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PARVATHY’S ARTS AND SCIENCE COLLEGE,WISDOM CITY, DINDIGUL-2, DEPARTMENT OF COMMERCE AND MANAGEMENT STUDIES
ELEMENTS OF COMPAMY LAW
PRESENTED BY,
V.TAMILSELVI,
ASSISTANT PROFESSOR,
COMMERCE AND MANAGEMENT STUDIES,
PARVATHY’S ARTS AND SCIENCE COLLEGE,
WISDOM CITY,
DINDIGUL-2.
SYLLABUS
UNIT : I
DEFINITION OF A COMPANY – CHARACTERISTI CS OF A COMPANY –
COMPANY DISTINGUISHED FROM PARTNERSHIP – KINDS OF C OMPANY.
UNIT :II
FORMATION OF THE COMPANY – INCORPORATION – D OCUMENTS TO BE
FILLED WITH REGISTER – CERTIFICATE OF INCORPORATION – CERTIFICATE OF
COMMENCEMENT OF BUSINESS- ROLE OF PROMOTERS IN FORM ATION.
UNIT : III
MEMORANDUM OF ASSOCIATION – ALTERATION OF MEMORANDUM OF
ASSOCIATION – ARTICLES OF ASSOCIATION – ALTERATION OF ARTICLES OF
ASSOCIATION –ARTICLES , MEMORANDUM DISTINCTION – PR OSPECTUS –
CONTENTS – STATEMENT IN LIEU OF PROSPECTUS .
UNIT : IV
SHAREHOLDERS – HOW TO BECOME A MEMBER – RIG HTS AND LIABILITIES OF
MEMBER – REGISTER AND INDEX OF MEMBERS.
UNIT : V
MEETINGS OF COMPANY – TYPES OF MEETING – NOTICE S – QUORUM – MINUTES
– PROXIES – AGENDA – CHAIRMAN OF THE MEETING – RESO LUTION – TYPES OF
RESOLUTION.
UNIT I
MEANING AND DEFINITION OF COMPANY
Literary meaning of the word ‘company’ is an association of persons formed for common object. A
company is a voluntary association of persons recognised by law, having a distinctive name and
common seal, formed to carry on business for profit, with capital divisible into transferable shares,
limited liability, a corporate body and perpetual succession.
Definition of Company:
THE MAIN DEFINITION OF A COMPANY ARE GIVEN BELOW
According to Justice James, “A company is an association of persons united for a common
object.”
According to Lord Lindley, “By a ‘company’ is meant an association of many persons who
contribute money or money’s worth to a common stock and employ it for some common purpose. The
common stock so contributed is denoted in money and is the capital of the company. The persons who
contribute it or to whom it belongs are members. The proportion of capital to which each partner is
entitled is his share.”
According to Kimball and Kimball, “A corporation is by nature an artificial person created or
authorised by the legal stature for some specific purpose.”
According to Prof. Haney, “A company is an artificial person created by law having a separate
entity with a perpetual succession and a common seal.”
According to James Stephenson, “A company is an association of any persons who contribute
money or money’s worth to a common stock and employs it in some trade or business, and who share
the profit and loss (as the case may be) arising there from.”
According to Section 3 (1) (i) of Indian Companies Act, 1956. “Company means a company
formed and registered under this act or an existing company. ‘Existing Company’ means a company
formed and registered under any of the previous Company Laws.”
CHARACTERISTICS OF COMPANY
On the basis of definitions studied above, the following are the characteristics of a company:
1. AN ARTIFICIAL PERSON CREATED BY LAW
A company is a creation of law, and is, sometimes called an artificial person. It does not take birth
like natural person but comes into existence through law. But a company enjoys all the rights of a
natural person. It has right to enter into contracts and own property. It can sue other and can be sued.
But it is an artificial person, so it cannot take oath, cannot be presented in court and it cannot be
divorced or married.
2. SEPARATE LEGAL ENTITY
A company is an artificial person and has a legal entity quite distinct from its members. Being
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.
Its members are its owners but they can be its creditors simultaneously as it has 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 agents of the company and so they cannot bind it by their acts.
3. PERPETUAL SUCCESSION
The life of company is not related with the life of members. Law creates the company and dissolve
it. The death, insolvency or transfer of shares of members does not, in any way, affect the existence of a
company.
According to Tennyson-
“For men may come, men may go,
But I go on forever.”
In the case of company it may be said that members may come and members may go but the
company goes on. It is a legal person having come into being by law and only law can bring its end and
none else.
4. COMMON SEAL
On incorporation a company becomes legal entity with perpetual succession and a common seal.
The common seal of the company is of great importance. It acts as the official signature of the
company. As the company has no physical form, it cannot sign its name on a contract. The name of the
company must be engraved on the common seal. A document not bearing the common seal of the
company is not authentic and has no legal importance.
5. LIMITED LIABILITY
The limited liability is another important feature of the company. If anything goes wrong with the
company his risk is only to the extent of the amount of his shares and nothing more. If some amount is
uncalled upon a share, he is liable to pay it and not beyond that.
The creditors of a company cannot get their claims satisfied beyond the assets of the company. The
liability of members of a company ‘limited by guarantee’ is limited to the amount of guarantee.
6. TRANSFERABILITY OF SHARES
A shareholder can transfer his shares to any person without the consent of other members. Under
Articles of Association, a company can put certain restriction on the transfer of shares but it cannot
altogether stop it. Private company can put more restrictions on the transferability of shares.
7. LIMITATION OF WORK
The field of work of a company is fixed by its charter. The Memorandum of Association. A
company cannot do anything beyond the powers defined in it. Its action is, therefore, limited. In order
to do the work beyond the memorandum of association, there is a need for its alteration.
8. VOLUNTARY ASSOCIATION FOR PROFITS
A company is a voluntary association of persons to earn profits. It is formed for the
accomplishment of some public good and whatsoever profit is divided among its shareholders. A
company cannot be formed to carry on an activity against the public policy and having no profit
motive.
9. REPRESENTATIVE MANAGEMENT
The shareholders of company are widely scattered. It is not possible for all the shareholders to take
part in the management. They leave their task to the representatives the Board of Directors and the
company is managed by Board of Directors.
10. TERMINATION OF EXISTENCE
A company is created by law, carries on its affairs according to law and ultimately is affected by
law. Generally, the existence of a company is terminated by means of winding up.
KINDS OF COMPANIES
Companies may be classified into various kinds on the following basis:
1. ON THE BASIS OF INCORPORATION
2. ON THE BASIS OF LIABILITY
3. ON THE BASIS OF NUMBER OF MEMBERS
4. ON THE BASIS OF CONTROL
5. ON THE BASIS OF OWNERSHIP.
1. ON THE BASIS OF INCORPORATION:
On the basis of incorporation companies may be classified into the following three categories
(I) BY ROYAL CHARTER-CHARTERED COMPANIES
A chartered company is created by the charter or special sanction granted by the Head of the State
giving certain exclusive privileges, rights and powers to a distinct body of persons for undertaking
commercial activities in specified geographical areas. These rights and privileges are to be enjoyed and
the powers are to be used within the terms of the charter.
The British East India Company formed in England in 1600 and Dutch East India Company
chartered in Holland in 1602 to trade with India and the East and Bank of England (1690) are the
examples of such companies. Since the country attained independence these types of companies do not
exist in India.
(II) STATUTORY COMPANY
A statutory company is brought into existence under the Act passed by the legislature of the country
or state. Powers, responsibilities, liabilities, objects, scope etc. of such a company are clearly defined
under the provisions of the Act which brings it into existence.
Usually, such companies are established to run the enterprises of social or national importance. The
Reserve Bank of India, the Industrial Finance Corporation of India, the Life Insurance Corporation of
India are some of the examples of statutory companies in India.
(III) REGISTERED COMPANIES
A registered company is a company which is organised by getting it registered with the Registrar of
Companies under the provisions of Companies Act of the country concerned. The formation, working
and continuity of such a company are governed by relevant provisions of the Companies Act.
Most of the companies in the field of industry and commerce are registered companies. In India such
companies are registered under the Indian Companies Act, 1956.
2. ON THE BASIS OF LIABILITY
On the basis of liability, company may be classified into:
(A) LIMITED LIABILITY COMPANIES.
(I) COMPANIES LIMITED BY SHARES
(II) COMPANIES LIMITED BY GUARANTEE
(B) UNLIMITED LIABILITY COMPANIES.
(A) LIMITED LIABILITY COMPANIES:
Where the liability of the members of a company is limited to the extent of the nominal value of
shares held by them, such companies are known as Limited liability companies.
(I) COMPANIES LIMITED BY SHARES
Where the liability of the members of a company is limited by the Memorandum of Association to
the amount unpaid on the shares, such a company is called company limited by shares. In case of
winding up of the company the members cannot be asked to pay more than the amount unpaid on the
shares held by them. A company limited by shares may be a public company or a private company.
(II) COMPANIES LIMITED BY GUARANTEE
Where the liability of the members of a company is limited by the Memorandum of Association to
such an amount as the members undertake to contribute to the assets of the company in the event of its
winding up.
Such type of companies are not formed for the purpose of profit but are formed for the promotion of
art, science, sports, commerce and for cultural activities. Such companies may or may not have share
capital. If it has a share capital, it may be a public company or a private company.
(B) UNLIMITED LIABILITY COMPANIES
Where the liability of members is not limited, such companies are known as unlimited liability
companies. Every member of such a company is liable for its debts in proportion to his interest in the
company. Such a company can be converted into a limited liability company after passing a special
resolution for conversion and applying to the Registrar of Companies for enrolling it as a limited
company.
3. ON THE BASIS OF NUMBER OF MEMBERS
On the basis of number of members, a company may be:
� PRIVATE COMPANY AND
� PUBLIC COMPANY.
1. PRIVATE COMPANY:
According to Sec. 3(1)(iii) of the Indian Companies Act, 1956, a private company is that company
which by its articles of association:
� limits the number of its members to fifty, excluding employees who are members or ex-
employees who were and continue to be members;
� restricts the right of transfer of shares, if any;
� Prohibits any invitation to the public to subscribe for any shares to debenture of the company.
Where two or more persons hold share jointly, they are treated as a single member.
According to Sec. 12 of the Companies Act, the minimum number of members to form a private
company is two. A private company must use the word ‘Pvt’ after its name.
CHARACTERISTICS OR FEATURES OF A PRIVATE COMPANY
The main features of a private company are as follows:
(i) A private company restricts the right of transfer of its shares. The shares of a private company are
not as freely transferable as those of public companies. The articles generally state that whenever a
shareholder of a Private company wants to transfer his shares, he must first offer them to the existing
members of the company. The price of the shares is determined by the directors. It is done so as to
preserve the family nature of the company’s shareholders.
(ii) It limits the number of its members to fifty excluding members who are employees or ex-
employees who were and continue to be the members. Where two or more persons hold shares jointly
they are treated as a single member. The minimum number of members to form a private company is
two.
(iii) A private company cannot invite the public to subscribe for its shares or debentures. It has to
make its own private arrangement to raise its capital or loans.
ADVANTAGES OF PRIVATE COMPANY
A private company enjoys the following advantages over limited company.
• A private company is easy to form than a public company. Only two members are sufficient to
form a private company.
