COMPANIES ACT 1956
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COMPANIES ACT 1956
COMPANY LAW
COMPANIES ACT, 1956
INTRODUCTION
The Indian companies act, 1956 came into force on 1st April, 1956. the present companies
act is based largely on the recommendations of the company law committee which
submitted its report in march, 1952.
FEATURES OF ACT
Full and fair disclosure of various matters in prospectus.
Detailed information of the financial affairs of the company to be disclosed in its
accounts.
Provision for intervention and investigation by the government into the affairs of a
company.
Restrictions on the powers of managing agents and other managerial personnel.
Enforcement of proper performance of their duties by company management.
APPLICATION OF THE ACT
The act applies to the following companies:
Companies formed or registered under the act.
Companies formed or registered under previous companies laws i.e existing
companies(sec 561)
Companies registered but not formed under any previous companies law to the
extent and in the manner declared in part ix of the act.(sec 562)
Unlimited companies registered as limited companies in pursuance of any
previous companies law(sec 563)
Unregistered companies for the purpose of winding up under part X of the
act(sec 582)
Foreign companies(sec 592)
Insurance companies except in so far as the provisions of the act are
inconsistent with the provisions of insurance Act,1938(IV of 1938)
Banking companies except in so far as the provisions of the act are inconsistent
with those of banking companies act,1949 (X of 1949)
Companies engaged in the generation and supply of electricity.
Government companies.
ADMINISTRATIVE AUTHORITIES UNDER THE COMPANIES ACT
Central government
National company law tribunal
National company law appellate tribunal
The Zonal offices (headed by regional directors)
Field offices (registrar of companies for each state)
MEANING OF COMPANY
The word 'company' has no strict or technical or legal meaning. A company in the normal
sense means an association of persons united for a common object. Accordingly the term is
used to represent associations formed to carry on some business for profit or to promote
art, science, education or some charitable purpose .According to companies act a company
means, "a company formed and registered under this act or an existing act".
CHARACTERISTICS OF A COMPANY
Incorporated association-A company comes into existence on incorporation or
registration under the Companies act. a joint stock company may be incorporated
under the act either as a private or a public company. minimum number of persons
required for the purpose of incorporation is seven in case of public company and ten
in case of a private company.
Separate legal entity-The main feature of a company is its independent corporate
existence. a company formed and registered under the companies Act is a distinct
legal entity.
Limited liability-limited liability of members is another most important characteristic
of a company. it is the reason why a great many people invest their money in limited
companies.
Separate property-another characteristic of the company is that it is capable of
owning, enjoying and disposing of property in its own name. it is a consequence of
the fact that the company is a legal person.
KINDS OF COMPANIES
FORMATION OF A COMPANY
Company formation is the term for the process of incorporation of a business. It is also
sometimes referred to as company registration. These terms are both also used when
incorporating a business. a company or corporation is considered to be an entity that is
separate from the people who own or operate the company.
STEPS IN FORMING A COMPANY
STEP 1:
Obtain Director’s Identification Number (DIN). It is only after the DIN is approved, the
incorporation documents can be filed with the Registrar. However, the name approval
can be obtained prior to approval of DIN. It takes about 7 days for getting the DIN approved, provided all proper documents are furnished.
STEP 2:
Obtain a Digital Signature Certificate (DSC) from any of the approved Certifying Authorities / Registration Authority in India. The Digital Signature is a digital ID of the person who would be signing the Forms & Returns that are required to be filed with the Registrar of Companies (ROC). DSC is necessary for the purpose of forming a Company in India as all the documents that are required to be filed with the Registrar is required to be signed using a DSC .
STEP 3: Apply to the Registrar for obtaining the proposed name of the Company. The following are the details that are required for this purpose.
Details of the Applicant
Name Occupation
Address City
State Country
Pin code / Zipcode
Details of Promoters
Name of the Promoter At least 2 persons (in case of a Private Limited Company) or 7 (in case of a Public
Limited Company) should be the Promoters of the Company in India. Please note that the names of the Promoters cannot be changed at the time of Incorporation. The Promoter of the Company can be a Foreign Company.
State in India where the Registered Office will be situated
Address of the Proposed Registered Office
Name of the Proposed Company Significance of the Proposed Name In case the name of the Proposed Indian Company is similar to that of your off-shore Company, then enclose a copy of the Certificate of Incorporation issued in the Country of its formation.
Details of the business that is proposed to be carried on.
Details of the Proposed Directors
Name
Father’s / Husband’s Name
Nationality Occupation
If the proposed Director is already a Director / Promoter in any existing Indian
Company, please furnish the full name of such Company, and also indicate his
status viz. Whether Director / Promoter.
Date of Birth
Passport No. Permanent Residential Address with City,
State, Country, Pin Code / Zip Code
Present Residential Address, with City,
State, Country, Pin Code / Zip Code
Directors Identification No. There should be at-least 2 Directors for Private Limited Company and 3 Directors if the proposed Company is to be a Public Limited Company. Proposed Authorised Share Capital of the Proposed Company The minimum Authorised Share Capital of a Private Limited Company should be INR 1,00,000/- and for a Public Limited Company should be INR 500,000/-. Whether there is any Trademark subsisting with regard to the name of the
Company inside or outside India?
Registrar will communicate the approval with regard to the name. It should take about 2 – 3 working days to get the name approved, from the date the same is filed with the
Registrar. STEP 4:
Get the papers for Incorporation ready:
(a) Memorandum of Association; (b) Articles of Association;
(c) Form 32 – Details of Directors (d) Form 18 – Situation of Registered Office
(e) Form 1 – Declaration of compliance with the requirements of the Act with respect to incorporation.
It should take about 10 – 12 working from the date on which the papers are filed with the Registrar, to get the Certificate of Incorporation.
POST INCORPORATION FORMALITIES (a) Company Registration with the Income-tax; (b) If the proposed business of Software Development is only for Exports, then the
Company should get itself registered with Software Technology Parks India. (c) If the proposed business is a manufacturing business, then there are other
enactments that would be applicable. (d) If the proposed business is a Service oriented business, the applicable laws
would be different. (e) Company if will employ more than 20 persons – Registration with Provident Fund
Authorities - Social Security for employees. (f) Company Registration with Local Authority – Shops & Establishments
ACTION ITEMS ON DECIDING TO INCORPORATE A COMPANY IN INDIA. (a) Decide the proposed activity of the Company.
(b) Decide the name of the Company. The name should reflect the purpose for which the company is incorporated.
(c) Decide who would be the initial subscribers to the memorandum. (d) Decide on who would be the first directors.
Memorandum of Association of a company : Is the constitution or charter of the company and contains the powers of the company. No company can be registered under the Companies Act, 1956 without the memorandum of association. Under Section 2(28) of the Companies Act, 1956 the memorandum means the memorandum of association of the company as originally framed or as altered from time to time in pursuance with any of the previous companies law or the Companies Act, 1956.
The memorandum of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case
of companies limited by the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited
by guarantee and having a share capital whereas form in table E is applicable to unlimited companies.
Contents of Memorandum : The memorandum of association of every company must contain the following clauses :-
Name clause
The name of the company is mentioned in the name clause. A public limited company must
end with the word 'Limited' and a private limited company must end with the words 'Private Limited'. The company cannot have a name which in the opinion of the Central Government
is undesirable. A name which is identical with or the nearly resembles the name of another company in existence will not be allowed. A company cannot use a name which is prohibited
under the Names and Emblems (Prevention of Misuse Act, 1950 or use a name suggestive of connection to government or State patronage.
Domicile clause
The state in which the registered office of company is to be situated is mentioned in this clause. If it is not possible to state the exact location of the registered office, the company must state it provide the exact address either on the day on which commences to carry on its business or within 30 days from the date of incorporation of the company, whichever is earlier. Notice in form no 18 must be given to the Registrar of Companies within 30 days of the date of incorporation of the company. Similarly, any change in the regis tered office must also be intimated in form no 18 to the Registrar of Companies within 30 days. The registered office of the company is the official address of the company where the statutory books and records must be normally be kept. Every company must affix or paint its name and address of its registered office on the outside of the every office or place at which its activities are carried on in. The name must be written in one of the local languages and in English.
Objects clause
This clause is the most important clause of the company. It specifies the activities which a company can carry on and which activities it cannot carry on. The company cannot carry on
any activity which is not authorised by its MA. This clause must specify :-
i. Main objects of the company to be pursued by the company on its incorporation
ii. Objects incidental or ancillary to the attainment of the main objects iii. Other objects of the company not included in (i) and (ii) above.
Doctrine of the ultra-virus Any transaction which is outside the scope of the powers specified in the objects clause of the MA and are not reasonable incidentally or necessary to the attainment of objects is ultra-virus the company and therefore void. No rights and liabilities on the part of the company arise out of such transactions and it is a nullity even if every member agrees to it.
Consequences of an ultra virus transaction :-
1. The company cannot sue any person for enforcement of any of its rights. 2. No person can sue the company for enforcement of its rights.
3. The directors of the company may be held personally liable to outsiders for an ultra virus
However, the doctrine of ultra-virus does not apply in the following cases :-
1. If an act is ultra-virus of powers the directors but intra-virus of company, the company is liable.
2. If an act is ultra-virus the articles of the company but it is intra-virus of the memorandum, the articles can be altered to rectify the error.
3. If an act is within the powers of the company but is irregularly done, consent of the shareholders will validate it.
4. Where there is ultra-virus borrowing by the company or it obtains deliver of the property under an ultra-virus contract, then the third party has no claim against the company on the basis of the loan but he has right to follow his money or property if
it exist as it is and obtain an injunction from the Court restraining the company from parting with it provided that he intervenes before is money spent on or the identity
of the property is lost. 5. The lender of the money to a company under the ultra-virus contract has a right to
make director personally liable.
Liability clause A declaration that the liability of the members is limited in case of the company limited by the shares or guarantee must be given. The MA of a company limited by guarantee must also state that each member undertakes to contribute to the assets of the
company such amount not exceeding specified amounts as may be required in the event of the liquidation of the company. A declaration that the liability of the members is unlimi ted in case of the unlimited companies must be given. The effect of this clause is that in a
company limited by shares, no member can be called upon to pay more than the uncalled amount on his shares. If his shares are already fully paid up, he has no liability towards the company.
The following are exceptions to the rule of limited liability of members :-
1. If a member agrees in writing to be bound by the alteration of MA / AA requiring him to take more shares or increasing his liability, he shall be liable upto the amount agreed to by him.
2. If every member agrees in writing to re-register the company as an unlimited company and the company is re-registered as such, such members will have unlimited liability.
3. If to the knowledge of a member, the number of shareholders has fallen below the legal minimum, (seven in the case of a public limited company and two in case of a private
limited company ) and the company has carried on business for more than 6 months, while the number is so reduced, the members for the time being constituting the
company would be personally liable for the debts of the company contracted during that time.
