whose acts are processed within the ambit of law [Shiromani Gurdwara Prabandhak Committee v. Shri Sam Nath Dass AIR 2000 SCW 139].

CASE EXAMPLE The case of Salomon v. Salomon and Co. Ltd., (1897) A.C. 22 The above case has clearly established the principle that once a company has been validly constituted under Companies Act, it becomes a legal person distinct from its members and for this purpose it is immaterial whether any member has a large or small proportion of the shares, and whether he holds those shares beneficially or as a mere trustee. In the case, Salomon had, for some years, carried on a prosperous business as a leather merchant and boot manufacturer. He formed a limited company consisting of himself, his wife, his daughter and his four sons as the shareholders, all of whom subscribed for 1 share each so that the actual cash paid as capital was 7. Salomon sold his business (which was perfectly solvent at that time), to the Company formed by him for the sum of 38,782. The companys nominal capital was 40,000 in 1 shares. In part payment of the purchase money for the business sold to the company, debentures of the amount of 10,000 secured by a floating charge on the companys assets were issued to Salomon, who also applied for and received an allotment of 20,000 1 fully paid shares. The remaining amount of 8,782 was paid to Salomon in cash. Salomon was the managing director and two of his sons were other directors. The company soon ran into difficulties and the debentureholders appointed a receiver and the company went into liquidation. The total assets of the company amounted to 6050, its liabilities were 10,000 secured by debentures, 8,000 owning to unsecured trade creditors, who claimed the whole of the companys assets, viz., 6,050, on the ground that, as the company was a mere alias or agent for Salomon, they were entitled to payment of their debts in priority to debentures. They further pleaded that Salomon, as principal beneficiary, was ultimately responsible for the debts incurred by his agent or trustee on his behalf.

EP-CL 4

Their Lordships of the House of Lords observed: the company is a different person altogether from the subscribers of the memorandum; and though it may be that after incorporation the business is precisely the same as before, the same persons are managers, and the same hands receive the profits, the company is not in law their agent or trustee. The statute enacts nothing as to the extent or degree of interest which may be held by each of the seven or as to the proportion of interest, or influence possessed by one or majority of the shareholders over others. There is nothing in the Act requiring that the subscribers to the memorandum should be independent or unconnected, or that they or any of them should take a substantial interest in the undertakings, or that they should have a mind or will of their own, or that there should be anything like a balance of power in the constitution of company.

CASE EXAMPLE The case of Lee v. Lees Air Farming Ltd. (1961) A.C. 12 (P.C.), The above case illustrates the application of the principles established in Salomons case (supra). In this case, a company was formed for the purpose of aerial top-dressing. Lee, a qualified pilot, held all but one of the shares in the company. He voted himself the managing director and got himself appointed by the articles as chief pilot at a salary. He was killed in an air crash while working for the company. His widow claimed compensation for the death of her husband in the course of his employment. The company opposed the claim on the ground that Lee was not a worker as the same person could not be the employer and the employee. The Privy Council held that Lee and his company were distinct legal persons which had entered into contractual relationships under which he became, the chief pilot, a servant of the company. In his capacity of managing director he could, on behalf of the company, give himself orders in his other capacity of pilot, and the relationship between himself, as pilot and the company, was that of servant and master. Lee was a separate person from the company he formed and his widow was held entitled to get the compensation. In effect the magic of corporate personality enabled him (Lee) to be the master and servant at the same time and enjoy the advantages of both. The decision of the Calcutta High Court in Re. Kondoli Tea Co. Ltd., (1886) ILR 13 Cal. 43, recognised the principle of separate legal entity even much earlier than the decision in Salomon v. Salomon & Co. Ltd. case. Certain persons transferred a Tea Estate to a company and claimed exemptions from ad valorem duty on the ground that since they themselves were also the shareholders in the company and, therefore, it was nothing but a transfer from them in one name to themselves under another name. While rejecting this Calcutta High Court observed: The company was a separate person, a separate body altogether from the shareholders and the transfer was as much a conveyance, a transfer of the property, as if the shareholders had been totally different persons.

CASE EXAMPLE New Horizons Ltd. v. Union of India, (AIR 1994, Delhi 126) The experience of a shareholder of a company can be regarded as experience of a company. The tender of the company, New Horizons Ltd., for publication of telephone directory was not accepted by the Tender Evaluation Committee on the ground that the company had nothing on record to show that it had the technical experience required to be possessed to qualify for tender. On appeal the rejection of tender was upheld by the Delhi High Court.


