Company Law Notes

IntroductionThe word 'Company' is an amalgamation of the Latin word 'Com' meaning "with or together" and 'Pains' meaning "bread". Originally, it referred to a group of persons who took their meals together. A company is nothing but a group of persons who have come together or who have contributed money for some common person and who have incorporated themselves into a distinct legal entity in the form of a company for that purpose. Under Halsbury’s Laws of England, the term "company" has been defined as a collection of many individuals united into one body under special domination, having perpetual succession under an artificial form and vested by the policies of law with the capacity of acting in several respect as an individual, particularly for taking and granting of property, for contracting obligation and for suing and being sued, for enjoying privileges and immunities in common and exercising a variety of political rights, more or less extensive, according to the design of its institution or the powers upon it, either at the time of its creation or at any subsequent period of its existence. However, the Supreme Court of India has held in the case of State Trading Corporation of India v/s CTO that a company cannot have the status of a citizen under the Constitution of India.

A company as an entity has several distinct features which together make it a unique organization. The following are the defining characteristics of a company :-

Separate Legal Entity :On incorporation under law, a company becomes a separate legal entity as compared to its members. The company is different and distinct from its members in law. It has its own name and its own seal, its assets and liabilities are separate and distinct from those of its members. It is capable of owning property, incurring debt, borrowing money, having a bank account, employing people, entering into contracts and suing and being sued separately.

Limited Liability :The liability of the members of the company is limited to contribution to the assets of the company upto the face value of shares held by him. A member is liable to pay only the uncalled money due on shares held by him when called upon to pay and nothing more, even if liabilities of the company far exceeds its assets. On the other hand, partners of a partnership firm have unlimited liability i.e. if the assets of the firm are not adequate to pay the liabilities of the firm, the creditors can force the partners to make good the deficit from their personal assets. This cannot be done in case of a company once the members have paid all their dues towards the shares held by them in the company.

Perpetual Succession:A company does not die or cease to exist unless it is specifically wound up or the task for which it was formed has been completed. Membership of a company may keep on changing from time to time but that does not affect life of the company. Death or insolvency of member does not affect the existence of the company.

Separate Property:A company is a distinct legal entity. The company’s property is its own. A member cannot claim to be owner of the company's property during the existence of the company.

Transferability of Shares:Shares in a company are freely transferable, subject to certain conditions, such that no share-holder is permanently or necessarily wedded to a company. When a member transfers his shares to another person, the transferee steps into the shoes of the transferor and acquires all the rights of the transferor in respect of those shares.

Common Seal:A company is a artificial person and does not have a physical presence. Therefore, it acts through its Board of Directors for carrying out its activities and entering into various agreements. Such contracts must be under the seal of the company. The common seal is the official signature of the company. The name of the company must be engraved on the common seal. Any document not bearing the seal of the company may not be accepted as authentic and may not have any legal force.

Capacity to sue and being sued:A company can sue or be sued in its own name as distinct from its members.

Separate Management:A company is administered and managed by its managerial personnel i.e. the Board of Directors. The shareholders are simply the holders of the shares in the company and need not be necessarily the managers of the company.

One Share-One Vote:The principle of voting in a company is one share-one vote. I.e. if a person has 10 shares, he has 10 votes in the company. This is in direct contrast to the voting principle of a co-operative society where the "One Member - One Vote" principle applies i.e. irrespective of the number of shares held, one member has only one vote.

Distinction between Company and Partnership

1. A Partnership firm is sum total of persons who have come together to share the profits of the business carried on by them or any of them. It does not have a separate legal entity. A Company is association of persons who have come together for a specific purpose. The company has a separate legal entity as soon as it is incorporated under law.

2. Liability of the partners is unlimited. However, the liability of shareholders of a limited company is limited to the extent of unpaid share or to the tune of the unpaid amount guaranteed by the shareholder.

3. Property of the firm belongs to the partners and they are collectively entitled to it. In case of a company, the property belongs to the company and not to its members.

4. A partner cannot transfer his shares in the partnership firm without the consent of all other partners. In case of a company, shares may be transferred without the permission of the other members, in absence of provision to contrary in articles of association of the company.

5. In case of partnership, the number of members must not exceed 20 in case of banking business and 10 in other businesses. A Public company may have as many members as it desires subject to a minimum of 7 members. A Private company cannot have more than 50 members.

6. There must be at least 2 members in order to form a partnership firm. The minimum number of members necessary for a public limited company is seven and two for a private limited company.

7. In case of a partnership, 100 % consensus is required for any decision. In case of a company, decision of the majority prevails.

8. On the death of any partner, the partnership is dissolved unless there is provision to the contrary. On the death of the shareholder the company' existence does not get terminated.

Illegal Association:Under the Companies Act, 1956, not more than 10 persons can come together for carrying on any banking business and not more than 20 persons can come together for carrying on any other of business, unless the association is registered under the Companies Act or any other Indian law. Any association which does not comply with the above norms is an illegal association. Therefore, a partnership of more 10 or 20 members, as the case may be, is an illegal association unless the registered under the Companies Act or any other Indian law.

However, this provision does not apply in the following cases :-

1. A Joint Hindu Family business comprising of family members only. But where two or more Joint Hindu families come together for business through partnership, the total number of members cannot exceed 10 or 20 as the case may be, but in computing

the number of persons, minor members of such family will be excluded. 2. Any association of charitable, religious, scientific trust or organisation which is not

formed with a profit motive

3. Foreign companies.

When the number of members exceed the prescribed maximum, members must register it under Companies Act or any other Indian law.

Consequences of non-registration:An illegal association is not recognised by law. An illegal association cannot enter into any

contract, cannot sue any members or any outsider, cannot be sued by any members or outsiders for any of its debts. The members of the illegal association are personally for the

obligations of the illegal association. A member may be liable to a fine of Rs. 1000. Any member of an illegal association cannot sue another member in respect of any matter

connected with the association.

Minimum number of membersA public company must have at least 7 members whereas a private company may have only 2 members. If the number of members fall below the statutory minimum and the company carries on its business beyond a period of six months after the number has so fallen, the

reduction of number of members below the legal minimum is a ground for the winding up of the company.

Types of Companies1.Public Company means a company which not a private company.

2.Private Company means a company which by its articles of association :-

a. Restricts the right of members to transfer its shares b. Limits the number of its members to fifty. In determining this number of 50,

employee-members and ex-employee members are not to be considered.

c. Prohibits an invitation to the public to subscribe to any shares in or the debentures of the company.

If a private company contravenes any of the aforesaid three provisions, it ceases to be private company and loses all the exemptions and privileges which a private company is

entitled.

Following are some of the privileges and exemptions of a private limited company:-

1. Mimimum number is members is 2 (7 in case of public companies) 2. Prohibition of allotment of the shares or debentures in certain cases unless statement

in lieu of prospectus has been delivered to the Registrar of Companies does not apply.

3. Restriction contained in Section 81 related to the rights issues of share capital does not apply. A special resolution to issue shares to non-members is not required in case of a private company.

4. Restriction contained in Section 149 on commencement of business by a company does not apply. A private company does not need a separate certificate of commencement of business.

5. Provisions of Section 165 relating to statutory meeting and submission of statutory report does not apply.

6. One (if 7 or less members are present) or two members (if more than 7 members are present ) present in person at a meeting of the company can demand a poll.

7. In case of a private company which not a subsidiary of a public limited company or in the case of a private company of which the entire paid up share capital is held by the one or more body corporates incorporated outside India, no person other than the member of the company concerned shall be entiled to inspect or obtain the copies of profit and loss account of that company.

8. Minimum number of directors is only two. (3 in case of a public company)

The Company Law Board on being satisfied that the infringement of the aforesaid 3 conditions was accidental or due to inadvertence or that on other grounds, it just an

equitable to grant relief, may grant relief to the company from the consequences of such infringement. The infringement of the aforesaid 3 conditions does not automatically convert

a private company into a public company. It continues to remain a private company; it merely ceases to be entitled to the privileges and exemptions available to a private

company.

3.Companies deemed to be public limited company:A private company will be treated as a deemed public limited company in any of the

following circumstances :-

1. Where at least 25% of the paid up share capital of a private company is held by one or more bodies corporate, the private company shall automatically become the public

company on and from the date on which the aforesaid percentage is so held. 2. Where the annual average turnover of the private company during the period of

three consecutive financial years is not less than Rs 25 crores, the private company shall be, irrespective of its paid up share capital, become a deemed public company.

3. Where not less than 25% of the paid up capital of a public company limited is held by the private company, then the private company shall become a public company on

and from the date on which the aforesaid percentage is so held.

4. Where a private company accepts deposits after the invitation is made by advertisement or renews deposits from the public (other than from its members or directors or their relatives), such companies shall become public company on and

from date such acceptance or renewal is first made.

4.Limited and Unlimited companies:Companies may be limited or unlimited companies. Company may be limited by shares or

limited by guarantee.

a. Company limited by shares In this case, the liability of members is limited to the amount of uncalled share capital. No member of company limited by the shares can

be called upon to pay more than the face value of shares or so much of it as is remaining unpaid. Members have no liability in case of fully paid up shares.

b. Company limited by the guarantee A company limited by guarantee is a registered company having the liability of its members limited by its memorandum of

association to such amount as the members may respectively thereby undertake to pay if necessary on liquidation of the company. The liability of the members to pay

the guaranteed amount arises only when the company has gone into liquidation and not when it is a going concern. A guarantee company may be a company with share

capital or without share capital.

Unlimited Company: The liability of members of an unlimited company is unlimited. Therefore their liability is similar to that of the liability of the partners of a partnership firm.

5.Section 25 Companies: Under the Companies Act, 1956, the name of a public limited company must end with the word 'Limited' and the name of a private limited company must

end with the word 'Private Limited'. However, under Section 25, the Central Government may allow comapnies to remove the word "Limited / Private Limited" from the name if the

following conditions are satisfied :-

1. The company is formed for promoting commerce, science, art, religion, charity or other socially useful objects

2. The company does not intend to pay dividend to its members but apply its profits and other income in promotion of its objects.

6.Holding and Subsidiary companiesA company shall be deemed to be subsidiary of another company if :-

1. That other company controls the composition of its board of directors ; or 2. That other company holds more than half in face value of its equity share capital

3. Where the first mentioned company is subsidiary company of any company which that other's subsidiary. eg Company B is subsidiary of the Company A and Company C is subsidiary of Company B, therefore Company C is subsidiary of Company A.

The control of the composition of the Board of Directors of the company means that the holding company has the power at its discretion to appoint or remove all or majority of

directors of the subsidiary company without consent or concurrence of any other person.

7.Government CompaniesMeans any company in which not less than 51% of the paid up share capital is held by the Central Government or any State Government or partly by the Central Government and

partly by the one or more State Governments and includes a company which is a subsidiary of a government company. Government Companies are also governed by the provisions of the Companies Act. However, the Central Government may direct that certain provisions of the Companies Act shall not apply or shall apply only with such exceptions, modifications

and adaptions as may be specified to such government companies.

8. Foreign CompaniesMeans a company incorporated in a country outside India under the law of that other country and has established the I. Promotion :Refers to the entire process by which a company is brought into existence. It starts with the conceptualisation of the birth a a company and determination of the purpose for which it is to be formed. The persons who conceive the company and invest the initial funds are known as the promoters of the company. The promoters enter into preliminary contracts with vendors and make arrangements for the preparation, advertisement and the circulation of prospectus and placement of capital. However, a person who merely acts in his professional capacity on behalf of the promoter (eg lawyer, CA, etc) for drawing up the agreement or other documents or prepares the figures on behalf of the promoter and who is paid by the promoter is not a promoter.

The promoters have certain basic duties towards the company formed :-

1. He must not make any secret profit out of the promotion of the company. Secret profit is made by entering into a transaction on his own behalf and then sell to concerned property to the company at a profit without making disclosure of the profit to the company or its members. The promoter can make profits in his dealings with the company provided he discloses these profits to the company and its members. What is not permitted is making secret profits i.e. making profits without disclosing them to the company and its members.

2. He must make full disclosure to the company of all relevant facts including to any profit made by him in transaction with the company.

In case of default on the part of the promoter in fulfilling the above duties, the company may :-

1. Rescind or cancel the contract made and if he has made profit on any related transaction, that profit also may be recovered

2. Retain the property paying no more for it then what the promoter has paid for it depriving him of the secret profit.

3. If these are not appropriate (eg cases where the property has altered in such a manner that it is not possible to cancel the contract or where the promoter has already received his secret profit), the company can sue him to for breach of trust. Damages upto the difference between the market value of the property and the contract price can be recovered from him.

A promoter may be rewarded by the company for efforts undertaken by him in forming the company in several ways. The more common ones are :-

1. The company may to pay some remuneration for the services rendered. 2. The promoter may make profits on transactions entered by him with the company

after making full disclosure to the company and its members.

3. The promoter may sell his property for fully paid shares in the company after making full disclosures.

4. The promoter may be given an option to buy further shares in the company.

5. The promoter may be given commission on shares sold.

6. The articles of the Company may provide for fixed sum to be paid by the company to him. However, such provision has no legal effect and the promoter cannot sue to enforce it but if the company makes such payment, it cannot recover it back.

If the promoter fails to disclose the profit made by him in course of promotion or knowingly makes a false statement in the prospectus whereby the person relying on that statement makes a loss, he will be liable to make good the loss suffered by that other person. The promoter is liable for untrue statements made in the prospectus. A person who subscribes for any shares or debenture in the company on the faith of the untrue statement contained in the prospectus can sue the promoter for the loss or damages sustained by him as the result of such untrue statement.

II.Incorporation by Registration :The promoters must make a decision regarding the type of company i.e a pulic company or a private company or an unlimited company, etc and accordingly prepare the documents for incorporation of the company. In this connection the Memorandum and Articles of Association (MA & AA) are crucial documents to be prepared.

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 clauseThe 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 (Prevntion of Misuse Act, 1950 or use a name suggestive of connection to government or State patronage.

Domicile clauseThe 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 Comapnies within 30 days of the date of incorporation of the company. Similarly, any change in the registered 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 clauseThis 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.

In case of the companies other than trading corporations whose objects are not confined to one state, the states to whose territories the objects of the company extend must be specified.

Doctrine of the ultra-vires 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-vires 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 ultravires 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 vires

However, the doctrine of ultra-vires does not apply in the following cases :-

1. If an act is ultra-vires of powers the directors but intra-vires of company, the company is liable.

2. If an act is ultra-vires the articles of the company but it is intra-vires of the memorandum, the articles can be altered to rectify the error.

3. If an act is within the powers of the company but is irregualarly done, consent of the shareholders will validate it.

4. Where there is ultra-vires borrowing by the company or it obtains deliver of the property under an ultra-vires 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-vires 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 unlimited in case of the unlimted 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 liabilty 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 AssociationThe 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.

III. Registration of the CompanyOnce the documents have been prepared, vetted, stamped and signed, they must be filed with the Registrar of Companies for incorporating the Company. The following documents must be filed in this connection :-

1. The MA & AA

2. An agreement, if any, which the company proposes to enter into with any individual for appointment as its managing director or whole-time director or manager.

3. A statutory declaration in Form 1 by an advocate, attorney or pleader entitled to appear before the High Courty or a company secretary or Chartered Accountant in whole - time practice in India who is engaged in the formation of the company or by a person who is named as a director or manager or secretary of the company that the requirements of the Companies Act have been complied with in respect of the registration of the company and matters precedent and incidental thereto.

4. In addition to the above, in case of a public company, the following documents must also be filed :-

i. Written consent of directors in Form 29 to agree to act as directors

ii. The complete address of the registered office of the company in Form 18

iii. Details of the directors, managing director and manager of the company in Form 32.

Certificate of IncorporationOnce all the above documents have been filed and they are found to be in order, the Registrar of Companies will issue Certificate of Incorporation of the Company. This document is the birth certificate of the company and is proof of the existence of the company. Once, this certificate is issued, the company cannot cease its existence unless it is dissolved by order of the Court.

IV. Commencement of BusinessA private company or a company having no share capital can commence its business immediately after it has been incorporated. However, other companies can commence their activities only after they have obtained Certificate of Commencement of Business. For this purpose, the following additional formalities have to be complied with :-

1. If a company has share capital and has issued a prospectus, then :-

a. Shares upto the amount of minimum subcription must be alloted b. Every director has paid to the company on each of the shares which he has

taken the same amount as the public have paid on such shares

c. No money is or may become payable to the applicants of shares or debentures for failure to apply for or to obtain permission to deal in those shares or debentures in any recognised stock exchange.

d. A statutory declaration in Form 19 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed

2. If a company has share capital but has not issued a prospectus, then :-

a. It must file a statement in lieu of prospectus with the Registrar of Companies b. Every director has paid to the company on each of the shares which he has

taken the same amount as the other members have paid on such shares

c. A statutory declaration in Form 20 signed by one director or the employee - company secretary or a Company secretary in whole time practice that the above provisions have been complied with must be filed

Once the above provisions have been complied with, the Registrar of Companies grants "Certificate of Commencement of Business" after which the company can commence its activities.

Capital refers to the amount invested in the company so that it can carry on its activities. In a company capital refers to "share capital". The capital clause in Memorandum of Association must state the amount of capital with which company is registered giving details of number of shares and the type of shares of the company. A company cannot issue share capital in excess of the limit specified in the Capital clause without altering the capital clause of the MA.

The following different terms are used to denote different aspects of share capital:-

1.Nominal, authorised or registered capital means the sum mentioned in the capital clause of Memorandum of Association. It is the maximum amount which the company raise by issuing the shares and on which the registration fee is paid. This limit is cannot be exceeded unless the Memorandum of Association is altered.

2.Issued capital means that part of the authorised capital which has been offered for subscription to members and includes shares alloted to members for consideration in kind also.

3.Subscribed capital means that part of the issued capital at nominal or face value which has been subscribed or taken up by purchaser of shares in the company and which has been alloted.

4.Called-up capital means the total amount of called up capital on the shares issued and subscribed by the shareholders on capital account. I.e if the face value of a share is Rs. 10/- but the company requires only Rs. 2/- at present, it may call only Rs. 2/- now and the balance Rs.8/- at a later date. Rs. 2/- is the called up share capital and Rs. 8/- is the uncalled share capital.

5.Paid-up capital means the total amount of called up share capital which is actually paid to the company by the members.

In India, there is the concept of par value of shares. Par value of shares means the face value of the shares. A share under the Companies act, can either of Rs10 or Rs100 or any other value which may be the fixed by the Memorandum of Association of the company. When the shares are issued at the price which is higher than the par value say, for example Par value is Rs10 and it is issued at Rs15 then Rs5 is the premium amount i.e, Rs10 is the par value of the shares and Rs5 is the premium. Similarily when a share is issued at an amount lower than the par value, say Rs8, in that case Rs2 is discount on shares and Rs10 will be par value.

Types of shares : Shares in the company may be similar i.e they may carry the same rights and liabilities and confer on their holders the same rights, liabilities and duties. There are two types of shares under Indian Company Law :-

1.Equity shares means that part of the share capital of the company which are not preference shares.

2.Preference Shares means shares which fulfill the following 2 conditions. Therefore, a share which is does not fulfill both these conditions is an equity share.

a. It carries Preferential rights in respect of Dividend at fixed amount or at fixed rate i.e. dividend payable is payable on fixed figure or percent and this dividend must paid before the holders of the equity shares can be paid dividend.

b. It also carries preferential right in regard to payment of capital on winding up or otherwise. It means the amount paid on preference share must be paid back to preference shareholders before anything in paid to the equity shareholders. In other words, preference share capital has priority both in repayment of dividend as well as capital.

Types of Preference Shares1.Cumulative or Non-cumulative : A non-cumulative or simple preference shares gives right to fixed percentage dividend of profit of each year. In case no dividend thereon is declared in any year because of absence of profit, the holders of preference shares get nothing nor can they claim unpaid dividend in the subsequent year or years in respect of that year. Cumulative preference shares however give the right to the preference shareholders to demand the unpaid dividend in any year during the subsequent year or years when the profits are available for distribution . In this case dividends which are not paid in any year are accumulated and are paid out when the profits are available.

2.Redeemable and Non- Redeemable : Redeemable Preference shares are preference shares which have to be repaid by the company after the term of which for which the preference shares have been issued. Irredeemable Preference shares means preference shares need not repaid by the company except on winding up of the company. However, under the Indian Companies Act, a company cannot issue irredeemable preference shares. In fact, a company limited by shares cannot issue preference shares which are redeemable after more than 10 years from the date of issue. In other words the maximum tenure of preference shares is 10 years. If a company is unable to redeem any preference shares within the specified period, it may, with consent of the Company Law Board, issue further redeemable preference shares equal to redeem the old preference shares including dividend thereon. A company can issue the preference shares which from the very beginning are redeemable on a fixed date or after certain period of time not exceeding 10 years provided it comprises of following conditions :-

1. It must be authorised by the articles of association to make such an issue. 2. The shares will be only redeemable if they are fully paid up.

3. The shares may be redeemed out of profits of the company which otherwise would be available for dividends or out of proceeds of new issue of shares made for the purpose of redeem shares.

4. If there is premium payable on redemption it must have provided out of profits or out of shares premium account before the shares are redeemed.

5. When shares are redeemed out of profits a sum equal to nominal amount of shares redeemed is to be transferred out of profits to the capital redemption reserve account. This amount should then be utilised for the purpose of redemption of

redeemable preference shares. This reserve can be used to issue of fully paid bonus shares to the members of the company.

3.Participating Preference Share or non-participating preference shares : Participating Preference shares are entitled to a preferential dividend at a fixed rate with the right to participate further in the profits either along with or after payment of certain rate of dividend on equity shares. A non-participating share is one which does not such right to participate in the profits of the company after the dividend and capital have been paid to the preference shareholders.