Capital clause The amount of share capital with which the company is to be registered divided into shares must be specified giving details of the number of shares and types of shares. A company cannot issue share capital greater than the maximum amount of share
capital mentioned in this clause without altering the memorandum.
Association clause A declaration by the persons for subscribing to the Memorandum that they desire to form into a company and agree to take the shares place against their respective name must be given by the promoters.
Articles of Association
The Articles of Association (AA) contain the rules and regulations of the internal management of the company. The AA is nothing but a contract between the company and
its members and also between the members themselves that they shall abide by the rules and regulations of internal management of the company specified in the AA. It specifies the
rights and duties of the members and directors.
The provisions of the AA must not be in conflict with the provisions of the MA. In case such a conflict arises, the MA will prevail.
Normally, every company has its own AA. However, if a company does not have its own AA, the model AA specified in Schedule I - Table A will apply. A company may adopt any of the model forms of AA, with or without modifications. The articles of association should be in any of the one form specified in the tables B,C,D and E of Schedule 1 to the Companies Act, 1956. Form in Table B is applicable in case of companies limited by the shares , form in Table C is applicable to the companies limited by guarantee and not having share capital, form in Table D is applicable to company limited by guarantee and having a share capital whereas
form in table E is applicable to unlimited companies. However, a private company must have its own AA.
The important items covered by the AA include :-
1. Powers, duties, rights and liabilities of Directors
2. Powers, duties, rights and liabilities of members
3. Rules for Meetings of the Company
4. Dividends 5. Borrowing powers of the company 6. Calls on shares
7. Transfer & transmission of shares 8. Forfeiture of shares
9. Voting powers of members, etc
Alteration of articles of association : A company can alter any of the provisions of its AA, subject to provisions of the Companies Act and subject to the conditions contained in the Memorandum of association of the company. A company, by special resolution at a general meeting of members, alter its articles provided that such alteration does not have the effect of converting a public limited company into a private company unless it has been approved by the Central Government.
The articles must be printed, divided into paragraphs and numbered consequently and must
be signed by each subscriber to the Memorandum of Association who shall add his address, description and occupation in presence of at least one witness who must attest the
signature and likewise add his address, description and occupation. The articles of association of the company when registered bind the company and the members thereof to
the same extent as if it was signed by the company and by each member
MEMBERSHIP OF A COMPANY
the term 'member' refers to the person whose name appears on the register of members.
on the other hand, the term 'shareholder' refers to a person who holds share in a company
WHO CAN BECOME THE MEMBER
1) Company.
A company may become a member of another company if it is authorised by its
memorandum or articles, or if it takes the shares of another company by way of a
Compromise or Arrangement.
A company cannot, however, buy its own shares. Also, subject to certain exceptions given in
Section 42, a company cannot buy shares of its holding company.
(2) Firm. A partnership firm cannot become a member of a company, as it is not a legal person having
a separate entity from that of partners. Partners may be registered as joint holders in which case each of them becomes a member.
(3) Joint holders.
The shares of a company may also be held jointly by two or more persons. In the case of. a
public company every joint shareholder is counted as a separate member (Narandas Man
Mohandas Ramji & Sons vs. Indian Manufacturing Co. Ltd.) but in the case of a private
company joint holders are treated as a single member [Section 3(l)(iii)].
(4) Registered society.
A society registered under the Society registration Act, I860, is competent to hold shares in
a company in its own name, if it is so authorized by its memorandum or articles of
association.
(5) Insolvent.
An insolvent may be a member of the company (Morgan vs. Grey), although the beneficial
interest in his shares will be with the Official Receiver. He does not cease to be a member of
the company on becoming insolvent, unless provided otherwise by the articles of
association.
(6) Minor.
A minor or lunatic, being incompetent to enter into a contract, cannot be allotted shares of
a company. "If directors, in ignorance of the fact of minority, allot shares to a minor, and
enter his name on the register of members, the company can repudiate the allotment and
remove his name from the register, when the fact of applicant's minority comes to its knowledge. The minor can also repudiate the allotment at any time during his minority. In
either case, the, company must repay to minor all money received from him in respect of
the allotted shares, and whether or not the minor should restore to the company the
benefits he might have derived from the shares would be for the court to decide in view of the facts and circumstances of each case.
Methods to attain membership :
A person may become a member in a company in any of the following ways:
(1) By allotment :
Ordinarily a person becomes a member of the company by applying for the shares in writing
and securing the allotment thereof directly from the company.
(2) By subscribing to the memorandum :
Section 41 of the Act provides that—"The subscribers of the memorandum of a company
shall be deemed to have agreed to become members of the company, and on its registration shall be entered as members in its register of members." Thus, the signatories to the memorandum become members of the company, simply by reason of their having signed the memorandum. Neither application form nor allotment of shares is necessary for
becoming a member in their case. Even entry in the register of members is not necessary to confer upon them the rights and liabilities of membership.
(3) By agreeing to purchase qualification shares :
As per the provisions of Section 266(2), all such persons who have signed an undertaking to take and pay for their qualification shares, for acting as a director of the company and
delivered it to the Registrar, are also in the same position as subscribers to the memorandum. As such they are also deemed to have become members automatically on
the registration of the company.
It must, however, be noted that this method of becoming a member is only possible in public companies having a share capital because Section 266 does not apply to: (a) a
company not having a share capital; (b) a private company; or (c) a company which was a private company before becoming a public company [Sec. 266(5)].
(4) By transfer :
A person may also become a member of the company by purchasing shares in the open market and then getting them registered in his name.
(5) By transmission or succession :
A person may become a shareholder by transmission of shares through death , lunacy or insolvency of a member. Transmission is different from transfer. It is an involuntary transfer.
It takes place by operation of law, to a person who is entitled under the law to succeed to the estate of the deceased or lunatic automatically and does not require an instrument of
transfer.
(6) By principle of estoppel :
If a person's name is improperly placed on the register of members and he knows and assents to it, that is, agrees in writing to become member or attends company meetings or/and accepts dividend, he shall be deemed to be a member (In Re. M.F.R.D. Cruz). Under the principle of Estoppel if a person holds himself out being in a position of membership which is not true, he will then be stopped from denying that he is a member.
It is important to note that such a person whose name has been wrongly entered in the Register of Members, does not become liable as a member unless either he agrees in
writing to become a member of the company or he has in fact accepted the position and acted as a member. A person cannot be deemed to have become a member by means of
‘estoppel’ simply because his name is entered wrongly in the 'Register'.
It should be observed that in first, fourth and fifth cases mentioned above, a person does not become a member in the strict sense of the term unless his name is entered in the Register of Members. During the time lag he is a shareholder only.
RIGHTS AND LIABILITIES OF MEMBER
RIGHTS:
to have the certificate of shares delivered
to transfer shares subject to any restrictions imposed by the articles
to attend meetings of shareholders, receive proper notices and vote at the meetings.
to inspect the registers, indexes, returns and copies of certificates, etc. kept by the
company and to obtain extracts or copy thereof.
to associate in the declaration of dividends and to apply to the court for an
injunction restraining the directors from paying dividends on an ultra vires
declaration or out of capital.
to obtain copies of memorandum and articles on request and payment of the
prescribed fees.
to have the first option to buy any new shares on a further issue of a shares .
to receive the copy of a statutory report.
to apply to the court to have any variation or obligation on his rights set aside by the
court.
to have notice of any resolution requiring special notice.
to obtain on request minutes of proceedings at general meetings.
to remove directors by joining with others.
to obtain a copy of the profit and loss account and the balance sheet with the
auditor's report.
to apply for appointment of one or more competent inspectors by govt to
investigate into the affairs of the company as well as for reporting thereon.
to participate in the appointment of an auditor or auditors at the annual general
meetings.
to inspect the auditor's report at the annual general meetings of the company.
to receive a share in the capital of the company and the surplus assets, if any, on the
company's liquidation.
to participate in passing of special resolution that the company may be wound up by
the court or voluntarily.
to participate in the appointment and fixation of remuneration of one or more
liquidators in the case of a members' voluntary winding up and to fill any vacancy in
the office of a liquidator so appointed by them.
LIABILITIES:
The liability of the members of a company depends on the nature of a company.
COMPANY WITH UNLIMITED LIABILITY-Every member of an unlimited company is liable in
full for all the debts of the company contracted during the period of his membership.
COMPANY LIMITED BY GUARANTEE-the liability of members of a company limited by
guarantee is limited to the amount they undertook to contribute to the assets of the
company in the event of winding up.
COMPANY LIMITED BY SHARES-The liability of a member of company is the amount, if any,
unpaid on his shares.
ISSUE OF CAPITAL
The word capital and share capital are synonymous in the case of company. share capital
means the capital raised by a company by issue of shares. A joint stock should have capital
in order to finance its activities. It raises its capital by issue of shares. The Memorandum of
Association must state the amount of capital with which the company is desired to be
registered and the number of shares into which it is to be divided. When total capital of a
company is divided into shares, then it is called share capital. It constitutes the basis of the
capital structure of a company. In other words, the capital collected by a joint stock
company for its business operation is known as share capital. Share capital is the total
amount of capital collected from its shareholders for achieving the common goal of the
company as stated in Memorandum of Association.
DIFFERENT TYPES OF SHARE CAPITAL
Share capital of a company can be divided into the following different categories :
1. Authorized, registered, maximum or normal capital
The maximum amount of capital, which a company is authorized to raise from the public by
the issue of shares, is known as authorized capital. It is a capital with which a company is
registered, therefore it is also known as registered capital.
2.Issued Capital
Generally, a company does not issue its authorized capital to the public for subscription, but
issues a part of it. So, issued capital is a part of authorized capital, which is offered to the
public for subscription, including shares offered to the vendor for consideration other than
cash. The part of authorized capital not offered for subscription to the public is known as
'un-issued capital'. Such capital can be offered to the public at a later date.
3.Subscribed Capital
It cannot be said that the entire issued capital will be taken up or subscribed by the public. It
may be subscribed in full or in part. The part of issued capital, which is subscribed by the
public, is known as subscribed capital
4.Called Up Capital
It is that part of subscribed capital, which is called by the company to pay on shares allotted.
It is not necessary for the company to call for the entire amount on shares subscribed for by
shareholders. The amount, which is not called on subscribed shares, is called uncalled
capital.
5. Paid-up Capital
It is that part of called up capital, which actually paid by the shareholders. Therefore it is
known as real capital of the company. Whenever a particular amount is called and a
shareholder fails to pay the amount fully or partially, it is known an unpaid calls or calls in
arrears. Paid-up Capital = Called up capital - calls in arrears
6. Reserve Capital
It is that part of uncalled capital which has been reserved by the company by passing a
special resolution to be called only in the event of its liquidation. This capital cannot be
called up during the existence of the company. It would be available only in the event of
liquidation as an additional security to the creditors of the company.