• It can start its business immediately after incorporation. Certificate to commence business is not
reuired to be obtained, which is compulsory for a public company.
• It may pay remuneration to directors and managerial personnel or appoint any one to the office
of profits without any restrictions.
• As no outsiders are its shareholders it is not required to hold a statutory meeting or file a
statutory report.
• It may give loan to directors without obtaining consent or approval of the Central Government.
• There is a greater flexibility in regard to the management and conduct of the business than in
the public company.
• The control and management is generally in the hands of capital owners, which is not the case
with public company.
2. PUBLIC COMPANY
According to Section 3(1)(iv) of Indian Companies Act, 1956 A public company means a company
which is not a private company.
If we explain the definition of Indian Companies Act, 1956 in regard to the public company, we note
the following:
� The articles do not restrict the transfer of shares of the company.
� It imposes no restriction on the maximum number of the members in the company.
� It invites the general public to purchase the shares and debentures of the company.
4. ON THE BASIS OF CONTROL
On the basis of control, companies may be classified into two categories:
� Holding company [Sec. 4(4)].
� Subsidiary company [Sec. 4(1)].
1. HOLDING COMPANY
According to Section 4(4) of the Companies Act, 1956 “A company shall be deemed to be the
holding company of another, if that other is its subsidiary.”
2. SUBSIDIARY COMPANY
A company is said to be a subsidiary of another if:
(i) The other company controls the composition of its Board of Directors.
(ii) The other company holds more than half in nominal value of its equity share capital.
(iii) It is a subsidiary of such a company which is itself subsidiary of any other company.
For example, if company B is the subsidiary of company A and company C is the subsidiary of
company B then company C also becomes the subsidiary of company A. If company D is the subsidiary
of company C, it also becomes subsidiary of Company B and A and so on.
5. ON THE BASIS OF OWNERSHIP
On the basis of ownership, company may be a:
� GOVERNMENT COMPANY.
� NON-GOVERNMENT COMPANY.
1. GOVERNMENT COMPANY
According to section 617 of the Companies Act. 1956, Government company means, “any company
in which not less than 51% of the paid-up share capital is held by the Central Government or by any
State Government and includes a company which is a subsidiary of a Government Company.” It may
be a public company or a private company.
2. NON-GOVERNMENT COMPANIES
Non-Government company means a company which is not government company. The majority of
companies in India belong to this category.
3.FOREIGN COMPANY
Foreign company means any company incorporated outside India but has established business in
India.
These companies may be of the following two types:
(i) Companies incorporated outside India which established a place of business in India after the
commencement of Indian Companies Act, 1956; and
(ii) Companies incorporated outside India which established a place of business in India before the
commencement of this Act and continued to have such a place of business in India at the time of
commencement of this Act.
After the establishment of business in India the following documents must be filed with the
Registrar of Companies within 30 days from the date of establishment.
� A certified copy of Memorandum and Articles of the company translated into English.
� The complete address of the Registered Office of the company.
� A list of directors and secretary of the company.
� The complete address of the place at which the company has constituted as its main office in
India.
ONE-MAN COMPANY
One-man company is that company where one man holds practically the whole of the share capital of
the company and in order to meet the statutory requirement of minimum number of members, some
dummy names are added. The dummy names which are added are mostly the relatives or friends of
principal shareholder.
One-man company is a legal entity distinct from its members. The company in law is equal to a
natural person and has a legal entity of its own. The shareholder, even if he holds all the share is not a
company. Neither he nor any creditor of the company has any property, legal or equitable in the assets
of the company.
DIFFERENCE BETWEEN PARTNERSHIP AND COMPANY
Partnership and Company are the most familiar terms for the people who are pursuing business
education or commerce education. Besides being very familiar, many of us can’t able to correctly
differentiate these two forms of business. This article presents you the top differences between
Partnership Firms and Companies.
PARTNERSHIP
Indian Partnership Act, 1932 defines Partnership as ” Partnership is a relationship between two or
more persons who have agreed to share the profits of a business carried on by all partners or any one
partner acting for all”. The members of the Partnership firm are called as Partners. There are different
types of partners such as Active partner, Sleeping partner, Nominal partner, Minor partner, Etc.
Partnership Frim is created by agreement between two or more people by registering the partnership
firm with Registrar of Firms according to Indian Partnership Act, 1936.
Registration of a partnership firm is very simple process and Application for registration of firm
must contain the following details.
� Name of the firm
� Names of the partners and their addresses
� location where the business is carried on.
� Partnership tenure between the partners
� The main office of the firm, etc.
COMPANY
Indian Companies Act, 2013 defines Company as ” A Company formed and registered under this
Companies Act or under any previous company law”. A company is defined easily as an association of
two or more persons which is formed for doing business collectively and registered with Registrar of
Companies according to Indian Companies Act, 2013.There are different types of companies like One
Person Company, Private company and Public Company, etc.
To get registered with Registrar of Companies, the promoters are required to submit the copies of
Articles of Association and Memorandum of Association which consists of various information relating
to internal management and external management of the company.
The company exhibits certain special characteristics, such as
� It have a Separate Legal Entity
� It contains Common Seal under its name
� It has limited liability
� It acts as an artificial person, Etc.
DIFFERENCES
� The members of the Partnership firm are called as Partners.
� The members of the company are called as shareholders of a company.
Enacted by
� Partnership Form of business is governed by "The Indian Partnership Act, 1932."
� Company Form of business is governed by "The Indian Companies Act, 2013”.
NUMBER OF MEMBERS
Partnership firm must have Minimum of 2 partners and maximum of 20 partners.
A Company must have Minimum of 2 and maximum of 200 in the case of private company.
Minimum 7 and maximum is unlimited number of members in case of public company
Created by
Partnership Firm is Created by Contract between two or more people.
Company Firm is Created by Law i.e created by incorporation of a company under company law.
REGULATION AUTHORITY
� It is regulated by the Registrar of Firms which comes under State Government.
� It is regulated by the Registrar of Companies which comes under Central Government.
REGISTRATION PROCEDURE
� The registration of a Partnership firm is Not Mandatory.
� The registration of Company with Registrar of Companies is Mandatory.
DOCUMENTS REQUIRED
� Partnership Deed(Agreement Document) is the mandatory document for creation of a
Partnership Firm.
� Memorandum of Association(MoA) and Articles of Association(AoA) are the main documents
to the incorporation of the company.
�
SEPARATE LEGAL ENTITY
� Partnership firm is not a separate legal entity from partners. The Partners of the firm are
collectively referred as a Partnership firm.
� A company is a separate legal entity, It is a separate entity from its members, directors,
promoters, etc.
LIABILITY OF MEMBERS
� The partners have Unlimited Liability in all the matters relating to Partnership Firm.
� The Shareholders and promoters have Limited liability to Capital of the company.
ACCOUNTS AND AUDIT
� Partnership Firm has to maintain accounts as per the conditions stated in partnership deed. A
Company should maintain accounts and auditing of accounts by certified Chartered Accountant
are Compulsory.
COMMON SEAL
� A Common Seal is not required for Partnership Firm.
� A Common Seal in the form of a stamp is required for the company for legal and functional
purposes.
MANAGEMENT
� Management of the activities of a Partnership Firm is usually done by the working partners.
Management of the activities of a Company is done by Board of Directors.
CHANGE OF NAME
� The name of the Partnership Firm can be changed easily by having a discussion between
partners.
� The name of the company cannot be changed easily and a prior approval of Central Government
is required to change the name.
CONCLUSION
The Indian Partnership Act, 1932 laid down certain rules and regulations on matters relating to Rights
of partners, Liabilities of Partners, Duties of Partners, etc. Indian Companies Act, 2013 laid down
various principles relating to the functioning of companies to protect the shareholders and investors of
companies. Both Partnership and Company form of businesses is very prevalent in the world.
UNIT-II
Formation of a Company: 4 Stages
The formation of a company is a lengthy process.
For convenience the whole process of company formation may be divided into the following four
stages:
� Promotion Stage ,
� Incorporation or Registration Stage ,
� Capital Subscription Stage ,
� Commencement of Business Stage.
PROMOTION STAGE:
Promotion is the first stage in the formation of a company. The term ‘Promotion’ refers to the
aggregate of activities designed to bring into being an enterprise to operate a business. It presupposes
the technical processing of a commercial proposition with reference to its potential profitability.
The meaning of promotion and the steps to be taken in promoting a business are discussed in brief
here.
Promotion of a company refers to the sum total of the activities of all those who participate in the
building of the enterprise upto the organisation of the company and completion of the plan to exploit
the idea. It begins with the serious consideration given to the ideas on which the business is to be based.
DEFINITION
According to C.W. Grestembeg,
“Promotion may be defined as the discovery of business opportunities and the subsequent
organisation of funds, property and managerial ability into a business concern for the purpose of
making profits therefrom.”
According to H.E. Heagland,
“Promotion is the process of creating a specific business enterprise. Its scope is very broad, and
numerous individuals are frequently asked to make their contributions to the programme. Promotion
begins when someone gives serious consideration to the formulation of the ideas upon which the
business in question is to be based. When the corporation is organised and ready for operation, the
major function of promotion comes to an end.”
According to Guthmann and Dougall,
“Promotion starts with the conception of the idea from which the business is to evolve and continues
down to the point at which the business is full, ready to begin operations in a going concern.”
INCORPORATION OR REGISTRATION STAGE:
Incorporation or registration is the second stage in the formation of a company. It is the registration
that brings a company into existence. A company is properly constituted only when it is duly registered
under the Act and a Certificate of Incorporation has been obtained from the Registrar of Companies.
PROCEDURE TO GET A COMPANY REGISTERED
In order to get a company registered or incorporated, the following procedure is to be adopted
(A) PRELIMINARY ACTIVITIES
Before a company is incorporated, the promoter has to take decision regarding the following:
� To decide the name of the company,
� Licence under Industries Development and Regulation Act, 1951 .
(B) FILING OF DOCUMENT WITH THE REGISTRAR
� Memorandum of Association,
� Articles of Association,
� List of directors,
� Written consent of directors,
� Statutory declaration.
CERTIFICATE OF INCORPORATION
On the registration of memorandum and other documents, the Registrar will issue a certificate
known as the Certificate of Incorporation certifying under his hand that the company is incorporated
and, in the case of a limited company that the company is limited.
The specimen of certificate of incorporation is given below:
CERTIFICATE OF INCORPORATION
EFFECTS OF INCORPORATION
The certificate of incorporation is conclusive evidence of the fact that:
� The company is properly incorporated and duly registered;
� The terms of the Memorandum and Articles are within the law;
� All requirements of the Act in respect of registration have been complied with;
� A private company can start its business after getting the certificate of incorporation; and
� With the issue of certificate, the company takes birth with a separate legal entity.
CAPITAL SUBSCRIPTION STAGE
A private company or a public company not having share capital can commence business
immediately on its incorporation. As such ‘capital subscription stage’ and ‘commencement of business
stage’ are relevant only in the case of a public company having a share capital. Such a company has to
pass through these additional two stages before it can commence businessUnder the capital subscription
stage comes the task of obtaining the necessary capital for the company.
For this purpose, soon after the incorporation, a meeting of the Board of Directors is convened
to deal with the following business:
� Appointment of the Secretary. In most cases the appointment of pre-tem secretary appointed
is confirmed.