Alternation of capitalA company limited by shares can alter the capital clause of its Memorandum in any of the following ways provided that such alteration is authorised by the articles of association of the company :-

1. Increase in share capital by such amount as it thinks expedient by issuing new shares.

2. Consolidate and divide all or any of its share capital into shares of larger amount than its existing shares. eg, if the company has 100 shares of Rs.10 each ( aggregating to Rs. 1000/-) it may consolidate those shares into 10 shares of Rs100 each.

3. Convert all or any of its fully paid shares into stock and re-convert stock into fully paid shares of any denomination.

4. Subdivide shares or any of shares into smaller amounts fixed by the Memorandum so that in subdivision the proportion between the amount paid and the amount if any unpaid on each reduced shares shall be same as it was in case of from which the reduced share is derived.

5. Cancel shares which have been not been taken or agreed to be taken by any person and diminish the amount of share capital by the amount of the shares so cancelled.

The alteration of the capital of the company in any of the manner specified above can be done by passing a resolution at the general meeting of the company and does not require any confirmation by the court.

Reduction of the share capital can be effected only in the manners specified in Section 100-104 of the Act or by way of buy back under Section 77A and 77B of the Act. Notice of alteration to share capital is required to be filed with the registrar of the company in Form no 5 within 30 days of the alteration of the capital clause of the MA. The Registrar shall record the notice and make necessary alteration in Memorandum and Articles of Association of the company. Any default in giving notice to the registrar renders company and its officers in default liable to punishment with fine which may extend to the Rs50 for each day of default.

Conversion of shares into stocks : Conversion of fully paid shares into stock may likewise be affected by the ordinary resolution of the company in the general meeting. Notice of the conversion must be given to the Registrar within 30 days of the conversion, the stock may be converted into fully paid shares following the same procedure and notice given to the Registrar in Form no 5. In this connection, the following provisions are important :-

1. Only fully paid shares can be converted into stocks

2. Direct issue of stock to members is not lawful and cannot be done.

3. The difference between shares and stock is that shares are transferable only in complete units so that transfer of half or any portion of share is not possible whereas stock is expressed in terms of any amount money and is transferable in any money fractions.

4. Articles may be give the Board of Directors authority to fix minimum amount of stock transferable.

5. Since stock is not divided into different units it is not required to be numbered. Shares on the other hand must be numbered.

Reduction of share capital with sanction of the CourtA company limited by the shares or a company limited by guarantee and having share capital can if authorised by its articles, by special resolution and subject to confirmation by the court on petition reduce its share capital. It may effect reduction of its share capital in any of following circumstances:-

1. Where the company is overcapitalised :-

a. It may extinguish or reduce the liability of member in respect of uncalled or unpaid capital. For example, where shares are of Rs100 each with Rs60 paid up, the company may reduce them to Rs60 fully paid and thus release the shareholder from the liability on uncalled capital of Rs. 40/-.

b. Pay off or return part of the unpaid capital not wanted for the purpose of the company. For example, where the shares are fully paid of Rs100 they may be reduced Rs40 each and Rs60 may be paid back to the shareholders.

c. Pay off part of the paid up share capital on the footing that it may be called up again. If shares are of Rs100 each the company may pay off Rs25 per share on condition that when desired the company may call it again without extinguishing the liability of shareholders to pay the uncalled share capital.

d. Reduce by a combination of the aforesaid methods

2. Where has suffered loss of capital, in such situation the company can write off or cancel the share capital which has been lost or is unrepresented by available assets.

Where the company has passed the resolution for reducing the share capital, it must, by petition, apply to the court in the prescribed form to the court for an order confirming the reduction. Where the proposed reduction of share capital involves the either diminution of liabilities in respect of unpaid share capital or the payment to any shareholder of any paid-up share capital or in any other case if the court so directs the following provisions shall have effect :-

1. Every creditor of the company who on the date fixed by the court is entitled to debt from or any claim against the company shall be entitled to object to the reduction.

2. The Court shall settle a list of creditors so entitled to object and for that purpose shall ascertain as far as possible without requiring an application from any of the creditors, the names of creditors and the nature and amount of debt or claims and publish

notices fixing the day or days within which creditors not entered in the list are to be entered if they so desire.

3. Where a creditor entered on the list whose debt or claim is not discharged or has not been determined does not consent to the reduction, the court may, if it thinks fit, dispense with the consent of the creditors if the company secures payment of this debt or claim by appropriating the following amounts as the court may direct:-

a. The company admits the full amount claim or debt or though not admitting it is willing to provide for it, then the full amount of debt or claim

b. If the company does not admit and is not willing to provide for the full amount of debt or claim or if the amount is contingent or not ascertained, then amount fixed by the court after due enquiry.

1. Where the proposed reduction of share capital involves either diminution of any liability in respect of the unpaid share capital or payment of any shareholder of any paid share capital, the Court may, having regard to any special circumstances of the case as it thinks proper so to do, direct that the above provisions shall not apply to any class or classes of creditors.

2. If the court is satisfied with respect to every creditor of the company entitled to object to reduction that either his consent to the reduction has been obtained or his that debt or claim has been discharged or has been determined or has been secured, make an order confirming the reduction on such terms and conditions as it thinks fit.

3. Where the court makes such an order, it may, if for any special reasons thinks fit and proper to do so, make an order directing that the company shall shall during such period commencing on and any time after the date of the order as is specified in the order add to its name as the last words the words "& Reduced" and make an order requiring the company to publish the same along with the reasons for the reduction or such other information in regard thereto as the court may think expedient with view to giving proper information to the public and if the court thinks fit the causes which led to reduction.

4. Where the company is ordered to add to its name the words "& Reduced" those words shall until the expiry of period specified in the order shall be deemed to be part of the name of the company.

5. The registrar, on the production to him, of an order of the court confirming the reduction of the share capital of the company and on delivering to him the certified copy of the order and of minutes approved by the court showing with respect to the share capital of the company as altered by the order register the reduction of share capital. On registration of order and minutes, the reduction of share capital shall take effect.

6. Notice of the registration shall be published in such manner as the court may direct.

Reduction of capital without the sanction of the courtReduction of capital can take place without the sanction of the court in the following cases

1. Buy back of shares in accordance to the provisions of Section 77A and 77B

2. Forfeiture of shares - A company may if authorised by its articles forfeit shares for non-payment of calls by the shareholders. Such proceedings amount to reduction of capital but the act does not require court sanction for this purpose.

3. Valid surrender of the shares - A company may accept the surrender of shares

4. Cancellation of capital - A company may cancel the shares which has not been taken up or agreed to be taken by the person and diminish the amount of its share capital.

5. Purchase of shares of member by the company under Section 402B. The Company Law Board may, on application made under Section 397 or Section 398, order the purchase of shares or interest of any member of the company by the company. These provisions come in force when a prescribed number of members make a complaint to the CLB for mis-management or oppression of the minority shareholders in the company.

6. Redemption of redeemable preference shares. Where redeemable preference shares are redeemed, it actually amounts to reduction of the capital. However, this does not require the sanction of the court.

Buy-back of shares : Buy back of its own shares by a company is nothing but reduction of share capital. After the recent amendments in the Companies Act, 1956 buy back of its own shares by a company is allowed without sanction of the Court. It is nothing but a process which enables a company to go back to the holders of its shares and offer to purchase from them the shares that they hold.

There are three main reasons why a company would opt for buy back :-

1. To improve shareholder value, since with fewer shares earning per share of the remaining shares will increase.

2. As a defense mechanism against hostile take-overs since there are fewer shares available for the hostile acquirer to acquire.

3. Public Signaling of the Management’s Policy.

A company may purchase its own shares or other specified securities out of :-

i. its free reserves; or ii. the securities premium account; or

iii. the proceeds of any shares or other specified securities:

No buy-back of any kind of shares or other specified securities can be made out of the earlier proceeds of an earlier issue of the same kind of shares or same kind of other specified securities.

No company can purchase its own shares or other specified securities unless :-

a. the buy-back is authorized by its articles; b. a special resolution has been passed in general meeting of the company authorizing

the buy-back;

c. the buy-back is of less than twenty five per cent of the total paid-up capital and free reserves of the company:

d. the buy-back of equity shares in any financial year shall not exceed twenty five per cent of its total paid-up equity capital in that financial year

e. the ratio of the debt owned by the company is not more than twice the capital and its free reserves after such buy-back. However, the Central Government may prescribe a higher ratio of the debt than that specified under this clause for a class or classes of companies.

f. all the shares or other specified securities for buy-back are fully paid-up;

g. the buy-back of the shares or other specified securities listed on any recognized stock exchange is in accordance with the regulations made by the Securities and Exchange Board of India in this behalf;

h. the buy-back in respect of shares or other specified securities other than those specified in clause (g) is in accordance with the guidelines as may be prescribed.

The notice of the meeting at which special resolution is proposed to be passed shall be accompanied by an explanatory statement stating

a. a full and complete disclosure of all material facts b. the necessity for the buy-back

c. the class of security intended to be purchased under the buy-back

d. the amount to be invested under the buy-back and

e. the time limit for completion of buy-back.

Every buy-back must be completed within twelve months from the date of passing the special resolution.

The buy-back may be :-

a. from the existing security holders on a proportionate basis; b. from the open market or

c. from odd lots, that is to say, where the lot of securities of a listed public company whose shares are listed on a recognized stock exchange is smaller than such marketable lot as may be specified by the stock exchange;

d. by purchasing the securities issued to employees of the company pursuant to a scheme of stock option or sweat equity.

Where a company has passed a special resolution to buy-back its own shares or other securities under this section, it shall, before making such buy-back, file with the Registrar and the Securities and Exchange Board of India a declaration of solvency in the form as may be prescribed and verified by an affidavit to the effect that the Board has made a full inquiry

into the affairs of the company as a result of which they have formed an opinion that it is capable of meeting its liabilities and will not be rendered insolvent within a period of one year of the date of declaration adopted by the Board, and signed by at least two directors of the company, one of whom shall be the managing director, if any:

Such a declaration of solvency need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.

Where a company buys back its own securities, it shall extinguish and physically destroy the securities so bought back within seven days of the last date of completion of buy-back.

Where a company completes a buy-back of its shares or, other specified securities under this section, it shall not make further issue of the same kind of shares or other specified securities within a period of twenty four months except by way of bonus issue or in the discharge of subsisting obligations such as conversion of warrants, stock option schemes, sweat equity or conversion of preference shares or debentures into equity shares.

Where a company buys back its securities under this section it shall maintain a register of the securities so bought, the consideration paid for the securities bought-back, the date of cancellation of securities, the date of extinguishing and physically destroying of securities and such other particulars as may be prescribed.

A company shall, after the completion of the buy-back under this section, file with the Registrar and the Securities and Exchange Board of India, a return containing such particulars relating to the buy-back within thirty days of such completion as may be prescribed. However such return need not be filed with the Securities and Exchange Board of India by a company whose shares are not listed on any recognized stock exchange.

If a company makes default in complying with the provisions of this section or any rules or any regulations, the company or any officer of the company who is in default shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to fifty thousand rupees, or with both.

For the purposes of buy back, "specified securities" includes employees' stock option or other securities as may be notified by the Central Government from time to time;

Where a company purchases its own shares out of free reserves, then a sum equal to the nominal value of the share so purchased shall be transferred to the capital redemption reserve account and details of such transfer shall be disclosed in the balance sheet."

No company shall directly or indirectly purchase its own shares or other specified securities -

(a) through any subsidiary company including its own subsidiary companies; or

(b) through any investment company or group of investment companies; or

(c) if a default, by the company, in repayment of deposit or interest payable thereon, redemption of debentures, or preference shares or payment of dividend to any shareholder or repayment of any term loan or interest payable thereon to any financial institution or bank, is subsisting.

No Company can, directly or indirectly, purchase its own shares or other specified securities in case such company has not filed its annual returns with the Registrar of Companies, or

has not paid the dividends declared by it within 42 days from the date of declaration or has not prepared its annual accounts in the prescribed manner.

Variation of shareholders rightsThe rights, duties and liabilities of all shareholders are clearly defined at the time of issue of the shares. Once the rights of shareholders are fixed, they cannot be altered unless the provisions of the Companies Act for this purpose are complied with. The rights attached to the shares of any class can be varied only with the consent in writing of shareholders holding not less than 75 % of the issued shares of that class or with the sanction of special resolution passed at a separate meeting of the holders of issued shares of that class. However, the following conditions also must be complied with :-

1. The variation of rights are allowed by the Memorandum or Articles of Association of the Company.

2. In absence of such provision in the Memorandum or Articles of company, such variation must not be prohibited by the terms of issue of shares of that class.

Rights of Dissenting Shareholders : The rights of the shareholders who did not consent to or vote for variation of their rights are protected by the Companies Act. If the rights of any class of the shareholders are varied, the holders of not less than 10 per cent of the shares of that class, being persons who did not consent to or vote in favour of resolution for variation of their rights can apply to the court to have the variation cancelled. Where such application is made to the court, such variation will not be given effect unless and until it is confirmed by the court.

Voting Rights of the MembersEvery member of a public company limited by shares holding equity shares will have votes in proportion to his share in paid up equity capital of the company.

Generally, preference shareholders do not have any voting rights. However, they can vote on matters directly relating to the rights attached to the preference share capital. Any resolution for winding up of the company or for the reduction or repayment of the share capital shall be deemed to affect directly the rights attached to preference shares. Where the preference shares are cumulative (in respect of dividend) and the dividend thereon has remained unpaid for an aggregate period of two years before date of any meeting of the company, the preference shareholders will have right to vote on any resolution. In case of non-cumulative preference shares, preference shareholders have right to vote on every resolution if dividend due on their capital remains unpaid, either in respect of period of not less than two years ending with the expiry of the financial year immediately preceding the commencement of the meeting or in respect of aggregate period of not less than three years comprised in six years ending with the expiry of concerned financial year.

Every equity shareholder has a right to vote at a general meeting. No company can prohibit any member from exercising his voting right any ground including the ground that he has not held his shares for a minimum period before he becomes eligible to vote. However, a member’s voting rights can be revoked if that member does not make payment of calls or other sums due against him or where the company has exercised the right of lien on his shares.

Further issue of the capitalRights Issue of SharesIf, at any time after the expiry of 2 Years from the date of incorporation of the company or after one year from the date of first allotment of shares, whichever is earlier, a public

company limited by shares issues further shares within the limit of authorised capital, its directors must first offer such shares to the existing holders of equity shares in proportion to the capital paid up on their shares at the time of further issue. This is commonly known as "Rights Issue of shares". The company must give notice each of the equity shareholders giving him the option to buy the shares offered to him. The shareholders must be informed of the number of shares he has the option to buy. He must be given at least 15 days to decide for exercising his option. The directors must state in the notice of the offer the fact that the shareholders also has the right to renounce the offer in whole or part in favour of some other person. This is commonly known as "Renunciation of Rights".

If the shareholder does not inform the company of his decision to take the shares, it is deemed that he has declined the offer. In case where the rights shares are not taken by the shareholders, the directors of the company may dispose of the shares in the manner they think fit.

A company may by special resolution in the general meeting decide that the directors need not offer the shares to the existing shareholders of the equity shares and that they may dispose them off in a manner thought fit by them. This is known as "preferential offer of shares" where third parties or only certain shareholders are given shares in priority over the other shareholders.

However, if a special resolution for preferential issue of shares is not passed but merely an ordinary resolution is passed, preferential issue of shares may be done provided sanction of the Central Government is obtained. The price at which the preferential shares are to be offered are governed by the SEBI guidelines in case of listed companies. Such shares cannot be issued at a price which is less than the higher of the following :-

1. The average of the weekly highs and lows of the closing prices of the shares on the stock exchange during 6 months preceding the date of issue ; or

2. The average of the weekly highs and lows of the closing prices of the shares on the stock exchange during 2 weeks preceding the date of issue

The above provisions of preferential allotment do not apply to conversion of loans or debentures in equity shares provided the terms of the loan or terms of issue of debentures give an option to convert such loans or debentures into shares of the company. Such terms and conditions must be approved before the issue of debenture or raising of the loan by the Central Government or must be in confirmity with the rules made by the Government for this purpose. The proposal must be approved by the special resolution passed by Company at the general meeting before the issue of debentures or raising of the loan. For this purpose the Central Government has framed the Public Companies (Terms of issue of debentures and raising of loans with option to convert such debentures or loan into equity shares ) Rules, 1977. The following is the broad gist of these rules :-

1. The debenture or loan is raised or issued either through private subscription or through issue of the prospectus to the public.

2. The financial institutions specified for this purpose either underwrite or subscribe to the whole or part of the issue of debentures or sanction the raising of loan.

3. Having regard to financial position of the company, the terms of issue of debentures or terms of loan (eg rate of interest payable on debenture and loan the capital of the company, its liabilities and its profits during immediately preceeding five years and

the current market price of shares of the company), the conversion must be either at par and or at premium not exceeding 25 percent of the face value of the shares.

The provisions of rights and preferential issue do not apply in the following cases :-

1. Increase in share capital by a private company. 2. Increase in share capital by a deemed public company.

Issue of shares at discountA company may issue shares at a discount i.e at a value below its par value. The following conditions must be satisfied in connection with the issue of shares at a discount :-

1. The shares must be of a class already issued 2. Issue of the shares at discount must be authorised by resolution passed in the

general meeting of company and sanctioned by the company law board.

3. The resolution must also specify the maximum rate of discount at which the shares are to be issued

4. Not less than one year has elapsed from the date on which the company was entitled to commence the business.

5. The shares to be issued at discount must issued within 2 months after the date on which issue is sanctioned by the company law board or within extended as may be allowed by the Company Law Board.

6. The discount must not exceed 10 percent unless the Company Law Board is of the opinion that the higher percentage of discount may be allowed in special circumstances of case.

Issue of shares at premiumA company may issue shares at a premium i.e. at a value above its par value. The following conditions must be satisfied in connection with the issue of shares at a premium:-

1. The amount of premium must be transfered to an account to be called share premium account. The provisions of this Act relating to the reduction of share capital of the company will apply as if the share account premium account were paid up share capital of the company.

2. Share premium account can be used only for the following purposes :-

a. In issuing fully paid bonus shares to members.

b. In Writing off preliminary expenses of the company.

c. In writing off public issue expenses such as underwriting commission, advertisement expenses, etc

d. In providing for the premium payable paid on redemption of any redeemable preference shares or debentures.

e. In buying back its shares

Issue of bonus sharesBonus shares are issued by converting the reserves of the company into share capital. It is nothing but capitalization of the reserves of the company. Bonus shares can be issued by a company only if the Articles of Association of the company authorises a bonus issue. Where there is no provision in this regard in the articles, they must be amended by passing special resolution act at the general meeting of the company. Care must be taken that issue of bonus shares does not lead to total share capital in excess of the authorised share capital. Otherwise, the authorised capital must be increased by amending the capital clause of the Memorandum of association. If the company has availed of any loan from the financial institutions, prior permission is to obtained from the institutions for issue of bonus shares. If the company is listed on the stock exchange, the stock exchange must be informed of the decision of the board to issue bonus shares immediately after the board meeting. Where the bonus shares are to be issued to the non-resident members, prior consent of the Reserve Bank should be obtained.

Only fully paid up bonus share can be issued. Partly paid up bonus shares cannot be issued since the shareholders become liable to pay the uncalled amount on those shares.

Sweat Equity and Employee Stock OptionsSweat Equity Shares mean equity shares issued by the company to its directors and / or employees at a discount or for consideration other than cash for providing know how or making available the rights in the nature of intellectual property rights or value additions.

A company may issue sweat equity shares of a class of shares already issued if the following conditions are fulfilled :-

i. A special resolution to the effect is passed at a general meeting of the company ii. The resolution specifies the number of shares, the current market price,

consideration, if any, and the class of employees to whom the shares are to be issued

iii. At least 1 year has passed since the date on which the company became eligible to commence business.

iv. In case of issue of such shares by a listed company, the Sweat Equity Shares are listed on a recognized stock exchange in accordance with SEBI regulations and where the company is not listed on any stock exchange, the the prescribed rules are complied with.

Share certificateA share certificate is a document issued by the company stating that the person named therein is the registered holder of specified number of shares of a certain class and they are paid up upto the amount specified in the share certificate. The share certificate must bear the common seal of the company and also must be stamped under the relevant stamp act. One or more directors must sign it .It should state the name as well as occupation of the holder and number of shares , their distinctive number and the amount paid up.

Every company making allotment of shares must deliver the share certificate of all shareholders within three months of allotment. In case of transfer of shares, the share certificate must be ready for delivery within two months after the shares are lodged with the company for transfer. If default is made in complying with the above provisions, the company and every officer of company who is in default is liable to punishment by way of

fine which may extent to Rs500 for every day of default. The allotee must give notice to the company reminding of its obligation and even then, if default is not made good within 10 days of the notice, the allotee may apply to the Company Law Board for direction to the company to issue such share certificate in accordance with the Act. Application for this purpose must be made with the concerned regional bench of the Company Law Board by way of petition. The petition should be accompanied by the following documents :-

1. Copy of the letter of allotment issued by the company 2. Documentary evidence for the allotment of the shares or debentures for transfer

3. Copy of the notice served on the company requiring to make good the default

4. Any other correspondence

5. Affidavit verifying the petition

6. Bank draft evidencing payment of application fee

7. Memorandum of appearance with the Board copy of resolution of the board for the executive Vakalat Nama as the case may be Companies act does not prescribe any form for share certificate.

A Shareholder must keep his share certificate in safe custody or in case of shares which are traded in demat mode, with the depository. The company may renew or issue a duplicate certificate if such certificate is proved to have been lost or destroyed or having being defaced or mutilated or torn or is surrendered to the company. However, if the company, with the intention to defraud issues duplicate certificate, the company shall be punishable with the fine upto Rs10000 and every officer of the company who is in default with imprisonment upto 6 months or fine upto Rs10000 or both.