Further issue of share capital (1) Where at any time, a company having a share capital proposes to increase its
subscribed capital by the issue of further shares, such shares shall be offered—
(a) to persons who, at the date of the offer, are holders of equity shares of
the company in proportion, as nearly as circumstances admit, to the paid-up
share capital on those shares by sending a letter of offer subject to the
following conditions,
(i) the offer shall be made by notice specifying the number of shares
offered and limiting a time not being less than fifteen days and not
exceeding thirty days from the date of the offer within which the
offer, if not accepted, shall be deemed to have been declined.
(ii) unless the articles of the company otherwise provide, the offer
aforesaid shall be deemed to include a right exercisable by the person
concerned to renounce the shares offered to him or any of them in
favour of any other person and the notice referred to in clause (i) shall
contain a statement of this right.
(iii) after the expiry of the time specified in the notice aforesaid, or on
receipt of earlier intimation from the person to whom such notice is
given that he declines to accept the shares offered, the Board of
Directors may dispose of them in such manner which is not
disadvantageous to the shareholders and the company.
(b) to employees under a scheme of employees’ stock option, subject to
special resolution passed by company and subject to such conditions as may
be prescribed
(c) to any persons, if it is authorised by a special resolution, whether or not
those persons include the persons referred to in clause (a) or clause (b),
either for cash or for a consideration other than cash, if the price of such
shares is determined by the valuation report of a registered valuer subject to
such conditions as may be prescribed.
.
(2) The notice referred to in sub-clause (i) of clause (a) of sub-section (1) shall be
despatched through registered post or speed post or through electronic mode to all
the existing shareholders at least three days before the opening of the issue.
(3) Nothing in this section shall apply to the increase of the subscribed capital of a
company caused by the exercise of an option as a term attached to the debentures
issued or loan raised by the company to convert such debentures or loans into
shares in the company. Provided that the terms of issue of such debentures or loan
containing such an option have been approved before the issue of such debentures
or the raising of loan by a special resolution passed by the company in general
meeting.
(4) Notwithstanding anything contained in sub-section (3), where any debentures
have been issued, or loan has been obtained from any Government by a company,
and if that Government considers it necessary in the public interest so to do, it may,
by order, direct that such debentures or loans or any part thereof shall be converted
into shares in the company on such terms and conditions as appear to the
Government to be reasonable in the circumstances of the case even if terms of the
issue of such debentures or the raising of such loans do not include a term for
providing for an option for such conversion: Provided that where the terms and
conditions of such conversion are not acceptable to the company, it may, within sixty
days from the date of communication of such order, appeal to the Tribunal which
shall after hearing the company and the Government pass such order as it deems fit.
(5) In determining the terms and conditions of conversion under sub-section (4),
the Government shall have due regard to the financial position of the company, the
terms of issue of debentures or loans, as the case may be, the rate of interest
payable on such debentures or loans and such other matters as it may consider
necessary.
(6) Where the Government has, by an order made under sub-section (4), directed
that any debenture or loan or any part thereof shall be converted into shares in a
company and where no appeal has been preferred to the Tribunal under sub-section
(4) or where such appeal has been dismissed, the memorandum of such company
shall, where such order has appeal has been dismissed, the memorandum of such
company shall, where such order has the effect of increasing the authorised share
capital of the company.
LOANS
For making investment, giving loan or guarantee or security board resolution with
the consent of all the directors present at the meeting is required.[Section 186]
As per section 185 of the Companies Act, 2013, no company is authorized directly or
indirectly to advance any loan to or give any guarantee or provide any security in
connection with any loan taken by the following persons: -
Any of its director or any partner or relative of such director
Any director of its holding company or any partner or relative of such director
Any firm in which any such director or relative is partner
Any private company of which any such director is a director or member;
Anybody-corporate at a general meeting of which not less than 25% of total voting
power may be exercised or controlled by any such director, or by two or more such
directors, together
Anybody-corporate, the board of directors, managing director or manager, whereof
is accustomed to act in accordance with the directions or instructions of the Board,
or of any director or directors, of the lending company.
section 185 shall not apply in the following cases : -
If a loan is given to MANAGING or WHOLE TIME director as a part of the conditions
of service extended by the company to all its employees or pursuant to a scheme approved by the members by a SPECIAL RESOLUTION.
If the company is in the business of providing loans and in respect of such loan interest is charged at the bank rate declared by RBI.
In case of loan, guarantee or security given by holding company to subsidiary
company or with respect to loan to subsidiary company, provided that such loan is
utilized by subsidiary company for its principal business activities.
General restriction towards company:-
Rate of interest to be charged by the company for giving loan should be
equal to or more than the prevailing yield of one year, three year, five year
or ten year Government Security closest to the tenor of the loan.
No company shall give loan, guarantee, security or invest in case if it is in
default in repayment of deposits or payment of interest thereon. Disclosure requirements
The Company is required to disclose in its Annual Accounts the full particulars of
such loan, guarantee or security and its purpose of utilization.
Penalties
In contravention of section 185 – the company shall be punishable with fine
ranging between Rs.5,00,000/- to Rs.25,00,000/-. Also the concerned
director shall be punishable with imprisonment for six months or fine
ranging between Rs.5,00,000/- to Rs.25,00,000/- or with both.
In contravention of section 186 – the company shall be punishable with fine
ranging between Rs.25,000/- to Rs.5,00,000/-. Also every officer in default
shall also be punishable with imprisonment for two years and fine ranging
between Rs.25,000/- to Rs.1,00,000/-
INVESTMENTS
The Investment Company Act of 1940 defines and classifies investment companies. It
describes their functions, activities, size and structure; provides for exemptions from the act
and election to be regulated as a business development company; regulates transactions of
certain affiliated persons and underwriters; outlines accounting, recordkeeping and auditing
requirements; and describes how securities may be distributed, redeemed and repurchased.
It also explains how investment companies must handle changes in their investment policies
and what will happen in the event of fraud or breach of fiduciary duty. Further, it sets forth
specific guidelines for different types of investment companies, including unit investment
trusts, periodic payment plans and face-amount certificate companies.
Specifically, the Investment Company Act requires funds to do the following :
Register with the SEC. Have a board of directors, 75% of whom must be independent. Limit their investment strategies, such as the use of leverage. Maintain a certain percentage of their assets in cash for investors who might wish to
sell. Disclose their structure, financial condition, investment policies and objectives to
investors.
the national public interest and the interest of investors are adversely affected:-
(1)when investors purchase, pay for, exchange, receive dividends upon, vote, refrain from voting, sell, or surrender securities issued by investment companies without adequate,
accurate, and explicit information, fairly presented, concerning the character of such securities and the circumstances, policies, and financial responsibility of such companies and their management. (2) when investment companies are organized, operated, managed, or their portfolio
securities are selected, in the interest of directors, officers, investment advisers, depositors, or other affiliated persons thereof, in the interest of underwriters, brokers, or dealers, in the interest of special classes of their security holders, or in the interest of other investment
companies or persons engaged in other lines of business, rather than in the interest of all classes of such companies’ security holders.
(3)when investment companies issue securities containing inequitable or discriminatory
provisions, or fail to protect the preferences and privileges of the holders of their
outstanding securities. (4) when the control of investment companies is unduly concentrated through pyramiding
or inequitable methods of control, or is inequitably distributed, or when investment companies are managed by irresponsible persons .
(5) when investment companies, in keeping their accounts, in maintaining reserves, and in computing their earnings and the asset value of their outstanding securities, employ
unsound or misleading methods, or are not subjected to adequate independent scrutiny. (6) when investment companies are reorganized, become inactive, or change the character
of their business, or when the control or management thereof is transferred, without the consent of their security holders.
(7) when investment companies by excessive borrowing and the issuance of excessive amounts of senior securities increase unduly the speculative character of their junior
securities. (8) when investment companies operate without adequate assets or reserves.
Limits for Investment and Guarantee (u/s 186 (2) )
The Limit is fixed in the Section 186 (2), that 60% of Paid up capital + Free Reserve + Security Premium or 100% of Free Reserve + Security Premium (whichever is More). In this
Section, the company cannot give loan, guarantee or provide any security or acquisition as per fixed limit. This sub section restricts within limit.
Approvals for Investment and Guarantee (u/s 186 (3))
The Sub section (2) of Section 186 makes restriction, but Section 186(3), gives power to the company, that it may give loan, guarantee or provide any security or acquisition beyond the limit but before taking prior approval from Shareholder in the General Meeting.
It means once we need to take approval from Shareholder in the General Meeting,
thereafter we may make investment beyond the limit.
DEPOSITS
What is a Deposit?
As per explanation to Section 58A “deposit means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as
may be prescribed in consultation with the Reserve Bank of India.
Such exempted categories prescribed by the Central government in consultation with RBI (through Companies (Acceptance of Deposit Rules), 1975) are as follows:-
Amounts Received from the Government Amounts Received from Foreign Sources
Loans from Banking company
Loans from Certain Financial Institutions
Deposits by Wholly Owned Government Financial Companies
Notified Financial Companies/ Public Financial Institutions
Inter- company deposits Amount Received from Employee by way of Security Deposit
Amount Received from Agents Advances against Orders (for supply of goods etc.)
Subscriptions to Securities Calls in Advance of Shares
Trust Moneys
Money in Transit
Amount Received from Directors or his relative
Amount Received from Members (only in case of Private co.)
Secured Bonds or Debentures
Convertible Bonds or Debentures Promoters Unsecured Loans pursuant to stipulations laid down by the financial institutions for granting the loan.
Deposits v/s Loans
The explanation to Section 58A of the Companies Act supplies a wide connotation to the
term “deposit”. It states that the term “deposit” means any deposit of money with, and includes any amount borrowed by a company. Prima facie, the explanation suggests that
loans are also deposits within the meaning of the Act. This conclusion seems to be reinforced by the definition of “depositor” under Section 2 (c) of the Acceptance of Deposits
Rules. Depositor is defined to include any person who has given a loan to the company.
The difference between the two terms can be judged considering the following criteria:
(i) The person making the deposit has no right to call back the deposit;
(ii) The deposit does not become a debt until the period for which the money is deposited expires and
(iii)As a consequence the creditor has no right to recover the money before the deposit
period concludes.
After considering the above facts we can distinguish loan from the deposit as:
The person lending the loan can demand the same at any time.
The amount of loan is treated as a liability from the time it is accepted.
Lender can recover the money of loan without expiry of any specified period as in case of deposit.
MEETINGS
Meeting may be defined as, the gathering of people for transacting lawful business. The meeting should be conducted according to the Company’s Act. 1956.
Kinds of Meeting
Members Meeting
Other Meetings
MEMBERS MEETING
STATUTORY MEETING
It is the first meeting of the members after the Company’s incorporation. It must be held within a period of not less than one month not more than 6 months from the date of
commencement of business. This meeting is held once in the life of the company the objective of this meeting is to display the important facts to the members .
The following companies are required to hold the statutory meeting:
Public company limited by shares, Private company limited by shares.
Public company limited by guarantee but having share capital. Private company, limited by guarantee need not conduct this meeting.