� Appointment of bankers, auditors, solicitors and brokers etc.
� Adoption of draft ‘prospectus’ or ‘statement in lieu of prospectus’.
� Adoption of underwriting contract, if any
Besides the above mentioned business, the Board also decides as to whether:
(i) a public offer for capital subscription is to be made, and
(ii) Listing of shares at a stock exchange is to be secured.
The company will now proceed to obtain the permission of the Controller of Capital Issue, New
Delhi, under the Capital Issue Control Act, 1947 if a public offer for sale of shares and
debentures exceeding Rs. one crore is to be made during a period of 12 months, unless the issue
fulfils the conditions of exemption as laid down in the Capital Issue (Exemption) Order, 1969.
The Capital Issue Control Act, 1947 however, does not apply to a private company, a banking
company, an insurance company, and a government company provided it does not make an issue
of securities to the general public.
After the above formalities have been completed, the directors of the company file a copy of the
‘prospectus’ with the Registrar and invite public to subscribe to the shares of the company by putting
the ‘prospectus’ in circulation.
Application for shares are received from the public through the company’s bankers and if the
subscribed capital is at least equal to the minimum subscription amount as disclosed in the prospectus,
and other conditions of a valid allotment are fulfilled, the directors of the company pass a formal
resolution of allotment.
Allotment letters are then posted, return of allotment is filed with the Registrar and share certificates
are issued to the allottees in exchange of the allotment letters. If the subscribed capital is less than the
minimum subscription or the company could not obtain the minimum subscription within 120 days of
the issue of prospectus, all money will be refunded and no allotment can be made.
It may be noted that a public company having a share capital, but not issuing a ‘prospectus’ has to
file with the Registrar ‘a Statement in lieu of Prospectus’ at least three days before the directors proceed
to pass the first allotment resolution.
COMMENCEMENT OF BUSINESS STAGE
After getting the certificate of incorporation, a private company can start its business. A public
company can start its business only after getting a’ certificate of commencement of business’.
After getting the certificate of incorporation:
� A public company issues a prospectus of inviting the public to subscribe to its share capital,
� A minimum subscription is fixed, and
� The company is required to sell a minimum number of shares mentioned in the prospectus.
After making the sale of the required number of shares a certificate is sent to the Registrar stating this
fact, along-with a letter from the banks, that it has received application money for such shares.
The Registrar scrutinizes the documents. If he is satisfied, then issues a certificate known as
Certificate of Commencement of Business. This is the conclusive evidence of the commencement of
the business.
The specimen of certificate of commencement of business is given below:
CERTIFICATE OF COMMENCEMENT OF BUINESS
Restrictions on the Commencement of Business:
Section 149 of the Companies Act, 1956 has imposed some restrictions on the commencement of
business by public companies, which are as follows:
1. COMPANIES WHICH ISSUE A PROSPECTUS:
A company having share capital issues prospectus to the general public for subscription of their
shares or debentures.
But this company cannot commence business or exercise borrowing powers unless the following
formalities are complied with [Sec. 149 (1)]:
� The shares payable in cash have been allotted equal to an amount not less than the minimum
subscription.
� The directors have taken up and paid for the qualification shares in cash an amount equal to the
amount payable by other subscribers on application and allotment.
� No money is liable to become refundable to applicants, because of company’s failure to apply
for, or to get permission for the share or debentures to be dealt in on any recognised stock
exchange.
� A statutory declaration duly verified by any one of the company should be filed with the
Registrar stating that all conditions given above in (i), (ii) and (iii) have been complied with.
2. COMPANIES WHICH DO NOT ISSUE A PROSPECTUS:
A company which has not issued a prospectus must file the following documents with the Registrar or
in other words, cannot commence the business unless the following formalities are complied with [Sec.
149 (2)].
� A statement in lieu of prospectus has been filed with the Registrar.
� The directors have taken up and paid for the qualification shares in cash an amount equal to the
amount payable by other subscribers on application and allotment.
� A statutory declaration duly verified by any one of the directors or secretary of the company
that the directors have taken up and paid for the qualification shares in cash an amount equal to
the amount payable by other subscribers on application and allotment.
If the above requirements have been complied with, the Registrar issues a certificate that the
company is entitled to commence business.
This certificate of commencement of business, like the certificate of incorporation, is a conclusive
evidence that the company is so entitled [Sec. 149 (3)].
PROMOTER OF A COMPANY: FUNCTIONS, DUTIES AND LIABIL ITIES
After reading this article you will learn about:-
� Meaning of a Promoter
� Functions of a Promoter
� Legal Position
� Rights 5. Duties
� Liabilities
� Preliminary Contracts.
MEANING OF A PROMOTER
The idea of carrying on a business which can be profitably undertaken is conceived either by a person
or by a group of persons who are called promoters. After the idea is conceived, the promoters make
detailed investigations to find out the weaknesses and strong points of the idea, to determine the
amount of capital required and to estimate the operating expenses and probable income.
The term ‘promoter’ is a term of business and not of law. It has not been defined anywhere in the
Act, but a number of judicial decisions have attempted to explain it.
According to L.J. Brown. “The term promoter is a term not of law but of business, usefully
summing up in a single word a number of business operations familiar to the commercial world by
which a company is generally brought into existence.”
According to Justice C. Cockburn. “Promoter is one who undertakes to form a company with
reference to a given object and to set it going, and who takes the necessary steps to accomplish that
purpose.”
According to Palmer, “Company promoter is a person who originates a scheme for the formation
of the company, has the memorandum and the articles prepared, executed and registered and finds the
first directors, settles the terms of preliminary contracts and prospectus (if any) and makes arrangement
for advertising and circulating the prospectus and placing the capital.”
According to Guthmann and Dougall. “Promoter is the person who assembles the men, the
money and the materials into a going concern.”
From these definitions of promoter it is concluded that:
“Promoter is the person who originates the idea for formation of a company and gives the practical
shape to that idea with the help of his own resources and with that of others.”
A person cannot be held as promoter merely because he has signed at the foot of the
Memorandum or that he has provided money for the payment of formation expenses.
The promoters, in fact, render a very useful service in the formation of the company. A
promoter has been described as ”a creator of wealth and an economic prophet.” The promoters carry a
considerable risk because if the idea sometimes goes wrong then the time and money spent by them
will be a waste.
In the words of Henry E. Heagland, “A successful promoter is a creator of wealth. He is an
economic prophet. He is able to visualise what does not yet exist and to organise business enterprise to
make the products available to the using public.”
A promoter may be an individual, a firm, an association of persons or even a company.
FUNCTIONS OF A PROMOTER
The Promoter Performs the following main functions:
� To conceive an idea of forming a company and explore its possibilities.
� To conduct the necessary negotiation for the purchase of business in case it is intended to
purchase as existing business. In this context, the help of experts may be taken, if considered
necessary
� To collect the requisite number of persons (i.e. seven in case of a public company and two in
case of a private company) who can sign the ‘Memorandum of Association’ and ‘Articles of
Association’ of the company and also agree to act as the first directors of the company.
� To decide about the following:
• The name of the Company,
• The location of its registered office,
• The amount and form of its share capital,
• The brokers or underwriters for capital issue, if necessary,
• The bankers,
• The auditors,
• The legal advisers.
� To get the Memorandum of Association (M/A) and Articles of Association (A/A) drafted and
printed.
� To make preliminary contracts with vendors, underwriters, etc.
� To make arrangement for the preparation of prospectus, its filing, advertisement and issue of
capital.
� To arrange for the registration of company and obtain the certificate of incorporation.
� To defray preliminary expenses
� To arrange the minimum subscription.
LEGAL POSITION OF A PROMOTER
The promoter is neither a trustee nor an agent of the company because there is no company yet in
existence. The correct way to describe his legal position is that he stands in a fiduciary position towards
the company about to be formed.
Lord Cairns has correctly stated the position of promoter in Erlanger V. New Semberero Phophate
Co. “The promoters of a company stand undoubtedly in a fiduciary position. They have in their hands
the creation and moulding of the company. They have the power of defining how and when and in what
shape and under what supervision, it shall start into existence and begin to act as a trading corporation.”
From the fiduciary position of promoters, the two important results follow:
(1) A promoter cannot be allowed to make any secret profits. If it is found that in any particular
transaction of the company, he has obtained a secret profit for himself, he will be bound to refund the
same to the company.
(2) The promoter is not allowed to derive a profit from the sale of his own property to the
company unless all material facts are disclosed. If he contracts to sell his own property to the company
without making a full disclosure, the company may either repudiate/rescind the sale or affirm the
contract and recover the profit made out of it by the promoter.
A promoter who wishes to sell his own property to the company must make a full disclosure of
his interest.
The disclosure may be made:
� To an independent Board of Directors, or
� In the articles of association of the company, or
� In the prospectus, or
� To the existing and intended shareholders directly.
If the promoter fails to discharge the obligation demanded of his fiduciary position the company may
rescind the contract or may in the alternative choose to take advantage of the contract and sue the
promoter for damages for breach of his duty to the company.
Secret profits on the sale of property can be recovered from a promoter only when the property
was bought and sold to the company while he was acting as a promoter.
RIGHTS OF PROMOTER
The rights of promoters are enumerated as follows:
1. Right of indemnity:
Where more than one person act as the promoters of the company, one promoter can claim
against another promoter for the compensation and damages paid by him. Promoters are severally and
jointly liable for any untrue statement given in the prospectus and for the secret profits
2. Right to receive the legitimate preliminary expenses:
A promoter is entitled to receive the legitimate preliminary expenses which he has incurred in the
process of formation of the company such as cost of advertisement, fee of solicitor and surveyors. The
right to receive the preliminary expenses is not a contractual right. It depends upon the discretion of the
directors of the company. The claim for expenses should be supported by vouchers.
3. Right to receive the remuneration:
A promoter has no right against the company for his remuneration unless there is a contract to that
effect. In some cases, articles of the company provide for the directors paying a specified amount to
promoters for their services but this does not give the promoters any contractual right to sue the
company. This is simply an authority vested in the directors of the company.
Whatever be the nature of remuneration, it must be disclosed in the prospectus if paid within the
preceding two years from the date of prospectus.
DUTIES OF PROMOTER
The duties of promoters are as follows
1. To disclose the secret profit:
The promoter should not make any secret profit. If he has made any secret profit, it is his duty to
disclose all the money secretly obtained by way of profit. He is empowered to deduct the reasonable
expenses incurred by him.
2. To disclose all the material facts:
The promoter should disclose all the material facts. If a promoter contracts to sell the company a
property without making a full disclosure, and the property was acquired by him at a time when he
stood in a fiduciary position towards the company, the company may either repudiate the sale or affirm
the contract and recover the profit made out of it by the promoters.
3. The promoter must make good to the company what he has obtained as a trustee:
A promoters stands in fiduciary position towards the company. It is the duty of the promoter to make
good to the company what he has obtained as trustee and not what he may get at any time.
4. Duty to disclose private arrangements:
I t is the duty of the promoter to disclose all the private arrangement resulting him profit by the
promotion of the company.
5. Duty of promoter against the future allottees:
When it is said the promoters stand in a fiduciary position towards the company then it does not
mean that they stand in such relation only to the company or to the signatories of memorandums of
company and they will also stand in this relation to the future allottees of the shares.
