BL - 3

CHAPTER IZ
Elements of Company Law
Outlines
1. Meaning and Nature of aCompany
2. FormationofaCompany
3. Memorandum of Association
4. Articles of Association
5. Prospectus
6. Shares and Share Capital
7. AllotmentofShares
8. Membership
9. Transfer and Transmission of Shares
10. Borrowings (including Debentures) and Registration of charges
11. General Meetings and Proceedings
12. Accounts, Audit and Dividends
13. Lrspection and Investigation
L4. Management of a Company
15. Inter-corporate Loans and brvestments
16. Prevention of Oppression and Mismanagement
17. Compromise and Anangement
1-8. Windingup of Companies
19. Gaining Practical Experience
- Objective.type Questions
- Practical Problems
- Self-testQuestions
350 Business Law
PART 1 - MEANINC AND NATURE OF A COMPANY
12.1.1 Definition of a Company. The Companies Act, 1956 defines the word
'company' as a company formed and registered under the Act or an existing
company formed and registered under any of the previous company laws (s.3).
This definition does not bring out the meaning and nature of the company into a
clear perspective. Also s.12 permits the formation of different types of companies.
These may be (i) companies limited by shares, (ii) companies limited by guarantee
and (iii) unlimited companies. The vast majority of companies in India are with
limited liability by shares. Therefore, it is advisable to define the term'company'
keeping in mind this type of company. However, a brief description of other types
of companies willbe given later.
Lord Lindley has described the company as "an association of many persons
who, contribute money or money's worth to a common stock and employ it in
some trade or business; and who share the profit and loss (as the case may be)
arising therefrom". The common stock so contributed is denoted in money and is
'the capital' of the company. The persons who contribute it, or to whom it belongs,
are members. The proportion of capital to which each member is entitled is his
'share'. The member may sell his share in the company, thus withdrar,r'ing himself
and making someone else a member to whom he transfers shares. Thus, shares in
a company are transferable. As a natural consequence of transferability of shares,
the company has what is commonly known as perpetual succession. With the
withdrawal or death of a member of a company, the latter does not come to an end.
The life of the company is independent of the lives of the members of the company.
Members may come and members may go, the company continues until it is
dissolved.
Gower, L.C.B. in his book entitled 'The Principles of Modem Company Law' gives
an interesting example. He says, 'During the war all the members of one private
company, while in general meeting, were killed by a hydrogen bomb. But the
company survived, not even a hydrogen bomb could have destroyed it'.
Section 34(2) gives the effect of registration of a company by identifying the features
it acquires as a consequence thereof. The section provides that:
From the date of incorporation mentioned in the certificate of incorporation, such
of the subscribers of the memorandum and other persons, as may from time to time
be members of the company, shall be a body corporate by the name contained in
the memorandum, capable forthwith of exercising all the functions of an
incorporated company and having perpetual succession and a common seal, but
with such liability on the part of the members to contribute to the assets of the
company in the event of its being wound up as is mentioned in the Act.
12.1.2 Features of a Company. Or the basis of the above observations, we may
spell out the following characteristic features of a company:
1. lncorporated association. A company must be incorporated or registered
under the Companies Act. Minimum number required for the purpose is 7, in case
of a public company and 2, in case of a private company (s.12). It may also be
Elements of Company Law 351
mentioned that as per s.11, an association of more than 10 persons, in case of
banking business and 20 in case of any other business, if not registered as a
company under the Companies Act, or under any other law for the time being in
force, becomes an illegal association.
2. Artificial person. A company is created with the sanction of law and is not
itself a human being, it is therefore, called artificial; and since it is clothed with
certain rights and obligations, it is called a person. A company is accordingly an
artificial person.
3. Scparate legal entity. Unlike partnership, cornpany is distinct from the
persons who constitute it. Section 34 (2) says that on registration, the association
of persons becomes a body corporate by the name contained in the memorandum.
Lord Macnanghtaninthe famous case of Salomona. Salonton €t Co. Ltd. (7877) AC22
observed that:
A company is at law a different person altogether from the subscribers.....; and
though it may be that after incorporation the business is precisely the same as it
was before and the same persons are managers and the same hands receive the
profits, the company is at law not the agent of the subscribers or trustee for them.
Nor are the subscribers as members liable, in any shape or form, except to the
extent and in the manner provided in the Act.
The facts of the famous Salomon's case were as follows:
Salomon carried on business as a leather merchant. He sold his business for a sum
of €30,000 to a company formed by him along with his wife, a daughter and four
sons. The purchase consideration was satisfied by allotment of 20,000 shares of €1
each and issue of debentures worth f,10,000 secured by floating charge on the
company's assets in favour of Mr Salomon. All the other shareholders subscribed
for one share of €1 each. Mr Salomon was also the managing director of the
company. The company almost immediately ran into difficulties and eventually
became insolvent and winding up commenced. At the time of winding up, the
total assets of the company amounted to f,6,050; its liabilities were f,10,000 secured
by the debentures issued to Mr Salomon and €8,000 owing to unsecured trade
creditors. The unsecured sundry creditors claimed the whole of the company's
assets, viz,86,050 on the ground that the company was a mere alias or agent for
Salomon.
HeId:The contention of the trade creditors could not be maintained because the
company being in law a person quite distinct from its members, could not be
regarded as an'alias'or agent or trustee for Salomon. Also the company's assets
must be applied in payment of the debentures as a secured creditor is entitled to
payment out of the assets on which his debt is secured in priority to unsecured
creditors.
In Lee v. Lee Air Farming Limited (1960) 3 All ER 429 PC, a company was formed
for the purpose of manufacturing aerial top-dressing. Lee, a qualified pilot, held
all but one of the shares in the company and by the articles was appointed goveming
director of the company and chief pilot. Lee was killed while piloting the company's
352 Business Law
aircraft and his widow claimed compensation for his death under the workmen
Compensation Act. The company opposed the claim on the ground that Lee was
not a 'worker' as the same person could not be employer and the employee.
Held:There was a valid contract of servicebetween Lee and the company and Lee
was, therefore, a worker. Mrs Lee's contention was upheld.
rnBachaF. Grzdara.The Commissioncr of Inconrc-Tax,Bontbay [AIR (1955) sC.74], the
facts of the case were as follows:
The plaintiff (Mrs Guzdar) received certain amounts as dividend in respect of
shares held by her in a tea company. Under the Indian lrcome-tax Act, agricultural
income is exempted from payment of income-tax. As income of a tea company is
partly agricultural, only 40 per cent of the company's income is treated as income
from manufacture and sale and, therefore, liable to tax. The plaintiff claimed that
the dividend income in her hands should be treated as agricultural income up to
60 per cent, as in the case of a tea company, on the ground that dividends received
by shareholders represented the income of the company.
Held:By theSupreme Court, that though the income in the hands of the company
was partly agricultural yet the same income when received by Mrs Guzdar as
dividend could not be regarded as agricultural income.
4. Limiteil liability. The company being a separate person, its members are not
as such liable for its debts. Hence, in the case of a company limited by shares, the
liability of members is limited to the nominal value of shares held by them. Thus,
if the shares are fully paid up, their liability will be nil. However, companies may
be formed with unlimited liability of members or members may guarantee a
particular amount. In such cases, l-iability of the members shall noi be limited to
the nominal or face value of the shares held by them. In case of unlimited liability
companies, members shall continue to be liable till each paise has been pa'id off. In
case of companies limited by guarantee, the liability of each member shall be
determined by the guarantee amount, i.e., he shall be liable to contribute upto the
amount guaranteed by him.
Unlimited liability of a member of a limited liability contpany .In the following cases, a
shareholder or member shall lose the privilege of limited liability:
(i) \{here members of the company are reduced below the statutory minimum,
viz.,7 in case of a public company and 2 in case of a private company and the
comPany carries on the business for more than 6 months while the members are so
reduced, every person who is a member during the time that it so carries on business
after those 6 months and is aware of the fact that it is operating with fewer than the
requisite number shall be personally liable for the whole of the debts contracted
during that time (s.45).
(ii) Where in the course of winding up, it appears that any business of the
company has been carried on with intent to defraud creditors, the Court may
declare the persons who were knowingly parties to the transaction personally
liable without limitation of liability for all or any of the debts or other liabilities of
the company (s.5a2).
5. separate property. Shareholders are not, in the eyes of the law, part owners of
the undertaking. L India, this principle of separate property was best laid down
by the supreme court in Bacha F. Guzdar v. The Commissioner of Income Tax,
Bombay (Supra). The Supreme Court held that a shareholder is not the part owner
of the company or its property, he is only givencertain rightsbylaw, e.g.,to vote or
attend meetings, to receive dividends. Similarly, in R.F. Perumal v. H. John, it was
observed that no member can claim himself to be owner of the company's property
during its existence or on its winding up. In still another case, it was observed that
even where a shareholder held almost entire share capital, he did not even have an
insurable interest in the property of the company. It was the case of Macaure v.
Northem Assurance Co. Ltd. and the facts were as follows:
'Macaure'held all except one share of a timber company. He had also advanced
substantial amount to the company. He insured the company's timber in his
personal name. On timber being destroyed by fire his claim was rejected for want
of insurable interest. The Court applying principle of separate legal entity held
that the insurance company was not liable.
6. Transferability of shares. since business is separate from its members in a
comPany form of organisation, it facilitates the transfer of member's interests. The
shares of a company are transferable in the manner provided in the Articles of the
company (s.82). Howeveq, in a private company, certain restrictions are placed on
such transfer of shares but the right to transfer is not taken away absolutely.
7. Perpetual existence. A company being an artificial person cannot be

incapacitated by illness and it does not have an allotted span of life. The death,
insolvency or retirement of its members leaves the company unaffected. Members
may come and go but the company can go forever. The saying "King is dead, long
live the King" very aptly applies to the company form of organisation.
8. Common seal. Acompany being an artificial person is not bestowed with a
body of natural being. Therefore, it has to work through its directors, officers and
other employees. But, it can be held bound by only those documents which bear its
signature. Common seal is the official signature of a company.
Seal of company when to be used - The articles of association of the company
provide for putting the seal of the company on documents. Apart from those
documents, the company seal is to be put on power of attomey, deed of lease, share
certificates, debentures, debenture trust deed, deed of mortgage, promissorynotes,
negotiable instruments (except cheques), agreement of hypothecation, loan
agreements with banks and financial institutions, contract of employment,
guarantees issued by the company and all formal documents and documents
executed on stamp papers.
lndia (s.50). \ /here a company has any business or transaction in

Use of scal outside
aplace outside India a facsimile (exact reproduction) of the common seal may be
kept there. The seal should also contain the name of the place where the seal
would be used. For such use there must be power in the articles. A person must be
properly authorised to use the seal, who shall sign his name and also put the
354 Business Law
name of the place and the fact that he has been authorised to do so by the specified
resolution.
it were under its common seal,
not maintainable.
and are responsible for the perpehation of fraud.

Following are some such cases:
were received by the companies, D applied to the companies for loans which were
immedi paid. In a legal proceeding the corporate veils of
all the c the incomes of the compinies treited as if they
were of ee Petit (7927)Bom.37|l.
(i) Where the conrpany is acting as agent of the shareholdcrs, then the shareholders
will be held liable for its acts. There may be an express agreement to this effect or
such agreement may be implied from the facts of a particular case.
(iii) Where a company has been formed by certain pcrsons to aaoid their own oalid
contrachnl obligation, the court may proceed on the assumption as if no company
existed.
(iv) wl7_1 company has been fornred for some fraudttrent plffpose or is a 'sham, the
1 ,
court will lift the corporate veil to identify the perpetrator of the fraud.
where y company fornred is against pttblic interest or pttblic policy,for the

.(v) purpose
of determining the character of the members, the Court maylift tiie corporate
veil.
(vi) lMere the per cent shares in a utbsidiary company and.

the latter is crea olding comp any lstate of ll-.p. a. ientisagar
Power Co. (1997
ly:i)^Y!*: breach of economic offence is in olaed. lsantamt Ray a. union of tndia

(1989) 65 Comp. Cas 196 (Delhi)1.
(vlir) where company is used as a medhmr to aaoid zuelfare legislation.

lworkmen of
Associated Rttbbcr Industry Ltd. a. Associatecl Rttbbcr ilaustry"rta. egg6) 59 Comp.
Cas. 134 SCl.
356 Business Law
Court refrained the defendants from in any manner alienating, transferring,
disposing of or encumbering the properties in question.
(x) For determination of technical competence of a conryany the experience of the
promoters could well be considered as the experience of the comp any lN ew Hoimns
Ltd. a. Union of lndia (7995) 1 Comp. L.I. 1 00 (S.C.)1.
(xi) Where the number of menfuersfallsbelow the statutory mininntm (i.e., seven in the
case of a public company and two in the case of a private company) and the
company continues to carry onbusiness formore than sixmonths while the number
is so reduced. In such a case, eaery person who is a member of the colnpany during the
tinrc that it so carries on business after those six months and has knowledge of that fact,
shall be seaerally liable to the creditors for the payment of the company's debts contracted
during that perlod. Such a member can be sued severally (i.e., directly) by the creditors
of the company. Both the privileges of limited liability and that of the separate legal
entity are lost. The creditors are permitted to look behind the company to the
shareholders for the satisfaction of their claims (s.45).
(xll)Whereprospectus inchdes afraudulent rhisrepresentation.Incase of a prospectus
containing fraudulent misrepresentation as to a material fact, Ss. 62 and 63 make
the promoters, directors, etc., personally liable not only in damages but they may
even be prosecuted in terms of fine upto Rs 50,000 or imprisonment upto 2 years or
both.
(xiii) \A/here a negotiable instrument is signed by an officer of a company on behalf
of the company without mentioning the name of the company thereon, he is
personally liable to the holder of the instrument, unless the company has already
made the palanent on the instrumentfs.T4T (a) (c)1.
(nv) Holding and Subsidiaty Companies (5s.272-213). In the eyes of law, the holding
company and its subsidiaries are separate legal entities. However, in the following
cases, a subsidiary company may lose its separate identity to a certain extent:
(a) Where at the end of its financial year, a company has subsidiaries, it may
lay before its members in general meeting not only its own accounts, but also a
set of group accounts showing the profit or loss eamed or suffered by the holding
company and its subsidiaries collectively and their collective state of affairs at
the end of the year;
(b) The Central Govemment, where it feels desirable, may direct the holding
and subsidiary companies to slmchronize their financial years;
(c) The Court may, on the facts of a case, treat a subsidiary company as merely
abranch or department of one large undertaking ownedbytheholding company.
(xv) Inaestigation into relatcd companies, Section 239 provides that if it is necessary
for the satisfactory completion of the investigation into the affairs of a company,
the Inspector appointed to investigate may look into the affairs of another related
company in the same management or group.
(xvi) For inaestigation of ozunership of a company. The separate legal entity may be
disregarded under s.247. Th'is Section authorises the Central Govemment to appoint
Elements of Companylaw gS7
report on the membership of any company

persons who are financially interested in
ially influence its policy.
on of
ft any
ny as
12.1.4 Classification of companies. Companies can be classified into three

categories according to the mode of incorporation. If a company is incorporated by
a charter granted by the monarch, it is called a Chartered Company andis regulated
by that charter.For cxample,theEastrndia Company came intobeingby the grant
of a Royal Charter. such type of companies do not exist in India. A company which
is created by a special Act of the Legislature is called a statutory Company and is
governed by the provisions of that Act. The State Bank of India and the Industrial
Finance Corporation of L:rdia are two examples of statutory companies. A company
brought into existence by registration of certain documents under the Companies
Act, 1956 is called Registcred Conryany.
The liability of members of a registered company may be limited or unlimited
(s.12). It may be limited by shares, or by guarantee or by both (i.e., shares and
guarantee).
A company limited by shares is a registered company having the liability of its
members limited by its memorandum of association to the amount, if any, unp.aid
on the shares respectively held by them. The amount remaining unpaid on the
shares can be called up at any time - during the lifetime of the company or at the
time of winding up. However, a shareholder cannot be called upon to pay more
than the amount remaining unpaid on his shares. His personal assets cannot be
called upon for the payment of the liabilities of the company, if nothing remains to
be paid on the shares purchased by him. such a company is also known as a'share
Cornpany.'
A company limiteclby gunrantee is one having the liability of its members limited
by the memorandum to such amount as the members may respectively undertake
by the memorandum to contribute to the assets of the company in the event of its
being wound up. Such a company is also known as'gtnrantee conrpany,.The
liability of the members of a guarantee company is limited by a stipulated sum
mentioned in the memorandum. The guaranteed amount canbe called up by the
comPany from the members only at the time of winding up if the liabilities of the
company exceed its assets.
A pure 'guarantee company'does not have a share capital. The working funds, if
required, are raised frorn source like fees, donations, subsidy, endowments, grants,
Business Law
358
subscriptionsandthelike.Suchacompanyisgenerallyformedforthepurpose.of
some similar
lro*otîo" of art, science, culture, charity, sport' commerce or for
PurPose.
is a hybrid form of company
A company limited by shares as well as by guarantee
such a comPany
which combines elements of the guarantee and the share comPany'
raises its initial capital from its slhareholders,
while the normal working funds are
as fees, charges, subscription, etc. Every member
frovided form other sources such gY.ul1:t"" which may
if ,,r.tt a comPany is subject to a two-fold liability' i'e'' !h9
liability to pay up to-
b".o*" effective in une *naing up of the company and the during the lifetime of
bec-ome effective
the nominal umorrnt of hir tnut""*tti.h may
the company or at the time of winding up'
any limiton the liability of its
An unlimi
members. liable' in the event of its being
woundupttheobligationsofthecompany. The comPany,
However, re not liable to the company,s creditors..
who constitute it, is liable to its
;"_g a separate legal entity from-the. persons
cannot obtain payment frorn lne cgr,nPany, they
may
creditors. if tn" .r"ditors
company' The Liquidatorwill then call
without rimitation or
:; li*:tr#l}:Y
'
l2.l.5PrivateandPublicCompanies.Eitheroftheabovekindsofcompanies
(ie.,alimitedliabilitycompanyandanunlimitedliabilitycompany)maybeprivate
or public (s.12).
by subscribing their
A private comPany can be formed by merely two persons
which.has a
names to the vr"ôiuna"m of Association. It means
a company
minimumpaid.up.upi,"tofonelakhruPeesorsuchhigherpaidupcapitalas
maybe prelcribed; and by its Articles:
(r) restilctsthe rights of its members to transfer shares;
fifty, excluding its employee'members or
treated as a single member; ^:'T""",'il:;1il:::ff

"i?l;I?i?.':T;:
its shares and debentures;
(iri) prohibits an invitation to the public to subscribe to
and
(iv)prohibitsanyinvitationoracceptanceofdepositsfrompersonsotherthanits
members, directors or their relatives'
ate comPanY; (b) has a
*TXl#;'#?IJ;
ibes the mininumnumber of members as
es to the memorandum of association but
of members of a public
there is no restriction with regard to the maximum number
Elements of Companylaw 359
comPany. A public comPany may or may not invite public to subscribe to its share
capital. In case, it decides to invite public to subscribe to its share capital, then it
has to issue a prospectus. In case, it decides not to invite public to subscribe to its
share capital and arranges the capital privately then it need not issue a prospectus;
it has simply to submit a statement in lieu of prospectus with the Registrar of
Companies at least three days before it can make allotment of shares. The articles
of such a company do not contain provisions restricting the right of members to
transfer their shares. Under the Securities (Contracts) Regulation A ct,7956,shares
and debentures of public companies only are capable of being dealt in on a stock
exchange.
Listed Public Company ls.z (23)l.It means a public company which has any of its
securities listed on any recognised stock exchange.
Distinction between private and public company. Following are the main points
of distinction between a private and a public company:
1. In the case of a private company minimum number of persons to form a
company is two while it is seven in the case of a public company.
2. In case of a private company the maximum number of members must not
exceed fifty whereas there is no such restriction on the maximum number of
members in case of a public company.
3. In private company the right to transfer shares is restricted, whereas in case
of public company the shares are freely transferable.
4. A private company cannot issue a prospectus, while a public company may,
through prospectus, invite the general public to subscribe for its shares or
debentures.
5. A private company can commence business immediately after receiving the'

certificate of incorporation, while a public company can commence business only
when it receives a certificate to commence business from the Registrar.
6. A private company need not hold a statutory meeting but a public company
must hold a statutory meeting and file a statutory report with the Registrar.
7. The directors of a private company are not required to file with the Registrar
written consent to act as directors or sign the memorandum of association or enter
into a contract for their qualification shares. But the directors of a public company
must file with the Registrar their written consent to act as directors, must sign the
memorandum and mustenter into a contract for their qualification shares.
8. Directors of a private company may be appointed by a single resolution, but
it is not so in case of a public company.
9. Directors of a private company are not required to retire by rotation, but in
case of a public company, at least two-third of the directors must retire by rotation.
1.0. The number of directors in a private company may be increased to any extent
without the permission of the Cenhal Govemment, but in case of a public company
360 Business Lar'r'
if the number of directors is tobe more than twelve then the approval of the Central
Govemment is necessarY.
11. Two members have tobe personally present to form the quorum in a private
company but in a public comPany this number is five members'
12. In a private company, there are no restrictions on managerial remuneration.
13. In addition to the above, a private company enjoys some special privileges. A
public company enjoys no such privileges'
14. A private comPany cannot issue share warrants'
12.1.6 Special Privileges and Exemptions available to a Private Company. A
private .o-pu.y enjoys certain special privileges which are not available to a
public y. It is so because in a private comPany the money is raised from
"otttput
ie* peopte and generally they belong to the same family or group or are close-
-Therefore,
friends. not much public interest is involved therein. But in case of
publ sed from generalpublic and the number
i, q' their interests, hence several restrictions
are imposed on public comPanies'
Following are the specialprivileges available to a private company:

(1) A private comPany can be formed with only two members [s'12 (1)]'
(2) A private company can proceed to allot shares without waiting for the
minimum subscription (s.69). The reason is that a private company is not required
to offer shares to the Public.
(3) A private company is not required to issue a PlosPectus. Therefore, it can
allot shares without issuing a prospectus or delivering to the Registrar a statement
in lieu of prospectus [s.70 )3)l'
(4) A private company need not offer further issue of shares to the existing
sharehoiders, i.e., Jprivate comPany is free to allot new issue to outsiders
[s.81(3)1.
(5) A private company can issue any kind of shares and allow disproportionate
voting rights since SJ. gS to 89 of the Act are not applicable to it. [s.90(2)].
(6) A private company can commence business immediately after its
incorporation [s.1a9 t7)]'
(7) It need not have an index of members [s.151 (1)].
(8) A private company is not required to hold a statutory meeting or to file a

statutory report with the Registrar of Companies [s'165 (10)]'
(9) Only two members, who are personally present at the meeting, shall form the
quorum unless the articles provide for a larger number [s'174 (1)] '
(10) In case of a private company, poll can be demanded by one pelson present in
person or by proxy, if not more than seven persons are present; if the number
Elements of Company Law 361.
present is more than seven, two members present in person or by proxy can demand
apoll [s.179 (1) &)].
(11) A private company need have a minimum of two directors only [s.252 (2)].
(12) All the directors may be appointed by a single resolution.
(13) The directors of a private company need not file their written consent to act
up their qualification share (Ss.264 &.266).
as directors or to take
(14) The directors of a private company need not retire by rotation (s.255).
(15) Section 266 deahng with restrictions on appointment or advertisement of
directors is not applicable to a private company [s.266 (5) (b)].
(16) \Atrhere a new director is to be appointed, a special notice of fourteen days is
required. This provision is not applicable to a private company, unless it is a
subsidiary of a public company 1s.257 (2)1.
(17) Directors of a private company can vote on a contract in which they are
interested (s.300).
(18) A private company is exempted from restrictions regarding managerial
remuneration.
Additional privileges of private companies. In addition to the privileges mentioned
above, an independent private company enjoys following additional
privileges:
(1) It can give financial assistance directly or indirectly for purchase or
subscription of its own shares.
(2) The provisions of Ss.85 to 89 as to kinds of share capital (s.85), new issue of
share capital (s.86), voting rights (s.87), and termination of disproportionately
excessive voting rights in existing companies (s. 89), do not apply.
(3) The provisions of s.108A containing restrictions of more than 25 per cent of
the paid up share capital of a company without the previous approval of the
Central Government are inapplicable.
(4) Sections l71to186relating to general meetings are not applicable if it makes
its own provisions for them by the Articles.
(5) No person other than its own member is entitled to inspect, or obtain copies
of, the profit and loss account of the company under s.610 (s.220).
(6) The provision that the written consent of directors should be filed with
Registrar is not applicable (s.264).
(7) Itmay,by its articles, provide additional disqualifications for appointment
of directors ls.27a Q)1.
(8) It may, by its articles, provide special grounds for vacation of office of a
director [s.283(3)].
(9) Provisions regarding prohibition of loan to director, etc., (s.295) is not
applicable.
362 Business Law
(10) The restrictions as to the number of companies of which a person may be
appointed managing director and prohibition of such appointments for more than
five years at a time do no apply to it. (Ss.316, 317).
(11) The restrictions regarding loans to companies under the same management
do not apply to it (s.370).
(12) The provision, prohibiting the subscription, purchase, or otherwise, the shares
of other companies in the same group do not apply to it. (s.372).
Loss of Privileges by a Private Company. Section 43 provides that if a private
company contravenes any of the three conditions included in its Articles as per
s.3(1) (iii), then it will be treated as if it is a public company and it will then result
in loss of privileges and exemptions to which it is normally entitled to.
The provison to s.43 states that if the contravention of any of the three restrictions
contained in the articles was accidental, or if the Company Law Board is satisfied
that it is just and equitable to grant relief, it may relieve the company from these
consequences on the application by the company or any other interested person.
12.1.7 Deelrl.ed Public Company. The concept of deemed public company was
introduced in 1960 by inserting s.43A. It contemplated for deeming a private
company as a public company in certain circumstances.
The companies (Amendment) Act 2000 has abolished the concepts of the 'deemed
public company.'If a deemed public companybecomes a private company on or
after the commencement of this Act, then such a company shall inform the registrar
of companies alongwith the original certificate of incorporation for registration
and insertion of the word'private'in its name and memorandum and articles of
association.
12.1.8 Conversion of Private Company into a Public Company. Section 44 provides
for conversion of a private company into a public company. The procedure is:
(1) The company in general meeting must pass a special resolution altering its
articles in such a manner that they no longer include the provisions of
s.3(1) (iii) which are required to be included in the articles of a private company.
On the date of the passing of the resolution, the company ceases to be a private
company and becomes a public company.
(2) Within thirty days of the passing of the special resolution altering the articles,
the company shall file with the Registrar (i) a printed or type-written copy of the
special resolution and (ii) a prospectus or a statement in lieu of prospectus.
If default is made in filing the resolution and the prospectus or the statement in
lieu of prospectus, the company and every officer in default shallbe liable to a fine
upto Rs 5,000 for every day of default.
(3) If the number of members is below seven, steps should be taken to increase it
to at least seven whilst the number of directors should be increased to at least
three, if there are only two directors.
(a) The word 'Private'is to be deleted before the word 'Limited' in the name.
12.1.9 Conversion of Public Company into a Private Company. There isno direct
or express provision in the Act for the conversion of a public company into a
private company except a reference in the proviso to s.31(1). A public company
having a share capital and membership within the limits imposed upon private
companies by s.3(1) (iii), maybecome a private companybyfollowing the procedure
as givenbelow:
(1) The company in general meeting has to pass special resolution for altering
the articles so as to include therein the necessary restrictions, limitations and
prohibitions and to delete any provision hconsistent with the restrictions. For
instance, a private company has to put certain restrictions on the right of members
to transfer their shares.
(2) The word 'Private'should be added before 'Limited'.

(3) The approval of the Central Government to the alteration in the articles for
converting a public company into a private company should be obtained.
(4) Within one month of the date of the receipt of the order of approval, a printed
copy of the altered articles must be filed with the Registrar.
(5) With thirty days of the passing of the special resolution, a printed or type-
written copv thereof should be filed with the Registrar.
12.7.70 Holding and Subsidiary Companies. \zVhere a company has control over
another compahy, it is known as the Holding Company and the company over
which control is exercised is called the Subsidiary Company. A company is deemed
to be under the control of another if:
(1) that other controls the composition of its Board of Directors; or

(2) the other company holds more than half in nominal value of its equity share
capital (where a company had preference shareholders, before commencement of
this Act, enjoying voting rights with that of equity shareholders, for the purpose of
control, holding company should enjoy more than half of the total voting power);
(3) it is a subsidiary of a third company which itself is a subsidiary of the
controlling company. For example, where company 'B' is asubsidiary of company
'A' and company 'C' is a subsidiary of company 'B' , then company 'C' shall be a
subsidiary of company 'A'.If company'D'is a subsidiary of company 'C', then
company'D'shall also be a subsidiary of company 'B' and consequently also of
company'A'.
Thus, in order to be holding company, a company must either control the
composition of the Board of Directors or hold more than half of the nominal value
of the equity share capital of another company.
Control of composition of board of direcfors. The composition of the Board of Directors

of a company shall be deemed to be controlled if the latter has the power, without
the consent or concurrence of the other person, to appoint or remove the holders of
all or majority of the directorships.
364 Business Law
A company shall be deemed to have the power to appoint a person as a director in
other company in the following cases:
1. Where a person cannot be appointed thereto without the exercise in his
favour by the company of such a power of appointment.
2. Where aperson's appointment or directorship follows necessarily from his
appointment as director, or manager of, or to any other office or employment in the
comPany,
3. Where a directorship is held by an individual nominated by the company or

a subsidiary thereof.
In determining whetlrcr one company is a subsidiary of another, following shall be

disregarded:
1. Any shares held or power exercisable by the other company in a fiduciary

capacity shall be treated as not held or exercisable by it.
2. Any shares held or power exercisable in a company by any person under
provisions of its debentures or of a trust-deed for securing any issue of such
debentures shall be disregarded.
3. Any shares held or power exercisable by, orby a nominee for a company or
its subsidiar/, other than as in clause (2) above, shall be treated as not held or
exercisable by it if the ordinary business of that other company is lending money
and the shares are held or power is exercisable only by way of security in the
ordinary course of business.
However, shares held or power exercisable by any person as a nominee of that
other company shall be treated as held or exercisable by the said company. Thus,
the shares held or power exercisable by a subsidiary shall be treated as 'held' or
'exercisable'by the holding company. For exnnrple,'B' and'C', are subsidi'nries of
company 'A', and both of them hold together more than half of the equity share
capital of company'D'then'D'shallbe deemed tobe a subsidiary of 'A'although
it has not made any direct investment nor 'B' or'C'singly hold more than 50%
shares, in the company'D'.
l2.7.ll One-man Company. A membermayhold virtually the entire share capital

of a company. Such a company is known as a 'one-man company/. This can happen
both in a private company and a public company. The other member/members of
the company may be holding just one share each. Such other members may be just
dummies for the purpose of fulfilling the requirements of law as regards minimum
membership lSalonrona. Salonnn I Co. Ltd.).
l2.l.l2 Non-trading Company orAssociation not for Profit. As we shall see later,
the name of a limited company must end with the word 'limited' in the case of a
public company and with 'private limited' in the case of a private limited company
(s.13). But, s.25 permits the registration, under a license granted by the Central
Govemment, of associations not for profit with limited liability without using the
word 'limited' or'private limited' to their names on certain conditions. Such a
company must have the objects of p
charity or any other useful object and
in promoting its object and must proh
As soon as it obtains a license and is registered accordingly, it will have the same
privileges and obligations that a limited company has under the Act. This licence
It is worth noting that even a parhrership firm can be a member of such a company,
in its own name. But on dissolution of the partnership, its membership of the
company will come to an end [s.25 ( )].
12.1.73 Government Company. Section 617 defines a Govemment Company as
any company in which not less than eld by
the CentralGovemmenf orby anySta rtlyby
the Central Govemment and partly by cludes
a company which is a subsidiary of a Government Company.
Govemment Companies are as much govemed by the provisions of the Companies
Companies from the provisions of ss.619 and 619-A which specifically deal with
such companies.
section 619 provides thatthe auditorof a GovemmentCompanyshallbe appointed
or re-appointed by the Central Government on the advice of the Comptroller and
Auditor-General of India. The ceilings on the number of audits to be undertaken
by an auditor under s.224 are equally applicable to auditof Govemment Companies.
The Comptroller and Auditor General of India have the power to direct the manner
in which the accounts are to be audited and to give instructions to the auditor in
regard to any matter relating the performance of his functions. He is also
empowered
authorised b
of his audit
supplement
supplementary audit report must be placed before the annual general meeting of
the company at the same time and in the same manner as the auditor's report.
Section 619-4 provides that the Central Govemment must place before both House
of Parliament an annual report on the working and affairs of each Government
Company to be prepared within three months of its annual general meetings,
together with a copy of the audit report and any comments upon or supplement to,
such audit report, made by the C.& A.G.L Where a state Govemment is a participant
in a Government Company, this report has, likewise, to be placed before the state
Legislature.
366 Business Law
Section 619-8 provides that the provisions of s.619 as stated above also apply to a
company in which the Central Government or any State Govemment or any
Govemment Corporation hold either singly or jointly not less than 51% of the
paid-up share capital.
12.1.14 Foreign Company. Foreign Company is a company incorporated in a
country outside India and has a place of business in India.
However, where not less than 50% of the paid-up share capital (whether equity or
preference or partly equity and parfly preference) of a company incorporated outside
India and having an established place of business in India, is held by one or more
citizens of India or by one or more Indian bodies corporate, such company shall
comply with such of the provisions of the Act as may be prescribed with regard to
the business carried on by it in India.
Section 592 requires that every foreign company which establishes a place of
business in India, must, within 30 days of the establishment of such place of
business, file with the Registrar of Companies at New Delhi and also the Registrar
of Companies of the State in which such place of business is situated: (a) A certified
copy of the memorandum and articles of the company and if they are not in English,
then a certified translation thereof; (b) the full address of the registered office of the
companyi (c) a list of the directors of the company and its secretary with fu1l
particulars of their nationality, address and business or occupation; (d) the names
and addresses of one or more persons resident in India who are authorised to
accept service of process or notice or other documents to be served on the company;
and (e) the address of the principal place of business in India.
Section 593 provides that in case of any alteration in any of the above particulars,
the company has to file with the Registrar of Companies a retum of such alteration
within the prescribed time.
Section 594 makes the application of the provisions regarding books of account to
be kept by a company under s.209 to a foreign company so far as it concerns its
business in India. The books of account must be kept at the principal office in India
and three copies of balance sheet, profit and loss account and other documents
must be delivered to the Registrar with a list in triplicate of all places of business in
India.
Section 595 requires a foreign company to exhibit conspicuously on the outside of
every office or place of business in India the name of the company and 'limited' or
'private limited,' if it is a limited company and the country in which it is
incorporated in English as well as in the local languages in general use in the
locality in which the office is situated. Also the prospectus issued in India must
contain this information.
Section 596 provides the procedure for service of any process, notice or other
documents on a foreign company and it shall be deemed to have been served, if
addressed to any person whose name has been delivered to the Registrar of
Companies under s.592.
Section 597 provides that the foreign company must also deliver the documents
under s.592 to the Registrar of Companies, New Delhi.
Section 598 provides penalty for default in complying with any of the foregoing
requirements. The company and every officer of the company who is in default
shall be punishable with fine up to Rs 10,000 and in the case of a continuing
default with an additional fine up to Rs 1000 for every day during which the
default continues.
Section 599 provides that the foreign company which fails to comply with the
foregoing provisions is prohibited from enforcing any contract by way of a suit,
set-off or counter-claim, although it will be liable to be sued in respect of any
contract it may have entered into.
Section 600 makes the application of the following Sections to a foreign company:
Sections 124-745 ; 778 ; 209 ; 159 -760 ; 209 A; 607- 608.
Section 584 provides for the winding up of a foreign company. Where a foreign
company, which has been carrying on business in India, ceases to carry on such
business in India, it may be wound up as an unregistered company under Part X
(Ss.582-590), notwithstanding the fact that the company has been dissolved or
ceased to exist under laws of the country in which it was incorporated.
12.1.15 Public Financial Institutions (s.4-A). The following financial institutions
shall be regarded, for the purposes of the Companies Act, as public financial
institutions, namely: (i) The L:rdustrial Credit and Investment Corporation of Lrdia
Limited (ICICD, (ii) The Industrial Finance Corporation of India (IFCI), (iii) The
Industrial Development Bank of India (IDBI), (iv) The Life Insurance Corporation
of hrdia (LIC), (v) The Unit Trust of India (UTD.
Also s.4-A empowers the Central Government to specify other institutions, as it
may think fit, to be a public financial institution by issuing a notification in the
OfficialGazette. However, no institution shall be so specified unless (i) it has been
established or constituted by or under any Central Act; or (ii) not less than 51 per
cent of the paid up share capital of such an institution is held or controlled by the
CentralGovemment.
PART 2 - FORMATION OF A COMPANY

The whole process of formation of a company may be roughly divided, for
convenience, into three parts. These are: (i) Promotion; (ii) Registration and
(iii) Floatation.
72.2.1 Promotion. Promotion is a term of wide import denoting the preliminary
steps taken for the purpose of registration and floatation of the company. The
persons who assume the task of promotion are called promoters. The promoter
may be an individual, syndicate, association, parbrership or company.
Who is apromofcr? This term has notbeen defined under the Act, although the term
is used expressly in Ss. 62, 69, 76, 478 and 519.
An attempt to define exactly what a promoter is was made by Cockbums, C.1., in
Ttuyct'oss a. Grant who described a promoter as 'one who undertakes to form a
368 Business Law
company with reference to a given project and to set it going and who takes the
necessary steps to accomplish that purpose. Another attempt was made by Bowen,
L.J., in Whalay Bridge Printing Co. a. Grcen. He observed, the term promoter is a term
not of law but of business, usefully summing up, in a single word a number of
business operations familiar to the commercial world by which a company is
brought into existence.
Perhaps, the true fesf of whether a person is a promoter is whether he has a desire
that the company be formed and is prepared to take some steps, which may or may
not involve other persons, to implement it. However, persons assisting the promoters
by acting in a professionnl capacity do not thereby become prontoters themselaes. The
solicitor who drafts the Articles, or the accountant who values assets of a business
to be purchased, are merely giving professional assistance to the promoters. If,
however, he goes further ttran tnis, e.g.,by introducing his client tol person who
may be interested in purchasing shares in the proposed company, he would be
regarded as promoter.
12.2.2 Duties and Liabilities of Promoters. Promoters have been described to be
in fiduciary relationship (relationship of trust and confidence) with the company.
This relationship of trust and confidence requires the promoter to make a full
disclosure of all material facts relating to the formation of the company. He should
not make any secret profit at the expense of the company he promotes, without the
knowledge and consent of the company and if he does so, the company can compel
him to account for it.
A promoter is not forbidden to make profit but to make secret pro fit.In GltLckstein o.
Barnes, a Syndicate of persons was formed to buy a property called 'Olympia' and
re-sell this Olympia to a company tobe formed for the purpose. The Syndicate first
bought the debentures of the old Olympia company at a discount. Then they bought
the company itself for f.7,40,000. Out of this money provided by themselves the
debentures were repaid in fulI and aproht of L20,000 made thereon. They promoted
a new company and sold Olympia to it for f, 1,80,000. The profit f, 40,000 was
revealed in the prospectus but not the profit of f, 20,000.
HeId:Profitof f.20,000was a secret profit and the promoters of the companywere
bound to pay it to the company because the disclosure of this profit by themselves
in the capacity of vendors to themselves in the capacity of directors of the
purchasing company was not sufficient.
Disclosure to be made to zuhom? In Erlanger a. N ew Sombrera Phosphate Co. , it w as held
that the disclosure should be made to an independent and competent Board of
Directors. This duty is not discharged if he makes the disclosure to the Board of
Directors who are mere nominees of his own or are in his pay.
Where it is not possible to constitute an independent Board of Directors, the
disclosure should be made to the whole body of persons who are invited to become
shareholders and this can be done through the prospectus. Thus, the promoters
have to ensure that 'the real truth is disclosed to those who are induced by the
promoters to join the company.'
Liabilities of a promoter are:
(7) For non-disclosure, In case a promoter fails to make full disclosure at the time
the contract was made, the company may either: (i) rescind the contract and recover
the purchase price where he sold his own property to the company, or (ii) recover
the profit made, even though rescission is not claimed or is impossible, or (iii) claim
damages for breach of his fiduciary duty. The measure of damages will be the
difference between the market value of the property and the contract price.
(2 moter is liable to the original allottee of shares
for the prospectus. It is clear thathis liability does
not He may also be imprisoned for a term which
may extend to 2 years or may be punished with fine upto Rs 50,000 for such untrue
statements in the prospectus (ss.62 and 63). (ii) In the course of winding up of the
company/ on an application made by official Liquidator, the court may make a
promoter liable for misfeasance or breach of trust (s.5a3). The court may also order
for the public examination of the promoter (Ss.478 and 519).
where there are more than one promoter, they are jointly and severally liable and
if one of them is sued and pays damages, he is entitled to claim contribution from
other or others. However, thc death of a promoter does not relieac his estate fi.ont liability
arising out of abuse of his fiduciary position.
12.2.3 Registration (Ss.12, 33). Section 12 states that, "any seven or more persons
or where the company to be formed will be a private company, two or more persons,
associated for any lawful purpose may, by subscribing their names to a
memorandum of association and otherwise complying with the requirements of
this Act in respect of registration form an incorporated company, with or without
limited liability." Thus, the promoters will have to get together at least seven persons
in the case of a public company, or two persons in the case of a private company to
subscribe to the memorandum of association.
proposes to enter into with any individual for appointment as its managing or
wholetime director or manager.
The documents in (i) and (ii) ab
the case of a public company an
As we shall see later, certain typ
of Association; in that case "Regulations for Management of a Company Limited
by shares" (given in Table A of Schedule I to the Act, 1956) may be adopted.
Section 33 also requires a declaration tobe filed with the Registrar along with the
Memorandum and the Articles. This is known as "statutory Declaration of
Compliance." Itcanbe madeby an advocate of Supreme Court or of a High Court,
an attomey or pleader entitled to appear before a High Court, or a Company
secretary or a Chartered Accountant in wholetime practice in India, who is englged
370 Business Law
in the formation of the company, or by a Person named in the articles as a director,

manager or secretary of the company. The declaration must certify that all
requirements of the Act and Rules made thereunder in respect of registration have
been complied with.
Section 266 requires that if the first directors are appointed by the articles then the
following must be complied with before the registration of articles with the
Registrar: (i) Written consent of those directors to act, signed by themselves, or by
an agent duly authorised in writing; and (ii) an undertaking in writing signed by
each such director to take from the comPany and pay for his qualification shares
(if any), unless he has taken his qualification shares and paid or agreed to pay for
them, or signed the Memorandum for a number of shares not less than the
qualification shares.
Section 266 is appticable only to a public comPany having a share capital'
12.2.4 Availability of Name. Section 20 states that a company cannot be registered
by a name, which in the opinion of the Central Govemment is undesirable.
Therefore, it is advisable that promoters find out the availability of the proposed
name of the company from the Registrar of Companies, For the purpose, three
names in order of priority should be filed.
The following se of
registration,a The
address of the dittg
directors, manager and secretary,if any (s'303).
These two documents are required to be submitted within thirty days of registration
of the company.
12.2.5 Certificate of Incorporation'/Consequences of Incorporation. When the
aforesaid documents have been filed with the Registrar and the necessary fees
paid, the Registrar will, if he is satisfied, enter the name of the company on the
Register of Companies maintained by him (s.33) and then will issue a Certificate of
Incorporation under his signature in token of registration of the comPany on the
date noted on it (s.34). This certificate serves the same Pulpose in the case of a
company which a birth certificate does in the case of a natural Person'
On registration, the company comes into existence as a legal person distinct from
its members who constitute it from the earliest moment of the day of incorporation
stated in the certificate of incorporation, with rights and liabilities similar to a
natural person, competent to enter into contracts (s.34).
incorp
The certificateof irements of the
Companies Act in res and incidental
thereto have been co is found to be
materially altered after signature but before registration (Peel's case), or is signed by
only one person for all the seven subscribers or the signatories be all infants
(Moosa Goolnm Ariffo. Ebrqhim Gulam Arffi, the certificate would be nevertheless
conclusive and would not affect the status and existence of the comPany as a
legal person although such irregularities might give
rise to craim between the
subscribers.
This provision prevents the reopening of matters prior

and contemporaneous to
the registration and essential toit and-it places the
existence of the company as a
legal person beyond doubt.
In another ca se of lubilee Cotton Mills Ltd. a. Laais,the Registrar issued

a certificate
of incorporation on January grh, but dated
it January 6,x, which was the date he
received the documents. on January 6,h, the company
made an allotment of share
to Lewis' Held, that the certificate was conclusive
of incorporation on
January 6th and that the allotment was not void on"uid".,."
the ground that it was made
before the company was incorporated.
Howeve4, if a company has been incorporated with illegal
objects, the illegal objects
would not become legal by the issue of the certificate.
Section 36 states that, on registration, memorandum a
nr,
bind the company and its members to the same extent
;;
been signed by the company and by the members and its
and their part to observe all the piovisions contained. in the
Memorandum and
Articles.
72.2.6 Floatation. When a
red and has received its
certificate-of incorporation
, that is to say, it can go
ahgaf with raising capital siness and to carry it on
satisfactorily.
We have seen earlier companies, that a private company is
prohibited from invi to its share capital. Therefore, when a
private company is ry capital is obtained from friends and
relatives by private arrangement.
In.the case of a pubric .3fnu"t also, the promoters may
not invite public to
subscribe to its share capital and tnuy urrungu the capitar
pr;;;"ry as in the case
of a private company. In such u .url, the i-itention or tne pro-6t"r,
is to take
advantages of incorporation not available to a private
.o-pu.ry, e.g., to have
unlimited number of members, to confer unrestricted rigrrt
to traisfer shares on
the members, etc. Howey."t,ly far the rargest number
of"pubric companies raise
their capital in the very first instance by iiviting public to,,rurJu"
to its share
capital.
Section T0makes
two sreps: (i) lss
capital, or (ii) Sr
113il#:,ffi:;T',"j*:.?[TT:
L of prospectus, in case
capital has been
arranged privately. It must be done at least a aays uerore
anotmeni]
372 Business Law
12.2.7 Cerlificate to Commence Business. We have mentioned earlier that one of
the privileges of a private company is that it has neither to issue a prospectus nor
to submit a statement in lieu of prospectus with the Registrar. It can go ahead with
the allotment of shares without these formalities and, therefore, can commence
business immediately after the certificate of incorporation has been obtained.
Section 149 exempts a private company from obtaining a certificate to commence
business.
However, in the case of every public company having share capital, it is absolutely
necessary to obtain a certificate to commence business. This certificate can be
obtained only after'floatation' of the company.
The procedure for obtaining the certificate varies with the fact whether the company
has issued a prospectus or not. If the company has issued a prospectus, then the
procedure stated in s.149 (1) becomes applicable, and if it has not issued a
prospectus, then the procedure as laid down in s.7a9 Q) shall apply.
Where the Company has issued a prospectus. s.149 (1) provides that if a company
having a share capital has issued a prospectus, it shall not commence busines's or
exercise any borrowing powers unless:
(a) shares upto the amount of the minimum subscription have been allotted by
thecompany;
(b) every director of the company has paid to the company/ on each of the shares
taken or contracted to be taken by him and for which he is liable to pay in cash, the
same proportion as is payable on application and allotment on the shares, offered
for public subscription;
(c) no money is, or may become, liable to be repaid to the applicants for shares or
debentures offered for public subscription, for failure to apply for, or to pbtain
permission for the shares to be dealt in any recognised stock exchange;
(d) there has been filed with the Registrar a duly verified declaration by one of
the directors or the secret ary or, where the company has not appointed a secretary,
a secretary in whole time practice in the prescribed form (Form No. 19) that clauses
(a), (b) and (c) (mentioned above) have been complied with.
Where the company has not issued a prospechrc.If a public company having share
capital has not issued a prospectus, s.749 (2) requires that it shall not commence
business or exercise its borrowing powers unless:
(a) it has filed with the Registrar a statement in lieu of prospectus;
(b) every director of the company has paid to the company on each of the shares
taken or contracted to be taken by him and for which he is liable to pay in cash, the
same proportion as is payable on application and allotment on the shares payable
in cash;
(c) there has been filed with the Registrar duly verified declaration by one of the
directors or the secretary $ where the company has not appointed a secretary a
secretary in whole time practice in the prescribed form (form No. 20), that clause
(b), as stated above, has been complied with.
When the company has complied with these conditions, the Registrar will issue a
certificate to commence business.
Penalty: If any public company having share capital commences business or
exercises borrowing power without obtaining the certificate to commence
business, then every person at fault is liable to a fine upto Rs 5000 for every day of
default.
The certificate to commence business entitles the company to commence business
in the
of the
on an
siness
in the 'other objects' clause, even if only ordinary resolution is passed by the
company in general meeting.
72.2.8 Prc-incorporation and Provisional Contracts. We have mentioned earlier
that a company is an artificial person and is capable of entering into contracts. The
promoters may enter into contracts with third parties on behalf of the proposed
comPany before obtaining the certificate of incorporation or after obtaining the
certificate of incolporation but before obtaining the certificate to commence business.
Thus, in the case of a public company following are the three situations when
conkacts maybe entered into: (i) contracts before incorporation, (ii) contracts after
incorporation but before obtaining the certificate to commence business and
(iii) contracts after obtaining the certificate to commence business.
Howeveq, in the case of a private company, as it is not required to obtain the
certificate to commence business, there are only two situations, i.e., (i) contracts
before incorporation; and (ii) contracts after incolporation.
Those contracts which are entered into by promoters for the intended company
before registration of the company are known as pre-incorporation or preliminary
contracts. Very often a company is formed to purchase an existing business or
other property. In such circumstances, the promoters enter into contracts with the
owners of the business or property to be acquired by the proposed company.
comPany in such a case must have accepted the contract after its incorporation
and communicated such acceptance to the other party to the contract. Contracts
like preparation and printing of the Memorandum, Articles, etc., renting a premises,
hiring secretarial staff are envisaged under the Act.
Liability of promoters ztis-h-uis pre-incorporation contracts. An important question
that needs tobe tackled is what is the position of a promoter vis-a-vis preliminary
374 Business Law
contracts? If the company does not execute a fresh contract after incorporation and
the contract is not one warranted for the purpose of incorporation of the company,
what will be the legal position of the promoter who brings about such a
contract?
InPhonogram Ltd. a. Lane (1982) Q.B. 938, it was observed that although a contract
made before a company's incorporation cannot bind the company, it is not wholly
devoid of legal effect, even if all the persons who negotiated the contract are aware
that the company has not yet been incorporated.
The contract takes effect as a personal contract with the persons who purport to
contract on the company's behalf lKelner o. Baxter (1866) LR 2 CP 1741. Promoters
shall be liable to pay damages for failure to perform the promises made in the
company's name. This shall be so even where the contract expressly provides that
only the company's paid up capital shall be answerable for perform ance fScot o.
Lord Ebury 0867) LR 2 CP 2551.
Proaisional contracts. Those contracts which are entered into by a public company
after obtaining the certificate of incorporation but before getting the certificate to
commence business are known as provisional contracts [s.1a9(a)]. Such contracts
are not binding on the company until the company is entitled to commence
business and on that date they shall become binding, without any need for
ratification.
If the company is unable to obtain the certificate to commence business, the
provisional contracts will never become binding on it and no one can sue in
respect of them.
As it shall be explained later, a company can do only such acts as by its

memorandum it is expressly or impliedly authorised to do. Any trarsaction which
is not so authorised isultraaires @eyond the powers) and is null andvoid ab initio.
Neither the company, nor the other party to the contract can enforce it.
12.2.9 Formof Contracts made by Companies. Section 46 provides that a company
can, in general, contract in the same forrn as an individual. Thus, a contract which,
if made between private persons, is required to be in writing, may be made on
behalf of the company also in writing. It should be signed by a person acting under
the express or implied authority of the company. Such contracts may also be varied
or discharged in the same manner. Also, a contract which would be valid if made
betweenprivate persons although made orally orbyparol onbehalf of the company
by any person acting under express or implied authority. Such contracts could
also be varied or discharged in the same manner.
Some contracts are required to be under seal and, therefore, s.147 requires every
company incorporated under the Act to have a corunon seal upon which its name
shouldbe engraved in legible characters.
Under s.50, a company may obtain power thror-rgh its articles to have an official
seal, for use outside India. This is in addition to a common seal.
Elements of Company Law g7S
PART 3 _ MEMORANDUM OF ASSOCIATION
12.3.1 Meaning and Purpose. The Memorandum of Association of a company is

its charter which contains the fundamental conditions upon which alone ihe
company can be incorporated. It tells us the objects of the company's formation
and the utmost possible scope of its operations beyond which its actions cannot
go. Thus, it defines as well as confines the powers of the company. If anything is
done beyond these powers, that will be tLltra aires (beyond pow-ets or; u,re iornpit y
and so void.
The memorandum serves a two-fold purpose. It enables shareholders, creditors
and all those who deal with the company to know what its powers are and what
is the range of its activities. Thus, the intending shareholdefcan find out the field
in, or the purpose for which his money is going to be used by the company and
what risk he is taking in making the investment. Also, any one dealing wiih the
company/ say, a supplier of goods or money, will know whether the transaction he
intends to make with the company is within the objects of the company and not
ultra aires its objects.
72.3.2 Form and Contents. section 14 requires that the memorandum of a
company shallbe in such one of the Forms in Tables B, c, D and E in schedule I to
the Act, as may be applicable in the case of the company, or in Forms as near
thereto as circumstance,q admit. Section 15 requires the memorandum to be printed,
divided into paragraphs, numbered consecutively and signed by at leait seven
persons (two in the case of a private company) in the presence of at least one
witness, who will attest the signature. Each of the members must take at least one
share and write opposite his name the number of shares he takes. section 13
requires the memorandum of a limited company to contain: (i) the name of the
company/ with 'limited' as the last word of the name in the case of a public
c.o.mpany and 'private limited' as the last words in the case of a private companyi
(ii) the name of the state, in which the registered officer of the company ijto be
situated; (iii) the objects of the company, stating separately 'Main-objects' and
'other objects'; (iv) the declaration that the liability of the members is limited; and
(v) the amount of the authorised share capital, divided into shares of fixed amounts.
These contents of the memorandum are called compulsory clauses and are
explainedbelow.
The nanrc The promoters are free to choose any suitable name for the company
-clause.
provided:
(a) the last word in the name of the company, if limited by shares or guarantee is
'limited' unless the company is registered under s.25 as an 'association not for
profit' [s.13(1) (a) & s.25].
(b) In the opinion of the Central Govemment, the name chosen is not undesirable
[s.20(1)].
The Department of Company Affairs has issued guidelines and laid down
certain principles for deciding availability of names. However these are not
exhaustive but only illustrative of what is considered an undesirable name under
s.20.
376 Business Law
Too similar name. rn case of too similar names, the resemblance between the two
names must be such as to be calculated to deceive. A name shall be said to be
calculated to deceive where it suggests some connection or association with the
existing company.
Exnmples. (i) In Society of Motor Marutfacturers and Tratlus Ltd. o. Motor Marufachrqs
and rraders Mutual Assurancc Ltd. (1925) | ch. 67s, the plaintiff company brought an
action to restrain the defendant company to use the said name. But, Lawrence, J., held
"any one who took the trouble to think about the matter, would see the defendant
comPany was an insurance company and that the plaintiff society was a trade protection
society and I do not think that the defendant company is liable to have its business
stopped unless it changes its name simply because a thoughtless person might
unwarrantedly jump to the conclusion that it is connected with the plaintiff society."
(il)In Asiatic Goat. Scarity Life Insurance Co.Ltd. a. New Asiatic Insurance Co. Ltd. (1939)
9 Comp. Cas. 208, the court held the two names were not too identical and therefore
did not restrain from using their name.
(iil)InEraind a. Butterury MargaineCo.Ltd. (7977),the plaintiff who carried onbusiness
under the name of the Buttercup Dairy Co. succeeded in obtaining an injunction
against the defendant on the ground that the public might think that the two businesses
were connected, since the word'buttercup'was an unnecessary and fancy one.
(iv) In Executive Board of theMethodistChwchin Indiao.lJnionof India (1985) 57 Comp.
Cas. 443 (Bom), the Methodist Church in India sought registration of a company in the
name of 'Methodist Church in India Trust Association'. There was already existing a
company bearing the name Methodist Church in Northern India Trust Association (P)
Ltd.' in Calcutta. The former secretary of the later's association informed the Registrar
that the said company had not functioned since 1970; that no annual reports or minutes
had been filed with the Registrar since L970; and that some directors had died and
some had left. The question was whether in these circumstances the Calcutta company
was a bar to the registration of the new company.
if a company is practically defunct, it is not a bar to registration of a new