Legal provision relating to statutory meeting
Statutory meeting must be held within a period of not less than one month and not more than 6 months.
The Board of Directors required to prepare a Report called the Statutory report.
The report should be sent to every member before 21 days from the date of meeting.
The report should contain the following:-
a) Total number of shares allotted, distinguishing shares allotted as fully or partly paid up, otherwise than in cash.
b) Cash received for allotment
c) A summary of income & expenditure and balance sheet of the company.
d) Preliminary expenses of the company
e) The particulars of directors and Managing director, Secretary, and Auditors of the company.
f) The arrears of call due from directors and managers.
g) The Particulars of contract modification needs company’s approval.
The Statutory report should be signed by at least two directors among them one must be the managing director.
It should be sent to the registrar of the company within 30 days from the date of meeting.
The meeting may be adjourned from time to time by passing a resolution.
ANNUAL GENERAL MEETING
It is the regular meeting of the members of the company and must be held every year in addition to any other meeting. The purpose of the meeting is to provide an opportunity to
the members of the company to express their views on the management of the companies’ affairs.
The meeting enables the shareholders to exercise control over the company.
They may ask any question relating to the acts and affairs of the company.
Legal provision relating to Annual General Meeting
It must be held once in every year. The time gap between two meeting should not be more than 15 months.
However, the registrar may extend the period up to three months (15+3=18months).
At least 21days notice of the meeting in writing must be given to every members The meeting must be held on any day during the business hours at the registered
office and not on public holidays.
Perhaps, the company does not conduct the meeting, the shareholders may appeal
with Central Government on such application the Central Government may call for the meeting with one man quorum.
Minimum number of members who must be present at a meeting .It is five in case of Public Limited Company and two in case of Private Limited Company.
In case the company fails to conduct the meeting then every officer in default shall be punishable with fine which may extend to Rs. 50000 and if the default continue
with a further fine up to Rs.2500 per day(Sec 167).
The meeting is conducted for the following:
a) Submission of books of accounts at the meeting for the consideration of shareholders.
b) Declaration of Dividend.
c) Appointment /Re-appointment of Directors.
d) Appointment of Auditor
The meeting must be held in the registered office of the company or some place within the same city, town or village.
EXTRA ORDINARY MEETING
The meeting is called for, dealing with some urgent decision and it cannot be postponed till the next Annual General Meeting.
Legal Provision relating to Extra Ordinary Meeting
The Extra ordinary general meeting may be called by the Board of Directors whenever they think fit to call the meeting.
The requisition for calling this meeting must be signed by members who have 1/10
share of the paid up capital or 1/10 voting rights if the company has no shares. The notice of the meeting must be sent to the member before 21days from the
receipt of the requisition, giving 21 days notice. If the board does not proceed to conduct the meeting requisitionist may themselves
proceed to call the meeting within 3 months from the date of deposit of requisition. If a meeting is called upon a requisition of members, the quorum is not present
within half an hour then the meeting shall stand dissolved.
Some times Company Law Board may conduct extra ordinary general meeting in such cases the following procedure should be adopted.
a. The meeting should be conducted according to the direction of the Company Law Board.
b. Sometimes the registered office of the company lacked, conduct anywhere located in registered office.
c. When the company has disputes between shareholders in such a case the Company Law
Board may interfere to conduct the meeting.
CLASS MEETING
It is the meeting of a particular class of shareholders. Generally the company has two classes of shareholder namely Equity and Preference shareholders. In order to discuss the matters
affecting one class, only the shareholders of particular class will attend the meeting.
OTHER MEETING
Meeting of Board of Directors
The Board of Directors of a company must hold meeting of Board of Directors at least once
in 3 months. There must be at least 4 meetings in a year.
Meeting of Debenture holders
The meeting of the debenture holders is conducted from time to time according to the debenture deed.
Meeting of Creditors
This meeting is conducted by the order of court. Sometimes a compromise or arrangement is proposed between the company and the creditors. In such a case all the class of creditors
will attend the meeting. The court orders such a meeting on the application of the company or creditors or member of the company
ACCOUNTS AND AUDITORS
Books of Account to be kept by a Company
Every company must maintain proper books of accounts of its affairs. The following transactions must be entered in the books of accounts of the company which must be kept at its registered office :-
a. all sums of money received and expended by the company and the matters in respect of which the respect of which the receipt and expenditure took place;
b. all sales and purchases of goods by the company; and c. the assets and liabilities of the company.
d. in the case of a company engaged in production, processing, manufacturing or mining activities, such particulars relating to utilisation of material or other items of
cost as may be prescribed relating to certain class of companies as the Central Government may require.
The books of accounts must comply with the following conditions :-
1. The books must give a true and fair view of the state of affairs of the company or the branch office, if any, and explain its transaction.
2. The books must be kept on accrual basis and according to double entry system of accounting.
Every company must keep its books of account at its registered office. However, some of the books of account may be kept at such other place in India as the Board of Directors may decide, provided a notice in writing giving full address of that other place along with requisite filing fee is filed with the Registrar of Companies within seven of such decision.
If the company has a branch office, the books of account relating to transactions at the
branch office may be kept at that branch office, but proper summarised reports and statements must be sent to the registered office or such other place where the books are
kept, at intervals of not more than three months. The books of account of the branch must give a true and fair view of the affairs of the branch and clearly explain its transactions.
They must not conceal any transaction and also not disclose any transaction which is fictitious. The books of accounts and other documents and records are open to inspection by any director during business hours. Similarly, they are open to inspection by the Registrar
of Companies or an officer authorised by the Central Government.
These books and papers together with the vouchers pertaining to entries made must be maintained for at least 8 years. It has been clarified by the Department of Company Affairs
in their Circular No. 2/83 dated 2/3/1983 that the books of account should be prepared and maintained in indelible ink (and not in pencil).
The following persons are responsible for maintaining the books of accounts of a company : -
1. The managing director or manager;
2. If the company has neither a managing director nor manager, then every director of the company;
3. Every officer and other employee who has been authorised and to whom responsibility to maintain the books has been allotted by the Board of Directors.
If any of the persons referred to above fails to take all reasonable steps to maintain proper
books of accounts or has by his own wilful act been the cause of any default by the company in this respect, he is punishable with imprisonment up to six months or with fine which may
extend to Rs. 1,000 or with both. However, no person can be sentenced to imprisonment unless it is proved that the contravention was committed by him wilfully.
Preparation of Balance Sheet and Profit and Loss Account
The company has to prepare its balance sheet and profit & loss account from the books of account maintained by it. Every Balance Sheet of a company must give a true and fair view of the state of affairs of the company as at the end of the financial year and must be in the prescribed format.
If the responsible for maintaining proper books of account fails to take all reasonable steps
to secure compliance by the company with the requirement of law relating to the form and contents of the balance sheet, he is liable for each offence to imprisonment for a term
extending up to six months or to fine up to Rs.1,000/- or to both.
Form of Balance Sheet
Part 1 to Schedule VI of the Companies Act, 1956 gives the format in which the balance sheet is to be prepared. The schedule specifies 2 types of formats, the horizontal format and the vertical format. A company can prepare its balance sheet in either of the 2 formats. In the horizontal format, the liabilities including the share capital are placed on the left side and assets of all types on the right. The main heads in this form are arranged as under:
(a) Share Capital (a) Fixed assets
(b) Reserves and surplus (b) Investments
(c) Loans (c) Current assets, loans and advances
(d) Current liabilities and (d) Miscellaneous expenditure to the provisions extent not written
off or adjusted
(e) Profit & Loss Account
Total
In the vertical format, the various heads of liabilities and assets are arranged vertically and current liabilities are shown as deduction, from current assets. Whatever information which
is required to be given in the horizontal format must also be given in the vertical format. Summarised prescribed vertical form of balance sheet is given below:
I . Sources of Funds
(1) Shareholders' funds
(2) Loan funds
Total
II Application of Funds
(1) Fixed assets
(2) Investments
(3) Current assets, loans and advances
Less: Current liabilities & provisions
(4) (a) Miscellaneous expenditure to the extent not written off or adjusted
(b) Profit & Loss Account
Total
The Central Government may, on the application or with the consent of the Board of Directors of the company, by order, modify in relation to that company, any of the requirements as to matters to be stated in the company's balance sheet or profit and loss account for adapting them to the circumstances of the company.
Contents of Profit and Loss Account
Though no format has been prescribed for the profit and loss account, Part II to Schedule VI of the Companies Act, 1956 gives a list of items which must be disclosed in every profit & loss account. Every profit and loss account of a company must give a true and fair view of the company's profit or loss for the financial year for which it is drawn up.
Adoption of Balance Sheet and Profit & Loss Account
The Board of directors must present to the shareholders of the company, the balance sheet
and a profit and loss account for the financial year at every annual general meeting. In the case of companies which are not commercial organisations such as Section 25 companies,
instead if the profit & loss account, an income & expenditure account may be prepared. The profit and loss account to be placed in the FIRST annual general meeting should relate to a
period beginning with the incorporation of the company and ending with a day, the interval between which and the date of the meeting does not exceed nine months. In case of
subsequent annual general meetings, the profit and loss account should relate to a period beginning with a day immediately after the period for which the preceding profit & loss
account was made and ending with a day, the interval between which and the date of the
meeting should not exceed six months. The financial year may be more or less than a calendar year, but it must not exceed 15 months or with the special permission of the
Registrar, 18 months.
If any director fails to take all reasonable steps to comply with the aforesaid requirements he is, in respect of each offence liable to be punished with imprisonment up to six months
or with fine up to Rs.1,000/- or with both.
Authentication of Balance Sheet and Profit & Loss Account
The balance sheet and profit & loss account of a company must be signed on behalf of the Board of directors by two directors out of whom one must be the managing director, where
there is one and the manager, or secretary, if any. The balance sheet and profit and loss account must be approved by the Board of directors before they are submitted to the auditors for the purpose of audit. The report of the auditors must be attached to the balance sheet and profit & loss account.
The company and every officer of the company who is in default with the above provisions shall be punishable with the fine which may extend to Rs.500/-, if:
a. any copy of balance sheet and profit and loss account is issued, circulated or
published, without being signed as required ; or b. any copy of balance sheet is issued, circulated or published, without there being
annexed or attached thereto, a copy each of the following :-
1. the profit and loss account; 2. any accounts, reports or statements pertaining to subsidiary companies
which are required to be attached to the balance sheet,
3. the auditors' report; and 4. the Report of the Board of Directors
Circulation of Balance Sheet and Auditors' Report
A copy of every balance sheet, profit and loss account, auditors' report and every other document required to be annexed or attached to the balance sheet must be sent not less than twenty-one days before the general meeting to every member, to every trustee for debenture holders, and to all other persons who are entitled to have a notice of general meetings. In the case of a company not having a share capital, the above documents need not be sent to a member, or debenture holder who is not entitled to have notice of general meetings.