LIABILITIES OF PROMOTER
The liabilities of promoters are given below:
1. Liability to account in profit
As we have already discussed that promoter stands in a fiduciary position to the company. The
promoter is liable to account to the company for all secret profits made by him without full disclosure
to the company. The company may adopt any one of the following two courses if the promoter fails to
disclose the profit.
� The company can sue the promoter for an amount of profit and recover the s
� ame with interest.
� The company can rescind the contract and can recover the money paid.
2. Liability for mis-statement in the prospectus:
Section 62(1) holds the promoter liable to pay compensation to every person who subscribes for any
share or debentures on the faith of the prospectus for any loss or damage sustained by reason of any
untrue statement included in it. Sec. on 62 also provides certain grounds on which a promoter can avoid
his liability. Similarly Sec. 63 provides for criminal liability for mis-statement in the prospectus and a
promoter may also become liable under this section.
The promoter may also be imprisoned for a term which may extend to two years or may be punished
with the fine upto Rs. 5,000 for untrue statement in the prospectus. (Sec. 63).
3. Personal liability:
The promoter is personally liable for all contracts made by him on behalf of the company until the
contracts have been discharged or the company takes over the liability of the promoter.
The death of promoter does not relieve him from liabilities.
4. Liability at the time of winding up of the company:
In the course of winding up of the company, on an application made by the official liquidator, the
court may make a promoter liable for misfeasance or breach of trust. (Sec. 543).
Further where fraud has been alleged by the liquidator against a promoter, the court may order for
his public examination. (Sec. 478).
PRELIMINARY CONTRACTS/PRE-INCORPORATION CONTRACTS M ADE BY THE
PROMOTERS:
Preliminary contracts are those contracts which are made by the promoters with different parties on
behalf of the company yet to be incorporated. Such contracts are generally entered into by promoters to
acquire some property or right for and on behalf of the company to be formed.
The promoters enter into preliminary contracts, generally as agents or trustees of the company.
Such contracts are not legally binding on the company because two consenting parties are necessary to
a contract whereas the company is non-entity before incorporation.
The company has no legal existence until it is incorporated. It therefore follows:
� That when, the company is registered, it is not bound by the preliminary contract.
� That the company when registered cannot ratify the agreement. The company was not a
principal with contractual capacity at the time of contract. A contract can be ratified only
when it is made by an agent for a principal who is in existence and who is competent to
contract at the time when the contract is made.
� That if the agent undertook any liability under the agreement, he would be personally
liable notwithstanding that he is described in the agreement as an agent and that the
company may have attempted to ratify the agreement.
� The company cannot enforce the preliminary agreement.
The preliminary contracts made by promoters generally provided that if the company adopts the
agreement the promoter’s liability shall cease and if the company does not adopt the agreement within a
certain time either party may rescind the contract. In such a case promoter’s liability would cease after
the lapse of fixed time.
UNIT III
INTRODUCTION
One of the first steps in the formation of a company is to prepare a document called the
memorandum of association (hereinafter referred to as MoA). The MoA of the company contains the
fundamental conditions upon which alone the company has been incorporated.[1]Every registered
company should have a MoA which is the company's charter. In general the MoA regulates the
company's external affairs while the articles of association regulate its internal structure
The precondition for the registration of the company involves one or more person signing and
delivering to the Companies House or the Registrar of Companies (RoC) a memorandum of association
stating the intention of the subscriber or subscribers to form a company with a particular name stating
where its registered office is located and stating the objects the company is formed to pursue. The
memorandum must state that the company is to be a limited company if that is so and must state that it
is to be a public company if that is so.
The memorandum of association is also called the charter of the company as it is the company's
principle document. Like explained before, no company can register without a memorandum of
association as it defines the right and objects of the company.
According to section 2(28) of the Companies Act, “Memorandum means Memorandum of
Association as originally framed or as altered from time to time in pursuance of any companies law or
of this Act.” Evidently the definition is not comprehensive and does not convey the full importance of
the document. However it is notable that the act provides for the admission of an altered version of the
original memorandum the Memorandum of Association of the company.
In this project the researcher will explicate the importance of Memorandum of Association and
elucidate the process and procedure involved in the alteration of Memorandum of Association of a
company.
SUBJECT MATTER OF MEMORANDUM
According to Palmer, the Memorandum of Association is a document of great importance in
relation to the proposed company. It contains the objects for which the company is formed and
therefore identifies the possible scope of its operations beyond which its actions cannot go. It defines as
well as confines the powers of the company. If anything is done beyond these powers that will be ultra
vires the company and be void
In the celebrated case of Ashbury Railway Carriage and Iron Co. Ltd. v. Richie[5] Lord
Carins Observed that the Memorandum of Association of a company defines the limitation on the
powers of the company… it contains in it both that which is affirmative and that which negative. It
states affirmatively the ambit and extent of vitality and power which by law are given to the
corporation and it states, if it is necessary to state, negatively that nothing shall be done beyond that
ambit.
CONSTITUENTS OF MEMORANDUM OF ASSOCIATION
Name Clause
Since a company is an artificial person it can be identified only by its name, which is thus of
considerable importance. The promoters are free to choose any name for the company but the same is
subject to certain limitations.
If a company is limited by shares is to be a private company, the last word of its name must be
“limited” or “private limited”
. If the name chosen according to the opinion of the Central Government is undesirable or it is identical
or resembles too nearly, to the name by which a company in existence has been previously registered, it
may deem to be undesirable
Registered Office Clause
The Memorandum of Association registered with the RoC must state the geographical location of
the company. Every registered company must have a registered office which establishes its domicile
and is also the address at which the company's statutory books must normally be kept and to which
notices and other communications can be sent. The notice of the exact situation of the company has to
be submitted to the RoC within 30 days of incorporation
Objects Clause
The Memorandum of Association of a company should state the objects of the company. The
RoC can deny registration to a company which whose objects are unlawful. It is the intention of the
legislature that the Memorandum of Association of a company must state the objects for which it is
incorporated, and the company is accordingly incorporated only for the purpose of pursuing those
objects. Pursuing any other object is said to be ultra vires the company.
Accordingly there can be two objects as far as a company is concerned namely
� Main objects of the company which is to be pursued by the company on its incorporation and
objects incidental or ancillary to the attainment of the main objects
� Other objects
Capital Clause
A company can be limited by shares only if it has a share capital and a company limited by shares must
state in its memorandum the total amount of share capital it is to have and the way it is divided into
shares.
The clause lays down the limit beyond which the company cannot issue shares without altering
the memorandum as provided by section 94 of the Companies Act.
The association or subscription Clause: At the end of ever Memorandum of Association there is an
association clause or subscription clause.
ALTERATION OF MEMORANDUM
As a matter of course Memorandum of Association is not alterable. In fact the words of the
Memorandum cannot be changed that easily. It is said that “Memorandum of Association is an
unalterable document alterable only in accordance with the provisions of the law
Alteration of Memorandum of Association under the Common Law
Under the Common Law the Joint Stock Companies Act 1856, which introduced the Memorandum of
Association into company law, made no provisions for the alteration of a memorandum. Companies
Act 1862 permitted a company to change its name and its authorized share capital, but forbade any
other alteration. Subsequent acts have extended the range of alteration that may be made. The CA Act
1985 S.2 (7) provides:
A company may not alter conditions contained in the memorandum except in the case in the mode
and to that extend, for which express provision is made by this Act
The court has in Scott v. Scott Ltd. held that even if inadvertently the memorandum of a company does
not correctly express the wishes of its subscribers, the court doesn't to have power to rectify the mistake
after the company has been registered.
Alteration of Memorandum of Association under Indian Law
Several restrictions have been imposed as far as the alteration of Memorandum of Association is
concerned. The quantum of such restrictions can be seen under S.16 of the Companies Act.
Alteration of Name Clause
Alteration of the name of a company can be effected by two methods.
(a) By special Resolutions and Permission of the government
The Law regarding the change of name of a company is laid down under section 21 of CA. The
section provides that the name of a company may be changed at any time by passing a special
resolution at a general meeting of the company and with the written approval of the central government.
However no such approval is required if the change of name involves addition or deletion of the word
“private”
(b) By rectification of omission in name
If by oversight or mistake a company is registered with a name which is the same or similar to the name
of an existing company, the company may change its name by passing an ordinary resolution and
getting a written permission from the Central government. In such a case the central government within
a period of one year of the first registration or registration under a changed name can direct the
company to change its name. In such a situation, the company must alter its name by passing an
ordinary resolution within three months from the date of such direction.
After the alteration of name of the company, the registrar should write the new name in the place of
old name. Accordingly the certificate of newly incorporated company should be issued. If and when the
certificate of newly incorporated company is received, then only the company's name is recognized
With the change of the name of the company the power and responsibilities are not changed. Because
of this change of the name legal affairs of the company are not affected. Besides it does not affect the
company's existence. But after the new name is registered the legal affairs cannot be continued with the
old name.
The legal effect of change in name clause can be illustrated by the decision of the Calcutta High
Court in the case of Malhati Tea Syndicate v. Revenue Officer[12] wherein a company changed its
name from Malhati Tea Syndicate Ltd. to Malhati Tea and Industries Ltd. It filed a writ petition in its
former name. Declaring the petition to be invalid the court said that nothing in the Act authorized the
company to commence legal proceedings in its former name at a time when it had acquired its new
name which has been put on the register of joint stock companies.
Alteration of Registered Office Clause
A company may change the situation of its registered office for the smooth running of its business
and the realization of its objects. Such change in the situation can be: (a) from one place to another in
the same city or town (b) from one town to another in the same state and (c) from one state to another.
(a) Shifting from one place to another in the same city or town:
If the registered office of the company is to be shifted from one place to another in the same city or
town, the board of directors must pass a resolution to that effect and give the name address of its
registered office to the RoC within 30 days after the date of the change of address (b) Shifting from one
town to another in the same state:
IF the company wants to shift its registered office from one town to another in the state, it shall pass
a special resolution to that effect at its general meeting and send the notification to the registrar within
30 days. It shall give the new address of its registered office to the registrar
(c) Shifting from one state to another:
This kind of shifting is a much more complicated affair, as it involves alteration of the memorandum
itself. The alteration of the memorandum for this purpose is subject to the provisions of Section 17
which requires, in the first place, a special resolution of the company and in the second, confirmation
by the Company Law Board can confirm the alteration only if the shifting of the registered office from
one state to another is necessary for any of the purpose detailed in section 17.
When this condition is fulfilled, the second stage is reached namely to consider the objections of a
person or class of person whose interest will in the opinion of CLB be affected the alteration
The Supreme Court in Mackinnon v. Mackenzie & Co[16] refused to sustain the contention of the
state and allowed the transfer of the company to another state. The court said there is no statutory right
of the state as a state to intervene in an application made under section 17 for alteration of the place of
the registered office of a company. To hold that the possibility of the loss of revenue is not only
relevant but of persuasive force in regard to change is to rob the company of the statutory power
conferred on it by section 17.
The question of loss of revenue to one state would have to be considered in the total conspectus of
revenue for the Republic Of India and no parochial considerations should be allowed to turn the scale
in regard to change of registered office.