Held,
company with a similar name.
Use of certain key raords as part of the name. The Department of Company Affairs vide
itsCircular dt.7.3.7989 hasclarifiedthatif acompanyusedanyof ihefollowing
key words in its name, it must have a minimum authorised iapital mentioned
against the key words:
Key words Required outhorised copitol (Rs.)

(i) Corporotion 5 crores
(ii) lnternotionol, Globe, Universol Continenlol, I Crore
lnter-coniineniol, Asiotic, Asio, being the first
word of the nome
(iii) lf ony ol lhe words ot (ii) obove ls used within 50 Lokhs
lhe nome (with or without brockels)
(iu) Hinduston, lndio, Bhorot, being the first word 50 lokhs
ol lhe nome
(u) l{ ony of the words ot (iv) obove is used within 5 lokh
the nome (with or wiihout brockets)
(vi) lndustries/Udyog I crore
(vii) - Enterprises, Products, Business, Monufocturing l0 lokhs
Pttblication of name (s.147). Every company shall: (a) Paint or affix its name and the
address of its registered office and keep the same painted or affixed, on the outside
of every office or place of business in a conspicuous position in letters easily
legible and in the language in general use in the locality.
Department of Company Affairs has clarified that exhibition of its name in English
alone, withoutat the same time showing itin the local language willnotbe sufficient
compliance with the requirements of the Section.
The words 'outside of every office' do not mean outside the premises in which the
office is situated lDr. H.L. Batliwala Sons & Co. Ltd. a. Emperor Q9a\ 11 Comp. Cas.
15a (Bom)1. Where office is situated within a compound, the display outside the
office room though inside the building is sufficient.
(b) have its name engraven in legible characters on its seal.
(c) have its name and address of its registered office mentioned in legible
characters in all business letters, bill heads, negotiable instruments, invoices,
receipts, etc. of the company.
Penaky.If a companydoesnotpaintoraffixitsname and the address of itsregistered

office in the prescribed manner, the company and every officer of the company
who is in default shallbe punishable with fine.
Also, every officer of a company or any person on its behalf who sigrs or authorises
to be signed on behalf of the company any bill of exchange, hundi, promissory
note or cheque, etc., wherein the name of the company is not mentioned in the
prescribed manner, shallbe personally liable to the holder of suchbill of exchange,
hundi, promisory note, cheque, etc., for the amount thereof unless it is paid the
company. It is for the Registrar to take appropriate proceedings against the
companyif theprovisions of s.'1.47 areviolated lC.HansaKoyau.ShaktiAutomobiles
(P) Ltd. (1992) 73 Comp. Cas 97 (Mad). Personal Liability will, howeve4, be not
incurred in the following cases:
(a) The holder of a negotiable instrument, on which the company's name has
been incorrectly stated, will not be able to enforce the personal liability under
s.1a7(\ against the officer concerned if the error was due to the holder's own act
lDurham Fancy Goods Ltd. a. Michqel Jnckson (Fancy Goods) Ltd. and Another (1968)
2 Q.B.83el.
(b) The word 'Limited'is abbreviated to 'Ltd.' (P, Stacey I Co. a. WaUis (7912)28
T.L.R.219.
(c) There is an accidental omission of the word 'limited' lDernutine Co. u.
Ashworth (1905) 21 T.L.R. 5101. In this case, a bill of exchange was accepted on
behalf of a limited company. The rubberstamp of the companywas longerthan the
paper. As a result, the word 'limited'did not appear on the instrument. HeId,the
directors who accepted the bill of exchange were not personally liable because
omission was neither deliberate nor of negligent origin. It was an obvious error of
most trifling kind and the mischief aimed at by the Act did not here exist.
378 Business Law
The registered ffice clause [s.'].3(1) (b)1. This clause states the name of the State in
which the registered office of the company will be situated. Every company must
have registered office which establishes its domicile and it is also the address at
which company's statutory books must normally be kept and to which notices
and all other communications can be sent. The notice of the exact situation (address)
of the registered office maybe given to the Registrar within thirty days from the
date of incorporation (s.1a6).
As in the case of publication of the company's name, s.147 also makes similar
provisions regarding publication of the Registered Office of the company.
The objects clause [s.L3 (1) (d)1. The objects clause defines the objects of the
company and indicates the sphere of it activities. A company cannot do anything
beyond or outside its objects and any act done beyond them will be ultra aires
and void and cannot be ratified even by the assent of the whole body of
shareholders. Howeveq, a company may do anything which is incidental to and
consequential upon the objects specified and such act will not b e ultra aires.Thus,
a trading company has an implied power to borrow money, draw and accept bills
ofexchange.
Section 13, read along with Tables 'B','C','D' and 'E', requires the company to
divide its objects clause into three parts: (a) Main objects of the company to be
pursued by the company on its incolporation; (b) Objects incidental or ancillary to
the attainment of the main objects; and (c) Other objects of the company not included
in (a) and (b) above. Acompany,mayonreceiptof certificatetocommencebusiness,
pursue any business given in the 'main objects'. Lr the case of companies (other
than trading companies) with objects not confined to one State, the Memorandum
must give the name of the State/(s) to whose 'territories the objects extend'. No
business givenin'other objects'can, however, be conunenced unlessprior approval
of shareholders with regard thereto is obtained by way of special resolution passed
in generalmeeting [s.149 (2A)]. Where special resolution isnotpassed, the Central
Govemment, may on an application made by the Board of directors, allow a
company to commence business in the 'other objects', provided the votes cast in
favour of the resolution exceed the votes cast against the resolution, if any [s.149
(2B)1.
The objects of the company must not be illegal, immoral or opposed to public
policy or in contravention of the Act. For example, s.77 prohibits a company to
purchase its own shares.
Liability clartse [s.13 (2)]. This clause states the nature of liability of the
members. In case of a company with limited liability, it must state that liability of
members is limited, whether it be by shares or by guarantee. This means that in
case of a company limited by shares, a member can be called upon at any time to
pay to the company the amount unpaid on the shares held by him. In case of
companies limited by guarantee, this clause will state the amount which every
member undertakes to contribute to the assets of the company in the event of its
winding up.
Elements of Company Law g7g
In the case of an unlimited company, this clause need not be given in the
memorandum. In fact, the absence of this clause in the memorandum means that
the liability of its members is unlimited.
specimen liability clause in a memorandum of association of guarantee company

not having a share capitall. Every member of a company undertakes to contribute
to the assets of the company in the event of its being wound up while he is a
member or within one year after he ceases to be a member, for the payment of the
debts and liabilities of the company contracted before he ceased to be a member
and the costs, charges and expenses of winding up and for the adjusttnent of the
rights of the contributories among themselves, such amount as maybe required,
not exceeding one thousand rupees.
As per s.45, under certain circumstances the liability of members of a limited
comp any becomes unlirnited2.
The capital clausels.T3 ( ) (c)l.This clause states the amount of share capital with
which the company is registered and the mode of its division into shares of fixed
value, i.e., the number of shares into which the capital is divided and the amount
of each share. If there are both equity and preference shares, then the division of
the capital is to be shown under these two heads.
The associationclause [s.13(a)(c)]. Atthe end of the memorandumof everycompany

there is an association or subscription clause or a declaration of association which
reads something like this:
"We, the several persons whose names and addresses and occupations are
subscribed, are desirous of being formed into a company in pursuance of this
memorandum of association and we respectively agree to take the number of shares
in the capital of the company set opposite our respective names".
Then follow the names, addresses, descriptions, occupations of the subscribers
and the number of shares each subscriber has taken and his signature attested by
a witness.
the company. Sonte points worth noting as regards doctrine of ultra aires are:
1. A company exists only for the objects which are expressly stated in its objects
clause or which are incidental to or consequential upon these specified
objects.
2. Any act done outside the express or implied objects is ultraaires.
1 Table C, Schedule Ito the Companies Act, 1956; Also, Sec. 13(3).
2 See discussion under 'Lifting the Corporate Veil'.
380 Business Law
3. The ultra oires acts are null and v oid ab initio. The company is not bound by
these acts; and neither the company nor the other contracting party can sue upon
it.
Examples. (i) A company with the objects, namely (a) to make and sell or lend on hire
railway carriages and wagons and all kinds of railway plant, fittings, machinery and
rolling stock; (b) to carry on the business of mechanical engineers and general
contractors; (c) to purchase, lease, work and sell, mines, minerals, land and buildings;
(d) to purchase and sell as merchants timber, coal, metals or other materials. The
company contracted to finance the construction of a railway bridge in Belgium and
there was evidence that the agreement had been ratified by all the members. Later, the
company repudiated the agreement and was sued for breach of contract. In its defence
the company repudiated its lack of capacity to enter into a contract which was outside
the scope of its objects clause. The other parly brought an action for damages for
breach of contract. His contentions were that the contract in question came well within
the meaning of the words 'general contractors' and, was, therefore, within the powers
of the company and secondly, that the contract was ratified by the majority of the
shareholders.
Held,thatthe term general contractors mustbe taken to indicate the making generally
of such contracts as were connected with the business of mechanical engineers. If the
term'general contractors' was so interpreted it would authorise the making of contracts
of any and every description, such as, for instance, of fire and marine insurance and
the memorandum in place of specifying the particular kind of business, would virtually
point to the carrying on of business of any kind whatsoever and would, therefore, be
altogether unmeaningful. Hence, the contract was entirely beyond the objects in the
memorandum of association . lAshbury Railzuay Carriage and lron Co. o. Richc (1875) LR
7 HL6s3l.
(ii) The objects clause of a company included making of costumes, gowns and similar
things within the clothing trade. However, it extended its activities to the manufacture
of veneered panels and became indebted to three parties (a) builders of the veneered
panels factory, (b) suppliers of veneers and (c) fuel merchants. In the meantime the
company went into liquidation and rejected the claim of the three creditors. The
creditors filed suits for the recovery of money. HeId, the contention of the liquidator
was correct as all the three contracts were clearly ultrn aires.
4. In case a company is about to undertake an ultra aires act, the members of a

company (even a single member) can get an order of injunction from the court
restraining the company from going ahead with the ultra aires act.
5. If the directors have exceeded their authority and done something then such
matter can be ratified by the general body of the shareholders, provided the
company has the capacity to do so by its memorandum of association.
Example. The Company has the power to borrow money, but the Articles of the
company provide that in case the directors borrow more than Rs. 50,000, they
should get prior approval by the company in general meeting. However, the
directors can issue debentures to the extent of Rs. 75,000 without getting the approval
from the shareholders.
The company in general meeting may ratify the act of directors as itis intra aires the
company, though Liltra oires the powers of the directors of the company.
Elements of Company Law 3g1
6' Anyproperty acquired by a company under an u rtra airestransaction may
be
protected by the company against damageby third persons.
7. Directors and other officers can be held liable to compensate the company
for
any loss occasioned to itby anultraaires act.
8' Directors and other officers shall be personally accountable
to the third parties
9'. Money or ProPerty gained through an ultra-aircs transaction
available in
specie or capable of being identified shalibe restituted (restored)
to the other party.
10. ln case, an ultra-aires loan,- taken by a company is used for payment
of its
intra-aires debts, the lender of
the ultra-aires loin is substituted in place of the
creditor who has been paid off and as such can recover the money.
16 provides that the company cannot
dum except in the cases and in the
as been made in the Act' These provisions
are explained herein below.
Change of rame. section 21 provides that the name of a company
maybe changed at
If through inadvertence or otherwise, a company has been registered with a name

which is identical with or too closely resembies with the iame of an existing
company/ the company may change its name by passing an ordinary
resolutioi
and by obtaining the approval of the central Governmeit in writing
(s.22).
Registrar will also make the necessary

tion of the company [s.23(2)].
Howevel,
9h1.gu of name shall not affect any-rights or obligations of the company
or render defective any legal proceeding whiih might hive been continued
or
commenced by or against the company-byits form"r nlu''"
-uy be continued by or
against the companyby its new name 1s.Ze1a;.1
within30 days of the passing of the special resolution, a printed or a type written
copy of the resolution should be sent to tl e Registrar of iompanies.
Change of registered office. This may include:
(a) s b another premises in

the same city,
town A resolution passed by the Boai'J
e.
of di notice of the change should, within 30
382 Business Law
days after the date of the change, be given to the Registrar who shall record the
same (s.146).
p) Change of registered ffice from one town or city or aillage to another town or city or
aillngeintfuesame State (s.1.45).In this case, the followingprocedure is tobe followed:
(t a special resolution is required to be passed at a general meeting of the

shareholders;
(ii) a copy of it is to be filed with the Registrar within 30 days'
(iii) Within 30 days of the removal of the registered office, notice of the new
location has to be given to the Registrar who shall record the same.
thin the same state
the jurisdiction of
trar of comPanies
ional Director. For
this purpose, an application is to be made in the prescribed form and the
cooJir-ution shall6i communicated within four weeks. Such confirmation is
nies who shall
lbe conclusive
(d) Change of rcgistered ffice from one state to anothet state.
Section of the registered offic

and suc of memorandum.The
from on e same citY or from on
State does not involve alteration of memorandum.
wilt editors of the company, the Registrar

and to be heard. The CLB may confirm the
reso it thinks fit.
It was made clear inZuari Agro Chemicals Ltd. o. F. S. Wadia and Others (1974) 44
Comp. Cas.455 that
or judgement for the
special resolution. B
bescremed.
from Orissa to West Bengal,inter alia,on the ground that in a Federal constitution
every state has the right to protect its revenue and, therefore, the interest of the
State must be taken into account.
But in Mineroa MiIIs Ltd. a. Goat. of Maharashtra (r9TS) 45 Comp. Cas l(Bom.),
Justice Ray of the Bombay High Court held that the Company Law Board cannot
refuse confirmation on the ground that the change would cause loss of revenue
to
a State or would have adverse effects on the general economics
of the State. The
question of loss of revenue to one state would have to be considered in the
prospectus of total revenues for the Republic of India and no parochial
considerations should be allowed to tum the scale in regard to change of registered
office from one State to another within India.
Distributors of India Ltd. a. Registrar of
.t^Tn:ll:i;iJj,T::"T::i,?Hi
other.
A printed or a typewritten copy of the special resolution both under s. 146 and s.
17 should be sent to the Registrar of Companies within 30 days of its passing.
A certified copy of the CLB's order should be filed within three months thereof
with the Registrar of Companies of each State - the old and the new State. If it is not
filed within the prescribed time, then the alteration shall, at the expiry of such
period, become void and inoperative.
A notice of the new location of the registered office must be given to the Registrar of
the State to which the office has been shifted, within thirty Jays after the clange
of
the office (s.1a6).
A company is in a position to shift its registered office from one State to another foi
certain purposes only. These are discussed in the following paragraph (under
'Alteration of objects'- the grounds being common). - '
Alteration Section Z e
of objects clause. 1 by a special resolution
{uly_confirmedbythe Companylaw urb ouiects orto change
the placeof its registered office from one the alferation is sougtt
on any of the following grounds.
_] fl carry onitsbusiness more economically and more

(Bhnrat) Ltd.,lnre (7964)34Comp. Cas. 729 (Mad.),the
fficiently.InDalmia Cement
Court obJerved thatwhether
a company can carry on its business more economically or more efficiently
is a
matter for the judgement of the directors. If the directors consider that under the
existing circumstances, it will be convenient and advantageous to combine the
new objects with the existing objects and if it appears that such a conclusion may
be fairly arrived at, the-court will not go uehina it and hold an enquiry as tb
whether the opinion of the directors is well founded or is justified.
The true legal position, observed the Delhi High Court, is that the business must
remain substantially the same and the additions, alterations and changes should
384 Business Law
gly 9u steps-in-aid to improve the efficiency of the company [Delhi Bharat Grain
Merchants Assn. Ltd.,Inre (1974)44 comp. Cis.274(Oelhi)1. '
In Re, scientific potiltry

Breeders Association (1933) 3 Comp. Cas. g9 (CA),
a
company's memorandum prohibited pa)rment of remuneration
to the members of
its governing body. It wanted for efficient management, amendment
in the
memorandum to enable it to pay remuneration to iL goveming
body members
which was allowed.
2. To attain its main purpose by nna o
after October, 1965, there is no
10th
because the Memorandum would state i
one has to look not only to the memorandum but also to what has
actually been
done.
_ 3. To enlarge or change the local area of its operation. In lndia Mechanical Gold
Extyctils Company,ln Re (7891) 3 ch. 53-g, the company's business was
confined
to the 'Empire of India'. It wanted to enlarge its operations by dropping
these
words. It was allowed to do so on the condition that the word',Indian,
was also
dropped from its name.
4' carry on somebusiness whichunder existing,cirutmstances may be
,To conaeniently
or adaantageously combined with the business ofThe company. rn fict,
most of the
amendments soughtin objects clause arebased on this gto;d This
clause enables
a company to diversify..The working of the clause malies
its scope very wide in as
*yS."r *I activity which may either convenienfly or advantageously be combined
with the existingbusiness maybe allowed.
Thus, a company formed for generating power was allowed to
carry on ,cold
storage and other allied business' [In re, Ambala Electric srtpply Co. Ltd. (1963)
33
Comp. CAS.585 (Punj)1.
rnParentTyre Co. Ltd.lnre. (7922)2ch.222,a tyre company was
allowed to take
power to undertake financial operations. similaily, a company formed
forbusiness
in Jute was allowed to add business in rubb er
t]uggilat Knitapit Tute lttiils a. Registrar
of Companies (1966) 1 Comp. L].2g2l.
Likewise, cyclistsTouring Ctttb Ltd. was not allowed to change its

objects so as to
admit motorists since of the objects was to protect cyclists fiom motor ists
fln re,
CyclistsTouring Club Ltd. (1907) 7 Ch.Z69l.
In sipani Automobiles (7993), diversification sought by the company was
refused
by the Company Law Board on the ground that ilre compar,y hJd
H;bilities (tG 24
Elements of Companylaw 3g5
crores) far in excess of its current assets (Rs 21
crores) besides accumulated losses
and. also had to pay a large number of persons
who had deposited money for
booking of its motor cars. In these circum'stances, Company
raw Board observed
that it would not only be against public interest but
utro uiuir,rt public policy to
permit the addition of the proposed ,re- clauses.
In view of the above judgements, it becomes pertinent
to note the principres that
court (CLB) normally follow in permitt ng or refusing
alteration of objects on this
ground.
Confirmation of alteration of objects is not to be refused only because
new business
iswhollydifferentfro_mexistingbusinesslNew AsanuaMfg.
c". iia.,Inre(1975) 4s
Comp. Cas. 151 (cuj)1.
5. To abandon
restrict or rcntorandtmr. Even for
fe-fting gyportion of the down in s.17has tobe
followed. CLB has juris which involves the
abandonment of objects which are h th
Garden Subn"tb Trust Ltd.,In re (1963) 33
company was that the surplus in th
transferred to some institution or insti
the company and in default to some char
so as to give or transfer the said balance to H Ltd., The
company,s contention was
that the alteration by special resolution was within its poweis
as the alteration
was to'restrict or abandon any of the objects of the
company,.
HeId that, what was sought to be d
altogether any institution or institut
this company and,secondly, to make the b
of the class of beneficiaries. Thisvirtually amounted to destruction
of the o$ects
and could in no way be regarded as restiicting o. aba.,doni.,j
or tn" objects.
6. To sell or dispose of the whore or any
""y
part of the tmdertaklng. IA/here a company
wishes to adopt a cut-back or retrench-ment strategy, i.e.,
wh"ere it feels that it has
To amalgamate wilh any other company or body

- _7 -
' of persons [Hari Krishna Lohia a.
HoolungoreeTea Co. Ltd. (1970)40 Comp. Cas. +StiCai.l.
A printed or a typewritten copygf th9 special resolution is

required to be filed with
the Registrar of Companies within thiriy days of the
passing m"*"r.
Also petition is to be filed with the CLB for confirmation of the special
a
resolution.
The CLB, being satisfied that the notice of the resolution
was gi;* to all persons
386 Business Law
whose interests are likely to be affected by the alteration, including the Registrar of
Companies and the State Govemment and having heard them, may confirm the
alteration either wholly or in part.
A certified copy of the CLB's order together with a printed copy of the altered
memorandummustbe filed within three months of the date of the order, with the
Registrar. The Registrar will register the documents and issue, within one month
a certificate which will be conclusive evidence that everything required has been
done (s.18). If the required documents are not filed within the prescribed time, the
alteration and the order of the CLB confirming the alteration, shall, at the expiry of
such period, become void and inoperative (s.19).
Alterationof liability clause (s.38). The liability of a member of a company cannot be
increased unless the member agrees in writing. The consent of the member may,
however, be given either before or after the alteration. Increase in liability may be
by way of subscribing for more shares than the number held by him at the date on
which the alteration is made or in any other manner.
In case where the company is a club or any other similar association and the
alterationin the memorandum requires the member topay recurring orperiodical
subscription or charges at a higher rate, although he does not agree in writing to be
bound by the alteration, it shall be binding on him.
Incase of unlimited liabilitycompany, theliabilitymaybe madelimitedbypassing
a special resolution and obtaining the Court's approval (s.32). A copy of the special
resolution and that of Court's confirmation mustbe filed with the Registrar within
the time specified. The alteration will, however, not affect any debts, liabilities,
obligations or contracts entered into by or with the company before the registrations
[s.32 (3)].
Alteration of capital clause. Section 94 provides that, if the articles authorise, a
company limited by share capital may, by an ordinary resolution passed in general
meeting, alter the conditions of its memorandum in regard to capital so as:
1.. to increase its authorised share capital by such amount as it thinks expedient
by issuing fresh shares;
2. to consolidate and divide all or any of its share capital into shares of larger
amount than its existing shares;
3. to convert all or any of its fully paid-up shares into stock and reconvert the
stock into fully paid-up shares of any denomination;
4. to sub-divide its shares, or any of them, into shares of smaller amount than
fixed by the memorandum, but the proportion paid and unpaid on each share
mustremain the same;
5. to cancel shares which, at the date of the passing of the resolution in that
behalf, have not been taken or agreed to be taken by any person.
These five clauses are now explained.
Increase of authorised share capitar.
A company, rimited by shares, if the article
can increase its authorised sirare capiral by passing
an ordinary
:;;tffil::
If default is made in filing the notice, the company and

every officer of the company
who is in default shalr be punishable with fine Lpto
Rs 5d;;;;;y during which
the default continues (s.92).
Consolidation and nLb-diaision of shares. Consolidation is

the process of combining
shares of smaller denomination. For instance, 10 shares
oi n" to each may be
consolidated into one share of Rs 100.
sub-division of shares is just the opposite of consolidation,
e.g., one share of Rs
100 may be divided into 10 shares oi Rsf O eactr.
Once a resolution hu:l": passed, copy of the resolution is required to be sent

within thirty days to the Re[istrar of1 Companies.
up shares into stockby

rise such conversion. A
s of the passing of the
t be issued in the first instance. It is necessary

to
fully paid-up and then convert them into stock.
tofully paid-up shares by passing a resolution in
3gg Business Law
constitutes diminution of capital and should be distinguished from reduction of
capital which is discussed under Chapter on'Share capital'.
PART 4 -ARTICLES OF ASSOCIATION
12.4.1 Meaning and Purpose. The articles of association of a company and its bye
laws are regulations which govem the management of its internal affairs and the
The Articles of association of a company have a contractual force between

comPany and its members as also between the membersinter se in relation to their
rights as such members. They are subordinate to and are controlled by
memorandum. Arlicles cannot supersede the objects as set out in the memorandum
of association lBirds Inaestments Ltd, a. C.l.T. (1965) 35 Comp. Cas.747 Cal.l The
memorandum, as we have seen earlier, lays down the scope and powers of the
company, whereas the articles govem the ways in which the objects of the company
are to be carried out. Also the alteration of memorandum involves elaborate
procedure, whereas the articles can be framed and altered by the members by
passing special resolution. The memorandum is the area beyond which the actions
of the company cannot go inside that area the shareholders may make such
regulations for their own governance as they think fit. However, the articles must
not be inconsistent with the memorandum. Also, as in the case of memorandum,
the articles of the company must not contain anything which is against or
repugnant to the provisions of the Companies Act (s.9). Thus, where article 2 of the
Articles of a company limited by guarantee without share capital provided as
follows: For the purpose of registration, the number of members is 1500. This may
be reduced or increased from time to time by the general committee. The article was
held to be void. The articles can be altered only by a special resolution of the
generalbody.
12.4.2 Registration of Articles. section 26 states that a public company limited by
shares may register articles of association signed by the subscribers to the
memorandum. If, howeveq, it does not register its own articles, then the articles
given in Thble A of Schedule I automaticallybecomes applicable. Further, even if it
does register articles of its orvn, Table A will still apply automatically unless it has
been excluded or modified. There are actually three possible altematives in which
such company may adopt articles: (i) it may adopt Table A in full or, (ii) it may
wholly exclude Table A and set out its own regulations in full, or (iii) it may set out
is own articles and adopt part of Table A. The altematives (ii) and (iii) are often
employed; and partial adoption of Table A has particular advantage for small
companies, because of economy in printing and also because any provision of
Table A is legallybeyond any doubt.
As regard a company limited by guarantee and unlimited liability company and,

a private company limited by shares, s.26 provides for compulsory registration of
articles prescribing regulations for the company. Howeveq, they may adopt any of
the appropriate regulations of Table A.
In any case, the articles of a company must be: (i) printed, (ii) divided into
paragraphs, numbered consecutively, (iii) signed by subscribers to the
memorandum in the presence of at leastone wihress who shall attest the signatures.
The articles are to be stamped with requisite stamp and filed along with the
memorandum (s.3).
12-4.3 Subject Matter of Articles. The articles of a company usually deal with the
following matters;
(1) the business of the company;
(2) the amount of capital issued and the classes of shares into which the capital
is divided; the increase and reduction of share capital;
(3) the rights of each class of shareholders and the procedure for variation of
their rights;
() the execution or adoption of a preliminary agreement, if any;
(5) the allotment of shares; calls and forfeiture of shares for non-payment of
calls;
(6) transfer and transmission of shares;
(7) company's lien on shares;
(8) exercise of borrowing powers including issue of debentures;
(9) general meetings, notices, quorurn, proxy, poll, voting, resolution, minutes;
(10) number, appointment and powers of directors;
(11) dividends - interim and final - and general reserves;
(12) accounts and audi!
(13) keeping of books - both statutory and others.
L2.4.4 Inspection and copies of the Articles. A company shall, on being so required
by a member, send to him within seven days of the requirement, on payrment of one
rupee/ a copy of the articles. If a company makes default, the company and every
gffiger of the company, who is in default, shall be punishable with fine up to Rs 5b
(s.3e).
12.4.5 Alteration of Articles. Section 31 provides that subject to the provisions of

the Act and to the conditions contained in its memorandum, u co*pat y rnay,by
special resolution alter or add to its articles. A printed or type written copy of every
special resolution altering the articles must be filed with the Registrar within 3b
days of the passing of the special resolution.
The right to alter just by passing special resolution is so important that a company
cannot in any manner deprive itself of the power to alter its articles. Also, the
power to reduce or increase the number of members in the case of a company
limited by guarantee without share capital, from time to time, as given in thl
390 Business Law
articles can be done by a special resolution of the general body of members.
Howeveq, in spite of the power to alter its articles, a company can exercise this
power subject to certain limitations.
12.4.5 Limitations on Power to alter Articles. These are:
(i) The alteration must not exceed the powers given by the memorandum or
conflict with the other provisions of the memorandum.
(ii) The alteration must not be inconsistent with any provision of the Companies
Act or any other statute. For example, no company can purchase its own shares
(s.Z) and if the articles of a company are altered so as to have the power to purchase
its own shares, then such power will be void.
(iii) The altered articles must not include anything which is illegal, or opposed to
public policy or unlawful.
(iv) The alteration mustbebonafde for the benefit of the company as a whole. The
alteration will not, however, be bad merely because it inflicts hardship on an
individual shareholder.
Examples. (i) A company had a lien on all shares "not fully paid" for calls due to the
company. There was only one shareholder A, who owned fully paid-up shares. He
also held partly-paid shares in the company. A died. The company altered its articles
striking out the words "not fully paid up" and thus gave itself a lien on all shares -
whether fully paid up or not. The legal representative of A challenged the alteration
on the ground that the alteration had retrospective effect.
Held: The alteration was good, as itwas donebonafdefor the benefit of the company
as a whole, even though the alteration had a retrospective effect lAIIen a. GoId Reefs
of West Africa Ltd. (1900) 1 Ch. 6561.
(ii) By an alteration in the articles, a comPany was emPowered to expropriate
shares held by any member who was in business in competition with the company.
At the time of alteration, there was only one member doing business in competition
with the company. He challenged the alteration.
HeId: The alteration was valid, although only one member was at that time within
the ambit of alteratiory as the alteration was bona fide and for the benefit of the
company lsidebottom a. Kershaw Leese & Co, (1920) Ch. 154 (C.A.)l.
(v) The alteration must not constitute a fraud on the minority by the majority. If
the alteration is not for the benefit of the company as a whole, but for majority of the
shareholders, then the alteration would be bad. In other words, an alteration to the
articles must not discriminate between the majority shareholders and the rninority
shareholders so as to give the former an advantage of which the latter have been
deprived.
Example: In Brown u. British Abrasiae Wheel Co. (1979) 1 Ch' 290, the majority which
held 98 per cent of the shares passed a special resolution that upon the request of
holders of 9/70h of the issues shares, a shareholder shallbe bound to sell and
transfer his shares to the nominee of such holders at a fair value. The alteration was
held to be invalid since it amounted to an oppression of minority.
Elements of Company Law ggl
the articles so as to compel the existing members
s or in any way to contribute to the shire capital,
writing (s.38).
(vii) An alteration of articles to effect a conversion of a public company into a
pri-vate companycannotbe made withoutthe approval of the
Central Govemment
(s.31).
t$il e .oT-f1ll of conrract with third parties or avoid a

cohtractual liability"Ttro!justifybreach
by altering articles.
However, where the damage is capable of being measured in terms

of money,
the company may alter its articles subject to belng answerable in damages
foi
breach.
on in the Articles of Association cannot operate

the date of amendment [pyarelnlsharmaa. Managing
392 Business Law
(1922) 73 Comp. Cas 201 (S'C.)l'
obligations to him, such as to send the notice for the meetings, to allow him
to cast
his vote in the meetings.
Menfuersbotmd tomember.Thearticlesbind themembersintet se,r'e',one to

another
so far as rights and duties arising from the articles are concemed'
It is well settled that the articles of association will have a contractual force between
the company and its members as also between the members inter se in relation
to
(P) Ltd' u. P' R' Ramakrishnan
their rigirts as such memb erslRamakrishnalndustries
Whetherco ?No, the memorandum or articles do

not confer against the company or its members'
even thou ntioned in the articles'
(1875)I Ex. D.881.

In case of contravention of the provisions of the articles, the directors render
themselves liable to an action at the instance of the members. However, members
may ratify the act of the director, if they so desire. But if as a result of the breach of
duty any loss has resulted to the company, the directors are liable to refund to the
company any damage so suffered.
Further, where the directors contravene the provisions of the articles, it may affect
outsiders' interest also. This is explained below with the help of a case, viz., Royal
British B ank a. Tur q uand.
12.4.8 Constructive Notice of Articles and Memorandum. Section 610 provides
that the memorandum and articles, when registered, become public documents
and then they can be inspected by anyone on payment of a nominal fee. Therefore,
any person who contemplates entering into a contract with the company has the
means of ascertaining and is thus presumed to know the powers of the company
and the extent to which they have been delegated to the directors. In other words,
every person dealing with the company is presumed to have read these documents
and understood them in their true perspective. This is known as 'Doctrine of
Constructive Notice'. Even if the party dealing with the company does not have
actual notice of the contents, it is presumed that he has "constructive notice" of
them.
Examples. (i) One of the articles of a company provides that a bill of exchange to be
effective must be signed by two directors. A bill of exchange is signed only by one of
the directors. The payee cannot claim under the bill.
(ii) In Kotla Venkatawamy a. Ram Murthy AIR (1934) M ad,. 579, the articles provided that
all deeds and documents of the company shall be signed by the managing director,
secretary and working director. A mortgage deed was accepted with secretary and
working ilirector's signature only. Held, the deed was invalid.
(iii) Similarly, if a person enters into a contract which is beyond the powers of the
compan, he cannot acquire any right under the contract against the company.
12.4.9 Doctrine of Indoor Management. The doctrine of constructive notice
throws a burden on people entering into contracts with the company that they are
presumed to have read the documents, though in fact, they might not have read
them. On the other hand, the doctrine of indoor management allows all those who
deal with the company to assume that the provisions of the articles have been
observed by the officers of the company. In other words, they are not bound to
enquire into the regularity of intemal proceedings. An outsider is not expected to
see that the company carries out its intemal regulations.
Example. The directors of a company were authorised by the articles to borrow on
bond such sums of money as should from time to time, by a resolution of the company
in general meeting, be authorised to be borrowed. The directors gave a bond to T
without the authority of any such resolution. The question arose whether the company
was liable on the bond. Held; The company was liable on the bond, as T was entitled to
assume that the resolution of the company in general meeting had been passed [T/re
Royal BritishBankzt.Turquand (1856) 5 E &83271.
Exceptions. The doctrine of indoor management is subject to the following

exceptions:
394 Business Law
7 .
Knowledge of irregularity . The rule does not protect any person who has actual
or constructive notice of the want of authority of the person acting on behalf of the
comPany.
Exnmple. The articles of a company emPowered the directors to borrow up to
€ 1,000. They could exceed the limit of € 1,000 with the consent of the company in
general meeting. Without such consent, they borrowed f,3,500 from themselves
and took debentures. The company refused to pay the amount. HcId: Thert
debentures were good to the extent of € 1,000 only as they had notice of the internal
irregularity lHoward o. Patent Iaory Co., (38 Ch. D. 156)].
2. No knowledge of articles. The rule cannot be invoked in favour of a person who
did not consult the memorandum and articles and thus did not rely on them.
Example. T was a direc nY'
of the company, entere ma
from the latter. The a Pr
delegate their powers to one of them. But Rama Corporation never read the articles'
Latef, it was found that the directors of the company did not delegate their Powers to
T. Plaintiffs relied on the rule of Indoor Management. Held: They could not, because
they did not know the existence of the por^rer to delegate. lRama Corporation a. Protted
Tin and General lnaestment Co. (1952) 1 All ER 5541.
3. Void or illegal transaction. The rule does not aPPly to transactions which are
void or illegal ab initio, e.9., fotgery'
Fingal Consolidated (7906) A.C 4391.
4.Negligence.If an officer of a company does something which would not

ordinarily be within his powers, the person dealing with him must make ProPer
enquiries and satisfy himself as to the officer's authority. If he fails to make inquiry
he cannot rely on the rule.
PART 5 _ PROSPECTUS
12.5.1 Stepswhich are Necessary before the Issue of Prospectus. We have
mentioned earlier that a private company is prohibited from inviting public to
subscribe to its share capital and it arranges its share capital privately. The shares
are subscribed by a small number of Persons who are known to the promoters or
are related to them by family connections'
A public company may also decide not to invite public to subscribe to its share
cupitul and arrange its capital privately as in the case of a private company. Under
Elements of Company Law ggs
such circumstances, the public company is required to submit a statement
in lieu
of prospectus with the Registrar o1 companies at least three days before the
allotment of shares is made.
Howeveq, a public company limited by shares, generally issues shares to the public
for which it has to issue a prospectus. In that case it has to follow the procedure
below.
After the certificate of incorporation is obtained, the affairs of the company are
taken over by the first directors appointed in accordance with the provisions
of
law. They will elect one of their members as the chairman of the Board of Directors,
if none is named in the articles of association. The Board attends to the following
matters: (i) Appointment of various expert agencies such as bankers, auditors]
secretary, etc. (ii) Entering into underwriting contract, brokerage contracts.
(iii) Making arrangements for the listing of sharei on stock exchung"r.
lirr; Drafting
a prospectus for the purpose of issue to the public
The appointment of a bankeris necessary as it has to receive the share application

along with application moneys. The appointment of first auditor is in thLiands
of
Board of directors and it becomes necessart as we shall see late1, to make the
appointrnent before the issue of prospectus. The appointnent of company secretary
is obligatory in case of companies, having the prescribed paid-up share capital
(presently, Rs 50 lakhs or more). In other companies also,ihe appointmenfof a
company secretary is desirable.
12.5.2 Underwriting. The Board of Directors enters into underwriting contracts
with underwrite rm, consists of an uidertaking
by some Person o take up the issue, he or the!
will do so. br retu y agrees to pay the underwriter
a comrnission on
, whether taken up by the public or by the
underwriters
Section 76 prescribes certain conditions subject to which underwriting commission
maybe paid. These are:
(1) The authority to pay is given in the articres of the company. Authority in the
-Memorandum
is not suff icient[Republic of BoliaiaExploration syndicate ud.
e91.4)
1. Ch. 1391.
(2) The commission payable cannot be more than 5 per cent of the issued price
of
shares and 2
{ per c"r,i oi th" price of debentures.
(3) The commission can be paid only on shares issued to the public.
(4) The payment must be strictly by way of 'commission' and not merely a device
to issue shares at a discount.
(5) The rate of commission and the number of shares and debentures which the
underwriters have agreed to subscribe for a 'commission, should be disclosed in
the prospectus.
396 Business Law
(6) The names of the underwriters and the opinion of the directors that the
resources of the underwriters are sufficient to discharge their obligations must be
disclosed in the prospectus.
When prospectus is issued to the public and the issue is a success, i.e., the issue
has been subscribed fully, the underwriters are not required to take up the shares,
but they receive their commission. On the other hand, if the issue is a failure, i.e.,
the issue has notbeen subscribed fully, the underwriters have to take up the shares
not subscribed for by the public and pay for them. In this case also, they will get
their commission.
Under s.69, as we shall see later, a company must receive applications equivalent
to the minimum subscription as mentioned in the prospectus, otherwise money
become refundable to the applicants. But when the issue is underwritten, the
company is sure of getting the minimum subscription, as the underwriters act as
insurers a gainst under-subscription.
Sub-unclenariting. Every underwriter has a certain Iimit up to which he would go
in for taking risk by entering into an underwriting contract. The underwriters
usually choose to spread their riskby using sub-underwriters who agree to take a
certain number of shares for which they accept responsibility and for which they
receive a commission out of the commission received by the underwriters. The
difference between the commission paid by them to the sub-underwriters is known
as overriding commission.
SEBI Guidelines relating to underwriting, SEBI guidelines for disclosure and investor
protection provide rules as to underwriting.
L2.5.3 Brokerage Contracts. In addition to underwriters, a company may also

enter into brokerage contracts with brokers. A broker is a person who undertakes
to 'place' shares, i.e., find persons who will buy shares, in consideration of an
agreed brokerage and if he fails to place any of the shares, he is not personally
liable to take them, nor is he entitled to any brokerage in respect of shares not
placed. The underwriteq, on the other hand, is bound to take up the shares, which
the public has not taken and is entitled to the whole of the agreed commission.
It may be noted that there must be authority in the articles to pay brokerage and the
brokerage must be disclosed in the prospectus, or statement in lieu of prospectus,
as the case maybe and it shouldpay a reasonable brokerage (s.76).
12.5.4 Listing of the Shares on a Stock Exchange. Shares of a public company

may be sold or purchased on stock exchange. But for this purpose the company
has to get permission from the stock exchange authorities. Section 73 provides that
it is necessary for every public company, before issuing shares or debentures for
public subscription by issue of a prospectus, to make an application for listing the
security in one or more recognised stock exchanges. This is known as listing of the
shares. The information that permission has been obtained from the stock exchange
or that an application for getting permission has been made or will be made, may
be mentioned in the prospectus.
The eligibility criteria for listing of securities of a company is:
(i) minimum issued equity capital of a company should be Rs 3 crores; and
(ii) the minimum public offer of equity capital shall be not less than 25% [Rule
le(2)1.
1-2.5.5 Structure of Shar

subdivision into equity an
of Association which is
obtained. After obtaining
prospectus, the Board of directors have to take a decision regarding the total
amount of capital which is to be raised by issue of shares and ttre kindi of shares
to be issued. A company cannot issue capital exceeding the authorised capital
mentioned in the memorandum. How much capital should be raised lt a
particular time? the purpose for
which the capita ts like pLnt and
machinery, etc., ; the alternative
sources of raising capital (e.g., debentures, public financial institutions and so
on)' The directors should also decide about the ratio of equity to preference share
capital. For certain Purposes the Central Govemment has fixed this ratio at 3:1.
Also, the amount of capital in each category, i.e., equity and preference and the
.
amount tobe called up atthe time of application, allotment, etc., are tobe decided.
Also, the Board of directors have to decide about the type of preference shares to
be issued.
12.5.5 Time of Floatation. The Board of directors will then decide about the time
of issue of prosPectus. It is advisable to consider the condition of the capital market,
the investors'mood, fiscal and monetary policies of the Govemment ind the state
of business conditions before issuing a prospectus.
1. It invites subscriptions to share or debentures or invites deposits.