Once a share certificate is issued by the company, the name of the person in whose favour it has been issued becomes the registered shareholder. Nobody can then deny the fact of his being the registered shareholder of the company. Similarly, if the certificate states that on each of shares a certain amount has been paid up, nobody can deny the fact that such amount has been paid up

A charge means an interest or right which a lender or creditor obtains in the property of the company by way of security that the company will pay back the debt. Charges are of 2 types :-

1. Fixed Charge : Such a charge is against a specific clearly identifiable and defined property. The property under charge is identified at the time of creation of charge. The nature and identity of the property does not change during the existence of the charge. The company can transfer the property charged only subject to that charge so that the charge holder or mortgage must be paid first whatever is due to him before disposing off that property.

2. Floating Charge : Such a charge is available only to companies as borrower. A Floating charge does attach to any definite property but covers the property of a circulating and fluctuating nature such as stock-in-trade, debtors, etc. It attaches to the property charged in the varying conditions in which happens to be from time to time. Such a charge remains dormant until the undertaking charge ceases to be a going concern or until the person in whose favour charge created takes steps to

crystallise the floating charge. A floating charge on crystallisation becomes a fixed charge.

Crystallization of floating charge :When the charge holder takes steps to enforce his charge, a floating charge becomes a fixed charge on the assets covered by that charge. Until a floating charge becomes a fixed charge, the company is free to deal with the property charged in any manner it deems fit. But once the floating charge crystallises, the company cannot dispose off the charged assets without paying of the chargeholder. Otherwise, the chargeholder can recover his dues from the proceeds. A floating charge crystallises or becomes the fixed in following situations :-

1. Where the company ceases to carry on the business, whether the principal money has become payable or not, unless the debenture or trust deed contains the stipulation to the contrary.

2. Upon the commencement of winding up of the company.

3. If a debentureholder, having become entitled to realise the securities by the reason of the fact that the principal money has become payable, intervenes for the purpose by appointing the receiver or by making an application to the court for appointment of the receiver.

Registration of charges :Every company must keep at its registered office a register of charges in which all the charges and mortgages specifically affecting the property of the company must be entered. The register must contain short description of the property charged, the amount of the charge, the name of the person entitled to the charge, etc. The company must keep at its registered office, a copy of every instrument creating any charge requiring the registration. During the business hours inspection by the creditor or member of the company is allowed to be without charge of the register and documents. Any outsider can inspect them on the payment of Rs10 for each inspection during the business hours. Registrar of the company must keep also the register of charges in respect of each company and register therein full particulars relating to the charge created by the company and registrable under the Act. This register is also open to inspect by any person on payment of Rs 10 as fees . The company must submit to the Registrar the instrument creating the charge or its certified copy which will be returned after the registration along with the certificate of registration. The company must cause the copy of every registration to be endorsed on every debenture or certificate of debentures stock which is issued by the company and the payment of which is secured by the charge.

Charges requiring registration :A company must file within 30 days of creation of a charge with the Registrar complete details of the charge together with the instrument of charge or its verified copy in respect of certain charges. Otherwise the charge will be void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them. The following charges are compulsorily registrable :-

i. A charge for the purpose of securing any issue of any debentures ii. A floating charge

iii. A charge on uncalled share capital

iv. Charge on calls made but not paid

v. A charge on any immovable property

vi. A charge on ship

vii. A charge on book debts of the company

viii. A charge on goodwill or on patent or on license under the patent or on trademark or copyright or on the license under the copyright

ix. A charge other than a pledge on any movable property of the company.

Effects of Registration :Once a charge is registered, it acts as a notice to the public at large that the charge holder has an interest in the charged property. No person can take a defense against the charge holder that he was not aware that a charge was created against the property. That person will be entitled to the property subject to the interest of the charge holder. Once certificate of charge is issued by the Registrar, it is conclusive evidence that the document creating the charge is properly registered.

Consequences of Non-Registration :

1. A charge which is compulsorily registarble but which is not registered is void. This does not mean that the creditors cannot recover their dues. It merely means that the benefit of the charged security will not be available to them.

2. Although the security becomes void by non-registration, it does not affect the contract or obligation of the company to repay the money thereby secured.

3. Omission to registrar particulars of charge is required punishable with fine. A company or every officer of company is in default shall be liable to fine upto Rs 500 for each day of continuing default. A further fine of Rs. 1000 may be impose on the company and every officer for other defaults relating to registration of charges.

Wherever the terms and conditions or the extent of the operation of any registered charge is modified , the company is required to file the particulars of modification within 30days thereof with the Registrar of Companies.

Memorandum of satisfactionA company must make a report to the Registrar of payment of satisfying in full of any charge registered under this act. The satisfaction of charges must be filed with the Registrar within 30 days from the date of such a payment of charge. On receipt of intimation to the company, the Registrar gives notice to the charge-holder calling upon him to show cause within time not exceeding 14 days as why the payment of satisfaction should not be registered. If no cause is shown within the time stipulated above the Registrar must enter the satisfaction of the payment of charge. If some cause is shown, the Registrar must record note to that effect in the register and inform the company accordingly A company is an association of several persons. Decisions are made according to the view of the majority. Various matters have to be discussed and decided upon. These discussions take place at the various meetings which take place between members and between the directors. Needless to say, the importance of meetings cannot be under-emphasised in case of companies. The Companies Act, 1956 contains several provisions regarding meetings. These provisions have to be understood and followed.

For a meeting, there must be at least 2 persons attending the meeting. One member cannot constitute a company meeting even if he holds proxies for other members.

Kinds of Company Meetings :Broadly, meetings in a company are of the following types :-

I. Meetings of Members :These are meetings where the members / shareholders of the company meet and discuss various matters. Member’s meetings are of the following types :-

A. Statutory Meeting :A public company limited by shares or a guarantee company having share capital is required to hold a statutory meeting. Such a statutory meeting is held only once in the lifetime of the company. Such a meeting must be held within a period of not less than one month or within a period not more than six months from the date on which it is entitled to commence business i.e. it obtains certificate of commencement of business. In a statutory meeting, the following matters only can be discussed :-

a. Floatation of shares / debentures by the company b. Modification to contracts mentioned in the prospectus

The purpose of the meeting is to enable members to know all important matters pertaining to the formation of the company and its initial life history. The matters discussed include which shares have been taken up, what money has been received, what contracts have been entered into, what sums have been spent on preliminary expenses, etc. The members of the company present at the meeting may discuss any other matter relating to the formation of the Company or arising out of the statutory report also, even if no prior notice has been given for such other discussions but no resolution can be passed of which notice have not been given in accordance with the provisions of the Act.

A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company.

A statutory meeting may be adjourned from time to time by the members present at the meeting.

The Board of Directors must prepare and send to every member a report called the "Statutory Report" at least 21 days before the day on which the meeting is to be held. But if all the members entitled to attend and vote at the meeting agree, the report could be forwarded later also. The report should be certified as correct by at least two directors, one of whom must be the managing director, where there is one, and must also be certified as correct by the auditors of the company with respect to the shares allotted by the company, the cash received in respect of such shares and the receipts and payments of the company. A certified copy of the report must be sent to the Registrar for registration immediately after copies have been sent to the members of the company.

A list of members showing their names, addresses and occupations together with the number shares held by each member must be kept in readiness and produced at the commencement of the meeting and kept open for inspection during the meeting.

If default is made in complying with the above provisions, every director or other officer of the company who is in default shall be punishable with fine upto Rs. 500. The Registrar or a contributory may file a petition for the winding up of the company if default is made in

delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14 days after the last date on which the statutory meeting ought to have been held.

Contents of Statutory Report must provide the following particulars:- (a)The total number of shares allotted, distinguishing those fully or partly paid-up, otherwise than in cash, the extent to which partly paid shares are paid-up, and in both cases the consideration for which they were allotted.(b) The total amount of cash received by the company in respect of all shares allotted, distinguishing as aforesaid.(c) An abstract of the receipts and payments upto a date within 7 days of the date of the report and the balance of cash and bank accounts in hand, and an account of preliminary expenses.(d) Any commission or discount paid or to be paid on the issue or sale of shares or debentures must be separately shown in the aforesaid abstract.(e) The names, addresses and occupations of directors, auditors, manager and secretary, if any, of the company and the changes which have taken place in the names, addresses and occupations of the above since the date of incorporation.(f) Particulars of any contracts to be submitted to the meeting for approval and modifications done or proposed.(g) If the company has entered into any underwriting contracts, the extent, if any, to which they have not been carried out and the reasons for the failure.(h) The arrears, if any, due on calls from every director and from the manager.(i) The particulars of any commission or brokerage paid or to be paid, in connection with the issue or sale of shares or debentures to any director or to the manager.

The auditors have to certify that all information regarding calls and allotment of shares are correct.

B. Annual General MeetingMust be held by every type of company, public or private, limited by shares or by guarantee, with or without share capital or unlimited company, once a year. Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings. However, a company may hold its first annual general meeting within 18 months from the date of its incorporation. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year only.

In the case there is any difficulty in holding any annual general meeting (except the first annual meeting), the Registrar may, for any special reasons shown, grant an extension of time for holding the meeting by a period not exceeding 3 months provided the application for the purpose is made before the due date of the annual general meeting. However, generally delay in the completion of the audit of the annual accounts of the company is not treated as "special reason" for granting extension of time for holding its annual general meeting. Generally, in such circumstances, an AGM is convened and held at the proper time . all matters other than the accounts are discussed. All other resolutions are passed and the meeting is adjourned to a later date for discussing the final accounts of the company. However, the adjourned meeting must be held before the last day of holding the AGM.

A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. The notice must state that the meeting is an annual general meeting. The time, date and place of the meeting must be mentioned in the notice. The notice of the meeting must be accompanied by a copy of the annual accounts of the company, director’s report on the position of the company for the year and auditor’s report on the accounts. Companies having share capital should also state in the notice that a member is entitled to attend and vote at the meeting and is also entitled to appoint proxies in his absence. A proxy need not

be a member of that company. A proxy form should be enclosed with the notice. The proxy forms are required to be submitted to the company at least 48 hours before the meeting.

The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. The Central Government may, however, exempt any class of companies from the above provisions. If any day is declared by the Central government to be a public holiday after the issue of the notice convening such meeting, such a day will be traeted as a working day.

A company may, by appropriate provisions in its its articles, fix the time for its annual general meeting and may also by a resolution passed in one annual general meeting fix the time for its subsequent annual general meetings.

Companies licensed under Section 25 are exempt from the above provisions provided that the time, date and place of each annual general meeting are decided upon beforehand by the Board of Directors having regard to the directions, if any, given in this regard by the company in general meeting.

In case of default in holding an annual general meeting, the following are the consequences :-

1. Any member of the company may apply to the Company Law Board. The Company Law Board may call, or direct the calling of the meeting, and give such ancillary or consequential directions as it may consider expedient in relation to the calling, holding and conducting of the meeting. The Company Law Board may direct that one member present in person or by proxy shall be deemed to constitute the meeting. A meeting held in pursuance of this order will be deemed to be an annual general meeting of the company. An application by a member of the company for this purpose must be made to the concerned Regional Bench of the Company Law Board by way of petition in Form No. 1 in Annexure II to the CLB Regulations with a fee of rupees fifty accompanied by (i) affidavit verifying the petition, (ii) bank draft for payment of application fee.

2. Fine which may extend to Rs. 5,000 on the company and every officer of the company who is in default may be levied and for continuing default, a further fine of Rs. 250 per day during which the default continues may be levied.

Business to be Transacted at Annual General Meeting :At every AGM, the following matters must be discussed and decided. Since such matters are discussed at every AGM, they are known as ordinary business. All other matters and business to be discussed at the AGM are specila business.

The following matters constitute ordinary business at an AGM :-

a. Consideration of annual accounts, director’s report and the auditor’s report b. Declaration of dividend

c. Appointment of directors in the place of those retiring

d. Appointment of and the fixing of the remuneration of the statutory auditors.

In case any other business ( special business ) has to be discussed and decided upon, an explanatory statement of the special business must also accompany the notice calling the meeting. The notice must should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice must also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings.

C. Extraordinary General MeetingEvery general meeting (i.e. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof, is an extraordinary general meeting. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is special business. An explanatory statement of the special business must also accompany the notice calling the meeting. The notice must should also give the nature and extent of the interest of the directors or manager in the special business, as also the extent of the shareholding interest in the company of every such person. In case approval of any document has to be done by the members at the meeting, the notice mus also state that the document would be available for inspection at the Registered Office of the company during the specified dates and timings.

The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks fit, call an extraordinary general meeting" or it may provide that "if at any time there are not within India, directors capable of acting who are sufficient in number to form a quorum, any director or any two members of the company may call an extraordinary general meeting".

Extraordinary General Meeting on Requisition :The members of a company have the right to require the calling of an extraordinary general meeting by the directors. The board of directors of a company must call an extraordinary general meeting if required to do so by the following number of members :-

a. members of the company holding at the date of making the demand for an EGM not less than one-tenth of such of the voting rights in regard to the matter to be discussed at the meeting ; or

b. if the company has no share capital, the members representing not less than one-tenth of the total voting rights at that date in regard to the said matter.

The requisition must state the objects of the meetings and must be signed by the requisitioning members. The requisition must be deposited at the company's registered office. When the requisition is deposited at the registered office of the company, the directors should within 21 days, move to call a meeting and the meeting should be actually be held within 45 days from the date of the lodgement of the requisition. If the directors fail to call and hold the meeting as aforesaid, the requisitionists or any of them meeting the requirements at (a) or (b) above, as the case may be, may themselves proceed to call meeting within 3 months from the date of the requisition, and claim the necessary expenses from the company. The company can make good this sum from the directors in default. At such an EGM, any business which is not covered by the agenda mentioned in the notice of the meeting cannot be voted upon.

Power of Company Law Board to Order Calling of Extraordinary General Meeting :If for any reason, it is impracticable to call a meeting of a company, other than an annual general meeting, or to hold or conduct the meeting of the company, the Company Law

Board may, either i) on its own motion, or ii) on the application of any director of the company, or of any member of the company, who would be entitled to vote at the meeting, order a meeting to be called and conducted as the Company Law Board thinks fit, and may also give such other ancillary and consequential directions as it thinks fit expedient. A meeting so called and conducted shall be deemed to be a meeting of the company duly called and conducted.

Procedure for Application under Section 186 :An application by a director or a member of a company for this purpose is required to be made to the Regional Bench of the Company Law Board before whom the petition is to be made in Form No 1 specified in Annexure II to the CLB Regulations with a fee of Rs200. The petition must be accompanied with the following documents -

a. Evidence in proof of status of the applicant. b. Affidavit verifying the petition.

c. Bank draft evidencing payment of application fee.

d. Memorandum of appearance with copy of the Board's resolution or executed vakalat nama, as the case may be.

D. Class MeetingClass meetings are meetings which are held by holders of a particular class of shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to vary the rights of that particular class of shares. At such meetings, these members dicuss the pros and cons of the proposal and vote accordingly. (See provisions on variations of shareholder’s rights). Class meetings are held to pass resolution which will bind only the members of the class concerned, and only members of that class can attend and vote.

Unless the articles of the company or a contract binding on the persons concerned otherwise provides, all provisions pertaining to calling of a general meeting and its conduct apply to class meetings in like manner as they apply with respect to general meetings of the company.

II. Meetings of the Board of Directors

- Meeting of the Board of Directors

- Meeting of a Committee of the Board

III. Other MeetingsA. Meeting of debenture holdersA company issuing debentures may provide for the holding of meetings of the debentureholders. At such meetings, generally nmmatters pertaining to the variation in terms of security or to alteration of their rights are discussed. All matters connected with the holding, conduct and proceedings of the meetings of the debentureholders are normally specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed majority are valid and lawful and binding upon the minority.

B. Meeting of creditorsSometimes, a company, either as a running concern or in the event of winding up, has to make certain arrangements with its creditors. Meetings of creditors may be called for this purpose. Eg U/s 393, a company may enter into arrangements with creditors with the

sanction of the Court for reconstruction or any arrangement with its creditors. The court, on application, may order the holding of a creditors' s meeting. If the scheme of arrangement is agreed to by majority in number of holding debts to value of the three-fourth of the total value of the debts, the court may sanction the scheme. A certified copy of the court's order is then filed with the Registrar and it is binding on all the creditors and the company only after it is filed with Registrar.

Similarly, in case of winding up of a company, a meeting of creditors and of contributories is held to ascertain the total amount due by the company and also to appoint a liquidator to wind up the affairs of the company.

Requisites of a Valid Meetings The following conditions must be satisfied for a meeting to be called a valid meeting :-

1. It must be properly convened. The persons calling the meeting must be authorised to do so.

2. Proper and adequate notice must have been given to all those entitled to attend.

3. The meeting must be legally constituted. There maust be a chairperson. The rules of quorum must be maintained and the provisions of the Companies Act, 1956 and the articles must be complied with.

4. The business at the meeting must be validly transacted.. The meeting must be conducted in accordance with the regulations governing the meetings.

Notice of General MeetingA meeting cannot be held unless a proper notice has been given to all persons entitled to attend the meeting at the proper time, containing the necessary information. A notice convening a general meeting must be given at least 21 clear days prior to the date of meeting. However, an annual general meeting may be called and held with a shorter notice, if it is consented to by all the members entitled to vote at the meeting. In respect of any other meeting, it may be called and held with a shorter notice, if at least members holding 95 percent of the total voting power of the Company consent to a shorter notice.

Notice of every meeting of company must be sent to all members entitled to attend and vote at the meeting. Notice of the AGM must be given to the statutory auditor of the company.

Accidental omission to give notice to, or the non-receipt of notice by, any member or any other person on whom it should be given will not invalidate the proceedings of the meeting. The notice may be given to any member either personally or by sending it by post to him at his registered address, or if there is none in India, to any address within India supplied by him for the purpose. Where notice is sent by post, service is effected by properly addressing, pre-paying and posting the notice. A notice may be given to joint holders by giving it to the jointholder first named in the register of members. A notice of meeting may also be given by advertising the same in a newspaper circulating in the neighbourhood of the registered office of the company and it shall be deemed to be served on every member who has to registered address in India for the giving of notices to him.

A notice calling a meeting must state the place, day and hour of the meeting and must contain the agenda of the meeting. If the meeting is a statutory or annual general meeting, notice must describe it as such. Where any items of special business are to be transacted at the meeting, an explanatory statement setting out all materials facts concerning each item

of the special business including the concern or interest, if any, therein of every director and manager, is any, must be annexed to the notice. If it is intended to propose any resolution as a special resolution, such intention should be specified.

A notice convening an AGM must be accompanied by the annual accounts of the company, the director’s report and the auditor’s report. The copies of these documents could, however, be sent less than 21 days before of the date of the meeting if agreed to by all members entitled to vote at the meeting.

ProxyIn case of a company having a share capital and in the case of any other company, if the articles so authorise, any member of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint another person (whether a member or not) as his proxy to attend and vote instead of himself. Every notice calling a meeting of the company must contain a statement that a member entitled to attend and vote is entitled to appoint one proxy in the case of a private company and one or more proxies in the case of a public company and that the proxy need not be member of the company.

A member may appoint another person to attend and vote at a meeting on his behalf. Such other person is known as "Proxy". A member may appoint one or more proxies to vote in respect of the different shares held by him, or he may appoint one or more proxies in the alternative, so that if the first named proxy fails to vote, the second one may do so, and so on.

The member appointing a proxy must deposit with the company a proxy form at the time of the meeting or prior to it giving details of the proxy appointed. However, any provision in the articles which requires a period longer than forty eight hours before the meeting for depositing with the company any proxy form appointing a proxy, shall have the effect as if a period of 48 hours had been specified in such provision.

A company cannot issue an invitation at its expense asking any member to appoint a particular person as proxy. If the company does so, every officer in default shall be liable to fine up to Rs1,000. But if a proxy form is sent at the request of a member, the officer shall not be liable. Every member entitled to vote at a meeting of the company, during the period beginning 24 hours before the date fixed for the meeting and ending with the conclusion of the meeting may inspect proxy forms at any time during business hours by giving 3 days notice to the company of his intention to do so.

The proxy form must be in writing and be signed by the member or his authorised attorney duly authorised in writing or if the appointer is a company, the proxy form must be under its seal or be signed by an officer or an attorney duly authorised by it.

The proxy can be revoked by the member at any time, and is automatically revoked by the death or insolvency of the member. The member may revoke the proxy by voting himself before the proxy has voted, but once the proxy has exercised the vote, the member cannot retract his vote. Where two proxy forms by the same shareholder are lodged in respect of the same votes, the last proxy form will be treated as the correct proxy form.

A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of hands.

QuorumQuorum refers to the minimum number of members who must be present at a meeting in

order to constitute a valid meeting. A meeting without the minimum quorum is invalid and decisions taken at such a meeting are not binding. The articles of a company may provide for a quorum without which a meeting will be construed to be invalid. Unless the articles of a company provide for larger quorum, 5 members personally present (not by proxy) in the case of a public company and 2 members personally present (not by proxy) in the case of a private company shall be the quorum for a general meeting of a company.

It has been held by Courts that unless the articles otherwise provide, a quorum need to be present only when the meeting commenced, and it was immaterial that there was no quorum at the time when the vote was taken. Further, unless the articles otherwise provide, if within half an hour from the time appointed for holding a meeting of the company, a quorum is not present in the person, the meeting :-

a. if called upon the requisition of members, shall stand dissolved; b. in any other case, it shall stand adjourned to the same day in the next week, at the

same time and place, or to such other day and time as the Board of Directors may determine.

If at the adjourned meeting also, the quorum is not present within half an hour from the time appointed for holding the meeting, the members present shall a quorum.