Alteration of Object Clause
Plainly speaking, it is very difficult to alter the objects clause because the law has laid down strict
limitations on such alteration. Section 17 of the CA defines the limitations and any alteration must
necessarily be within these limitations.
The limits imposed upon the power of alteration are of two kinds, namely substantive and procedural.
The former defines the physical limits of alteration and the latter the procedure by which it can be
effected
The alteration of object clause involves
(a) Special Resolution:
In the first place , the company has to call a general meeting of its members and pass a special
resolution and file a certified copy of the resolution with the central government.
(b) Ratification by the central government:
After this, the application for proposed alteration is filed with the central government. The application
shall be scrutinized by the government before confirming the alteration.
(c) Registration of alteration:
A certified copy of the order of the central government shall be filed by the company with the RoC
along with the printed copy of the altered memorandum within three months from the date of the order.
The registrar shall register the same and certify the registration under his hand within one month of the
date of filing such documents
Doctrine of Ultra Vires
It is the function of the Memorandum of Association to delimit and identify the objects in such
plain and unambiguous manner as that the reader can identify the field of industry within which the
corporate activities are to be confined. And it is the function of the courts to see that the company does
not movie in a director away from the field. That is where the doctrine of ultra vires comes into play in
relation to joint stock companies
The doctrine has been affirmed by the Supreme Court in India in the case of Lakshmanaswami
Mudaliar v. Life Insurance Corporation of India [20]wherein the court held that the directors of a
company were authorized to make payment towards any charitable or any benevolent object or for any
general public, general useful object. The payment made towards the same was held by the court as
ultra vires. The court said that the directors could not spend the company's money on any charitable
institutions or any general object they choose. They could spend for the promotion of only such
charitable objects as would be useful for the attainment of the company's own objects.
CONCLUSION
Alteration of Memorandum of Association is an important exercise through which the company
brings about the required flexibility which is pertinent to its existence and survival as an entity. It is a
precondition before the company can initiate any drastic change in its ‘shape or structure'. As what is
now clear from the discussion above it is clear that any act of the company has to be within the limits
set by the Memorandum of Association.
A seemingly innocuous act like the change of situation requires the prior mandate of the Board of
directors or the permission of the government or in certain cases both along with a special resolution.
Such approval has to be accommodated within the Memorandum of Association before the company
can actually bring about the change.
It however has to be remembered that aside from the sanction of the government or the board of
directors or the appropriate authority concerned there is an array or of other statutory limitations
involved in the alteration of the memorandum. This has been particularly true in the case of alteration
of the object clause. Due to the nature of intricacies involved a host of statutory limitations have been
instituted to prevent wanton changes in the objectives of the company. The discussion above has made
it abundantly clear the intricacies, complications and limitations in the alteration of Memorandum of
Association.
The alteration of object clause is beset with even more intricate procedures. Like explained
above, the Doctrine of Ultra Vires plays an important role in the alteration of the object clause. In the
case of alteration of objects a copy of the resolution should be filed with the RoC within one month
from the date of resolution. In the case of inter state shifting of the registered office a certificate copy of
the boards' order and a printed copy of the alternated memorandum may be filed with the registrar
within three months of the board's order. Within one month the registrar will certify the registration.
Alteration takes place when it is so registered. If an application for registration is not made within the
above time the whole proceedings of the alteration of the company will lapse.
ARTICLES OF ASSOCIATION
Articles of Association is an important document of a Joint Stock Company. It contains the rules
and regulations or bye-laws of the company. They are related to the internal working or management of
the company. It plays a very important role in the affairs of a company. It deals with the rights of the
members of the company between themselves.
The contents of articles of association should not contradict with the Companies Act and the
MoA. If the document contains anything contrary to the Companies Act or the Memorandum of
Association, it will be inoperative. The pvt concern that are limited by shares and those limited by
guarantee and unlimited companies must have their articles of association. Public companies may not
have their articles but may adopt Model articles given in Table A of Schedule I of Companies Act,
1956. If a public company has only some articles of its own, for the rest, articles of Table A will be
applicable.
Articles that are profound to be registered should be printed, segmented well and sequenced
consecutively. Each subscriber to Memorandum of Association must sign the articles in the presence of
at least one witness.
CONTENTS OF ARTICLES OF ASSOCIATION
The articles generally deal with the following
� Classes of shares, their values and the rights attached to each of them.
� Calls on shares, transfer of shares, forfeiture, conversion of shares and alteration of capital.
� Directors, their appointment, powers, duties etc.
� Meetings and minutes, notices etc.
� Accounts and Audit
� Appointment of and remuneration to Auditors.
� Voting, poll, proxy etc.
� Dividends and Reserves
� Procedure for winding up.
� Borrowing powers of Board of Directors and managers etc.
� Minimum subscription.
� Rules regarding use and custody of common seal.
� Rules and regulations regarding conversion of fully paid shares into stock.
� Lien on shares.
� Alteration of Articles of Association
The alteration of the Articles should not sanction anything illegal. They should be for the benefit of the
company. They should not lead to breach of contract with the third parties. The following are the
regulations regarding alteration of articles:
A company may alter its Articles with a special resolution. Due importance and care should be
given to ensure that the alteration of AoA does not conflict with the provisions of the Memorandum of
Association or the Companies Act. A copy of every special resolution altering the Articles must be
filed with the Registrar within 30 days of its passing.
� The proposed alteration should not contravene the provisions of the Companies Act.
� The proposed alteration should not contravene the provisions of the Memorandum of
Association.
� The alteration should not propose anything that is illegal.
� The alteration should be bonafide for the benefit of the company.
� The proposed alteration should in no way increase the liability of existing members.
� Alteration can be made only by a special resolution.
� Alteration can be done with retrospective effect.
� The Court does not have any power to order alteration of the Articles of Association.
PROSPECTUS
Prospectus is an invitation issued to the public to offer for purchase/subscribe shares or debentures of
the company. In other words, any advertisement offering shares or debentures of the company for sale
to the public is a prospectus. A company secures capital by the issue of prospectus inviting deposits or
offers for shares and debentures from the public.
MEANING OF PROSPECTUS
It is a document containing detailed information about the company. It is an invitation to the public for
subscribing to the shares or debentures of the company.
Private limited companies are strictly prohibited from issuing prospectus and they cannot invite
public to subscribe to their shares. Only public limited companies can issue prospectus. Thus, it is an
open invitation extended to the public at large.
OBJECTIVES OF ISSUING PROSPECTUS
1. To bring to the notice of the public that a new company has been formed.
2. To preserve authentic record of the terms and allotment on which the public have been invited to buy
its shares or debentures.
3. To secure that the directors of the company accept responsibility for the statements in the prospectus.
REQUIREMENTS OF A CORRECT PROSPECTUS
The correct prospectus must have the following.
1. It must not be exaggerated
2. It must contain full and honest disclosures
3. Material facts must be disclosed and should not to be concealed.
4. There must not be false details and untrue statements.
CONTENTS OF PROSPECTUS
The contents of the prospectus have been specified in Schedule II of the Companies Act. The important
contents in the prospectus include the following.
� Name and address of the company
� Objects of the company
� Full particulars of the signatories to the Memorandum and number of shares taken by them.
� The names, addresses and occupations of the directors, managing directors or managers etc.
� The number and classes of shares.
� The minimum subscription.
� The qualification shares of a director and the remuneration of the directors.
� The amount payable on application, on allotment and on calls.
� The names of the underwriters.
� The estimated amount of preliminary expenses.
� The names and addresses of the auditors of the company.
� Particulars about reserves and surpluses.
� Voting rights of the different classes of shares.
� Reports of the auditors regarding profits and losses of the company.
� A similar report by the Chartered Accountant regarding the Profits and Losses and Assets and
Liabilities of the Company.
CONSEQUENCES OF MISSTATEMENTS IN PROSPECTUS
The persons, responsible for preparing false and misleading prospectus will face civil and criminal
liabilities.
1. Civil liability
In case, misleading prospectus amounts to misrepresentation, the aggrieved persons can repudiate the
contract. They can claim refund of their money. Damages can also be claimed from the persons found
guilty.
2. Criminal liability
In case any deliberate concealment is made, directors will be punished with a fine of Rs. 5,000 or
imprisonment up to two years or both. If it is fraud the fine will extend to Rs. 10,000 or 5 years
imprisonment or both.
Statement in Lieu of Prospectus
When the prospectus is not issued by the company a statement in lieu of prospectus, must be filed with
the Registrar at least three days before the allotment of shares. The contents of the statement in lieu of
prospectus are very much similar to the prospectus. The statement must be signed by all the directors or
their agents authorized in writing. These provisions do not apply to a private company
UNIT – IV
'SHAREHOLDER'
A shareholder, commonly referred to as a stockholder, is any person, company, or institution that owns
at least one share of a company’s stock. Because shareholders are a company's owners, they reap the
benefits of the company's successes in the form of increased stock valuation. If the company does
poorly and the price of its stock declines, however, shareholders can lose money.
SHAREHOLDER RIGHTS
Shareholders enjoy certain rights, which are defined in the corporation's charter and by laws.
Shareholders have the following rights:
• to inspect the company's books and records
• to sue the corporation for misdeeds of the directors and officers
• Common shareholders are entitled to vote on major corporate matters, such as who sits on the
board of directors and whether a proposed merger should occur.
• If a company liquidates its assets, its shareholders have a right to a proportionate allocation of
the proceeds. However, creditors, bondholders, and preferred stockholders have precedence
over common stockholders.
• to receive a portion of any dividends the company declares.
• to attend, in person or via conference call, the corporation's annual meeting to learn about the
company's performance
• Common shareholders who do not attend the voting meeting have the right to vote by proxy
through the mail or online.
The specific rights allocated to both common and preferred shareholders are outlined in each company's
corporate governance policy.
MEMBER
A member is one of the company’s owners whose name has been entered on the register of
members. Members delegate certain powers to the company’s directors to run the company on their
behalf.
The Companies Act divides the members into three classes. According to Sec. 41 of the Companies
Act, the three classes of members are:
� The persons who have subscribed to the Memorandum of a company.
� Every other person who has agreed in writing to become a member of the company and whose
name has been entered in the Register of Members.
� Every person holding equity share capital of a company and whose names are recorded as
beneficial owner in the depository records are considered as members of the concerned
company.
From the above, it is clear that all the subscribers to the Memorandum are deemed to be the
members of the company even though their names do not appear in the Register of Members. But the
Act provides that their names must be entered in the Register on its registration. As regards the second
category of members, the criteria of membership are
� the person must have agreed in writing to become a member, and
� his name must have been entered in the Register of Members. If any one of the conditions is not
satisfied, the person shall not be a member under this Act.
For the third category of members also 2 conditions are to be fulfilled to become the member of the
company such as
The person must hold equity shares of the company.
His name must be entered as beneficial owner in the records of the depository.
A member can be distinguished from a shareholder in the following circumstances:
� A registered member of a company having no share capital is not a shareholder since the
company itself has no share capital.
� A person who holds a share warrant is a shareholder but he is not a member of the company.
� The legal representative of a deceased member is only a shareholder but not a member. To
acquire membership, the legal representative of the deceased member should apply to the
company and get his name registered in the register.