2. The aforesaid invitation is made to the public.
398 Business Law
What constitutes an offer to thc public? Section 67lays down two-way criteria as to
what shall constitute an invitation to the public. These are:
1. An invitation to the public shall include an invitation to any section of the
public, whether selected as rnembers or debenture holders of the comPany
concemed or as clients of the person issuing the prospectus or in any other manner.
Howevet a document by way of invitation to existing members or debenture holders
to subscribe to shares or debentureby way of right is not a prospectus [s.56 (5)].
2. An invitation shall not be an invitation to the public if it cannot be calculated

to result, directly or indirectly, in the shares or debentures becoming available for
subscription or purchase by persons other than those receiving the invitation.
Thus, it will not be an invitation to public where B, a friend of A who receives the
invitation, also desires to subscribe, but his offer shall be refused because he was
not invited to make the same. On the other hand, it will become an invitation to
public where his (B's) offer shall also be accepted.
The offering of shares of kith and kin of a director is not an invitation to the public
to buy shares lRattan Singh a. Moga Transport Co. Ltd. (7959)1.20 comp. cas. 1651'
Furthel the leamed judge in this case held that in all cases the determination of the
question of an offer being made to the public depends upon the facts and language
of the notice and the particular circumstance of each case.
lnNasha. Lynde (7929, A.C. 1585).Iustice Viscount Summer observed: "The 'public'
is of course a general word. No particular numbers are prescribed. Anything from
two to infinity may serve; perhaps even one, if he is intended to be the first of a
series of subscribers, but makes further proceeding needless by himself subscribing
the whole. The point is that the offer is such as to be open to any one who brings his
money and applies in due form, whether the prospectus was addressed to him on
behalf of the company or not."
Shelf prospectus and informationmemorandum (s.60,4' and 608)
Section 60A.makes provisions for a self-prospectus in certain situation. A'shelf-

prospectus'means a prospectus issued by any financial institution or bank for
one or more issue sof the securities class of securities specified in that prospectus.
Any public financial institution, public sector bank or scheduled bank whose
main object is financing shall file a shelf prospectus with the registrar. In such a
situation such a company need not file a prospectus afresh at every stage of offer of
securities by it within a period of validity not exceeding one year.
But a company filing a shelf prospectus is required to file an information

memorandum (as given in s. 608 below) on all material facts relating to new
charges created, changes in the financial position as have occured between the
first offer of securities, previous offer of securities within such period as may be
prescribed b the Central Government, prior to making of a second or subsequent
offer of securities under the shelf prospectus.
An information memorandum shall be issued to the public along with shelf
prospectus filed at the stage of the first offer of securities and such prospectus
Elements of Company Law 3gg
shall be valid for a period of one year from the date of opening of thefi1st issue
of
securities that prospectus.
update of information memorandum is filed every time an offer of securities
Iny'here an
is made, such memorandum together with the shelf prospectus shall constitute
the prospectus.
Information Memorandum
Section 608 provides as folows as regards information rnemorandum:
(i) A public comPany making an issue of securities may circulate information

memorandum to the public prior to filing of a prospectus.
(ii) A company inviting subscription by an information memorandum is bound
to file a prospectus prior to the opening of the subscription lists and the offer as a
redherring prospectus, at least three days before the opening of the offer.
The 'red-herring'prospectus means a prospectus which does not have
complete particulars on the price of the securities offered and the quantum of
securities offered.
(iii)The information memoradum and red-herring prospectus shall carry same

obligations as are applicable in the case of a prospectus.
(iv) Any variation between the information memorandum and the red-herring
prospectus have to carry same obligations as are applicable in the case of i
prospectus.
(v) Every variation as made and highlighted under (iv) is to be individually
intimated to the persons invited to subscribe to the issue of securities.
(vi) In the event of the issuing company or the underwriters to the issue have
invited or received advance subscription by way of cash or post-dated cheques or
stock-invest, the company or such underwriters or bankeri to the issue shill not
encash such subscription moneys or post-dated cheques or stock invest before the
date of opening of the issue, without having individually intimated the prospective
subscribers of the variation and without having offered an opportunity io such
prospective subscribers to withdraw their application and cancel their post-dated
cheques or stock-invest or refum of subscription paid.
(vii) The applicant or proposed subscriber can exercise his right to withdraw
from the application on any intimation of variation within r"'n* duys from the
date of such intimation and shall indicate such withdrawal in writing to the
company and the underwriters.
(viii) Any application for subscription which is acted upon by the company or
underwriters or bankers to the issue without having given enough information of
any variations, or the particulars of withdrawing the offer or opportunity for
cancelling the post-dated cheques or stock-invest or stop payments for such
400 Business Law
payments shall be void. Furtheq, the applicants shall he entitled to receive a refund
or retum of its post-dated cheques or stock-invest or subscription moneys or
cancellation of its application, as if the said application had never been made and
the applicants are entitled to receive back their original application and interest at
15% from the date of encashment till payment of relisation.
(ix) Upon the closng of the offer of securities, a final prospectus stating therein
the total capital raised, whether by way of debt or share capital and the closing
prive of the securities and any other details as were not complete in the red-herring
prospectus shall be filed in a case of Iisted public company with SEBI and registrar
and in any other case with the registrar only.
Small Depositors (s. 58AA)

To protect small depositors, twonew sections 58AA and 58AAA have been added
by the companies (Amendment) Act, 2000. The provisions are sununarised below:
(i) A small depositor is one who has deposited in a financial year a sum not
exceeding Rs 20000 in a company and includes his successors, nominees and
legal representatives. However, the term does not include those depositors who
renewed their deposits whose repayment is not made due to death or stay order of
a competent court or authority.
(ii) Any company accepting deposits shall have to inform the Company Law
Bord (CLB) on monthly basis, the names and addresses of each small depositor
about its default in repayment of deposit or payment of interest thereon. A period
of 60 days is prescribed for intimation of any default to the CLB which shall, after
giving the depositor an opportunity of being heard, pass an appropriate order
within 30 days from the date or receipt of such intimation from the defaulting
comPany.
Such a defaulting company is prohibited to accept further deposits from

small depositors at any time until the defaults are made gird.
(ii) The total numbers of small depositors and the amount due to them in respect
of which default is made and the fats of wariver of interest accured on deposits
shall be stated in all future advertisements and application forms inviting deposits
from the public. Further every application form of accepting deposits shall contain
a statementthatthe applicanthasbeen apprised or everypastdefaultof the company
in repayment of deposits and for payment or interest thereon to the small deposits.
(iii) Every director of such a defaulting company such be prohibited to be
appointed as a director of any public company for 5 years from the date of the
default.
(iv) No such defaulting company shall directly or indirectly make any loan to
any body corporate, give guaranteee or provide security or acquire security of any
body corporate till such default continues.
(v) Every non-compliance is punishable with imprironment upto 3 years and
also fine not less than Rs 500 for everyday.
(vi) An aggrived depositor is also entitled to make an application to CLB for
redressal of his grievance against the company.
Derault in aceptance or refund of deposits to be cognizable (s. 58AAA)

Every offence connected with or arising out of acceptance of deposits under s. 58A
or s. 58AAA is a cognizable offence under the code of criminal procedure, 1973.
Dating of prospectus (s.55). Section 55 states that every prospectus must be dated
and that date is deemed to be the date of publication of the prospectus.
Powers of SEBI. The companies (Amdnedment) Act, 2000 has inserted a new
s. 55A which provides that the provisions contained in sections 55 to 58,59 to 81,
108-110, 772-173, 776-722, 206, 206A and 207, so far as they relate to issue and
transfer of securities and non-payment of dividend shall be administered by BEBI
in the following cases: (a) in case of listed companies; (b) in case of those public
companies which intend to get their securities listed on any recognised stock
exchange in India. In any other, the Central Govemment shallbe the administering
authority.
12.5.8 Contents of a Prospectus. Section 56 lays down that the matters and reports
stated in Schedule II to the Act must be included in a prospectus. The format of
prospectus is divided into three parts.
In the first part brief particulars are to be given about matters mentioned below:
1, . information is given about (i) Name and
General information. Under this head
address of registered office of the company. (ii) Name/(s) of stock exchange/(s)
where application for listing is made. (iii) Declaration about refund of the issue if
minimum subscription of 90 per cent is not received within 90 days from closure of
the issue. (iv) Declaration about the issue of allotment letters/refunds within a'
period of 10 weeks and interest in case of any delay in refund at the prescribed rate
under s.73. (v) Date of opening of the issue. (vi) Date of closing of the issue.
(vii) Name and address of auditors and lead managers. (viii) Whether rating from
CRISIL or any rating agency has been obtained for the proposed debentures/
preference shares issue. If no ratinghasbeen obtained, this shouldbe answered as
'No'. (ix) Names and address of the underwriters and the amount underwrittenby
them.
2. Capital structure of the company. (i) Authorised, issued, subscribed and paid-
up capital. (ii) Size of the present issue, giving separately reservation for preferential
allotment to promoters and others.
3. Terms of the present issue. (i) Terms of payment. (ii) How to apply. (iii) Any
special tax benefits.
4. Partiuilars of the isnrc. (r) objects. (ii) Project cost. (iii) Means of Financing
(including contribution of promoters).
5. Company management and project. (i) History and main objects and present
business of the company. (ii) Promoters and their background. (iii) Location of the
402 Business Law
project. (iv) Collaborations, if any. (v) Nature of the product (s), export possibilities
(vi) Futureprospects (vii) Stockmarket data. For share/debentures of the company
including high and low price in each of the last three years and monthly high and
low during the six months, if applicable. '
6. Certain prescribed partiuilars in regard to the company including high and
low price in each of the last three years and monthly high and low during the last
six months, if applicable.
7. Otttstanding litigations relating to financial matters or criminal proceedings
against the company or directors under Schedule XIII.
8. Managenrcnt perception of riskfactors (e.g., sensitivity to foreign exchange rate
fluctuations, difficulty in availability of raw materials or in marketing of products,
cost/time over-run, etc.)
Part II of Schedule II requires the company to give detailed information. This part
is further sub-divided into three parts viz., General Information, Financial
Information and Statutory and Other Information.
General Information shall include information on matters like: (i) Consent of
directors, auditors, solicitors, managers to the issue, Registrars to the issue,
Bankers of the Company, Bankers to the issue and experts. (ii) Change, if any, in
directors and auditors during the last 3 years and reasons therefor. (iii) Procedure
and time schedule for allotment and issue of certificates. (iv) Names and address
of Company Secretary, legal advisor, Lead Managers, Co-managers, Auditors,
Bankers to the issue. (v) Authority for the issue and details of resolution passed
therefor.
Financial information includes: (i) reports of the auditors of the company with
respect to its profits and losses and assets and liabilities and the dividends paid
during the five financial years immediately preceding the issue of prospbctus;
(ii) report by the accountants (who should be named) on the profits or losses for
the preceding 5 financial years and on the assets and liabilities on a date which
must not be more than 120 days before the date of the issue of the prospectus.
Statutory and Other information includes information about. (i) Minimum
subscription. (ii) Expenses of the issue. (iii) Underwriting commission and
brokerage. (iv) Previous public or rights issue; if any, giving particulars about date
of allotment, refunds, premium/discount, etc. (v) Issue of shares otherwise than
for cash. (vi) Commission or brokerage on previous issue. (vii) Particulars about
purchase of property, if any. (viii) Revaluation of assets , if any. (ix) Material contracts
and time and place where such documents may be inspected. (x) Debentures and
redeemable preference shares or other instruments issued but remaining
outstanding on the date of the prospectus and terms of their issue.
Part III of the Schedule gives explanations of certain terms and expressions used
under Part-I and Part - II of the Schedule.
1.2.5.9 SEBI Guidelines Relating to Disclosure on Prospectus. Every prospectus
submitted to Stock Exchange Board of India (SEBI) for vetting shall in addition to
the requirements of schedule II to the Act, contain / specify certain particulars as

are announced from time to time.
12.5.10 Abridged Form of Prospectus. Section 56(3) requires that no one shall
issue any form of application for shares in or debentures of a company unless the
same is accompanied by a memorandum (Known as 'Abridged Prospectus')
containing such salient features of prospectus as may be prescribed. Thus, instead
of appending full prospectus, an 'abridged prospectus'need only be appended to
the application form.
In order to provide for greater disclosure of information to prospective investors so

as to enable them to take an informed decision regarding investment in shares and
debentures, Form 2-A has been prescribed as a format of abridged prospectus. It is
further required that the abridged prospectus and the share application form
should bear the same printed number and the two should be separated by a
perforated line. Accordingly, the investor may detach the application form before
submitting the same to the company or the designated bankers.
When ' abridged prospectus' not necessary.In the following circumstances, an 'abridged
prospectus' containing the prescribed particulars as per Form 2A need not
accompany the application forms:
(i) In the case of a bonafide invitation to a person to enter into an underwriting
agreement with respect to the shares or debentures [s.56 (3) (a)].
(ii) When shares or debentures are not offered to the public ts.56 (3) (b)1.
(iii) Where offer is made only to existing members/debenture holders of the
company by way of rights, whether with or without the right of renunciation
[s.56(5) (a)1.
(iv) In the case of issue of shares or debentures which are in all respects Similar
to those previously issued and dealt in and quoted on a recognised stock exchange
Is.56(s) (b)1.
Penalty: Non-compliance of the aforesaid provisions by any person shall attract
punishment in terms of fine which may extend to Rs 5,000.
Besides, the omission from a prospectus of a matter required to be included by s.56
may give rise to an action for damage at the instance of a subscriber for share or
debentures who has suffered loss thereby. It should be noted that the Act does not
say that directors shallbe liable, but this seems to be implied from s.56 (a).
12.5.11 Draft Prospectus to be made Public. SEBI requires making public the
draft prospectus filed with it. The lead Merchant Bankers shall simultaneously
file copies of the draft document with the stock exchanges where the issue is
proposed to be listed. Lead Merchant Bankers shall also make copies available to
the public. Lead Managers/stock exchanges can charge an appropriate sum from
the person requesting such a copy(ies).
12.5.12 The Experfls Consent to the Issue of Prospectus. A prospectus may contain
a statement purporting to be made by an expert. The term 'expert' includes an
404 Business Law
engineer, a valuer, an accountant and any other person whose profession gives
authority to a statement made by him. The reports from an expert must not be
included in a prospectus unless:
(i) Such expert is unconnected with the formation or management of the company
(s.57);
(ii) he gave his consent (s.58);

(iii) he is competent to make the report, valuation or statemen|
(iv) a statement that he has given and not withdrawn his consent thereto appears
in the prospectus (s.58).
If the report of the expert is published in contravention of the above mentioned
provisions, every person who is knowingly apafty to the issue of the prospectus
shall be punishable with fine up to Rs 50,000 (s.59).
12.5.13 Registration of the Prospectus (s.60). A copy of the prospectus duly signed
by every director or proposed director must be delivered to tlne Registrar before its
publication. Furtheq, every copy of the prospectus on its face must state that a copy
has been delivered for registration. The copy must have attached to it the following
documents namely:
(i) the consent of the expert to file the prospectus;
(ii)
a copy of every contract required to be specified in the prospectus or a
memorandum giving full particulars of a contract not reduced to writing;
(iii) a copy of every contract appointing or fixing the remuneration of a managing
director or manageri
(iv) the consent in writing of a person, if any, named in the prospectus'as the
auditor, legal adviser, attomey, solicitot, banker to the company to act in that
capacity;
(v) consent of directors under s.266;
(vi) a copy of the underwriting agreement, if any; and
(vii) when the persons making the reports relating to profits and losses, assets
and liabilities, etc., in respect of a business proposed to be acquired have made
adjustments to them, a signed statementby them stating the adjustments and the
reasons for the same.
12.5.14 Prospectus by Implication. Section 64 has been designed to check the by-
passing of the provisions of s.56 as given above by making an offer of sale of shares
or debentures through the medium of Issue Houses. The process involves allotrnent
of shares to an Issue House who, in tum, will issue advertisement offering shares
for sale. Since the advertisement is not issued by the company, it does not amount
to a prospectus and thereby liability of non-compliance of s.56 provisions cannot
be invoked. To check this malady, s.64 provides that all documents containing
offer of shares or debentures for sale shall be included within the definition of the
term'prospectus' and shall be deemed as prospectus by implication of law. All
w as to the contents of prospectuses and as to the
ents and omissions from prospectuses shall apply in
Further, s.64 provides that unless the contrary is proved, an allotment of,
or an
agreement to allot, shares or debentures shall be deemed to have been made
with
For purposes of registration of a prospectus under s.60, the persons making the
offer of sale to the public are to be deemed as directors of the company.
where the person making the offer is a company or a firm, the documents (i.e.,
deemed prospectus) must be signed by at leist'two directors or one-half of the
parbrers as the case may be.
accepted onlyby the person to whom it is made and none otheq, then itwill notbe
deemed tobe an offer or invitation to the public.
The section of thepublic (s.62).Itmay, thus, include all

regi s in Delhi, all advocates of High bourt of Delhi, all
E^g
Howevet in the following cases, the document inviting subscription to shares or
deb_entures of a company shall not be deemed as invitation to the public and hence
shall not be a prospectus:
406 Business Law
2. The offering of shares to the kith and kin of a director is not an invitation to
the public to buy shares lRattan Sigh a. Moga Transport Co. Ltd. (1959)). Such an
offet therefore, shall notbe deemed as prospectus'
3. Where an invitation is made by the management of a company to selected
persons for subscription or purchase by the persors receiving the offer or invitation,
ihe shares or debentures and such invitation or offer is not calculated directly or
indirectly to be availed of by other persons, such invitation or offer shall not be
deemed as prospectus ts.67(3)1. However, this is in applicable in a case where the
offer or invitation to subscribe for shares or debentures is made to fifty persons or
more. In Nas ha. Lyne (1929),a document marked 'strictly confidential' containing
particulars of a proposed issue of shares was sent by
io-director and through him passed on privately to a
director. The House of Lords held that it was not a pr
no issue to the public'
4. Where a new company, by a circular, offered to buy all the shares of two
existing companies and issued its own shares in exchange of those shares, it does
not am6unt tô an offer to the public as it neither involves an offer for the purchase
of shares for money, nor an invitation for subscription of shares'
ls the isstrc of prospectus comptLlsory? /lVhenprospectus is not requir-ed tobe issucd? No,
issue of prospectus by a company is not compulsory in the following cases:
(i) A private company is not required to issue a prospectus'

(ii) Even a public company need not issue a prospectus if the promoters or
directors feel ihat they can mobilise resources through personal relationship and
contacts. In such cases, the company is required to file a statement called 'statement
in lieu of prospectus' with the Registrar of Companies'
(iii) A company may issue any forms of application for shares or debenLres
accompanielAy u memorandum containing the prescribed salient features of
protp"tt* (instead of prospectus). However, in such a case, a copy of the prospectus
mustbe made available to any Person on request [s.56 (3)]'
(iv) VVhere the application form is issued in connection with a bonafideinvltatron
to a person to enteiinto an underwriting agreement with respect to the shares or
debentures (s.56 (3)1.
(v) application form is issued in relation to shares or debentures not
\Atrhere the
offered to the public [s.56 (3)].
(vi) Where the shares or debentures are offered to existing holders of shares or
debentures (i.e., rights issue) with or without the right of renunciation in favour of
other persons [s.56 (5)]'
(vii)\A/here invitation to the public for subscription to the shares or debentures of
a company is made in the form of an advertisement, ordinarily called as
"prospectus
announcement" [s.66].
12'5.L5 statement in-Lieu of prospectus (s.70). If a public company makes a
private arrangement for raising its capital then it file a statement in lieu
^.tsi any allotment of shares of
prospectus with the Registrar at least three days before or
debentures can be made. Schedule III contains a model form of a Statement in Lieu
of Prospectus in pursuance of s.70; Schedule IV contains a model form of a Statement
in Lieu of Prospectus when a private company is converted into a public company
in pursuanc e of s.M.If allotment of shares or debenture is made without filing ttre
statement in lieu of prospectus, the allottee may avoid it within two months after
the statutory meeting, or where no such meeting is to be held, within two months
of the allotmmt. Contravention also renders the iompany and every director liable
to a fine upto Rs 10,000.
72.5.16 Liability for Untrue statements in the prospectus (ss.62-53). The
prospective shareholders are entitled to all true disclosures in the prospectus. The
persons issuing the prospectus are bound to state everything accurat-ely and not
omit material facts.
what is an untrue statement? According to s.65 (1): (a) A statement included in a
prospectus shallbe deemed to be untrue, if the statement is misleading in the form
and context in which it is included; and (b) where the omission from a prospectus
of any matter is calculated to mislead, the prospectus shall be deemed in respect of
such omission, to be a prospectus in which an untrue statement is included. The
expression 'included' with reference to a prospectus means, included in the
prospectus itself or contained in any report or memorandum appearing on the
face thereof or by reference incorporated therein or issued therewiih.
Example. A company issued a prospectus. All the statements included therein were
literally true. One of the statements disclosed the rates of dividends paid for a number
of years. But dividends had been paid not out of trading profits but out of realised
capital profits. This material fact was not disclosed. Ucld, ihit theprospectus was false
.
in material particulars and Lord Kylsant, the managing directoiandchairman, who
knew thatit was false, was held guilty of fraudlReia. kylsant, (1992) rK.B.44z).
A person who has applied for shares in the company and who has been allotted
shares has certain remedies against the company and the persons issuing the
prospectus. But a buyer of shares in the open market or a subscriber to the
memorandum has no such right. If, however, a prospectus is issued with the object
of incl open market, any person who buys
shares of the statements made in it has a rigirt
of acti r there is material omission from lhe
prospectus.
A false statement or omission of material facts gives rise to civil as well as criminal
liability.
1..5.17 Civil Liability (s.52). Where a prospectus is issued inviting persons to
subscribe for shares in, or debentures of a company, the following persons shall be
liable to pay compensation to every subscriber for loss or damige he may have
sustained by reason of any untrue statement included in the prospectus on the
faith of which he had applied for the shares or debentures:
408 Business Law
(1) every person who is a director of the company at the time of the issue of the
prospectus;
(2) every person who has authorised himsetf to be named and is named in the
prospectus as a directo! or as one having agreed to become a director, either
immediately, or after an interval of time;
(3) every promoter of the company; and
(4) every person (including an expert) who has authorised the issue of the
prospectus. But an expert is liable only in respect of his own untrue statements.
Thus, an allottee of shares, who had applied for shares on the faith of prospectus
containing untrue statements has remedies available against the different persons,
i.e., the company, directors, promoters and experts.
Remedics against the compnny. Any person who, relying on mis-statements in or

omission of material facts from a prospectus, takes shares from the company may:
(1) rescind the contract to take the shares; (2) claim damages. The effect of the
rescission of the contract would be that the shareholder would give up the shares
and get back his money with interest. He must, however, take action to rescind to
contiact: (a) within a reasonable time, @) before proceedings to wind up the
company have commenced; and (c) before he does anythhg (after he comes to
know of the mis-statements in the prospectus), which is inconsistent with the
right to repudiate, e.g., to accept dividends. The allottee can claim relief only if he
can show that the mis-statement or omission was: (i) one of fact and not of law nor
an expression of ophion, (ii) material; and (iii) acted upon by him.
The second right of the allotte against the company is to sue for damages for deceit-
In order to succeed, the allottee must, in addition to the three facts mentioned
ab ct), prove: (i) that those acting on
be those purporting to act onbehalf
of lf; and (iii) that he suffered a loss
or damages.
promoters and other Persons who had authorised the issue of the plosPectus
personally, or from experts who had signed reports referred to in the prospectus.
prospectus.
Damagesfor ftaudulent misrrpresentation. Anallottee of shares maybring an action
for deieit, i.e., fraudulent misrepresentation. There mustbe an intention to defraud
and that is to be proved by him. The directors, etc., will not be liable for the tort of
deceit if they honestly believed the statements to be true. The facts inDerry a. Peek
were as follows: The directors of a tamway Company issued a prospectus stating
that they had the right to run tram-cars with steam power instead of with horses as
before. In fact, the Act incorporating the company provided that such power might
be used with the sanction of the Board of Trade. But the Board of Trade refused to
give permission and the company had to be wound up. i1, a shareholder sued the
directors for damages for fraud, The House of Lords held that the directors were
not liable in fraud because they honestlybelieved what they said in the prospectus
to be true.
Compmsationfor untnrc statement (s.62). Another remedy available to an allottee of

shares for misstatements in a prospectus is to file a suit for compensation under
s.62. A claim can be made, whether the statements are fraudulent or innocent.
Section 65 provides that a statement is deemed to be untrue if it is misleading in
the form and context in which it is issued. It is not necessary for the allottee to
prove any fraud or knowledge on the part of the directors that the statement was
untrue.
If a director pays damages under s.62, he is entitled to recover contributions from
his co-directors, if they, too, are guilty of misstatement, misrepresentation, untrue
statement; and on the death of the co-directors, from their estates'
Defences aaailabie to aaoid ciuilliability Is.62(2)1. Section 62 names persons who are
liable to pay compensation but certain defences are available to them. In a claim
for compensation, the director may prove in defence that:
(i) he withdrew his consent to act as directorbefore the issue of the prospectus
and it was issued without his authority or consent; or
(ii)
the issue was made without his knowledge or consent and on becoming
aware of the issue he gave reasonable public notice of that facU or
(iii) he withdrew his consent after the issue of the prospectus but before allotrnent
and public notice was given; or
(iv) he had reasonable ground to believe that the statements were true and believed
them tobe true; or
(0 the statement was correct and fair summary or copy of an expert's report; or
(vi) the statement was made by an official document.
Another remedy available to an allottee of shares is to file a stdt for damage in case
the prospectus does not include the matters required to be included in accordance
with the provisions of the Act.
Remedies against expert. The allottee to the shares who has been induced to take
shares on the faith of an untrue statement of an expert in the prospectus is entitled
to claim from the expert: (i) damages, (ii) compensation under s.62'
An expert is liable in damages in respect of his own untrue statement, wrong
report or valuation made bv him and contained in the prospectus and the same
410 Business Law
principles apply as in the case of a fraudulent or an innocent statement made by
the directors. An expert is also liable to pay compensation und er s.62. However, he
shall not be liable if he proves:
(i) that having given his consent, he withdrew it in writing before delivery of a
copy of the prospectus for registration; or
(ii) that after delivery of prospectus for registration and before allotment, he
became aware of the untrue statement, withdrew his consent in writing and gave
reasonable public notice of the withdrawal and his reasons; or
(iii) that he was competent to make the statement and believed on reasonable
grounds that it was true.
Liability under s.56. An omission from a prospectus of a matter required to be stated
under s.56 (i.e., as per Sch. II) may give rise to an action for damages at the instance
of a subscriber for shares, who has suffered loss thereby, even if the omission does
not make the prospectus false or misleading. But, the plaintiff must prove that he
has sustained damage by reason of the omission of a matter required to be stated in
the prospectus. A director or other person sued under s.56 may escape liability if
he proves: (a) that he had no knowledge of the matter not disclosed; or (b) that the
contravention arose out of an honest mistake of fac| or (c) in the opinion of the
court, non compliance or contiavention was not material or that the person sued
ought reasonably to be excused, having regard to all the circumstances of the
case,
12.5.18 Criminal Liability for Misstatement in Prospectus (s.63). Where a

prospectus contains an untrue statement, every person authorising its issue is
punishable: (i) with imprisonment for a term upto two years or (ii) with fine upto
Rs 50,000, or (iii) with both imprisonment and fine. However, an expert is not
criminally liable in respect of misstatements in the prospectus.
Liability under s.68. Section 68 provides that any person who, either knowingly or
recklessly makes any statement, promise or forecast which is false, deceptive or
misleading, or by any dishonest concealment of material facts, induces or attempts
to induce another person to enter into or to offer to enter into any agreement fo4, or
with a view to acquiring, disposing of, subscribing for, underwriting shares or
debentures shall be punishable with imprisonment for a term which may extend
to 5 years or with fine which may extend to Rs one lakh or withboth.
12.5.19 Golden Rule forFraming of Prospectus. The'Golden Rule'for framing of
a prospectus was laid down by fustice Kindersley in Nezu B nnrswick €t Canada Rly.
€t Land Co. a. Muggeridge (1.860). Briefly, the rule is:
Those who issue a prospectus hold out to the public great advantages which will
accrue to the persors who will take shares in the proposed undertaking. Public is
invited to take shares on the faith of the representation contained in the prospectus.
The public is at the mercy of company promoters. Everything must, therefore, be
stated with strict and scrupulous accuracy. Nothing should be stated as fact which
is not so and no fact should be omitted the existence of which might in any degree
affect the natule or quality of_theprinciples and advantages which the prospectus
holds out as inducement to take shares. in a word, the truJnature of the company,s
venture should be disclosed.
rn Rex a. Kylsant (7932), the_prospectus stated that dividends of 5 to g per cent had
been regularly paid ov€r a long period. The truth was that the company had been
incurring substantial losses during the seven years preceding t^he date of the
Prospectus and dividends had been paid out of the realised capitat ptoht. HeIcI,
the prospectus was false and misleading. The statement though true in itself was
rendered false in the context in which ifwas stated
A half truth, for instance, represented as a whole truth may tantamount to a false
statement (Lord Halsbury in Aarons Reefs a. Twisa).
Thus,-the persons issuing the prospectus must not include in the prospectus all
the relevant particulars specified inParts I & II of Schedule II of the Act, which are
required to be stated compulsorily but should also voluntarily disclose any other
information within their knowledge with might in any way affect the decision of
the prospective investor to invest in the company.
72.5.20 Allotment of Shares in Fictitious Names prohibited (s.58-A). Following
to five years: (i) making
for, any shares therein
register any transfer of
Also this section shouJd be prominently reproduced both in the prospectus as

well as in application forms for shares.
to be in dematerialised form i certain cases (s. 688). Every
initial public offer of any security for a sum of spaces ten
ue thesame only in dematerialised form by complying
with therequisite provisions of the Depositories Act,1996 and reguiationjmadE
thereunder.
12.5.27 Announcement Regarding proposed Issue of Capital. It is very common
for companies to get an announcement regarding proposed issue of shares/
debentures inserted in the leading newspapeis. It is not required by company law
to do so' But it is done in order to invite the attention of the public to the proposed
issue. on the top of the insertion it is given that. "It is only an announcement and
not a prospectus", in order to avoid provisions under s.56 for publishing an
incomplete prospectus.
72.5.22 Public Deposits. The invitation and acceptance of public deposits by
companies were brought within the jurisdiction of Companiei Act in 1974. Rule;
have been framed prescribing the limits upto which, the hanner in which and the
conditions subject to which deposits may be invited or accepted by a company
either from the public or from its members. section 5g-A and Companies
(Acceptance of Deposits) Rules made tt ereunder contains the restrictions and
limitations subjectto which deposits maybe invited and acceptedby companies.
The provisions of the section and the summary of the importani rulej made
thereunder are as follows:
472 Business Law
1.. Meaning of deposit. Explanation to s.58-A defines the expression'deposit'to
mean any deposit of money with and includes any amount borrowed by a company
but shallnotinclude suchcategories or amount as maybe prescribeci in consultation
with the Reserve Bank of India.
Further rule 2 (b) provides that'deposit' means any deposit of money with and
includes any amountborrowed by a company. However, the expression'deposit'
does not include:
(i) any amount received from the Central Govemment or a State Govemment
or any amount received from any other source and whose repayment is
guaranteed by the Central Govemment or State Government or any amount
received from a local authority or a foreign Govemment or any o*her foreign
citizeru authority or person;
(ii) any amountreceived as a loan from anybanking company including a co-
operativebank;
(iii) any amount received from any of the notified financial institutions;
(iv) any amount received by a company from any other company;
(v) any amount received from an employee of a companyby way of security
deposit;
(vi) any amount received by way of security or as an advance from any
purchasing agent, selling agent or other agents in course of or for the purposes
of the business of the company or any advance received against orders for the
supply of goods or properties or for the rendering of any services;
(vii) any amount received by way of subscriptions to any shares, stock, bonds or
debentures and any amount received by way of calls in advance on phares, in
accordance with the Articles of the company so long as such amount is not
repal'able to the members under the Articles;
(viii) any amount received in trust or any amount in transit;
(ix) any amount received from a director or shareholder of a private company
or a deemed public company whichcontinues to include inits Articles restrictive
clauses of s.3 (1) (iii);
(x) any amount raised by issue of the bonds or debentures secured by the
mortgage of any immovable property of the company or with an option to convert
them into shares in the company. (However, in the case of such bonds or
debentures secured by the mortgage of any immovable property, the amount of
such bonds or debentures must not exceed the market value of such immovable
properry);
(xi) any amount brought in by the promoters by way of unsecured loans in
pursuance of stipulations of financial institutions subject to the fulfillment of
the following conditions; namely: (a) the loans are brought in pursuance of the
stipulation imposed by the financial institutions in fulfillment of the obligation
of the promoters to contribute such finance; (b) the loans are provided by the
promoters themselves and / orby their relatives and not from their friends and
business associates; and (c) the exemption shall be available only till the loans
of financial institutions are repaid and not thereafter.
2. No Company shall invite or accept any deposit except after the publication
of an advertisement specifying therein the financial condition, management
structure and other specified particulars of the company. The "renewal of deposits"
are included in the "acceptance of deposits" lJagjiuan HiraIaI Doshi and others a.
Registrar of Companies (1989) 65 Comp. Cas.553l.
3. Every deposit by a company, unless renewed in accordance with the mles

made under s.58A, shallbe repaid in accordance with the terms and conditions of
such deposit.
4. The form of application shall contain a declaration by the depositor that the
money is not being deposited out of funds acquired by him by borrowing or
accepting deposits from any other person.
5. A company cannot accept or renew deposits payable on demand.
6. Also, a company cannot accept deposits repayable before 6 months. Horveve!,
deposits for less than 6 months may be accepted provided such deposits do not
exceed 10% of the paid-up capital and free reserves.
However, in no case shall a company accept deposits repayable before 3 months.
7 . ceiling on deposits. A company shall not accept deposits over and above the
followinglimits:
(a) 10 per cent of the paid up capital and free reserves, in case of deposits in the
form of any deposit against an unsecured debenture, deposit from a shareholder
(not being a deposit accepted by a private company from its shareholders) or
any deposit guaranteed by the Directors of the Company;
(b) any other deposit exceeding 25 per cent of the aggregate of the paid-up
share capital and free reserves oi the iompany.
8. No Govemment company shall accept any deposits in excess of 35 per cent
of its paid-up capital and free reserves.
9. Penalties for contraaention. Any deposit received in contravention of the
provisions of the ActlRules must be paid back within 30 days from the date of
acceptance of such deposit. The period of 30 days may be extended by the Central
Government by another period but not exceeding 30 days.
In case of default, the company shall be subjected to fine which shall not be less
ot repai
r of the
termw
Penalty for acceptancc of deposit. Where the contravention relates to acceptance of
deposit, the company may be srrbjected to fine which shall not be lesJthan the
amount of deposit so accepted.
414 Business Law
Penalty for inaitationof any dEosit. Where contravention relates to the invitation of
any deposit, the company shall be punishable with fine which may extend to
Rs 10 lakh but shall not be less than Rs 50,000.
In both these cases of acceptance or

officer of the company who is in de
for a term which may extend upto
Marthanda varma €t H.H. Bhupendra Narqin Singh a. Registrar of Conrpanies (1.ggg)
Comp. Cas.125).
L0. Register of deposits. According to Rule 7 every company accepting deposits
shall keep at its registered office one or more registers in which there shll be
The register of deposit shall be kept for a minimum period of 8 years from the
financial year in which the latest entry is made in the register.
11 . \ly'here a company has failed to repay any deposit or part thereof in accordance
with the terms and conditions of such deposit, the Company Law Board may, if it
is satisfied, either on its own motion or on the application of the depositor, that it
company, the depositors or
ment of such deposit or part
such conditions as may be
However in the following circumstances, application under s.58A(9) of the Act

will NOT lie: (vide Dept. of Company Affairs Notificated dt. 8.3.1990).
0 Deposit made for booking/purchase of scooter, car, etc.
(ii) Deposits accepted by financial companies like hire-purchase, finance
company covered by the Sick

t,1985, in respect of which Board
specifically, by orde1, suspended
tlement, etc. under s.22(3) of the
said Act.
(iv) Deposits accepted by relief undertakings which are notified as such under
the State Laws.
Further, it may be clarified that the depositors can, besides the relief under the
Companies Act, take action against the defaulting companies under the normal
civil law of the country.
Elements of Company Law 41,5
12. MaintenanceofliEtidassets.Everycompanyshallbeforethe30thdayofApril
of each year, deposit or invest, as the case may be, a sum which shall not be less
than 15 per cent (we.f. 1't Aprll7992) of the amount of its deposits maturing
during the year ending on the 3L't of March next following in any one or more of
the securities prescribed in this regard. The amount so invested or deposited shall
only be used in repayment of the deposits outstanding and repayable within next
31't March. At no time such investment or deposit shall fall below 10% of the
deposits repayable within next 3L"t March.
It may be noted that all deposits of non-banking and non-financial companies are
regulated under s.58A and the Rules made thereunder.
Register of deposits. According to Rule 7, every company accepting deposits shall
keep at its registered office one or more registers in which there shall be entered
separately in the case of each depositor the following particulars, namely: (a) name
and address of the depositor; (b) date and amount of each deposit; (c) duration of
the deposit and the date on which each deposit is repayable; (d) rate of interest;
(e) date or dates on which repayment of interest will be made; (f) any other
particulars relating to the deposit.
The register of deposit shall be kept for a minimum period of 8 years from the
financial year in which the latest entry is made in the register.
Facility of nomination etc. The Companies (Amendment) Act, 1999 provides that a
depositor under s.58A is allowed to make a nomination. The provisions of newly
introduced Ss. 109 A and 109 B shall apply to such a nomination also.
Exemptions.The provisions of s.58A do not apply to:
1. Abankingcompany [s.58A (7)].
2. Companies other thanbanking companies as the Central Govemment may
after consultation with the Reserve Bank of India, specify in this behalf.
Exemption of small scale unlfs; Lr pursuance of its powers, the Central Govemment
has, after consultation with the Reserve Bank of India, granted exemption from the
applicability of the provisions of s.58A to the companiei which are small scale
unitsas per the parameters notiJied from time to time.
According to the notification GSR No .73 (E), dated2-2-7996, the exemption from
the provisions of s.58A of the Act shall be available to small scale industrial units
only if they fulfill all the following conditions, namely: (a) the paid-up capital of
the company does not exceed rupees 25 lakhs; (b) the company accepts deposits
from not more than 100 persons; (c) there is no invitation to public deposits; and
(d) the amount of deposits accepted by the company does not exceed rupees 20
lakhs or the amount of its paid-up capita, whichever is less.
3. Financial companies as the central govemment may, after consultation with
the Reserve Bank of India, specify in this behalf.
However, the central govemment cannot exempt the financial companies from the
provisions relating to advertisement contained in s.58A(2)(b). The Central
Govemment, in exercise of its aforesaid powers, exempted all classes of financial
476 Business Law
companies from all the provisions of s.58A except the provisions relating to
advertisement - vide Notification No. SD 523 (E), dated 78-9- t975.
Power of the central gozternment to grant total or partial exemption [s.58A (s)]: The
or total exemption from
(or a class of companies)
Cenfral Govemment is
also empowered to grant extention of time to any company (or a class of
companies) after consultation with the Reserve Bank in complying with these
provisions.
Isate of commercial paper exempted. The Department of Company Affairs has vide
notificatiorr dated 29-12-1989 exempted the class of companies which fulfil the
criteria under the Non-Bankhg Companies (Acceptance of Deposits through
Commercial Paper) Directions, 1989 from the provisions of s.58A with respect to
deposits received by non-banking companies by the issue of commercial paper as
per the aforementioned Directions. The following conditions are required to be
satisfied: (i) the companies comply with the terms and conditions stipulated from
time to time by the Reserve Bank of India relating to the issue of such commercial
paper; and (ii) the companies in their annual account disclose the maximum
amount raised at any time during the financial year and the amount outstanding
as at the end of the financial year.
Adaertisement for inaiting deposits (RuIe 4). Every company intending to invite
deposits or allowing or causing any person to invite deposits on its behalf is
required to issue an advertisement for the purpose in a leading English newspaper
and in one vemacular newspaper circulating in the State in which the registered
office of the company is situated. Each advertisement should contain the particulars
as prescribed in Rule 4. The advertisement must be issued on the authority and in
the name of the Board of Directors of the company. It must also. state the
date on which the text was approved by the Board of Directors. It must contain
reference to the conditions subject to which the deposits shall be accepted by the
comPany.
Accordihg to s.58B, an advertisement inviting a prospectus and consequently all
the provisions of the Act, applicable to the prospectus, are applicable to the
advertisement inviting deposits.
Signing of adpertisement. The advertisement should be signed by a majority of the
directors in the Board of the company, as constituted at the time the Board approved
the advertisement, or their duly authorised agents, in writing and a copy of the
same should be delivered to the Registrar of companies for registration. Even a
letter of authority is sufficient for this purpose and power of attomey is not
necessary. lCiruilar No. 23/75 @/14fr5-CL (M)l dated 25-9-1-975 isxted by the
D ep ar tment of Comp any Affair sl.
Period of ualidity of adaertisement and deliaery of tlrc text to the registrar. The
advertisement shall remain valid for a period of 6 months from the date of the
closure of the financial year in which it is issued or until the date the balance sheet
is laid beforethe companyin generalmeeting orwhere the Annual GeneralMeeting
is not held, the latest date on which the meeting should have held, whichever is
Elements of CompanyLaw
477
earlier. A fresh advertisement has to be made in each succeeding financial year for
inviting deposits thereafter.
2':;
invi ffi"ji;"1iT,';H#:Ti:;ffi:il
re advertiiement. It is, howeveq, required to
file with the Registrar a statement in lieu thereof containing all the paiticulars
required to be included in the advertisement under the Rulei and signed (in the
same manner as the i"dvertisement for deposits is to be signed) before accepting
any deposit.
The statement in lieu of advertisement shall be valid until the expiry of 6 months
from the date of closure of the financial year in which lt is so delivered or until the
date on which the balance sheet is laid before the company in the armual general
meeting, or, where the annual general meeting for any yeai has not been hEld, the
latest day on which that meeting should have been iteta in accordance with the
provisions of the Act, whichever is earlier.
e8(2)1. Where depositors so desire, deposits
eeding three, with or without any onebf the
return is required to be simultaneously

furnished to the Reserve Bank of India.
PART 6 _ SHARES AND SHARE CAPITAL

12.6.1 Meaning of a share. section 2(46) defines a share "as a share in the.share
capital of a company and includes stock except where a distinction between stock
and share is expressed or implied". This definition does not bring out the meaning
of a share in its true perspective. A share signifies the followingl
(i) the interest of a shareholder in the company; the right to receive dividend,
the rneeting and share in the surplus assets of the company,
company, being wound u p lBacha F. Gtzdar v. Commisiioner
.R.677 (S.C.)l;
.
(ii) the liability of the shareholder in the company to pay calls on shares until
tully paid up;
(iii) the right of the shareholder to transfer the shares subject to the articles of
association (For this Pulpose s.82 classifies shares as movable property transferable
in the manner provided in the articles);
(iv) binding covenants on the part of the cornpany as well as the shareholdel, as
given in the Articles of the company.
Thus, a share of a company in the hands of a shareholder signifies a bundle of
rights and obligations lvswanath a. East India Distiueries (19s2) 27 Comp. Cas.
418 Business Law
175]. But a share is not a negotiable instrument [C.I.T. v. Associated lndustrial Dca.
Co. (7969) 2 Comp. L.l. 191
Section 83 requires that each share in a company having a share capital must be
distinguished by its appropriate number.
The Companies (Amendment) Acf 1999 has amended s.82 to the effect that for the
word 'shares', the words 'shares and debentures' shall be substituted.
12.5.2 Share vs Share Certificate. A common man uses 'share' and 'share
certificate' to mean the same. It is, therefore, important to note the exact differences
between the two. Section 82, in this regard describes a share as a moveable property
transferable in the manner provided by the articles of the company and s'84, on the
other hand, describes a 'Share certificate' to mean a certificate, under the common
seal of the company, specifying any shares held by any member' Section 84 further
suggests that Jshare iertificate shallbeprimafacie evidence of title of the member
to iuch shares. Thus, whereas 'share'rePresents ProPerty, 'share certificate'is an
evidence of the title of the member to such proPerty.
Each share bears a distinctive number and it is not the same as share certificate
number, the two are different. In fact, a share certificate may be an evidence of
many shares, say 50, 100 or even L lakh. Thus, whereas there will be only one
number as the share certificate number for one certificate, there will be as many
distinctive numbers in respect of shares as are evidenced by the share certificate.
Thus, the share certificatebetngprimafacie evidence of title, it gives the shareholder
the facility of dealing more easily with his shares in the market. It enables him to
sell his shares by showing at once marketable title.
Also, a share certificate serves as an estoppel as to payment against a bona fide
purchaser of the shares from alleging that the amount stated as being paid on
ihares has not been paid. However, a Person who knows that statements in a
certificate are not true cannot claim an estoppel against the company lCrickmer
Case (1875) 461-.1. C. 8701.
12.6.3 Share vs Stock

Share.Theshare capital of a company is divided into a number of indivisible units
of specified amount. Each of such unit is called a 'share'. Thus, if the share capital
of the company is Rs 5,00,000 divided into 50,000 units of Rs 10 each, unit of
Rs 10 shall be called a share of the company.
sfock. The term 'stock' may be defined as the aggregate of fully paid-up shares
of a member merged into one fund of equal value. It is a set of shares put together
in a bundle. The 'stock' is expressed in terms of money and not as so many
shares. Stock canbe divided into fractions of any amount and such fractions may
be transferred like share. Such fractions, unlike the shares, bear no distinctive
numbers.
Distinction. Following are the main points of difference:
Shore Stock
1 A shore hos o nominol volue. l. A stock hos no nominol volue.
2 A shore hos o distinclive number A slock beors no such number.
which distinguish it from other shores.
Shore con be issued originolly io lhe 3. A compony connot moke on originol

public. issue of stock. Slock con be issued by
existing compony by converting its fully
poid-up shores.
4. A shore moy eilher be fully poid-up 4. A stock con never be portly poid-up
or portly poid-up. il is olwoys {ully poid-up.
5. A shore connot be lronsferred in 5 A stock moy be trons{erred in ony
frociions. lt is lrons{erred os o whole. froctions.
6. All the shores ore of equol denominotion. 6. Stock moy be o{ different denominolions.
7. Shores con be issued by ony compony 7. Stock con be issued only by o public
public or privoie. compony limiied by shores.
A company cannot make an original issue of the stock. A company limited by

shares may, if authorised by its Articles by a resolution passed in the g"n"til
meeting, convert all or any of its fully paid-up shares into stock [s.9a (1) (c)].on
conversion into stock, the register of members must show the amount of stock held
by each member instead of the number of shares. The conversion does not affect
the rights of the members in any way.
12.6.4 Classes of shares. As mentioned above, a share carries certain rights and
is subject to some obligations. A company may issue all shares with same rights
and obligations. Howeveq, it may issue different types of shares with diffeient
rights and liabilities attached to them so as to satisfy the needs of different types of
investors. In such a case, the rights attached to the different classes of share-s are
called class rights. The class rights normally relate to voting, dividends, return of
capital or share in the surplus assets of the company (the last two rights being
available at the time of winding up) and are invariably set out in the articles of the
company. The most common classes of shares are: (1) Preference; (2) Equity or
ordinary; and (3) Deferred or Founders'. A public company and a private company
whi,ch is a subsidiary of apublic company may not issue shares other than equity,
preference and cumulative convertible preference shares (CCPS).
The companies (Amendment) Act, 2000 has substituted a ne-w section for s. g6. It
provides that the share capital of a company limited by shares shall be of two
kinds only, namely: (a) equty share capital (i) with voting rights; or (ii) with
differential rights as to dividend, voting or otherwise in accordance with such
rules and subject to such conditions as may be prescribed; (b) preference share
capital.
12.5.5 Preference share. A preference share is one which carries the following
two rights over holders of equity shares: (i) a preferential right in respect ol
dividends at a fixed amount or at a fixed rate and (ii) a preferential right in regard
to repayment of capital on winding up.
Business Law
420
The preference or priority of the preference shareholders is in relation to the rights
of equity shareholders [s.85].
Participating and non-participating.If a preference share carries either one or both of
share: (i) to ParticiPate further
a certain rate of dividends on
t the time of winding uP [s.85).
;:H""lff ::lil?ll1"ti:"':"H1,::
arealwayspresumedtobenon-participatingunlessexpresslydescribedas
participating.
the right for payment of
Cumtiatiae and non-cttmttlatiae.lf apteference share carries
is known as cumulative
arrears in dividend from future p-fitt, then such a share
s d in any year or years-accumulate and
preference
arepaidout.Ifapreference.sharedoesnotcarrythe
right to div a preference share is known as non-
cumulative are available in a year' the holders get
nothingnorcantheyclaimunpaiddividendinsubsequentyears.Itshouldbe
remenibered that preference shares are always presumed tobe
cumulative unless
expressly described as non-cumulative'
share which can be redeemed upon the
-
Redeemable and irredeemable. Aprefetence
rticles so provide, is known as redeemable
issue redeemable preference shares if it
ts:
shares; shares issued