In case of listed companies, the company may keep the aforesaid documents available for
inspection at its registered office during working hours for a period of twenty-one days before the meeting and send to every member and trustee for debenture holders only a summarised statement containing the salient features of these documents in the prescribed format.
STATUTORY BOOKS AND REGISTERS
In addition to the books of account or financial books to be maintained by every company under section 209, every company must maintain the following statutory books:
1. Register of investments 2. Copy of every instrument creating any charge requiring registration 3. Register of charges 4. Register of members 5. Register of debenture-holders 6. Copies of annual returns prepared under section 159 and 160 together with copies of certificates and documents required to be annexed thereto under sections 160 and 161 7. Minutes of Board of Directors and committees of the board and of proceedings of general meetings 8. Register of contracts, companies and firms in which the directors of the company are interested
9. Register of Directors, Managing Director, Managers and Secretary 10. Register of Directors’ shareholdings 11. Register of Investments of Loan made or guarantee given to any other body corporate.
STATISTICAL BOOKS
1.share application and allotment register
2.share call register 3.register of share warrants 4.register of share certificates 5.register of transfer 6.register of certified transfer
7.agenda book 8.register of sealed documents 9.register of lost certificates 10.register of director's attendance
11.register of power of attorney 12.dividend register 13.debenture holders' interest register
14.register of probates
Fi ling of Annual Accounts with the Registrar
Every company must file with the Registrar within 30 days from the day on which the annual
accounts, auditor’s report and the director’s report were presented at the annual general meeting, three certified copies of these documents signed by the managing director,
manager or secretary of the company or if there be none of these by a director of the company.
These accounts may be inspected and copies thereof may be obtained by any member of the public at the Registrar of Companies on payment of the requisite fee. However, no person other than a member of the company is entitled to inspect, or obtain copies, of the profit and loss account in the case of the following types of companies :-
1. a private company which is not a subsidiary of public company;
2. a private company whose entire paid-up capital is held only by one or more bodies corporate incorporated outside India; or
3. a private company which is deemed to be a public company by virtue of Section 43A, if the Central Government directs that it is not in the public interest that any person
other than a member of the company should be entitled to inspect or obtain copies of the profit and loss account of the company.
In case the annual general meeting of a company for any year has not been held, , 3 copies of the balance sheet and profit and loss account, duly signed, within thiry days from the latest day on or before which that meeting should have been held in accordance with the provisions of the Act must be filed with the Registrar of Companies. If for any reason, the annual general meeting before which a balance sheet is laid does not adopt it, or is adjourned without adopting the balance sheet or if the annual general meeting of a
company for any year has not been held, a statement of the fact and reasons thereof must also be annexed to the balance sheet and to the copies thereof to be filed with the Registrar.
If default is made in complying with the above provisions, then the company and every
officer of the company who is in default shall be punishable with fine which may extend to Rs.50 for every day during the period the default continues.
Directors' Report
The report of the Board of Directors must be attached to every balance sheet prsented at the annual general meeting. The report must contain information regarding the following
matters :-
1. The state of affairs of the company 2. The amount, if any, which it proposes to carry to any reserves in such balance sheet
3. The amount of dividend recommended 4. Details of any material changes and commitments, if any, affecting the financial
position of the company which have occurred between the end of the financial year
of the company to which the balance sheet relates and the date of the report 5. Conservation of energy, technology absorption, foreign exchange earnings and
outgo. 6. Names, designations and other particulars of all employees drawing more than Rs.
50000/- p.m. in the company 7. Details necessary for a proper understanding of the state of the company's affairs
and which are not, in the Board's opinion, harmful to the business of the company or of any of its subsidiaries, in respect of changes which have occurred during the
financial year :-
i. in the nature of company's business; ii. in the company's subsidiaries or in the nature of the business carried on by
them; and iii. generally in the classes of business in which the company has an interest
Auditors of Company
QUALIFICATIONS OF AN AUDITOR
According to Provisions of Section 141(1) of the Companies Act, 2013 “a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant within the meaning of Chartered Accountants Act, 1949 and holds a val id Certificate of Practice. It has been further provided that the firm shall also considered to appointed by its firm name whereof majority of partners practising in India are qualified for appointment as auditor of a company.
According to Provisions of Section 141(2) of the Companies Act, 2013, a firm including
limited liability partnership who are chartered accountants shall be authorised to act as auditor and sign on behalf of the such limited liability partnership or firm.
A person shall appointed as an auditor if he is chartered accountant within the meaning of Chartered Accountants Act, 1949 and holding valid certificate of practice and acting in
capacity as:-
a) Individual b) Partnership Firm
c) Limited Liability partnership
It has been further provided that only partners who are Chartered Accountants will be authorised to sign on behalf of the firm.
Auditor's Disqualifications
Apart from the qualifications prescribed under the Companies Bill 2012, disqualifications have been provided for appointment as an Auditor of the company. The following cannot be appointed as auditors:
1. A body corporate 2.An officer or employee of the company
3.A partner 4.a person who is indebted to the company for any amount exceeding Rs. 1000/- or has
given a guarantee of third person concerned with the company above Rs. 1000/-
5.a person is holding any security which carries voting rights.
6.for any above reason, for all such firms which are subsidiaries.
Appointment of Auditors:
1. Appointment of First Auditors: u/s 224(5) first auditors shall be appointed by the BOD within 1 month from the date of registration of the company. These auditors will work until
the conclusion of the First AGM.
2. Appointment by the Shareholders: u/s 224(1) every year in the AGM auditors are to be appointed by passing an ordinary resolution. Such auditors must accept within 30 days else
another AGM must be called to appoint a auditor. 3. Reappointment of Auditor:
4. Appointment by Central Government: u/s 224(3) where no auditor is appointed, reappointed the central govt. will appoint a person to fill the vacancy.
5. Appointment in case of Casual vacancy: Casual vacancy arises due to death, insanity, disqualification or insolvency of the auditor. u/s 224(6) BOD has the power to fill the
vacancy. 6. Appointment by Special resolution: u/s 224A where 25% or more share are with a) PFI or
Govt. Coy or Central Govt. or State Govt. b) Nationalized Bank or Insurance Coy, the appointment of the Auditors will be by way of special resolution only.
7. Appointment of auditors of Government Company: u/s 619 auditors are appointed by the CAG.
Ceiling on Number of Audits:
u/s 224(1B) not more than 20 companies at a time out of this not more than 10 having Rs.
25 lakhs as capital. Private, foreign companies are not taken for the counting.
Remuneration of Auditor:
u/s 224(8) if auditor is appointed by the BOD or CG they will fix his remuneration however
for other services proved by the auditor he may be given extra remuneration.
Removal of Auditor:
Removal before the expiry of the Tenure
First Auditor: By the BOD by passing an ordinary resolution. Subsequent Auditor: Before passing the ordinary resolution permission from the Central
Government is required.
Rights & Duties of Auditor
Rights of the Company Auditor:
1. Right of access to books and account. 2. Right to obtain information or exploration 3. Right to inspect Branch Accounts 4. Right to receive notices 5. Right to attend general meeting 6. Right to remuneration 7. Auditors Lien
Duties of Company Auditor:
1. Statutory Duties:
Report to Members
Duty as to inquiry Report as to additional matters
Duty to sign report
Duty as to statutory report Duty as to prospectus Duty as to report under voluntary wining up Duty to assist investigation
2.Duties under common Law:
Duty to perform contract Duty of Care & Caution
Liabilities of an Auditor:
1.Liabilities in case of Non-Statutory Audit: Where the audit is with a sole proprietorship or
partnership then the level of liability will depend on the contract between the parties .
2.Liabilities in case of Company Audit:
Civil Liability
1. Liability for Negligence
2. Liability for Misfeasance 3. Liability under the Income Tax Act
Criminal Liability
a. Misstatement in Prospectus
b. Non- Compliance by Auditor with Sec 227 and 229
c. Failure to assist investigation
d. Failure to assist prosecution of guilty officers
e. Failure to return property, books or papers
f. Public examination by court
g. Penalty for falsification of books
Auditors of Government Companies.
The auditor of a Government company is appointed or re-appointed by the Central Government on the advice of the Comptroller and Auditor-General of India provided that the audit would be within the number of acceptable audits available to each auditor.
The Comptroller & Auditor General of India has the power :-
a. to direct the manner in which the company's accounts are to be audited by the
auditor so appointed and to give such auditor instructions in regard to any matter relating to the performance of his functions as such
b. to conduct supplementary or test audit of the company's accounts by such person or persons or persons as he may authorise in this behalf; and for the purpose of such audit, to require additional information to be furnished to any person or persons so
authorised, on such matters, by such person or persons, and in such form, as the Comptroller and Auditor-General may, by general or special order, direct.
The auditor must submit a copy of his audit report to the Comptroller and Auditor-General
of India who shall have the right to comment upon or supplement, the audit report in such manner as he may think fit.
Any such comments upon, or supplement to, the audit report must be placed before the annual general meeting of the company at the same time and in the same manner as the
auditors' report.
Auditors of Other Companies
It is the duty of the auditor conduct the audit of the books of accounts of the company and
to make his report to the members of the company on the accounts examined by him, and on every balance sheet, every profit and loss account and on every other document declared by the Act to be part of or annexed to the balance-sheet or profit and loss account
and laid before the company in general meeting during his tenure of office. The auditor’s report, besides other things necessary in any particular case, must expressly state-
1. whether, in his opinion and to the best of his information and according to
explanation given to him, the accounts give the information required by the Act and in the manner as required;
2. whether the balance-sheet gives a true and fair view of the company's affairs as at the end of the financial year and the profit and loss account gives a true and fair
view of the profit or loss for the financial year; 3. whether he has obtained all the information and explanations required by him for
the purposes of his audit; 4. whether in his opinion, the profit & loss account and balance sheet referred to in his
report comply with the accounting standards recommended by the Institute of Chartered Accountants of India;
5. whether, in his opinion, proper books of account as required by law have been kept by the company, and proper returns for the purposes of his audit have been received from the branches not visited by him;
6. whether the company's balance sheet and profit and loss account dealt with by the report are in agreement with the books of account and returns.
In case any of the above matters is answered in the negative or with a qualification, the auditor's report must state the reason for the same. Where the auditor is unable to express
any opinion in answer to a particular question, his report shall indicate such fact together with the reasons why it is not possible for him to give an answer to such question.
The Central Government is empowered to issue orders requiring the auditor to include in his
report a statement on such matters as may be specified. In exercise of this power the Central Government has issued an order called "The Manufacturing and other Companies
(Auditor's Report) Order, 1975. It is the duty of the auditor to comply with this order when making his report to the shareholders.
Only the person appointed as auditor of the company or where a firm of auditors is so appointed, only a partner of that the firm practising in India, can sign the auditor's report or
sign or authenticate any other document of the company required by law to be signed or authenticated by the auditor.