In case the Company Law Board calls or directs the calling of a meeting of the company, when default is made in holding an annual general meeting, the government may give directions regarding the quorum including a direction that even one member of the company present in person, or by proxy shall be deemed to constitute a meeting. Similarly the Company Law Board may, direct a meeting of the company (other than an annual general meeting) to be called and held where for any reason it is impracticable to call a meeting and direct that even one member present in person or by proxy shall be deemed to constitute a meeting.

ChairmanThe chairman is the head of the meeting. Generally, the chairman of the Board of Directors is the Chairman of the meeting. Unless the articles otherwise provide, the members present in person at the meeting elect one of themselves to be the chairman thereof on a show of the hands. If there is no Chairman or he is not present within 15 minutes after the appointed time of the meeting or is unwilling to act as chairman of the meeting, the directors present may elect one among themselves to be the chairman of the meeting. If, however no director is willing to act as chairman or if no director is present within 15 minutes after the appointed time of the meeting, the members present should choose one among themselves to be chairman of the meeting. If, after the election of a chairman on a show of hands, poll is demanded and taken and a different person is elected as chairman, then that person will be the chairman for the rest of the meeting.

Duties of the chairmanWithout a chairman, a meeting is incomplete. The chairman is the regulator of the meeting. His duties include the following :-

1. He must ensure that the meeting is properly convened and constituted i.e. that proper notice has been given, that the required quorum is present, etc.

2. He must ensure that the provisions of the act and the articles in regard to the meeting and its procedures are observed.

3. He must ensure that business is taken in the order set out in agenda and no business which is not mentioned in the agenda is taken up unless agreed to by the members.

4. He must impartially regulate the proceedings of the meeting and maintain discipline at the meeting.

5. He may exercise his powers of adjournment of the meeting, should he in good faith feel that such a step is necessary. The chairman has the power to adjourn the meeting in case of indiscipline at the meeting. A chairman however does not have the power to stop or adjourn the meeting at his own will and pleasure. If he adjourns the meeting prematurely, the members present may decide to continue the meeting and elect another chairman and proceed with the business for which it was convened.

6. He must exercise his power to order a poll correctly and must order it to be taken when demanded properly.

7. He must exercise his casting vote bonafide in the interest of the company.

Voting and Demand for PollGenerally, initially matters are decided at a general meeting by a show of hands. If the majority of the hands raise their hands in favour of a particular resolution, then unless a poll is demanded, it is taken as passed. Voting by a show of hands operates on the principle of "One Member-One Vote". However, since the fundamental voting principle in a company is "One Share-One Vote", if a poll is demanded, voting takes place by a poll. Before or on declaration of the result of the voting on any resolution on a show of hands, the chairman may order suo motu (of his own motion) that a poll be taken. However, when a demand for poll is made, he must order the poll be taken. The chairman may order a poll when a resolution proposed by the Board is lost on the show of hands or if he is of the opinion that the decision taken on the show of hands is likely to be reversed by poll. When a poll is taken, The decision arrived by poll is final and the decision on the show of hands has no effect.

A poll is allowed only if the prescribed number of members demand a poll. A poll must be ordered by the chairman if it is demanded:-

a. in the case of a public company having a share capital, by any member or members present in person or by proxy and holding shares in the company-

i. which confer a power to vote on the resolution not being less than one-tenth of the total voting power in respect of the resolution, or

ii. on which an aggregate sum of not less than fifty thousand rupees has been paid up.

b. in the case of a private company having a share capital, by one member having the right to vote on the resolution and present in person or by proxy if not more than seven such members are personally present, and by two such members present in person or by proxy, if more than seven such members are personally present.

c. in the case of any other, by any member or members present in person or by proxy and having not less than one-tenth of the total voting power in respect of the resolution.

MotionMotion means a proposal to be discussed at a meeting by the members. A resolution may be passed accepting the motion, with or without modifications or a motion may be entirely rejected. A motion, on being passed as a resolution becomes a decision. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. Only those motions which are mentioned in the agenda to the meeting can be discussed at the meeting. However, motions incidental or ancillary to the matter under discussion may be moved and passed. Generally, a motion is proposed by one member and seconded by another member.

AmendmentAmendment means any modification to a motion before it is put to vote for adoption. Amendment may be proposed by any member who has not already spoken on the main motion or has not previously moved an amendment thereto. There can be an amendment to an amendment motion also. A motion must be in writing and signed by the mover and put to the vote of the meeting by the chairman. An amendment must not raise any question already decided upon at the same meeting and must be relevant to the main motion which it seeks to amend. The chairman has the discretion to accept or reject an amendment on various grounds such as inconsistency, redundancy, irrelevance, etc. If the amendment is adopted on a vote by the members, it is incorporated in the body of the main motion. The altered motion is then discussed and put to vote and if passed, becomes a resolution.

Kinds of ResolutionsResolutions mean decisions taken at a meeting. A motion, with or without amendments is put to vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be passed at a properly convened meeting with the required quorum. There are broadly three types of resolutions :-

1. Ordinary Resolution :An ordinary resolution is one which can be passed by a simple majority. I.e. if the votes (including the casting vote, if any, of the chairman), at a general meeting cast by members entitled to vote in its favour are more than votes cast against it. Voting may be by way of a show of hands or by a poll provided 21 days notice has been given for the meeting.

2. Special Resolution :A special resolution is one in regard to which is passed by a 75 % majority only i.e. the number of votes cast in favour of the resolution is at least three times the number of votes cast against it, either by a show of hands or on a poll in person or by proxy. The intention to propose a resolution as a special resolution must be specifically mentioned in the notice of the general meeting. Special resolutions are needed to decide on important matters of the company. Examples where special resolutions are required are :-

a. To alter the domicile clause of the memorandum from one State to another or to alter the objects clause of the memorandum.

b. To alter / change the name of the company with the approval of the central government

c. To alter the articles of association

d. To change the name of the company by omitting "Limited" or "Private Limited". The Central Government may allow a company with charitable objects to do so by special resolution under section 25 of the Companies Act, 1956.

3. Resolution requiring Special Notice :There are certain matters specified in the Companies Act, 1956 which may be discussed at a general meeting only if a special notice is given regarding the proposal to discuss these matters at a meeting. A special notice enables the members to be prepared on the matter to be discussed and gives them time to indicate their views on the resolution. In case special notice of resolution is required by the Companies Act, 1956 or by the articles of a company, the intention to propose such a resolution must be notified to the company at least 14 days before the meeting. The company must within 7 days before the meeting give the notice of the proposed resolution to its members. Notice of the resolution is required to be given in the same way in which notice of a meeting is given, or if that is not practicable, the company may give notice by advertisement in a newspaper having an appropriate circulation or in any other manner allowed by the articles, not less 7 days before the meeting.

The following matters requiring Special Notice before they are discussed before tha meeting :-

a. To appoint at an annual general meeting appointing an auditor a person other than a retiring auditor.

b. To resolve at an annual general meeting that a retiring auditor shall not be reappointed.

c. To remove a director before the expiry of his period of office.

d. To appoint another director in place of removed director.

e. Where the articles of a company provide for the giving of a special notice for a resolution, in respect of any specified matter or matters.

Please note that a resolution requiring special notice may be passed either as an ordinary resolution (Simple majority) or as a special resolution (75 % majority).

Circulation of Member's ResolutionGenerally, the Board of Directors prepare the agenda of the meeting to be sent to all members of the meeting. A member, by himself has very little say in deciding the agenda. However, there are provisions in the Companies Act which enable members to introduce motions at a meeting and give prior notice of their intention to do so to all other members of the company. If members having one twentieth of the total voting rights of all members having the right to vote on a resolution or if 100 members having the right to vote and holding paid-up capital of Rs1,00,000 or more, require the company to do so, the company must :-

1. Give to the members entitled to receive notice of the next annual general meeting, notice of any resolution which may be properly moved and is intended to be moved at that meeting; and

2. Circulate to members entitled to have notice of any general meeting sent to them, any statement of not more than 1,000 words with respect to the matter referred to in any proposed resolution, or any business to be dealt with at that meeting. 

The expenses for this purpose must be borne by the requisitionists and must be tendered to the company. The requisition, signed by all the requisitionists, must be deposited at the registered office of the company at least 6 weeks before the meeting in the case of resolution and not less than 2 weeks before the meeting in case of any other requisition

together with a reasonable sum to meet the expenses. However, where a copy of the requisition requiring notice of resolution has been deposited at the registered office of the company and an annual general meeting is called for a date six weeks or less after the requisition is deposited, the copy though not deposited within the prescribed time is deemed to have been properly deposited.

The company is required to serve the notice of resolution and/or the statement to the members as far as possible in the manner and so far as practicable at the same time as the notice of the meeting ; otherwise as soon as practicable thereafter.

However, a company need not circulate a statement if the Court, on the application either of the company or any other aggrieved person, is satisfied that the rights so conferred are being abused to secure needless publicity or for defamatory purposes. Secondly a banking company need not circulate such statement, if in the opinion of its Board of directors, the circulation will injure the interest of the company.

Registration of Resolutions and AgreementsA copy of each of the following resolutions along with the explantory statement in case of a special business and agreements must, within 30 days after the passing or making thereof, be printed or typewritten and duly certified under the signature of an officer of the company and filed with the Registrar of Companies who shall record the same :-

1. All special resolutions 2. All resolutions which have been unanimously agreed to by all the members but

which, if not so agreed, would not have been effective unless passed as special resolutions

3. All resolutions of the board of directors of a company or agreement executed by a company, relating to the appointment, re-appointment or renewal of the appointment, or variation of the terms of appointment, of a managing director

4. All resolutions or agreements which have been agreed to by all members of any class of members but which, if not so agreed, would not have been effective unless passed by a particular majority or in a particular manner and all resolutions or agreements which effectively bind all members of any class of shareholders though not agreed to by all of those members

5. All resolutions passed by a company conferring power upon its directors to sell or dispose of the whole or any part of the company's undertaking; or to borrow money beyond the limit of the paid-up share capital and free reserves of the company; or to contribute to charities beyond Rs50000 or 5 per cent of the average net profits

6. All resolutions approving the appointment of sole selling agents of the company

7. All copies of the terms and conditions of appointment of a sole selling agent or sole buying or purchasing agent

8. Resolutions for voluntary winding up of a company

AdjournmentAdjournment means suspending the proceedings of a meeting for the time being so that the meeting may be continued at a later date and time fixed in that meeting itself at the time of

such adjournment or to decided later on. Only the business not finished at the original meeting can be transacted at the adjourned meeting.

The majority of members at a meeting may move an adjournment motion at a meeting. If the chairman adjourns the meeting, ignoring the views of the majority, the remaining members can continue the meeting. The chairman cannot adjourn the meeting at his own discretion without there being a good cause for such an adjournment. Where the chairman, acting bona fide within his powers, adjourns the meeting as per the view of the majority, the minority members cannot to continue with such meeting and, if they do the proceedings there will be null and void.

An adjourned meeting is merely the continuation of the original meeting and therefore, a fresh notice is not necessary, if the time, date and place for holding the adjourned meeting are decided and declared at the time of adjourning it. If a meeting is adjourned without stipulation as to when it will be continued, fresh notice of the adjourned meeting must be given.

PostponementPostponement of a meeting means defering the holding of the meeting itself at a later date. Postponement is done by the Board of Directors or by the person convening the meeting. In case of adjournment, it is the decision of the majority of the members present at the meeting itself.

DissolutionDissolution of a meeting means termination of a meeting. The meeting no longer exists once it has been dissolved. If within half an hour after the time appointed for holding a general meeting; the quorum is not present, the meeting shall stand dissolved if it was called on requisition by members.

Minutes of Proceedings of MeetingsEvery company must keep minutes of the proceedings of general meetings and of the meetings of board of directors and its committees. The minutes are a record of the discussions made at the meeting and the final decisions taken thereat.

Every company must keep minutes containing details of all proceedings at the meetings. The pages of the minute books must be consecutively numbered and the minutes must be recorded therein within 30 days of the meeting. They have to be written directly on the numbered pages. Pasting or attaching of papers is not allowed. Each page of every such minutes books must be initialed or signed and last page of the record of proceedings of each meeting in such books must be dated and signed by :-

a. in the case of the meeting of the Board of directors or committee thereof, by the chairman of that meeting or that of the succeeding meeting, and

b. in the case of a general meeting, by the chairman of the same meeting within the aforesaid 30 days or in the event of the death or inability of that chairman within the period, by a director duly authorised by the Board of directors for the purpose.

The Company Law Board, however, may not object if minutes are maintained in loose leaf form provided all other procedural requirements are complied with and all possible safeguards against manipulation or interpolation of the minutes are ensured. The loose leaves must be bound at reasonable intervals. Entering the minutes in a bound minute book by a chemical process, which does not amount to attachment to any book by pasting or otherwise is permissible provided on the mechanical impression of the minutes, the original

signatures of the Chairman are given on each page. All appointments of officers made at any of the meetings must be included in the minutes of the meeting. In the case of a meeting of the Board of directors or its Committee, the minutes must also state the names of directors present at the meeting and the names of directors, if any, dissenting from, or not concurring with a resolution passed at the meeting.

The chairman may exclude from the minutes any matters which are defamatory, irrelevant or immaterial or which are detrimental to the interests of the company. The discretion of the Chairman with regard to the inclusion or exclusion of any matter is absolute and unfettered.

Where minutes of the proceedings of any meeting have been kept properly, they are, unless the contrary is proved, presumed to be correct, and are valid evidence that the meeting was duly called and held, and all proceedings thereat have actually taken place, and in particular, all appointments of directors or liquidators made at the meeting shall be deemed to be valid.

The minute books of the proceedings of general meetings must be kept the registered office of the company. Any member has a right to inspect, free of cost during business hours at the registered office of the company, the minutes books containing the proceedings of the general meetings of the company. Further, any member shall be entitled to be furnished, within 7 days after he has made a request to the company, with a copy of any minutes on payment of Rupee One for every hundred words or fraction thereof. If any inspection is refused or copy not furnished within the time specified, every officer in default shall be punishable with fine up to Rs. 500 for each offence. The Company Law Board may also by order compel an immediate inspection or furnishing of a copy forthwith. But the minutes books of the board meetings are not open for inspection of members

Books of Account to be kept by a CompanyEvery 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 alongwith 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 alloted 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 willful 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 AccountThe 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 AccountThough 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 AccountThe 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 AccountThe 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' ReportA 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 debentureholders only a summarised statement containing the salient features of these documents in the prescribed format.

Filing of Annual Accounts with the RegistrarEvery 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 occured 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

Auditors of Government CompaniesThe 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 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 CompaniesIt 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 refered 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.

==========================================================================

Inter Corporate Loans and Investments

A company cannot :-

i. make any loan to any other body corporate ii. give guarantee or security in connection with any loan made by any person to

another body corporate

iii. acquire, by subscription, purchase or in any other manner, securities in any other body corporate

exceeding 60 % of its paid up share capital and free reserves or 100 % of its free reserves, whichever is more, unless approved by a special resolution passed at a general meeting of members.

The Board of the company may give a guarantee without being previously authorised by a special resolution of members if all the following conditions are satisfied :-

i. a Board resolution is passed to this effect ii. there exist exceptional circumstances which prevent the company from obtaining

previous authorisation by special resolution

iii. the Board resolution is confirmed within 12 months in a general meeting or its next Annual general meeting, whichever is earlier.

Notice of such resolution must clearly indicate the specific limits, the particulars of the body corporate in which the investment / loan / guarantee / security is proposed, the purpose of the investment / loan / guarantee / security, sources of funding, etc.

No investment / loan / guarantee / security may be made or given unless the Board resolution sanctioning it is with the consent of all directors present at the meeting and prior approval of the public financial institution ( if any term loan is outstanding ) is obtained.

Approval of the public financial institution is not required if the investment / loan / guarantee / security is with the 60 % limit as mentioned above and there has been no default in repaying the term loan and / or interest thereon.

No loan can be made at a rate of interest lower than the bank rate prescribed by the Reserve Bank of India.

A company which has defaulted in repaying public fixed deposits cannot make or give any investment / loan / guarantee / security unless the fixed deposit is fully repaid along with interest due as per the terms and conditions of the fixed deposit.

A register of such inter-corporate loans and investments must be maintained giving the relevant details.

The above provisions do not apply to :-

i. Any loan / guarantee / security made or given by :-

a. a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company established with the object of financing industrial enterprises or providing infrastructural facilities

b. a company whose principal business is the acquisition of shares, stocks, debentures or other securities

c. a private company unless it is a subsidiary of a public company

ii. Investment made under Rights issue of securities

iii. Loan made by holding company to its wholly subsidiary company

iv. Guarantee or security given by a holding company for loan to its wholly owned subsidiary

v. Acquisition of securities by a holding company in its wholly owned subsidiary

Books of Account to be kept by a CompanyEvery 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 alongwith 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 alloted 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 willful 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 AccountThe 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 AccountThough 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 AccountThe 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 AccountThe 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' ReportA 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 debentureholders only a summarised statement containing the salient features of these documents in the prescribed format.

Filing of Annual Accounts with the RegistrarEvery 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 occured 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

Auditors of Government CompaniesThe 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 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 CompaniesIt 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 refered 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.

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Inter Corporate Loans and Investments

A company cannot :-

i. make any loan to any other body corporate ii. give guarantee or security in connection with any loan made by any person to

another body corporate

iii. acquire, by subscription, purchase or in any other manner, securities in any other body corporate

exceeding 60 % of its paid up share capital and free reserves or 100 % of its free reserves, whichever is more, unless approved by a special resolution passed at a general meeting of members.

The Board of the company may give a guarantee without being previously authorised by a special resolution of members if all the following conditions are satisfied :-

i. a Board resolution is passed to this effect ii. there exist exceptional circumstances which prevent the company from obtaining

previous authorisation by special resolution

iii. the Board resolution is confirmed within 12 months in a general meeting or its next Annual general meeting, whichever is earlier.

Notice of such resolution must clearly indicate the specific limits, the particulars of the body corporate in which the investment / loan / guarantee / security is proposed, the purpose of the investment / loan / guarantee / security, sources of funding, etc.

No investment / loan / guarantee / security may be made or given unless the Board resolution sanctioning it is with the consent of all directors present at the meeting and prior approval of the public financial institution ( if any term loan is outstanding ) is obtained.

Approval of the public financial institution is not required if the investment / loan / guarantee / security is with the 60 % limit as mentioned above and there has been no default in repaying the term loan and / or interest thereon.

No loan can be made at a rate of interest lower than the bank rate prescribed by the Reserve Bank of India.

A company which has defaulted in repaying public fixed deposits cannot make or give any investment / loan / guarantee / security unless the fixed deposit is fully repaid along with interest due as per the terms and conditions of the fixed deposit.

A register of such inter-corporate loans and investments must be maintained giving the relevant details.

The above provisions do not apply to :-

i. Any loan / guarantee / security made or given by :-

a. a banking company or an insurance company or a housing finance company in the ordinary course of its business or a company established with the object of financing industrial enterprises or providing infrastructural facilities

b. a company whose principal business is the acquisition of shares, stocks, debentures or other securities

c. a private company unless it is a subsidiary of a public company

ii. Investment made under Rights issue of securities

iii. Loan made by holding company to its wholly subsidiary company

iv. Guarantee or security given by a holding company for loan to its wholly owned subsidiary

v. Acquisition of securities by a holding company in its wholly owned subsidiary

Minimum number of directorsEvery public company ( other than a deemed public company ) must have at least three directors. Every other company must have at least two directors.

The directors of a company collectively are referred to as the "Board of directors" or "Board". Only individuals can be appointed as directors. No body corporate, association or firm can be appointed director of a Company.

In case the first directors are not appointed by the promoters of a company, subscribers of the memorandum who are individuals, shall be deemed to be the directors of the company, until the directors are duly appointed.

Appointment of directors and proportion of those who are to be retire by rotationUnless that articles provide for the retirement of all directors at every annual general meeting, at least two-thirds of the total number of directors of a public company, or of a private company which is subsidiary of a public company, must :-

(a) retire by rotation

(b) be appointed by the company in general meeting, except where otherwise provided by the Companies Act.

The remaining directors in the case of any such company, and the directors generally in the case of a private company which is not a subsidiary of a public company, must also be appointed by the company in general meeting, unless otherwise provided in any regulations in the articles of the company.

Ascertainment of directors retiring by rotation and filling of vacanciesAt every annual general meeting of a public company, or a private company which is a subsidiary of a public company, one-third of the directors liable to retirement by rotation or if their number is not three or a multiple of three, then, the number nearest to one-third, shall retire from office.

The directors to retire by rotation at every annual general meeting shall be those who have been longest in office since their last appointment, but as between persons who became directors on the same day, those who will have to retire is to be determined by lot, unless otherwise agreed to among themselves.

At the annual general meeting at which a director retires as aforesaid the company may fill up the vacancy by appointing the retiring director or some other person thereto. In other words, a retiring director is eligible for re-appointment at the same meeting.

If the place of the retiring director is not so filled up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the

next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.

If at the adjourned meeting also, the place of the retiring director is not filled up and that meeting also 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

i. a resolution for the re-appointment of such director has been put to the meeting and lost

ii. the retiring director, has by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed

iii. he is not qualified or is disqualified for appointment

iv. a resolution, whether special or ordinary, is required for his appointment or re-appointment in virtue of any provisions of this Act.

Right of persons other than retiring directors to stand for directorshipA person who is not a retiring director shall, subject to the provisions of this Act, be eligible for appointment to the office of director at any general meeting, if he or some member intending to propose him has, given notice in writing to the company at its registered office of at least 14 days before the meeting, signifying his candidature for the office of director or the intention of such member to propose him as a candidate for that office along with a deposit of rupees five hundred ( refundable on successful election ).