(i) srrch shares are to be issued as redeemable preference
cannotbe converted into redeemable preference shares;
"uiii", preference'shares;
(ii) there mustbe authority in the articles to issue redeemable
(iii) the shares can be redeemed only when they are fully paid
up;
(iv) the shares may only be redeemed: (a) out of profits of the company which
of a new issue
would otherwise be available for divider d, or (b) out of the proceeds
made for the Purpose
of shares - not necessarily of redeemable preference shares
of redemPtion;
(v)ifthereisapremiumpayableonredemption,itmusthavebeenprovidedout
oi profits o. orrt of ttre ,hur" pt" nium account before the shares are
redeemed;
(vi)wherethesharesareredeemedoutofprofits,aSumequaltothenominal
to the "Capital
amount of the shares redeemed is to be translerred out of profits
RedemPtion Reserve Account' "
The redeemable preference shares can be redeemed by
the company either at a
at the option of the company' But
fixed date, or after a certain period of time, or
reducing the nominal capital of
i"a"-ption of such shares sirall not be taken as
the companY [s.80 (3)]'
The Companies (Amendment) Act, Tggghasamended s. 80 to tire effect that for
the
words "share premium account", the words "security premium account,, shall be
substituted.
Irredeenuble preference shares. No company limited by shares can issue any
preference shares which are irredeemable or are redeematle after the expiry of ten
years frorn the date of issue. Also, once the company has redeemed the sharls, or it
is about to redeem them, it may issue new shares upto the same nominal amount
and it will be presumed that the preference shares were never redeemed. h such a
situation the company's capital is not deemed to be increased and, therefore, no
slamp duty is to be paid. This privilege is avi,ilable only if the redenrption takes
-
place within one month after the making of the fresh issue [s.g0 (4)1.
Non-compliance with the provisions of s.80 will render the company and every
officer of the company who is in default liable to a fine upto Rs 10,000.
Voting rights of preferenc,e shareholders.The preference shareholders will vote only
on matters directly relating to prefcrence shares. section g7 (2) mentions the
following matters v.zhich relate to preference shares and preference sharehold.ers
can vote on them: (i) any resolution for winding up of the company; (ii) any
resolution for the reduction or repayment of share capital; (iii) any resolution at
any meeting, if dividend on cumulative preference shares remains unpaid for at
least two years. Holders of non-cumulative preference shares shall have a right to
vote on all resolutions, if their dividends are in arrear for the two financial years
lunnga period of six years ending with the financial year preceding the meeting.
[s.87(2)].
12.6.5 Equity share. 'Equity share'means a share which is not preference share
(s.85). The rate of dividend is not fixed. The Board of Directors recommend the rate
of dividend which is then declared by the members at the Annual General Meeting.
Before recommending dividend on equity shares, the Board of Directors have to
comply with the provisions of law as regards depreciation, transfer of a minimum
amount to reserves, etc.
The holders of equity shares have voting rights in proportion to the paid-up equity
capital of the company [s.87(1)].
12.6.7 Cunulative Convertible Preference Shares (CCps). The Govemment vide
its guidelines dated 1.9th August, 1985 permitted issue of another class of shares by
public limited companies, called cumulative convertible preference shares.
The Guidelines issued by the Ministry of Finance in this regard are as follows:
1'. Applicability.The guidelines will apply to the issue of cCps by public limited
companies which propose to raise finance.
2. Objectsoftheissue.Theobjectsoftheissueoftheaboveinstrumentsshouldbe
for any of the following purposes: (a) setting-up of new projects; (b) Expansion or
diversification of existing projects; (c) Normal capital expenditure for
modernisation; and (d) Working capital requirements.
422 Business Law
3 . Qtwntum of isxrc. The amount of CCPs cannot exceed the equity shares offered
to the public for subscription. However, in case of projects assisted by financial

institutions, the quantum of issue would be approved by the financial institutions/
banks.
4. Terms of isxte. (i) CCPs would be deemed to be equity issue for the purpose of
calculation of debt equity ratio as may be applicable; (ii) The entire issue of CCP
would be convertible into equity shares between the end of 3 years and 5 years as
may be decided by the company and approved by the Controller of Capital Issue
CCI (Now, SEBI); (iii) The conversion of the CCP shares into equity would be
deemed as being one resulting from the process of redemption of the preference
shares out of the proceeds of a fresh issue of shares made for the purposes of
redemption; (iv) The rate of preference dividend payable on CCP would be 10%*;
(v) The guidelines in respect of preference shares regarding ratio of 1:3 as between
preference shares and equity shares would not be applicable to this new insbrumen!
(vi) On conversion of the preference shares into equity shares, the right to receive
arrears of the dividend, if any, on the preference shares up to the date of conversion
shall devolve on the holder of the equity shares on such conversion. The holder of
the equity shares shall be entitled to receive the arrears of dividend as and when
the company makes profit and is able to declare such dividend; (vii) The aforesaid
CCP share would have voting rights as applicable to preference share under the
Companies Act; (viii) The conversion of aforesaid preference shares into equity
shares would be compulsory at the end of 5 years and the aforesaid preference
shares would not be redeemable at any stage.
5. Denomination of CCP. The face value of CCP share will ordinarily be Rs 100
each.
6. Listing of CCP. CCP shares shall be listed on one or more stock exchange in
the country.
7. Articles of association of the company and resolution of the general body. The
articles of association of the company proposing to issue CCPs should contain a
provision for issue of such shares. Further, the company must submit with the
application to the CCI (Now SEBI) a certified copy of a special resolution in this
regard under s.81 (1A) of the Companies Act, duly passed in the general meeting
of the company. This resolution must approve the issue of CCP shares and provide
for compulsory conversion of the preference shares between the 3rd to sth year, as
the case maybe.
12.5.8 Deferred or Founder's Shares. A pure private company can issue shares
of a type other than those discussed above (s.90). Thus, it may issue what are
known as deferred shares. As deferred shares are normally held by promoters and
directors of the company, they are usually called founder's shares. They are usually
of a smaller denomination, say one rupee each. However, they are generally given
equal voting rights with equity share which may be of higher denomination, say
Rs 10 each. As regard payment of dividend to holders of such shares, the articles
Now, companies are free to offer any percentage depending upon the market forces.
usually provide that these shares will carry a dividend fixed in relation to the
ve been declared on the preference and equity
ers and directors have a very direct interest in
greater the profits of the company the higher
It is to be remembe when the

itself into a public alter its c
only equity share c re capital
12.6.9 Non-voting shares. 'Non-voting shares' as the term suggests are shares
which carry no voting rights. These are contemplated as altogether a different
:lass of shares which may carry additional dividends in lieu of the voting rights.
Although the idea was first mooted tn 7987, it was only in early 1994 thai the
ertain broad guidelines in this regard. Accordingly,
Act, 2000 now provides for issue of such type of
12.6.10 Sweat Equity shares. The Companies (Amendment) Acf 1999, has allowed
issue of sweat equity shares subject to fulfillment of certain conditions. A new
section -79A has been inserted for this purpose. The provision of s.z9A are
summarisedbelow:
Notwithstanding anything contained ins.79, a company may issue sweat equity
shares of a class of shares already issued if the following conditions are satisfied:
(a) the issue of sweat equity shares is authorised by a special resolution passed by
the company in the general meeting; (b) the resolution specifies the number of
shares, current market price, consideration, if any and the class or classes of
directors or employees to whom such equity shares are to be issued; (c) not less
than one year has, at the date of the issue elapsed since the date on which the
company was entitled to commence business; (d) the sweat equity shares of a
company whose equity shares are listed on a recognised stock exchange are issued
in a res are
not issued
in a of this
section, the expression'a company'means company incorporated, formed and
registered under this Act and includes its subsidiary company incorporated in a
country outside India.
The expression "sweat equity shares" means equity shares issued by the company
to employees or directors at a discount or for consideration other than cash for
providing know-how or making available rights in the nature of intellectual
property rights or value additions, by whatever named called."
However, all the limitations, restrictions and provisions relating to equity shares
shall be applicable to such sweat equity shares.
72.6.1\ Issue of Shares alPar, at Premium and at Discount. A company may
issue shares at paq, or at premium, or at a discount.
424 Business Law
Isnrc at par. Shares are deemed to have been issued at par when subscribers are
required to pay only the amount equivalent to the nominal or face value of the
shares issued. For instance, if the face value of a share is Rs 10 and the buyer is
required to pay thereon Rs 10 only - nothing more nothing less - then he will be
said to be holder of a share issued at par
According of SEBI guidelines of 11.'h June 1992, a new comPany set up by
entrepreneurs (individuals) without a track record can issue shares only at par.
Likewise, issues of existing private/closely held and other unlisted companies
without three years track record of consistent profitability (including
disinvestments by offer to public) are only allowed to be priced at par. Again,
issues of new companies set-uP by existing unlisted companies without a 5 year
track record of consistent profitability can be made only at par.
Isxte at aprenittm.Inthe above example, if thebuyer is required to paymore than
the face value of the share, e.g., Rs 12.50 on a share of Rs 10, then the share is said
to be issued or sold at a premium.
The Companies Act, 1956 does not stipulate any conditions or restrictions
regarding the issue of shares by a company at a premium. Howeveq, it does impose
conditions regulating the utilisation of the amount of premium collected on shares.
Firstly, the premium cannotbe treated as profit and, therefote, cannotbe distributed
as dividend. Secondly, the amount of premium received in cash and the equivalent
of it received in kind must be kept in a separate bank account known as the 'Share
Premium Account'. Thirdly, the amount of share premium is to be maintained
with the same sanctity as the share capital. Fourthly, the share premium account
cannotbe treated as free reserves as it is in the nature of capital reserve. Fifthly, the
amount credited to the 'Share Premium Account'canbe used only for the purPoses
listed in s.78(2).
In accordance with the provisions of s.78(2), the share premium can be qtilised
only for the following purposes: (i) to pay for unissued shares of the company to be
issued to members of the company as fully paid bonus sh.ares; (ii) to write off the
preliminary expenses of the companyi (iii) to write off the expenses or the
commission paid or discount allowed on, any issue of shares or debentures of the
company; (iv) to provide for the payment of premium payable on the redemption of
redeemable preference shares or of any debentures of the company.
The issue of shares at a premium does not require the sanction of the Company
Law Board. The company is, however, required to ensure compliance of SEBI
guidelines in this regard.
SEBI has allowed a certain class of companies to make their issues at any premium
subject, however, to certain conditions as to promoters contribution and lock in
period.
The Companies (Amendment) Act, 1999 has amended s. 78 to the effect that for the
word 'share' in the section, the lvord 'securities' shall be substituted.
Issr.rc at a discount.If thebuyer of shares is required to pay less than the face value of
the share, e.g., Rs 8.50 on a share of Rs 10, then the share is said to t'e issued or sold
at a discount. However, the issue of shares at a discount is regulated by law and
s.79 provides for certain conditions subject to which shares can be issued at a
discount. These conditions are:
(1) The issue of shares at a discount is authorised by a resolution passed by the
company in general meeting and sanctioned by the Company Law Board.
(2) The issue must be of a class of shares already issued.
(3) The maximum rate of discount must not exceed 10 per cent or such higher
rate as the Company Law Board may permit in any special case.
(a) Not less than one year has, at the date of issue, elapsed since the date on
which the company was entitled to commence business.
(5) The shares to be issued at a discount must be issued within two months of
the sanction by the Company Law Board or within such extended time as it may
allow; and
(6) Every prospectus at the date of its issue must mention particulars of the
discount allowed on the issue of shares, or the exact amount of the discount as has
not been written off. In case of default, the company and every officer of the
company who is in default, shall be punishable with fine which may extend to
fiftyrupees.
12.6.12 Bonus Shares. A company may, if the articles so provide, capitalise profits
by issuing fully paid-up shares to the members thereby transferring the sums
capitalised from the profit and loss account or Reserve Account to the Share Capital
[s.205 (3)]. Such shares are known as bonus shares and are issued to the existing
members of the company free of charge.
The issue of bonus shares is regulated not only by the Companies Act, 1956 but
also by the guidelines issued by SEBI in this regard.
12.5.13 Rights Shares. The existing members of the company have a right to be
offered shares, when the company wants to increase its subscribed capital. Such
shares are known as "right shares" but they are not issued free of charge.
Section 81 provides that where at any time after the expiration of two years from
the date of incorporation of the company or after one year from the date of the first
allotment of shares, whichever is earlier, a public company limited by shares,
issues further shares within the limits of the authorised capital, its directors must
first offer these shares to the existing holders of equity shares in proportion, as
nearly as circumstances admit, to the capital paid up on their shares at the time of
the further issue. The company must give notice to each of the equity shareholders,
giving him the option to buy the shares offered to him by the company. The
shareholders must be informed of the number of shares he has the option to buy.
He must be given at least fifteen days to decide whether he would exercise his
option or not. If the shareholder does not inform the company of his decision, he
shall be deemed to have declined the offer. Unless the articles of the company
otherwise provide, the directors must state in the notice of offer the fact that the
shareholder has also the right to renounce the offer, in whole or part, in favour of
some other person who need not be member of the company. If the shareholder
426 Business Law
declines or is deemed to have declined or if the person in whose favour the
renunciation is made declines to buy the shares, the company's directors may
dispose of those shares in such manner as they may think fit.
Exceptions. However, the company may,by special resolution in general meeting,
decide that the directors need not offer the shares in the further issue to the existing
equity shareholders and that they may dispose them off in any manner whatsoever.
But where, it has been possible to muster ordinary majority only, the directors may
not offer the shares to the existing equity shareholders, if permission is obtained
from the Central Government. Further, s.81 does not apply to a private company.
Thus, a private company need not offer its further issue first to existing
shareholders. Directors are free to offer them in the manner they deem fit. Furtheq,
s.81 is not applicable in the case of issue of shares against conversion of loans or
debentures.
SEBI has issued guidelines regarding Rights Issues.
Duty of transferor to transferee in respect of rights shares . There may be pending transfers
at the time when a rights issue takes place. This raises the question whether the
transferor of an unregistered transfer is under any obligation towards his transferee
to apply for the rights shares for the benefit of the transferee. The Supreme Court in
R, Mathalone a. Bombay Life Assurance Co. Ltd. AIR 1953 SC 385 has observed that
after the transfer form has been executed, the transferor cannot be held to undertake
any additional financial burden in respect of the shares at the instance of the
transferee where, after the transfer of shares, butbefore the company had registered
the transfer, the company offered rights shares to its members. The transferor could
notbe compelled by the transferee to take up on his behalf the rights shares offered
to the transferor and all thathe could require the transferor to do was to renounce
the rights issue in the transferee's favour.
Allotmenttorenouncee. As per s.81(1)(c), unless the Articles of the company otherwise

provide, the letter of offer of rights shall be deemed to include a right to renounce
the shares offered to a member in favour of any other person; and the notice sent to
him must contain a statement to this effect. \Alhen a shareholder renounces any of
the rights shares offered to him, in favour of third person, it is not in the nature of
transfer of such shares. The Board of Directors, therefore, cannot refuse to allot the
shares to the renouncee unless the Articles so provide - Re Simo SeatritiesTrust Ltd.
(1972) 42 Comp. Cas.457.
However, the right to renounce shares is not available to members of a s.43A

company even to the limited extent of renouncing in favour of other members. The
Articles of a company may contain provisions enabling members to transfer shares
to each other, but that is different from a renunciation of shares - Needle Industries'
case (supra).
In the case of shares registered in joint names, any of the joint holders may lodge a
letter of renunciation.
12.6.14 Conversion of Loans or Debentures Into Shares. There is one more
situation where the existing equity shareholders may lose the right to be offered
the shares, discussed above. Sub-sections (a) to (7) of s.81 provide for such a
contingency.
A company may issue shares to its lenders or debentures-holders who have been
given the option to convert their loan or debentures into shares. However, the
company can do so only if such conversion has been approved before the issue of
debentures or raising of the loan by a special resolution and also by the Central
Government. But no such special resolution is necessary where the lender or the
debenture-holder is either the Govemment or any institution specified by the Central
Government in this behalf. Moreover, the Central Government may allow a
Govemmmt holder of debentures or a Govemment lender of money to the company
to ask for shares of the company in lieu of the loan or debenture amount, even
though the instrument of loan or debenture does not contain any option for
conversion. A copy of every such order issued by the Central Govemment mustbe
laid in draft before each House of Parliament while it is in session for a total period
of thirty days.
Section 94A empowers the Central Government to administratively increase the
authorised capital when conversion is ordered by it and the company does not
have shares to issue and has not increased its share capitalby ordinary resolution.
72.6.75 Meaning of Share Capital.It means the capital of a company/ or the figure
in terms of so may rupees divided into shares of a fixed amount, or the money
raised by the issue of shares by a company.
As mentioned above, a public company and its subsidiary can issue only two
kinds of shares, viz., preference and equity. Therefore, such a company can have
only two kinds of share capital by issue of preference shares and equity shares, viz.,
prefererrce share capital and equity share capital. The expression "Preference Share
Capital" and "Equity Share Capital" are used in the following different
SCNSCS:
Nominal, authorised or registued capital. This is the sum stated in the memorandum
as the share capital of a company with which it is proposed to be registered. This
is the maximum amount of capital which it is authorised to raise by issuing shares
and upon which'it pays stamp duty. As we shall see later, when the original
amount of the authorised capital is exhausted by issue of shares, it can be increased
by passing an ordinary resolution.
Isxrcd capital. It is that part of the authorised capital which the company has
issued for subscription. The amount of issued capital is either equal to or less than
the authorised capital.
portion of the issued capital which has been subscribed
Subscribed capital.It is that
for by the purchasers of the company's shares. The amount of subscribed capital is
either equal to or less than the issued capital.
Called-rtp capital. The company may not call up full amount of the face value of the
shares. Thus, the called-up capital represents the total amount called-up on the
shares subscribed. The total amount of called-up capital can be either equal to or
less than the subscribed capital.
428 Business Law
Po:d-"p capital. Paid-up capital is the amount of money paid-up on the shares
subscribed.
12.6.16 Alteration of 94 provides that, if the articles
authorise, a company miy,by an ordinary resolution
passed in general mee of its memorandumin regard to
capital so as:
(1) to increase its authorised share capital by such amount as it thinks expedient
by issuing fresh shares;
(2) to consolidate and divide all or any of its share capital into shares of larger
amount than its existing sharesi
(3) to covert all or any of its fully paid-up shares hto stock and reconvert the
stock into fully paid-up shares of any denomination;
(4) to sub-divide its shares, or any of them, into shares of smaller amount than
fixed by the memorandum, but the proportion paid and unpaid on each share
must remain the same;
(5) to cancel shares which, at the date of the passing of the resolution in this
behalf, have not been taken or agreed to be taken by any person.
These five clauses are now explained.
t . Increase of authorised share capital. A company, timited by shares, if tlre articles
authorise, can increase its authorised share capital by passing an ordinary
resolution.
Within 30 days of the passing of the resolution, a notice of increasein the share
On receipt of the notice, the
y alterations which may be
orboth.
If default is made in filing thenotice,the company and every officer of the company
who is in default shall be punishable with fine upto Rs 50 per day during #ni.[,
the default continues (s.97).
2. Consolidation and sub-diaision of shares. consolidation is the process of
combining shares of smaller denomination. For instance, L0 shares of Rs 10 each
are consolidated into one share of Rs 100.
sub-divisionof shares is justthe opposite of consolidation, i.e., one share of Rs 100
is divided into 10 shares of Rs 10 each.
once a resolution has been passed, a copy of the resolution is required to be sent
within thirty days to the Registrar of Companies.
Elements of Company Law 42g
3., Conaersion of shares into stock and aice aersa. stock is simply a set of fully
paid-
up shares put together and is transferable in any denominati,oi or fraction.'Or.,
tn"
t be issued in the first instance.

It is necessary to
fully paid-up and then convert them into stock.
to fully paid-up shares by passing a resolution in
\A/hen shares are converted into stock, the shareholders are issued stock
certificates.
In the Register of Members, the amount of stock is written against the name a
of
particular member in place of number of shares. The stockf,older is as much a
member of thecompany as a shareholder.
.but4.areDiminution of share capital. sometimes, it so happens that shares are issued,

not taken up by the
members of the publiiind, therefore, not allotted.
section 94 provides that a company may, if itJarticles authorise, by resolution in
qe"9tu]T99ting, cancel shares which at ihe date of the passing of the resolution in
that behalf have not been taken or agreed to be taken by any p"erson and diminish
the amount of the share capital by-the amount of the shares so cancelled. This
constitutes diminution of capital and should be distinguished from reduction of
capital which is discussed herein below.
72.5-77 Reduction of Capital. Sections 100-105 provide for the reduction
of share
capital. A company limited by shares, if so authorised by its articles, may,by
special resolution, which is to be confirmed by the Colrt, reduce its share
capital:
(D by reducing or extinguishing the liabi ailed capital,
e.9., where a share of Rs 10 on which Rs 5 are e of ns S futty
paid-up. In this way the shareholder is rel the uncallei
capital;
(ii)by paying off or returning capital which is in excess of the wants of the
company, e.g., where there is a share of Rs 10 fully paid-up, reduce it to Rs 5 and
pay back Rs 5 to the shareholder;
(iii) pay off paid-up capital on the understanding that it may be called up again,
e.9., a share of Rs 10 is fully paid-up, on which Rs 2.50 *uy b" returned to the
shareholder on the condition that when nec€ssary, the company may call it up
again. Thus, the difference between method (i) and ihis method is that the uncalled
liability is not extinguished in the latter;
(iv) a combination of the precedingmethods;
Elements of Companylaw $1,
any creditorentitled to objectto the reduction ormisrepresenb thenature or amount
of claim or debt or abets such concealment or misrepresentation.
12.6.18 Reduction of Share Capital without the Sanction of the Court. There are
some cases in which there is reduction of share capital and no confirmation by the
Court is necessary. These are:
(i) Forfeiture of shares. A company may, in pursuance of its articles, forfeit shares
for non-payment of calls.
(i) surrender of shares.It is a shortcut to forfeiture. It may be accepted by the
comPany under circumstances where its forfeiture is justified. It has the effect of
releasing the shareholder whose surrender is accepted from liability on shares.
(iil) Diminution of capital. This has already been explained. section 94 clearly
states that diminution of capital does not amount to reduction of capital.
(iv) Redemptionofredeemableprefermceshares.Thishasalreadybeenexplainedas
provided by s.80.
(v) Purchase of shares of amemberby the company under s. \2.TheCompany Law
Board may order the purchase of shares of any member of the company by the
company, under certain circumstances.
Reductionof capitalos. iliminutionof capital.Reductionof capitalinvolvesworking
off past losses against capital cancellation of the uncalled capital or repayment of
surplus capital. It may involve reduction of issued capital, subscribed or paid up
share capital. Diminution of capital denotes cancellation of the authorised or
issued capital (but not subscribed). Diminution of capital does not constitute a
reduction of capital within the meaning of the Companies Act. The distinction
between reduction and diminution of capital is as follows:
1. Diminution of capital is the reduction of the issued capital. Reduction of
capital involves reduction of subscribed or paid up capital; there is no reduction of
issued capital.
2. Both require authorisation by Articles but whereas 'diminution' can be
effectedby an ordinaryresolution (if so authorisedby Articles), reduction of capital
cannotbe effected without passing a special resolution.
3. 'Reduction'requires confirmation by Court (s.100) but'diminution, needs
no confirmation by the Court (s.94).
4. In case of 'reduction', Court may order the company to add the words ,and
reduced' after its name [s.102 (3) but no such order can be passed in case of
'diminution' s.94f.
5. In case of 'diminution', notice is to be given to Registrar within 30 days from
the date of cancellation whereupon the Registrar shall record the notice and make
the necessary alteration in the Memorandum of Association and Articles of
Association. In case of 'reduction'more detailed procedure has been prescribed
though there is no time limit as in case of 'diminution'.
432 Business Law
72.6.19 Purchase of its own Shares by a Company (s.77). No company limited by
shares and no company limited by guarantee and having a share capital, shall
have power tobuy its own shares, unless the consequent reduction of share capital
is effected and sanctioned by the court in pursuance of s.100 to 104 or of s.402.
Further, no public company and no private company which is a subsidiary of a
public company can directly or indirectly (through loans or guarantee) provide
financial assistance to any person to buy shares in the company or in its holding
comPany.
If default
is made in compliance of s.77, then the company and every officer of the
company in default shall be punishable with a fine upto Rs 1 lakh.
There are, however, certain exceptions to s.77. They are: (1) A company may
redeem its redeemable preference shares issued under s.80; or (2) A banking
company may lend money for the purpose in the ordinary course of its business; or
(3) A company in pursuance of scheme for the purchase of fully paid-up shares in
the company tobe heldby trustees for thebenefit of its employees including salaried
directors, may advance loan for the purchase; or (4) A company may advance
loans to its bonafideemployees (excluding directors ormanagers) to enable them to
purchase fully paid shares for amount not exceeding six months' salary or wages
of each employee; or (5) An unlimited company can purchase its own shares; or
(6) A private company which is not a subsidiary of a public company may advance
loan or offer guarantee for purchase of its shares. Howeveq, even such a company
cannot purchase its own shares.
The Companies (Amendment) Act,1999 has inserted three new sections -77A,
77 AA andTTB.The companies have been allowed to buy-back their shares subject
to certain safeguards. SEBI (Buy Back of Securities) Regulations, 1998 have also
been issued. These provisions are summarized below.
Section 77A provides that a company may purchase its own shares t, othe.
specified securities (also known as "buy-back") out of (i) its free reserves; or (ii) the
securities premium account; or (iii) the proceeds of any shares or other specified
securities.'Howeve{, no buy-back of any kind of shares or other specified securities
shall be made out of the proceeds of an earlier issue of the same kind of shares or
same kind of other specified securities. Thisbuy-backis allowed onlyif the following
conditions are satisfied; (a) the buy-back is authorised by the articles, @) a special
resolution has been passed in general meeting of the company authorising the
buy-back; (c) the buy-back does not exceed 25% of the total paid-up capital and
free reserves of the company; also, the buy-back of equity shares in any financial
year shall not exceed 25% of the total paid-up equity capital in the financial year;
(d) the ratio of the debt owed by the company must notbe more than twice the
capital and its free reserves after suchbuy-back. However, the Central Govemment
may prescribe a higher ratio of the debt for a class or classes of companies. The
term 'debt'here includes all amounts of unsecured and secured debts; (e) alt the
shares or other specified securities, for buyback must be fully paid-up, (f) the buy-
back of the shares or other specified securities listed on any recognised stock
exchange is in accordance with the regulations made by SEBI; (g) the buy-back in
respect of unlisted shares or other specified securities is in accordance with the
guidelines 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
securityintended tobepurdrasedunderthebuy-back, (d) the amounttobeinvested
under the buy-back; (e) the timeJimit for completion of buy-back. L:r any case every
buy-back shall be completed within L2 months from the date of passing the special
resolution.
The buy-back may be (a) from the existing security-holders on a proportionate
basis; or (b) from the open-marke! or (c) from odd lots, (i.e., where the lot of securities
of a public company, whose shares are listed on a recognised stock exchange, is
smaller than such marketable lot, as may be specified by the stock exchange; or
(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, it shall, before making such buy-back file with the Registrar of
Companies and the SEBI a declaration of solvency in the prescribed form. This
declaration is to be verified by an affidavit to the effect that the Board of Directors
of the company 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.
However, in case if a company whose shares are not listed on a recognised stock
exchange, no such declaration need be filed with SEBI.
Where a company buys back its own securities, it shall extinguish and physically
destroy the securities soboughtbackwithinseven days of the last day of completion
ofbuy-back.
Where a company completes a buy-back of its shares or other specified securities,
it shall not make further issue of the same kind of shares [including allotment of
further shares under s.81 (1)l or other specified securities within a period of 24
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 the securities, 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, file with the Registrar and
SEBI, a retum containing such particulars relating to the buy-back within 30 days
of such completion as may be prescribed. However, no such retum need be filed
434 Business Law
with SEBI, in the case of a company whose shares are not listed on a,ny recognised
stock exchange.
If a company makes a default in complying with the above provisions, the company
or any officer of the company who is in default shall be punishable with
imprisonment for a term which may extend upto 2 years, or with fine which may
extend upto Rs 50,000 or with both.
For the purposes of this Section - (i) 'specified securities'includes employees'
stock option or other securities as may be notified by the Central Govemment from
time to time, (ii)" free reserves" shall have the meaning assigned to it in s.372A
Transfer of certain stms to capital rcdemptionresctav accoltnt (s.77AA). Where a company
purchases its own shares out of free reserves, then a sum equal to the nominal
value of the shares so purchased shall be transferred to the capital redemption
reserve account and details of such transfer shall be disclosed in the balance sheet.
Prohibition for buy-back in certain cirumrctances (s.778). This section provides that 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 investrnent
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.
Further no company shall directly or indirectly purchase its own shares or other
specified securities in case it has not complied with provisions of Ss. 159, 207 and
211..
12.6.20 Raising of CapitaUlssue of Shares. Companies limitedby shares have to

issue shares to raise the necessary capital for their operations. Issue of shares may
be made in 3 ways. (i) By private placement of shares; (ii) By allotting entire shares
to an issue-house, which in tum, offers the shares for sale to the public; and (iii) By
inviting thepublic to subscribe for shares in the company through a prospectus.
Priaate placement of shares. A private company limited by shares is prohibited by
the Act and the Articles from inviting the public for subscription of shares or
debentures. It also need not file statement in lieu of prospectus. Its shares are
issued privately to a small number of persons lcrown to the promoters or related to
them by family connections.
A public company can also raise its capital by placing the shares privately and
without inviting the public for subscription of its shares or debenhrres. In this
kind of arrangement an underwriter or broker finds persons, normally his clients
who wish to buy the shares. He acts merely as an agent and his function is simply
to procure buyer for the shares, i.e., to place them. Since no public offer is made for
shares, there is no need to issue any prospectus. However, under s.70, such a
company is required to file with the Registrar a statement in lieu of prospectus at
least 3 days before making allotment of any shares or debentures.
Elements of Company Law Bs
also raised by issue of rights

e the shares are allotted to the
riginal shareholding, e.g., one
It is advisable to keep_in mind the guidelines issued by SEBI with regard to

issue of
shares termed as "Guidelines for Disclosure and investor protlction,, before
issuing shares to the public.
436 Business Law
PART 7 _ALLOTMENT OF SHARES
12.7.1 Share Certificate (s.113). Once shares are allotted and the name of a person
is entered in the Register of members, the company shall deliver certificate of its
shares within three months after allotment and within two months after application
for registration of transfer is made. The share certificate states the naê, lddress,
occupation of the holder together with the number of shares and their distinctive
number and amount paid-up. It must bear the conunon seal of the company, must
be stamped and bear the signature of one or more directors.
If defaultismade incomplyingwiththisprovision, the companyand every officer

in default will be liable to a fine upto Rs 500 for every day of default.
Further, a notice may be served on the company by the person entitled to the
ce
th
of
within a specified time and to pay costs of and incidental to the application.
12.7.2 Share Certificate vs Share Warrant. The distinction between the two is
summarisedbelow:
L. A share certificate is issued in respect of partly or fully paid-up shares, while
a share warrant can be issued only in respect of fully paid shares.
2. The holder of a share certificate is a registered member of the company, while
the share warrantholder is not a member of the company.
3. The issue of a share certificate does not require the approval of the Central
Government. A share warrant canbe issued only if the articles authorise its issue
and with the approval of the Central Govemment.
4. Both public and private companies are required to issue share certificate, but
share warrants can be issued only by public companies.
5. The shares specified in a share certificate canbe transferredby delivery and
registration from the Board of Directors but in the case of a shar-e warrant, the
shares are transferred by a mere delivery of the share warrant.
6. A share certificate is not a negotiable instrument, but a share warrant is.

7. A share warrant does not constitute the share qualification of a directol, but
the share certificate does.
8. The holder of the share certificate can present a petition for the winding up of
the company, while the holder of a share warrant cannot do so.
9. Stamp duty is payable on transfer of shares specified in a share certificate,
but no stamp duty is payable on a transfer of a share warrant although heavy duty
is payable at the time of issue of the share warrant.
1 0 . A share warrant holder cannot requisition on extra-ordinary general meeting

of a company.
PART 8 - MEMBERSHIP
L2.8.1 Definition of a Member. section 4L provides that: (1) The subscribers of
the Memorandum of a company shall be deemed to have agreed to become members
of the company and on its registration, shall be entered as members in its register
of members. (2) Every other person who agrees in writing to become a member of a
company and whose name is entered in its register of members, shall be a member
of the company. on this basis, two pre-requisites for a person to become a member
of a company are: (i) the agreement in writing to take shares of the company; and
(ii) the registration of his name in its register of members;
Besides, aperson may also become a member of a company through the depository
system. Every person holding equity share capital of a company and whose name
is entered as beneficial owner in the records of the depository shall be deemed to be
a member of the concemed company. (vide Depository Act, 1996).
Thus, a person can agree to take shares of a company either as the subscriber at the
initial stage of its formation y subscribing
to its further or new shares; ting member;
(c) on acquisition or purchas , renunciation
of rigtrts shares by an existing member); and (d) on acquisition of its shares by
devolution (for example, transmission of shares to legal heirs of a deceased member,
on insolvency, upon merger/amalgamation through court's order); (e) on
conversion of convertible debenfures or loans pursuant to the terms of issue of
such debenture or loan agreement respectively.
The fundamental difference between the subscribes who agree to take shares at the
time of formation of the company and persons who agree to take shares later is that
the formerbecome members immediately on incorporation of the company, that is,
they automatically become members. The latter, though having agreed to take
shares, become members only after their names are registered in the register of
members of the company.
12.8.2 Memberand shareholder. In the case of a company,limited by shares, the

persons whose names are put on the register of members, are the members of the
company. They may also be called shareholders of the company as they have been
allotted shares and are holding them in their own right. In such a situation, the
terms 'member' and'shareholder'are interchangeably used to mean the same
person. rn sriknnta Data a. venknteshwara ReaI Estate Enterprises (P) Ltd. (1990) 6g
Comp. Cas.216 (Kar),
word'member'under
bearer of a share warra
or a company limited b
company may not have a share capital. However, sometimes a distinction is
of a companyhaving
ares one Person may
This distinction arises
in the following situations:
438 Business Law
(1) X is a member ola gomgany limited by shares. His name is placed
on the
register of members as he is holding shares in iris own right and, therefore
whether
we call him a member or a shareholder, it is immaterill. In such a situation,
the
terms 'member' and.'shareholder'may be used interchangeably. Now, in
the
following three situation he will cease tobe a shareholder, though he continues
to
be the member of the company:
(a) On sale' X sells the shares to Y. He fills in a share transfer form and hands it
over to Y. He also gives the share certificate representing the shares to y. In
retum for sale of iion from"y. X is no longer a
shareholder as he rty in the shares has passEC to
Y. But the name of tei of members till thl transfer
of shares is registe in favour of y.
(b) on death' x dies and his property, including shares, is inherited by y, his
legal representative. X is no longer the shareho-ider. He is not in existence to
hold the shares. Y is holding the shares in his own right and, therefore, can
rightly be called the shareholder. But X continues to be tle member as his name
still appears on the register of members. However, as soon as y gets his own
name registered in the register of me rbers, then X will cease to be-a member.
(c) Xbecomes insolvent and his property, including
sh eceiver or Official Assignee. f'ne Officiat Receiver
or ares in his own right. Therefore, X is no longer the
shareholdeq, though he continues to be the mehber of the company.
(2) A person who is holding a share warrant is a shareholder but he is not a
member of the company as his name is struck off the register of members (s.115).
(3) A person who subscribes to the memorandum of association immediately
becomes the member, even though no shares are allotted to him. Till shares
arl
allotted to the subscriber, he is a member but not the shareholder of the company.
(a) In the case of a company limited by guarantee having no share capital or an
unlimitedcompany having no share capitd, there will be Jnly ,members, but not
'shareholders'.
12.8.3 Modes of Acquiring Membership. A person may become
a member or a
shareholder of a company by any of the following ways:
7. By subscribing to the memorandum of association. The subscribers of the
memorandum of a company are deemed to have agreed to become members
of the
company onlyby reason of their hav
the memorandum becomes a membe
is not necessary that their names must ha
Further, bysubscribing the memorandum every one of thesubscribers is deemed
to
have contracted to become a shareholder in reipect of the shares he subscribed
for.
l. By agreement and registration. section 41(2) provides that apart from the
subscribers of the memorandum, 'every other peison who agrees in writing to
become a member and whose name is entered inits register of irembers shall
be a
Elements of Company Law 4gg
m the case of the subscribers to the
r of the company, until his name
il
Registration of the name of a person as a member of a company may arise:
(a) Upon application and allotment.
b) ny tuansfer, The member may acquire shares from an existing memberby sale,
gift or some other transaction.
(c) By transmission Here a person becomes a shareholder by transmission of
shares to him through death, lunacy or insolvency.
topurchnse qtnl on who signs and delivers to

_(e) _By ryreeing
the Registrar a written under the comfany and pay for
qualification shares is in the he had iubscribed to the
memorandum for a similar number. As such, he is also deemed to have become a
member automatically on incorporation of the company.
!?.8.4 who may Become a Member? subject to the provisions of law, the
Memorandum and the Articles, any person sui juris can become a member of a
company. The position of certain person in this regard is given below
(a) Minor. The position of a minor as a member of a company is summarised as
under:
(i) As a minor is wholly incompetent to enter into a contr act [Mohiri Bibi a.
D,harmodas Ghose, (1903) 30 Cal. 539 (p.c)], an agreement by a minor to take
shares is void and hence, he cannot be a member of a company.
(iii) The minor can also repudiate the allotment during his minority and he
shall be retumed the amount he paid towards the allotment of shares.
(iv) If the name of the minor continues on the register of members and neither
t, the minor does not hcur any liability on the
e cannot be held a contributory at the time of
The Credit Bankof India (I9I4) 39 Bcom. 3311.
(v) If an applic father as guardian of his minor
child and the co the name of the child describing
him as a minor, rdian can be placed on the list oi
440 Business Law
contributories at the time of winding up lPahaniappav. Official Liqr.idator, Pawpati
Bank Ltd., 19 42 Mad 47 0 and 87 5).
(vi) If somehow the name of a minor appears on a register of members and in
the meantime he attains majority and if he does not want to continue to be a
member, then he must repudiate his liability on the shares on the grounds of
minority. The company cannot take defence on the principle of estoppel that the
minor had fraudulently misrepresented his age or had received dividends and
other privileges as a member. Howevet if he had received dividends and
exercised his rights as a member of the company after attaining majority, then
he cannot repudiate his liability on shares.
(vii)In case of transfer of a partly-paid shares to a minor, the company may
refuse to register him as a member. In case, the company, in ignorance of the
minority, has permitted the transfe{, then the company may remove the name of
the minor and replace itby that of transferol even though the latter may have
been ignorant of the minority.
(viii) In case of fully paid shares, minot's name may be admitted in the register
of members, if he happens to acquirethe same by way of transfer or transmission.
ln Deaan Singh v. Mineraa Films Ltd. (AIR 1956 Punjab 106), the Punjab High
Courtheld that there is no legalbar to a minorbecoming a member of a company
by acquiring shares (by *ay of transfer) provided the shares are fully paid-up
and no further obligation or liability is attached to them. Similarly, inS.LBagree
v. Britania lndustries Ltd. (7980), Company Law Board upheld transfer in favour
of aminor.
allotment or transfer of shares in a holding company to its subsidiary, or even to a

nominee for such subsidiary, is void, except that a subsidiary company mayi
(i) hold shares in the holding comPany in the capacity of a personal
representative of a deceased shareholdel, or
(ii) hold such shares trustees, (except where the holding comPany or another
as
subsidiary is beneficially interested under the trust otherwise than merelyby
way of the holding company's business), or
(iii) remain a member of its holding company, if it was a member before April 1,
1956, but may not vote at meetings of a holding comPany or any class of its
members.
As has been mentioned earlier, a comPany cannot purchase its own shares (s.77)
and, therefore, cannotbecome a member of igelf. However, a comPany may acquire
a beneficial interest in its own shares, as by the exercise of its paramount lien on
the shares of a member as security for moneys owningby him to the company, or
by forfeiture of shares for non-payment of calls'
(c) A partnership firm: A partnership firm being an unincorporated association
and therefore, not having a separate legal entity from the Partners, cannot be
Elements of Company Law 441,
registered as a member in the register of members of a company. However, partrers,

either individually or in their joint names (as joint members) may hold shares in a
company as a part of the partnership property. But a partnership firm may become
a member of a company registered under s.25 of the Companies Act, 1956 (i.e.,
associations not for profit).
(d) Aforeigner. As per the Law of Contract, a foreigner can enter into contracts
and therefore, can purchase shares in a company but this is subject to the provisions
of Foreign Exchange Management Act, 7999 (FEMA).
When the country, of which the foreigner is resident, is at war with India, then
the foreigner becomes an alien enemy and therefore, his power of voting at
company meetings and his right to receive notices are suspended during the
war-period.
L2.8.5 Joint Membership. It is possible for two or more than two persons to hold
shares jointly in a company. In that case all of them are not the individual members
of the company. Instead, they are said to hold the shares jointly. There is no direct
provision for joint membership, but there are a few indirect references. Therefore,
Articles of a company provide for joint membership and sometimes the maximum
number of persons who can be joint-holders of shares is given in the Articles
(generally not more than four). Some provisions relating to joint-membership, are:
(i) Only one share certificate is issued to them. (ii) All the members are jointly and
severally liable to make payment of calls (Clause 15, Table A). (iii) A person whose
name appears first in the orderinwhich thenames stands in the register of members,
shall be entitled to vote (Clause 57, Table A). (iv) A document may be served by the
company on the joint-holders of a share by serving it on the joint-holder named
first in the register of members in respect of the share [s.53( )]. (v) The names of the
joint-holders may be entered in the register of members in the order in which they
appear in the Application form or in the Share Transfer Form.
12.8.6 Termination of Membership. A person may cease to be a member of a
companywhen:
(i) he transfers his shares to another person and the shares are registered in the
name of the transferee;
(ii) his shares are forfeited by the company for non-payment of calls;
(iii) he surrenders his shares to the company and the latter accepts the
surrender;
(iv) his shares are sold by the company to enforce its lien and the buyer of these
shares is registered as a member;
(v) he dies and his legal representative gets his own name registered in the
register of members or sells shares to a party who gets his name registered with the
comPany;
(vi) he is adjudged insolvent and the Official Receiver/Official Assignee either
transfers the shares to a third party who gets registered as a member or disclaims
shares;
442 Business Law
(vii) he was holder of redeemable preference shares which have now been
redeemed by the company;
(viii) he rescinds the contract of membership on the ground of fraud or
misrepresentation;
(ix) his shares are purchased either by another member of the company or by the
company itself by an order of a Court under s.402;
(x) he has got share warrants issued in exchange for share certificates of fully
paid up shares; and
(xi) on the corrunencement of winding up (but he will be liable as a contributory
and is also entitled to a share in the surplus assets, if any).
As mentioned earlier, a company maybe member of another comPany. In such a
situation if the shareholding company is being wound up then the membership
will come to an end if the Liquidator disclaims the shares.
12.8.7 Rights of a Member. A member of a company has a number of rights ols-ri-
zls the company. These are conferred on him either by the Act or by the Articles of
the company. Some of the most important rights of a member are:
(i) To have the certificate of shares held ready for delivery to him within three
months from the date of allotment;
(ii) To have his name entered in the register of members if it had not been entered
orhas been wrongly removed;
(iii) To transfer shares subject to the provisions of the Act and the articles;
(iv) To receive notices of meetings, to attend meetings and to vote threat (either in
person orby proxy);
(v) To inspect the register of members and register of debenture holders and get
extracts therefrom (s.1 63);
(vi) To obtain copies of memorandum and articles on request and payment of the
prescribed fees;
(vii) To have the first option tobuy any new shares on a further issue of shares by
the company (s.81);
(viii) To participate in the election of directors and appointment of auditors;
(ix) To get a copy of the balance sheet and profit and loss accor:nt 21 days before
the Annual General Meeting;
(x) To apply to the Court to have any "variation of shareholders' rights" set
aside (s.106);
(xi) To obtain, on request, minutes of proceedings at general meetings (s.196);
(xii) To participate in the removal of directors by passing an ordinary resolution
(s.28a);
(xiii)To petition to the Court for prevention of mismanagement and oppression
(s.39e);
(xiv) To petition to the Court for an order of injunction restraining the directors
from going ahead with an ultrnaints act;
(xv) To petition for compulsory winding up;
(xvi). To participate in passing a special resolution for voluntary or compulsory
winding up;
(xvii) To participate in the surplus assets, if any, on the liquidation of the company.
12.8.8 Expulsion of a Member. It cannot be denied that there are some members
Howeveq, itseems
govemedbys.25 to
(through forfeiting
the interest of the company.
12.8'9 Liability of Members. A member is also subject to certain liabilities and
obligations either by the Act or by the Articles. some of the important ones are
stated hereunder:
(1) If shares are not allotted for a consideration other than cash, then a membei
must pay the whole nominal value of his shares in cash.
(2) It a member shares and the company goes into
liquidation, then h utory to pay, if called uponlo do so,
towards the assets
amember; and (ii) the contributories of the 'A' list (i.e., present members) are not
able to satisfy the contribution required from them in relpect of their shares.
(4) As mentioned earlier, the liability of members becomes unlimited and several,
even in the case of a limited liability company (s.45).
(5) A member is bound to the company by all the covenants of the Articles e.g., a
company may have a paramount lien on a member's shares for any amount due
from him to the company.
444 Business Law
(6) In the case of company limited by guarantee, the member may be asked to
contribute to the extent of his guarantee at the time of winding up.
12.8.10 Register of Members. Section 150 read with s.168 requires everv company
to keep a register of members ordinarily at its registered office. The Register must
contain the following particulars:
(i) the name, address and occupation of each member;
(ii)
the number of shares held by each member, distinguishing each share by its
number and amount paid-up;
(iii) the date of entry in the register;
(iv) the date on which a person ceased to be a member.
\A/here fully paid-up shares have been converted into stock, the fact that stock has
been issued is to be entered against the name of the member in the Register.
lndex of members. Section 151 requires every comPany with more than fifty members
to keep an lndex of Members, unless the Register itself is in the form of an index.
The Index of Members is required to be kept at the same place as the Register of
Members.
The Register of members is open to inspection by members free of charge and by

non-membels on payment of one rupee for two hours a day during business houls.
A company may close the Register at any time by giving seven days'previous
notice by an advertisement in a newspaper circulating in the district in which the
registered office of the company is situated. Howevet the aggregate number of
days for which it can be closed in a year cannot exceed 45 days. Also, it cannot be
closed for more than 30 days at a time'
Section L57 provides that a company with a share capital may, if authorised by its
articles, keep in any country outside India a branch register of members resident
there, called a Foreign Register. The Registrar of Companies must be informed of
the place iarhere this Register is kept. The foreign register is deemed part of the
company's principal register and mustbe keptin the same manner as the principal
register.
Rectification of register of members. Section 11,1 provides for the rectification of the
register of members by the Company Law Board on an application by any Person
aggrieved such as member, transferoq, transferee, the company. The Company Law
Board may order for rectification of the register : (i) where the name of any person
is, without sufficient cause, entered in or omitted from the Register of Members of
a company; (ii) where default or unnecessary delay occurs in entering on the
register the fact that a person has ceased to be a member of the company'
\rVhere the Company Law Board has ordered the rectification of the Register, the
rectification should be made and notice of rectification must be filed with the
Registrar within 30 days of the order of the Company Law Board.
members, those shareholders who have been issued share certificates can exercise
rights as members.
12.8.71 Annual Return. section 159 provides that every company having a share
capital must prepare and file within sixty days from the date on which iti annual
general meeting is held, or if no annual general meeting is held, from the date
when the meeting ought to have been held, with the Registrar an Annual Retum in
accordance with Part I of Schedule V, which prescribes the contents as follows:
(i) the address of the Registered office of the company;