AMALGAMATION
When two or more companies carrying on similar business go into liquidation and a new company is formed to take over their business, it is called amalgamation. In other words,
amalgamation refers to the formation of a new company by taking over the business of two
or more existing companies doing similar type of business. In amalgamation, two or more companies are liquidated and a new company is formed to take over the business of
liquidating companies. The companies which go into liquidation are called vendor or
amalgamating companies where as the new company which is formed to take over the business of liquidating companies is called purchasing or amalgamated or transferee company. The main aim of amalgamation is to minimize the possibility of cut-throat
competition and to secure the advantages of large scale production. Features Of Amalgamation
*Two or more existing companies are liquidated. * A new company is formed to take over the business of liquidating companies. * The nature of business of existing companies is similar. * Liquidating companies are called vendor companies and the new company is called purchasing company. * Generally, purchase consideration is discharged by the issue of equity shares of purchasing company.
Example of Amalgamation:
Consider the example of amalgamation shown in the following diagram.
In the above example, Company 'A' and Company 'B' are operating (existing) in the market.
Company 'A' is one amalgamating company while Company 'B' is another amalgamating company. Company 'A' and Company 'B' are getting amalgamated to form a new (separate) Company named 'AB'.
TYPES OF AMALGAMATIONS:
1.Amalgamation in nature of merger-under this type of amalgamation where is a genuine pooling is not merely of the assets and liabilities of the amalgamating companies
but also of the shareholders' interest and of the businesses of these companies.
2.Amalgamation in nature of purchase-a mode by which one company acquires another company and, as a consequence, the shareholders , of the company which is acquired
normally do not continue to have a proportionate share in the equity of the combined company, or the business of the company which is acquired is not intended to be continued.
METHODS OF ACCOUNTING FOR AMALGAMATIONS:
1.The pooling of interests method: under this method, the assets, liabilities and reserves
of the transferor company are recorded by the transferee company at their existing carrying amounts.
2.The purchase method: under this method the transferee company accounts for the
amalgamation either by incorporating the assets and liabilities at their existing carrying amounts or by allocating the consideration to individual identifiable assets and l iabilities of the transferor company on the basis of their fair values at the date of amalgamation.
Power of Central Government to provide for amalgamation of companies in national interest
Where the Central Government is satisfied that it is essential in the national interest that two or more companies should amalgamate, then the Central Government may, by order notified in the Official Gazette, provide for the amalgamation of those companies into a single company with such constitution; with such property, powers, rights, interest,
authorities, and privileges; and with such liabilities duties, and obligations ; as may be specified in the order.
The order aforesaid may contain such consequential, incidental and supplemental
provisions as may, in the opinion of the Central Government, be necessary to give effect to the amalgamation.
RECONSTRUCTION
Reconstruction occurs when a company transfers the whole of its undertaking and property
to a new company consisting substantially of the same shareholders. The object of
reconstruction is to re-organize capital and variations of the right of investors.
Amalgamation is the blending of two or more existing company so as to form a third entity
or one company is absorbed into and blended with another company. It implies creation of
a new company by a complete consolidation of combining units. Under amalgamation,
none of the existing company retains its entity.
A reconstruction may take the following forms:-
(i) By scheme of arrangement.
(ii) By sale of undertaking.
(iii) By sale of shares.
(iv) By amalgamation.
Sale of undertaking: - This involves a sale of the undertaking as a going concern. In case of
sale, some vital provisions must be addressed to facilitate reconstruction and amalgamation
as follows:-
(i) The transfer of property and liabilities of a transferor company.
(ii) The allotment/appropriation by the transferee company of any shares, debentures, and
so on in that company which under the compromise/arrangement are to be allotted.
(iii) The continuation by the transferee company of any legal proceedings pending against
the transferor.
(iv) The provision to be made for any person who within such time and in such manner as the
court directs, dissent from the compromise/arrangement.
Sale of shares: - If the offer to acquire shares is made, then the shareholders have the
option to approve the offer within 4 months. Approval should be made by 9/10 in value of
the shares or 90% of the value of shares. These shares exclude shares already held by the
transferee company or its subsidiaries.
Once 90% of majority approves for the transfer, the transferee company gets the right to
acquire the shares of the dissenting shareholders within 2 months after the expiry of the
above 4 months, the transferee company should give a notice to shareholders that it desires
to acquire the shares within one month from the date of the notices. The dissenting
shareholders may apply to the court but if no application is made to the court, the
transferee company gets the final right and also becomes bound to acquire those shares.
WHY RECONSTRUCTION?
A reconstruction may be necessary for the following purpose:
1. To extend the operations of the company
2. As a method of altering the MEMORANDOM OF ASSOCIATION
3. For purpose of reorganisation
4. In order to amalgamate with one or more companies
5. Reconstruction of arrangement undertaken for bringing the capital structure of
companies into line with the requirements of the act.
ARRANGEMENTS AND COMPROMISES
compromise: compromise means a settlement of dispute or controversy by the method
of making mutual concessions. compromise implies the parties agree not to try it out but to
settle in between themselves by a give and take arrangement. as in the case of individuals,
companies also enter into compromises with their creditors or members and the settlement
arrived at is called 'compromise'.
ARRANGEMENT: section 390 provides that "the expression 'arrangement' includes a
reorganisation of the shares capital of the company by the consolidation of shares of
different classes, or by the division of shares into shares of different classes or by both these
methods."
The scheme of arrangement may include the following:
1. reorganisation the share capital of the company including preference shares, the special
rights attached to which may also be varied.
2. reduction of share capital not involving cancellation of liabilities or paying off a part of
capital.
3. fresh issue of shares.
4. issue of shares to creditors in lieu of debts.
5. sales, lease or other variation of property rights and
6. conversion of one class of shares into loan capital.
Power to compromise or make arrangements with creditors and members
Where a compromise or arrangements is proposed-
a. between a company and its creditors or any class or them; or
b. between a company and its members or any class or them;
the Court may, on the application of the company or of any creditor or member of the company, or, in the case of a company which is being wound up, of the liquidator, order a
meeting of the creditors or class of creditors, or of the members of class or members, as the case may be to be called, held and conducted in such manner in the court directs.
The Court shall not approve of such a scheme unless it is satisfied that the Company or the applicant has disclosed to the Court all material facts relating to the company such as the
latest financial position of the company, the latest auditor's report, details of any investigation pending against the company, etc.
Power of High Court to enforce compromises and arrangements
Where a High Court makes an order as above sanctioning a compromise or an arrangements in respect of a company, it-
a. shall have power to supervise the carrying out of the compromise or arrangement; and
b. may, at the time of making such order or at any time thereafter, give such directions in regard to any matter or make such modifications in the compromise or
arrangement as it may consider necessary for the proper working of the compromise or arrangement.
If the Court aforesaid is satisfied that a compromise or arrangement sanctioned under the above provisions cannot be worked satisfactorily with or without modifications, it may, either on its own motion or on the application of any person interested in the affairs of the company, make an order winding up the company.
Information as to compromises or arrangements with creditors and members
Where a meeting of creditors, or any class of creditors, or of members or any class of
members, is called: -
a. with every notice calling the meeting which is sent to a creditor or member, there shall be sent also a statement setting for the terms of the compromise or
arrangement and explaining its effect; and in particulars, stating any material interests of the directors, managing director or manager of the company, whether in
their capacity as such or as members or creditors of the company or otherwise, and the effect on those interest, of the compromise or arrangement, if, and in so far as, it is different from the effect on the like interests of other persons; and
b. in every notice calling the meeting which is given by advertisement there shall be included either such a statement as aforesaid or a notification of the place at which and the manner in which creditors or members entitled to attend the meeting may obtain copies of such a statement as aforesaid.
Where the compromise or arrangement affects the rights of debenture holders of the company, the said statement shall give the like information and explanation as respects the trustees of any deed for securing the issue of the debentures as it is required to give as respects the company's directors.
Where a notice given by advertisement includes a notification that copies of a statement
setting forth the terms of the compromise or arrangement proposed and explaining its effect can be obtained by creditors or members entitled to attend the meeting, every
creditor or member so entitled shall, on making an application in the manner indicated by the notice, by furnished by the company, free of charge, with a copy of the statement.
APPOINTMENT AND REMOVAL OF DIRECTOR
A director is a person who leads or supervises a certain area of a company, program, or project. Companies that use this title often have many directors spread throughout different business functions or roles . The director usually reports directly to a vice president or to
the CEO directly. Large organizations also sometimes have assistant directors or deputy
directors. Director commonly refers to the lowest level of executive in an organization, but
many large companies use the title of associate director more frequently.
Section 252 provides that every public company must have at least 3 directors and every private company must have at least 2 directors. Subject to the minimum number of
directors a company should have, the articles of a company may prescribe the maximum and the minimum number of directors for its board of directors. A company in a general
meeting may by ordinary resolution increase or reduce the number of its directors within the limits fixed in that behalf by its article. A public company or a private company which is a subsidiary of a public company cannot increase the number of directors beyond the permissible maximum under its articles without the approval of the central government. However, no approval of the central government is required if such permissible maximum is twelve or less than twelve, and the increase in the number of its directors does not exceed twelve.
Appointment of Directors :
Director may be appointed in the following ways:
1. By the articles as regards first directors.
2. By the company in general meeting.
3. By the directors,
4. By third parties
5. By the principle of proportional representation
6. By the central government
1. First directors :
The first directors are usually named in the articles. The articles may also provide that both the number and the names of the first directors shall be determined in writing by the subscribers to the memorandum or a majority of them. Where the articles are silent regarding the appointment of directors, the subscribers of the memorandum who are individuals shall be deemed to be the first directors of the company. They shall hold office until the directors are appointed at the first annual general meeting .
2. Appointment by company :
Appointment of subsequent directors is made at every annual general meeting of the
company. Section 255 provides that not less than two-thirds of the total number of directors of a public company must be appointed by the company in general meeting. These
directors must be subject to retirement by rotation. The remaining directors of such a
company and the directors generally of a purely private company must also be appointed by the company in general meeting. In other words, not more than one-third of the total number of directors can act as non-retiring directors i.e not subject to retirement by
rotation.
At the annual general meeting at which a director retires, the company may fill up the
vacancy by appointing the retiring director or some other person thereto. If the place of the retiring director is not so filled, and the meeting has not expressly resolved not to fill the
vacancy, the meeting shall stand adjourned. If at the adjourned meeting also the vacancy is not filled, and the meeting has not expressly resolved not to fill the vacancy, the retiring
director shall be deemed to have been re-appointed at the adjourned meeting unless:
1. At the meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost;
2. He has by a notice in writing, addressed to the company or its board, expressed his
unwillingness to be re-appointed;
3. He is not qualified or disqualified for appointment;
4. A special or ordinary resolution is necessary for his appointment or re-appointment.
A person other than a retiring director is also eligible for appointment to the office of director subject to his necessary qualification. A notice in writing signifying his candidature
must be left at the office of the company at least fourteen days before the date of the meeting. The notice may be given either by the candidate himself or by his proposer. The
company shall inform the members at least seven days before the meeting about the candidature. It is not necessary for the company to serve individual notices upon the
members if the company advertises such candidature not less than seven days before the meeting, in at least two newspapers. One of the newspapers must be in English language
and the other in the regional language of the place where the registered office of the company is located.