The company must inform its members of such candidature by giving at least 7 days prior notice. Such notice may not be required if the company advertises such candidature at least 7 days before the meeting in at least 2 newspapers circulating in the place where the registered office of the company is situated, one of which must be in English and the other in the regional language.

This provision shall not apply to a private company, unless it is a subsidiary of a public company.

Right of company to increase or reduce the number of directorsA company, at a general meeting may, by ordinary resolution, increase or reduce the number of its directors within the limits fixed in that behalf by its articles.

Increase in number of directors to require Government sanctionIn the case of a public company, or a private company which is a subsidiary of a public company, any increase in the number of its directors, beyond the maximum number of directors permitted by the Articles of the Company as first registered, shall not have any effect unless approved by the Central Government and shall become void if, and in so far as, it is disapproved by that Government.

However, where such permissible maximum is 12 or less, no approval of the Central Government is required provided the increase does not increase the number of directors beyond 12.

Additional directorsThe Board of directors may appoint additional directors if such power is conferred on it by

the articles of the company. Such additional directors shall hold office only up to the date of the next annual general meeting of the company.

Provided further that the number of the directors and additional directors together shall not exceed the maximum strength fixed for the Board by the articles.

Filling of casual vacancies among directorsIn the case of a public company or a private company which is a subsidiary of a public company, if the office of any director appointed by the company in general meeting is vacated before his term of office will expire in the normal course, the resulting casual vacancy may, in default of and subject to any regulations in the articles of the company, be filled by the Board of directors at a meeting of the Board.

Any person so appointed shall hold office only up to the date up to which the director in whose place he is appointed would have held office if it had not been vacated as aforesaid.

Appointment and term of office of alternate directorThe Board of directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint an alternate director to act for a director during his absence for a period of not less than three months from the State in which meetings of the Board are ordinarily held.

An alternate director so appointed shall not hold office for a period longer than the period for which the original director hold office and vacate office if and when the original director returns to the State in which meetings of the Board are ordinarily held.

Appointment of directors to be voted on individuallyAt a general meeting of public company or of a private company which is a subsidiary of a public company, each director has to be appointed separately by a separate resolution. However, appointment of more than one director through the same resolution will be valid if it has been passed unanimously. A resolution moved in contravention of the aforesaid provision shall be void, whether or not objection was taken at the time to its being so moved:

Consent of candidate for directorship to be filled with RegistrarA person shall not act as director of a company unless he has, by himself or by his agent authorised in writing, signed and filed with the Registrar, a consent in writing to act as such director within 30 days of his appointment. This provision shall not apply to a private company unless it is a subsidiary of a public company.

Option to company to adopt proportional representation for the appointment of directorsIf the articles of a company provide for the appointment of not less than two-thirds of the total number of the directors of a public company or of a private company which is a subsidiary of a public company, according to the principle of proportional, representation, whether by the single transferable vote or by a system of cumulative voting or otherwise. Such appointments may be made once in every three years and interim casual vacancies being filled by the Board of Directors as Casual Vacancies. This may enable minority shareholders to have a proportional representation on the Board of Directors of the company.

Restrictions on appointment or advertisement of directorA person shall not be capable of being appointed director of a company by the articles,

unless before the registration of the articles, the publication of the prospectus, or the filing of the statement in lieu of prospectus, as the case may be , he has, by himself or by his agent authorised in writing

(a) signed and filed with the Registrar a consent in writing to act as such director; and

(b) either ;-

i. signed the memorandum for shares not being less in number or value than that of his qualification shares, if any, or

ii. taken his qualification shares, if any, from the company and paid or agreed to pay for them; or

iii. signed and filed with the Registrar and undertaking in writing to take from the company his qualification shares, if any, and pay for them; or

iv. made and filed with the Registrar an affidavit to the effect that shares, not being less in number or value than that of his qualification shares, if any, are registered in his name.

Qualification shares are the minimum number of shares a person must own, as provided in the articles of the company, in order to qualify to become a director of the company. Qualification shares must be acquired by a director within 2 months of his appointment. The articles cannot require a director to acquire qualification shares within a shorter period. The face value of the qualification shares cannot exceed five thousand rupees, or if the face value of one share is more than five thousand rupees, then the qualification share will be one qualification share.

Every director, not being a technical director of a director appointed, by the Central or a State Government, shall within two months after his appointment file with the company a declaration specifying the qualification shares held by him. If, after the expiry of the said period of two months, any person acts as a director of the company when he does not hold the qualification shares, he shall be punishable with the fine which may extend to fifty rupees for every day between such expiry and the last day on which he acted as a director.

The above provisions do not apply to-

a. a company not having a share capital; b. a private company;

c. a company which was a private company before becoming a public company; or

d. a prospectus issued by or on behalf of a company after the expiry of one year from the date on which the company was entitled to commence business.

Managing DirectorsManaging Director means a person who, by virtue of an agreement with the company or of a resolution passed by the company in a general meeting or by its Board of directors or by virtue of its memorandum or articles of association, is entrusted with substantial powers of management which could not otherwise be exercisable by him and includes a director

occupying the position of a managing director, by whatever name called. The power merely to do administrative acts of a routine nature, when so authorised by the Board such as the power to affix the common seal of the company on any document or to draw and endorse any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or to sign any share certificate or to direct registration of share transfers will not be deemed to be included within substantial powers of management. The managing director must exercise his powers subject to the superintendence, control and direction of the Board.

Certain persons not to be appointed managing directorsNo company can, appoint or employ, or continue the appointment or employment of, any person as its managing or whole time director who-

a. is an undischarged insolvent, or has at any time been adjudged an insolvent b. suspends, or has at any time suspended, payment to his creditors or makes, or has

at any time made, a composition with them

c. is, or has at any time been, convicted by a Court in India of an offence involving moral turpitude.

Every public company or a private company which is a subsidiary of a public company, having a paid up share capital of Rs. 5 crores or more must have a managing director or wholetime director or manager.

Appointment of managing director or wholetime director or manager of a public company or a private company which is a subsidiary of a public company requires the approval of the Central Government unless the appointment is in accordance with the conditions specified in Schedule XIII of the Companies Act, 1956 and a returm in Form 25 C is filed within 30 days of appointment.

Application for approval must be made to the Central Government if Form 25 A within 90 days of appointment. The Central Government shall grant its approval if it is satisfied that :-

a. the managing director or wholetime director or manager is in its opinion, a fit and proper person

b. such appointment is not against public interest

c. the terms and conditions of the appointment are fair and reasonable.

The Central Government may grant approval for a period less that the period for which approval is sought.

In case the approval of the Central Government is refused, the appointed person shall vacate his office on the date of communication of the decision of the Central Government to the company and if he omits to do so, he shall be liable to a fine of Rs. 500/- for each day of default.

The Central Government, on information received by it or suo moto, is of the opinion that such appointment made without approval of the Central Government contravenes the conditions given in Schedule XIII, it may refer the matter to the Company Law Board for decision.

On receipt of the order of the Company Law Board against the company,:-

a. The company shall be liable to fine of upto Rs. 5000/- b. Every officer of the company in default shall be liable to a fine of Rs. 10000/-

c. The appointment shall be deemed to have come to an end and the appointed person shall in addition to being liable to pay a fine of Rs. 10000/-, refund to the company the entire amount of remuneration received by him from such appointment.

Number of companies of which one person may be appointed managing directorNo public company or private company which is a subsidiary of a public company can, appoint or employ any person as managing director, of he is either the managing director or the manager of any other company, except as provided below.

A public company or a private company which is the subsidiary of a public company may appoint or employ a person as its managing director, if he is the managing director or manager of one, and of not more than one, other company provided that such appointment or employment is made or approved by a unanimous resolution passed at a meeting of the Board and of which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then in India.

In addition to the above provision, the Central Government may, by order, permit any person to be appointed as a managing direct of more than two companies if the Central Government is satisfied that it is necessary that the companies should, for their proper working, function as a single unit and have a common managing director.

Managing director not to be appointed for more than five years at a timeNo company can, appoint or employ any individual as its managing director for a term exceeding five years at a time.

However, a person may be re-appointed, re-employed, or his term of office extended by further periods not exceeding five years on each occasion. Such re-appointment, re-employment or extension cannot be sanctioned earlier than two years from the date on which it is to come into force.

This provision does not apply to a private company unless it is a subsidiary of a public company.

Disqualifications of directorsA person shall not be capable of being appointed director of a company, if,

a. he has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force

b. he is an undischarged insolvent

c. he has applied to be adjudicated as an insolvent and his application is pending

d. he has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence

e. he has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call

f. an order disqualifying him for appointment as director has been passed by a court and is in force unless the leave of the court has been obtained for his appointment in pursuance of that section.

The Central Government may, by notification in the Official Gazette, remove :-

i. the disqualification incurred by any person in virtue of clause (d) either generally or in relation to any company or companies specified in the notification; or

ii. the disqualification incurred by any person in virtue of clause (e)

A private company which is not a subsidiary of a public company may, by its articles, provide that a person shall be disqualified for appointment as a director on any grounds in addition to those specified above.

No person to be a director of more than twenty companiesNo person shall, hold office at the same time as director in more than twenty companies.

Where a person already holding the office of director in twenty companies is appointed, as a director of any other company, the appointment :-

a. shall not take effect unless such person has, within fifteen days thereof, effectively vacated his office as director in any of the companies in which he was already a director; and

b. shall become void immediately on the expiry of the fifteen days if he has not, before such expiry effectively vacated his office as director in any of the other companies aforesaid.

Where a person already holding the office of director in nineteen companies or less is appointed, as a director of other companies, making the total number of his directorships more than twenty, he shall choose the directorships which he wishes to continue to hold or to accept so however that the total number of the directorships, old and new, held by him shall not exceed twenty.

None of the new appointments of director shall take effect until such choice, is made; and all the new appointments shall become void if the choice is not made within fifteen days of the day on which the last of them was made.

In calculating the number of companies of which a person may be a director, the following companies shall be excluded :-

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 prohibits the payment of dividend

d. a company in which such person is only an alternate director, that is to say, a director who is only qualified to act as such during the absence or incapacity of some other director.

Any person who holds office, or acts, as a director of more than twenty companies in contravention of the foregoing provisions shall be punishable with fine which may extend to five thousand rupees in respect of each of those companies after the first twenty.

Vacation of office by directorsThe office of a director shall become vacant if :-

a. he fails to obtain within the time specified ( 2 months ) or at any time thereafter ceases to hold, the share qualification, if any, required of him by the articles of the company

b. he is found to be of unsound mind by a Court of competent jurisdiction

c. he applies to be adjudicated an insolvent

d. he is adjudged an insolvent

e. he is convicted by a Court of any offence involving moral turpitude and is sentenced in respect thereof to imprisonment for not less than six months

f. he fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others, with in six months from the last date fixed for the payment of the call unless the Central Government has, by notification in the Official Gazette removed such disqualification.

g. he absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board, for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board

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 he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295 ( without due authorization of the Central Government )

i. he acts in contravention of section 299 ( failure to disclose interest in any transaction with the company )

j. he becomes disqualified by an order of Court under section 203

k. he is removed by the members by- resolution at a general meeting

l. having been appointed a director by virtue of his holding any office or other employment in the company, he ceases to hold such office or other employment in the company.

The disqualification referred to in clauses (d). (e) and (j) shall not take effect,-

a. for thirty days from the date of the adjudication sentence or order b. where any appeal or petition is preferred within the thirty days aforesaid against the

adjudication, sentence or conviction resulting in the sentence, or order until the expiry of seven days from the date on which such appeal or petition is disposed of

c. where within the seven days aforesaid, any further appeal or petition is preferred in respect of the adjudication, sentence, conviction, or order, and the appeal or petition, if allowed, would result in the removal of the disqualification, until such further appeal or petition is disposed of.

If a person functions as a director, knowing that his office has vacated on account of the above provisions, shall be liable to a fine upto Rs. 500/- per day of default.

A private company which is not a subsidiary of a public company may, by its articles, provide, that the office of director shall be vacated on any grounds in addition to those specified in above

Removal of directorsA company may, by ordinary resolution, remove a director (not being a director appointed by the Central Government in pursuance of section 408) before the expiry of his period of office. This provision shall not apply where the company has availed itself of the option given to it of proportional representation on the Board of Directors to appoint not less than two-thirds of the total number of directors according to the principle of proportional representation.

Special notice shall be required of any resolution to remove a director, or to appoint somebody instead of a director so removed at the meeting at which he is removed.

On receipt of notice of a resolution to remove a director under this section, the company shall forthwith send a copy thereof to the director concerned, and the director (whether or not he is a member of the company) shall be entitled to be heard on the resolution at the meeting.

Where notice is given of a resolution to remove a director and the director concerned makes representations in writing to the company (not exceeding a reasonable length) and requests their notification to members of the company, the company shall, unless the representations are received by it too late for it to do so :-

a. in any notice of the resolution given to members of the company state the fact of the representations having been made; and

b. send a copy of the representations to every member of the company to whom notice of the meeting is sent

If a copy of the representations is not sent as aforesaid because they were received too late or because of the company's default, the director may (without prejudice to his right to be heard orally) require that the representations shall be read out at the meeting.

However, copies of the representations need not be sent out and the representations need not be read out at the meeting if, on the application either of the company or of any other

person who claims to be aggrieved, the Company Law Board is satisfied that the rights conferred by this provision are being abused to secure needless publicity for defamatory matter and the Company Law Board may order the company's costs on the application to be paid in whole or in part by the director.

A vacancy created by the removal of a director if he had been appointed by the company in general meeting or by the board in on a casual vacancy, be filled by the appointment of another director in his stead by the meeting at which he is removed, provided special notice of the intended appointment has been given.

A director so appointed shall hold office until the date up to which his predecessor would have held office if he had not been removed as aforesaid.

If the vacancy is not filled, it may be filled as a causal vacancy in accordance with the provisions.

The above provisions of removal of a director shall not affect :-

a. any compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director

b. any other power to remove a director which may exist apart from this provision.

Board to meet once in every three monthsIn the case of every company, a meeting of its Board of directors shall be held at least once every three months and at least four such meetings must be held every year.

Notice of meetingsNotice of every meeting of the Board of directors of a company shall be given in writing to ever director for the time being in India, and at his usual address in India to every other director.

Every officer of the company whose duty it is to give notice as aforesaid and who fails to do so shall be punishable with fine which may extend to one hundred rupees.

Quorum for meetingsThe quorum for a meeting of the Board of directors of a company shall be one-third of its total strength (any fraction contained in that one-third being rounded off as one), or two directors, whichever is higher.

Provided that where at any time the number of interested directors exceeds or is equal to two-thirds of the total strength, the number of the remaining directors, that is to say, the number of the directors who are not interested, present at the meeting being not less than 2 shall be the quorum during such time.

Interested director means any director whose presence cannot, by reason of his being interested in some manner in the subject matter of discussion be counted for the purpose of forming a quorum at a meeting of the Board, at the time of the discussion or vote on any matter.

Procedure where meeting adjourned for want of quorumIf a meeting of the Board could not be held for wand of quorum, then, unless the articles otherwise provide, the meeting shall automatically stand adjourned till the same day in the

next week, at the same time and place, or if that day is a public holiday, till the next succeeding day which is not a public holiday, at the same time and place.

Passing or resolutions by circulationNo resolution shall be deemed to have been duly passed by the Board or by a committee thereof by circulation, unless the resolution has been circulated in draft, together with the necessary papers, if any, to all the directors, or to all the members of the committee, then in India (not being less in number than the quorum fixed for a meeting of the Board of committee, as the case may be), and to all other directors or members at their usual address in India, and has been approved by such of the directors as are then in India, or by a majority of such of them, as are entitled to vote on the resolution.

Validity of acts of directorsActs done by a person as a director shall be valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or had terminated by virtue of any provision contained in this Act or in the articles.

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Board's powers and restrictions thereon

General powers of BoardSubject to the provisions of this Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do.

However, the Board shall not exercise any power or do any act or thing which is directed or required, whether by this or any other Act or by the memorandum or articles of the company or otherwise, to be exercised or done by the company in general meeting.

Certain powers to be exercised by Board only at meetingThe Board of directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board:-

a. the power to make calls on shares holders in respect of money unpaid on their sharesb. the power to issue debentures

c. the power to borrow moneys otherwise than on debentures

d. the power to invest the funds of the company

e. the power to make loans

However, the Board may, by a resolution passed at a meeting delegate to any committee of directors, the managing director, or the manager of the company or any other principal officer of the company or in the case of a branch office of the company, a principal officer of the branch office, the powers specified in clauses (c), (d) and (e), to the extent specified in the resolution and subject to such conditions as may be imposed.

Acceptance by a banking company in the ordinary course of its business of deposits of money from the public repayable on demand or otherwise and withdrawable by cheque,

draft, order or otherwise or the placing of moneys on deposit by a banking company with another banking company on such conditions as the Board may prescribe, shall not be deemed to be borrowing of moneys or making of loans by a banking company for the purpose of these provisions.

These provisions also do not apply to borrowings by a banking company from other banking companies or from the Reserve Bank of India, the State Bank of India or any other banks.

In respect of dealings betwwen a company and its bankers, the exercise by the company of its powers to borrow money otherwise than on debentures shall mean the arrangement made by the company with its bankers for the borrowing of money by way of overdraft or cash credit or otherwise and not the actual day-to-day operation of overdrafts, cash credit or other accounts.

Every resolution delegating the power referred to in clause (c) ( the power to borrow moneys otherwise than on debentures ) shall specify the total amount outstanding at any one time up to which moneys may be borrowed by the delegate.

Every resolution delegating the power referred to in clause (d) (the power to invest the funds of the company ) shall specify the total amount up to which the funds may be invested, and the nature of the investments which may be made, by the delegate.

Every resolution delegating the power referred to in clause (e) (the power to make loans ) shall specify the total amount up to which loans may be made by the delegate, the purposes for which the loans may be made, and the maximum amount of loans which may be made for each such purpose in individual cases.

Nothing in this section be deemed to affect the right of the company in general meeting to impose restrictions and conditions on the exercise by the Board of any of the powers specified above.

Restrictions on powers of BoardThe Board of directors of a public company, or of a private company which is a subsidiary of a public company, shall not, except with the consent of such public company or subsidiary in general meeting :-

a. sell, lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company, or where the company owns more than one undertaking, of the whole, or substantially the whole, of any such undertaking

b. remit, or give time for the re-payment of, any debt due by a director except in the case or renewal or continuance of any advance made by a banking company to its director in the ordinary course of business

c. invest, otherwise than in trust securities, the amount of compensation received by the company in respect of compulsory acquisition of any such undertaking as is referred to in clause (a), or of any premises or properties used for any such undertaking and without which it cannot be carried on or can be carried on only with difficulty or only after a considerable time

d. borrow moneys, where the moneys to be borrowed together with the moneys already borrowed by the company, (apart from temporary loans obtained from the company's

bankers in the ordinary course of business) will exceed the aggregate of the paid-up capital of the company and its free reserves

e. contribute, to charitable and other funds not directly relating to the business of the company or the welfare of its employees, any amounts the aggregate of which will, in any financial year, exceed fifty thousand rupees, or five per cent of its average net profits during the three financial years immediately preceding, whichever is greater.

The resolutions under clause (d) and (e) above must specify the total amount upto which the Board may borrow or the total amount which may be contributed in a financial year.

Temporary loans mean loans repayable on demand or within 6 months from the date of the loan such as short term cash credit arrangements, the discounting of bills and the issue of other short term loans of a seasonal character, but does not include loans raised for the purpose of financial expenditure of a capital nature.

Any resolution passed by the company permitting any transaction such as is referred to in clause (a) may attach such conditions to the permission as may be specified in the resolution, including conditions regarding the use, disposal or investment of the sale proceeds which may result from the transaction:

The acceptance by a banking company, in the ordinary course of its business, of deposits of money from the public, repayable on demand, or otherwise, and withdrawable by cheque, draft, order or otherwise, shall not be deemed to be a borrowing of moneys by the banking company within the meaning of clause (d).

No debt incurred by the company in excess of the limit imposed by clause by clause (d) shall be valid or effectual, unless the lender proves that he advanced the loan in good faith and without knowledge that the limit imposed by that clause had been exceeded.

No company, without obtaining the prior approval of the Central Government in this behalf, can make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person, to or to any other person by,-

a. any director of the lending company or of a company which is its holding company or any partner or relative of any such director

b. any firm in which any such director or relative is a partner

c. any private company of which any such director is a director or member

d. any body corporate at a general meeting of which not less than twenty five percent of the total voting power may be exercised or controlled by any such director, or by two or more such directors together

e. any body 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.

The above provision shall not apply to any loan made, guarantee given or security provided-

a. by a banking company

b. by a private company unless it is a subsidiary of a public company

The above provision shall not apply to any loan made by a holding company to its subsidiary.

The above provision shall not apply to guarantee given or security provided by a holding company in respect of a loan made to its subsidiary.

Every person who is knowingly a party to any contravention of the aforesaid provisions, including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months:

However, where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed.

Where the loan has been re-paid in part, the maximum punishment which may be imposed by way of imprisonment shall be proportionately reduced.

All persons who are knowingly parties to any contravention of the afoesaid provisions shall be liable jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon to pay in virtue of the guarantee given or the security provided by such company.

The above provisions will also apply to any transaction represented by a book debt which was from its inception in the nature of a loan or advance.

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Disclosure of Director's Interest

Boards sanction to be required for certain contracts in which particular directors are interestedExcept with the consent of the Board of directors, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company

a. for the sale, purchase or supply of any goods, materials or services b. for underwriting the subscription of any shares in, or debentures of, the company.

In case of a company having paid up share capital of at least Rs. 1 crore, no such contract can be entered into by the company without the previous approval of the Central Government.