A person may become a member of a company in the following ways- The subscribers to the
memorandum of Association of a company are de to have agreed to become its members and
shareholders.
How to become a member of a company.— A person may become member of a company in the
following ways—
1. Membership by subscribing to memorandum.
2. Membership by application and allotment.
3. Membership by application.
4. Membership by a transfer.
5. Membership by succession.
6. Membership by acquiescence.
1. Membership by subscription
It should be remembered here that a memorandum of association contains an association clause and
the persons desirous to be formed into a company subscribe their names to the memorandum with their
addresses, descriptions, and the number of shares each one of them has agreed to take. All these
persons are deemed to have agreed to become members of the company only by reason of their having
signed the memorandum.
2. Membership by application
To acquire membership by this way a person must send in an application for such numbers of
shares as he desires to have or as the company might allot to him. The application is regarded as an
offer “from the applicant and it is to be accepted by” the company. The acceptance, if made, should be
communicated to the applicant by giving him a notice of allotment. This, however, is not all there is
another condition mentioned which must be complied with before the shares transferred in his name if
otherwise entitled. A person actually becomes a member only when his name is entered on the register
of members.
3. Membership by transfer
As regards this way of becoming a member, shares are made freely transferable by Section 44 of the
Act but the mode of transfer is left to be decided by the articles of the company. Accordingly, a person
taking a transfer of shares becomes entitled to be placed on the register of members in place of the
transferor in respect of the shares so transferred subject to the provisions of the articles,
4. Membership by succession.
This mode comes into effect on the death of a member. Shares of a deceased member vests in his
executors or administrators and the estate is liable for calls if the shares are not fully paid. The
executors or administrators in whom shares have to becomevested are themselves entitled to be
registered, if they so choose, as the holders of the shares in the absence of any provisions in the articles
to the contrary.
A succession certificate alone is not sufficient evidence to enable certificate of the register of
members, when the shares were held in joint holding. But the applicant can get the shares transferred in
his name if otherwise entitled. /In re New Monk Hooshi Tea Co. Ltd., A.LR. 1967 CaL 196.
5. Membership by acquiescence
As regards this mode it has been held by certain judicial decision that aperson may be deemed to be
a member of a company if he allows his name apart from any agreement to become a member, to be on
the register of members or otherwise holds himself out or allows himself to be held out as a member.
6. A gift of shares will be valid if the same is made or executed in the manner prescribed by the articles
of the company. re Paradise Motor Co. Ltd., (1968 Vol.) 38 Com. Cas p. 863. It is clear, therefore, that
to constitute membership, it is essential that an entry to this effect must be made in the register of
members. The only exception to this rule, is in the case of signatories to the memorandum of
association.
WHO CAN BECOME A MEMBER
The company law does not prescribe any disqualification, which would depart a person from becoming
a member of a company. It appears that any person who is competent to enter into valid contract can
become a member of a company. The reason is obvious. Subscribing for shares is basically a contract
between the company and the shareholder. However, the Memorandum or Articles may impose certain
restrictions or restrain certain persons from acquiring membership in a company. In the absence of any
express provision regarding the capacity of a person, the provisions of the Contract Act shall apply.
As regards to certain special category of persons, the judiciary has laid down certain principles for
acquiring membership in a company. They are as follows:
1. Minors
A minor, is not a competent person to enter into a valid contract. As such, he is disqualified to
acquire membership. However, minors may be allotted shares. On attaining majority, the minor can
avoid the contract. But the minor should repudiate the contract within a reasonable time.
2. Lunatic and Insolvent
A lunatic cannot become a member. An insolvent, however, can become a member and is entitled to
vote at the meetings of the company. But his shares vest in the Official Receiver when he is adjudged
insolvent.
3. Partnership Firm
A partnership firm may hold shares in a company in the individual name of partners as joint
holders. But the shares cannot be issued in the name of the partnership firm, as it is not a legal person in
the eye of law.
4. Company
A company, being a legal person, can become the member of another company in its own name.
But a company can subscribe for the shares of another company only when it is authorized by
Memorandum. Similarly, a subsidiary company cannot buy the shares of its holding company.
5. Foreigners
Foreign national can be members of companies registered in India. For that permission of RBI is
mandatory. When he turns an alien enemy, his right as a member will be suspended.
6. Fictitious Person
A person who takes the shares in the name of fictitious person becomes liable as a member.
Besides, such a person can be punished for impersonation under section 68-A.
MODES OF ACQUIRING MEMBERSHIP
As per Sec. 41 of the Companies Act, a person may acquire the membership of a company
• By subscribing to the Memorandum before the registration of the company.
• By agreeing to become a member
• By applying for the shares offered by a company.
• By becoming a transferee of a share or shares and being placed on the register of
members.
• By transmission of shares on succession to a deceased or bankrupt member and the
consequent registration in the register of the company.
• By holding out shares and by allowing his name to be retained on the register.
Besides, there is another method of becoming a member of a company i.e. “Membership by
Qualification Shares“. If a person agrees to become a director of a company, he is deemed to have
accepted to become a member of that company. On his appointment, certain shares should be allotted to
him. The Companies Act provides that any one who agrees to become a director of a public company
should take at least one share before his appointment. Such shares are known as qualification shares.
RIGHTS OF THE MEMBERS
The members of a company enjoy several rights and they are the ultimate authority in the matters of the
company and its management. Their rights can be grouped under three heads. They are detailed below:
1. Statutory Rights
These are the rights conferred upon the members by the Companies Act. These rights cannot be
taken away by the Articles of Association or Memorandum of Association. Some of the important
statutory rights are given below
� Right to receive notice of meetings, attend, to take part in the discussion and vote at the
meetings.
� Right to transfer the shares [in case of public companies].
� Right to receive copies of the Annual Accounts of the company.
� Right to inspect the documents of the company such as register of members, annual returns, etc.
� Right to participate in appointments of directors and auditors in the Annual General Meetings.
� Rights to apply to the Government for ordering an investigation into the affairs of the company.
� Right to apply to the Court for winding up of the company.
� Right to apply to the National Company Law Tribunal for relief in case of oppression and
mismanagement under Secs. 397 and 398.
2. Documentary Rights
In addition to the statutory rights, there are certain rights that can be conferred upon the shareholders
by the documents like the Memorandum and the Articles of Association.
3. Legal Rights
These are the rights, which are given to the members by the General Law.
DUTIES OF MEMBERS
An organization's executive board of directors is tasked with specific governing duties for the
organization. Members of the board – including a member at large – are elected. Unlike other executive
board leadership such as a president or treasurer, a member at large doesn't have a specific role. A
member at large serves as a liaison to the general membership. Duties change as defined in organization
bylaws or as needed to fulfill board requirements and address overall organizational goals.
Attend All Board Meetings
To properly represent the membership, it is imperative that a member at large attends all board
meetings. Attendance gives the member an understanding of the board's direction and stance on issues.
Taking information back to the membership in a timely fashion is imperative. It means the membership
is able to contribute to the decision-making process before the board votes and finalizes things.
Liaison and Spokesperson
The member at large primarily serves as a liaison between the membership and the board of directors.
For example, a parent-teacher association can have an at-large teacher assigned to review information
and bring it back to the teacher segment of the organization. In this scenario, parents often overwhelm
the decision-making process while teachers are busy in the classroom. The member at large serves to
get input, provide feedback, and become a spokesperson for the teacher segment of the membership.
UNIT V
MEETING
In common parlance, the word meeting means an act of coming face to face, coming in company or
coming together.
The Oxford Dictionary defines a meeting as
An assembly of number of people for entertainment, discussion or the like.
A meeting therefore, can be defined as a lawful association, or assembly of two or more persons
by previous notice for transacting some business. The meeting must be validly summoned and
convened. Such gatherings of the members of companies are known as company meetings.
ESSENTIALS OF COMPANY MEETINGS
The essential requirements of a company meeting can be summed up as follows:
1. Two or More Persons
To constitute a valid meeting, there must be two or more persons. However, the articles of
association may provide for a larger number of persons to constitute a valid quorum.
2. Lawful Assembly
The gathering must be for conducting a lawful business. An unlawful assembly shall not be a
meeting in the eye of law.
3. Previous Notice
Previous notice is a condition precedent for a valid meeting. A meeting, which is purely accidental
and not summoned after a due notice, is not at all a valid meeting in the eye of law.
4. To Transact a Business
The purpose of the meeting is to transact a business. If the meeting has no definite object or
summoned without any predetermined object, it is not a valid meeting. Some business should be
transacted in the meeting but no decision need be arrived in such meeting.
KINDS OF COMPANY MEETINGS
The meetings of a company can be broadly classified into four kinds.
� Meetings of the Shareholders.
� Meetings of the Board of Directors and their Committees.
� Meetings of the Debenture Holders.
� Meetings of the Creditors.
1. Meeting of the Share Holders
The meetings of the shareholders can be further classified into four kinds namely,
Statutory Meeting,
Annual General Meeting,
Extraordinary General Meeting, and
Class Meeting.
The chart given below gives a classification of company meetings.
1. Statutory Meeting
This is the first meeting of the shareholders conducted after the commencement of the business of a
public company. Companies Act provides that every public company limited by shares or limited by
guarantee and having a share capital should hold a meeting of the shareholders within 6 months but not
earlier than one month from the date of commencement of business of the company.
Usually, the statutory meeting is the first general meeting of the company. It is conducted only once
in the lifetime of the company. A private company or a public company having no share capital need
not conduct a statutory meeting.
2. Annual General Meeting
The Annual General Meeting is one of the important meetings of a company. It is usually held once in a
year. AGM should be conducted by both private and public ltd companies whether limited by shares or
by guarantee; having or not having a share capital. As the name suggests, the meeting is to be held
annually to transact the ordinary business of the company.
3. Extra-ordinary General Meetings (EOGM)
Statutory Meeting and Annual General Meetings are called the ordinary meetings of a company. All
other general meetings other than these two are called Extraordinary General Meetings. As the very
name suggests, these meetings are convened to deal with all the extraordinary matters, which fall
outside the usual business of the Annual General Meetings.
EOGMs are generally called for transacting some urgent or special business, which cannot be
postponed till the next Annual General Meeting. Every business transacted at these meetings is called
Special Business.
Persons Authorized to Convene the Meeting
The following persons are authorized to convene an extraordinary general meeting.
� The Board of Directors.
� The Requisitionists.
� The National Company Law Tribunal.
� Any Director or any two Members.
�
4. Class Meetings
Class meetings are those meetings, which are held by the shareholders of a particular class of shares
e.g. preference shareholders or debenture holders.
Class meetings are generally conducted when it is proposed to alter, vary or affect the rights of a
particular class of shareholders. Thus, for effecting such changes it is necessary that a separate meeting
of the holders of those shares is to be held and the matter is to be approved at the meeting by a special
resolution.
For example, for cancelling the arrears of dividends on cumulative preference shares, it is necessary
to call for a meeting of such shareholders and pass a resolution as required by Companies Act. In case
of such a class meeting, the holders of other class of shares have no right to attend and vote.
2. MEETINGS OF THE DIRECTORS
Meetings of directors are called Board Meetings. These are the most important as well as the most
frequently held meetings of the company. It is only at these meetings that all important matters relating
to the company and its policies are discussed and decided upon.