These provisions do not apply to a private company, unless it is a subsidiary of a public company.
A person who is being proposed as a candidate for the office of a director must sign and file with the company his consent in writing to act as a director if appointed. This requirement
does not apply to a director retiring by rotating.
Appointment of directors of a public company must be voted individually by separate
ordinary resolutions.
3. Appointment by Directors :
The directors are empowered to appoint
i) Additional directors.
ii) Alternate directors.
iii) Directors filling casual vacancy.
Additional Directors:
The board of directors may appoint additional directors from time to time. The number of directors and additional directors must not exceed the maximum strength fixed for the board by the articles. The additional directors shall hold office only up to the date of the next annual general meeting.
Alternate directors:
The board of directors may appoint an alternate director if authorized by the articles or by a resolution of the company in general meeting. An alternate director acts in the place of a director who is absent for more than three months from the state in which board meetings are held. He cannot hold office for a period longer than that permissible to the original director in whose place he has been appointed. He must vacate office on the return of the original director.
Casual vacancy:
Where the office of any director appointed by the company in general meeting is vacated
before the expiry of his term, the directors may fill up the vacancy at a meeting of the
board. The director so appoint will hold office till the end of the term of the director in whose place he is appointed. These provisions are applicable only to a public company and a
private company which is a subsidiary of the public company.
4. Appointment by third parties :
The articles may gives right to debenture-holders, financial corporations or banking companies who have advanced loans to the company to nominate director on the board of the company. The number of directors so nominated should not exceed one-third of the total strength of the board. They are not liable to retire by rotation.
5. Appointment by proportional representation :
The articles of a company may provide that the appointment of not less than2/3 of the total number of director of a public company shall be according to the principle of proportional representation, either by the single transferable vote or by a system of cumulative voting or
otherwise. Such appointments shall be made once in three years and interim casual vacancies may be filled up according to section 262.
6. Appointment by the central government :
According to section 408 of the companies act, the central government has the power to appoint directors for the purpose of prevention of oppression and mismanagement. It
provides that the central government may appoint such number of directors on the board of the company as it may think fit to effectively safeguard the interest of the company, its
shareholders, or public interest. Such an appointment shall be for a period not exceeding three years, and shall be made on the application of not less than 100 member or members
holding not less than 1/10th of the voting power of the company. Such directors will not be required to hold any qualification shares, not they shall be liable to retire by rotation.
Restriction on appointment of directors:
A person shall not be capable of being appointed a director by the articles or named as a
director or proposed director of the company or intended company in a prospectus or statement in lieu of prospectus unless he or his agent in writing has signed and filed with the registrar consent in writing to act as such director and has:
(a) Signed the memorandum for his qualification shares; or
(b) Taken his qualification shares from the company and paid or agreed to pay for them; or
(c) Signed and filed with the registrar an undertaking in writing to take from the company his qualification shares and pay for them; or
(d) Field with the registrar an affidavit that his qualification share, if any, are registered in his name.
The provisions of section 266 do not apply to a private company.
Position of directors :
The exact position of directors with regard to the company is difficult to define. They are not
servants of the company. Some describe the directors as trustees, agents or managing partner. Jessel, M.R. has observed, “ it does not matter much what you call them so long as
you understand what their true position is, which is that are merely commercial men managing a trading concern for the benefit of themselves and all other share-holders in it.
They stand in a fiduciary position towards the company in respect of their posers and capital under their control.”
Directors as agents :
Directors are in the eyes o law agents of the company for which they act. The general principals of the law of agency apply to the company and its directors.
Directors are merely agents of a company. The company itself cannot act in its own
for it has no person; it can only act through directors and the case is as regard those directors merely the ordinary case of principal and agent. Whenever as agent is
liable those directors would be liable; where the liability would attach to the principal and principal only, the liability is the liability of the company.”
Where directors make contracts on behalf of the company they incur no personal liability provided they act within the scope of their authority. In such a case company
alone would be liable.
Where directors contact in their own name, but really principal can sue the company
as undisclosed the real principal can on the contract where director act in excess of their authority, in entering in to a contract, the company can be subsequent
resolution ratify the act but if the director do something which is ultra vires the company, such s act cannot be ratified.
Director as Trustees :
Directors are not only agent but they are to some extent trustees also. They are trustees of the company’s money or property which comes into their hands or which is actually under their control and also of the power entrusted to them.
As trustees of the company’s money and property directors are accountable for their proper use and required to refund or restore the same if improperly used. Such property must be applied for the specified purpose of the company has not earned any profit; they are liable for the breach of trust.
Directors are the trustees of the powers conferred upon them and they must exercise those
powers bonafide and for the benefit of the company as a whole.
Disqualification of directors :
The circumstances in which a person cannot be appointed as a director of a company are enumerated in section 247. According to this section, a person cannot be appointed as a director of a company, if
(i) He has been found to be of unsound mind by a competent court and the finding is in force;
(ii) He is an un discharged insolvent;
(iii) He has applied to be adjudicated as an insolvent and his application is pending;
(iv) He has been convicted of an office involving moral turpitude and sentence to imprisonment for not less than 6 months and a period of 5 year has not elapsed since the
expiry’s of his sentence;
(v) He has not paid any call in respect of share of the company held by him for period of six
month from the last day fixed for the payment;
(vi) He has been disqualified by an order of the court under section 203, of an office in
relation to promotion, formation and management of the company or fraud or misfeasance in relation to the company.
The central government may by notification in the official Gazette remove the
disqualification enumerated in clauses(iv) and (v) above.
A private company which is not a subsidiary of a public company may be its articles provide
for additional grounds for disqualification.
Restriction on number of Directorship :
No person can be a director in more than twenty companies. The following companies of which a person may be director:
(a) a private company which is neither a subsidiary nor a holding company of a public company
(b) an unlimited company
(c) an association not carrying on business for profit or which prohibited the payment of a dividend
(d) a company in which such person is only an alternate director.
Where a person already holding the office of director in 20 companies is appointed as a
director of any company, the appointment will not take effect unless such person has with in fifteen days thereof, effectively vacated his office as a director in any of the companies in
which he was already a director. His new appointment will become void if he does not make a choice within fifteen days as aforesaid.
Any person who holds office or act as a director or more than 20 companies in contravention of the above provision shall be punishable with fine which may extend to Rs5, 000 in respect of each of those companies after the first 20
Vacation of office by Directors
The office of a director shall become vacant if
(a) he fails to obtain or ceases to hold the share qualification required of him by the articles of the company.
(b) he is found to be of unsound mind by a component court.
(c) he applies to be adjudicated an insolvent.
(d) he is adjudged an insolvent.
(e) he is convicted by a court of an offence involving moral turpitude and sentence to imprisonment for not less than 6 months.
(f) he fails to pay any calls on the shares held by him within six months from the date fixed
for payment; unless the central Government has by notification in the official Gazette removed this disqualification.
(g) he absent himself from three consecutive meetings of the board of directors or from all
the meetings of board for a continuous period of 3 months whichever is longer without obtaining leave of absence from the board.
(h) he (whether by himself or by any person for his benefit or on his account) or any firm in which he is a partner or any private company of which is a director; accepts a loan or any guarantee or security for a loan from the company is contravention of section 295.
(i) he does not disclose to the board of directors of his interest in any contract or proposed contract with the company.
(j) he is restrained by court from being a director for committing fraud or misfeasance in relation to the company under section 203.
(k) he is removed by the company in general meeting in pursuance of section 284.
(l) Having been appointed a director by virtue of his holding any office or the other employment in the company, he ceases to hold such office or other employment in the company.
A person who acts as a director knowing well of his disqualification is subject to a penalty which may extend to Rs. 500 for each day on which he so acts as a director.
A private company which is not a subsidiary of a public company may by its articles provide for additional ground for vacating the office of a director.
Removal of directors :
A director of a company can be removed by
(a) shareholders
(b) central government, or
(c) the court
Removal by shareholder :
Section 284 empowers the company to remove a director by ordinary resolution before the expiry of his period of office except in the following cases:
(a) A director appointed by the central government under section 408.
(b) A director in case of a private company, holding office for life on the 1st day of April 1952.
(A director for life subsequent to that day may be removed).
(c) Director appointed in accordance with the principal of proportional representation,
under section 265. This is to ensure that the directors appointed by the minority are not removed by a bare majority.
Special notice is required of any resolution to remove a director or to appoint somebody in
his place at the meeting at which he is removed. On receipt of such notice, the company will immediately send a copy thereof to the director concerned. He may make any representation in writing and the copy of such representation may be sent by the company
to every member. Where the copy of the representation is not sent to the members, in that case the director concerned may require the representation to be read at the meeting.
The director so removed is entitled to claim compensation or damages for branch of
contract.
Removal by the central government :
A director can also be removed at the initiative of the central government. The companies act enables the central government to remove managerial personnel (including a director)
from office on the recommendation of the high court. The central government may refer to the high court cases against managerial person on any of the ground mentioned in section
388-B. Every such reference will be made in the form of an application which must contain a statement of material facts. The person against whom such reference is made must be joined as a respondent to the application.
The High court in the interests of creditors, members or or on the application of the central government, may his duties until further orders direct the respondent not to discharge any
of his duties until further orders. The court may also appoint a suitable person in place of the respondent. Every person so appointed is deemed to be a public servant.
The person who is so removed cannot hold office of a director for a term of five years unless the period is remitted. The person removed cannot claim any compensation for loss or termination of office.
Removal by the court:
On an application to the court for prevention of oppression and mismanagement the court may terminate or set aside or modify any agreement between the company and the managing director, or any other director or manager. On such termination, the director
cannot serve the company in a managerial capacity for a period of five years from the date of the order of termination, without the permission of the court. The director on removal
cannot sue the company for damages or compensation for loss of office.
WINDING UP BY COURT
Winding up of a company is a process of putting an end to the life of a company. It is a proceeding by means of which a company is dissolved and in the course of such a
dissolution its assets are collected, its debts are paid off out of the assets of the company or from contributions by its members, if necessary. If any surplus is left, it is distributed among
the members in accordance with their rights.
Winding up of a company is the stage, where by the company takes its last breath. It is a process by which business of the company is wound up, and the company ceases to exist anymore. All the assets of the company are sold, and the proceedings collected are used to
discharge the liabilities on a priority basis.
MODES OF WINDING UP
There are three modes of winding up of a company:
(a) Compulsory winding up by the court.
(b) Voluntary winding up, which is itself of two kinds:
Members’ voluntary winding up. Creditors’ voluntary winding up.
(c) Winding up under the supervision of the court.