The judgement of the Delhi High Court was reversed by the Supreme Court which observed as under: Once it is held that NHL (New Horizons Ltd.) is a joint venture, as claimed by it in the tender, the experience of its various constituents namely, TPI (Thomson Press India Ltd.), LMI (Living Media India Ltd.) and WML (World Media Ltd.) as well as IIPL (Integrated Information Pvt. Ltd.) had to be taken into consideration, if the Tender Evaluation Committee had adopted the approach of a prudent business man. Seeing through the veil covering the face of NHL, it will be found that as a result of re-organisation in 1992 the company is functioning as a joint venture wherein the Indian group (TPI, LMI and WML) and Mr. Aroon Purie hold 60% shares and the Singapore based company (IIPL) hold 40% shares. Both the groups have contributed towards the resources of the joint venture in the form of machines, equipment and expertise in the field. The company is in the nature of partnership between the Indian group of companies and Singapore based company who have jointly undertaken this commercial enterprise wherein they will contribute to the assets and share the risk. In respect of such a joint venture company, the experience of the company can only mean the experience of the constituents of the joint venture i.e. the Indian group of companies (TPI, LMI and WML) and the Singapore based company (IIPL) (New Horizons Ltd. and another v. Union of India (1995) 1 Comp. LJ 100 SC). Company as a person Company is an artificial person created by law. It is not a human being but it acts only through human beings. It is considered as a legal person which can enter into contracts, possess properties in its own name, sue and can be sued by others etc. It is called an artificial person since it is invisible, intangible, existing only in the contemplation of law. It is capable of enjoying rights and being subject to duties.

CASE EXAMPLE Union Bank of India v. Khader International Construction and Other [(2001) 42 CLA 296 SC] In this case, the question which arose before the Court was whether a company is entitled to sue as an indigent (poor) person under Order 33, Rule 1 of the Civil Procedure Code, 1908. The aforesaid Order permits persons to file suits under the Code as pauper/indigent persons if they are unable to bear the cost of litigation. The appellant in this case had objected to the contention of the company which had sought permission to sue as an indigent person. The point of contention was that, the appellant being a public limited company, it was not a person within the purview of Order 33, Rule 1 of the Code and the person referred to only a natural person and not to other juristic persons. The Supreme Court held that the word person mentioned in Order 33, Rule 1 of the Civil Procedure Code, 1908, included any company as association or body of individuals, whether incorporated or not. The Court observed that the word person had to be given its meaning in the context in which it was used and being a benevolent provision, it was to be given an extended meaning. Thus a company may also file suit as an indigent person. REVIEW QUESTIONS

State whether the following statement is True or False A shareholder cannot be personally held liable for the acts of the company even if he holds virtually the entire share capital.

True False

Correct Answer: True

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(ii) Limited Liability The privilege of limited liability for business debts is one of the principal advantages of doing business under the corporate form of organisation. The company, being a separate person, is the owner of its assets and bound by its liabilities. The liability of a member as shareholder, extends to contribution to the assets of the company up to the nominal value of the shares held and not paid by him. Members, even as a whole, are neither the owners of the companys undertakings, nor liable for its debts. In other words, a shareholder is liable to pay the balance, if any, due on the shares held by him, when called upon to pay and nothing more, even if the liabilities of the company far exceed its assets. This means that the liability of a member is limited. For example, if A holds shares of the total nominal value of ` 1,000 and has already paid ` 500/- (or 50% of the value) as part payment at the time of allotment, he cannot be called upon to pay more than ` 500/-, the amount remaining unpaid on his shares. If he holds fully-paid shares, he has no further liability to pay even if the company is declared insolvent. In the case of a company limited by guarantee, the liability of members is limited to a specified amount mentioned in the memorandum. Buckley, J. in Re. London and Globe Finance Corporation, (1903) 1 Ch.D. 728 at 731, has observed: The statutes relating to limited liability have probably done more than any legislation of the last fifty years to further the commercial prosperity of the country. They have, to the advantage of the investor as well as of the public, allowed and encouraged aggregation of small sums into large capitals which have been employed in undertakings of great public utility largely increasing the wealth of the country. Exceptions to the principle of limited liability

As provided by Section 45 of the Companies Act, 1956, the members become personally liable if the membership falls below prescribed minimum and the business is carried on for more than six months thereafter.

It is also provided in the Act vide Section 323 that a limited company may, if so authorised by its articles, alter its memorandum by special resolution so as to render the liability of its directors or of any of its director or manager as unlimited.

Further, where in the course of winding up it appears that any business of the company has been carried on with intent to defraud creditors, the Court may declare the persons who were knowingly parties to the transaction as personally liable without limitation of liability for all or any of the debts/liabilities of the company.