(ii) the name and address of the country where Foreign Register of members is
kePf
(iii) a summary of share capital and debentures: (a) the number of shares issued
for cash; (b) the number of shares for consideration other than in cash; (c) the
nominal amount of capital in respect of each class of shares; (d) the number of
shares into which nominal capital is divided; (e) the number of shares taken up to
the last annual general meeting; (f) the amount called up; (g) the total amount of
commission paid; (h) the discount allowed on any shares or debentures; (i) the
shares forfeited and the amount paid-up thereon; () the share warrants issued
and surrendered.
(iv) The total indebtedness of the company in respect of all charges (including
mortgages) which are required to be registered with the Registrar under s.125.
(v) List of present members and debentureholders and also of past members
who have ceased to be members or debentureholders since the dlte of the last
annual meeting, giving full particulars of the number of shares or debentures held
and details of transfer, if any.
(vi) A list of its directors, managing directors, and managers, past and present.
mbersome particulars, notes appended to the

rovided that where any of the five preceding
herdandtransrerredbythem,,h"R"fi,1"#iliilTiljil:ft:il'"11i,:L:r'lif; :
particulars as relate to persons ceasing to be or becoming members and to shares
transferred or to changes in the number of shares held since the date of one of these
Retums.
where any of the company's shares are converted into stock, notice regarding
which has been given to the Registrar, the list must state the amount of the stock
held by each member instead of shares so converted previously held by him.
signing of the annual retum (s.161). The copy of the annual retum to be filed with
the Registrar shall be signed both by a director and by the manager or secretary of
446 Business Law
the company or where there is no manager or secretary, by two directors of the
company/ one of whom shall be the managing director where there is one.
In case of a company whose shares are listed on a recognised stock exchange, the
copy of such annual retum shall also be signed by a secretary in whole-time
practice.
If default is made in filing the Annual Retum, the company and every officer in
default is liable to be fined upto Rs 50 per day during ttre period of default.
12.8.12 calls on shares. A member of a company is bound to pay the nominal
amount of shares which he has purchased. As noted earliea s.69 provides that not
less,than five per cent of the nominal value of a share can be ialled by way of
application money. The company may ask for some payment at the tim; of
application for shares (but not less than 5 per cent of the nominal value) and
another sum at allotment. The balance may be payable as and when called for.
Example. A company issues shares of Rs 10 each on such terms as Rs 2 payable on
application, Rs 4 on allotment and the remaining Rs 4 as and when requiied. This
balance of Rs 4 may called from the members in one or more installments. The
installments so demanded are called 'calls'
Thus, a call may be defined as a demand by a company, in pursuance of resolution
of the Board of directors and in accordance with the regulitions of its Articles and
the provisions of the Companies Act, upon its members to pay the whole or part of
the balance still due on each share.
The call can be made at any time by the directors of the company during the life-
lime 9f the company but once its winding up commencei then it is only the
liquidator who can call up the amount remaining unpaid, if it is necessary io do
so.
72.8.13 Forfeiture of Shares. Forfeiture of shares means taking them away from
the member. This is a serious step for not only does it deprive the shareholder of his
property but also, unless the shares are re-issued, it involves a reduction of capital.
Shares cannot be forfeited unless authorised by the Articles: The following rules
should be noted in connection with forfeiture of shares:
(1) In accordance utith the articles. The forfeiture to be valid must be in accordance
with the provisions contained in the articles. As per Table A, shares can be forfeited
only against non-payment of calls. The articles of the company may, howeve{,
lawfully incorporate any other grounds of forfeiture [Per Shah J. inNaresh Chqndra
Sanyal a.The Calutta StockExchange Assn. Ltd ArR(1971)SC 422l.But it cannotbe
for the non-payment of the other debts; that would amount to unauthorised
reduction of share capital lHopkinson a. Mortimer Harley & Co. (1917) 1 ch. 6461.
Where the articles authorised the directors to forfeit the shares of a shareholder,
who commences an action against the company or the directors, by making a
payment of the full market value of his shares . HeId sucha clause was invalid ai it
was against the rights of a shareholder fHope a. lnternational Finance Society (7876)
4 Ch. D.5981.
(2) Proper nofice. Articles of a company normally follow 'Table A' with regard to
forfeiture of shares. Thble A provides that a notice requiring payment of the amount
due together with any interest accrued mustbe served. The notice must mention a
further day (not less than 14 days from the date of service of the notice) on or before
which the payment is to be made. The notice must also mention that in the event of
non-payment the shares will be liable to forfeiture.
Any irregularity either in contents or in service of notice would invalidate forfeiture
of shares lBhagwandas Garga. CanaraBankLtd. (1981) 51 Comp. Cas,38(A.P.)l
Examples. (i) Where the notice on which the forfeiture was founded was inaccurate in
requiring payment of interest from the date of the call instead of the date when the call
was payable, the forfeiture was held invalid lJohnson o. Lyttle's lron Agency (1877) Ch.
D.6871.
(ii) Where a notice for the forfeiture was sent by registered post A.D and was returned
unserved, the forfeiture was held invalid lPromilla Bansal a. Wearwell CVcIe Co. (India)
Ltd. (1978) 48 Comp. Cas.202(Delhi)1.
(iii) Resolution for forfeiture. A resolution of the directors is necessary to enable the
shares to be forfeited.
(iv) Bona fide. The power to forfeit is in the nature of trust and must, therefore, be
exercised for the benefit of the company. Thus, forfeiture for the purpose of relieving
a friend from liability was held to be invalid (Lord Walls Court's case).
Even a slight irregularity in effecting a forfeiture would be fatal and render the
forfeiture null and void. The aggrieved shareholder may bring an action for setting
aside the forfeiture as well as for damages. His demand for damages can be proved
even in a winding up [Re New Chili, etc. Co. (1890) 45 Ch. D.598].
Effect offorfeiture.The effect of forfeiture of shares is as follows:
(1) The holder ceases to be a member of the company.
(2) Liability for unpaid calls remains even after forfeiture of shares lshiromani
Sugar Mills a. Debi Pb. (1950) 20 Comp. Cas.296 (All). However, the payment of
such amount cannot be enforced as a call but be sued for as a debt fLadies Dress
Assn. v. Pulbrookn (1909)2Q.8. App.376l. Similar view was expressed in the case of
Bhngwati Pd.a. Shiromani Sugar MillsKtd. (1949) 19 Comp. Cas.286 (All). The Court
in this case observed that after forfeiture, a member does not pay as a contributory
but he Pays as a debtor. In the event of his shares being forfeited the shareholder
would be liable to pay to the company all money that was due from him for
allotments, calls and further calls made on the shares allotted to him with interest.
There was thus a new obligation giving the company a fresh cause of action
against the shareholder and thus, the period of limitation for a suit to enforce this
new obligationbegins to run from the time the shares were forfeited. Thus, the suit
mustbebroughtwithinthree years fromthe date onwhich the shares were forfeited.
The company, however, cannot recover more than the difference between the sum
due to the company in respect of the shares and the sum received by the company
[Re Belton (1930) 2 Ch.48].
449 Business Law
(3) The former holder shall remain liable as a past member to pay calls if
liquidation takes place within one year of the forfeiture.
Re-issue offorfeited shares.It must be noted that the directors are not bound to sell
shares forfeited for non-payment of calls lBishambhar a. Agra Electric Stores Ltd.
(1990) 1Ch.5661. This reduction of capital would not require sanction of the Court.
It can be concluded from the above decision that if the shares are forfeited for
reasons other than the non-payment of calls, re-issue of such shares should be
obligatory.
Normally a company re-issues forfeited shares. The forfeited shares may be re-
issued at any price provided that the total of sum paid by the former holder of the
shares, together with the amount paid on re-issue and the amount remaining
unpaid on shares is not less than the par (face) value because if it were, this would
amount to an issue at a discount. This means that the discount on re-issue should
not exceed the amount forfeited on those shares.
If the shares are reissued at a price more than their face value, as is normally the
case, the excess is a premium and must, therefore, be transferred to the share
premium account.
No Return of Allotment of the shares reissued need be filed with the Registrar
[s.75(5)]. Such re-issue, however, cannot be called allotment.
Annulment of forfeiture. The Board of Directors may, if the former shareholder so
requests annul (cancel) the forfeiture. The directors must, however, act bonafide
and must pass a suitable resolution to that effect. On cancellation of the forfeiture
the former holder is required to pay all calls due with interest and then his name is
restored in the Register of members.
12.8.14 Lien on shares. A lien,like a mortgage or pledge, is a form of securify. It is
an equitable charge on shares to secure any debt which may be due from the
member of the company. The Act contains no reference to lien but the articles of
companies normally give the company a lien on the shares of a member for money
owed by him to the company. An article providing that company will have lien on
shares of a member for his debts and liabilities to companies is valid fCanaraBank
zs. Thribhtwandas (1957)27 Comp. Cas. 647 . where shares are held in joint names
of
more than one person the company will have a lien on such shares'in respect of a
debtdueby any one of the jointholder lNarandaa.The lndianManufacningco.Ltd.
55 Bom. L.R.5671.
This lien extends to the dividends as well. The Articles may provide for a lien even
after the death of the shareholder [Allen v. Gold Reefs of west Africa (1900)
1Ch.5661.1.
A lien of a company is transferable. Thus, for example, if the company has a lien on
X's shares for a debt and X borrows the money from y to pay the debt, X may
request the company to transfer its lien to Y.
Howeve4 the company must not enter either on the Register of members or on the
share certificate any notice of lien it may have.
enforce its lien on shares by the sale of those
in payment of the amount due against him. In
sale in the Articles, the permission shall have
to be sought from the Court.
In case the amount received on sale of such shares is more than the amount due,
the excess shall be payable to the former owner. Power to sell should be exercised
after a notice has been given to the shareholder requiring him to pay the debt due
to the company within a specified time. It should be made clear that the company
intends to sell shares in enforcement of the lien.
But a company cannot enforce the lien by forfeiting the shares. A provision in the
Articles to such effect is void amounting to reduction of capital without an order of
the Court.
If a shareholder mortgages his shares and the mortgagee gives notice thereof to the
company, the mortgagee has a priority over the company if the shareholder's
Iiability to the company was incurred after the notice of the mortgage has been
given to the company lBradford Banking Co. u. Briggs (1886)12A.C.291. But the
Articles may provide that the company is notbound to recognise such interest of
third parties. Even there the ordinary rules of law and equity will be applicable
[Rninfold o.lames Keith, etc. Co. (7905)2Ch.147].
The death of the shareholder does not destroy the lien lAllen a. GoId Rcefs of West
Asia (7900)7Ch.6561. Company's lien will not be lost by reason of the debt becoming
time barred because lien can be enforced without seeking the assistance of the
Court lUnit company a. Diamond Sugar Mills AIR (1971) Cal.18l.
Lien and forfeiture compared
(1) Forfeiture involves reduction of capital, in case the forfeited shares are
cancelled and not reissued. Lien never involves a reduction of capital because the
shares are necessarily sold if the member defaults in payment.
(2) Lien is a fortn of security of a debt. Forfeiture is a penal proceeding. Forfeiture
can be done for reasons other than non-payment of calls, e.g., in the case of Naresh
Chnndra Sanyal a. The Cqlattta StockExchange Association Ltd., (supra) the shares of
the stockbroker of the Exchange were forfeited fornot carrying outhis commitment
with his client. But lien cannot be exercised for reasons other than the non-payment
of a debt.
(3) In case of lien, the former holder is entitled to, on the sale of the share, the
amount in excess of the amount due. In case of forfeiture, nothing is payable to the
formerholder.
12.8.15 Surrender of Shares. Surrender of shares means voluntary retum of shares
by the shareholder to the company for cancellation. There is no provision for the
surrender of shares either in the Actorin Table Abut the Articles of some companies
may allow it as a short cut to the long procedure of forfeiture, where their forfeiture
is justified lTreaor a. Whiteworth (1,887) 1,2 App. Cases 4091. In any other
circumstances, surrender of shares cannot be accepted without sanction of the
450 Business Law
Court, as this would amount to a reduction of capital. In Mangal Sain u. Indian
Merchants Bank Arihorify, [AIR (7920)Lah.240] the objector who had been placed
in the list of contributories contended that he had surrendered his shares and the
directors had under a clear power in the Articles, accepted the same. Held, that a
company can only accept a surrender under conditions and limitations under
which shares can be forfeited, which did not exist in the present case.
Mere handing over of share certificates cannot constitute surrender of shares lVasant
Inaestment Corpn. Ltd.,Inrc (1982) 52 Comp. Cas. 139 (Bom.)l
Since shares can be surrendered only where their forfeiture is justified, a company
can accept surrender of partly paid-up shares only. The only exception where
fully paid-up shares may be accepted is when shares are surrendered in exchange
for new shares of the same nominal value (but with different rights). It is because,
in such a case, the capital is not reduced but only replaced.
Surrendered shares may be re-issued in the same way as forfeited shares. If this is
done, no reduction in capital occurs, However, no consideration can be paid by
the company in exchange of surrendered shares since it would amount to purchase
of its own shares, which is specifically prohibited under s.77. Tltus, where the
surrender was accepted in consideration of the discharge of the registered holder
from his liability in respect of them, it was held thatit amounted to purchase of its
own shares by the company and was thus ineffective (Bellerby a. Rowland €t Marwood
Steamship Co.).
12.8.16 Variation of Shareholders' Rights. Section 106 provides that where the
share capital of a company is divided into different classes of shares, the rights
attached to the shares of any class may be varied with the consent in writing of the
holders of no t less than three-fourths of the issued shares of that class or with the sanction
of special resolution passed at their meeting. However, this variation is posslble
only if provision for such variation is contained in the Memorandum or Articles of
the company and in the absence of such a provision, if the variation isnotprohibited
by the terms of issue of the shares of that class.
Section 107 provides that if the holders of 10 per cent of the issued shares of that
class who had not assented to the variation apply to the Court within 27 days of
the date of the consent or the passhg of the special resolution, the Court m ay, after
hearing the interested parties, either confirm or cancel the variation. The company
must, within 30 days of the service of the Court's order, forward a copy of the order
to the Registrar. In the event of a default, the company and every officer in default
is liable to fine upto Rs 500.
PART 9 _ TRANSFER AND TRANSMISSION OF SHARES

12.9.1 The Power to Tiansfer Shares. One of the most important features of a
company is that its shares are transferable. Section 82 empowers every shareholder
to transfer his shares in the manner laid down in the Articles and in accordance
with the various provisions of law. Thus, a private company is statutorily obliged
to place certain restrictions on the right of its members to transfer shares. One of
the most common restrictions on transfer of shares in a private company is the
Elements of Companylau' 451
"Pre-emption clause", which states that the intending transferor must offer his
shares tothe existingmembers of the company,before offeringthem tonon-members,
so long as a member canbe found to purchase thern at a fair price tobe determined
in accordance with the Articles.
In the case of public companies also, there may be some restrictions on the right of
members to transfer shares. Regulation 21 (Table A)provides that the Board of
directors may refuse to register the transfer of partly paid shares to a person of
whom they do not approve. Further, the Board of Directors may refuse to register
the transfer of any share on which the company has a lien. Regulation 22 also
envisages certain conditions which may be introduced by a company in its Articles
or restrict transfer of shares. It provides that the Board may also decline to recognise
any instrument of transfer unless: (a) the instrument of transfer is accompanied by
the certificate of the shares to which it relates and such other evidence as the Board
may reasonably require to show the right of the transferor to make the transfer; and
(b) the instrument of transfer is in respect of only one class of shares.
Right of a shareholder to transfer his share is always subject to provisions in

Articles of associationlMathrrtbhttmi Printing and Publishing Co. Ltd. a, Vatdhaman
Prtblishers Ltd. (1992) 73 Comp. Cas. 150 (Ker).
12.9.2 Power of the Board of Directors to Refuse Registration of Transfer of

Shares. \zVhere the Articles give power to the Board to refuse registration of a
transfer of shares, such power must be exercised by a resolution of the Board. The
Board may refuse to register the transfer as long as they are acting in the interests
of the company, but if they exercise their discretion to refuse malafide, i.e., they act
oppressively, or corruptly, Company Law Board or the Court will interfere and
order registration. The articles may, of course, be specific and empower the Board
of directors to refuse to register transfers on certain specific ground. As per s.111, if
a company refuses to register the transfer of shares, it shall, within 2 months from
the date of lodging the instrument of transfel, send notice of refusal to the transferor
or transferee giving reasons for such refusal. The Company Law Board, on appeal,
may direct the registration of the transfer.
12.9.3 Procedure of Tiansfer. Section 108 requires the transfer to be in a Proper
instrument of transfer known as Share Transfer Form which is required to be
presented to the Registrar of Companies before it is signed and filled up by the
transferor. The Registrar will stamp or otherwise endorse thereon the date on
which it is so presented to him. However, the transfer form is not necessary in case
of transfer of securities effected through the depository as per the Depositories Act,
7996.
A company shall not register a transfer of shares, unless a ProPer instrument of
transfer duly stamped and executed by the transferor and by the transferee, has
been delivered to the company along with the share certificate. A reading of s.108
of the Companies Act, 1956 and s.12 of the Indian stamp Act,7899, clearly shows
that the instrument of transfer of shares should bear the requisite stamps and the
adhesive stamps should be cancelled at the time of affixation of such stamps and
execution of the document. If these requirements are not complied with, then the
452 Business Law
instrument, although bearing an adhesive stamp but not cancelled, cannot be said
to be an instrument 'duly stamped'. Accordingly, transfer shall notbe valid
lNuddea
Tea Co. Lt d. a. Ashok Kttmar Saha €+ O ther s (1988) 64 Comp. Cas.775).
Time of stamping the transfer-deed. Is it necessary that stamps be affixed before deed
is executed or they could be affixed anytime before delivery. ln Prafttlla Kttmar Rorft
a. orient Engg. works (P) Ltd. (1986) 60 Comp. Cas. 65 (ori.) it was observed that all
that s.108 (IA) (b) requires is thatbefore delivery the stamps should be affixed and
it does not require the stamps to be affixed prior to execution of the documents.
However, in Mathrubhumi Printing €+ Publishing Co. Ltd. a. Vqrdhaman Pttblishers
Ltd. (7992) 73 Comp. Cas 80 (Ker), the Kerala High Court observed:
If the instrument is not properly executed or the stamp affixed to the instrument is
not cancelled before execution or at least at the time of executiory the said instrument
must be deemed to be unstamped.
Cancellation of the stamps by the staff of the company does not make transfer
instrument duly stamped. The contention of the company that stamps were
cancelled by them (the company) before the Board of Directors considered the
transfer shall not be upheld as valid lsubhash Chander a. vardhman Spg. €t Gen.
Mills Ltd. (CLB Order dt. 12.1i.1993)1.
Lodging the transfer. Every instrument of transfer completed in all respects, be
delivered to the company:
(i) in the case of shares dealt in or quoted on a recognised stock exchange, at
any time before the date on which the Register of members is closed, for the first
time after the date endorsed by the Registrar or within 12 months from the date of
such endorsement, whichever is later;
(ii) in any other case, within two months from the date of such endorsement.
Transfer of shares held in joint names. In case of shares held in joint names, the
transfer form must be signed by all of them, unless a specific authorisation is made
in favour of any or some of them. Thus,inshantaG.Pomnteretu. Sakelpapers(p)Lt(t.
(1990) 69 Comp. Cas. 65(Bom.) where though four persons were shown as
transferors of shares, only three had signed the shares, only three had signed the
share transfer form and fourth had not authorised the other to sign on hii behalf,
it was held, that transfer of shares was not valid.
Transfer zuhen complete? Ttansfer becomes compete and the transferee becomes a
shareholder only when the transfer is registered in the company's register
lMathrubhumi Printing & Pttblishing Co. Ltd. o. Vardhaman Publishers Ltd. (1992)73
Comp. Cas.80 (Ker.)1.
12.9.4 Notice of Refusal (s.111). Where a company refuses to register a transfer,
whether in pursuance of any power of the company under its Articles or otherwise;
it shall, within two months from the date on which the instrument of transfer was
delivered to the company, send notice of refusal to the transferee and the transferoq,
giving reasons for such refusal.
Refusal by the company on the ground that the registration of transfer will create
share certificates of less than marketable lot and would be in contravention of
Articles shallnotbe valid. Company Law Board inDipakKumarlayantilnl Shaha.
The Atul Prodttcts Ltd. [Decided on 189.7992, Reported in Chsrtered Secretary , Febnnry
1993 issuel held, thatthere is no prohibition under the Companies Act or any other
Act for holding share certificates below marketable lots. The provisions of law will
override the provisions of Articles.
In this case, the appellant was holding five shares in the respondent company. He
requested the company to transfer one share each in the names of four groups of
joint holders. He submitted all the relevant documents for the purpose. The company
refused registration of transfer on the ground that it would result in creating share
certificates of less than marketable lot which would be in contravention of the
provisions of the transferability as contemplated by the Articles. However, since
the appellant had lodged four transfer forms alongwith one share certificate, the
company was directed to register the transfer of share in the transfer form first
considered by the Board.
Appeal against refltsal. The transferor or transferee may appeal to the Company
Law Board (CLB) against any refusal of the company to register the transfer or
against any failure on its part within the period of 2 months, either to register [he
transfer or to send notice of its refusal to register the same [s.111 (2)]. An appeal
shall be made within two months of the receipt of the notice of such refusal or,
where no notice has been sent by the company, within four months from the date
on which the instrument to transfer was delivered to the company.
The CLB while dealing with an appeal against refusal to register the transfer may,
after hearing the parties, either dismiss the appeal or, by order, direct that the
transfer shallbe registered by the company and the company shall comply with
such order within ten days of the receipt of the order. However, the CLB may, at its
discretion, make (a) such interim order, including any orders as to injunction or
stay, as it may deem fit and just; (b) such orders as to costs as it thinks fi| and
(c) incidental or consequential orders regarding payment of dividend or the
allotment of bonus or rights shares.
If defaultis made in giving effect to the orders of the CLB under s.111, the company
and every officer of the company who is in default shallbe punishable with fine
which may extend upto Rs 10,000 and with a further fine which may extend upto
Rs 1000 for every day after the first day after which the default continues. Further,
if default is made in complying with any of the provisions of s.111, the company
454 Business Law
and every officer of the company who is in default, shallbe punishable with fine
which may extend upto Rs 500 for every day during which the default
continues.
Applicability of s.111 to priaate companies.In Dr. litendra Nath Seha and Another a.
Shymal Mondal [decided by CLB on 25.8.7992], it was observed that all the
provisions of s.111 are applicable to a private company except to the extent provided
in sub-s.(13).
Transfer of shares on thebasis ofpre-incorporation transfer deeds. A director of a company,
prior to its incorporation, signed a transfer deed, as if the company was in existence
at the relevant date. When later on the shares were submitted with the company
for the purpose of registration of the transfe4, the company refused to register the
same. On an appeal to the C.L.B, it was held that the transfer deed was not properly
executed and the company was justified in refusing to register the transfer Ltd.
llnlec lnuestment (P) a. Dynamatic Hydraulics Ltd. (7989) 3 Comp. L.I. GLB)2421.
SaIe of shares by tax recoaery offcer.'Nho should sign the transfer deed?. In Szuadeshi
PolytexLtd.a. SwadeshiMiningand MarufacturingCo.Ltd. (1987) 62 Comp. Cas.683
(All), it was held,thatwhen the Tax Recovery Officer is required to transfer shares
to a person who has purchased them, the Tax Recovery Officer may execute such
documents or make such endorsement as required and in that event the execution
and the endorsementmade shall have the same effect as an execution,/endorsement
made by the party.
Therefore, when shares are acquired from the Tax Recovery Office1, he is competent
to execute the document of sale.
Transfer of shares after winding up - whether oalid? The question was considered in
the case of H.L. Seth a. Wearwell Cycle Co. (lndia) Ltd. (In liquidation) (1988) 64
Comp. Cas.497 (Delhi). The Delhi High Court /reld that as between transferor and
transferee, a transfer of shares executed after the colrunencement of winding up is
valid, whether it was executed in performance of a contract made before or after '
thattime..
12.9.5 Tiansfer of Shares under Depository System. The Depositories Act, 1996
has paved the way for an altemate mode of effecting transfer of shares. Investors
will, however, have the choice of continuing with the existing share certificates
and adopt the existing mode of effecting their transfer.
The Depositories Act provides for the establishment of one or more depositories.
Every depository will be required to be registered with the SEBI and receive a
certificate of commencement of business on fulfillment of such conditions as may
be prescribed. Investors opting to join the system will be required to be registered
with one or more 'participants' who will be agents for the depositories. The
participants willbe custodial agencies likebanks, financial institutions as well as
Iarge corporate brokerage firms. Upon entry into the system, share certificates
belonging to the investors will be 'dematerialised' and their names entered in the
books of participants as beneficial owners. The investors' names in the register of
companies concerned will be replaced by the name of depository as the registered
owner of the securities. The investors will, however, continue to enjoy the economic
benefits from the shares as well as voting rights on the shares concemed.
Shares in the depository mode shall cease to have distinctive numbers. Issuers of
new securities will give investors the option either to receive physical securities or
to join the depository mode. While investors holding share certificates may opt to
become beneficial owners in a depository system, those investors opting to exit
from a depository will be allowed to do so and claim share certificates from the
company by substituting their names as the registered owner in place of the
depository.
Ownership changes in the depository system willbe made automatically on the
basis of deliveryvs. payment. There willbe a regulal, mandatory flow of in-formation
about the details of or,rrnership in depository's record to the company concemed. If
the latter has any reservations about the admissibility of share acquisition by any
person on the ground that the transfer of the security conflicts with the provisions
of SICA, 1985, the company will be entitled to make an application to the Company
Law Board (CLB) for rectification of the ownership records with depository. During
the pendency of company's application with the CLB, the transferee would be
entitled to all the rights and benefits of the shares except voting rights which will
be subject to the orders of the CLB.
The Act provides for detailed regulations to be framed by SEBI as well as detailed
bye-laws to be framed by the depositories with the approval of SEBI. The bye-laws
will crystallise the rights and obligations of participants and beneficial owners as
well as procedures for ensuring adequate safeguards to protect the interests of
investors. Any loss caused to beneficial owners due to the negligence of the
depository or the participant will be required to be indemnified by the depository.
Insertion of new section, aiz., s.111.A. Subject to the provisions of this section, viz.,
s.111A, the shares or debentures and any interest therein of a company, other than
a private company and a deemed public company shallbe freely transferable.
The Company Law Board may/ on an application made by a depository, the

company, participant or investor or the Securities and Exchange Board of India
within two months from the date of transfer of any shares or debentures held by a
depository or from the date on which the instrument of transfer or the intimation of
transmission was delivered to the company, as the case maybe, after such inquiry,
as it thinks fit, direct the company or depository to rectify register or records if the
transfer of the shares or debentures is in contravention of any of the provisions of
the Securities and Exchange Board of India Acl, 7992 or regulations made
thereunder or the Sick Industrial Companies (Special Provisions) Act, 1985.
Howevet the CLB may, at its discretion, make an interim order as to suspend the
voting rights before making or completing such enquiry.
The provisions of this section shall not restrict the right of a holder of shares or
debentures, to transfer such shares or debentures and any person acquiring such
shares or debentures shallbe entitled to voting rights unless the voting rights have
been suspended by an order of the Company Law Board.
456 Business Law
Notwithstanding anything contained in this section,
any further transfel, during
the pendency of the application with the Company
debentures shall entitle the transferee to voting
iu* go;ra, of shares or
rights unless the voting rights in
respect of such transferee have also been surp""a"a.
ares. Transmission of shares takes place (i) when
the
or (ii) when he is adjudicated an insolvenq or (iii)
if the
t goes into liquidation.
on the death of a shareholdel, his shares vest.in his legal representative.
The legal
representative can sell the shares without being regis"tered,
if he does not wish to
be registered as a member of thecompany. nrit
srfuyect to the provisions of the
Articles, he is entitled to be put on the Re6ster of Members,
if he so desires. For this
q,1tp9r:, the comparry is bound to aciept production of probate or Letter of
Administration or Succession Certificate as sufficient evidence
of his title. In case
the legal representative elects to become a member,
he must send a written and
company notifying his decision. If he
fter executing a transfer of the shares.
registration of transfer will apply to
LT". insolvency of a shareholdeq, his shares vest in the official Assignee or

official Receiver, who can selr and transfer the shares
as a member. "r;;;;;;seuregistered
M/he1e a shareholding company goes into liquidation,
the iiquidator may sell and
transfer the shares.
72-9.7 Distinction between Transfer and riansmission.
The following are points
of distinction between transfer and transmission
of shares.
(i) Transfer takes plac.e by a voluntary and deliberate act of the transfero4
transmission is the result of operation of law.
while
(ii)In case of transfer, the transferor and the transferee

have to execute an
instrument of transfer, while the shares are transmitted
on the death, insolvency of
a member and instrument of transfer is not
required; only a prooi oi ni, dtle to the
shares is required.
(iii)
Transfer is the normar method of hansferring property
in the shares, whereas
transmission of shares take place only on death,Insorv"".y
or u ,lareholder.
transfer form with the company and

Therefore, to overcome thiJ problem
transferor lodges the certificate and tr
to certifl'the transfer. The company obligr
that a share certificate covering ttrose traisfers has
been lodged with the company.
Elements of Company Law 4Sz
The certification is normally d f. I4trhen the transfer is
lodged with the company and the old certificate and
sends a 'certification of transfe to the transferee and a
balance certificate/ticket, for those retained, to the transferor, The 'certification of
ce ticket'are exchanged for share certificates as and when
shares being sold to two or more transferees, the certification
d for the new certificates.
The 'Certification of transfer' to be valid should satisfy the following requirements:

(i) the instrument of transfer should be certificated with the woids Certificate
Howeve4, it may be noted that there is no statutory obligation cast on the company
to certify transfers.
12.9.9 Right of Transferees Pending Registration of Transfer (s.205A). For
appear in the register of members. Technically, therefore, the transferor continues

to be a lawful owner and the member of the company but the transferee is the
beneficial owner. In order to protect the interest of lransferees in such a situation
s.206 A provides that where any instrument of trarsfer of shares has been delivered
458 Business Law
72.9.10 Statutory Restrictions on Tlransfer of Shares (Ss. 108A-L08I). Consequent
to the amendments to the MRTP Act, certain provisions relating to restrictions on
transfer of shares have been transferred to the Companies Act as Ss.108A to 108L
Details of these sections are as follows:
Restriction on acquisition of certain sharcs (s.108A). Section 108,{ prohibits the holding
of more than 25% of the paid-up share capital of a company without the previous
approval of the Central Govemment. In this regard the section provides:
(1) Except with the previous approval of the Central Govemmenf no individual,
firm, group, constituent of a group, body corporate orbodies corporate under the
same management, shall jointly or severally acquire or agree to acquire, whether
in his or its own name or in the name of any other person, any equity shares in a
public company, or a private company which is subsidiary of a public company, if
the total nominal value of the equity shares intended to be so acquired exceeds, or
would together with the total nominal value of any equity shares already held in
the companyby sudr individual, firm, group, constituent of a group,body corporate
or bodies corporate trnder the same management, exceed 25% of the paid-up equity
share capital of such company.
(2) Where the Central Government prohibits any person under Sub-s.(1) to
acquire any shares of a public or private subsidiary company, then eaen the following
havebeen disallowed, exceptwith the previous approvalof theCentralGovemment,
to transfer or agree to transfer shares of such a company if such person (acquirer)
is: (a) a company in which 51% or more of the share capital is held by the Central
Govemment or (b) Corporation (not being a company) established by or under
any Central Act; or (c) financial institution.
Restrictionontransfer of shares (s.1.088). (1) Everybody corporate orbodies corporate
under the same management which holds, where singly or in the aggregate,l0o/"
or more of the nominal value of the subscribed equity share capital of any other
company must before transferring one or more of such shares, give to the Central
Govemment an intimation of its or their proposal to transfer such share. Further,
every such intimation must include a statement as to the particulars of the shares
proposed to be transferred, the name and address of the person to whom the
shares are proposed to be transferred, the shareholding, if any, of the proposed
transferee in the concerned company and such other particulars as may be
prescribed.
(2) Where, on receipt of the intimation or otherwise, the Central Government is
satisfied that as a result of such transfer, a change in the composition of the Board
of Directors of the company is likely to take place and that such change would be
prejudicial to the interests of the company or to the public interest, it may issue any
of the following orders:
(a) No such share shall be transferred to the proposed transferee. However, no
suchordershallpreclude thebodycorporate orbodies colporate from intimating,
to the Central Government, its or their proposal to transfer the share to any
other person, or
Elements of Company Law 4Sg
(b) where such share-is held in a company engaged in any industry specified
in Schedule XV, such share shall be transferred to the Central Govemment or to
such Corporation owned or controlled by that Govemment as maybe specified
in the direction.
(3) vvhere a direction is made by the Central Govemment under clause
@) above,
the share referred to in such direction shall stand transferred to the Central
Govemment or to the Corporation specified therein and the Central Govemment
or the specified Corporation, as the case may be, shall pay in cash, to the body
corporate or bodies corporate from vhich such share stands transferred, an
amount, equal to the market value of such share, within the time specified
below.
Explanation. The term "market value" means, in the case of a share which is quoted
on any recognised stock exchange, the value quoted at such stock exchange,bn the
date immediately proceeding the date on which the direction is made and, in
any other case, such value as maybe mutually agreed upon between the holder of
the share and the Central Government or the specified Corporation, as the
case may be, or in the absence of such agreement, as rnay be determined by the
Court.
(a) The market value shall be given forthwith, where there is no clispute as to
such value or where such value has been mutually agreed upon, but where there
is a dispute as to the market value, such value as is estimated by the Central
Govemment or the Corporation, as the case may be, shall be given forthwith and
the balance, if any, shallbe given within thirty days from the date when the market
value is determinedby the Court.
(5) If the Central Govemment does not make any direction under (2) within sixty
days fromthe date of receiptby it of the intimation given under (1), the provisions
contained in sub-s. with regard to the transfer of such shares shall not apply.
Resohttion on the transfer of shares of foreign companies. Section 10gC prohibits any
body corporateor bodies corporate under the same management, which holds, or
hold in the aggregate, 107o or more of the nominal value of the equity share capital
of a foreign company, having an established place of business inlndia, to transfer
any share in such foreign company to any citizen of India or any body corporate
incorporated in trdia exceptwith thepreviotrs approval of theCentral Govemment.
The Central Govemment shall however not refuse such permission unless it is of
opinion that such transfer would be prejudicial to the public interest.
Power of cmtral goaernmmt to direct companiesnot to giae to the transfer (s.L08D).
ffict
(1) \Atrhere the Central Govemment is satisfied that as a result of the transfer of
any share or block of shares of a company, a change in the controlling interest of
the company is likely to take place and that such change would be prejudicial to
the interest of a company or to the public interest, that Govemment may direct the
comPany not to give effect to the transfer of any sdch share or block of shares and-
(a) where the transfer of such share or block of shares has already been registered,
not to permit the transferee or any nominee or proxy of the transferee, to exercise
460 Business Law
any voting or other rights attaching to such share or block of shares; and (b) where
the transfer of such share or block of shares has not been registered, not to permit
anynominee orproxyof the transferorto exercise anyvoting or other rights attaching
to such share or block of shares.
(2) \Alhere any direction is givenby the Central Govemment under (1), the share
or the block of shares referred to therein shall stand retransferred to the person
from whom it was acquired and thereupon the amount paid by the transferee for
the acquisition of such share or block of shares shall be refunded to him by the
person to whom such share or block of shares stands or stand retransferred.
(3) If the refund referred to in (2) is not made within the period of thirty days
from the date of the direction referred to in (1), the Central Govemment shall, on
the application of the person entitled to get the refund, direct, by ordet the refund
of such amount and such order may be enforced as if it were a decree made by a
civil court.
(4) The person of whom any share or block of shares stands or stand retransferred
under (2) shall, on making refund under (2) or (3), be eligible to exercise voting or
other rights attaching to such share orblock of shares.
Time within which refusal to be communicated (s.108E). Every request made to the
Central Govemment for according ib approval to the proposal for the acquisition of
any share referred to in s.108A or the transfer of any share referred to in s.108C shall
be presumed to have been granted unless within a period of sixty days from the
date of receipt of suchrequest the CenhalGovemmentcommunicates to the person
by whom the request was made that the approval prayed for cannot be granted.
Nothing in s.L08A to 108D to apply to goaernment companies, etc. (s.108F). Nothing
contained in s.108A [except sub-s.(2) thereof] shall apply to the transfer of any
share to and nothing in s. 1088 or s.108C or s.108D shall apply to the transfer of
any share by- (") any company in which not less than 51% of the share capital is
held by the Central Govemment; (b) any Corporation (not being a company)
established by or under any Central Act; (c) any financial institution.
Applicability of the proaisions of sections 108A to L08F (s.1.08G). The provisions of Ss.
108,4. to 108F (both inclusive) shall apply to the acquisition or transfer of shares or
share capital by, or to, an individual, firm, group, constituent of a group, body
corporate orbodies corporate under the same management, who or which-
(a) is, in case of acquisition of shares or share capital, the owner in relation to a
dominant undertaking and there would be, as a result of such acquisition, any
increase- (i) in the production, supply, distribution or control of any goods that
are produced, supplied, distributed or controlled in India or any substantial part
thereof by that dominant undertaking., or (ii) in the provision or control of any
services that are rendered in India or any substantial part thereof by that dominant
undertaking, or
(b) would be, as a result of such acquisition or transfer of shares or share capital,
the owner of a dominant undertaking; or
Elements of Company Law 46I
(c) is, in case of transfer of shares or share capital, the owner in relation to a
dominant undertaking.
Construction of certain exp
"group", "same manage
and "owner" used in Ss.
respectively assigned to
Act,7969.
Penalty for acquisition or transfer of shares in contraaention of Ss.L\BA to 10gD
(s'108-I)' Section 108I provides for penalties for non compliance of provisions
contained in s.108A to 108D.
Nominationfacility to shareholders etc. The Companies (Amendment) Act, 1999 has
extended the nomination facility to the holders of shares, debentures and fixed
deposit holders. Two new Ss.LO9A and 1098 have been inserted.
section 109.{ provides for nomination of shares. Every holder of shares in, or
holder of debentures of a company m ay, at any time, nominate, in the prescribed
manner a person to whom his shares iru or debentures of, the company shall rest
in the event of his death. In case of joint holding, all of them may nominate a
Person in whom the rights shall vest in the event of death of all the joint holders.
Further, notwithstanding anything contained in any other law for the time being
in force or in any disposition, whether testamentary or otherwise, the nominee
shall become entitled to all the rights of the shares etc., to the exclusion of all other
persons, unless the nomination is varied or cancelled in the prescribed manner.
In case the nominee is a minoq, theholder of shares or debentures mayalsonominate

a person to become entitled in the event of death of the mino1, during the minority.
Section 1098 proaidesfor transmission of shares. Any person who becomes a nominee
by virtue of the provision of s.109A, may elect either (a) to be registered himself as
a holder of the share or debentures; or (b) to transfer the share or debenture. In the
case of (a) he shall send to the company a notice in writing signed by him to that
effect accompanied by a death certificate of the deceased shareholder or
debenture holder. In case of (b), all the limitations, restrictions and provisions of
the Act relating to the right to transfer and the registration of transfers shall be
applicable.
Further, a person, being a nominee, becoming entitled to a share or debenfure by
reason of the death of the holder shall be entitled to the same dividends and other
advantages to which he would be entitled if he were the registered holder himself.
Howeve4, he shall not, before being so registered, be entitled to exercise right
conferred by membership in relation to meetings of the company.
Furthermore, the company any such person
to elect either to be register ebenture. And if
he does not comply with the notice within 90 days the company may withhold
payment of dividend, bonus or other money payable to him, until the requirements
of the notice have been complied with.
462 Business Law
PART IO - BORROWINGS (INCLUDING DEBENTURES) AND
REGISTRATION OF CHARCES
l2.l0.l Power of a Company to Borrow. Every trading company has an implied
Power to borrow but it is wise to include an express power to borrow in the objects
clause of the memorandum. Non-trading companies, however/ must be expressly
authorised to borrow by their memorandum.
A power to borrow, whether express or implied, includes the power to charge the
assets of the company by way of security to the lender.
The Companies Act does not expressly empower companies to borrow money.
Therefore, most of the companies expressly provide for such borrowing powers in
the memorandum. Insuch cases, where memorandumauthorises the company to
borrow, the Articles provide as to how and by whom these powers shall be
exercised. It may also fix up the mafmum amount which can be borrowed by the
comPany.
Exercise of borrmting powers. A public company cannot exercise its borrowing powers
until it secures the certificate to commence business [s.149 (1)]. A private
company may, however, exercise the borrowing powers immediately after its
incorporation.
The power to borrow money is generally exercised by the directors but Articles
normally provide for certain restrictions on their power to borrow. Section 293 also
limits the directors' power to borrow, to the aggregate of the paid up capital of the
company and its free reserves apart from temporary loans obtained from the
company's bankers in the ordinary course of business.
12.10.2 Ultra Vires Borowing. Borrowing by a company shall be deemed to be
ultra aires where the company borrows inspite of no power to borrow or borrows
beyond the limit fixed by the Memorandum or Articles. Any such loan to the
company is null and void and does not create an actionable debt. However, the
following remedies shallbe available to such a lender:
1. lnjunction and recoaery. If the money, assets, property, etc., purchased with
such money is identifiable and are still in the possession of the company, the
lender can obtain an injunction to restrain the company from parting with them
and seek a tracing order to trace and recover them.
2. Subrogatiorz. If the borrowed money was applied in payment of lawful creditors

of the company, the lender can subrogate to the rights of those creditors, i.e., he will
step into the shoes of the old creditors for the purpose of recovering his money
lSinclafuv.Brougham(1914) A.C.3981. Howeveq, he shallnothave anypriority over
other creditors even if the debts paid off had priori ty lRa Wirexhan MoId €t Cohmah's
Quau Rly. (7899) 1Ch. 4401.
3. Suit against the directors. The lender may claim damages from the directors
and sue them personally for a breach of warranty of authority lFirbank's Executors
a. Humphreys0866) L8 O.8.D.641. Butif the factthatthe companyhas nopowers to
borrow was apparent upon reference to the company's memorandum or articles,
the lender shall not be entitled to cla
as he was not misled because he is
documents lRanshdall a. Ford (L855)
12.10.3 Borrowing Intra Vires the Company but Utra vires the Directors. If the
and rende ratified, the loan shall become perfectly

valid and y. However, even where the cbmpany
refuses to 'doctrine of indoor management':hail
protect a lender provided he can establish that he advanced the money in
good faith. The company may in turn proceed against the directors and claim
indemnity.
12.10.4 other Restrictions on the Borrowing Powers of the Board. The Board can
exercise the following powers, solutions passed at
Board meeting and not by the the powei to issue
debentures; (ii) the power to bo on dibentures. The
p
a resolution wer in
eeofdirectors, orany
the company, which
amount can be borrowed by the delegatee. Also the Act empowers the company in
general meeting to impose restrictions and conditions on the powers of the Board
to issue debentures and borrow money.
12.10.5 Procedure for Delegating Powers to Borrow Monies otherwise than on
Debentures. section 292 empowers the Board to borrow money on behalf of the
company by means of resolution passed at the meeting of the Board. However,
s of a resolutionpassed ata meeting
any other principal officer of the
ise than on debentures.
Section 292 (2) further provides that every resolution delegating the power referred
to above relating to the power to borrow money otherwise than on debentures
a meeting of the Board of Directors. 2. Ensure that every director gets the proper
notice of the meeting along with the agenda. 3. Pass a resolution in the Board's
meeting delegating the stated power to the desired official of the company. 4. Ensure
that the resolution does state the maximum amount that the Official shallbe allowed
toborrow.
12.70.6 Debentures. The definition of 'debenture' as contained in s.2(12) does
not explain the term. It reads, "Debenture includes debenture stock, bonds and
464 Business Law
any other securities of a company whether constituting a charge on the company's
assets or not". The nature of debenture is thus not clear by this definition.
The term'debenture'simply means a document acknowledging a loan made to
the company and providing for the payment of interest on the sum borrowed until
the debenture is redeemed, i.e., the repayment of the principal sum. It may or may
not be under seal and so does not necessarily imply that any charge is given on the
company's assets, though such a charge usually exists.
Features of a debenture. The features of a debenture are as follows: 1. It is issued by
the company and is in the form of a certificate of indebtedness. 2. It usually specifies
the date of redemption.It also provides for the repayment of principal and interest
at specified date or dates. 3. It generally creates a charge on the undertaking or
undertakings of the company.
Usuatly the words 'paripassu'appear in the terms and conditions of debentures'
This means all the debentures of a particular class will receive the money
proportionately in case the company is unable to discharge the whole obligation.
In the absence of this clause the debenture holders would rank in accordance with
the rank of the issue and if issued on the same date then in the order of time when
they were issued (which is known by the serial number of the debenture).
12.10.7 Debenture Stock. A company instead of issuing individual debentures,
evidencing separate and distinct debts, may create one loan fund known as
"debenture stock" divisible among a class of lenders each of whom is given a
debentures stock certificate evidencing the parts of the whole loan to which he is
entitled.
This debenture stock, which is analogous to the loan stocks of governments and
Iocal and public authorities, is then the indebtedness itself and the certificate
evidences the stockholder's interest in it. A consequence of the distinction is that
whereas a debenture is a single thing which can be legally transferred only as one
entity, debenture stock can be sub-divided and transferred in any fractions which
the holder wishes. Further, "debenture stock" mustbe fully paid, debenture may
ormayncitbe fullypaid. Howevet forthepurpose of theCompanies Act'debenture'
includes'debenture stock'.
12.10.8 Issue of Debentures. Debentures are commonly issued in a similar manner
as shares by means of a prospectus inviting applications, the money being usually
payable by installments on application, allotment and on specified dates. The
power to issue debentures rests with the Board of Directors (s.292). Debentures
may be issued at par, at a premium or at a discount, unless the Articles specifically
forbids issue of debentures at a discount.
The company must complete and keep ready for delivery the debenture certificates
within 3 months of allohnen! unless the terms of the issue provide a longer period
(s.113).
12.10.9 Kinds of Debentures. Debentures may be of the following kinds:

(1) Bearer debentures. Bearer debentures are similar to share warrants in that
they too are negotiable instruments, transferable by delivery. According to Perrins
and Jeffreys, "By making debentures payable to bearer they are invested with the
character of a negotiable instrument, so as:
1. to make them transferable free from equities;
2. to render the delivery of a debenture and any interest coupon a good

discharge to the company;
3. to enable the bearer to sue the company in his own name, if necessary;
to ensure a good title to any person who acquires the debenture bona fide
tfor valuable consideration,
notwithstanding any defect in the title of the person
from whom he acquires it".
The interest on'bearer debenfures'is paid by means of attached coupons. on
maturity, the principal sum is paid to the bearers.
(i) Registered debentures. These are debentures which are payable to the
registered holders, i.e., persons whose names appear in the Registlr of debenture
holders' Such debentures are transferable in the sime wayas shaies or in accordance
with the conditions endorsed on their back. The debenture itself consists of two
parts: (a) the covenants by the company to pay the principal and interesU and (b)
the endorsed conditions, e.g., the term of thl loan.
The endorsed conditions vaty, but they normally contain a provision that the
debenture is one of a series all ranking pari passu. where debentures rank pari
passu, they will be discharged in proportion to the amount due in respect botir of
capital and interest, i.e., in the event of a deficiency of assets, if the interest on some
debentures is paid down to a later date than others, the interest due on each is
added to the capital thereof and a proportionate distribution of the assets made. If
there were no such provision, the debentures would rank in the order of issue
regarding the assets charged by the company.
Another usual endorsed condition is that 'no notice of trust'shall be recorded in
the Register of debenture holders (s.153)
(iii)
Perpetual'or irredeemable debentures. A debenture which contains no clause
as to payment or which contains
a clause that it shall not be paid back is called a
perpetual or irredeemable debenture.
However, section 120 expressly states that a condition contained i. *y debenture
is not invalid by reason only that thereby, the debentures are made irredeemable
or
redeemable only on the happenings of contingency, however remote, or on the
expiration of a period, however long. It follows that debentures can be made
perpetual, i.e., the loan is repayable only on winding up, or after a long period of
time.
(iv) Reileemable debentures. Redeemable debentures are issued for a specified
period of time. on the g*lily of that specified time the company has the right to
pay back the debentureholders and have ib properties released from the morigage
or charge. Generally, debentures are redeemable.
466 Business Law
However, redeemed debentures can be re-issued. Section 121 provides that if there
is no provision to the contrary in the articles, or in the conditions of the issue, or if
there is no resolution showing an intention to cancel the redeemed debentures, the
company shall have power to keep the debentures alive for the purpose of reissue.
The company may reissue either the same debentures or other debentures in their
place. Upon such reissue the person entitled to the debentures shall have the same
rights and priorities as if the debentures had never been redeemed.
Further, where with the object of keeping debentures alive for the purpose of re-
issue, they have been transferred to a nominee of the company, a transfer from that
nominee shallbe deemed tobe a reissue.
(v) Nakeil debentures.Normally, debentures are secured by a mortgage or a charge
on the company's assets. However, debentures maybe issued without any charge
on the assets of the company. Such debentures are called 'Naked or lJnsecured
debentures'. Th"y are mere acknowledgements of a debt due from the company,
creating no rights beyond those of ordinary unsecured creditors.
(vi) Conaertible debentures. A company may also issue convertible debentures,
in which case an option is given to the debenture-holders to convert them into
equity or preference shares at stated rates of exchange, after a certain period.
Such debentures once converted into shares cannot be reconverted into
debentures.
According to convertibility, debentures are further classified into three categories:
1. Fully Convertible Debentures (FCDs), 2. Non Convertible Debentures (NCDs),
3. Partly Convertible Debentures (PCDs).
Fully convertible debentures. Fully convertible debentures are those debentures

that are converted into equity shares of the company on the expiry of a specified
period or periods. \rVhere the conversion is to be made at or after 18 months from
the date of allotrnent but before 36 months, the conversion is optional on the part of
the debenture holders in terms of SEBI guidelines.
Non-convertible debentures. Non convertible debentures are those debentures that

do not confer any option on the holder to convert the debentures into equity shares
and are redeemed at the expiry of a specified period/(s).
Partly convertible debentures. Partly convertible debenture consists of two parts,
viz., convertible and non-convertible. The convertible portion is convertible into
equity shares at the expiry of the specified period(s). Non-convertible portion, on
the otherhand, is redeemed at the expiry of a certain period/(s). \Alhere the
conversion takes place at or after 18 months, as per SEBI guidelines the conversion
is optional at the discretion of the debentureholder.
12.10.10 Remedies of Debentureholders. In case of default by the company in
repayment, the remedies of a debenture holder vary according to whether he is
secured or unsecured.
An unsecured debentureholder is in exactly the same position as a creditor and he

has the same remedies. Thus, (1) he may sue for the principal and interesU or (2) he
may present a petition for the winding up of the company and prove his debt as
unsecured creditor.
A secured debentureholder has both the above remedies, but in addition he has
the following courses also open to him:
(t) Where a ttust ileed has been executed
1. Sale of assets. The power of sale by trustees is one of the express powers
usually contained in the debenture or debenture trust deed. If no such power is
given, an application maybe made to the Court for an order to sell.
2. Foreclonre. The trustees may make an application to the Court for an order
of foreclosure, the effect of which is that the borrowers' interest in the assets
charged is completely extinguished and the lender becomes the owner of them.
For an action of foreclosure, it is necessary that all debentureholders of the class
concemed join hands [Wallance v. Evershed (1899) 1 Ch. 891].
3. Appointment of areceiaer. \tVhere there is a trust deed, it often provides that
the trustees may appoint a receiver. If no such power is given, application to
appoint one may be made to the Court in a debentureholders' action. On the
appoinhnent of a Receiver, the assets become specifically charged in favour of
the debentureholders and the power of the company to deal with them in the
ordinary course of business ceases, although the company continues to exist
until it is wound up.
@ Where no deedhasbeen executed
Debentureholders' action: \A/here no trust deed had been executed in favour of
debentureholders, a debentureholder may, on default in payment of principal or
interest, bring an action (called a debentureholders' action) on behalf of himself
and other debentureholders of the same class asking for: (i) a declaration that the
debentures have a charge on the assets; (ii) an account of what is owed to the
debentureholdersi the amount of assets; prior claims, etc; (iii) an order of foreclosure
or sale; (iv) the.appointment of a Receiver.
If a debentureholder owes a debt to the company which is insolvent, the holder
cannot set off his debt against the liability he owes to the company. The rule is that
a person who claims a share in a fund must first pay up every thing he owes to the
fund before he can claim a share lRe Borwn and Gregory Ltd. (1904) 1- Ch.6271.
SEBI has also issued guidelines for disclosure and investor protection pertaining
to debentures.
l2.l0.l\ Fixed and Floating Charges. Fixed charge is a charge on definite or

specific property, i.e., the charge attaches to the property that is identified at the
time when the charge is created, e.g., land, heavy machinery, buildings. The essence
offxrd charge is that tholtgh the possession of the specified asset is with the company but
thelegal titlebelongs to theholdersof the charge.The consequence of this chargeis that the
company cannot dispose of that asset , free of charge, without the consent of the holderc of
the charge. Even if it is disposed of, the holders of the charge will have the first claim
as against the buyer of the property. If company creates a fixed charge on stock in
469 Business Law
trade, company will notbe able to deal in that. This would limit the company's
Powers to borrow. Hence afloating charge, is generally, created on assets such ai stock-
in-trade.
Floating charge, on the other hand, is not attached to definite property, but covers
property of a fluctuating tpe, e.g., stock-in-trade. The characteristics of a floating
charge are: (1) It is a charge on a class of assets, present and future; (2) The class oJ
ordinary course of business, is changing from
e taken to enforce the charge, the company may
arged in the ordinary course of business.
No particular form of words is necessary to create a floating charge. Any words
which show an intention to allow the company to continue to deal with the assets
by sale, lease, mortgage, etc., in the course of its business will create a floating
charge. The advantage, of such charge is that the company may continue to deal
with the property charged.
Co. (1885) 29 Ch.D.7151. But a company cannot, howeve{, create a further floating
charge on the same assets to rank in priority to or pari pasw with the existing
charge unless such power has been reserved by the company lRe Benjamin Cope €t
Sons (7974) 1 Ch. 800)1. Before crystallisation of the floating charge a company may
even sell the whole of the undertaking if that is one of the object specified in the
memorandum lRe Borax Co. (1901) 1 Ch.3261. Where, however, a specific charge is
made expressly subject to floating charge, the former is postponed as from the ilate
when the later is crystallised lRe Robert StEhenson I Co. Ltd. (1913) 10ZL.T. 331.
A floating charge can be created only by an incorporated body. It is created by a
deed and must be registered with the Registrar of Companies.
Crystallisation of afloating charge. A floating charge crystallises andbecomes fixed

in the following circumstances: (1) when the company goes into liquidation; or
(2) \a/hen the company ceases to carry on business; or (3) When the debenture
holders take steps to enforce their security,e.g.,by appointing a Receiver, etc., on
defaultby the company to pay principal and interest.
Effects of winding up onfloating charge. (A) According t o s.723,the debts, which are
entitled to a preferential payment in the event of the winding up of a company
under s. 530, get priority over the claims of the debenture holders having a floating
charge, even though the company is not in the course of winding up. (B) \A/here
company is being wound up, a floating charge on the undertaking or property of
the company created within 12 months immediately preceding the commencement
of the winding up shall be void unless: L, The company was solvent immediately
after the charge was created; and 2. The amount was paid to the company in cash
at the time of or subsequer-rt$ to the creation of and in consideration for, the charge
together with interest on that amount at the rate of 5% per annum or such other
rate as prescribed by the Central Govemment.
The object of the above provision is to prohibit insolvent companies from creating
any floating charge on their assets with a view to secure past debts to the prejudice
of unsecured creditors.
12.\0.12 Registration of Charges (s.125). Section 125 requires that the following
charges must be registered with the Registrar within 30 days after the date of their
creation. (i) a charge for the purpose of securing any issue of debentures; (ii) a
charge on uncalled share capital of the company; (iii) a charge on any immovable
property; (iv) a charge on any book debts of the company; (v) a charge not being a
pledge on any movable property of the company; (vi) a floating charge on the
undertaking or any property of the company including stock in trade; (vii) a charge
on calls made but not paid; (viii) a charge on a ship or any share in a ship; (ix) a
charge on goodwill, or a patent or a licence under a patent, or a trade mark or a
licence under a trade mark; or a copyright or a licence under a copyright.
The Registrar may, however, allow the registration of a charge within 30 days next
following the expiryof the said period of 30 days onpaymentof specified additional
fee, if the company satisfies the Registrar that it had sufficient cause for not filing
the required particulars or instrument, etc., within that period.
It is the duty of the company to send the above particulars to the Registrar but
registration may also be effected on the application of the creditor. The creditor
may in such a case recover the registration fee from the company (s.134).
Ef f ect of non-registration
(1) In case a registrable charge is not registered within the prescribed tirrte, it
becomes void (i) against the liquidator; and (ii) any creditor of the company.
Howeveq, the charge shallnotbe void against a purchaser of the properties charged
IS t at e B ank of India a. Vishw anir ay at ( P ) Lt d. (7987) 3 Comp. L.J. 77 7].
(2) However, the debt, in respect of which the charge was given remains valid,
that is, it can always be recovered as an unsecured debt.
(3) Another effect of non-registration of a charge is that the money secured thereby
becomes immediately payable.
Besides, company and every officer may be subjected to a penalty upto Rs 500 for
every day during which the default continues.
12.10.13 Miscellaneous Provisions as regards Charges