However, the above provision will not affect:-

i. the purchase of goods and materials from the company or the sale of goods and materials to the company by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices.

ii. any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for the sale, purchase or supply of any goods, materials or services in which either the company, or the director, firm, partner of private company, as the case may be regularly, trades or does business, provided that such contract or contracts do not relate to goods and materials the value of which or services, the cost of which exceeds five thousand rupees in the aggregate in any calendar year comprised in the period of the contract or contracts

iii. in the case or a banking or insurance company, any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company.

A director, relative, firm, partner or private company may enter into a contract with the company for the sale, purchase or supply of any goods, materials or services even if the value exceeds Rs. 5000/- and the approval of the Board is not obtained in cases of urgent necessity. However, approval of the Board must be obtained at a meeting within 3 months of the date on which the contract was entered into.

Every consent of the Board under these provisions must be by a resolution passed at a meeting of the Board and either before the contract was entered into, or within 3 months of the date on which it was entered into.

Where such consent is not accorded to the contract, the contract shall be voidable at the option of the Board.

Procedure, etc, where director interestedDisclosure of interests by directorEvery director of a company who is in any way, whether directly or indirectly concerned or interested in a contract or arrangement, or proposed contract or arrangement entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors.

In the case of a proposed contract or arrangement, the disclosure required to be made by a director shall be made at the meeting of the Board at which the question of entering into the contract or arrangement is first taken into consideration, or if the director was not, at the date of that meeting, concerned or interested in the proposed contract or arrangement, at the first meeting of the Board held after he comes so concerned or interested.

In the case of any other contract or arrangement, the required disclosure shall be made at the first meeting of the Board held after the director becomes concerned or interested in the contract or arrangement.

A general notice given to the Board by a director, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any contract or arrangement so made.

Any such general notice shall expire at the end of the financial year in which it is give, but may be renewed for further periods of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire (Form 24 AA).

No such general notice, and no renewal thereof, shall be of effect unless either it is given at a meeting of the Board, or the director concerned takes reasonable steps to secure that it is brought up and read at the first meeting of the Board after it is given.

Every director who fails to comply with the aforesaid provisions shall be punishable with fine which may extend to five thousand rupees.

Nothing in these provisions shall be taken to prejudice or adversely affect the operation of any rule of law restricting a director of a company from having any concern or interest in any contracts or arrangements with the company.

Nothing in these provisions shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of one company or two or more of them together hold not more than 2 % of the paid up capital in the other company.

Interested director not to participate or vote in Boards proceedingsNo director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement.

Nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote and if he does vote, his vote shall be void.

The above provision shall not apply to :-

a. a private company which is neither a subsidiary not a holding company of a public company

b. a private company which is a subsidiary of a public company, in respect of any contract or arrangement entered into, or to be entered into, by the private company with the holding company thereof

c. any contract of indemnity against any loss which the directors, or any one or more of them, may suffer by reason of becoming or being sureties or a surety for the company

d. any contract or arrangement entered into or to be entered into with a public company, or a private company which is a subsidiary of a public company, in which the interest of the director aforesaid consists solely :-

i. in his being a director of such company and the holder of not more than the qualification shares

ii. in his being a member holding not more than 2 % of its paid-up share capital

f. a public company, or a private company which is subsidiary of a public company, in respect of which a notification is issued, to the extent specified in the notification.

In the case of a public company or a private company which is a subsidiary of a public company, if the Central government is of opinion that having regard to the desirability of establishing or promoting any industry, business or trade, it would not be in the public interest to apply all or any or the prohibitions contained above to the company, the Central Government may, by notification in the Official Gazette, direct that the said provisions shall not apply to such company, or shall apply thereto subject to such exceptions, modifications and conditions as may be specified in the notification.

Every director who knowingly contravenes the provisions of this section shall be punishable with fine which may extend to five thousand rupees.

Registrar of contracts, companies and firms in which directors are interestedEvery company shall keep a register in which all contracts or arrangements in which directors are interested are entered into giving detailed information on

a. the date of the contract or arrangement b. the names of the parties thereto

c. the principal terms and conditions thereof

d. the date on which it was placed before the Board

e. the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral.

Particulars of every such contract or arrangement shall be entered in the register aforesaid within

i. 7 days ( exclusive of public holidays ) of the meeting of the Board where approval of the board is required

ii. 7 days of the receipt of the particulars of such contract or arrangement at the registered office of the company or within 30 days of the date of such other contract or arrangement, whichever is later.

The register must be placed before the next meeting of the Board and must then be signed by all the directors present at that meeting.

The register must also specify in relation to each director of the company, the names of the bodies corporate and firms of which notice has been given by him wherein he has interest.

The above provisions do not apply to :-

i. any contract or arrangement for the sale, purchase or supply of any goods, materials or services if the value does not exceed Rs. 1000/- per annum

ii. Any contract or arrangement by a banking company for the collection of bills in the ordinary course of its business or to any transaction with the director, , relative, firm, partner or private company as aforesaid in the ordinary course of its business.

If default is made in complying with the aforesaid provisions, the company, and every officer of the company who is in default, shall, in respect of each default, be punishable with fine which may extend to five hundred rupees.

The register aforesaid shall be kept at the registered office of the company, and it shall be open to inspection at such office, and extracts may be taken therefrom and copies thereof may, be required, by any member of the company to the same extent, in the same manner, and on payment of the same fee, as in the case of the register of members of the company.

Disclosure to members of directors interest in contract appointing manager, managing directorWhere a company :-

a. enters into a contract for the appointment of a manager of the company, in which contract and director of the company is in any way, whether directly or indirectly, concerned or interested or

b. varies any such contract already in existence and in which a director is concerned or interested as aforesaid

the company shall, within twenty-one days from the date of entering into the contract or of the varying of the contract, as the case may be, send to every member of the company as abstract of the terms of the contract of variation, together with a memorandum clearly specifying the nature of the concern or interest of the director in such contract or variation.

Where a company enters into a contract for the appointment of a managing director of the company, or varies any such contract which is already in existence, the company shall send an abstract of the terms of the contract or variation to every member of the company within within twenty-one days from such date and if any other director of the company is concerned or interested in the contract or variation, a memorandum clearly specifying the nature of the concern or interest of such other director in the contract or variation shall also be sent to every member of the company with the abstract aforesaid.

Where a director becomes concerned or interested as aforesaid in any such contract as is referred to above after it is made, the abstract and the memorandum, if any, referred to above shall be sent to every member of the company within twenty-one days from the date on which the director becomes so concerned or interested.

If default is made in complying with the foregoing provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.

All contracts entered into by a company for the appointment of a manager, or managing director, shall be kept at the registered office of the company; and shall be open to the inspection of any member of the company at such office; and extracts may be taken therefrom and copies thereof may be required by any such member, to the same extent, in the same manner and on payment of the same fee, as in the case of the registrar of members of the company.

The provisions of this section shall apply in relation to any resolution of the Board of directors of a company appointing a manager or a managing or whole-time director, or varying and previous contract or resolution of the company relating to the appointment of a manager or a managing or whole time director, as they apply in relation to any contract for the like purpose.

Register of DirectorsEvery company shall keep at its registered office a register of its directors, managing

director, manager and secretary, containing with respect to each of them the following particulars, that is to say:

a. in the case of an individual, his present name and surname in full, any former name or surname in full, his father's name and surname in full or where the individual is a married woman, the husband's name and surname in full, his usual residential address; his nationality; and, if that nationality is not the nationality of origin, his nationality of origin; his business occupation, if any; if he holds the office of director, managing director, manager or secretary in any other body corporate, the particulars of each such office held by him; and except in the case of a private company which is not a subsidiary of a public company, the date of his birth

b. in the case of a body corporate, its corporate name and registered or principal official and the full name, address, nationality, and nationality of origin, if different from that nationality, his father's name and surname in full or where the director is a married woman, the husband's name and surname in full of each of its directors; and if it holds the office of manger or secretary in any other body corporate, the particulars of each such office

c. in the case of a firm, the name of the firm, the full name, address, nationality, and nationality of origin, if different from that nationality, his father's name and surname in full or where the partner is a married woman, the husband's name and surname in full of each partner; and the date on which each became a partner; and if the firm holds the office of manager or secretary in any other body corporate, the particulars of each such officer

d. if any director or directors have been nominated by a body corporate; its corporate name; all the particulars referred to in clause (a) in respect of each director so nominated, and also all the particulars referred to in clause (b) in respect of the body corporate

e. if any director or directors have been nominated by a firm, the name of the firm, all the particulars referred to in clause (a) in respect of each director so nominated, and also all the particulars referred to in clause (c) in respect of the firm

The company shall, within the prescribed periods send to the Registrar a return in duplicate in the prescribed form ( form 32 ) within 30 days of appointment containing the particulars specified in the said register and a notification in duplicate in the prescribed form within 30 days of any change among its directors, managing directors or in any of the particulars contained in the register, specifying the date of the change.

If default is made in complying, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.

Inspection of the registerThe register kept shall be open to the inspection of any member of the company without charge and of any other person on payment of one rupee for each inspection during business hours subject to such reasonable restrictions as the company may by its articles or in general meeting impost, so that not less than two hours in each day are allowed for inspection.

If any inspection is refused :-

a. the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees; and

b. the court may, by order, compel an immediate inspection of the register.

Duty of directors etc., to make disclosureEvery director, managing director, manager or secretary of any company, who is appointed to or relinquishes the office of director, managing director, manager of any other body corporate must within 20 days of his appointment or relinquishment, disclose to the company aforesaid the particulars relating to the office in the other body corporate and if he fails to do so, he shall be punishable with fine which may extend to five hundred rupees.

Register of Director's shareholdingsEvery company shall keep a register showing, as respects each director of the company, the number, description and amount of any shares in, or debentures, of the company or any other body corporate, being the company's subsidiary or holding company, or a subsidiary of the company's holding company, which are held by him or in trust for him, or of which he has any right to become the holder whether on payment or not.

Where any shares or debentures have to be recorded in the said register or to be omitted therefrom, in relation to any director, by reason of a transaction entered into and while he is a director, the register shall also show the date of, and the price or other consideration for, the transaction.

However, where there is an interval between the agreement for any such transaction and the completion thereof, the date so shown shall be that of the agreement.

The nature and extent of any interest or right in or over any shares or debentures recorded in relation to a director in the said register shall, if he so requires, be indicated in the register.

The said register shall, subject to the provisions of this section, be kept at the registered office of the company, and shall be open to inspection during business hours (subject to such reasonable restrictions as the company may, by its articles or in general meeting, impost so that not less than two hours in each day are allowed for inspection) as follows:-

a. during the period beginning fourteen days before the date of the company's annual general meeting and ending three days after the date of its conclusion, it shall be open to the inspection of any member of holder of debentures, of the company; and

b. during that or any other period, it shall be open to the inspection of any person acting on behalf of the Central Government or of the Registrar.

In computing the fourteen days and the three days mentioned above, any day which is a Saturday, a Sunday or a public holiday shall be disregarded.

The Central Government or the Registrar may, at any time, require a copy of the said register, or any part thereof.

The said register shall also be produced at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.

Duty of directors and persons deemed to be directors to make disclosure of shareholdingsEvery director of a company, must give notice to the company of such matters relating to himself as may be necessary for the purpose of enabling the company to company with the aforesaid provisions.

Any such notice shall be given in writing, and if it is not given at a meeting of the Board, the person giving the notice shall take all reasonable steps to secure that it is brought up and read at the meeting of the Board next after it is given.

Any person who fails to comply with the above provisions shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to five thousand rupees, or with both

No company, without obtaining the prior approval of the Central Government in this behalf, can make any loan to, or give any guarantee or provide any security in connection with a loan made by any other person, to or to any other person by,-

a. any director of the lending company or of a company which is its holding company or any partner or relative of any such director

b. any firm in which any such director or relative is a partner

c. any private company of which any such director is a director or member

d. any body corporate at a general meeting of which not less than twenty five percent of the total voting power may be exercised or controlled by any such director, or by two or more such directors together

e. any body 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.

The above provision shall not apply to any loan made, guarantee given or security provided-

a. by a banking company b. by a private company unless it is a subsidiary of a public company

The above provision shall not apply to any loan made by a holding company to its subsidiary.

The above provision shall not apply to guarantee given or security provided by a holding company in respect of a loan made to its subsidiary.

Every person who is knowingly a party to any contravention of the aforesaid provisions, including in particular any person to whom the loan is made or who has taken the loan in respect of which the guarantee is given or the security is provided, shall be punishable either with fine which may extend to five thousand rupees or with simple imprisonment for a term which may extend to six months:

However, where any such loan, or any loan in connection with which any such guarantee or security has been given or provided by the lending company, has been repaid in full, no punishment by way of imprisonment shall be imposed.

Where the loan has been re-paid in part, the maximum punishment which may be imposed by way of imprisonment shall be proportionately reduced.

All persons who are knowingly parties to any contravention of the afoesaid provisions shall be liable jointly and severally, to the lending company for the repayment of the loan or for making good the sum which the lending company may have been called upon to pay in virtue of the guarantee given or the security provided by such company.

The above provisions will also apply to any transaction represented by a book debt which was from its inception in the nature of a loan or advance.

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Disclosure of Director's Interest

Boards sanction to be required for certain contracts in which particular directors are interestedExcept with the consent of the Board of directors, a director of the company or his relative, a firm in which such a director or relative is a partner, any other partner in such a firm, or a private company of which the director is a member or director, shall not enter into any contract with the company

a. for the sale, purchase or supply of any goods, materials or services b. for underwriting the subscription of any shares in, or debentures of, the company.

In case of a company having paid up share capital of at least Rs. 1 crore, no such contract can be entered into by the company without the previous approval of the Central Government.

However, the above provision will not affect:-

i. the purchase of goods and materials from the company or the sale of goods and materials to the company by any director, relative, firm, partner or private company as aforesaid for cash at prevailing market prices.

ii. any contract or contracts between the company on one side and any such director, relative, firm, partner or private company on the other for the sale, purchase or supply of any goods, materials or services in which either the company, or the director, firm, partner of private company, as the case may be regularly, trades or does business, provided that such contract or contracts do not relate to goods and materials the value of which or services, the cost of which exceeds five thousand rupees in the aggregate in any calendar year comprised in the period of the contract or contracts

iii. in the case or a banking or insurance company, any transaction in the ordinary course of business of such company with any director, relative, firm, partner or private company.

A director, relative, firm, partner or private company may enter into a contract with the company for the sale, purchase or supply of any goods, materials or services even if the value exceeds Rs. 5000/- and the approval of the Board is not obtained in cases of urgent

necessity. However, approval of the Board must be obtained at a meeting within 3 months of the date on which the contract was entered into.

Every consent of the Board under these provisions must be by a resolution passed at a meeting of the Board and either before the contract was entered into, or within 3 months of the date on which it was entered into.

Where such consent is not accorded to the contract, the contract shall be voidable at the option of the Board.

Procedure, etc, where director interestedDisclosure of interests by directorEvery director of a company who is in any way, whether directly or indirectly concerned or interested in a contract or arrangement, or proposed contract or arrangement entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors.

In the case of a proposed contract or arrangement, the disclosure required to be made by a director shall be made at the meeting of the Board at which the question of entering into the contract or arrangement is first taken into consideration, or if the director was not, at the date of that meeting, concerned or interested in the proposed contract or arrangement, at the first meeting of the Board held after he comes so concerned or interested.

In the case of any other contract or arrangement, the required disclosure shall be made at the first meeting of the Board held after the director becomes concerned or interested in the contract or arrangement.

A general notice given to the Board by a director, to the effect that he is a director or a member of a specified body corporate or is a member of a specified firm and is to be regarded as concerned or interested in any contract or arrangement which may, after the date of the notice, be entered into with that body corporate or firm, shall be deemed to be a sufficient disclosure of concern or interest in relation to any contract or arrangement so made.

Any such general notice shall expire at the end of the financial year in which it is give, but may be renewed for further periods of one financial year at a time, by a fresh notice given in the last month of the financial year in which it would otherwise expire (Form 24 AA).

No such general notice, and no renewal thereof, shall be of effect unless either it is given at a meeting of the Board, or the director concerned takes reasonable steps to secure that it is brought up and read at the first meeting of the Board after it is given.

Every director who fails to comply with the aforesaid provisions shall be punishable with fine which may extend to five thousand rupees.

Nothing in these provisions shall be taken to prejudice or adversely affect the operation of any rule of law restricting a director of a company from having any concern or interest in any contracts or arrangements with the company.

Nothing in these provisions shall apply to any contract or arrangement entered into or to be entered into between two companies where any of the directors of one company or two or more of them together hold not more than 2 % of the paid up capital in the other company.

Interested director not to participate or vote in Boards proceedingsNo director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement.

Nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote and if he does vote, his vote shall be void.

The above provision shall not apply to :-

a. a private company which is neither a subsidiary not a holding company of a public company

b. a private company which is a subsidiary of a public company, in respect of any contract or arrangement entered into, or to be entered into, by the private company with the holding company thereof

c. any contract of indemnity against any loss which the directors, or any one or more of them, may suffer by reason of becoming or being sureties or a surety for the company

d. any contract or arrangement entered into or to be entered into with a public company, or a private company which is a subsidiary of a public company, in which the interest of the director aforesaid consists solely :-

i. in his being a director of such company and the holder of not more than the qualification shares

ii. in his being a member holding not more than 2 % of its paid-up share capital

f. a public company, or a private company which is subsidiary of a public company, in respect of which a notification is issued, to the extent specified in the notification.

In the case of a public company or a private company which is a subsidiary of a public company, if the Central government is of opinion that having regard to the desirability of establishing or promoting any industry, business or trade, it would not be in the public interest to apply all or any or the prohibitions contained above to the company, the Central Government may, by notification in the Official Gazette, direct that the said provisions shall not apply to such company, or shall apply thereto subject to such exceptions, modifications and conditions as may be specified in the notification.

Every director who knowingly contravenes the provisions of this section shall be punishable with fine which may extend to five thousand rupees.

Registrar of contracts, companies and firms in which directors are interestedEvery company shall keep a register in which all contracts or arrangements in which directors are interested are entered into giving detailed information on

a. the date of the contract or arrangement b. the names of the parties thereto

c. the principal terms and conditions thereof

d. the date on which it was placed before the Board

e. the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral.

Particulars of every such contract or arrangement shall be entered in the register aforesaid within

i. 7 days ( exclusive of public holidays ) of the meeting of the Board where approval of the board is required

ii. 7 days of the receipt of the particulars of such contract or arrangement at the registered office of the company or within 30 days of the date of such other contract or arrangement, whichever is later.

The register must be placed before the next meeting of the Board and must then be signed by all the directors present at that meeting.

The register must also specify in relation to each director of the company, the names of the bodies corporate and firms of which notice has been given by him wherein he has interest.

The above provisions do not apply to :-

i. any contract or arrangement for the sale, purchase or supply of any goods, materials or services if the value does not exceed Rs. 1000/- per annum

ii. Any contract or arrangement by a banking company for the collection of bills in the ordinary course of its business or to any transaction with the director, , relative, firm, partner or private company as aforesaid in the ordinary course of its business.

If default is made in complying with the aforesaid provisions, the company, and every officer of the company who is in default, shall, in respect of each default, be punishable with fine which may extend to five hundred rupees.

The register aforesaid shall be kept at the registered office of the company, and it shall be open to inspection at such office, and extracts may be taken therefrom and copies thereof may, be required, by any member of the company to the same extent, in the same manner, and on payment of the same fee, as in the case of the register of members of the company.

Disclosure to members of directors interest in contract appointing manager, managing directorWhere a company :-

a. enters into a contract for the appointment of a manager of the company, in which contract and director of the company is in any way, whether directly or indirectly, concerned or interested or

b. varies any such contract already in existence and in which a director is concerned or interested as aforesaid

the company shall, within twenty-one days from the date of entering into the contract or of the varying of the contract, as the case may be, send to every member of the company as abstract of the terms of the contract of variation, together with a memorandum clearly specifying the nature of the concern or interest of the director in such contract or variation.

Where a company enters into a contract for the appointment of a managing director of the company, or varies any such contract which is already in existence, the company shall send an abstract of the terms of the contract or variation to every member of the company within within twenty-one days from such date and if any other director of the company is concerned or interested in the contract or variation, a memorandum clearly specifying the nature of the concern or interest of such other director in the contract or variation shall also be sent to every member of the company with the abstract aforesaid.

Where a director becomes concerned or interested as aforesaid in any such contract as is referred to above after it is made, the abstract and the memorandum, if any, referred to above shall be sent to every member of the company within twenty-one days from the date on which the director becomes so concerned or interested.

If default is made in complying with the foregoing provisions of this section, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to one thousand rupees.

All contracts entered into by a company for the appointment of a manager, or managing director, shall be kept at the registered office of the company; and shall be open to the inspection of any member of the company at such office; and extracts may be taken therefrom and copies thereof may be required by any such member, to the same extent, in the same manner and on payment of the same fee, as in the case of the registrar of members of the company.

The provisions of this section shall apply in relation to any resolution of the Board of directors of a company appointing a manager or a managing or whole-time director, or varying and previous contract or resolution of the company relating to the appointment of a manager or a managing or whole time director, as they apply in relation to any contract for the like purpose.