When the company is incorporated as an Unlimited Company under Section 12(2)(c) of the Act. (iii) Perpetual Succession An incorporated company never dies except when it is wound up as per law. A company, being a separate legal person is unaffected by death or departure of any member and remains the same entity, despite total change in the membership. A companys life is determined by the terms of its Memorandum of Association. It may be perpetual or it may continue for a specified time to carry on a task or object as laid down in the Memorandum of Association. Perpetual succession, therefore, means that the membership of a company may keep changing from time to time, but that does not affect its continuity. The membership of an incorporated company may change either because one shareholder has transferred his shares to another or his shares devolve on his legal representatives on his death or he ceases to be a member under some other provisions of the Companies Act. Thus, perpetual succession denotes the ability of a company to maintain its existence by the constant succession of new individuals who step into the shoes of those who cease to be members of the company. Professor L.C.B. Gower rightly mentions, Members


may come and go, but the company can go on forever. During the war all the members of one private company, while in general meeting, were killed by a bomb, but the company survived not even a hydrogen bomb could have destroyed it. (iv) Separate Property A company being a legal person and entirely distinct from its members, is capable of owning, enjoying and disposing of property in its own name. The company is the real person in which all its property is vested, and by which it is controlled, managed and disposed off. Their Lordships of the Madras High Court in R.F. Perumal v. H. John Deavin, A.I.R. 1960 Mad. 43 held that no member can claim himself to be the owner of the companys property during its existence or in its winding-up. A member does not even have an insurable interest in the property of the company.

CASE EXAMPLE Mrs. Bacha F. Guzdar v. The Commissioner of Income Tax, Bombay, A.I.R. 1955 S.C. 74 The Supreme Court in this case held that, though the income of a tea company is entitled to be exempted from Income-tax up to 60% being partly agricultural, the same income when received by a shareholder in the form of dividend cannot be regarded as agricultural income for the assessment of income-tax. It was also observed by the Supreme Court that a shareholder does not, as is erroneously believed by some people, become the part owner of the company or its property; he is only given certain rights by law, e.g., to receive or to attend or vote at the meetings of the shareholders. The court refused to identify the shareholders with the company and reiterated the distinct personality of the company. (v) Transferability of Shares The capital of a company is divided into parts, called shares. The shares are said to be movable property and, subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock companies were established, the object was that their shares should be capable of being easily transferred, [In Re. Balia and San Francisco Rly., (1968) L.R. 3 Q.B. 588]. Section 82 of the Companies Act, 1956 enunciates the principle by providing that the shares held by the members are movable property and can be transferred from one person to another in the manner provided by the articles. If the articles do not provide anything for the transfer of shares and the Regulations contained in Table A in Schedule I to the Companies Act, 1956, are also expressly excluded, the transfer of shares will be governed by the general law relating to transfer of movable property. A member may sell his shares in the open market and realise the money invested by him. This provides liquidity to a member (as he can freely sell his shares) and ensures stability to the company (as the member is not withdrawing his money from the company). The Stock Exchanges provide adequate facilities for the sale and purchase of shares. Further, as of now, in most of the listed companies, the shares are also transferable through Electronic mode i.e. through Depository Participants instead of physical transfers. However there are restrictions with respect to transferability of shares of Private Limited Company which are dealt in chapter 2.

(vi) Common Seal On incorporation, a company acquires legal entity with perpetual succession and a common seal. Since the company has no physical existence, it must act through its agents and all such contracts entered into by its

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agents must be under the seal of the company. The Common Seal acts as the official signature of a company. The name of the company must be engraved on its common seal. A rubber stamp does not serve the purpose. A document not bearing common seal of the company is not authentic and has no legal force behind it. The person authorised to use the seal should ensure that it is kept under his personal custody and is used very carefully because any deed, instrument or a document to which seal is improperly or fraudulently affixed will involve the company in legal action and litigation.