I. Date of notice of charge (s.126). \Nherc any charge on any property of a company
required to be registered under s.125 has been so registered, any person acquiring
such property or any part thereof or any share of interest therein shall be deemed
to have notice of the charge as from the date of such registration.
470 Business Law
2. Register of char ges to be kept by registrar ( s. 1 30). The Registrar shall with respect
to each company cause to be kept a register containing all the charges requiring
registration and shall on payment of the prescribed fee, cause to enter in the Register
with respect to every such charge the following particulars: (i) the date of its creation;
(ii) the amount secured by the charge; (iii) short particulars of the property charged;
and (iv) the persons entitled to the charge.
In case of a charge to the benefit of which the holders of a series of debentures are
entitled, the particulars to be entered in the Register are: (i) the total amount secured
by the whole series; (ii) the dates of the resolutions authorising the issue of the
series and the date of the covering deed, if any, by which the security is created or
defined; (iii) a general description of the property charged; (iv) the names of the
trustee, if any, for the debentureholders; and (v) the amount or rate per cent of the
commission or discount; if any, paid to any person subscribing or procuring
subscriptions for any debentures of the company (Ss.128 and 129).
The Register so kept shall be open to inspection by any person on payment of a fee
of one rupee for each inspection.
3. lndex to register of charges (s.131-). The Registrar shall give a certificate under
his hand of the registration of any charge registered with him, stating the amount
thereby secured. The certificate shallbe conclusive evidence that the requirements
of the Act as to registrationhavebeen complied with.
4. Modification of charges (s.L35). Section 135 provides that whenever the terms
or conditions, or the extent and operation, of any charge registered are modified, it
shall be the duty of the company to send to the Registrar the particulars of such
modification within 30 days.
It may be noted that under s.134, a charge can be filed by the company or by any
person interested in the charge. However, under s.135, modification of a charge
can only be filed by the company.
5. What constitutes modification. The term 'modification' includes variation of

any of the terms of the agreement including variation of rate of interest which may
be by mutual agreement or by operation of law. Even if the rights of a charge holder
are assigned to a third party, it will be regarded as a modification. Likewise, partial
release of the charge on a particular asset or property, shall amount to modification
of the charge.
6. Thememorandumof satisfaction(5s.1.38 tol-40). Onpaymentorsatisfactionof

any charge, in full, the company must notify the fact to the Registrar within 30
days from the date of such payment or satisfaction. The Registrar shall, on receipt
of such intimatiory cause a notice to be sent to the holder of the charge calling upon
to show cause within a time specified in such notice (but not exceeding 14 days) as
to why paymentor satisfaction shouldnotbe recorded as intimated to the Registrar.
If no cause is shown, the Registrar shall order that a memorandum of satisfaction
shall be entered in the Register of Charges.
But if cause is shown, the Registrar shall record a note to that effect in the Register
and shall inform the company that he has done so. The Registrar may also record
memorandum of satisfaction even if no intimation has been received by him from
the companyon getting evidence to his satisfaction that any registered charge has
been satisfied in whole or in part.
\rVhere the Registrar enters a memorandum of satisfaction as above, he shall fumish

the company with a copy of the memorandum of satisfaction (s.1a0).
or some other sufficient cause; or (c) is not of a nature as to prejudice the position
of creditors or shareholders of the company; or (d) that on other gto.tnds it is yust
and equitable to grant relief.
time for the registration of a charge, the order shall not

d in respect of the property concemed before the charge
If any officer of the company lcrowingly omits or wilfully authorises or permits the
omission of any of the above entries, he shall be punishable with fine which may
extend to Rs 5,000.
ts made by a
name. There
follows:
1' If any other law, for the time being in force, permits, the investments of the
company may be made and held by it in its own name.
company itself and of each such person or nominee or in the name of each such
director.
3. A company may hold any shares in its subsidiary in the name or names of
any nominee or nominees of the company to ensure that the number of members of
any subsidiary is not reduced, where it is a public company, below z and where it
is a private company, below 2.
472 Business Law
4.If the investrnents are made by a company, whose principal business consists
of the buying and selling of shares or securities, the company may hold its
investments in any othername. Securities include stock and debentures.
5. A company may deposit with a bank, being the bankers of the company, arry
shares or securities for the collection of any dividend or interest payable thereon.
6. A company may deposit, or transfer to, or hold in the name of, the State Bank
of India or a Scheduled Bank, being the bankers of the company, shares or securities,
in order to facilitate the transfer thereof. The company can do so only for period of
6 months. If the transfer of such shares or securities does not take place within 6
months, the company shall, as soon as practicable after the expiry of thatperiod of
6 months, have the shares or securities re-transferred to it from the State Bank of
lndia or the Scheduled Bank or, as the case may be, again hold the shares or
securities in its own name.
7. A company may deposit with, or transfer to, any person any shares or
securities, by way of security for the repayment of any loan advanced to the
company for the performance of any obligation undertaken by it.
The certificate or letter of allotment relating to the shares or securities in which
investrnents have been made by a company shall, except in cases (4) to (7) referred
to above, be in the custody of the company or with the State Bank of India, or a
Scheduled Bank, being the bankers of the company.
Vy'here any shares or securities in whichinvestnmts havebeenmadeby a company
are not held by it in its own name, the company shall enter in a register maintained
by it for the purpose: (a) the nature, value and such other particulars as may be
necessary fully to identify the shares or securities in question; and (b) thebank or
person in whose name or custody the shares or securities are held. The register
shall be open to the inspection of any member or debentureholder of the cbmpany.
If any inspection of the register is refused, the Company Law Board may, by order,
direct an immediate inspection of the register.
If default is made in complying with s.49, the company and every officer of the
company who is in default, shall be punishable with fine which may extend to
Rs 50,000.
PART 11 - GENERAL MEETINGS AND PROCEEDINGS

l2.l1^.l Need for Meetings. A company is an artificial person and therefore, cannot
act itself. It must act through some human intermediary. The various provisions of
law empower shareholders to do certain things. They are specifically reserved for
them to be done in company's general meetings. Section 291 emPowers the Board
of Directors to manage the affairs of the company. In this context meetings of
shareholders and of directors becomes necessary. In this Part meetings of
shareholders are taken up and later in Part 14, meetings of directors are discussed.
The Act has made provisions for following different types of meetings of
shareholders: (i) Statutory Meeting; (ii) Annual General Meeting; (iii) Extraordinary
General Meeting; and (iv) Class Meetings.
l2.ll.2 statutory Meeting (s.155). Some of the most important legal provisions
regarding the statutory meeting are:
public company having a share capital. A
egistered without share capital is under no
(ii) It must be held within a period of not less than one month and not more than
six months from the date at which the company is entitled to commence business.
(iii) At least 21 days before the day of meeting, a notice of the meeting is to be sent
to every member stating it to be a Statutory Meeting.
The statutory Report contains (a) the total number of shares allotted - fully paid-
up and partly paid-up; allotted for cash and for consideration other than cash;
(b) the total cash received by the company in respect of all allohnents; (c) an abstract
of receipts and payments up to a date within seven days of the date of the Report
and the balance of cash in hand; (d) any commission or discount paid on the iisue
of shares or debentures; (e) the names, addresses and occupations of directors,
auditors, managers and the secretary of the company; (f) the extent to which any
underwriting contract has not been carried out; (g) the arrears due on calls from
every director; (h) the particulars of any commission or brokerage paid to any
director or manager on the issue of shares and debentures.
The Statutory Report is required to be certified as correct by at least two directors,
one of whom shallbe the managing director, where there is one. Also, the auditbrs
of the company shall certify that part of the Statutory Report which relates to the
shares allotted, each received thereon and the receipts and payments and the
balance of cashin hand.
(v) The members present at the meeting may discuss any matter relating to the
formation of the company or arising out of the statutory report without previous
notice havingbeen given.
and the adjoumed meetinghas the same powers
umed meeting, therefore, may do anything which
ginalmeeting.
with the provisions of s.155, the following
rector or other officer of the company who is
fine upto Rs 5,000; (b) The Registrar or a
contributory may apply to the Court for the winding up of the company [s.a39].
Howeveq, the Courtmay, instead of passing anorder forwindingup, give directions
for the holding of the meeting or filing of the Statutory Report.
474
Business Law
(viii) It should be remembered that this meeting is required tobe held
only once in
the life time of a public company, having a sha-re .rpitul.
72.17.3 Annual General Meeting (AGM) (Ss.166-16g). As the name
signifies, this
is an annual -T!1"g of a company. The provisions rerating to this
rieeting are
summarised as follows:
(1) Every c.gmpar]y, whgtle.r public or private, having a share capitar
,. or not,
limited or unlimited must hold this meeting.
(2) The meeting must be held in each calendar year and not more than fifteen
ths by taking permission of the Registraq,
The Company Law Department has expressed the view that the Registrar
can
grant extension of time, for special reasons, upto a maximum period ofi months,
even if such extension allows the company to hotd its AGM blyond the
calendar
year. However, the said extension shallbe granted only if the application
therefor
is made to the Registrar before the expiry of the period p". ,.ioo 1r;.
"r
(3)meetin
The ich is not a public holiday, (ii)
during
business hours, of the .o-puny or at some other
place within the which the regisiered office is situated.
[s.1.66(2)].
(4) The business to be transacted (s.123) at such a meeting may comprise of:
(i) Ordinary business which relates to the following matters: (a) consideration
of accounts,balancesheet and the reports of the BoarJ of Drectori ana e"aitors;
(b) declaration of dividend; (c) appointrnent of directors in the place
of those
retiring; and (d) appointrnent of auditors and fixation of their remuneration.
(ii) Anybusiness other than ordinary business transacted at the meeting will
-with
be deemed to be special business. regard to all special businei, an
Explanatory statement is required to be anneied to the notice.
(5) \tVhat about a situation where annu
before the AGM? b:r case annual accounts
AGM, it is open to the company concem
date when the annual accounts are
consideration of annual accounts is only c
AGM, directors are under a statutory obligation to hold the meeting. The proper
course shall be meeting and then adjoum it to a suitable aateior
considering the meeting must, however, be held within
themaximumti .L66.
(6) The combined reading of Ss.166 and 210 requires compliance with the
following: (a) There must be one meeting held in each calenda. year. (b) Not more
than 15 months must elapse between one general meeting and another. (c) The
period of 15 months may be extended to 18 months by the Registrar. (d) Except in
the case of the first AGM, the accounts must relate to a period beginning with the
day immediatelyafter the period forwhich they were submitted and ending with
a day which must not precede the day of the meeting by more than 6 months; or 6
months and the extension granted by the Registrar, i.e., a maximum period of 9
months.
(7) The company must give twenty-one days notice to all the members of the
company and the auditor. A shorter notice may be held valid if consent is accorded
to by all the members entitled to vote at the meeting (s.171). Such a consent may be
given before the meeting is held or after the resolutions are passed. A copy of
directors' report on the company's position for the year together with copy of the
audited accounts and auditors'report must accompany the notice. Also a proxy
form must be attached with the notice, on which it shall be specifically mentioned
that a member entitled to vote is entitled to appoint Proxy, and Proxy need not be a
memberof thecompany.
The notice must specify the place and the day and hour of the meeting and shall
contain a statement of the business to be transacted thereat 1s.172(1)).
If the time of holding the meeting and other essential particulars required by the
section are not specified in the notice, the meeting will be invalid and all resolutions
passed thereat will be of no effect.
The notice mustbe given to every menrbel, legal represmtative of a deceased member
or assignee of an insolvent member and to auditor or auditors [s.172(2)].
(8) If default is made in holding the meeting, the CLB may, on the application of
any member of the company, call or direct the calling of the meeting. If the company
fails to hold the meeting either originally or when directed to do so by the CLB,
then the company and every officer of the company who is default shall be
punishable with fine upto Rs 50,000; and in the case of a continuing default, with
a further fine of'Rs 2500 per day during the continuance of default (s.168).
Certain typical issues in respect of AGM

1. Whether AGM can be called on a public holiday. Section 1.66(2), inter alia,
provides that every AGM shall be called on a day that is not a public holiday. The
Department of Company Affairs has opined that it is a mandatory provision.
However, Bank holidays (for purposes of closing) though declared as public
holidays under the Negotiable Instruments Act, 1881 shall notbe treated as public
holidays for the aforesaid purpose. Thus, 31"t March and 30th Sept. shall not be
considered as public holidays.
In the following cases, however, AGM may be held on a public holiday:
(i) Section 2(38) provides that if any day is declared by the Central Govemment
to be a public holiday after the issue of the notice convening such a meeting, it
shall not be deemed to be a public holiday in relation to the meeting.
476 Business Law
(ii) Where a public company or its subsidiary has by its articles fixed the time of
its AGM and the day turns out to be a public holiday lproaiso (a) to s.166(2)1.
(iii) \Alhere a public company or its subsidiary has, by a resolution passed in one
AGM fixed the time for its subsequent AGM and the day turns out to be a public
holiday lProaiso (a) to s.166(2)1.
(iv) A priaate cotnpany which is not a subsidiary of a public company may also
[ike a public company or its subsidiary under (ii) and (iii) above] by a resolution
agreed to all the members thereof fix the time as well as the place of its AGM and the
same shallbevalid if thedayhappens tobe apublicholiday lProaiso (b) tos.166(2)1.
(v) A company to whom a licence is granted under s.25 is exempted from the
provisions of s.766(2).
(vi) \A/here the AGM is adjoumed because of lack of quorum, it is to be held on the
same day in the next week at the same time and place (gvQ.br case the day comes
to be accidentally a public holiday, it shall not amount to contravention of s.166(2).
2. It is not obligatory to advertise notice of meetings h the newspapers. Howeveq,

as an abundant precaution, the company may advertise in the newspapers to
avoid objection from such of the shareholders as reside outside India and who
incidentally may not receive the notices served through post.
3. Voting rights of members shall be determined as at the date of the meeting
and not as they would/have been if the meeting had been held within the prescribed
time.
4. A meeting beyond statutory time cannot be said to be void or illegal. If the
CLB does not extend the date of holding the AGM u/ s 167 , the Directors shall be
subjected to increasingpenaltybutthe meeting shallbe a valid meeting. otherwise,
the position in law would become impossible
5. The Board of Directors has the power to cancel or postpone a

meeting convened, though it cannotbe exercised except for bonafide and proper
reasons,
l2.l1,4 Extra-ordinary Meeting (EGM) - s.159. Clause 47 of rable A (schedule -

I) provides that all general meetings other than AGMs shall be called the EGMs.
The legal provisions as regards such meetings are:
L. EGM is convened for transacting some special or urgent business that may
arise in between two AGMs, for instance, drange in the objects or shift of registered
office or alteration of capital. All business transacted at such meetings is called
special business. Therefore, every item on the agenda must be accompanied by an
'Explanatory Statement'.
2. An EGM may be called: (i) by the Directors of their own accord; (ii) by the
Directors on requisition; (iii) by the requisitionists themselves; (iv) by the CLB. The
Board of Directors may call a general meeting of the members at any timeby giving
not less than 21 days notice. A shorter notice may, however, be held valid if consent
is accorded thereto by members of the company holding 957o or more of the voting
rights (s.171). The Board of Directors must convene a general meeting upon
request
or requisition if the following conditions are satisfied (s.169):
days of the receipt of the requisition call the meeting giving at least 21 days
notice fixing the meeting within 45 days of the receipio] the iequisition.
osed is a special resolution then the requirements of

wlth, viz., it should be so described and explanatory
Any reasonable expenses incurred by the requisitionists, as aforesaid, shall be

repaid to them by the company and the same shall be recouped from directors at
fault.
478 Business Law
In Life lnntrance Corporation of lndia a. Escorts Ltd. (1986) 60 Comp. Cas. 548, it was
held that every shareholder of the company has the right, subject to compliance
with the provisions of the Act, to requisition an EGM. He cannot be restrained
from calling the meeting and is not bound to disclose his reasons for resolution
proposed. Section 773(2) only casts a duty on the management to disclose in an
explanatory statement all material facts relating to the resolutions proposed.
Meetingby therequisitionistsmustbe held in the samemanner asnearly as possible,
in which the meetings are to be called by the Board. However, where the registered
office is not made available to them for holding the meeting, they may hold the
meeting elsewhere lR. Chettair o. M. Chettair (1951) 21 Comp. Cas. 931.
Certaintypicalpoints
1. The right of members to requisition a meeting is not lost only because a
receiver has been appointed in respect of their shares lBalkrishana Gupta a. Swadeshi
Polytex Ltd. (1985) 88 Comp. Cas. 5531.
2. Where requisitioned meeting was called only to interfere with a pending
petition u/s 391 and in an attempt to prevent sanction by the Court of a scheme of
amalgamatiory theholding of suchmeetingcouldbe restrainedbytheCourtlCentron
Industrial Alliance Ltd. a. P.K. Vakil (1985) 57 comp. Cas. 121.
3. An institutional shareholder, say L.LC., has the same rights as every other
shareholder to requisition an EGM for the purpose of considering removal of a
certain number of directors. The institution cannot be restrained from doing so on
the ground that reasons for the proposed removals have not been stated (Lfe
lnsurance Corporation of lndiav. Escorts Ltd. (7986) Tax LR 1826 (SC)1.
4. Whether preference shareholders can attend a meeting in which no business
affecting them is to be conducted and what are their rights in such a meeting.
Under s.172(2)(i), notice of every meeting of the company is required to be given to
every member of the company. From this it maybe inferred that although there is
no express provision to that effect every member of a company is entitled to attend
every general meeting. However, it is clear from s.87(2) (a) that the holders of
preference shares do not have any right to vote on resolutions placed before the
company, which do not directly affect the right attached to the preference shares.
Further, in respect of resolutions in regard to which preference shareholders have
no right to vote they have also no right to take part in the discussion, even though
they have the implied right by virtu e of s.772(2) (i) to attend the meeting.
5. Can an EGM be held in a State other than the State of the company's registered
office? InBharat Commerce €t Indrstries Lfd. v. R.O.C., it was held, that it may be so
held. But the power mustbe excisedbonafide.
Powers of CLB (s.18O.If for any reason it is impracticable to call a meeting of the
company, other than an AGM, the CLB may direct the calling of the meeting: (a) on
its own motion; (b) on an application of any director; (c) on an application of any
member entitled to vote at that meeting.
For the aforesaid meeting, the CLB may give directions in respect of the place, date
and the manner in which the meetingbe held and conducted. It may also give such
ancilliary or consequential directions as it thinks expedient, including a direction
that one member present in person or proxy shall be deemed to corutitute a meeting.
The main principles that should guide CLB as regards ordering a meeting to be
called were spelt out in the matter of Ru ttonjee & Co. Ltd. - a Calcutta case, as follows:
1. The CLB would not ordinarily interfere with the domestic management of a
company which should be conducted in accordance with the articles.
2. The discretion granted under s.186 should be used sparingly with caution
so that the CLB does not become either a shareholder or director of the company
trying to participate in the internal squabbles of the company. The CLB should
ordinarily keep itself aloof from participating in quarrels of rival groups of directors
or shareholders.
3. The word 'impracticable'means impracticable from a reasonable point of

vlew.
4. The CLB should take a common sense view of the matter and must act as a
prudent man of business.
5. \A/here doubts and controversy as to who are directors arise and rival groups
convene their own meetings, the situation may make the meeting impracticable.
6. The power should be exercised upon consideration of all the facts and
circumstances of the case.
72.11.5 Class Meetings (s.107). When it is proposed to alter, vary or affect the
rights of particular class of shareholders (e.g., where accumulated dividends on
cumulative preference shares is to be cancelled) and it is not possible to obtain the
consent in writing, of the holders of 3/4th of the issued shares of that class, a
meeting of the holders of those shares may be called. Such a meeting is commonly
known as a 'class meeting'. It should be noted that all resolutions in a class meeting
must be passed as special resolutions.
The holders of at least 10 percent of the issued shares of that class who did not
consent in favour of the resolution m ay apply to the Court within 21 days to have
the resolution cancelled and where such application is made, the resolution shall
not have effect unless and until it is confirmed by the Court.
72.11.6 Matters Relatingto General Meetings

Notice of the meeting (s.777). Every member of the company is entitled to a notice
of every general meeting. A notice of not less than 2L days must be given in writing
to every member. However, a shorter notice for AGM will be valid if all members
entitled to vote give their consent. In case of other meetings, a shorter notice will be
valid if consent is given by members holding at least 95 per cent of the paid-up
capital carrying voting rights, or representing at least 95 per cent of the voting
power (s.771).
A private company not being a subsidiary of a public company can make its own
provisions by its articles and exclude provisions of s.777.
480 Business Law
The notice may be given to members either personally, or sending by post to him at
his registered address. A notice of a meeting may also be given by advertising the
same in a newsPaPer circulating in the neighbourhood of the registered office of
the company.
The secretary should see that proper notice of meeting must be given to all persons
who are entitled to receive it. Animproper or insufficientnotice, as well as ibr"t ce
of notice, may affect the validity of a meeting and render the resolutions passed at
the meeting ineffective. Also the notice should make a full and frank disilosure to
the members of the fact on which they would be expected to vote.
Agenda of the meeting. The word 'agenda' indicates the business to be transacted
at a meeting. It is prepared for all kinds of meetings in order that the meeting may
be conducted systematically. The agenda is generally prepared by the secretiry in
consultation with the chairman. It is drafted in such a manner as to help the
chairman to conduct the meeting smoothly. In drafting the agenda, the secr-etary
should bear in mind the following: (i) the agenda should be clear and explicii;
(ii) it should be drafted in a summary manner; (iii) all items of routine buiiness
should be put down first and the contentious matters later; and (iv) all items of
similar nature should be placed in a continuous order.
The foregoing points are important because when a copy of the agenda is sent to a
membel, he is in a position to form a definite opinion of the subject matter to be
discussed at the meeting. while preparing the agenda, care should be taken for the
order of the matters to be discussed, as the order of the agenda cannot be altered
except with consent of the meeting. sometimes, the agenda is drafted in such a
marurer that it can serve the purpose of minutes later on. Some space is left opposite
each agenda item and the secretary writes it up during the meeting; this prictice is
very common in the preparation of agenda for Board meetings.
sometimes, companies maintain an Agenda Book, wherein the agenda items are
entered. It is placed before the chairman of the meeting and is regarded as the
agenda' Those placed before the members or other directors are copies only. Later,
the Agenda bookbecomes a permanent record for fufure reference.
Proxy (s.776).In the case of a company, every member of a company entitled to

attend and vote at a meeting has the right to appoint another person, whether a
member or not to attend and vote for him. The term proxy is applied to the person
so appointed. Also, it refers to the instrument by which a member of a company
appoints another person to attend the meeting and vote on his behalf. However,
the proper term for this document is proxy form or proxy paper. The following
points about proxies are to be noted: (i) A proxy has no right to speak at the
meeting. (ii) A proxy need not be a member of the company. (iii) The instrument
appointing a proxy must be in writing and signed by the appointed. (iv) The proxy
form mustbear the date of the meeting. (v) No company can make it compulsory for
any one to lodge proxies earlier than 48 hours before the meeting. (vi) A proxy may
be revoked before the person appointed has voted. (vii) A proxy can demand a
poll. (viii) A proxy cannot vote against the wishes of his appointer.
Secretaialworkasregardsproxies. (a) Scrutinise theproxy forms to see whether they
complywith theprovisions the Act, and thebye-laws and rules of the organisation.
(b) Any proxies received after the stipulated time limit must be returned with a
note that they cannot be accepted. (c) Any irregularities in proxy forms should be
reported to Chairman of the meeting, as he is the final authority to accept or reject
them. (d) Each correct proxy form is countersigned by the secretary. (e) Enter the
correct proxy forms in Register of profes. (f) Retum the proxy form to the member
together with an Admission card in the name of the proxy.
12.71.7 Quorum for Meeting. A number of members of any body sufficient to
transact business at a meeting is a quorum. Stated differently, a quorum is the
minimum number of persons whose presence is necessary for the transaction of
business. The quorum for meetings is generally fixed by the Articles of the company,
or bye-laws and the rules of the association or society. Any resolution passed
without a quorum is invalid. In fact, if no quorum is present, then there is no
meeting and the proceedings are invalid.
Section 174 provides that unless otherwise so provided in the Articles, in the case
of a public company, the quorum is five members personally present and in the
case of a private company, it is two members personally present. If Quorum is not
presentwithin %hour, the meeting shallbe adjourned to the same day next week
at the same time and place. The Board may determine some other time, day and
place but it should be within the town, city or village of the registered office.
Quorum - certain ty pi c al is sue s
1. Can a single member present constitutes a valid quorum? A single member

presentcannotbyhimself constitute a valid quorum exceptwhere the Act expressly
so provides (vide Ss.167 and 186). Thus, where the meeting is convened by CLB
u/s'1.67 or L86, it may give any directions including a direction thal a single
member present in person or proxy shall constitute a valid meeting.
2. Presence of Preference Shareholders - whether to be counted for quorum. If
business proposed to be transacted at a general meeting does not include any item
or resolution proposed tobe passed, which direct$affectthe rights of the preference
shareholders, their presence should not be taken into account for purpose of
determining the quorum, but where the subject matter includes any resolution in
which the rights of preference shareholders are directly affected, their presence
should be taken into account for the purpose of the quorum.
Chairman of the meeting. The chairman is a necessary element of a meeting. His
position is of great importance. His many duties include the following:
(i) He must act at all times bona fide and in the interest of the company as a
whole.
(ii) He must ensure that the meeting is properly convened and constituted.
(iii) He must ensure that the provisions of the Act and the Articles are
observed.
482 Business Law
(iv) He should see that the business is taken in the order set out in the agenda,
unless subsequently altered by the consent of the meeting.
(v) He should ensure that the business is within the scope of the meeting.
(vi) He must preserve order, conduct proceedings properly and take care that the
sense of the meeting is ascertained with regard to every question before it.
(vii) It is his duty to see that the majority do not refuse to hear the minority; but
when the views of the minority have been heard, the chairman can with the sanction
of a vote of the meeting, declare the discussion closed and put the question to vote.
(viii) He must not permit any discussion until a motion or proposition is duly
proposed and seconded, nor must he permit any irrelevant discussion.
(ix) He must exercise correctly his powers of adjoumment and of demanding a
poll.
(x) He must exercise his casting vote bona fide in the interest of the company.
This casting vote is a second vote of the Chairman, to be used only when the vbting
for and against the motion is equal. It is advisable to use the casting vote to defeat
themotion.
(xi) The chairman should always stand to address the meeting except in
committees and even there it is often desirable.
(xii) The chairman should follow the appropriate procedure, however, small and
friendly the meeting is.
(xiii) The chairman should ensure that the meeting begins punctually and closes
formally.
(xiv) The chairman should insist that all questions, comments and observations
made by any member must be addressed to the chairman and not directly to the
speaker or to anyone else in the meeting.
(xv) The chairman should work in close contact with the secretary.
1,2.ll.8 voting (Ascertaining the sense of the house). Unanimity on all matters
before a meeting is always not obtained. Lr the absence of unanimity, the chairman
wants to know the wishes of the persons present therein. This is known as
ascertaining the
before the house
by the chairman
members. They are as follows: (i) By acclamatiort (ir) By voice vote, (iii) By division,
(iv) Byshowof hands, (v) Byballotand (vi) Bypoll.
(i) By acclamation.tdhenpersons present in a meeting indicate their approval or
disapproval of the motion by clapping of hands, cheering or applause, it is known
as voting by acclamation. This method is adopted where there is a unanimous
approval or disapproval. For ex generally
adopted by this method. But th is a sharp
difference of opinion among th
$) By aoice aote.In this case, the Chairman puts the proposition before the
meeting and persons who are in favour of the proposition say 'yes' and those who
are against it say'no' . The Chairman hears both the voices'yes' and 'no' and
gives his decision after ascertaining the numbers of 'yes' and 'no'. At this stage, a
member who is dissatisfied with the Chairman's decision on the basis of voice
vote may demand a vote by show of hands.
(iii) By diaislon. Under this method, the Chairman requests the members present
in the meeting to divide themselves into two blocks-one in favour of the
proposal and another against it. The Chairman, with the help of the Secretary,
counts the number of persons in favour and against the proposal and gives his
verdict.
(iv) By show of hands.Under this method, the Chairman asks all those in favour of
the resolution to raise their right hand and when that number is noted, asks all
those against to do likewise. The Chairman then declares the result of the voting
indicating whether the proposal has been carried or lost.
(v) By ballot. Under this method, every person present records his vote on a
ballotpaper and deposits itintheballotboxprovided forthatpurpose. Thecounting
of ballots cast for and against the motion reveals the results. This method ensures
secrecy in casting votes.
(vi) By poll.ln company meetings, voting by poll is according to the nurnber of
sharesheldby a member. The votingby show of hands maynot always reflectthe
opinion of members upon a value basis. Also, there may be a number of proxies
who can vote only by poll and not by show of hands.
Rules inrespect of aoting. As per the provisions of the Act, rules regarding voting
maybenoted as follows:
(i) Every holder of equity shares shall have a right to vote [s.87(1)].
(ii) Right of an equity shareholder to vote cannotbe prohibited on the ground
that he has not held his shares for any specified period before the meeting or on
anyother ground (s.182).lnAnanthalakshmiv.H.l. €rF.Trust, AIRl9S7Mad.927,
a provision in the articles of a company that only those shareholders would be
entitled to vote whose names havebeen there on the register for two monthsbefore
the date of the meeting was held to be in contravention of the Act. Section 182,
however, does not apply to a private company which is not a subsidiary of a
public company.
The only ground on which the right to vote maybe excluded is non-payment of
calls by a member or other surns due against a member or where the company has
exercised the right of lien on his shares (s.181).
(iii) A preference shareholder shall have the right to vote only on resolutions
which directly affect the rights attached to his preference shares [s.87(2)].
IrVhere the directors proposed to increase the shares of the company by issue of
further equity shares, by capitalising an amount standing to the credit of the
484 Business Law
company's reserve account and applying the same in paying-up the new equity
shares and distributing the same as fully paid among the equity shareholders, the
proposed resolution was held to affect the rights of the preference shareholders
and could, therefore,be only carried out with their sancnon[Re lohn Smith's Tadcaster
Brnsery Co. Ltd. (1952) 2 All ER 7511.
However, rights of preference shareholders are not 'affected' by the issue of
additional ordinary shares, though their voting rights are thereby weakened lWite
v.Bristol Aeroplane Co. Ltd. (1953) I All ER40 (CA)].
(iv) Voting rights of a member are not affected by the fact that his shares have
been attached or pledged or a receiver has been appointed lBalkrishnan Gupta a.
Swadeshi Polytex Ltd. (1985) 58 Comp Cas. 5631.
(v) Voting to be by show of hands in the first instance. Section 177 provides that
at any general meeting, a resolution put to vote shall, unless a poll is demanded
under s.179, be decided on a show of hands. A declaration by the chairman that on
a show of hands, a resolution has or has notbeen carried either unanimously or by
a particular majority and an entry to that effect in the Minutes Book of the company,
shall be conclusive evidence of the fact. No proof of the number or proportion of
the votes cast in favour of or against such resolution shall be required (s.178).
Demand for poll: Section 179 provides that before or on declaration of the result of
the voting on any resolution on a show of hands, a poll may be ordered to be taken
bytheChairman of themeetingof his ownmotion and shallbe ordered tobe taken
by him on a demand made in that behalf by the person or persons specified below,
Yh.,
(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 1 / 1'0th 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,
present in person or by proxy if not more than seven members are personally
present and by two members present in person or by proxy, if more than seven
members are personally present;
(c) in the case of any other company, by any member or members present in
person or by proxy and having not less than l./10th of the total voting power in
respect of the resolution.
The chairman of the meeting may regulate the manner inwhich thepoll should be
taken. He must appoint two scrutinisers to scrutinise the votes given on the poll
and to report thereon to him. Then the chairman will declare the result.
Votingby companies and goaernment as members (Ss. 187-187-A). \A/here a company

or a corporation is a member of another company, it may attend the meetings of the
other company through a representative. The representative mustbe appointed by
a resolution of the Board of Directors or the other goveming body. Where the
Central Govemment or a State Govemment is a member, the President or the
Govemor of the State, as the case maybe, has the power to appoint representatives
to attend meetings of the company. The person nominated shall hold the position
of a proxy.
12.11.9 Motions, Resolutions and Amendments. Decisions of a company are
taken by resolution of its members, passed at their meetings. Also, the Board of
Directors takes certain decisions at its meeting by passing certain resolutions after
due deliberations.
The term 'mortion' indicates a proposition made at a meeting by any member.

Such a motion may be passed without any change or modification. But if some
members feel that the motion in the form proposed needs some change or
modification, they may move an amendment. A motion when passed with or
without amendment is called a resolution.
A motion should always be in writing and before it is brought before the meeting,
the necessary notice must be given. A person proposing a motion is called the
mover and the motion should be signed by him.
An amendment is proposed alteration or modification in the terms or wording of
the motion which is yet to be considered by the meeting. An amendment to a
motion may - (i) add some new words to the motion, or (ii) replace some words of
the motion by some other words, or (iii) drop some words from the motion, or
(iv) change the place or position of words or certain phrases in the motion.
An amendment to be valid should comply with the following rules: (a) The
amendment should always be worded in the affirmative and should be put in
writing. (b) It should be seconded. (c) It should notbe a counter proposal. (d) If the
amendment is carried, the chairman should incorporate the same in the main
motion. (e) \A/hen the amended motion is put to the meeting, itbecomes a substantive
motion and when passed, it becomes a resolution. (f) An amendment cannot be
withdrawn without the permission of the meeting.
Then these are formal motions. They are also known as 'procedural'or'dilatory'
motions as they are concerned with the procedure at a meeting and are meant for
the purpose of interrupting the proceedings. Formal motions are in addition to the
amendments which intem.rpts the proceedings of the meeting. They take precedmce
over all other motions and need not be in writing. Also they do not require any
notice. A member may move such a motion during the proceedings of the meetings.
For example, a motion may be moved by a member with the object of either:
(i) dropping any item on the agenda; (ii) adjouming the meeting; (iii) applyine
closure to the meeting; (iv) adjouming the debate on a motion.
Once the motion has been put to the members and they have voted in favour of it,
it becomes a resolution. [r the case of a company, there are three kinds of resolutions:
(i) ordinary resolution; (ii) special resolution; (iii) resolution requiring special notice.
Ordinary resoltttion [s.189(1)]. When a motion is passed by simple majority of the

members voting at a general meeting, it is said to have been passed by an ordinary
486 Bushess Law
resolution. In other words, votes in favour of the resolution are more than
50 per
cent.still in other words, a resolution shall be an ordinary resolution where the
votes cast in favour of the resolution are more than the votes cast against the
resolution. According to s.189(1), "A resolution shall be an ordinary iesolution
when at a general meeting of which the notice required under the Act has been
how of hands, or on poll, as the case may
g the casting vote, if any, of the chairman)
allowed,byproxy,exceedthevotes,o"#""J:"ril:;f,:i"Hr:l:lr?ffii:::
so entitled and voting."
All matters which are not required either by the Act or the company,s articles to be
done by a special resolution can be done by means of an ordinary resolution. some
of the cases in which only ordinary resolution is required. are: alteration of
authorised capital, declaration of dividend, appointment of auditors, election of
directors.
Special resolution[s.I89 (2)]. A resolution is a special resolution in regard to
which:
(a) th9 intention to propose the resolution as a special resolution has been
specifically mentioned in the notice calling the get e.ul meeting; (b) 21 days notice
has been duly given for calling the meeting; (c) the number of iotes cast in favour
of the resolution is three times the number cast against it.
Some of the cases in which a special resolution is necessary: alteration of objects

clause; change of registered office from one State to another; aiteration of the Articles;
changes in the name of the company; reduction of share capital.
Resohttion requiring special notice (s.190). Some resolutions require special notice.
The object of special notice is to give the members sufficient time to consider the
proposed resolution and also to give the Board of directors an opportunity to
indicate views, on the resolution if it is not proposed by them but by ro*" oih",
shareholders. Under this, a notice of intention to move the resolution should be
given to the company not less than 14 days before the date of the meeting at which
itis proposed tobe moved. The company in tummust immediately give-noticeby
advertisement in a newspaper or in any other mode allowed by tiJArucles, but
not less than seven days before the meeting. Some of the cases in which a special
notice is necessary are: appointing an audito"a a person other than a retiring auditor;
moving a resolution that a retiring auditor will not be re-appointed; reiroving a
director before his term expires.
Sectionlg2 requires that a printed or a type written copy of each special resolution
should be sent to the Registrar within 30 days thereof.
Passing of resolutions by postal ballot (s. 1924). The companies (Amendment)
Act,2000 has inserted a new section containing following piovisions for passing
of resolution by postal ballot:
(i) A listed comPany may and in the case of resolution relating to such business
as the central Govemment may, by notification, declare to be conducted only by
postal ballot, shalf get any resolution passed by means of a
postal ballot, instead
of transacting the business in general meeting of tn" .or.,puiy.-
(iv) If a resolurion is toby a requi-ste majority of the shareholders by

1ss9nt-9{
means of postal ballot, it shall be deemed lo have been iuly passed
at a general
meeting convered in thatbehalf.
(vi) Ifadefaultis (1)to(4),thecompany

and every officer o e punishable with fine
which may extend arrtt.
(2) The requisition must have been deposited at the registered office
of the
company: (a) at least 6 weeks before the meeting in case of a-requisition requiring
notice of a resolution; and (b) at least 2 weeks before the meetîng ir,
cur" or u.,|
other requisition.
(3) The statement to be circulated does not contain more than 1000 words.
488 Business Law
(a) The requisitionists must have deposited with the company a sum reasonably
sufficient to meet the expense of the requisition.
Exceptions. Section 188 authorises a company not to circulate a resolution or
statement of the requisition in the following cases: (a) The CLB, on the application
of the company or any other aggrieved party, is satisfied that the rights so conferred
are being abused to secure needless publicity for defamatory matters. (b) The Board
of Directors of a banking company considers that the circulation of the statement
would injure the interests of the company.
Registration of certain resolution and agreements [s.192]. A copy of the resolutions or
agreements as enumerated in this section must within 30 days after their passing
or makingbe forwarded to the Registrar of Companies who shall record the same:
72.11.10 Point of Order. A point of order deals with the conduct or procedure of
the meeting. There are four bases upon which points of order can be called:
(a) lncorrect procedure.It implies that some member is contravening the rules of
the meeting, e.g., speaking far longer than the time allowed, proposing an
amendment incorrectly, speaking out of tum and so on.
@) Irrelnancy. \A/hen the speaker is speaking outside the scope of the notice then
it is known as irrelevancy.
(c) Unparliamentary language.It is bad languages, such as personal abuse. Also
it implies something derogatory to the association, place or person.
(d) Transgressing the rules of the organisation. The procedure laid down in the
standing orders of the organisation should be followed. If that is not followed, a
point of order can be raised.
The chairman has to give his ruling or decision on a point of order at once. His
ruling on any matter of procedure is final.
l2.l1'll Minutes of Proceedings of Meeting. Minutes are a record of business
transacted at meetings. Every organisation must keep minutes containing a fair
and correct surunary of all proceedings of general meetings of members and of
Management Committee. It is the duty of the secretary to make this record.
After the meeting is over or as soon thereafter as possible, whilst the proceedings
are still fresh in mind, the secretary should proceed to draft the minutes of the
meeting. Each minute entered on the mhute book should be consecutively
numbered, abbreviated in the margin and indexed. Th"y must be written in the
orderinwhichthebusiness was transacted at the meeting. Minutes maybe recorded
either in the form of narration or conclusions. In the latter case, only conclusions
in theform of resolutions passed are recorded. The practice is to have conclusions
only. Details of the actual discussion and irrelevant talks should be omitted. The
minutes should be clear, compact, unambiguous and definite. Minutes of each
meeting must begin on a fresh page and should be headed with the number, date
and nature of the meeting. The wording of resolutions and amendments mustbe
recorded in full and the name of the proposer and seconder given, whether they
are eventually carried or not.
Elements of Companylaw 4gg
PART 12 - ACCOUNTS, AUDIT AND DIVIDENDS
period of eight years. It is obligatory on companies to maintain accounts on accrual

basis.
It is the responsibility of the Managing Director or manager of the company to

comply with legal requirements relating to accounts, but they may engage a
competent Person and make him responsible for the accounts. On the defiult of
compliance, every person charged with the maintenance of accounts would be
liable to be punished for imprisonment up to six months, or fine up to Rs 10,000 or
withboth.
Section 210 the
comPany u ofit
companies,
Section 211 talks about form and contents of the Balance Sheet and Profit and Loss
Account. The form of the Balance Sheet and the details to be given in the profit and
Loss Account are set out in Schedule VI of the Act. The Balince Sheet and profit
ehalf
If the
s. The
The companies (Amendment) Act, 2000 has inserted sub-section to s. 2]l7. rt

provides that every comPany shall include in its directors report a statement of its
director's resonsibility which shall indicate that (i) in prepiration of the annual
490 Business Law
accounts, the applicable accounting standas had been followed alongwith proper
explanation relating to material departure therefrom; (ii) the directors had foilowed
such policies consistently so as to give a true and fair view of the state of affairs of
the company; (iii) the directors had taken proper and sufficient care for the
ma cords so as to safeguard the company,s
ass ities; and (iv) the directors had prepared
the basis.
Section 272 provides that the Balance Sheet of a holding company should have
arurexed to it certain documents relating to its subsidiary. Some of them are: (i) a
copy of the Balance Sheet of the subsidiary; (ii) a copy of its Directors' report; (iii) a
copy of its Profit and Loss Account.
Section 219 provides that not less than 21 days before the date of the meeting a
copy of the Balance Sheet together with Profit and Loss Account, Auditor's and
Board's reports, must be sent to every member, debentureholdet trustee for the
debentureholder, legal representative of deceased member, official Receiver or
Assignee of an insolvent member, and auditor of the company. However the Act,
gives a choice to the listed companies either to send detailed accounts to its
shareholders or a statement containing the salient features only. \fhere a company
has sent only the salient features of accounts to its shareholders, it must send a
copy of the detailed accounts free of cost to a shareholdeq, who demands the same.
Furthel accounts and documents need notbe sent to debentureholders. However,
these shall be required to be sen t to the trustee of the debentureholders.
Section 220 requires every compan) io file with the Registrar three copies of the
Balance Sheet and the Profit and Loss Account within thirty days from the date of
the AGM, and where it is not held, then within 30 days from the last day on or
before which that should have been held. If the accounts are not adopted in the
A.G.M, or the meeting is adjoumed without adopting the accounts, itis obligatory
on the part of the company to report to the Registrar the reason for the same. The
penalty for failure to file in time the annual accounts would be a continuing offence
within meantng of s.472 of Code of Criminal Procedure, 1973.
12.12.2 Appointment of Auditors.Itis compulsory for every company to appoint
qualified auditors to do the audit of the accounts maintained by the company. The
first auditors(s) canbe appointed by the Board of Directors within one month of
the date of the incorporation of the company. The first auditors hold office until the
conclusion of the first AGM of the company. However, they can be removed by
members at their meeting held before the first AGM by giving a special notice of an
intention to remove them. Also, if the Board of Directors do not appoint the first
auditors, then the company in general meeting may do so.
The Board of Directors is also authorised to fill casual vacancies arising for reasons
other than by the resignation of an auditor, which can only be filled up by the
company in general meeting. The duration of the auditor, so appointed in casual
vacancy shall be upto the conclusion of the next AGM.
Every company must appoint at each AGM to hold office from the conclusion of
the AGM until the conclusion of the next AGM. The company has to inform,
Elements of Companylaw 491.
companies each of which has a paid-up share capital of Rs 25 lakhs or more.