Winding up by court:
A company may be wound up by an order of the court. This is called compulsory winding up. Section 433 lays down the following grounds for the winding up of a company:
1. Special resolution of the company:
If the company has by a special resolution resolved that it may be wound up by the court. The power of the court in such a case is discretionary. The court may refuse to order winding up where it is opposed to public or company’s interest.
2. Default in holding statutory meeting:
If a company makes a default in delivering the statutory report to the registrar or in holding
the statutory meeting, the court may order winding up of the company either on the petition of the register or on the petition of the contributory. The petition for winding up
must not be filed before the expiration of 14 days after the last day on which the statutory meeting ought to have been held. However, the court may instead of making a winding up
order, direct the statutory report shall be delivered or that meeting shall be held.
3. Failure to commence or suspension of business:
Where a company does not commence its business within a year from its incorporation, or suspends its business for a whole year, the court may order for its winding up. The power of the court is discretionary and will be exercised only where there is a fair indication that the company has no intension to carry on the business. Where the suspension of the business is temporary or can be satisfactorily accounted for, the court will refuse to make an order. A company will not be wound up if it abandons one of its several businesses, unless that business is the main object of the company.
4. Reduction of members below minimum:
Where the number of members is reduced below 7 in the case of public company and below 2 in case of a private company, the court may order the winding up of the company. This
provision is for the protection of existing members against unlimited liability.
5. Inability to pay debts:
The court may order for the winding up of a company if it is unable to pay its debts. The basis of an order for winding up under this clause is that the company has ceased to be commercially solvent i.e. it is unable to met its current demands, although the assets when
realized may exceed its liabilities.
6. Just and equitable:
The last ground on which the court can order the winding up of a company is when the court is of the opinion that it is just and equitable that the company should be wound up. This clause gives the court a very wide power to order winding up wherever the court
considers it just and equitable to do. The court will consider such grounds to wind up a company for just and equitable reasons as are not covered by the preceding fie clauses.
The following are the instances where the courts have exercised their discretion under this clause:
Where there is a deadlock in the management. Where it is impossible to carry on the business of the company except at a loss.
Where the company has ceased to carry on its authorized business and is engaged in an illegal business.
Where the object for which the company is formed is impossible of further pursuit.
Where the minority is being disregarded or oppressed.
Where there is lack of confidence in directors.
Where a company has been conceived and brought forth in fraud.
Winding-up Petition
A limited company may be wound up by the court in the circumstances set out in the
Companies (Winding Up and Miscellaneous Provisions) Ordinance. The more common
ones are :
(a) the company is unable to pay a debt of $10,000 or above.
(b) the court is of the opinion that it is just and equitable that the company should be wound
up.
(c) the company has by special resolution resolved that the company be wound up by the
court.
A creditor, a shareholder or the company itself can file a winding-up petition against
the company.
A solicitor is normally instructed by the petitioner to prepare and file the winding -up
petition.
Any person who is qualified for receiving legal aid under the Legal Aid Ordinance and
Rules may apply to the Legal Aid Department for assistance in filing a winding -up
petition.
Procedures for Filing Petition
The procedures for filing a winding-up petition are :
(a) prepare a petition according to Form 2 or 3 in the Appendix of the Companies (Winding-up)
Rules with such variations as circumstances may require.
(b) deposit with the Official Receiver's Office a sum of $11,250 for the purpose of covering the
fees and expenses to be incurred by the Official Receiver.
(c) go to the Registry of the High Court to:
pay a court fee of $1,045,
obtain a date for the hearing of the petition, and
file the petition.
(d) submit a copy of all documents filed in the High Court in connection with the petition to
the Official Receiver within 24 hours after such documents are filed with the court.
(e) advertise the petition seven clear days before the hearing date of the petition.
(f) deliver a sealed copy of the petition to the registered office of the company or, in case
there is no registered office of the company, the principal or last known principal place of
business of the company.
(g) file an affidavit verifying the petition within four days after the petition is filed with the
court using Forms 7 and 8 in the Appendix of the Companies (Winding-up) Rules.
WHO CAN FILE A PETITION FOR WINDING UP?
Section 439 provides that an application to the Court for the winding up of a company can be made:—
(a) by the company. (b) by any creditor or creditors, including any contingent or prospective Creditor or
creditors. (c) by any contributory or contributories. (d) by all or any of the parties at (a), (b) and (c), whether together Or separately.
(e) by the Registrar of Companies. (f) by any person authorised by the Central Government as a result of investigation carried
out on the affairs of a company pursuant to section 237.
(g) by the Central Government or a State Government, in a case falling under clause (h) of section 433.
Winding up a Registered Company
The Companies Act provides for two modes of winding up a registered company.
Winding up by the Tribunal
If the company has, by a Special Resolution, resolved that the company be wound up
by the Tribunal. If default is made in delivering the statutory report to the Registrar or in holding the
statutory meeting. A petition on this ground may be filed by the Registrar or a contributory before the expiry of 14 days after the last day on which the meeting ought to have been held. The Tribunal may instead of winding up, order the holding
of statutory meeting or the delivery of statutory report. If the company fails to commence its business within one year of its incorporation, or
suspends its business for a whole year. The winding up on this ground is ordered only if there is no intention to carry on the business and the Tribunal's power in this situation is discretionary.
If the number of members is reduced below the statutory minimum i.e. below seven in case of a public company and two in the case of a private company.
If the company is unable to pay its debts.
If the tribunal is of the opinion that it is just and equitable that the company should be wound up.
Tribunal may inquire into the revival and rehabilitation of sick units. It its revival is
unlikely, the tribunal can order its winding up. If the company has made a default in filing with the Registrar its balance sheet and
profit and loss account or annual return for any five consecutive financia l years If the company has acted against the interests of the sovereignty and integrity of
India, the security of the State, friendly relations with foreign States, public order, decency or morality.
The petition for winding up to the Tribunal may be made by :-
The company, in case of passing a special resolution for winding up.
A creditor, in case of a company's inability to pay debts. A contributory or contributories, in case of a failure to hold a statutory meeting or to
file a statutory report or in case of reduction of members below the statutory minimum.
The Registrar, on any ground provided prior approval of the Central Government has been obtained.
A person authorised by the Central Government, in case of investigation into the
business of the company where it appears from the report of the inspector that the affairs of the company have been conducted with intent to defraud its creditors,
members or any other person. The Central or State Government, if the company has acted against the sovereignty,
integrity or security of India or against public order, decency, morality, etc.
Voluntary Winding Up of a Registered Company
When a company is wound up by the members or the creditors without the intervention of Tribunal, it is called as voluntary winding up. It may take place by:-
By passing an ordinary resolution in the general meeting if :- (i) the period fixed for the duration of the company by the articles has expired; or (ii) some event on the happening of which company is to be dissolved, has happened.
By passing a special resolution to wind up voluntarily for any reason whatsoever.
Within 14 days of passing the resolution, whether ordinary or special, it must be advertised
in the Official Gazette and also in some important newspaper circulating in the district of the registered office of the company.
two methods for voluntary winding up:-
Members' voluntary winding up
It is possible in the case of solvent companies which are capable of paying their liabilities in full. There are two conditions for such winding up:-
A declaration of solvency must be made by a majority of directors, or all of them if they are two in number. It will state that the company will be able to pay its debts in
full in a specified period not exceeding three years from commencement of winding up. It shall be made five weeks preceding the date of resolution for winding up and filed with the Registrar. It shall be accompanied by a copy of the report of auditors on Profit & Loss Account and Balance Sheet, and also a statement of as sets and liabilities up to the latest practicable date; and
Shareholders must pass an ordinary or special resolution for winding up of the company.
The provisions applicable to members' voluntary winding up are as follows:-
Appointment of liquidator and fixation of his remuneration by the General Meeting. Cessation of Board's power on appointment of liquidator except so far as may have
been sanctioned by the General Meeting, or the liquidator.
Filling up of vacancy caused by death, resignation or otherwise in the office of liquidator by the general meeting subject to an arrangement with the creditors.
Sending the notice of appointment of liquidator to the Registrar.
Power of liquidator to accept shares or like interest as a consideration for the sale of business of the company provided special resolution has been passed to this effect.
Duty of liquidator to call creditors' meeting in case of insolvency of the company and place a statement of assets and liabilities before them.
Liquidator's duty to convene a General Meeting at the end of each year. Liquidator's duty to make an account of winding up and lay the same before the final
meeting.
Creditor's voluntary winding up
It is possible in the case of insolvent companies. It requires the holding of meetings of
creditors besides those of the members right from the beginning of the process of voluntary winding up. It is the creditors who get the right to appoint liquidator and hence, the winding up proceedings are dominated by the creditors.
The provisions applicable to creditors' voluntary winding up are as follows:-
The Board of Directors shall convene a meeting of creditors on the same day or the
next day after the meeting at which winding up resolution is to be proposed. Notice of meeting shall be sent by post to the creditors simultaneously while sending notice
to members. It shall also be advertised in the Official Gazette and also in two newspapers circulating in the place of registered office.
A statement of position of the company and a list of creditors along with list of their claims shall be placed before the meeting of creditors.
A copy of resolution passed at creditors' meeting shall be filed with Registrar within 30 days of its passing.
It shall be done at respective meetings of members and creditors. In case of difference, the nominee of creditors shall be the liquidator.
A five-member Committee of Inspection is appointed by creditors to supervise the work of liquidator.
Fixation of remuneration of liquidator by creditors or committee of inspection. Cessation of board's powers on appointment of liquidator.
As soon as the affairs of the company are wound up, the liquidator shall call a final meeting of the company as well as that of the creditors through an advertisement in local
newspapers as well as in the Official Gazette at least one month before the meeting and place the accounts before it. Within one week of meeting, liquidator shall send to Registrar
a copy of accounts and a return of resolutions.
Winding up an Unregistered Company
According to the Companies Act, an unregistered company includes any partnership, association, or company consisting of more than seven persons at the time when petition for winding up is presented. But it will not cover the following:-
A railway company incorporated by an Act of Parliament or other Indian law or any
Act of the British Parliament; A company registered under the Companies Act, 1956;
A company registered under any previous company laws. An illegal association formed against the provisions of the Act.
However, a foreign company carrying on business in India can be wound up as an unregistered company even if it has been dissolved or has ceased to exist under the laws of the country of its incorporation.
The provisions relating to winding up of a unregistered company:-
Such a company can be wound up by the Tribunal but never voluntarily.
Circumstances in which unregistered company may be wound up are as follows:-
If the company has been dissolved or has ceased to carry on business or is carrying on business only for the purpose of winding up its affairs.
If the company is unable to pay its debts. If the Tribunal regards it as just and equitable to wind up the company.
Contributory means a person who is liable to contribute to the assets of a company in the event of its being wound up. Every person shall be considered a contributory if
he is liable to pay any of the following amounts:-
Any debt or liability of the company. Any sum for adjustment of rights of members among themselves.
Any cost, charges and expenses of winding up.
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