Since the administration of the company lies in the hands of the Board, it should meet frequently for
the proper conduct of the business of the company. The Companies Act therefore gives wide discretion
to the directors to frame rules and regulations regarding the holding and conduct of Board meetings
The directors of most companies frame rules concerning how, where and when they shall meet and
how their meetings would be regulated. These rules are commonly known as Standing Orders.
3. MEETINGS OF DEBENTURE HOLDERS
The debenture holders of a particular class conduct these meeting. They are generally conducted
when the company wants to vary the terms of security or to modify their rights or to vary the rate of
interest payable etc. Rules and Regulations regarding the holding of the meetings of the debenture
holders are either entered in the Trust Deed or endorsed on the Debenture Bond so that they are binding
upon the holders of debentures and upon the company.
4. MEETINGS OF THE CREDITORS
Strictly speaking, these are not meetings of a company. They are held when the company proposes
to make a scheme of arrangements with its creditors. Companies like individuals may sometimes find it
necessary to compromise or make some arrangements with their creditors, In these circumstances, a
meeting of the creditors is necessary.
COMPONENTS OF A BUSINESS MEETING: NOTICE, AGENDA AN D MINUTES
Some of the major components of a business meeting are :
� Notice of Meeting,
� Agenda of Meeting and
� Minutes of the Meeting
�
NOTICE OF A MEETING
When a meeting is to be convened, a notice is required to be sent to all who are to attend it.
It should satisfy these conditions:
� It should be under proper authority
� It should state the name of the organisation
� It should state the day, date, time, and place. Also, sometimes, how to reach the place
� It should be well in advance. Some require seven days’ notice, some 48 hours’
� It should state the purpose and, if possible, the agenda
� It should carry the date of circulation and convener’s/secretary’s signature
� It should go to all persons required at the meet
� It should mention the TA/DA etc. payable and the arrangements for this
In pratice, it is necessary to ensure that the notice has reached in time. This may be done
telephonically. Dispatch section and post are prone to delays
We often find that between the date of a letter from a major public organisation and the post
mark on the letter, there is a gap of 10-12 days. A notice that should reach seven days before a meet
should not reach seven days after the meet.
AGENDA
As stated earlier, an agenda is the list of items to be considered at a meeting. It is also called
business or order of business. It comes from the Latin word agendum (singular) which means ‘a thing
to be done.’ But agenda (the Latin plural) is used as a singular noun.
It is the route map of the meeting. The specimen notices above already contain a hint of how it
is written. The agenda may be a part of the notice or may be attached as an annexure. The
convenor/secretary prepares it in consultation with the chairperson and gets his approval.
The items of agenda should cover all that is necessary to be considered at that time. Meetings
take time and effort to arrange; hence the agenda has to be well thought out.
The items may be devised from:
� Previous minutes
� Suggestions received
� Actions and events since last meeting
� Correspondence of the organization
HERE ARE SOME GUIDELINES FOR LISTING THE ITEMS:
� Apologies from absent members (need not be written previously)
� Condolences if any (may or may not be written previously)
� Reading and approval of minutes of the last meet
� Matters arising out of previous meet’s minutes (this need not always be mentioned)
� Urgent and non-controversial items
� Matters requiring closer discussion and debates
� Any new, on-the-spot items with the approval of the chairman
� Date of the next meet.
The last item in a meeting is a vote of thanks to the chairman but this need to be mentioned. The
items are mentioned briefly or elaborately according to the practice or need
The style used is as follows:
� Appointment of auditors
� Induction of new members
� Reading of minutes
� Felicitating so-and-so on the award of Padmashri to him/her
� To read and approve the minutes of the previous meet
� To consider the advertisement draft
� To organize a blood donation camp
� iv) To appoint sub-committees for sports competition and music competition
The agenda should be manageable within the time at disposal. Some clubs have a time limit for the
duration of a meeting (e.g. 90 minutes), which automatically dictates the scope of discussion.
MINUTES OF THE MEETING
The minutes of a meeting are the record of the discussions/decisions therein. They have an official
status; they are useful in law, and in some cases required by law to be written. Minutes are final when
they are approved by the members of the group to which they relate, generally in the next meeting, and
signed by the chairperson.
Even if there are emotional moments in a meet, the minutes are written in an unemotional
manner, are cool, factual, impersonal, and impartial. Moreover, such are the demands of time on most
people that the minutes should be concise, boiled down to the essentials.
Only some organizations’ require that they record the detailed discussions as well (i.e. who said what
and what were the reactions… until the decision was reached). Normally, the body of the minute’s
records.
� The motions and amendments thereto
� The proposer and seconded of motions
� The details of voting, if any
� Recommendations
� Decisions/ resolutions
� Tasks assigned to individuals, sub-committees
The overall minutes should give
� The name of the organisation/ unit
� Day, date, time and place
� Number in order (e.g. 33rd meeting of…)
� Names of chairperson and secretary
� Names of members present
� Names of the absent
� Attendees by special invitation, e.g. auditor, caterer, etc.
� Record of the transactions (on the guidelines given above)
� Signature of secretary and, after approval, that of the chairman.
TIPS FOR WRITING MINUTES
The minutes are written generally by the secretary from the notes taken during the meet. He/she can use
the agenda as the framework for writing them and use short forms, shorthand etc. to take quick and
accurate notes. He may have to ask members to repeat their words to get them right.
He should note down all the particulars needed for the fair copy of minutes. The items of the minutes
can be written under short headings such as are used in the agenda.
(As for reading them, some committees circulate them in advance and take them as read. Otherwise
the reader should read them loudly, clearly, and quickly.)
Style wise, they use one of these constructions:
a. It was resolved that the minutes of the previous meeting be approved.
b. It was decided that a sub-committee be set up to consider
c. Resolved that a blood donation camp be held on 15th August. (The verb is used in the
subjunctive mood: “be done, be appointed”, etc.)
Alternatively, the description is given in the past tense:
1. Minutes of last meet:
The secretary read out the minutes of the meet dated… and they were approved.
2. Donation received:
The chairman informed that he had received a donation of Rs. 50,000 from ex-member Mr. Gopal
Rathi.
At the time of approval, the chairman asks, “Do you accept the minutes as they stand?” OR “Any
matters arising out of the minutes?”
Your ability to write good minutes can earn you a prize position in an organisation. Also, if you
hold a position and do not know how to write minutes, you may face embarrassment.
MEANING OF QUORUM
Quorum means the minimum number of persons who being entitled to attend a meeting must be present
at the meeting so that the business of the meeting can be transacted validly. Such a number is desirable
so that a meeting gets a representative character and no decisions are taken with a very small number of
persons being present.
At the same time the quorum shall not be too big so that a meeting falls through on account of small
attendance.
FEATURES OF QUORUM
� What shall be the quorum for different types of meetings of an organisation are usually
mentioned in its bye-laws or in the Articles of Association in case of a company. Some statutes
also make such provisions. For example Sec. 174 of the Companies Act makes such provisions.
The bye-laws or the Articles cannot provide smaller quorum than what are provided in the
statutes, if any.
� A meeting cannot be started if quorum is not present. The quorum might be continuously
present. If any member or members leaves or leave earlier and by that the quorum falls, then
any decision taken afterwards will not be binding, if the by-laws or Articles so provide.
� It is the duty of the chairman to see that the quorum is present. The secretary helps him in
counting the quorum. If at the middle of the meeting quorum falls, any member present may
draw the attention of the chairman to this fact by raising a ‘point of order’.
� If quorum is not present at the scheduled hour of a meeting already notified, then the members
present will wait for half an hour
WHERE QUORUM IS STRICTLY NOT NECESSARY
Normally the quorum is necessary for a valid meeting.
But in the following circumstances a less number of persons may make the quorum:
� Whenever a meeting is adjourned for want of quorum, any number of members present at the
adjourned meeting shall make the quorum.
� At a Board meeting when a matter comes up in which one or more than one director is or are
interested then, director or directors concerned cannot take part in the discussion. The remaining
directors shall make the quorum. If only on- director is left out then of course there cannot be a
quorum and the matter shall be referred to a general meeting of members for decision.
� In case of class meetings if one person alone holds all the shares of that particular class of
shares then he alone shall make the quorum.
� In case of an annual general meeting of a company (ailed by the order of the Central
Government on the complaint by only one member of the company, or a general meeting called
by the Company Law Board on the application of one member of the company then the member
alone present in person or by proxy, shall make the quorum when the meeting is held.
THE GENERAL PATTERNS OF QUORUM
Every company in its Articles of Association or an association in its bye laws or a Com-mittee or
Sub-Committee in its own rules and regulations usually provides what shall be the quorum for the
different kinds of meetings to be held under it. The quorum for a general meeting is usually one-fourth
or one-third of the total number of members or a fixed number like ten, fifteen etc. taking into
consideration.
The Companies Act is very liberal and provides that if nothing is mentioned in the Articles then any
two members in case of a private company and any five members in case of a public company, present
in person at a general meeting, shall make the quorum.
The quorum for the meeting of an important committee, like the Executive Committee or Managing
Committee, is generally fixed at one-third. The Companies Act provides that the quorum for Board
meeting, if nothing is provided in the Articles, shall be one-third or two whichever is bigger.
The directors themselves at the first Board meeting may fix the quorum for Board meetings. In some
special cases, the quorum is fixed at a big percentage of the total number of members. For example, the
quorum for a class meeting in a company is very often fixed by the Articles to be two- thirds or three-
fourths or all the shareholders belonging to that class.
Sometimes all the members make the quorum. For example, in a private company having only two
directors, both the directors shall make the quorum at a Board meeting. Again, in a private company
having only two shareholders, both the members shall make the quorum at a general meeting.
CHAIRMAN
'Chairman'
A chairman is an executive elected by a company's board of directors that is responsible for presiding
over board or committee meetings. The chairman ensures that meetings run smoothly and remain
orderly, and works at achieving a consensus in board decisions. The position is different than that of the
chief executive officer (CEO) and can be either a non-executive (part-time) or executive (full-time)
position.
MAJOR DUTIES OF A CHAIRMAN IN A MEETING
� The Meeting is in Order
� According to Rules
� Agenda is Followed
� Within the Scope of the Meeting
� Discussion on Motions Only
� Maintenance of Order
� Opportunity to Speak
� Accurate Voting
� Minutes are Kept
� Other Duties.
The Meeting is in Order:
First of all, the chairman shall see that the meeting itself is in order and for that the following points
have to be taken into consideration:
� That a proper notice has been sent to all the persons entitled to receive a notice.
� That only those persons who are entitled are present at the meeting (includ-ing invitees, if any).
� That his own appointment is in order.
� That the quorum of members is present.
� If there is want of quorum at the beginning and the quorum is not present within half an hour
then the chairman is to see that the meeting is adjourned.
According to Rules
It is the duty of the chairman to see that the proceedings are carried on strictly according to the rules
Agenda is Followed:
The chairman shall see that the busi-ness at a meeting is conducted in the order as given in the
agenda. He may vary the order with the consent of the meeting. When he finds that some important
item is placed at the bottom of the agenda which needs discussion on the day and within the presence of
the largest number of participants, but much time has passed in taking up a few items at the top, he
changes the order.
Within the Scope of the Meeting
It is his duty to see that the participants do not raise discussions or suggestion of amendments or
otherwise on any matter which is not within the scope of the meeting.