where a firm is appointed as auditors, the ceiling of twenty will be per partner.
However, when any partner of a firm or auditors is also a paitner in any otirer firm
or firms of auditors, the overall ceiling in relation to such pirfrer wili abb be twenty.
The private companies are not to be taken into account for calculating the number
of companies which an auditor can audit.
A person will not be eligible for appointment as an auditor of a company if be, after
a period of one year from the corrunencement of the Amendment Actis holding any
security in that company.
e receiptfrom the company

trar in writing that he has
Appointment of auditorby special resolution only (s.224-A)
Company carrying on general insurance business, the appointment or re-

appointment at each AGM of an auditor or auditors shall be made by a special
resolution.
(2) In case any company referred to in (1) above omits or fails to appoint an
auditor or auditors in the manner as aforesaid, it shall be deemed that no luditors
or auditors had been appointed by the company at its AGM and thereupon the
Central Government shallbe empowered to fill the vacancy.
Certain typical isxtes
1. with reference to the provisions of s.224A(as discussed above), whether the
material date of shareholding shall be the date of the notice of the meeting or the
date of passing the special resolution?
492 Business Law
general meeting and the date of actual passing of this resolution regarding
appointment of auditol, the company may either:
(i) adjourn the meeting to another date and later issue the required notice in
accordance with law and thereafter pass the special resolution required to be
passed under s.224A, or
(ii) omit or pass over the item on the agenda regarding appointment of
auditor.
purposes of s.224A.
is fixed by the Board of Directors as regards

other appointments, the company in general
Section 225 makes provision

auditor. A specialnotice mu
person other than a retiring
not be re-appointed. \A/hen
send a copy of it to the retiring auditor. The retiring auditors may make a written
representation to the company and ask that the same should be sent to all the
members. The company must, unless it receives the representation too late (i) state
the fact of the representation having been made, in any notice of the resolution
given to the members; and (ii) send a copy of the representation to every member to
whom notice of the meeting is sent. If a copy is not sent out in this waybecause the
representation was received too late orbecause of the company's default, then the
auditor may demand that his statement shall be read out at the meeting. He shall,
of course, have the right tobe heard orally at the meeting. However, the copies of
the representation neednot be sent out, nor need the representation be read out, if
the company or any aggrieved person applies to the Company Law Board (CLB)
and the CLB thinks that the auditor is abusing his rights to secure needless publicity
for defamatorymatter.
12.12.4 Qualification of Auditors. Section 226 provides for qualifications of
auditors. A person who is a Chartered Accountant in practice is qualified tobecome
an auditor. In other words, he must be a member of the Institute of Chartered
Accountants of India and in practice. However, none of the following persons,
even though qualified as above, can be appointed as auditor of a company: (i) a
body corporate; (ii) an officer or employee of the company (officer includes a director,
manager or secretary); (iii) a person who is a partner or who is in the employment
of an officer or employee of the company; (iv) a person who owes the company
more than Rs 1,000 or who has guaranteed the repayment of any debt of more than
Rs 1,000 due to the company by a third personi (v) a person holding any security
of that company after a period of one year from the date of commencement of the
companies (Amendment) Act,2000. The term 'security'here means an instrument
which carries voting rights; (vi) a person who is disqualified for appointment as
auditor of the company's subsidiary or holding company, or a subsidiary of its
holding company. If an auditor becomes disqualified in any of the above ways
after his appointment as auditor, then he shall be deemed to have vacated his
office as such.
12.12.5 Powers and Duties or Obligations of Auditors. Section 227 enumerates
some of the powers of auditors:
(i) Every auditor of a company has right of free and complete access at all times
to the books, accounts and vouchers of the company whether kept at the head
office or elsewhere.
(ii) He has also the right to require from the officers of the company such
information and explanation as maybenecessary for the performance of his duties
as auditor.
(iii) He is entitled to receive notice of and to attend general meetings of the

company and be heard on any part of the business which concerns him as
auditor.
Section 227 alsoirnposes some obligations on the auditor. He is to make a report to
the members of the company on the accounts examined by him and on every
Balance Sheet and every Profit and Loss Account laid before the company in
general meeting during his tenure of office. The report, besides other things
necessary in any particular case, must expressly state:
(i) Whethea in his opinion and to the best of his information and according to
explanations given to him, the accounts give the information required by the Act
and in the manner so required.
494 Business Law
(ii) \a/hether the Balance Sheet gives true and fair view of the company's affairs
a
as at the end of the financial year and the Profit and Loss Account gives a true and
fair view of the profit and loss for its financial year;
(iii)\iVhether he has obtained all the information and explanations required by
him for the purposes of his audit;
(iv) \Alhether in his opinion, proper books of accounts as required by law have
been kept by the company and proper returns for the PurPose of his audit have
been received from the branches not visited by him.
(v) 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.
(vi) \A/hether, in his opinion, the profit and loss account and balance sheet comply
with the accounting standards referred to under s. 211 (3c).
or comments of the auditors which
(vii) kr thick type or in italics the observations
have any adverse effect on the functioning of the company.
(viii) Whether any director is disqualified from being appointment as director
under s.27a$)@).
Where any of these matters enumerated from (i) to (v) is answered in the negative
or with a qualification, the Auditor's Report must state the reason for the answer.
Such a report is called the 'qualified report'.
12.L2.6 Branch Audit. Section 228 states that the audit of a branch office of a
company, if any, must be conducted by the company's auditors. However, in case
the branch is situated outside India then the accounts of the branch can be audited
either by the company's auditors or by a person qualified to act as auditor according
to the laws of that country.
Where the accounts of any branch office are audited by a person other than the
company's auditor, the company's auditor: (a) shall be entitled to visit the branch
office, if he deems it necessary to do so for the performance of his duties as auditor;
and (b) shall have a right of access at all times to the books and accounts and
vouchers of the company maintained at the branch office.
The branch auditor shall prepare a report on the accounts of the branch office
examined by him and forward the same to the company's auditors who shall, in
preparing the auditor's report, deal with the same in such manner as he considers
necessary.
The branch auditor shall receive such remuneration and shall hold his appointment
subject to such terms and conditions as may be fixed either by the company in
general meeting or by the Board of Directors if so authorised by the company in
generalmeeting.
12.12.7 Special Audit. Section 2334 empowers the Central Govemment to appoint
auditors for conducting a Special Audit. Where the Central Govemment is of
opinion: (i) that the affairs of a company are not being managed in accordance
w'ith sound business principles or prudent commercial practices; or (ii) that the
company is being managed in a manner likely to cause serious injury or damage to
the interests of the trade, industry or business to which it pertains; or (iii) that the
financial position of any company is such as to endanger its solvency; then the
Central Government may at any time, by order direct that a special audit of the
company's accounts for such period or periods as may be speiified in the ordeq,
shall be conducted by a chartered accountant specifically appointed by the
Government for the occasion, or it may be conducted by the company's auditor.
The special auditor shall have the same powers and duties in relation to the
special audit as an auditor of a company has under s.227.However, he shall,
instead of making his report to the members of the company, make the same to the
Central Government. The report of the special auditor shall, as far as may be,
include all the matters required to be included in an auditor's report under s.227
and if the Central Government so directs, shall also include a siatement on any
othermatter whichmaybe referred tohimby that Govemment.
The special auditor has to report to the Central Govemment and on receipt of the
rgport, the Govemment shall take such action as it may consider necessary. But if
the Govemment does not take any action on the report within four months from
the date of its receipt, it shall send to the company a copy of the report with its
comments for circulating among the members of the company.
The expenses of the special audi! as determined by the Govemment, shall be paid
by the company. Also the CentralGovemment is empowered to direct any peison
specified in the order to fumish to the special auditor within such time as maybe
specified in the order such information as may be required by the special auditor.
Default in compliance of the order is punishable with fine upto Rs 500.
12.72.8 cost Audit. section 2338 empowers the Central Govemment to issue
necessary directions for conducting Cost Audit of companies engaged in
production, processing, manufacturing or mining activities. The manner of
conducting cost audit of a particular company may be specified in the order of the
Govemment.
The cost audit can be conducted by a Cost Accountant within the meaning of the
Cost and works Accountants Ac! 1959. Howeve4, a chartered accountant can also
conduct cost audit if sufficient number of cost auditors are not available and the
Central Govemment issues a notification to this effect.
The cost auditor can be appointed by the Board of Directors in accordance with the
provisions of s.224(B) and with the previous approval of the Central Govemment.
The appointment of any person as cost auditor of a company who is in full-time
employment elsewhere is also prohibited. The ceilings on number of audits are
also applicable to a cost auditor as in the case of financial auditor under s.224. An
auditor of the company cannot be appointed cost auditor. Also a person who is
disqualified as an auditor is also disqualified for appointment as cost auditor.
Further, if the cost auditor, after his appointment as such suffers from any of the
disqualifications, he must cease to act as cost auditor. The provisions of s.224 shall
also apply in relation to a cost auditor. The cost auditor shall make a report in
relation to the auditconductedbyhimtothe Central Govemment and send a copy
of the report to the company.
496 Business Law
12.72.9 Dividends. All the profits of a contpany are not available for distribution
amongst the shareholders. Only the divisible profits which are determined in
accordance with legal provisions are available for distribution. Some of the more
important provisions regarding dividends are:
(1) No dividend shall be declared or paid for any financial year except out of
profit of the current year or of the previous years.
(2) The company must provide for depreciation (including arrears of
depreciation- asper Department of Company Affairs clarification)before declaring
dividends.
(3) Dividends can be paid in cash only. (Payment of dividend by cheque or
dividend warrant amounts topaymentof dividend incash). Howevel, capitalisation
of profits or reserves for the purpose of issuing fully paid-up bonus shares is
allowed.
(4) Capital profits can also be distributed by way of dividend but only if (i) the
capital profits are realised; (ii) the capital profits remain after the revaluation of all
the assets; and (iii) the distribution of a dividend of such profits is permitted by the
company's articles.
(5) The company must transfer from the profits to its reserves the following
minimum amount; before declaring dividends, at the rates mentioned below:
Per cenl Role of Dividend Minimum percenloge of profils to be
Proposed. tronsferred lo Reserves.
'I
0 per cent to 12.5 per cenl. 2.5 per cent.
1 2.5 per ceni lo I 5 per cenl. 5 per cenl.
'I
5 per cenl to 20 per cenl. 7.5 per cenl.
20 per'cent ond obove. 1 O per cenl.
A company may transfer a higher percentage of profits (i.e., more than 10 per cent)
voluntarily to the reserves in accordance with the Rules framed by the Central
Government (s.205). However, no transfer to reserves shall be required if the
dividend proposed is less than 10 per cent (as per clarification).
(6) In case of inadequacy or absence of profits in any yea1, the company may
declare dividends out of previous year's accumulated profits and reserves in
accordance with Rules framed by the Central Government.
The Rules framed by the Central Government in this regard, called Companies
(Declaration of Dividends out of Reserves) Rules, 7975,inter alin, provide as follows:
(i) The rate of the dividend declared shall not exceed the average of the rates at
which dividend was declared by the company in the five years immediately
preceding that year or 10 per cent of its paid-up capital, whichever is less.
(ii) The total amount to be drawn from the accumulated profits eamed in previous
years and transferred to the reserves shall not exceed an amount equal to 1/10th of
the sum of its paid-up capital and free reserves.
Elements of Companylaw 4gz
(iii) The amount so drawn from general reserves shall first be utilised to set-off
the losses incurred in the financial yearbefore any dividend in respect of preference
or equity shares is declared.
(iv) The balance of reserves after such drawal shall not below 15 per cent of its
paid-up share capital.
(7) The rate of dividend is recommended by the Board of Directors and is declared
by the shareholders in the AGM. The shareholders cannot insist on either
declaration of dividend or on increasing the rate recommended by the Board of
Directors.
(8) The dividends mustbe paid or the warrants in respect thereof posted to the
shgreholders, within 30 days from the date of declaration (s.202).
All the unclaimed dividends lying to the credit of the said Dividend Account for a
period of more than three years will have to be transferred to a "General Revenue
Account of the Central Government". The shareholders will have to prefer their
claims for arrears of dividends for more than three years to the Central Govemment
[s.205-4(5)].
(9) section 206,{ provides for payment of dividend and allotment of bonus and
right shares to the transferee on a mandate in this regard from the transferor. But in
the absence of such a mandate, it is obligatory on the part of the company to
transfer the dividends accruing on such shares to the Unpaid Dividend Account
and to keep in abeyance offer to rights orbonus shares till the title to the shares is
decided.
(10) The articles may also empower the directors to declare interim dividends.
An interim dividend is that dividend which is declared by the Board of Directors
f auditors
fits of the
lwhichis
(11) section 205 lays down the general rule that dividends can be paid out of
profits only and not out of capital. An exception to this rule is, howeveq, constituted
by s.208. It provides tha
of works of building or
the companymay (i) pa
respect of such shares, i
of the Central Government is obtained; and (ii) charge such interest to capital as
part of the cost of works, building, or plant.
(12) Section 205 delinks the depreciation from that under the Income-tax Act. The
companies must provide for depreciation at rates as given in Schedule XIV to the
498 Business Law
Companies Act. Depreciation atrates higher than Schedule XIVmay, however,be

provided. Department of Company Affairs has clarified that Schedule XIV
rates represent the minimum rates at which the companies should provide
depreciation.
(13) The companies (Amendment) Act,2000 has introduced certain changes in s.
205, 205A and 207 . Also for the first time companies (Amendment) Act, 2000 has
defined the term'dividend'. It includes any interm dividend. [s.2 (1a)]
The board of directors may declare interim dividend and the amount of dividend
including interim dividend shall be deposited in a separate bank account within
five days from the date of declaration of such dividend (s. 205). The dividend is
required tobe paid (within 30 days from the date of declaration) in cash, by cheque
or warrant or bank draft (s. 2054). For such non-Payment within the prescribed
period, every director of the comPany shall, if he is knowingly a party to the
default, be punishable with simple imprisonment upto 3 years and also five of
Rs 1000 for every day during which the default continues. Also the company shall
be liable to pay simple interest at the rate of 18 per cent per annum during the
period the default continues (s.207).
All the provisions of sections 205,205A,20,206a and 207 shall be applicable to
interim dividend as well (s.205).
PART 13 - lNSPECTION AND INVESTIGATION

12.\3.1 Inspection of Books of Account etc', of Companies. Section 209,4'
provides that the books of account and other books and papers of every company
shall be open to inspection during business hours (i) by the Registrar, or (ii) by
such officer of govemment as may be authorised by the Central Government in
this behalf.
The books of account include ledger, cash book, journal and vouchers, deeds,
writings and documents.
The place at which inspection may be carried out need not be registered office of
the company. The books of account are required to be kept either at the registered
office of the company or at some other place, after intimation to Registrar. Thus the
books of account can be inspected at such other place also.
Section 2094(2) requires every director, other officer or employee of the company to
assist in inspection. He is required to produce to the inspecting authority such
books of account and other books and papers of the company in his custody or
control and to fumish him with any statement, information or explanations relating
to the affairs of the company as the said authority may require him within such
time and at such place as may be specified.
Section 209 gives certain powers to the inspectors. These are: (i) to make copies;
(ii) to place identification marks; (iii) to exercise powers of civil courts with regard
to (a) the discovery and production of books of account and other documents, at
such place and such time as may be specified by him; (b) summarising and enforcing
Elements of Companylaw 4gg
the attendance of persons-and examining them on oath,: (c) inspection of any
books, registers and other documents of the company at any place.
12.13.2 Investigation. The Ac! affords some protection to shareholders and

creditors of a company by giving powers to the central Govemment in certain
circumstances to investigate either (i) the affairs; or (ii) the ownership of a
comPany.
The following chart shows the powers of the Central Govemment to appoint one
or more competent inspectors to conduct investigation of the affairs of a company
(Ss.235 and237).
Power of lnvesligotion of Cenlrol Governmenl.
Discrelionory. Mondotory.
(i) if required by lhe Members, or 0 lf required by the compony by
speciol resolution; or
(ii) on the Report by ihe Registror; or o l{ required by the Court.
(iii) on its own motion.
72.13.3 Discretionary Powers of the central Government. The Central

Government may appoint one or more competent persons as inspectors to
investigate into the affairs of any company and to report in such marurer as the
Central Governmentmay direct in the circumstances as under.
(i) on the application of members of a company. where (a) in the case of a company
having a share capital, the number of members making application is not lesjthan
or more competent persons as inspectors to investigate the affairs of the

company and to report thereon in such manner as the Central Govemment may
direct (s.235).
istrar.The re a report has
r in pursu ore inspectors
manner as the
Central Govemment mat ;r:Ttd: Registrar's report is made where a document
filed by any company (whether having a share capital or not) with him discloses
an unsatisfactory state of affairs, or it does not disclose full and fair statement of
the matter to which it purports to relate [s.235 (1)].
(iii) on suggestion ofCLB. Section 237 provides that the Central Govemment may
appoint if, in opinion of the Company Law Board, there are circumstances
suggesting: (a) that the company's business is being conducted with intent to
defraud its creditors, members or any other persons, or otherwise for a fraudulent
500 Business Law
or unlawful purpose, or in a manner oppressive of any of its members, or that the
company was formed for any fraudulent or unlawful purpose; or (b) that persons
concemed in the formation or the management of its affairs have in connection
therewith been guilty of fraud, misfeasance or other misconduct towards the
(iv) where the company, by special resolution, resolves that the affairs of the
companybe investigated by an inspector appointed by the Central Govemment
(s.237).
v. where the court by order declares that the affairs be investigated by an

inspector appointed by the Central Govemment (s.237).
72.13.4 Mandatory Powers. section 237 provides that the central Govemment
must appoint (independently of its powers under s.235) one or more competent
inspectors to investigate the affairs of a company, and to report thereon as the
Central Government directs, if either the company by special resolution or the
Courtby order, declares that its affairs ought to be so investigated.
72.13.5 Powers of the Inspectors

1. Under s.239, the inspector, appointed under s.235 or 237, is empowered to
investigate the affairs of any other body colporate which is, or has at any relevant
time been: (a) the company's subsidiary or holding company or a subsidiary of its
holding company, or a holding company of its subsidiary; O) managed by any
person as managing director or manager or who is, or was at the relevant time
either the managing director or manager of the company; (c) managed by the
company or whose Board of Directors comprises of nominees of the company or is
accustomed to act in accordance with the directions or instructions of: (i) the
the d or (iii) any company, any of
held minees of those having the
ent o mpany; (d) the company's
managing director or manager.
2. The inspectormay require any officer and other employees to preserve and
produce to him or any person authorised by him all books and papers of, or
relating to the company, which are in their custody or power.
3. The inspector may, with the prior approval of the Central Govemment, require
anybody corporate to furnish or produce such books and papers as he may consider
necessary if the fumishing of such information or the production of such books
and papers is relevant or necessary for the purposes of his investigation. The
inspector is further empowered to keep such books in his custody for 6 months.
4. An inspector is also empowered to examine on oath: (a) any officers or
employees of the company, @) any other person provided prior approval of the
Central Government has been obtained.
12.13.5 Inspector's Report (s.241). The inspector may and if so directed by the
Central Govemment shall make interim reports to that Government and on the
conclusion of the investigation shall make a final report to the Central Government.
The report may be written or printed, as the Central Govemment direct.
The Central Govemment - (a) shall forward a copy of any report (other than the
interim report) made by the inspectors to the company at its registered office and
also to any body corporate dealt within the report by virtue of s.239; (b) may, if it
thinks fit, furnish a copy thereof, on request and on payment of the prescribed fee,
to any person - (i) who is a member of the company or otherbody corporate deart
within the report; (ii) whose interests as a creditor of the company, or other body
corporate aforesaid appear to the Central Govemment to be affected; (c) shall; on
request, furnish a copy to the applicants for investigation; (d); shall, where
appointed at the instance of CLB, fumish a copy to it; (e); may also cause the report
tobe published.
72.13.7 Investigation of ownership of a company (ss.247-248). The Central
Government, if satisfied that there is a good reason, may appoint one or more
inspectors to investigate and report on the membership of any companies, for the
purPose of determining who are the persons financially interested in its success or
failure or are able to control its policy. The inspector may also investigate (with the
prior approval of the Central Govemment) the ownership of other connected
companies such as subsidiary companies, holding companies. On completion of
his investigation, the inspector is required to submit his report to the Central
govemment, but the latter is under no obligation to supply copies of the inspector's
report to the company or any other person, if it is of the opinion that there is no
good reason for not divulging the contents of the report or parts thereof (s.247).
Similarly, wherever it appears to the Central Government or the Company Law
Board that there is good reason so to do, it may appoint on or more inspectors to
investigate the ownership of shares and debentures of a company (s.2a8). Further,
s.250 provides that in a case where, owing to a change in the ownership of shares,
a change in the directors of a company is likely to take place, which, if permitted
would, in the opinion of the Central Govemment, be prejudicial to the public
interest, then the government may direct that for a specified period voting rights
shall not be exercised by the transferees of those shares.
PART 14 - MANACEMENT OF A COMPANY

72.14.1 Managerial Personnel. A company, being an artificial person, acts through
human agency. Accordingly, under the Act, it is necessary for every company to
have a Board of Directors. [r addition to this, the following categories of managerial
persorurelmaybe appointed (s.197-A): (i) ManagingDirector; or (ii) Manager. But
s.197 A does not prohibit the employment of other managerial personnel, such as
executives or wholetime directors, which do not come within the term "managing
director" or "manager".
12.14.2 Directors and their Legal Position. In this Part following matters are
discussed: (a) Legal Position of Directors (b) Legal Provisions as regards directors
502 Business Law
and (c) Director's Powers, Duties and liabilities.
Section 2 (13) defines a director as
position of director, by whatever name
y on function; a person is a director if he
:airs of the company in their hands. They

chalk-out the general policy of the company withrn ih" fruû-ork
Memorandum of ,h:.:gTp1y. Tlel appoint the company,s of the
officers and
recommend the rate of dividend. The diri ctori of company
arl cofiectively referred
to as the 'Board of Directors,.
The exact position of 'director' is hard to define, as no formal
definition, either
statutory orjudicial, of th.e.term has been given. Howeve4, judicial
pronouncements
have described them as (i) agents, (ii) tru-stees, or (iii)
-u.rugi.g partners.
The directors act and the ordinary rules of agency apply.
They exercise th to duties within the framework of the
company's Artic ance, theymaymake contracts onbehalf
of the company and they will n
scope of their authority. But if
personal liability, they also will
The directors have also been described as trustees. But they are
not trustees in the
full sense of the term in as much as no proprietary right,
or ti .or^pany,s property
are transferred to them and, therefore, they enter into contracts
" bn behalf of the
company and in the name
the legal ownership of the
he can enter into contract
benefit of the beneficiaries.
Although directors are not trustees in the real sense of the term,
they occupy an
office of the trust and are in certain respects in the position of
trustees for the
company. Such cases are:
which comes to their hands or which is actually

ply company,s money, they have to make gooi
(ii) xercising powers conferred on them for the benefit of

the c po-erJtb a'ot shares, to make calls. forfeit shares
shou e in the interests of the company-
(iii) They stand in a fiduciary relationship to the company and, therefore,

whenever there is clash of his personal interests with thai
of the company, he
should keep in mind the compuny,s interests.
A director is in no way a trustee for individual shareholders except when the
former induces the latter by misrepresentation to sell the shares to him.
The directors are also sometimes described as managing partners. They manage
the affairs of the company on their own behalf and on behalf of other shareholdeis
who elect them.
are quite separate from his rights as employee.
72.14.3 Legal Provisions as Regards Directors. some of the important legal

provisions as regards directors are sununarised as follows:
(7) Number of diredors. Every public company must have at least three directors.
Every private company must have at least two directors (s.252). Howevel a public
company having: (a) a paid-up capital of Rs 5 crore or more; (b) 1000 or more small
shareholders may have a director elected by such small shareholders in the maruler
as may be prescribed. The phrase 'small shareholders' means a shareholder
holding shares of nominal value of Rs 20,000 or less in a public company to which
this section applies. This is the minimum legal requirement of the number of
directors. The Articles of a company may and usually do, fix the minimum and
maximurn number of directors of its Board. For instance, the articles may fix 5 as
the minimum and 9 as the maximum number of directors of the Board. Also, the
articles may fix, within these limits, the number which will constitute the Board
for the time being. For instance, in the above example, the number of directors
constituting a Board may be hxed at7.
(2) lncrease in number of directors. A company in general meetings may,by
ordinary resolution, increase or reduce the number of its directors within the limits
fixed in that behalf by its articles (s.258).
In certain cases, the increase in number of directors also requires the approval
of the Central Government. Section 259 provides that if a public company, or a
private company which is subsidiary a public company wishes to increase the
number of its directors beyond the maximum fixed by its articles, the increase even
though decided upon by resolution of the company in general meeting will not
have any effect unless approved by the Central Govemment and shall become
void if and in so far as it is disapproved by the Central Government. But if the
increase in the number will not make the total number of directors more than
twelve, no approval of the Central Govemment is necessary. Howeveq, independent
private companies and Govemment companies are exempted from the provisions
of s.259.
(3) lniliaiduals to be directors. No body corporate, association or firm shall be
appointed director of any company. only an individual canbe a director (s.253).
504 Business Law
oinhnent of directors rests in the following
randum - s.254; Clause 64 (Table A);
255-57;263-265; (c) Board of directors -
Ss.260, 262, 31.3; (d) Central Govemment - s.408; (e) Third parties - s.255.
Appointment offrst directors. The first directors are usually named in the articles of
a comPany. The Articles may, however, instead of naming the first directors confer
power on the subscribers, or majority of them to appoint the directors. where the
appointment is tobemadebythemajority f them (and
not only the quorum fixed by the Articles) ointment is
to be valid. Where there are no Articles e them nor
confer any such power on the subscribers, then Clause 64 of rable A in schedule I
to the Act confers powers on the subscribers or a majority of them to make the
appointment of first directors. Furthennore, if the Articles neither name them, nor
do they contain a provision for their appointment by the subscribers and Table A
is excluded, then the subscribers to the memorandum who are individuals are
deemed to be the fust directors of the company until the directors are duly appointed
at a general-meeting of the company in accordance with the provisions of s.255.
Appointment of subsequent directors, Sections 255 and 265 provide for three schemes
for the constitution of the Board of Directors of a public company or a private
company which is subsidiary of a public company. These are: (i) All the directors
retire at every Annual General Meeting [s.255]; or (ii) At least two-thirds of the total
number of directorsmustbepersons whoseperiod of office is liable to determination
by retirement by rotation (s.255); or (iii) At least two-thirds of the directors may be
appointed by the principles of proportional representation, by a single transferable
vote by a system of cumulative voting or otherwise and shall be directors for a
period of three years at a time (s.265). The remaining directors in (ii) and (iii) and
the directors generally of a pure private company, unless otherwise provided in
the Articles, must alsobe appointedby the company in general meeting.
Thus, every company should have a duly constituted Board appointed in

by the'first'
ed by shares
cificpurpose
Appointment in general meeting. Section 256 provides that at the first AGM after the
general meeting at which the first directors are appointed in accordance with
s.255, the number nearest to one-third of the directors liable to retire by rotation
mustretire from office. The r
of office of directors, or in ca
subsequent AGM, one-third
by rotation. The retiring directors are, howevea eligible for re-election.
Deenrcd re-appointment of a retiring director. Section 256 also provides forautomatic
reappointment of directors in certain cases. The company may fill the vacancy
caused by the retirement of a director at the AGM by appointment of the same
Person or someone else, or decide not to fill the vacancy. If the vacancy is not filled
up and the company has not expressly decided not to fill it up, the meeting shall
stand adjoumed till the same day in the next week, at the same time and place and
if at that meeting also the vacancy is not filled up and that meeting also does not
decide not to fill it up, the retiring director shall be deemed to have been elected at
the adjoumed meeting except where: (i) at that meeting or at the previous meeting
a resolution for the re-appointment of such director had been put to vote but was
lost; or (ii) the retiring director has, in writing, expressed his unwillingness to
continue; or (iii) he has been rendered disqualified; or (iv) a special or ordinary
resolution is necessary for his appointment by virtue of any provisions of this Ac!
or (iv) it is resolved not to fill the vacancy.
Lr respect of an independent private company s.256 does not provide for retirement
of any director periodically. Therefore, in the absence of any provisions in the
Articles, directors are entitled to continue until removed under s.284 lS.lnbh Singh
v. Panaser Mech. Works (P) Ltd. (1.987)1.
Appointment of a director other than a retiring director. Section 257 provides for the
procedure of appointrnent of a person other than the retiring director. If any persorL
other than the retiring director wishes to stand for directorship, he must signify
his intention to do soby giving 14 days'notice to the companybefore the meeting
and the company must inform the members not later than seven days before the
meeting either by individual notices or by advertlsement of this fact in at least two
newspapers circulating in the place where its registered office is situated, of which
one mustbe in English and the other in the regional language of the place. Also the
candidate or the member who intends to propose him as director has to deposit a
sum or Rs 500 which shall be refunded to such person or as the case may be, to
such other member, if the candidate succeeds in being elected. In case such person
is not elected as directoq, he or the member, as the case may be, will not be entitled
to the refund of Rs 500 and the amount deposited shall stand forfeited by the
company. Also s.264 requires every person pioposed as a candidate for the office
of a director to sign and file first with the company his consent to act as a director,
if appointed and then with Registrar within 30 days of his appointment.
Section 263 prescribes the mode of voting on appointment of directors. No motion
can be made at a general meeting of a public company or a private company which
is a subsidiary of a public company for the appointrnent of two or more persons as
directors by a single resolution, unless a resolution is first unanimously passed
that it shall be so made. Any resolution moved in contravention of this provision
shallbe void.
Appointmmt by board of directors. The Board of Directors can exercise the power to
appoint directors in the following three cases: (i) Additional directors (s.260).
(ii) Fillingup the casual vacancies (s.262). (iii) Altemate directors (s.313).
If the Articles authorise, the Board may appoint additional directors. Such
additional directors together with the directors constituting the Board should not
exceed the maximum number fixed by the Articles. Also, the additional directors
are entitled to hold office only up to the date of the next AGM of the company
(s.260).
506 Business Law
Section 262 empowers the Board to fill casual vacancies in the case of a public
company or a private company which is subsidiary of a public company. Thus, if
the office of any directors appointed by the company in general meeting is vacated
before his term of office expires in the normal course, the resulting casual vacancy,
may, 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 to which the original director would have continued if it
had notbeen vacated.
By virtue of s.313, altemate director, in place of a director who is absent from the
State in which Board meetings are held for not less than three months, may be
appointed by the Board, if so authorised by the Articles or by a resolution passed
by the company in general meeting. The alternate director shall not hold office for
a period longer than that permissible to original director and shall vacate office
when the original director retums to such State. Also, if the term of office of the
original director is determined before he so returrs, any provision for the automatic
reappointrnent (under s.256) of retiring directors in default of another appointment
shall apply to the original director and not to the alternate director.
a company may authorise a director to appoint by will or otherwise
The Articles of
his successor in office. This appointment is not hit by s.312 which prohibits
assignment of office by directoi.
Appointment by central goaernment. Section 408 empowers the Central Goverunent
to appoint directors onthe Board of a company on therecommendation of Company
Law Board that it is necessary to appoint govemment directors to effectively
safeguard the interests of the company or its shareholders or the public interest.
On the application of not less than 100 members of the company or of members
holding not less than one-tenth of the total voting power therein, the CLB may, if
satisfied after making any inquiry it deems fit that it is necessary to prevent
oppression and mismanagement and that the affairs of the company are being
carried on in a manner which is prejudicial to the interest of the members or the
company or the public, direct the appointment of as many persons (whether
members of the company or not) as directors as it thinks fit to hold office for such
period not exceeding three years on any one occasion. The Company Law Board,
however, instead of passing the above order direct the company to alter its Articles
so as to arrange for the election of its directors on the principle of a proportional
representation under s.265.
Apersonappointedbythe CentralGovemmentinpursuance of the above provisions
shall not be: (a) considered for the purpose of reckoning 2/3rds or any other
proportion of the total number of directors of the company [s.a08(3)]; (b) required
to hold qualification shares [s.408(a)]; (c) required to retire by rotation [s.a08(a)];
and (d) required to file written consent with the company under s.264(1).
The Central Govemment may remove any such director from his office at any time
and appoint another person to hold office in his place the provisions of this section
are applicable to both public and private companies.
Appointmentby thirdparties. Under s.255, there cannotbe more than one-third of
the total number of directors, which are not subjected to retirement by rotation. The
third parties may be empowered by the Articles to nominate directors. Such third
parties maybe lenders of money-i.e., financial institutions, debentureholders.
(5) Number of directorships. A person cannot hold office at the same time as a
mputing this number of 20
es (other than subsidiaries)
(iv) altemated directorships
If a person who
any other comp
thereafter, the d
he was already
None of the new appointments of director shall take effect until such choice is
made and all the new appointments will become void if the choice is not made
them were made (s.277). Any
of more than 20 companies in
le to be fined upto Rs 5,000 in
0 companies (s.279).
Example. If a person is already a director of 20 public companies and if a private
company of which he is a director has become a public company under s.43-A, then, he
will have to give up the directorships of one of those companies.
(6) Qu
any acad
no share
a provision to that effect, a director need not be a shareholder unless he wishes to
be one voluntarily, But the Articles usually provide for a minimum share
qualification. lrvhere a share qualification is fixed by the Articles of a company, the
Act provides (s.270) that: (i) it mustbe disclosed in the prospectus; (ii) each director
must take his qualification shares within two months after his appointrnent; (iii) the
notional value of the qualification shares must not exceed Rs 5,000 or the nominal
value of the one share where it exceeds Rs 5,000; (iv) share warrants will not count
for purposes of share qualification.
If a director fails to obtain his share qualification within two months, he vacates
old qualification
tain qualification
tment and if any
The effect of this provision is that, if the company is wound up during this period
of two months, the director cannot be placed in the list of contributorieJ, h as
508 Business Law
much as there is no express or implied contract under which he would be bound
to take the qualification shares, since his name cannot be put on the register of
members unless he has applied for shares and these are allotted to him lZamir
Ahmed Raz. a. D.R. Banaji (1957)27 Comp. Cas. 6341.
However, a private company which is not a subsidiary of a public company may,

by its Articles, provide additional qualifications for a director, such as, a Person
must be a B. Com. or holding a fixed deposit receipt in his own name issued by the
comPany.
Section 274has laid down certain disqualifications and therefore, the following
persons are incapable of being appointed directors of any comPany: (i) a person
found by the court to be of unsound mind; (ii) an undischarged insolvent; (iii) a
person who has applied to be adjudged an insolvent; (iv) a Person who has been
convicted anywhere in the world for an 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 the expiry of the sentence; (v) a
person who has failed to pay calls on shares for six months from the date fixed
for the payment; (vi) a person who has been disqualified by court under s'203
which empowers the court to restrain fraudulent Persons from managing
companies; (vii) such person is already a director of a public company which,
(a) has not filed the annual accounts and arurual returns for any continuous three
financial years corunencing on and after 1't April, 7999; ot (b) has failed to repay
due date or
suchperson
ompany for
a period of 5 years from the date on which such public comPany/ in which he is a
director, failed to file annual accounts and annual retums under (A) above or has
failed to repay its deposit or interest or redeem its debentures on due date or pay
dividend referred toin (B).
The disqualifications mentioned under (iv) and (v) above may be removed by the
Central Govemment by a notification in the Official Gazette. On the other hand, a
non-subsidiary private company may provide in its Articles that a person shallbe
disqualified for appointnent as director on any other additional ground. However,
asubsidiary comPany cannot, by its Articles, provide
addi
for any S.Nidhio, Daiaasigamani AIR 1951 Mad.
Sl};AlsoCri (1975)45Comp. Cas.574l.
Minor as a director: In the case of a minor, though there is no provision in the Act,
expressly disqualifying him, as he is not competent to contract, he cannot file
either with the company or with the Registrar any valid consent to act as director,
he be delegated any powers of the Board. He may possibly vote on all resolutions
at Board meetings.
(7) Vacation of ffice of a ilirector. Section 283 provides for the office of the director
becoming vacant on the happening of certain contingencies. It provides that the
office of a director shall become vacant if: (i) he is found to be of unsound mind by
a competent court; (ii) he is adjudged insolvenU (iii) he fails to obtain within two
months of his appointment, or ceases to hold at any time thereafter his share
qualification, i of any o
andsentenced essthan
six
call within te fixed
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; (vii) he becomes disqualified
by an order of the court under s.203 which regtrains fraudulent persons from
managing companies; (viii) he is removed in pursuance of s.284 by an ordinary
resolution of which special notice was given; (ix) he accepts a loan from the company
in contravention of s.295; (x) he fails to disclose to the Board his interest in any
contract entered into by the company as required by s.299; (xi) if he became the
director by virtue of an office, on coming to an end of that office. A private company
may provide additional grounds in its Articles for vacation of office of a director. If
a Person functions as a director after the office has become vacant on account of
any of the disqualifications specified in (i) to (xi), he shall be punishable with fine
up to Rs 500 for every day during the period he so functions.
(8) Remoaal of directors. A director may be removed under Ss.284, or 3888-8.
Remoaal by shareholders. Section 284 provides that company may by ordinary

resolution passed in general meeting after special notice, remove a director before
the expiry of his term of office. But the following directors cannotbe removed by
the company in general meeting: (i) a director appointed by the Central Govemment
under s.408; (ii) a director of a private co*putly holding office for life on April 1,
7952; (iii) director elected by the principle of proportional representation under
s.265.
on receipt of the special notice, the company must forthwith send a copy thereof to
the director concemed to enable him to make a representation. If he makes a
representation in writing and requests the company to notify it to the members, the
comPany must unless it is received by it too late for it to send to the members, state
the fact of the representation in any notice of the resolution given to the members.
It should also send a copy of the representation to every member of the company to
whom notice of the meeting is sent. If the representation is not sent as aforesaid the
company must at the instance of the director concemed read it out at the meeting.
The director is also entitled to be heard on the resolution at the meeting.
The vacancy caused by the removal of a director may be filled at the same
meeting and if so filled, person appointed thereto will only hold office for the
residue period of the removed director. If the vacancy is not filled by the company
in general meeting, the Board of Directors may fill it as if it were a casual
vacancy in accordance with s.262,blut the Board cannot appoint the removed
director.
510 Business Law
Remotsal by central goaernment. The provisions of Ss.203 and 274 prohibit certain
Persons from acting or being appointed as directors and provide for their removal
only if they were convicted for offences involving rnoral turpitude. In all those
cases conviction or finding of guilt by the court is the prerequisite for bringing
about vacation of office. Strict proof of guilt in a criminal case is essential and very
often such persons may go scot-free in spite of malpractices. The finding of the
Company Law Board will enable the Central Government to take quick action
against persons involved in cases of fraud, etc. For this purpose a Chapter IV A
-
and s.3888 to 388E have been inserted in the Act.
under s.388B, the Central Government has the power to make a reference to the
Company Law Board against any managerial personnel. The power can be
exercised where, in the opinion of the Central Govemment, there are circumstance
suggesting:
(a) the any person concerned in the conduct and management of the affairs of a
company is or has been guilty of fraud, misfeasance, persistent negligence of default
in carrying out his obligations and functions under the law, or breach of trust in
connection therewith; or
(b) that the business of the company is not or has not been conducted and
managedby such person in accordance with soundbusiness principles or prudent
commercial practices; or
(c) that the business of the company is or has been conducted or managed by
such person in a manner which is likely to cause or has in fact caused, serious
injury or damage to the interest of trade, industry or business to which such
company pertains; or
(d) that the business of the company is or has been conducted and managed by
such person with an intent to defraud its creditors, members, or any other person
or otherwise for a fraudulent or unlawful purpose or in a manner prejudicial to
public interest.
The reference may be made by stating a case against the person aforesaid with a
request that the CLB may inquire into the case, record finding as to whether or not
such person is a fit and proper person to hold the office of director or any other
office connected with the conduct and management of any company.
The statement of the case by the Central Govemment should be in the form of an
application presented to the CLB and the person against whom such case is stated
and referred should be joined as a respondent to the application. The application
should contain a concise statement of such circumstances and materials as the
Central Govemmentmay consider necessary for purpose of inquiry to be made by
the CLB. The application must be signed and verified in the same manner as a
plaint in a suitby the Central Govemment under the Code of Civil Procedure.
Thereafter, the CLB will hear the case against the respondent. At any stage of the
proceedings, the CLB may allow the Central Govemment to alter or amend the
application in such manner and on such terms as may be just and all such
Elernents of Company Law 511
alterations and amendments shallbe made as maybe necessary for the purpose of
determining the real question in the inquiry (s.388-B).
If during the pendency of the case of CLB finds it necessary, in the interest of the
members or creditors of the company, it may, either on the application of the Central
Government or of its own motion Il not discharge
until
any of the duties of his office is place another
suitable person to discharge the person, who is
temporarily appointed to discharge the duties in place of the respondent will be
regarded as a public servantwithin the meaningots.2l. of the Indian Penal Code
(s.388-C).
At the conclusion of the hearing of the case, the CLB shall record its findings,
stating therein specifically as to whether or not respondent is a fit and proper
person to hold the office of director or any other office connected with the conduct
and management of any company (s.388-D). on the basis of the aforesaid findings,
the Central Govemment may, by order, not-withstanding any other provisions
contained in the Act, remove the delinquent respondent from his office [s.388-
E(1)1.
An order under s.388E must not be passed against any person unless he has been
given a reasonable opportunity to show cause against the order. However, no
matter can be raised by such a person before the Central Govemment, which has
already been decided by the CLB [s.388-E(2) and proviso thereto].
After the delinquent person has been, by order, removed, he shall not hold any
office for a period of 5 years from the date of the order of removal, nor will he be
paid any compensation for loss of office as a result of removal. The time-limit may,
however, be relaxed by the Central Govemment with the previous concurrence of
the CLB, and the Central Govemment may accordingly permit such person to hold
the office of a director or any other office connected with the conduct and
management of the affairs of the company even before the expiry of the period of 5
years. On the removal of the person, the company may, with previous approval of
the Central Govemment, appoint another person to that office in accordance with
the provisions of the Act.
(9) Resignationby a director. There is nothing in the Act as to whether and by
what procedure, a director can resign. The Act, howeveq, indirectly recognises
resignation through the provisions in s.318 one of which is that no director is
entitled to compensation if he resigns his office. In S.S. Inkshmana Pillai a. Registrar
of Companies (1977) 47 Comp.Cas.652 (Mad), it washeld,thatrtthere is a provision
in the articles, resignation will take effect in accordance with such provision and
if there is no provision, resignation will take effect in accordance with its terms.
Notice may be written or oral.
In the aforesaid case, it was also held, that the resignation shall be effective even
when no other director was in office. In this case, of the two directors of a company,
one died and the other wanted to resign. The Court however, observed that a
director could not evade his obligations by severing his connection with the
company.
5t2 Business Law
Resignation to be valid must be addressed to the company. Letter of resignation

addressed to a third party shall have no effect [Registrar of Cos. V. Orissa Paper
Products Ltd. (1988) 63 Com. Cas. 460 Orissal. Once a director has given a notice of
resignation, he cannot withdraw it except with the consent of the company properly
exeicised by the directors lGtossop a. Glossop (1907)2Ch.3701.
(70) Directors not to holil office or place of profit. Section 314 imposes certain
restrictions on the holding of office or place of profit in a company by the directors
and their associates. Following is the summary of restrictions so provided:
1. No director of a company shall hold any office or place of profit (carrying

any remuneration) under the company or its subsidiary except with the consent of
the companyby a special resolution. It shall, however, be sufficient if the special
resolution is passed at the first general meetingheld after such appointment.
A director shall be deemed to hold an office or place of profit under the company if
the director holding an office obtains from the company anything by way of
remuneration over and above the remuneration to which he is entitled as such
director. Such remuneration may be by way of salary fees, commission, perquisites,
the right to occupy free of rent any premises as a place of residence or otherwise.
2. Except by passing a special resolution, partner or relative of such director, no

firm in which such director or a relative of such director, is a parhrer, no private
company of which such director is a director or member and no director, or manager
of such a private company shall hold any office or place of profit carrying a total
monthly remuneration of such sum as maybe prescribed (presently Rs 3,000 per
month). Again, special resolution may be passed at the first general meeting after
the appointmentmade. \A[here, howeve4, the aforesaid appointmentmade without
the knowledge of the director, the consent of the company may be obtained either
in the general meeting aforesaid or within 3 months from the date of the
appointment, whichever is later.
However, a director or any of his associates may be appointed as managing directol,
manager, banker or trustee for the debentureholders of the company without
sanction of special resolution, if the remuneration received from such subsidiary
in respect of such office or place of profit is paid over to the company or its holding
comPany.
For the aforesaid appointment of a director or his associates, special resolution
shall not only be necessary at the time of first appointment but also for every
subsequent appointment on a higher remuneration not covered by the special
resolution except where an appointment on a time-scale has already been approved
by the special resolution.
It may be noted that the aforesaid restrictions do not apply where a relative of a
director or a firm in which such relative is a partner holds any office or place of
profit under the company or a subsidiary thereof having been appointed to such
office or place before such director became a director of this company.
3. No parbrer or relative of a director or manger, (ii) no firm in which such
director or manger, or relative of either is a partner, (iii) no private company of
which such a director or manager, or relative of either, is a director membeq, shall
hold an office e company carrying a total monthly
remuneration o s maybe prescribed (presently, Rs 6,00-0
per month). The nay, howevel, be made by passing a special
resolution and the approval of the Central Govemment.
while interpreting the scope of the term 'remuneration' for the aforesaid
purpose/ the emphasis should be on the 'monthly remuneration' and not on what
a p_erson gets for a whole year [R,K. sangal a. Auto Lamps Ltd. (7984) 55 Comp. Cas.
742 (Det.)].
If any director or his associate holds an office or place of profit in contravention of

the aforesaid provisions, then: (i) he shall be deemed to have vacated such office or
place of profits as such on and from the date next following the date of the general
meeting. (ii) he shall be liable to refund to the company any remuneration received
or the monetary equivalent of the perquisites or advantage enjoyed by him. The
company cannot waive the recovery any sum refundable to it as above unless
permitted to do soby the Central Govemment.
The aforesaid restrictions do not apply to a person who being the holder of any
office of profit in the company is appointed by the Central Gbvernment, under
s.408, as a director of the company.
Meaning of 'ffice or place of profit'. Any office or place shall be deemed to be an

office or place profit under the company: (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 oifice or
place is held by an individual other than a director or by any firm, private cornpany
or other body corporate holding it obtains from the company anything by way of
remuneration whether as salary, fees, commission, perquisite, the right to occupy
free of rent any premises as a place of residence or otherwise.
12.14.4 Managing Director. secti on2(26) defines'managing director' as a'director'

who, by virtue of an agreement with the company or of a resolution passed by the
company in 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 would not otherwise be exercisable by him. The expression
includes a director occupying the position of a managing director, by whatever
name called.
Howevet, the power to do administrative acts of routine nature when so authorised

by the Board such as the power to affix the common seal of the company to any
doclrment or to draw and endorse any cheque on the account of the company in
anybank or to draw and endorse anynegotiable instrument or to sign any ceitificate
of share or to direct registration of transfer of any share, shall not be deemed to be
included within substantial powers of management. Further, a managing director
of a company shall exercise his powers subject to the superintendence, control
and direction of its Board of Directors.
574 Business Law
Some of the more important legal provisions about managing directors are
summarised as follows: (i) He, being a directot must be an individual. (ii) He is
appointed, usually to perform such functions and carry out such duties as may be
assigned to him by the Board of directors to whom he is responsible or subject. The
Board can revoke the authority of the managing director. (iii) He mustbe entrusted
with substantial powers of management. (iv) There can be two or more than two
managing directors in a company. (v) A person cannotbe appointed as managing
director of more than two companies unless so permitted by the Central
Govemment.
His appointrnent is subject to the approval by the Central Govemment. The Central
Government upon application for permission to appoint a person as managing
director of the company has power to impose conditions. Ss. 268,269,31.6 and317
are applicable to a public company or a private company which is subsidiary of a
public company.
Section 268 states that an amendment of any provision relating to appointrnent or
reappointrnent of a managing director (or a wholetime director) shallnotbe effective
unleis approved by the Central Govemment and shall be become void if and in so
far as, it is disapproved by the Central Government.
o require goaernment
/orprivate company
share capital of not
in the remuneration under Ss. 310 and 3111'
For appointunent of a managing, wholetime director or a manager, approval of the