Register of DirectorsEvery company shall keep at its registered office a register of its directors, managing director, manager and secretary, containing with respect to each of them the following particulars, that is to say:

a. in the case of an individual, his present name and surname in full, any former name or surname in full, his father's name and surname in full or where the individual is a married woman, the husband's name and surname in full, his usual residential address; his nationality; and, if that nationality is not the nationality of origin, his nationality of origin; his business occupation, if any; if he holds the office of director, managing director, manager or secretary in any other body corporate, the particulars of each such office held by him; and except in the case of a private company which is not a subsidiary of a public company, the date of his birth

b. in the case of a body corporate, its corporate name and registered or principal official and the full name, address, nationality, and nationality of origin, if different from that nationality, his father's name and surname in full or where the director is a married woman, the husband's name and surname in full of each of its directors; and if it

holds the office of manger or secretary in any other body corporate, the particulars of each such office

c. in the case of a firm, the name of the firm, the full name, address, nationality, and nationality of origin, if different from that nationality, his father's name and surname in full or where the partner is a married woman, the husband's name and surname in full of each partner; and the date on which each became a partner; and if the firm holds the office of manager or secretary in any other body corporate, the particulars of each such officer

d. if any director or directors have been nominated by a body corporate; its corporate name; all the particulars referred to in clause (a) in respect of each director so nominated, and also all the particulars referred to in clause (b) in respect of the body corporate

e. if any director or directors have been nominated by a firm, the name of the firm, all the particulars referred to in clause (a) in respect of each director so nominated, and also all the particulars referred to in clause (c) in respect of the firm

The company shall, within the prescribed periods send to the Registrar a return in duplicate in the prescribed form ( form 32 ) within 30 days of appointment containing the particulars specified in the said register and a notification in duplicate in the prescribed form within 30 days of any change among its directors, managing directors or in any of the particulars contained in the register, specifying the date of the change.

If default is made in complying, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees for every day during which the default continues.

Inspection of the registerThe register kept shall be open to the inspection of any member of the company without charge and of any other person on payment of one rupee for each inspection during business hours subject to such reasonable restrictions as the company may by its articles or in general meeting impost, so that not less than two hours in each day are allowed for inspection.

If any inspection is refused :-

a. the company, and every officer of the company who is in default, shall be punishable with fine which may extend to fifty rupees; and

b. the court may, by order, compel an immediate inspection of the register.

Duty of directors etc., to make disclosureEvery director, managing director, manager or secretary of any company, who is appointed to or relinquishes the office of director, managing director, manager of any other body corporate must within 20 days of his appointment or relinquishment, disclose to the company aforesaid the particulars relating to the office in the other body corporate and if he fails to do so, he shall be punishable with fine which may extend to five hundred rupees.

Register of Director's shareholdingsEvery company shall keep a register showing, as respects each director of the company, the number, description and amount of any shares in, or debentures, of the company or any

other body corporate, being the company's subsidiary or holding company, or a subsidiary of the company's holding company, which are held by him or in trust for him, or of which he has any right to become the holder whether on payment or not.

Where any shares or debentures have to be recorded in the said register or to be omitted therefrom, in relation to any director, by reason of a transaction entered into and while he is a director, the register shall also show the date of, and the price or other consideration for, the transaction.

However, where there is an interval between the agreement for any such transaction and the completion thereof, the date so shown shall be that of the agreement.

The nature and extent of any interest or right in or over any shares or debentures recorded in relation to a director in the said register shall, if he so requires, be indicated in the register.

The said register shall, subject to the provisions of this section, be kept at the registered office of the company, and shall be open to inspection during business hours (subject to such reasonable restrictions as the company may, by its articles or in general meeting, impost so that not less than two hours in each day are allowed for inspection) as follows:-

a. during the period beginning fourteen days before the date of the company's annual general meeting and ending three days after the date of its conclusion, it shall be open to the inspection of any member of holder of debentures, of the company; and

b. during that or any other period, it shall be open to the inspection of any person acting on behalf of the Central Government or of the Registrar.

In computing the fourteen days and the three days mentioned above, any day which is a Saturday, a Sunday or a public holiday shall be disregarded.

The Central Government or the Registrar may, at any time, require a copy of the said register, or any part thereof.

The said register shall also be produced at the commencement of every annual general meeting of the company and shall remain open and accessible during the continuance of the meeting to any person having the right to attend the meeting.

Duty of directors and persons deemed to be directors to make disclosure of shareholdingsEvery director of a company, must give notice to the company of such matters relating to himself as may be necessary for the purpose of enabling the company to company with the aforesaid provisions.

Any such notice shall be given in writing, and if it is not given at a meeting of the Board, the person giving the notice shall take all reasonable steps to secure that it is brought up and read at the meeting of the Board next after it is given.

Any person who fails to comply with the above provisions shall be punishable with imprisonment for a term which may extend to two years, or with fine which may extend to five thousand rupees, or with both

The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance the provisions given below either by the articles of the company, or by a resolution ( special resolution if the articles so require ), passed by the company in general meeting and the remuneration payable to any such director determined as per the said provisions shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. However, any remuneration for services will not be so included if the services are of a professional nature and in the opinion of the Central Government, the director possesses the requisite qualifications.

A director may receive remuneration by way of fees for attending each meeting of the Board or of any committee thereof ( Sitting Fees ).

A director who is in whole time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of net profits of the company or partly by one and partly by the other. Such remuneration cannot exceed 5 % of the net profits of the company, except with the approval of the Central Government in case of one director and 10 % for all such directors.

The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to its directors and its manager in any financial year must not exceed 11 % of the net profits of the company calculated in accordance with the provisions of section 349, 350 and 351.

In the case of a director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration either by way of a monthly, quarterly or annual payment with the approval of the Central Government or by way of commission if the company by special resolution authorises such payment. Such special resolution to in sub-section (4) shall not remain in force for a period of more than five years; but may be renewed, from time to time, by special resolution for further periods of not more than five years at a time. Remuneration payable to such directors cannot exceed :-

a. if the company has a managing or whole-time director or a manager, one per cent, of the net profits of the company;

b. in any other case, three percent of the net profits of the company.

If any director earns remuneration from a company in excess of the above limits without prior approval of the Central Government, he shall refund the excess to the company and until such repayment, hold the money in trust with him.

The Company cannot waive recovery of such sum due from the director unless approved by the Central Government.

No approval of the Central Government is required in case the remuneration is within the limits mentioned in Schedule XIII to the Companies Act, 1956.

No director of a company who is in receipt of any commission from the company and who is either in the whole-time employment of the company or a managing director shall be entitled to receive any commission or other remuneration from any subsidiary of such company.

The above provisions pertaining to remuneration do not apply to a private company unless it is a subsidiary of a public company.

Provision for increase in remuneration to require Government sanctionIn the case of a public company, or a private company which is a subsidiary of a public company, any provision relating to the remuneration of any director or any amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount of remuneration shall not have any effect unless :-

i. is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or ii. approved by the Central Government

and the amendment shall become void if, and in so far as, it is disapproved by the Government.

Increase in remuneration of managing director on reappointment or appointment after Act to require government sanctionIn the case of a public company, or a private company, which is a subsidiary of a public company, if the terms of any re-appointment or appointment of a managing or whole-time director, purport to increase or have the effect of increasing, whether directly or indirectly, the remuneration which the managing or whole-time director or the previous managing or whole-time director, as the case may be, was receiving immediately before such appointment, the or appointment shall not have any effect unless :-

i. is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or ii. approved by the Central Government

and the amendment shall become void if, and in so far as, it is disapproved by the Government.

Director cannot to hold office or place of profitExcept with the previous consent of the company accorded by a special resolution :-

i. No director of a company can hold any office or place of profit in that company ii. No partner or relative of such a director ( i.e. a director holding an office or place of

profit in the company ), no firm in which such a director or relative is a partner, no private company of which such a director is a director or member, and no director, or manger of such a private company can hold any office or place of profit carrying monthly remuneration in excess of the prescribed amount ( Rs. 10000/-).

However, the above restrictions are not applicable to the office of managing director, manager, banker, or trustee for the holders of debentures of the company either :-

i. in the company ; or ii. in any subsidiary of the company, unless the remuneration received from such

subsidiary in respect of such office or place is paid over to the company or its holding company.

The special resolution required for the above purpose may be passed at the first general meeting after the appointment. Such special resolutions will required at subsequent re-appointments also on a higher remuneration not covered by the earlier special resolution.

However, if the monthly remuneration is not less than Rs. 20000/- per month, the special resolution mentioned above has to be obtained prior to the appointment and in addition to

the special resolution, approval of the Central Government will also be required for the appointment.

If any office or place of profit under the company or a subsidiary thereof is held in contravention of the above provisions, the director, partner, relative, firm, private company or, manager shall be deemed to have vacated his office, with effect from the day following the date of general meeting mentioned above. Such person will also be liable to refund to the company any remuneration received, or the monetary equivalent of any perquisites or advantage enjoyed by him, in respect of such office or place of profit. The company will not be able to waive recovery of such amounts, except with the approval of the Central Government.

Any office or place in a company shall be deemed to be an office or place or profit under the company for these provisions :-

a. in case the office or place is held by a director, if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise;

b. in case the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.

None of the above provisions apply to a director appointed by the Central Government u/s 408 of the Companies Act, 1956

Compensation for loss of officePayment may be made by a company, except in the cases specified below and subject to the limit specified, to a managing director or a director holding the office of manager or in the whole time employment of the company, by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement.

However, such payment cannot be made by the company to any other director.

No payment shall be made to a managing or other director in the following cases :-

a. where the director resigns his office in view of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;

b. where the director resigns his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;

c. where the office of the director is vacated

d. where the company is being wound up, whether by or subject to the supervision of the Court or voluntarily, provided the winding up was due to the negligence or default of the director;

e. where the director has been guilty of fraud or breach of trust in relation to, or gross negligence in or gross mismanagement or, the conduct of the affairs of the company or any subsidiary or holding company thereof;

f. whether the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

Any such payment made to a managing or other director shall not exceed the remuneration which he would have earned if he had been in office for the unexpired residue of his term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of three years immediately proceeding the date on which he ceased to hold the office, or where he held the office for a lesser period than three years, during such period.

No such payment shall be made to the director in the event of the commencement of the winding up of the company, whether before, or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses thereof , are not sufficient to repay to the share-holders the share capital (including the premiums, if any) contributed by them.

These provisions do not prohibit the payment to a managing director or a director holding the office of manager, of any remuneration for services rendered by him to the company in any other capacity.

Payment to director for loss of office in connection with transfer of undertaking or propertyNo director of a company shall, in connection with the transfer of the whole or any part of any undertaking of property of the company, receive any payment, by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement

a. from such company; or b. from the transferee of such undertaking or property or from any other person, unless

particulars with respect to the payment proposed to be made by such transferee or person (including the amount thereof) have been disclosed to the members of the company and the proposal has been approved by the company in general meeting.

Where a director of a company receives payment of any amount in contravention of the above provisions, the amount shall be deemed to have been received by him in trust for the company.

Payment to director for loss of office, etc., in connection with transfer of sharesNo director of a company shall, in connection with the transfer to any persons of all or any of the shares in a company, being a transfer resulting from-

i. an offer made to the general body of shareholders; ii. an offer made by or on behalf of some other body corporate with a view to the

company becoming a subsidiary of such body corporate or a subsidiary of its holding company;

iii. an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at any general meetings of the company; or

iv. any other offer which is conditional on acceptance to a given extent;

receive any payment by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement,-

a. from such company; or b. from the transferees of the shares or from any other person except as provided

below.

It shall be the duty of the director concerned to take all reasonable steps to secure that details with respect to the payment proposed to be made by the transferees or other person (including the amount thereof) are sent with, any notice of the offer made for their shares which is given to any shareholders.

If :-

a. any such director fails to take reasonable steps as aforesaid; or b. any person who has been properly required by any such director to include the said

details in the aforesaid notice fails so to do;

he shall be punishable with fine which may extend to two hundred and fifty rupees.

If-

a. the above provisions are not complied with ; or b. the making of the proposed payment is not, before the transfer of any shares in

pursuance of the offer, approved by a meeting, called for the purpose ,of the concerned shareholders

any sum received by the director on account of the payment shall be deemed to have been received by him in trust for any persons who have sold their shares as a result of the offer made, and the expenses incurred by him in distributing that sum amongst those persons shall be borne by him and not retained out of that sum.

If at a meeting called for the purpose of approving any payment, a quorum is not present and, after the meeting has been adjourned to a later date, a quorum is again not present, the payment shall, be deemed to have been approved.

Directors with unlimited liability in limited companyIn a limited company, the liability of the directors or of any director or of the manager may ie generally limited to the amount of investment in shares of that company. However, if so provided by the memorandum, it may become unlimited.

In a limited company in which the liability of a director or manager is unlimited, the directors, and the manager of the company, and the member who proposes a person for appointment, to the office of director or manager, shall add to that proposal a statement that the liability of the person holding that office will be unlimited and before the person

accepts the office or acts therein, notice in writing that his liability will be unlimited, shall be given to him.

If any director, manager or proposer makes default in adding such a statement, or if any promoter, director, manager or officer of the company makes default in giving such a notice, he shall be punishable with fine which may extend to one thousand rupees and shall also be liable for any damage which the person so appointed may sustain from the default; but the liability of the person appointed shall continue to remain unlimited.

Special resolution of limited company making liability of directors unlimitedA limited company may, if so authorised by its articles, by special resolution, alter its memorandum so as to render unlimited the liability of its directors or of any director or of its manager.

However no alteration of the memorandum making the liability of any of the officers unlimited shall apply to such officer, if he was holding the office from before the date of the alteration, until the expiry of his then term, unless he has accorded his consent to his liability becoming unlimited.

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Prevention of Oppression and Mismanagement

Application to the Company Law Board for relief in cases of oppressionAny members of a company who complain that the affairs of the company are being conducted in a manner prejudical to public interest or in a manner oppressive to any member or members may apply to the Company Law Board for an order for relief, provided such members have a right so to apply as given below.

If, on any application, the Company Law Board is of the opinion :-

a. that the company's affairs are being conducted in a manner oppressive to any member or members; and

b. that to wind up the company would unfairly prejudice such member or members and would be a very serious step, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be would up;

the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Application to Court for relief in cases of mismanagementAny members of a company who complain :-

a. that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or

b. that a material change has taken place in the management or control of the company, whether by an alteration in its Board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that

the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;

may apply to the Company Law Board for an order of relief provided such members have a right so to apply as given below.

If, on any such application, the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.

Right to applyThe following members of a company shall have the right to apply as above:-

a. in the case of a company having a share capital, not less than one hundred members of the company or not less than one tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

b. in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

Where any share or shares are held by two or more persons jointly, they shall be counted only as one number.

Where any members of a company, are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board, notwithstanding that the above requirements for application are not fulfilled.

The Central Government may, before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Court dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.

If the managing director or any other director, or the manager, of a company or any other person, who has not been impleaded as a respondent to any application applies to be added as a respondent thereto, the Company Law Board may, if it is satisfied that there is sufficient cause for doing so, direct that he may be added as a respondent accordingly.

Notice to be given to Central Government of applicationThe Company Law Board must give notice of every application made to it as above to the Central government, and shall take into consideration the representations, if any, made to it by that Government before passing a final order.

Right of Central Government to applyThe Central Government may itself apply to the Company law Board for an order, or cause an application to be made to the Company Law Board for such an order by any person authorised be it in this behalf.

Powers of Company Law Board on applicationWithout prejudice to the generality of the powers of the Company Law Board, any under either section may provide for :-

a. the regulation of the conduct of the company's affairs in future; b. the purchase of the shares or interests of any members of the company by other

members thereof or by the company;

c. in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

d. the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other namely:-

i. the managing director,

ii. any other director,

iii. the manager,

upon such terms and conditions as may, in the opinion of the Company Law Board, be just and equitable in all the circumstances of the case;

a. the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned;

b. the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;

c. any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made.

Interim order by the Company Law BoardPending the making by it of a final order, the Company Law Board may, on the application of any party to the proceedings, make any interim order which it thinks fit for regulating the conduct of the company's affairs, upon such terms and conditions as appear to it to be just and equitable.

Effect of alteration of memorandum or articles of company by orderWhere an order makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except

to the extent, if any permitted in the order, to make without the leave of the Company Law Board, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles.

The alterations made by the order shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act.

A certified copy of every order altering or giving leave to alter, a company's memorandum or articles, must within thirty days after the making thereof, be filed by the company with the Registrar who shall registrar the same.

If default is made in complying with the above provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.

Consequences of termination or modification of certain agreementsWhere an order terminates, sets aside or modifies an agreement :-

a. the order shall not give rise to any claim whatever against the company by any person for damages or for compensation for loss of office or in any respect, either in pursuance of the agreement or otherwise;

b. no managing or other director or manager whose agreement is so terminated or set aside, shall for a period of five years from the date of the order terminating the agreement, without the leave of the Company Law Board, be appointed, or act, as the managing or other director or manager of the company.

Any person who knowingly acts as a managing or other director or manager of a company in contravention of the above provision, every director of the company, who is knowingly a party to such contravention shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to five thousand rupees, or with both.

The Company Law Board will not grant leave for appointment as managing director or director or manager of the company unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given an opportunity of being heard in the matter.

Powers of Central Government to prevent oppression or mismanagementThe Central Government may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interests of the Company or its shareholders or public interests, to act as directors thereof for such period not exceeding 3 years on any one occasion as it deems fit if the Company Law Board :-

a. on a reference being made to it by the Central Government ; or b. on an application of not less than one hundred members of the company or of

members of the company holding not less than one-tenth of the total voting power therein,

is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest.

However, in lieu of passing order as aforesaid, the Company Law Board may, if the company has not availed itself of the option given to it of proportional representation to minority shareholders on the Board of the company, direct the company to amend its articles in the manner provided section 265 and make fresh appointments of directors in pursuance of the articles as so amended within such time as may be specified in that behalf by the Company Law Board.

In case the Central Government passes such an order it may, if thinks fit, direct that until new directors are appointed in pursuance of the order aforesaid, not more than two members of the company specified by the Company law Board shall hold office as additional directors of the company. The Central Government shall appoint such additional directors on such directions.

The person appointed as a director by the Central Government in accordance with the above provisions, need not hold any qualification shares nor need to retire by rotation. However, his office as director may be terminated at any time by the Central Government and another person appointed in his place.

No change in the constitution of the Board of Directors can take place after an additional director is appointed by the Central Government in accordance with these provisions unless approved by the Company Law Board.

The Central Government in such cases may also issue such directions to the company as it may consider necessary or appropriate in regard to its affairs.

Power of the Company Law Board to prevent change in Board of directors likely to affect company prejudiciallyWhere a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company that, as a result of a change which has taken place or is likely to take place in ownership or any shares held in the company, a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper to do so, by order direct that no resolution passed or that may be passed or no action taken or may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the Company Law Board.

Any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the memorandum or articles of the company, or in any agreement with, or any resolution passed in general meeting by, or by the Board of directors or, the company.

The Company Law Board shall have power when any such complaint is received by it, to make an interim order to the effect set out above, before making or completing the inquiry aforesaid.

Nothing contained above shall apply to a private company, unless it is a subsidiary of a public company

The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, in accordance the provisions given below either by the articles of the company, or by a resolution ( special resolution if the articles so require ), passed by the company in general meeting and the remuneration payable to any such

director determined as per the said provisions shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. However, any remuneration for services will not be so included if the services are of a professional nature and in the opinion of the Central Government, the director possesses the requisite qualifications.

A director may receive remuneration by way of fees for attending each meeting of the Board or of any committee thereof ( Sitting Fees ).

A director who is in whole time employment of the company or a managing director may be paid remuneration either by way of a monthly payment or at a specified percentage of net profits of the company or partly by one and partly by the other. Such remuneration cannot exceed 5 % of the net profits of the company, except with the approval of the Central Government in case of one director and 10 % for all such directors.

The total managerial remuneration payable by a public company or a private company which is a subsidiary of a public company to its directors and its manager in any financial year must not exceed 11 % of the net profits of the company calculated in accordance with the provisions of section 349, 350 and 351.

In the case of a director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration either by way of a monthly, quarterly or annual payment with the approval of the Central Government or by way of commission if the company by special resolution authorises such payment. Such special resolution to in sub-section (4) shall not remain in force for a period of more than five years; but may be renewed, from time to time, by special resolution for further periods of not more than five years at a time. Remuneration payable to such directors cannot exceed :-

a. if the company has a managing or whole-time director or a manager, one per cent, of the net profits of the company;

b. in any other case, three percent of the net profits of the company.

If any director earns remuneration from a company in excess of the above limits without prior approval of the Central Government, he shall refund the excess to the company and until such repayment, hold the money in trust with him.

The Company cannot waive recovery of such sum due from the director unless approved by the Central Government.

No approval of the Central Government is required in case the remuneration is within the limits mentioned in Schedule XIII to the Companies Act, 1956.

No director of a company who is in receipt of any commission from the company and who is either in the whole-time employment of the company or a managing director shall be entitled to receive any commission or other remuneration from any subsidiary of such company.

The above provisions pertaining to remuneration do not apply to a private company unless it is a subsidiary of a public company.

Provision for increase in remuneration to require Government sanctionIn the case of a public company, or a private company which is a subsidiary of a public

company, any provision relating to the remuneration of any director or any amendment thereof, which purports to increase or has the effect of increasing, whether directly or indirectly, the amount of remuneration shall not have any effect unless :-

i. is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or ii. approved by the Central Government

and the amendment shall become void if, and in so far as, it is disapproved by the Government.

Increase in remuneration of managing director on reappointment or appointment after Act to require government sanctionIn the case of a public company, or a private company, which is a subsidiary of a public company, if the terms of any re-appointment or appointment of a managing or whole-time director, purport to increase or have the effect of increasing, whether directly or indirectly, the remuneration which the managing or whole-time director or the previous managing or whole-time director, as the case may be, was receiving immediately before such appointment, the or appointment shall not have any effect unless :-

i. is within the limits specified in Schedule XIII, where Schedule XIII is applicable ; or ii. approved by the Central Government

and the amendment shall become void if, and in so far as, it is disapproved by the Government.