Discussion on Motions Only
Further, the chairman shall also see that the participants do not discuss anything for which specific
motion is not before the house.
Maintenance of Order
A major duty of the chairman is to see that perfect order and tranquility prevail at the meeting).
Unless there is perfect order, the business of the meeting cannot be con-ducted smoothly and timely.
The participants may cause disorder by making adverse remarks on one another, by personal talks
while dis-cussion is going on, by disobeying the orders or rulings of the chairman, by violating the
rules of the meeting, etc. The chairman has powers (see below) to take steps to maintain order,
discipline and decorum at the meeting.
Opportunity to Speak
The chairman shall see that every participant gets reasonable opportunity to speak. Generally, he
does not allow one individual to speak more than once on the same topic unless he is compelled to
explain something what he has already said. The chairman must see that persons belonging to the
minority group, if any, and whatever small number they may have, are given oppor-tunities to place
their views.
Accurate Voting
Another major duty of the chairman is to see that the sense of the house is properly ascertained. It
means that voting is conducted perfectly and the results are declared accor-dingly. In case a special
resolution is necessary, he shall see that the difference of votes is correct. He has to ask the secretary to
arrange poll when it is demanded. In counting votes the chairman takes the help of the secretary as well
as of the ‘tellers” appointed by him.
Minutes are Kept
It is the duty of the chairman to con-firm the minutes, by putting his signature, prepared by the
secretary after the meeting is over. Similarly, the chairman shall see that the secretary takes necessary
notes at a meeting so that minutes can be subsequently prepared. The chairman himself puts down
notes on the detailed agenda sheet for the purpose.
OTHER DUTIES
The chairman has some other formal duties.
For example:
� If he is elected a pro tem chairman, his duty is to vacate when, the fixed chairman arrives.
� He shall not be partial in his behaviour and shall exercise his casting vote, if any, very
selectively.
� He shall lend patient hearing to every-body, whether the views expressed are liked or disliked
by him.
� He has to see that the business of the meeting be completed within the shortest possible time.
� He shall comply with the requests of the participants for adjourning the meeting.
� He has to give satisfactory replies to the questions raised by members on his speech, if any.
� He shall exercise his powers reasonably.
Non-compliance with Duties
If a chairman does not comply with his duties then the participants as a whole or in part may stage a
walk-out as a mark of protest. This we often find in an Assembly or in Parliament. If he is a temporary
chairman, elected at the meeting, he may be removed by the participants.
PROXY
Definition
Written authorization from an absent member (or a shareholder, called the 'principal') that confers a
limited power of attorney on another person, member, or management of the firm (called 'agent' or
'proxy' to vote on behalf of, and in accordance with the directions of, the principal.
ROLE OF PROXY IN A MEETING
The knowledge of the term quorum is complete when the meaning of the term proxy is known. Proxy
means substitute. In the world of meetings proxy means a substitute sent by a members to attend a
meeting on his behalf. The idea comes from the Companies Act. Sec. 176 of the Act provides that a
member of a company is entitled to send another person to attend a meeting and to vote on his behalf.
According to Sec. 176 of the Companies Act:
(1) Any member entitled to attend a general meeting and to vote may send a proxy to attend the
meeting and to vote on his behalf.
But the following rules have to be followed for the purpose:
• In case of a company not having share capital, a proxy can be sent provided it is mentioned in
the Articles of the company.
• A member of a private company cannot send more than one proxy unless otherwise provided in
the Articles.
• A proxy can vote at the meeting only by poll unless otherwise provided in the Articles but he
cannot speak.
• In the notice for the meeting it shall be clearly mentioned that a proxy can be sent and a proxy
form is attached to the notice.
• A member intending to send a proxy shall fill in the form naming the proxy and signing on
stamps of prescribed value and send it to the company at least forty-eight hours before the
meeting. A legally appointed representative of the member may sign on his behalf on the proxy
form.
• The proxy sent by a member need not be a member and may be an outsider.
• Any member may inspect the proxy forms sent by other members provided he gives three days’
notice to the company.
• Inspection shall be allowed by the company at least twenty-four hours before the meeting,
during business hours.
� A proxy is not counted when quorum is counted. But at an annual general meeting held at the
order of the Central Government (Sec. 167) or at a meeting of members held at the order of the
Company Law Board (Sec. 186), only one member on whose complaint meeting has been so
ordered, may be present by proxy and that proxy will make the quorum.
� It has to be noted that no proxy can be sent by a director to attend a Board meeting on his
behalf.
� Generally associations other than companies do not allow proxy.
� It is a duty of the secretary to collect the proxy forms and prepare a Proxy List.
� In case of Government Companies, the shares are often held in the name of the President of
India or a Governor, who invariably sends a representative (Sec. 187 A). Same is true when one
body corporate (not necessarily a ‘company’) holds shares in another body corporate then the
shareholder body corporate send a representative to the meetings.
Such a representative is selected by a resolution of the Body of Directors (or Governing Body) of the
shareholder body corporate. A representative is not merely a proxy (Sec. 187). A representative is
counted for counting quorum and can speak at the meeting unlike a proxy. The word ‘proxy’ has
double meaning. It means the person who is sent as substitute as well as the form or the instrument to
be filled in by a member for appointing a proxy.
During the life of your company, you may have to hold general meetings and board meetings when
important decisions need to be made by members and directors. At such times, certain rules and
procedures must be followed to ensure the execution of these formal meetings complies with company
law.
Any resolutions (decisions) that are taken during the course of a general or board meeting must be
recorded accurately. In some circumstances, directors also have to report certain matters to Companies
House.
If you are the sole director and shareholder of your company, you are still required to hold
‘meetings’ in some situations. Yes, meetings with just yourself. It seems bizarre but it is simply a
matter of formality to satisfy corporate compliance regulations.
If a general meeting is called, a notice period of at least 14 days is required. This notice must be
provided to every shareholder and it should contain the following information:
� Date, time and location of the meeting.
� Type of general meeting.
� Nature of the meeting.
� Statement declaring that every shareholder has the right to appoint a proxy.
� Date the notice is issued.
� Name of the person calling the meeting.
Any formal decisions made by shareholders at a general meeting require ‘passing a resolution’. These
decisions are legally binding. Copies of resolutions must be filed with Companies House. The company
should also keep copies at its registered office or SAIL address.
Minutes must be taken at all general meetings to officially record the proceedings, the names of all
those present and any decisions taken.
LIMITED COMPANY BOARD MEETING
A board meeting is an official meeting of limited company directors. These individuals are appointed to
manage a limited company on behalf of its shareholders or guarantors. Board meetings are held when
directors need to collectively make decisions, present proposals, raise concerns, review the financial
position of the business and discuss strategies.
First board meeting of directors
The purpose of this meeting is to provide an opportunity for directors to discuss the formalities of the
new business, such as:
� Consult the articles of association.
� Determine the rights, duties and responsibilities of each director.
� Confirm the objectives, vision and values of the company.
� Allot shares.
� Issue share certificates.
� Appoint a strong leader as the chairperson of the board.
� Appoint a company secretary.
� Delegate duties and responsibilities to the company secretary.
� Confirming the company’s accounting reference date.
� Confirming statutory filing deadlines for annual accounts, annual returns and tax returns.
� Setting up a business bank account.
� Record-keeping and accounting requirements.
� Appointing an accountant and auditor.
� Discuss the hiring of staff.
� Directors are legally required to document the proceedings of board meetings by taking minutes
(even if there is just one director).
Taking minutes of meetings
It is extremely beneficial to keep an accurate record of everything that occurs in board meetings and
general meetings in case any disagreements should arise at a later date. Minutes serve as evidence of
the proceedings and they should contain details such as:
Company name and registered office address.
� Time, date and location of meeting.
� Names of all persons in attendance.
� Apologies for absences.
� Proposals put forth for consideration.
� Proposed resolutions.
� Decisions that were taken – resolutions that were passed.
� Names of those who supported or opposed any proposed resolutions.
� Queries or objections that were raised.
� Any other matters raised or discussed during the course of the meeting.
� Signature of director or company secretary.
� Limited companies must maintain copies of all minutes at their registered office or SAIL
address for a minimum period of two years.
RESOLUTIONS
A resolution is a legally binding decision made by limited company directors or shareholders. If a
majority vote is achieved in favour of the decision, a resolution is ‘passed’. Shareholders can pass
ordinary resolutions or special resolutions at general meetings, or they can pass written resolutions. All
types of collective decisions of directors are simply referred to as ‘resolutions’. These decisions can be
made at board meetings or in writing.
Types of resolutions
There are 3 types of resolutions available to limited company shareholders:
Ordinary resolutions
Passed by a simple majority of shareholders’ votes. Used for all matters, unless the Companies Act,
the articles of association, and/or a shareholders’ agreement stipulates the need for a special resolution.
The majority of ordinary resolutions must be filed with Companies House.
Special resolutions
Passed by a 75% majority of shareholders’ votes at a general meeting. Used for extraordinary
matters that cannot be passed by an ordinary resolution.
Written resolutions
Used when a general meeting is not required to pass an ordinary resolution or special resolution.
Any written ordinary resolution must be passed by a simple majority of shareholders’ votes; written
special resolutions require a 75% majority vote. Shareholders must sign a written resolution to cast
their votes.
DECISIONS REQUIRE AN ORDINARY RESOLUTION
An ordinary resolution is passed if a simple majority (above 50%) of the votes cast are in favour of
the resolution. This type of resolution can be used by shareholders and directors for all day-to-day
matters, such as:
� Appointing and removing directors.
� Appointing and removing secretaries.
� Matters pertaining to directors’ employment contracts.
� Amending directors’ powers.
� Approving dividend payments.
� Authorising directors’ loans.
� Authorising the transfer of shares.
The types of decisions that company directors can make will depend on the powers they are granted by
the shareholders. Their rights and powers will be outlined in the articles of association and
shareholders’ agreement.
SPECIAL RESOLUTION
In the context of limited companies, a special resolution is a motion or proposal that requires approval
of at least 75% of shareholder votes. This kind of resolution is reserved for important and rare
decisions,
such as:
� Changing a company name.
� Reducing share capital.
� Allotting more shares.
� Issuing different share classes.
� Altering the articles of association.
� Removing pre-emption rights.
� Re-registering a company.
� Changing a private company to a public company, or vice versa.
� Winding up a company by members’ voluntary liquidation.
The Companies Act 2006 specifies the types of decisions requiring a special resolution. Where no type
of resolution is specified, shareholders may pass an ordinary resolution with a simple majority of
50.01% of the votes.
Method of passing special resolution
In order to pass a special resolution, 14 days’ notice must be given to all shareholders (members)
about the proposed resolution and its intention, unless the Articles states otherwise. If a general meeting
is held, a vote will be taken by a show of hands or using a poll. Alternatively, these decisions can be
passed by written resolution. If 75% of the shareholders agree to pass a proposed resolution, the
decision is legally binding in accordance with the Companies Act 2006.
Special resolutions must be delivered to Companies House by post within 15 days of being passed.
A copy must also be given to all shareholders and the company auditor. Furthermore, a company must
keep a copy of all resolutions at its registered office address or SAIL address for a minimum period of
10 years.
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