REVIEW QUESTIONS

(vii) Capacity to Sue and Be Sued A company being a body corporate, can sue and be sued in its own name. To sue, means to institute legal proceedings against (a person) or to bring a suit in a court of law. All legal proceedings against the company are to be instituted in its own name. Similarly, the company may bring an action against anyone in its own name. A companys right to sue arises when some loss is caused to the company, i.e. to the property of the personality of the company. Hence, the company is entitled to sue for damages in libel or slander as the case may be [Floating Services Ltd. v. MV San Fransceco Dipaloa (2004) 52 SCL 762 (Guj)]. A company, as a person separate from its members, may even sue one of its own members for libel. A company has a right to seek damages where a defamatory material published about it, affects its business. Where video cassettes were prepared by the workmen of a company showing, their struggle against the companys management, it was held to be not actionable unless shown that the cassette would be defamatory. The court did not restrain the exhibition of the cassette. [TVS Employees Federation v. TVS and Sons Ltd., (1996) 87 Com Cases 37]. The company is not held liable for contempt committed by its officer. [Lalit Surajmal Kanodia v. Office Tiger Database Systems India (P) Ltd., (2006) 129 Com Cases 192 Mad]. (viii) Contractual Rights A company, being a separate legal entity different from its members, can enter into contracts for the conduct of the business in its own name. A shareholder cannot enforce a contract made by his company; he is neither a party to the contract nor entitled to the benefit of it, as a company is not a trustee for its shareholders. Likewise, a shareholder cannot be sued on contracts made by his company. The distinction between a company and its members is not confined to the rules of privity, however, it permeates the whole law of contract. Thus, if a director fails to disclose a breach of his duties to his company, and in consequence a shareholder is induced to enter into a contract with the director which he would not have entered into had there been disclosure, the shareholder cannot rescind the contract. Similarly, a member of a company cannot sue in respect of torts committed against the company, nor can he be sued for torts committed by the company. [British Thomson-Houston Company v. Sterling Accessories Ltd., (1924) 2 Ch. 33]. Therefore, the company as a legal person can take action to enforce its legal rights or be sued for breach of its legal duties. Its rights and duties are distinct from those of its constituent members.

State whether the following statement is True or False A common seal acts as the official signature of a company.

True False

Correct Answer: True


(ix) Limitation of Action A company cannot go beyond the power stated in the Memorandum of Association. The Memorandum of Association of the company regulates the powers and fixes the objects of the company and provides the edifice upon which the entire structure of the company rests. The actions and objects of the company are limited within the scope of its Memorandum of Association. In order to enable it to carry out its actions without such restrictions and limitations in most cases, sufficient powers are granted in the Memorandum of Association. But once the powers have been laid down, it cannot go beyond these powers unless the Memorandum of Association is itself altered prior to doing so. (x) Separate Management As already noted, the members may derive profits without being burdened with the management of the company. They do not have effective and intimate control over its working and they elect their representatives to conduct corporate functioning. In other words, the company is administered and managed by its managerial personnel. (xi) Voluntary Association for Profit A company is a voluntary association for profit. It is formed for the accomplishment of some public goals and whatsoever profit is gained is divided among its shareholders or restored for the future expansion of the company. Only a Section 25 company can be formed with no profit motive. (xii) Termination of Existence A company, being an abstract and artificial person, does not die a natural death. It is created by law, carries on its affairs according to law throughout its life and ultimately is effaced by law. Generally, the existence of a company is terminated by means of winding up. However, to avoid winding up sometimes companies adopt strategies like reorganisation, reconstruction and amalgamation. To sum up, a company is a voluntary association for profit with capital divisible into transferable shares with limited liability, having corporate entity and a common seal with perpetual succession. 2. HISTORICAL DEVELOPMENT OF CONCEPT OF CORPORATE LAW IN INDIA The laws are developed by the common consciousness of the people, and corporate laws are no exception to it. The business people on the Indian subcontinent utilized the corporate form from a very early period. Corporations as such were not unknown to India as is clear from Kautilyas Arthashastra (4th Century BC). Regulations concerning trade and industry in the Arthashastra have a surprisingly modern look. The trade and industry of the period were characterized by a highly developed organization. The institution called Sreni was a corporation of men following the same trade, art, or craft, and resembled the guilds of Medieval Europe. Almost every important industry had its guilds, which laid down rules and regulations for the conduct of members, with a view to safeguarding their interests. These rules and regulations were recognized by the law of the land. Each guild had a definite constitution, with a President or a Headman, and a small Executive Council. Sometimes the guilds attained great power and prestige, and in all cases the head of the guild was an important personage in Court. The guilds sometimes maintained armies and helped the King in times of need, though at times, there were quarrels and fights between different guilds which taxed the power of the authority to its utmost. One of the most important functions of these guilds was to serve as local banks. People kept deposits of money with them with a direction that the interest accruing there from was to be devoted to specific purposes, every year, so as the Sun and Moon endure. This is the best proof of the efficient organization of these bodies, for people would hardly trust them with permanent endowments if they

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were not satisfied with their working. Sometimes the guilds proved to be centres of learning and culture, and, on the whole, they were remarka