Director cannot to hold office or place of profitExcept with the previous consent of the company accorded by a special resolution :-

i. No director of a company can hold any office or place of profit in that company ii. No partner or relative of such a director ( i.e. a director holding an office or place of

profit in the company ), no firm in which such a director or relative is a partner, no private company of which such a director is a director or member, and no director, or manger of such a private company can hold any office or place of profit carrying monthly remuneration in excess of the prescribed amount ( Rs. 10000/-).

However, the above restrictions are not applicable to the office of managing director, manager, banker, or trustee for the holders of debentures of the company either :-

i. in the company ; or ii. in any subsidiary of the company, unless the remuneration received from such

subsidiary in respect of such office or place is paid over to the company or its holding company.

The special resolution required for the above purpose may be passed at the first general meeting after the appointment. Such special resolutions will required at subsequent re-appointments also on a higher remuneration not covered by the earlier special resolution.

However, if the monthly remuneration is not less than Rs. 20000/- per month, the special resolution mentioned above has to be obtained prior to the appointment and in addition to the special resolution, approval of the Central Government will also be required for the appointment.

If any office or place of profit under the company or a subsidiary thereof is held in contravention of the above provisions, the director, partner, relative, firm, private company or, manager shall be deemed to have vacated his office, with effect from the day following the date of general meeting mentioned above. Such person will also be liable to refund to the company any remuneration received, or the monetary equivalent of any perquisites or advantage enjoyed by him, in respect of such office or place of profit. The company will not be able to waive recovery of such amounts, except with the approval of the Central Government.

Any office or place in a company shall be deemed to be an office or place or profit under the company for these provisions :-

a. in case the office or place is held by a director, if the director holding it obtains from the company anything by way of remuneration over and above the remuneration to which he is entitled as such director, whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise;

b. in case the office or place is held by an individual other than a director or by any firm, private company or other body corporate, if the individual, firm private company or body corporate holding it obtains from the company anything by way of remuneration whether as salary, fees, commission, perquisites, the right to occupy free of rent any premises as a place of residence, or otherwise.

None of the above provisions apply to a director appointed by the Central Government u/s 408 of the Companies Act, 1956

Compensation for loss of officePayment may be made by a company, except in the cases specified below and subject to the limit specified, to a managing director or a director holding the office of manager or in the whole time employment of the company, by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement.

However, such payment cannot be made by the company to any other director.

No payment shall be made to a managing or other director in the following cases :-

a. where the director resigns his office in view of the reconstruction of the company, or of its amalgamation with any other body corporate or bodies corporate, and is appointed as the managing director, manager or other officer of the reconstructed company or of the body corporate resulting from the amalgamation;

b. where the director resigns his office otherwise than on the reconstruction of the company or its amalgamation as aforesaid;

c. where the office of the director is vacated

d. where the company is being wound up, whether by or subject to the supervision of the Court or voluntarily, provided the winding up was due to the negligence or default of the director;

e. where the director has been guilty of fraud or breach of trust in relation to, or gross negligence in or gross mismanagement or, the conduct of the affairs of the company or any subsidiary or holding company thereof;

f. whether the director has instigated, or has taken part directly or indirectly in bringing about, the termination of his office.

Any such payment made to a managing or other director shall not exceed the remuneration which he would have earned if he had been in office for the unexpired residue of his term or for three years, whichever is shorter, calculated on the basis of the average remuneration actually earned by him during a period of three years immediately proceeding the date on which he ceased to hold the office, or where he held the office for a lesser period than three years, during such period.

No such payment shall be made to the director in the event of the commencement of the winding up of the company, whether before, or at any time within twelve months after, the date on which he ceased to hold office, if the assets of the company on the winding up, after deducting the expenses thereof , are not sufficient to repay to the share-holders the share capital (including the premiums, if any) contributed by them.

These provisions do not prohibit the payment to a managing director or a director holding the office of manager, of any remuneration for services rendered by him to the company in any other capacity.

Payment to director for loss of office in connection with transfer of undertaking or propertyNo director of a company shall, in connection with the transfer of the whole or any part of any undertaking of property of the company, receive any payment, by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement

a. from such company; or b. from the transferee of such undertaking or property or from any other person, unless

particulars with respect to the payment proposed to be made by such transferee or person (including the amount thereof) have been disclosed to the members of the company and the proposal has been approved by the company in general meeting.

Where a director of a company receives payment of any amount in contravention of the above provisions, the amount shall be deemed to have been received by him in trust for the company.

Payment to director for loss of office, etc., in connection with transfer of sharesNo director of a company shall, in connection with the transfer to any persons of all or any of the shares in a company, being a transfer resulting from-

i. an offer made to the general body of shareholders; ii. an offer made by or on behalf of some other body corporate with a view to the

company becoming a subsidiary of such body corporate or a subsidiary of its holding company;

iii. an offer made by or on behalf of an individual with a view to his obtaining the right to exercise, or control the exercise of, not less than one-third of the total voting power at any general meetings of the company; or

iv. any other offer which is conditional on acceptance to a given extent;

receive any payment by way of compensation for loss of office, or as consideration for retirement from office, or in connection with such loss or retirement,-

a. from such company; or b. from the transferees of the shares or from any other person except as provided

below.

It shall be the duty of the director concerned to take all reasonable steps to secure that details with respect to the payment proposed to be made by the transferees or other person (including the amount thereof) are sent with, any notice of the offer made for their shares which is given to any shareholders.

If :-

a. any such director fails to take reasonable steps as aforesaid; or b. any person who has been properly required by any such director to include the said

details in the aforesaid notice fails so to do;

he shall be punishable with fine which may extend to two hundred and fifty rupees.

If-

a. the above provisions are not complied with ; or b. the making of the proposed payment is not, before the transfer of any shares in

pursuance of the offer, approved by a meeting, called for the purpose ,of the concerned shareholders

any sum received by the director on account of the payment shall be deemed to have been received by him in trust for any persons who have sold their shares as a result of the offer made, and the expenses incurred by him in distributing that sum amongst those persons shall be borne by him and not retained out of that sum.

If at a meeting called for the purpose of approving any payment, a quorum is not present and, after the meeting has been adjourned to a later date, a quorum is again not present, the payment shall, be deemed to have been approved.

Directors with unlimited liability in limited companyIn a limited company, the liability of the directors or of any director or of the manager may ie generally limited to the amount of investment in shares of that company. However, if so provided by the memorandum, it may become unlimited.

In a limited company in which the liability of a director or manager is unlimited, the directors, and the manager of the company, and the member who proposes a person for appointment, to the office of director or manager, shall add to that proposal a statement that the liability of the person holding that office will be unlimited and before the person accepts the office or acts therein, notice in writing that his liability will be unlimited, shall be given to him.

If any director, manager or proposer makes default in adding such a statement, or if any promoter, director, manager or officer of the company makes default in giving such a notice, he shall be punishable with fine which may extend to one thousand rupees and shall also be

liable for any damage which the person so appointed may sustain from the default; but the liability of the person appointed shall continue to remain unlimited.

Special resolution of limited company making liability of directors unlimitedA limited company may, if so authorised by its articles, by special resolution, alter its memorandum so as to render unlimited the liability of its directors or of any director or of its manager.

However no alteration of the memorandum making the liability of any of the officers unlimited shall apply to such officer, if he was holding the office from before the date of the alteration, until the expiry of his then term, unless he has accorded his consent to his liability becoming unlimited.

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Prevention of Oppression and Mismanagement

Application to the Company Law Board for relief in cases of oppressionAny members of a company who complain that the affairs of the company are being conducted in a manner prejudical to public interest or in a manner oppressive to any member or members may apply to the Company Law Board for an order for relief, provided such members have a right so to apply as given below.

If, on any application, the Company Law Board is of the opinion :-

a. that the company's affairs are being conducted in a manner oppressive to any member or members; and

b. that to wind up the company would unfairly prejudice such member or members and would be a very serious step, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be would up;

the Company Law Board may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Application to Court for relief in cases of mismanagementAny members of a company who complain :-

a. that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company; or

b. that a material change has taken place in the management or control of the company, whether by an alteration in its Board of directors, or manager or in the ownership of the company's shares, or if it has no share capital, in its membership, or in any other manner whatsoever, and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company;

may apply to the Company Law Board for an order of relief provided such members have a right so to apply as given below.

If, on any such application, the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the court may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit.

Right to applyThe following members of a company shall have the right to apply as above:-

a. in the case of a company having a share capital, not less than one hundred members of the company or not less than one tenth of the total number of its members, whichever is less, or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

b. in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

Where any share or shares are held by two or more persons jointly, they shall be counted only as one number.

Where any members of a company, are entitled to make an application, any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorise any member or members of the company to apply to the Company Law Board, notwithstanding that the above requirements for application are not fulfilled.

The Central Government may, before authorising any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Court dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.

If the managing director or any other director, or the manager, of a company or any other person, who has not been impleaded as a respondent to any application applies to be added as a respondent thereto, the Company Law Board may, if it is satisfied that there is sufficient cause for doing so, direct that he may be added as a respondent accordingly.

Notice to be given to Central Government of applicationThe Company Law Board must give notice of every application made to it as above to the Central government, and shall take into consideration the representations, if any, made to it by that Government before passing a final order.

Right of Central Government to applyThe Central Government may itself apply to the Company law Board for an order, or cause an application to be made to the Company Law Board for such an order by any person authorised be it in this behalf.

Powers of Company Law Board on applicationWithout prejudice to the generality of the powers of the Company Law Board, any under either section may provide for :-

a. the regulation of the conduct of the company's affairs in future; b. the purchase of the shares or interests of any members of the company by other

members thereof or by the company;

c. in the case of a purchase of its shares by the company as aforesaid, the consequent reduction of its share capital;

d. the termination, setting aside or modification of any agreement, howsoever arrived at, between the company on the one hand, and any of the following persons, on the other namely:-

i. the managing director,

ii. any other director,

iii. the manager,

upon such terms and conditions as may, in the opinion of the Company Law Board, be just and equitable in all the circumstances of the case;

a. the termination, setting aside or modification of any agreement between the company and any person not referred to in clause (d), provided that no such agreement shall be terminated, set aside or modified except after due notice to the party concerned and provided further that no such agreement shall be modified except after obtaining the consent of the party concerned;

b. the setting aside of any transfer, delivery of goods, payment, execution or other act relating to property made or done by or against the company within three months before the date of the application, which would, if made or done by or against an individual, be deemed in his insolvency to be a fraudulent preference;

c. any other matter for which in the opinion of the Company Law Board it is just and equitable that provision should be made.

Interim order by the Company Law BoardPending the making by it of a final order, the Company Law Board may, on the application of any party to the proceedings, make any interim order which it thinks fit for regulating the conduct of the company's affairs, upon such terms and conditions as appear to it to be just and equitable.

Effect of alteration of memorandum or articles of company by orderWhere an order makes any alteration in the memorandum or articles of a company, then, notwithstanding any other provision of this Act, the company shall not have power, except to the extent, if any permitted in the order, to make without the leave of the Company Law Board, any alteration whatsoever which is inconsistent with the order, either in the memorandum or in the articles.

The alterations made by the order shall, in all respects, have the same effect as if they had been duly made by the company in accordance with the provisions of this Act.

A certified copy of every order altering or giving leave to alter, a company's memorandum or articles, must within thirty days after the making thereof, be filed by the company with the Registrar who shall registrar the same.

If default is made in complying with the above provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to five thousand rupees.

Consequences of termination or modification of certain agreementsWhere an order terminates, sets aside or modifies an agreement :-

a. the order shall not give rise to any claim whatever against the company by any person for damages or for compensation for loss of office or in any respect, either in pursuance of the agreement or otherwise;

b. no managing or other director or manager whose agreement is so terminated or set aside, shall for a period of five years from the date of the order terminating the agreement, without the leave of the Company Law Board, be appointed, or act, as the managing or other director or manager of the company.

Any person who knowingly acts as a managing or other director or manager of a company in contravention of the above provision, every director of the company, who is knowingly a party to such contravention shall be punishable with imprisonment for a term which may extend to one year, or with fine which may extend to five thousand rupees, or with both.

The Company Law Board will not grant leave for appointment as managing director or director or manager of the company unless notice of the intention to apply for leave has been served on the Central Government and that Government has been given an opportunity of being heard in the matter.

Powers of Central Government to prevent oppression or mismanagementThe Central Government may appoint such number of persons as the Company Law Board may, by order in writing, specify as being necessary to effectively safeguard the interests of the Company or its shareholders or public interests, to act as directors thereof for such period not exceeding 3 years on any one occasion as it deems fit if the Company Law Board :-

a. on a reference being made to it by the Central Government ; or b. on an application of not less than one hundred members of the company or of

members of the company holding not less than one-tenth of the total voting power therein,

is satisfied, after such inquiry as it deems fit to make, that it is necessary to make the appointment or appointments in order to prevent the affairs of the company being conducted either in a manner which is oppressive to any members of the company or in a manner which is prejudicial to the interests of the company or to public interest.

However, in lieu of passing order as aforesaid, the Company Law Board may, if the company has not availed itself of the option given to it of proportional representation to minority shareholders on the Board of the company, direct the company to amend its articles in the

manner provided section 265 and make fresh appointments of directors in pursuance of the articles as so amended within such time as may be specified in that behalf by the Company Law Board.

In case the Central Government passes such an order it may, if thinks fit, direct that until new directors are appointed in pursuance of the order aforesaid, not more than two members of the company specified by the Company law Board shall hold office as additional directors of the company. The Central Government shall appoint such additional directors on such directions.

The person appointed as a director by the Central Government in accordance with the above provisions, need not hold any qualification shares nor need to retire by rotation. However, his office as director may be terminated at any time by the Central Government and another person appointed in his place.

No change in the constitution of the Board of Directors can take place after an additional director is appointed by the Central Government in accordance with these provisions unless approved by the Company Law Board.

The Central Government in such cases may also issue such directions to the company as it may consider necessary or appropriate in regard to its affairs.

Power of the Company Law Board to prevent change in Board of directors likely to affect company prejudiciallyWhere a complaint is made to the Company Law Board by the managing director or any other director or the manager of a company that, as a result of a change which has taken place or is likely to take place in ownership or any shares held in the company, a change in the Board of directors is likely to take place which (if allowed) would affect prejudicially the affairs of the company, the Company Law Board may, if satisfied, after such inquiry as it thinks fit to make that it is just and proper to do so, by order direct that no resolution passed or that may be passed or no action taken or may be taken to effect a change in the Board of directors after the date of the complaint shall have effect unless confirmed by the Company Law Board.

Any such order shall have effect notwithstanding anything to the contrary contained in any other provision of this Act or in the memorandum or articles of the company, or in any agreement with, or any resolution passed in general meeting by, or by the Board of directors or, the company.

The Company Law Board shall have power when any such complaint is received by it, to make an interim order to the effect set out above, before making or completing the inquiry aforesaid.

Nothing contained above shall apply to a private company, unless it is a subsidiary of a public company

Power to compromise or make arrangements with creditors and membersWhere 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.

If 3/4 in value of the creditors, or class of creditors, or members or class of members, present and voting either in person or, where proxies are allowed, under rules made by the Court, by proxy, at the meeting, agree, to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors, all the creditors of the class, all the members, or all the members of the class, as the case may be, and also, on the company, or, in the case of a company which is being would up, on the liquidator and contributories of the company.

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.

An order made by the Court shall have no effect until a certified copy of the order has been filed with the registrar.

A copy of every such order shall be annexed to every copy of the memorandum of the company issued after the certified copy of the order has been filed, as aforesaid.

If default is made in complying with the above provisions, the company, and every officer of the company who is in default, shall be punishable with fine which may extend to ten rupees for each copy in respect of which default is made.

The Court may, at any time after an application has been made to it under this section, stay the commencement or continuation of any suit or proceeding against the company on such terms as the Court thinks fit, until the application is finally disposed of.

An appeal shall lie from any order made by a Court exercising original jurisdiction under this section to the Court empowered to hear appeals from the decisions of that Court, or if more than one Court is so empowered to the Court of inferior jurisdiction.

Power of High Court to enforce compromises and arrangementsWhere 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 membersWhere 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 issued 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.

Provisions for facilitating reconstruction and amalgamation of companiesWhere an application is made to the Court as above for the sanctioning of a compromise or arrangement proposed between a company and any such persons as are mentioned in that section, and it is shown to the Court-

a. that the compromise or arrangement has been proposed for the purposes of , or in connection with, a scheme for the reconstruction of any company or companies, or the amalgamation of any two or more companies; and

b. that under the scheme the whole or any part of the undertaking, property or liabilities of any company concerned in the scheme is to be transferred to another company : -

the Court may, either by the order sanctioning the compromise or arrangement or by a subsequent order, make provision for all or any of the following matters:-

a. the transfer to the transferee company of the whole or any part of the undertaking, property or liabilities of any transferor company;

b. the allotment or appropriation by the transferee company of any shares, debentures, policies, or other like interests in that company which, under the compromise or arrangement, are to be allotted or appropriated by that company to or for any person;

c. the continuation by or against the transferee company of any legal proceedings pending by or against any transferor company;

d. the dissolution, without winding up, of any transferor company;

e. the provision to be made for any persons who, within such time and in such manner as the court directs, dissent from the compromise or arrangement; and

f. such incidental, consequential and supplemental matters as are necessary to secure that the reconstruction or amalgamation shall be fully and effectively carried out.

Where an order provides the transfer or any property or liabilities then, by virtue of the order, that property shall be transferred to and vest, and those liabilities shall be transferred to and become the liabilities of, the transferee company; and in the case of any property, it the order so directs, freed from any charge which is, by virtue of the compromise or arrangement, to cease to have effect.

Within fourteen days after the making of an order under this section, every company in relation to which the order is made shall cause a certified copy thereof to be filed with the Registrar for registration.

Power and duty to acquire shares of shareholders dissecting from scheme or contract approved by majorityWhere a scheme or contract involving the transfer of shares or any class of shares in a company to another company has, within four months after the making of the offer in that behalf by the transferee company, been approved by the holders of not less than nine-tenths in value of the shares whose transfer is involved (other than shares already held at the date of the officer by, or by a nominee for, the transferee company or its subsidiary), the transferee company may, at any time within two months after the expiry of the said four months, give notice in the prescribed manner to any dissenting shareholder, that it desires to acquire his shares; and when such a notice is given, the transferee company, shall, unless, on an application made by the dissenting shareholder within one month from the date on which the notice was given, the Court thinks fit to order otherwise, be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares of the approving share holders are to be transferred to the transferee company.

However, where shares in the transferor company of the same class as the shares whose transfer is involved are already held as aforesaid to a value greater than one-tenth of the aggregate of the values of all the shares in the company of such class, the foregoing provisions shall not apply, unless :-

a. the transferee company offers the same terms to all holders of the shares of that class (other than those already held as aforesaid) whose transfer is involved; and

b. the holders who approve the scheme or contract, besides holding not less than nine-tenths in value of the shares (other than those already held as aforesaid) whose transfer is involved are not less than three-fourths in number of the holders of those shares.

Where, in pursuance of any such scheme or contract, as aforesaid, shares or shares of any class, in a company are transferred to another company or its nominee, and those shares together with any other shares or any other shares of the same class, as the case may be, in the first- mentioned company held at the date of the transfer by, or by a nominee for, the transferee company or its subsidiary comprise nine-tenths in value of the shares, or the shares of that class, as the case may be, in the first-mentioned company, then :-

a. the transferee company shall, within one month from the date of the transfer (unless on a previous transfer in pursuance of the scheme or contract it has already complied with this requirement) give notice of that fact in the prescribed manner to the holder so the remaining shares or of t remaining shares of that class, as the cast may be, who have not assented to the scheme or contract; and

b. any such holder may, within three months from the giving of the notice to him, require the transferee company to acquire the shares in question; and where a shareholder gives notice under clause (b) with respect to any shares, the transferee company shall be entitled and bound to acquire those shares on the terms on which, under the scheme or contract, the shares, of the approving shareholders were transferred to it, or on such other terms as may be agreed, or as the Court on the application of either the transferee company or the shareholder thinks fit to order.

Where a notice has been given by the transferee company and the Court has not, on an application made by the dissenting shareholder, made an order to the contrary, the transferee company shall, on the expiry of one month from the date on which the notice has been given, or, if an application to the Court by the dissenting shareholder is then pending, after that application has been disposed of, transmit a copy of the notice to the transferor company together with an instrument of transfer executed of behalf of the shareholder by any person appointed by the transferee company and on its own behalf by the transferee company, and pay or transfer to the transferor company the amount or other consideration representing the price payable by the transferee company for the shares which, by virtue of this section, that company is entitled to acquires; and the transferor company shall thereupon register the transferee company as the holder of those shares.

Any sums received by the transferor company shall be paid into a separate bank account, and any such sums and any other consideration so received shall be held by that company in trust for the several persons entitled to the shares in respect of which the said sums or other consideration were respectively received.

Power of Central Government to provide for amalgamation of companies in national interestWhere 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.

Every number or creditor (including a debenture holder) of each of the companies before the amalgamation shall have, as nearly as may be, the same interest in or rights against the company resulting from the amalgamation as he had in the company of which he was originally a member or creditor; and to the extent to which the interest or rights of such member or creditor in or against the company resulting from the amalgamation are less than his interest in or rights against the original company, he shall be entitled to compensation which shall be assessed by such authority as may be prescribed.

The compensation so assessed shall be paid to the member or creditor concerned by the company resulting from the amalgamation.

No such order shall be made, unless-

a. a copy of the proposed order has been sent in draft to each of the companies concerned; and

b. the Central Government has considered, and made such modifications if any, in the draft order as may seem to it desirable in the light of any suggestions and objections which may be received by it from any such company within such period as the Central Government may fix in that behalf, not being less than two months from the date on which the copy aforesaid is received by that company, or from any class of shareholders, therein, or from any creditors or any class of creditors thereof.

Copies of every order made under this section shall, as soon as may be after it has been made, be laid before both Houses of Parliament.