Central Government would not be required if the following conditions were
satisfied:
(i) he had notbeen sentenced to imprisonment for any period or to fine exceeding
Rs 1,000 for conviction of an offence under any of the fourteen acts mentioned in
ScheduleXIII;
(ii) he had notbeen detained for any period under the Conservation of Foreign
Exchange and Prevention of Smuggling Activities Act 1974;
(iii) he has completed the age of 25 years but has not attained the age of 70 years;
(iv) he is not a managing or wholetime director or manager or in any way in

wholetime employment elsewhere;
(v) he is citizen of Lndia and is resident in India;
(vi) the
the prece
is made,
immediately preceding.
In case any of the above conditions are not complied with, an application must be
made to the Central Govemment within 90 days of the appointment. If the
appointrnent isnot approvedby the Central Govemment the appointee shall vacate
the office immediately on communication of the decision by the Central Govemment.
Section 316 states that a person, who is either the managing director or the manager
of any other company (including a pure private company), cannotbe appointed a
managing director of a public company or a private company which is a subsidiary
of a public company. But such an appointrnent can be made if the board of such
company approves of the appointment by a unanirnous resolution passed at the
Board meeting specific notice of which had been given to all the directors then in
India. Also the Central Govemment is empowered to permit, by order, the same
person to be managing director of more than one companies, if it is satisfied and it
is necessary for their proper working that the companies should function as'a
single unit and have a common managing director.
Section 3L7 states that the term of office of a managing director cannot exceed five
years at a time. Also re-appointments or extension can be made on the basis of 5
years tenure on eadr occasion, provided each time the re-appoinknent or extension
is madeby the company during two years of the existing term.
It may be emphasised that Ss.268, 269 and 317 relating to restrictions on

appointrnent of managing directors (as noted above) do not apply to pure private
companies.
Disqualification of a managing director. Section 267 prohibits the appointment or
employment or the continuance of the appointment or employment of any person
by a company as its managing director or wholetime director, if the said Person:
(i) is an undischarged insolvent or has at any time been adjudged an insolven|
(ii) suspends, or has at any time suspended payment to his creditors, or make's or
has at any time made a composition with them; or (iii) is or has at any time, been
convicted by a court of an offence involving moral turpitude.
It may be noted that these disqualifications are in addition to the ones mentioned
n s.272(i.e., disqualifications of a director).
12.14.5 Manager. Section 2(24) states that "manager means an individual who,
subject to the superintendence, control and direction of the Board of Directors, has
the management of the whole, or substantially the whole of the affairs of the
company and includes a director or any other person occupying the position of a
managel by whatever name called and whether under a contract of service or
not".
Thus, an individual must be incharge of the whole or substantially the whole of
the business of the company, in order to be called a manager in accordance with
the Act. A person who is one of the departmental managers or a branch manager
is not deemed to be a manager in this sense. Some of the more important legal
provisions aboutmanagers are summarised as follows:
(1) Only an individual canbe appointed a manager of a company (s.38a)
51,6 Business Law
(2) Section 385 lays down the disqualifications of a Manager. No company shall
appoint or continue the appointrnent or employment of any person as its m€mager,
who (a) is an undischarged insolvent; or (b) has at any time within the preceding
five years been adjudged an insolven! or (c) suspends, or has suspended payment
to his creditors; or (d) make, or has at any time, within the preceding five years
made a composition with his creditors; or (c) is, or has at any time within preceding
five years been convicted of an offence involving moral turpitude.
(3) A person may not be appointed manager of more than 2 companies.
(a) The provision of the following sections relating to managing directors have
been made applicable to Manager also (s.388); (a) s.269: Appointment or re-
appointment requires Govemment approval except in cases specified under
Schedule XIII; (b) Ss. 310-311: Provisions for increase in remuneration requires
Govemment approval; (c) s.312: Prohibition of assignment of office by a director;
(d) s.317: Term of appointment to be not more than five years at a time.
12.14.6 Compensation to Directors for Loss of Office. Section 3L8 provides that
no compensation for loss of office may be paid by a company to any director other
than the managing director, or wholetime director, or a director holding the office
of manager. Even in their cases, no such payment must be made: (i) when he
resigns his office on reconstruction or amalgamation of the company; (ii) where
the office is vacated under s.203 or s.283; (iii) where he has to grve up directorship
beyond 20 directorships; (iv) where the winding up of the company takes place
due to his negligence and mismanagemen! (v) where he has been guilty of fraud
or breach of trust in relation to, or of gross negligence in or gross mismanagement
of the conduct of the affairs of the company or any subsidiary or holding company
thereof; (vi) where he has instigated or has taken part directly or indirectly in
bringing about the termination of his office.
Where, however, the compensation is payable, itmust not exceed the remuneration
which would have been eamed by the director for the unexpired residue of the
term or for three years whichever is shorter. The calculation of this amount should
be based on the average remuneration actually earned by him during a period of
three years immediately prior to the date on which he ceased to hold the office, or
where he held the office for a shorter period than three years, during such period.
No such payment can be made to him if the winding up has commenced either
before or at any time within 12 months after the date of his ceasing to hold office, if
the assets of the company are not sufficient to repay to the shareholders the share
capital including the premium, if any, contributed by them.
12.14.7 Remuneration of Managerial Personnel. Section 198 provides that the
total managerial remuneration payable by a public company or a private company
which is subsidiary of a public company to its directors or manager in respect of
any financial year must not exceed 11 per cent of the net profit of that company
for that financial year. In computing the above ceiling of 11 per cent, the fees
payableio diredtoili for attending Board meetings is notincluded. If, howeveq, in
any financial year a company has no profits or its profits are inadequate,itmay,
subject to the approval of the Central Govemment, pay to directors (including
managing or whole-time director) or manager by way of minimum remuneration

such sum not exceeding Rs 50,000 per annum (excluding sitting fees) as it considers
reasonable.
Wh at i s in clu de d in m an agei aI rcmun er ati o n? Explanation to s. 1 98 describes the

term remuneration. According to it, for the purposes of Ss. 309,3\0,311 and 387,
'remuneration'includes the following: (a) any expenditure incurred by the
company in providing rent-free accommodation, or any other benefit or amenity in
respect of accommodation free of charge, to any of its directors or manager; (b) any
expenditure incurred by the company in providing any otherbenefit or amenity
free of charge or at a concessional rate to any of the persons aforesaid; (c) any
expenditure incurredby the company in respect of any obligation or service, which,
but for such expenditure by the company/ would have been incurred by any of the
persons aforesaid; and (d) any expenditure incurred by the company to effect any
insurance on the life of, or to provide any pension, annuity or gratuity for, any of
the persons aforesaid or his spouse or child.
Section 309 contemplates three kinds of directors, i.e., (i) Managing Director;
(ii) lAlhole-time director; (iii) Director pure and simple. Further, s.309 provides that
subject to the general provisions of s.198, dealing with the total managerial
remuneration, the remuneration be determined by the articles, or by a resolution
ot, if the articles or require, by a special resolution, passed by the company in
general meeting. Any remunera-tion paid for services in any other capacity shall
not be included if: (a) the services rendered are of a professional nature; and (b) in
the opinion of the Central Government, the director possesses the requisite
qualifications for the practice of the profession.
A director who is neither in the whole-time employment of the company nor a
managing director maybe paid remuneration. (a) by way of a monthly, quarterly
or annual payment with the approval of the Central Govemmen! or (b) by way of
commission, if the company by special resolution authorises such payment; or
(c) byboth.
However, in either of the above cases, the remuneration paid to such director, or
where there is more than one such director, shall not exceed: (i) one per cent of the
net profit of the company, if the company has managing or wholetime director or
manager; (ii) three per cent of the net profits of the company in any other case. The
company in general meeting may, howevet, with the approval of the Central
Govemment, authorise the payment of a commission at a rate higher than one per
cent, or as the case many be, three per cent of its net profits.
Each director is entitled to receive a sitting fee for each meeting of the Board or a
committee thereof, provided the same is authorised by the articles.
A whole-time director or a managing director maybe paid remuneration eitherby
way of a monthly payment or at a specified percentage of the net profits of the
company or partly by one way and partly by the other; provided that except with
the approval of the Central Govemment such remuneration shall not exceed 5 per
cent of the net profits for one such director and if there is more than one such
518 Business Law
whole-
receive
If any director draws or receives, directly or indirectly, by way of remuneration any

sum in excess of the limits stated above, without the sanction of the Centrjl
thecompany
ffJ
rhe
permitted by the Central Govemment.
T;tllll;
The provisions of s.309 will not apply to a private company unless it is a subsidiary
of a public company.
Increase in remuneration. Section 310 provides that every increase in the remuneration
accordance with the conditions specified in Schedule X111. Also no approval of the
Central Govemment is necessary, if the increase in the remuneration is only by
way of fee for each meeting of the Board or a committee of the Board attended by
any such director and the amount of the fee after such increase does not exceed
such sum as may be prescribed. The Central Govemment has laid down differential
scale of sitting fee according to the paid-up capital of the companies.
As regards remuneration payable to a Manager, s.387 provides that he may receive

remuneration either by way of a monthly payment or by way of a specified
percentage of the 'net profits' of the company, or partly by one way and partly by
the other. Such remuneration, however, must not exceed in the aggregate 5 per cent
of the net profits except with the approval of the Central Govemment.
Managerinl remuneration ais-a-vis schedule XIII. The Department of Company Affairs

issued guidelines regarding managerial g or
wholetime or part-time paid directors or any.
These were known as administrative . the
Government to fix an administrative ceiling within the statutory ceiling on the
the Amendment Act of 1988 inserted statutory
refore, a public company or a private company
company, is enabled to appoint its managerial
personnel and fix their remuneration so long as the same is in accordance with the
conditions laid down in schedule XIII without seeking the prior approval of the
Central Govemment. Schedule XIII, provides as follows:
Remuneration payable by companies haaing profts. subject to the provisions of s.198
and s.309, a company having profits in a financial year may pay any remuneration,
by way of salary, dearness allowance, perquisites, commission and other
allowances, which shall not exceed 5 per cent of its net profits for one,sueh
Elemmtsof CompanyLaw 519
managerial person and if there are more than one such managerial persons, 10 per
cent for all of them together.
Remuneration payable by companies haaing no profits or inadequate profits.lAlhere
in
any financial year during the currency of tenure of the managerial person, a
company has no profits or its profits are inadequate, it may pay remuneration to a
managerial person, by way of salary, dearness allowance, perquisites and other
allowance, not exceeding ceiling limit of Rs 10,50,000 per annum or Rs 82,500 per
month calculated on the following scale:
Where the effective copitol of the Monthly remunerotion poyoble

comPony rs sholl not exceed
(i) Less thon Rs I crore Rs 40,000
(ii) Rs I crore or more but less lhon Rs 5 crores Rs 57,000
(iii) Rs 5 crores or more bul less thon Rs I5 crores Rs 72,000
(iv) Rs
'l
5 crores or more Rs 87,500
Lr addition to the above, certain perquisites like contribution to provident fund,

grat,:uity,leave encashment may be paid. Non-resident Indians may also be paid
children education allowance, holidaypassage for children studying outside India
or family staying abroad, leave travel concession. These additional benefits shall
be subject to the limits laid down in Schedule XIII.
The expression 'effective capital' shall mean the aggregate of the

paid-up share capital
(excluding share application money or advances against shares); amount, if any,
for the time being standing to the credit of share premium account, reserves and
surplus (excluding revaluation reserve); long term loans and deposits repayable
after one year (excluding working capital loans, overdrafts, interest due on loans
unless funded, bank guarantee, etc. and other short term arrangements) as reduced
by the aggregate of any investrnents (except in case of investnents by an investrnent
company whose principal business is acquisition of shares, stock, debentures
or other securities), accumulated losses and preliminary expenses not written
off.
Sitting Fee (s.310). The sitting fee payable to a director for each meeting of the Board
of Directors or a committee thereof shallnotexceed ceilingprescribedbythe Central
Govemment (presently, Rs 2000). Anyincreasein the sittingfee payable to a director
shall not require the prior approval of the Central Govt. if it falls within the
prescribed limits.
12.74.8 Meetings of Directors. The directors of a company are collectively known
as Board and decisions are taken by them at a Board meeting. But in certain
circumstances, resolutions of directors canbe passed by circulating them among
the directors. Also the Board may delegate powers to a director or a committee of
directors.
520 Business Law
Section 285 provides that a meeting of the Board of Directors of every comPany
must be held at least once in every three months and at least four such meetings
mustbe held in every calendar year.
The requisite quorum for a Board meeting is one-third of the total strength of the
directors or two directors whichever is higher. For the purpose of counting number
of directors forming the quorum, the directors who are interested in any contract to
be entered into with the company should notbe taken into account. In other words,
only those who are disinterested in the matters to be discussed at the Board meeting
will form the quorum. If the requisite quorum is not present at the meeting, it
stands adjoumed and will be held on the same day, time and place in the next
week. If the quorum is not present at the meethg, any decisions taken or resolutions
passed shallbe invalid, but no quorum is necessary at the adjoumed meeting'
The chairman for the meetings of the Board of Directors may either be named in the
articles or he may be elected by the directors. The questions arising at the meeting
of the directors are to be decided by a majority vote and the chairman of the Board
will have a casting vote in case of equality of votes.
Resohttions by ciruilation As mentioned earlier, certain resolutions can be passed
by circulation also. Section 289 states that the resolution to be passed by circulation
mustbe circulated in a draft together with the necessary PaPers, if any, to all the
directors, or to all the members of the committee, as the case may be, then in India
(notless thanthe quorum fixedfor a meetingof the Board orCommittee of directors)
and to all other directors at their usual address inlndia.If the resolutionis 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, it will be deemed to have been duly passed.
However, there are certain Powers of the Board which can be exercised only at
Board meetings and not through circulation. sections 262,292, 297 , 376 and 488
provide for such matters.
l2.l4.g Powers of the Board of Directors. Section 291 provides for general powers
of the Board of directors. It provides:
Subject to the provisions of the Act, the Board of Directors of a company shallbe
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 cannot exercise any Powel 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. [r exercising any such power or doing any such act or thing, the
Board will be subject to the provisions contained in that behalf in this or any other
Act, or in the memorandum or articles of the company, or in any regulations nOt
inconsistent therewith and dulymade thereunder, includingregulations madeby
the company in general meeting.
Thus, the Board may exercise all powers of the company and can do all such acts
and things that the company can do. But the exercise of such powers of the Board
Elements of Company Law SZI
shallbe rovisions of the Companies Act or any other Act
andMe resolutions of the company in general meetings.
Thus, a amending the articles, restrict the powers of the
Board. Butthe meeting xcept
in the following cases: to act
[Barrona. Potter (L914) sonal
interests in complete disregard to the company fMarshall's Value Gear Co. Ltd. a.
Manning Wardle I Co. Ltd (1909) Ch. 2671;3. when the Board has become
incompetent to act e.g. where all the directors constituting the Board are interested
in a dealing or where none of the directors was validly appointed lB.N.Vishwanathan
a.Tffins B.A. and Lfd. AIR (1953) Mad 5101.
The mode ot fiianner of exercise of board's powerc, Section 2g2provides that the
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 meeting of
the Board: (i) the power to make calls on shareholders in respect of money unpaid
on their shares; (ii) the power to issue debentures; (iii) the power to borrow money
otherwise than on debentures; (iv) the power to invest funds of the company; and
(v) the power to make loans.
The Board may, howevelby a resolution passed at a meeting delegate to any

committee of directors, the managing directors, the manager or any otherprincipal
officer of the company, the powers specified in clauses (iii), (iv) and (v) on such
conditions as the Board mayprescribe.
Besides the powers specified ins.292, there are certain other powers also which
can be exercised only at the meeting of the board. These are: (i) The power of filling
casual vacancies in the Board (s.262); to appoint additional directors (s.260); and
to appoint altemate disectors (s.313) (ii) sanctioning of a contract in which a
director is interested 1s.2971. (iii) the power to recommend the rate of dividend to be
declared by the company at the Annual General Meeting, subject to the approval
by the shareholders.
In the followingcases, not only thatthe powersbe exercised at the Board's meeting
but also that every director present and entitled to vote must consent thereto: 1. The
power to appoint a person as managing director or manage{, who is already
managing director or manager of another company (Ss.316 and 386). 2. The power
to invest in any shares and debentures of any other body corporate (s.372).
Restrictions on powers of directors. Section 293 provides that the Board of Directors of
a public companyor private companywhichis a subsidiary of a public company
a
cannot exercise the following powers without the consent of the shareholders in
general meeting:
1. Sell, lease or otherwise dispose of the whole, 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.
However, this restriction does not apply to the case of a company whose ordinary
business is to sell or lease properly.
522 Business Law
2. Remit or give time for the re-payment of any debt due by a director except in
the case of renewal or of continuance of an advance made by a banking company
to its director in the ordinary course of business.
3. brvest, otherwise than in trust securities, the amount of compensation received

by the company in respect of compulsory acquisition of any fixed assets of the
comPany.
4. Borrow money exceeding the aggregate of the paid-up capital of the company
and its free reserves. "Borrowing' does not include temporary loans obtained from
the company's bankers in the ordinary course of business.
5. Contribute in any year, to charitable and other funds not directly relating to
the business of the company or the welJare of its employees, any amount exceedLg
Rs 50,000 or 5% of its average net profit for the last three financial years, whichever
is greater.
Howevel, contributions of National Defence Fund or any other fund approved by

the Central Govemment for the purpose of national defence are exempted from the
above provisions. Any amount maybe contributed without obtaining the sanction
of the company is general meeting.
The Companies Act does not expressly empower companies to borrow money.
Therefore, most of companies expressly provide for such borrowing powers in the
memorandum. In such case, where memorandum authorises the company to
borrow, the Articles provide as to how and by whom these powers shall be
exercised. It may also fix up the maximum which can be borrowed by the company.
12.74.10 Duties of Directors. Duties of directors may be divided under two heads:
1. Statutory duties; and 2. Duties of a general nature. The statutory duties are the
duties and obligations imposed by the Companies Act. These have been discussed
at appropriate places. Important among them are:
(a) To file return of allotments. Section 75 charges a company to file with the
registrar, within a period of 30 days, a retum of the allotments stating the specified
particulars. Failure to file such retum shall make directors liable as 'officer in
default'. A fine upto Rs 500 per day till the default continues may be levied.
(b) Nof to issue irredeemable preferences shares or shares redeemable after 1.0 years.
Section 80, forbids a company to issue irredeemable preference shares or preference
shares redeemable beyond 1.0 years. Directors making a^y such issue may be held
liable as 'officer in default' and may be subject to fine upto Rs 1,000.
(c) To disclose interest [5s.299-300], A director who is interested in a transaction
of the company must disclose his interest, to the Board. The disclosure must be
made at the first meeting of the Board held after he has become interested. This is
because a director stands in a fiduciary capacity with the company and therefore,
he must not place himself in a position in which his personal interest conflicts
with his duty. hterestshould be suchwhich conflicts with the duties of the director
towards the company.
Notice, howeaer, that the Companies Act does not debar a company from entering into a
contract in which a director is interested. It only requires that such interest be disclosed. An
interested director should not take part in the discussion on the matter of his
interest. His presence shall not be counted for the purpose of quorum. He shall not
vote on that matter. If he does vote, his vote shall be void. Non-disclosure of interest
makes the contract voidable and not void. \Atrhere the whole body of directors is
aware of the facts, a formal disclosure is not necessary (Venkntachalapathi o. Guntur
MiIIs).In this case a loan was advanced by the wife of a director creating a mortgage
on the property of the company. The director did not disclose his interest and he
even voted on the matter. The company later sued to have mortgage set aside. Held,
the fact was known to all directors and a formal disclosure was not necessary. As
regards voting by the interested director, it was held that the voting would not
render the contract void or voidable unless in the absence of that vote, there would
have been no quorum qualified to contract.
(d) To disclose receipt from transferee of property. Section 319 provides that any
money receivedby the directors from the transferee in connectionwith the transfer
of the company's property or undertaking mustbe disclosed to the members of the
company and approved by the company in general meeting. Otherwise the amount
shall be held by the directors in trust for the company. This money may be in the
name of compensation for loss of office but in essence may be on account of hansfer
of control of the company. But if it is bonafde payrnent of damages of the breach of
contract, then it is protected by s.321(3).
(e) To disclose receipt of compmsation from trunferee of sharcs.If the loss of office
results from the transfer (under certain conditions) of all of the shares of the
company, its directors would not receive any compensation from the transferee
unless the same has been approved by the company in general meeting before the
transfer takes place (s.320). If the approval is not sought or the proposal is not
approved, any money received by the directors shall be held in trust for the
shareholders who have sold their shares.
Section 320 further provides that in pursuance of any agreement relating to any of
the above transfers, if the directors receive any payment from the transferee within
one year before or within 2years after the transfer, it shall be accounted for to the
company unless the director proves that it is not by way of compensation for loss
ofoffice.
Section 321 further provides that if the price paid to a retiring director for his
shares in the company is in excess of the price paid to other shareholders or any
other valuable consideration has been given to him, it shall also be regarded as
compensation and should be disclosed to the shareholders.
Some other statutory duties are: to attend Board meetings; to convene and hold
general meetings; to prepare and place before AGM financial accounts; to make
declaration of solvency.
The general duties of directors are as follows:
(A) Duty of good faith. The directors must act in the best interest of the company.
Lrterest of the company implies the interests of present and future members of the
524 Business Law
company on the footing that the company would be continued as
a going
concem.
Also if or
and in of
such p €,
Others
Similar view was expressed in Langunas Nitrate Co.

(1899) 2 Chi. 392, in the following words: "If directo
they act with such care as is to be reasonably expect
Elements of Companylaw S2S
their knowledge and experience and if they act honestly for the benefit of the
company they discharge both their equitable as well as legal duty to the company.,,
Section 201, states that a proaision in the company's Articles or in any agreement that
excludes the liability of the directors for negligence, default, misfeasance, breach of duty or
breach of duty or breach of tntst, is aoid. The company cannot even indemnify the
directors against such liability. But if a director has been acquitted against such
charges, the company may indemnify him against costs incurred in defense. Section
633 further states that where a director may be liable in respect of the negligence,
default, breach of duty, misfeasance or breach of trust but if he has acted honestly
and reasonably and having regard to all the circumstances of the case, he ought
fairly to be excused, the court may relieve him either wholly or partly from his
liability on such terms as it may think fit.
(C) Dutytoattendboardmeetings.Anumberofpowersofthecompanyareexercised
by the Board of Directors in their meetings held from time to time. Although a
director is not expected to attend all the meetings but if he fails to attend three
consecutive meetings or all meetings for a period of three months, whichever is
longer, without permission, his office shall automatically fall vacant.
@) Dttty not to delegate. Director being an agent is bound by maxim 'delegatus

non protest delegate'which means a delegate cannot further delegate. Thus, a
director must perform his functions personally. A director may, hozoeuer, delegate in the
fuIlowing cases: (a) where permitted by the Companies Act or articles of the company;
(b) Having regard to the exigencies of business certainfunctions may be delegated to
other officials of the company.
Some other duties are: to convene statutory, annual general meeting and also
extraordinary generalmeeting general meeting when requiredby the shareholders
of the company; to prepare and place at the AGM along with the balance sheet and
profit and loss account a report on the company's affairs; to make a declaration of
solvency in the case of a Member's voluntary winding up.
The duties of the directors are usually regulated by the company's articles. IA/hile
performing their duties, they must display reasonable care, honesty, good faith,
skill and diligence. As they stand in a fiduciary relationship to the company and
they are agents and trustees in certain respects, they are bound to exercise in the
performance of their duties a reasonable degree of skill and care.
12.14.17 Liabilities of Directors. The liabilities of directors may be considered
under the followingheads: 1,. Liability to the company. 2. Liability to third parties.
3. Liability for breach of statutory duties. 4. Liability for acts of co-directors.
5. CriminalLiability.
Liability to the cornpany. The liability to the company may arise from: (a) breach of
fiduciary duty; (b) tiltra-aires acts; (c) negligence; and (d) breach of trust and
misfeasance.
(a) Breach of fiduciary duty.Where a director acts dishonestly in disregard to
the interests of the company, he will be held liable for breach of fiduciary duty.
526 Business Law
Most of the powers of directors are 'powers in trust' and therefore, should be
exercised in the interest of the company and not in the interest of the directors or
any section of members. Thus, where the directors, in order to forestall a take-over
bid, transferred the unissued shares of the company to trustees to be held for the
benefit of the employees and an interest-free loan from the company was advanced
to the trustees to enable them to pay for the shares, it was held to be a wrongful
exercise of the fiduciary powers of the directors [Hogg a. Cramphorn Ltd. (1966) 3
AllER420l.
@) Ultra-oires acts. Directors are supposed to act within the parameters of the
provisions of the Companies Act, Memorandum and Articles of Association since
these lay down the limits to the activities of the company and accordingly to the
powers of the Board of Directors. The directors shall be held personally liable for
acts beyond the aforesaid limits, beingultra-oires.Thus, where the directors pay
dividends or interest out of capital, they will be liable to indemnify the company
for any loss or damage suffered due to such act.
(c) Negligence. The directors shall be deemed to have acted negligently in
discharge of their duties and consequently liable for any loss or damage resulting
therefrom where they fail to exercise reasonable care, skill and diligence. However,
error of judgement will not be deemed as negligence. It may be noted that the
directors cannotbe absolved of the liability for negligence by any provision in the
Articles (s.201). The court may award relief to directors against such liabilitv under
s.633.
(d) Breach of trust andmisfeasance. Directors are the trustees for the money and
property of the company handled by them, as well as the exercise of the powers
vested in them. If they act dishonestly or malafide in the exercise of their powers
and performance of their duties, they will be liable for breach of trust and may be
required to make good the loss or damage suffered by the company by reason of
suchmalafide acts. They are also accountable to the company for any secretprofits
they might have made in transactions on behalf of the company.
Directors can also be held liable for their acts of 'misfeasance', i.e., misconduct or
wilfulmisuse of powers. However, misconductwhichisnotwilfulshallnotamount
to 'misfeasancel. Moreover, the directors are entitled to relief against liability for
breach of trust or misfeasance under s.633.
Where a director has misapplied or misappropriated money or property of the
company or has been guilty of breach of trust or misfeasance, the court may order
him to repay the money or restore the property or to pay compensation [P.K.
Nedungadia. Malayalee Bank Ltd., AIR (1971) S.C. 8291.
Liability to third parties. The discussion on liability of directors towards third

parties may be grouped as under: (a) Liabitity under the provisions of the Act.
(b) Liability for breach of warranty of authority.
(a) Liability uniler the act.The following provisions make directors personally
liable to third parties:
(i) With regard to prospectus. Failure to state any particulars as per the
requirements of s.56 or misstatement of facts in a prospectus renders a director
personality liable of damage to the third party. Section 62 provides that a directors
shall be liable to pay compensation to every person who subscribes for any
shares or debentures on the faith of the prospectus for any loss or damage he
may have sustained by reason of any untrue statement included therein. He
may, however, escape liability where he proves his innocence.
$) With rcgard to allotment. Directors may also incur personal liability for:
- irregular allotment, i.e., allotmentbefore minimum subscription is raised or
without filing a copy of the statement in lieu of prospectus [s.71(3)].
- for failure to repay application money in case of minimum subscription having
not been received [s.69(5)].
- for failure to repay application money when application for listing of securities
is not made or is refused (s.73).
(iil) Unlimitedliability. Directors will alsobe held personally liable to the third
parties where their liability is made unlimited in pursuance of s.322 (i.e., vide
memorandum) or s.323 (i.e., vide alteration of memorandumbypassingspecial
resolution).
(iv) Fraudulent trading. Directors may also be made personally liable for the
debts or liability of a company by an order of the court under s.542. Such an
order shall be made by the Court where directors have been found guilty of
fraudulent trading.
@) Liability forbreach of waranty. Directors are supposed to function within

the scope of their authority. Thus, where they transact business in respect of matters
ultra-aires the company or ultra-aires the Articles, they maybe proceeded against
personally for any loss sustained by the third party.
Liability for Breach of Statutory Duties. The Act, imposes numerous statutory
duties on the directors under its various sections. Default in compliance of these
duties attracts penal consequences. For instance, they are liable as 'officer-in-
default'for default in filing retum of allotments (s,75); for failure to comply with
the provisions of the Act relating to issue of redeemable preference shares or
redemption of irredeemable preference shares, etc. (s.80,80A).
Liability for acts of co-directors. A director is the agent of the company and not of
the other members of the Board. Accordingly, nothing done by the Board can
impose liability on a director who did not participate in their action or did not
know it. His liability shall not arise even where he attends the subsequent Board
meeting at which minutes recording the wrongful action of the earlier meeting are
confirmed. To incur liability he must either be a party to the wrongful act or later
acquiesce (consent) to it. Thus, the absence of a director from Board meetings does
not make him liable for the fraudulent acts of a co-director on the ground that he
ought to have discovered the fraud lDooey a. Cory 0884) 25 Ch. D.7251.
528 Business Law
director is made liable for the acts of codirector he is entitled to contribution
\Ay'here a
from the other director or codirector who were a party to the wrongful actlRnmskil
a, Edwards (1885) 3L Ch.D.L001. However, where the director seeking contribution
alone benefited from the wrongful act, he is not entitled to contribution.
Criminal liability. Apart from civil liability under the Act or under the general law,
directors of a company may also incur criminal liability under colrunon law, as
well as under the Companies Act and other statutes. Some of the provisions of the
CompaniesActwhichmake directors criminallyliable (fine orland imprisonment)
are:
S.M(4) - Filing of prospectus or statement in lieu of prospectus (to be filed by

private company on ceasing to be private company) containing untrue statement.
- Failure to repay deposits within the prescribed time limits.
S. 58,4'(5)
S. 53A(6) - Accepting deposits or inviting deposits in excess of the prescribed

limits.
S. 53 - Issuing a prospectus containing untrue statement.
- Knowingly making a false, deceptive or misleading statement and thereby

S. 68
inducing persons to invest money.
S. S4(3) - Fraudulently renewing a share certificate or issuing a duplicate
certificate.
S. 210(5) - Failure to lay balance-sheet, profit & loss accounts, etc. at the annual
generalmeeting.
S. 240(3) - Failure or refusal to produce books to inspector or fumish information
or to appearbefore inspector conducting hvestigation.
S. 295(4) - Granting loan to directors without approval of the Central Govemment.
Ciminnl liability under SEBI. The directors of a company may also be held criminally
liable for contravention of the provision of SEBI.
Criminal liability under economic legislations. Directors are also made criminally
liable for various lapses and non<ompliances under MRTP Act, I(D&R) Ac! FEMA,
Income-tax Act, etc.
Audit Committee ( s. 292A)
It provides that every public company having paid up capital of Rs 5 crore or more
shall constitute a committee of the board of directors known as Audit Committee.
It will consist of three or more directors as decided by the board. Two thirds of the
members shallbe other than managing or whole time director. Its members shall
elect a chairman from amongst themselves. It shall act in accordane with the terms
of reference as specified in writing by the board.
The meetings of the audit committee still also be attended and participated by
auditors, intemal auditors and director-in-charge of finance with no voting right.
The committee shall discuss the company's intemal control system, scope of audit,
auditors' observations and review the half-yearly and arurual financial statements
before submission to the board. The committee shall also have authority to
investigate into the terms specified or referred to and for this purpose it shall have
access to the company's records and extemal professional advice.
The recommendations of the committee relating to financial management including

the audit report shall be binding on the board and if not accepted, the board shall
record the reasons therefore and communicate the same to the shareholders through
its report.
The chairmano theAuditCommittee shall attend every annual generalmeetingof

the company to provide classification on matters relating to audit..
For non-compliance of the provisions of s. 292A, the company and every officer in
default shall be punishable with imprisonment upto one year or fine upto Rs
50,000. The offence is compoundable.
PART 15 - INTER-CORPORATE LOANS AND INVESTMENTS

The Companies (Amendment) Act, 7999 inserted a new section - 372A which
replaced the erstwhile Ss. 370 and372. Now a single section is meant to regulate
inter-corporate loans, guarantees and investments which were earlier being
regulated through two sections (i.e., s.370 for loans and guarantees and s.372for
investrnents). The provisions of s.372 A are summarised below:
(1) A company is prohibited, directly or indirectly, to (a) make any loan to any
other body corporate; (b) grve any guarantee, or provide security, in connection
with a loan made by any other person to, or to any other person by, any body
corporate; and (c) acquire, by way of subscription, purchase or otherwise the
securities of any other body corporate, exceeding 60% of its paid-up share capital
and free reserves whichever is more. However, this limit can be exceeded by
previously authorised special resolution passed in a general meeting.
Further, the Board may give guarantee without being previously authorised by a
special resolution, if following three conditions are satisfied: (a) a resolution is
passed in the meeting of the Board authorising to give guarantee in accordance
with the provisions of this section; (b) there exists exceptional circumstances which
preventthe companyfrom obtainingprevious authorisationby a special resolution
passed in general meeting for giving a guarantee; and (c) the resolution of Board is
confirmed within 12 months, in a general meeting of the company or the
AGM held immediately after passing of the Board resolution, whichever is
earlier.
Furthermore, it is mandatory that the notice for the special resolution indicate the
specific limits, the particulars of the body corporate in which the investment is
proposed tobe made or loan or security or guarantee tobe givery the purpose of the
investment, loan or security or guarantee, specific sources of funding and such
other details.
530 Business Law
following: (a) any loan
ilkl-lll,,,lJl:'.1".1|"{
of its wholly owned subsidiary.
(3) No loan to any body corporate shall be made at a rate of interest lower than
the prevailing bank rate, being the standard rate made public under s.49 of the
Reserve Bank of India Act,1934.
(4) No company, which has defaulted in complying with the provisions of s.58A
shall, till such default is subsisting, shall, directly or indirectly (a) make any loan
to any body corporate; (b) give any guarantee, or provide security, in connection
with a loan made by any other person to, or to any other person by, any body
corporate; and (c) acquire, by way of subscription, purchase or otherwise the
securities of any other body corporate.
(5) (a) Every company shall keep a register showing the following particulars in
respect of every investrnent or loan made, guarantee given or security provided by
it in relation to any body corporate (i) the name of the body corporate; (ii) the
amount, terms and purpose of the investment or loan or security or guarantee;
(iii) the date on which the investment or loan has been made; and (iv) the date on
which the guarantee has been given or security has been provided in connection
with a loan. (b) The particulars of such investment, loan, guarantee or security
shall be entered chronologically in the register within 7 days of the making'of such
investrnent or loan, or the giving of such guarantee or the provision of such security.
(6) The Register shall be kept at the registered office of the company concemed
and (a) shall be open to inspection at such office; and (b) 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 fees as in the case
of the register of members of the company; and the provisions of s.163 shall apply
accordingly.
(7) The Central Government is authorised to prescribe guidelines for the
purposes of this section.
(8) In application of the provisions of this section. Nothing contained in this
section shall apply (a) to any loan made, any guarantee given or any security
provided or any investment made by (i) a bankhg company, or on 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 of
providing infrastructural facilities. (ii) a company whose principal business is the
acquisition of shares, stock, debentures or other securities; (iii) a private company,
unless it is a subsidiary of a public company; (b) to investments made in shares
allotted in pursuance of s.81 (1)(a).
(9) Penalty for not complying with the provisions of this section excluding
sub-s.S. The company and every officer of the company who is in default shall be
punishable with imprisonment which may extend to 2 years or with fine which
may extend to Rs 50,000. Further, all persons who are knowingly parties to any
such contravention shall be liable, jointly and severally, to the company for the
repaymentof the loan or formaking good the same which thecompanymayhave
been called upon to pay by virtue of the guarantee given or the securities provided
by such company.
(10) Penalty for not complying with the provisions of sub-s.S. The company and
every officer of the company who is in default shall be punishable with fine which
may extend to Rs 5,000 and also with a further fine which may extend to Rs 500 for
every day after the first during which the default continues.
The words 'loan' and 'free reserves' are explained as follows: 'Loan' includes
debentures or any deposit of money made by one company with another company,
not being a banking company. 'Free reserves' means those reserves which, as per
latest audited balance sheet of the company, are free for distribution as dividend
and shall include balance to the credit of the securities premium account but shall
not include share application money.
PART 16 - PREVENTION OF OPPRESSION AND MISMANAGEMENT

12.16.1 Rule of Majority. The principle of rule by majority is made applicable to
the management of affairs of the company. The shareholders pass resolutions on
various subjects either by simple majority or by three-fourths majority. Once a
resolution is passed, then it is binding on all the members of the company. As a
resultant corollary the court will not intervene to protect minority against the
resolution, as on becoming a member, the shareholder agrees to submit to the will
of the majority of the members. Thus, if a wrong is done to the company, it is the
company which is legal entity having its own personality, which can institute a
suit against the wrongdoer; and shareholders do not have a right to do so. This
rule was laid down in the leading case of Foss v. Harbottle thefacts of this case were
as follows:
F and T brought an action on behalf of themselves and all other shareholders
against the defendants who consisted of 5 directors, a solicitor and an architect of
the company alleging thatby concerted and illegal transactions they had caused
the company's property to be lost to the company. It was also alleged that there
was no qualified Board. F and T claimed damages from the defendants to be paid
to the company. The Court held, that the action could not be brought by the minority
shareholders. The wrongdone to the companywas one which couldbe ratifiedby
the majority of members. The company was the proper plaintiff for wrongs done to
the company and the company can act only through its majority shareholders.
The majority of the members should be left to decide whether to commence
proceedings against the directors.
532 Business Law
The principle of majority rule has since then been applied to a number of cases. In
Mac Dougall a. Gardiner (1975) 1 Ch. D. 13, Mellish, L.J. observed: If the thing
complained of is a thing which, in substance, the majority of the company is
entitled to do, or if something has been done irregularly which the majority of the
company are entitled to do regularly, or if something has been done illegally which
a majority of the company are entitled to do legally, there canbe no use in having
litigation about it, the ultimate end of which is only that a meeting has to be called
and then ultimately end of which is only their wishes.
Similarly, inRnjanhmundry Electric Sttpply Co.a.NageshwaraRao,AIR (1956) S. C.
213, the Supreme Court observed thal The Courts will not, in general, intervene at
the instance of shareholders in matters of intemal administration and will not
interface with the management of the company by its directors so long as they are
actingwithinthepowers conferred onthemunder articles of the company. Moreoveq,
if the directors are supported by the majority shareholders in what they do, the
minority shareholders can, in general, do nothing about it.
One may notice that the aforesaid decisions are essentially a logical extension of
the principle that a company is a separate legal person from the members who
compose it. Once it is admitted that a company is a separate legal person, it follows
that 'if a wrong is done to it, the company is the proper person to bring an action.
This is a simple rule of procedure which applies to all wrongs, viz., only the
injured party may sue. If, for instance, X intentionally pushes Y down the stairs
and Y breaks his leg in consequence, C, who has seen the whole incident can not
bring an action against X. C has not been hurt; he is not the injured party; he is the
wrong plaintiff. The right plaintiff is Y.
The rule, as applied to companies, however, appears a little more complicated.
After all, the directors who have been fraudulent have injured the company. The
company is composed of members. Losses to the company affect all the members,
not simply the majority or the minority or any particular member. \rVhy then, should
an individual member not sue, since he has been injured?
The answer is that injury is not enough. The plaintiff must show that the injury
has been caused by a breach of duty to him. In the course of existence a person
suffers many injuries for which no action can be brought, for no duty owned to
him has been broken. The individual shareholders or even the minority
shareholders who try to show that the directors owe a duty to them personally in
their management of the company's assets will definitely fail. The directors own
no duty to the individual members, but only to the company as a whole. A company
is a person and if it suffers injury through breach of duty owed to it, then the only
possible plaintiff is the company itself acting, as it must always act, through its
majority.
It should, howevel, be noted that the aforesaid principle of Fo ss zi. Harbottle applies
only where a corporate right of a member is infringed. The rule doesn't apply
where an individual right of a member is denied. The shareholder, by his contract
with company undertakes with respect to his rights which his membership carries
to accept as binding upon him the decisions of the majority of shareholders, if
arrived at in accordance with the law and the articles; these membership rights are
referred to as corporate membership rights, other rights of the sharehbld6r, such
as right to vote, or right to receive dividend are his personal or individual rights
and cannot be taken away by the majority and if the company refuses to record his
vote orpay him the dividend, he can sue in his own name and this right of action
is unaffected by any decision of the majority .
Exceptions to 'The Majoity RuIe' (Protection of Minoity Rights). In the following

cases the rule of Foss a. Harbottle does not apply, i.e., the minority the shareholderi
may bring an action to protect their interest:
1' . Where the act done is iIIegaI or ultra-aires the company . A shareholder is entitled
tobring an action against the company and its officers in respect of matters which
are illegal or ultra-aires the company since no majority of shareholders (not even
the entire body of shareholders) can sanction such matters .lBurland a. Earle (7902)
A.C.831.
2. Breach offiduciary duty.Whena director is in breach of fiduciary duty, every

shareholder may be regarded an authorised organ to bring the action lsantya
Charan LaI o. Rameshusar Prasad Bajoria (1950) S.C.R. 394l.In Blakesly a. lohnson
(L980), a IJ.S. case, the President Director of a colporation who was also the majority
stockholder did not make adequate disclosure to the minority shareholder of facts
conceming the sale of the business and as a result the latter allowed his stock to be
redeemed by the corporation for an inadequate price. HeId, the president was
guilty of breach of fiduciary duty.
3. Where the act complained of constitutes a fraud on the minority. \A/here the majority
of a company's members use their power to defraud or oppress the minority, their
conduct is liable to be impeached even by a single shareholder. Justice Evershed,
M.R. in Greenhalgha. Ardene Cinemas Ltd. (1957) said,"a special resolution would
be liabletobe impeached if the effect of itwere to discriminatebetween the majoiity
shareholders and minority shareholders, so as to give the former an advantage of
which the latter were deprived."
Thus, where the majority of members of company 'A', who were also members of
company'B', passed a resolution to compromise an action against company'B'.
The resolution was charged to be favourable to company 'B'but unfavourable to
company'A' . Held, the minority of company A' could get the compromise set aside
(Menier a. Hooper's Telegraph Works Ltd.)
4. \A/here an actwhich requires special resolution tobe effectivebuthas, in fact,
been doneby a simple majority.
5. Wherethepersonnlrightsofanindiuidualmemberhnaebeeninfringed.Asalready
noted, the principle of majority rule is applicable only to the corporate membership
rights of a member. Infringement of a member's individual rights like right to vote,
right to receive dividends, etc., entitles him to proceed in his own name.
6. Protection under the Companies Act.The Companies Act,7956, vide certain
specific provisions, extends protection to the minority shareholders by conferring
certain rights on them:
534 Business Law
prejudicial to the interest of its members or to public interest.

affairs of the company will be conducted in a manner prejudicial to public interest

or in a manner prejudicial to the interests oT the comPany.
After hearing the petition, the CLB may pass such order as it thinks fit.
Persons entitledto complain. Section 399 specifies the persons who are entitled to
apply to the CLB, for relief in cases of oppression and mismanagement complained
of in pursuance of Ss.397-398. The numbers necessary to make such application
is: (i) in the case of a company having a share capital, 100 members or 10 per cent
of the total number of its members whichever is less, or members holding 10 per
cent of the issued share capital; (ii) in the case of a company not having a share
capital, 20 per cent (one fifth) of the total number of its members. The Central
Govemment is empowered in an appropriate case to authorise any lesser number
of members to make such application to the CLB.
Section 402 provides for the relief that can be provided by the CLB and the CLB's
order may include: (a) the regulation of the conduct of the company's affairs in
future; (b) the acquisition of the shares or interests of anymembersby other members
or by the company; (c) the consequent reduction of the share capital in case of
(b) above; (d) termination, setting aside or modification of any agreement, however
arrived at, between the company and the manager, managing director or any other
director; (e) termination, setting aside or modification of any agreementbetween
the company and any other person with the latter's consent; (f) setting aside of any
transfef, delivery of goods, payment, execution or other act relating to the property
made or done by or against the company within three months of the application
which would amount to fraudulentpreference in case of anindividual's insolvency;
(g) any other matter for which, in the opinion of the CLB, it is just and equitable
that provision should be made.
12.76.3 Powers of Central Government to Prevent Oppression or
Mismanagement. Section 408 empowers the Central Government to prevent
oppression or mismanagement by nominating directors on the Board of directors
of i company. For details please see the Discussion on 'Appointment of Directors'-
Part72.74.3.
12.16.4 Investigation. Besides the aforesaid provisions, to prevent oppression or
mis-managementby those who control the affairs of the company, the Act contains
certain provisions under the head Investigation (see Part 12'13.7).
PART 17 _ COMPROMISE AND ARRANGEMENT

1'2.17.l Meaning. Compromise means an amicable settlement of differences by
mutual concessions by the parties to dispute or difference by agreeing not to try it
out. Arrangementis of wider importthancompromise and includes a reorganisation
of the share capital of the company by the consolidation of shares of different
classes, or by both these methods. An arrangement may also involve
(i) debentureholders being given an extension of time for payment, releasing their
security in whole or in part or changing their debentures for equity shares in a new
company; (ii) the creditors agreeing to receive cash in part payment of the claims
and the balance in shares or debentures of the comPany; (iii) the preference
536 Business Law
shareholders giving up- their rights to arrears of dividends, further
agreeing to
accept a reduced rate of dividend in the future and so on.
@) For purpose of reorganisation which implies alteration or modification of the

rights of shareholders or creditors or both.
n is the blending of two or more undertakings into one
, the shareholders of each blending compar,yi becoming
the shareholders of the other company which trotas utenaei
as would enable it to secure the passing of special resolution at general meetings.

Where share purchase can be effected by negotiation and agreement, it is not
necessary to resort to the provision of the Act. But s.395 provides a means whereby,
if it is so desired, the whole of the capital or the whole of a class of shares can be
acquired by enforcing the compulsory purchase of the shares of dissentients subject
to the right of the latter to appeal to the court.
12.77.3 Statutory Frovisions regarding Compromise or Arrangement. The Act
empowers a company to make compromise or arrangement with its creditors or
members and make suitable provisions under Ss.391 to 393.
Section 391 makes the following provisions:
1. lA/here a compromise or arrangement is proposed (a) between a company
and its creditors or any class of them; or (b) between a company and its members or
any class of them; the court may, on the application of the company or any creditor
or member or liquidator order that a meeting of the creditors or members (or any
class of them) be called and held in the manner directed by the court.
2. If at the meeting, a majority of the number representing in value three fourths
of the creditors or members (or any class of them) present in person or by proxy
agree to the compromise or arrangement, then the compromise or arrangement
will be binding on: (a) all the creditor or creditors of the class or all the members or
members of the class; and (b) the company or, if the company is being wound up,
on the liquidator or contributaries of the company.
3. The court shall not make any order sanctioning the compromise or
arrangemeilt unless it is satisfied that the company or any other party making the
application has disclosed to the court, by affidavit or otherwise, all material facts
relating to the company, such as: (a) the latest financial position of the company;
(b) the latest auditor's report on the accounts of the company, (c) whether any
investigation or proceedings under Ss. 235 to251. are pending against the company/
etc.
4. An order made by the court sanctioning the compromise or arrangement

shall have no effect until a certified copy of the same is filed with the Registrar.
Moreover, a copy of every such order must be annexed to every copy of the
memorandum, issued after the filing of the certified copy of the order or, if the
company has no memorandum, to every copy of its constitution.
5. After an application for compromise or arrangement is made, the court may at
any time stay the commencement or continuation of any suit or proceedings again-st
the company on such terms as it thinks fit, until the application is disposed of.
72.17.4 Certain Typical Points

1 . The application to the Court under s.391 may be made in the case of a company
in liquidation, not only by the liquidator but also by a creditor or member. This
right of the creditor or member is not taken away by reason of the company being
wound uplRnjmdraPrasad Agarwala. Official Liryidator (1978)48 Comp.Cas.476l.
2. Section 391 contemplates a scheme between a company and its creditors or
any class of them orbetween the company and its members or any class of them.
539 Business Law
Where a sche etween the company
shareholders ing with the rights o
shareholders, be valid even though
preference sha to ascertain their views
S. K. Ganguly (7975)45 Comp. Cas.5631.
3. There is no provision of law which enables compulsory transfer of the

employees of an undertaking along with the assets, machinery, licenses, permits,
rights, etc., of the undertaking. The employees mustbe given the option to join or
not to join the transferee company lJohnwyeth (India) Ltd.,In re, (7988) 63 Comp.
Cas. 2331.
4. Section 372 operates in a different field and in different circumstances from

s.391. It is confined to transactions where shares are purchased by the investing
company out of its funds, the consideration being money or money's worth.
Compliance with s.372 is, company
are exchanged for those of angement
lNauijiaan Mills Ltd. Kalol,
72.17.5 Powers of court. The courthas very wide powers in sanctioning or rejecting
a scheme of compromise or arrangement. The court shall have, inter alia, the
following powers:
1. It may, at any time, after an application has been made to it under s.391, stay
the commencement or continuation of any suit or proceeding against the company
on such terms as it thinks fit, until the application is finally disposed of.
2. Where an order sanctioning a compromise or an arr€u:lgement hasbeen made,
it: (i) shall have power to supervise the carrying out of the compromise or
arrangemenf and (ii) may, at the time of making such order or at any time thereafteq,
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.
3. If the Court is satisfied that a compromise or arrangement sanctioned under

s.391 cannotbe worked satisfactorily with or without modifications, it may make
an order for the winding up of the company on its own or on the application of any
interested person.
Points to be considered by the court. The matters which the court has to consider in
giving its sanction were explained by Ashbury,J. inRe Anglo Continental Supply
Co' 1199212Ch.723 andare: (i) That the provisions of the statute have been complied
with; (ii) That the class was fairly represented by those who attended the meeting
and that the statutory majority are acingbonafirle and are not coercing the minority
in order to promote interests adverse to those of the class whom they purport to
represen! and (iii) that the arrangement is such as a man of business would
reasonably approve.
A more elaborate list of such matters was drawn in the matter of Sakamari Steel I
AIIoys Ltd. (1987) 51 Comp. Cas.267 viz. (i) that the provisions of the Companies
Elements of Company Larv 539
Act and Rules have been compiled with; (ii) that the class or classes of members
and/or creditors affected by the scheme have been fairly represented by those who
attended meeting(s); (iii) that the statutory majority agreeing to the proposal were
acting bonafide for thebenefit of all concemed and were not coercing the minority
in order to promote the interests adverse to the class whom they purported to
represenf (iv) that the scheme is fair and reasonable and a shareholder will consider
itbeneficial to the company and for himself; (v) that the company really wants to
save itself from liquidation and it does not want to eat up a part or whole of the
principal and interest of a particular class of its creditors.
12.17.5 Information as to Compromise or Arrangement. Section 393 lays down
the following rules regarding providing of information to the affected persons
under a scheme of compromise or arrangement:
1. Where a meeting of the creditors (or any class of creditors), or of members (or
any class of members) is called under s.391, the notice calling the meeting must be
accompanied by a statement setting forth the terms of compromise or arrangement
and explaining its effect. The statement must in particular state any material interest
of the directors, managing director or manager and every trustee of debenture
holders of the company, whether in their capacity as such or as member or creditors
of the company or otherwise.
2. In case notice calling the meeting is given by advertisement there must 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. Such copies must be fumished
by the company free of charge.
3. If default is made in complying with any of the above requirements, the
company and every officer of the company who is in default, shall be punishabl'e
with fine, which may extend upto Rs 5,000. The company and its officers can
avoid liability if it can be proved that the default in sending the notice and the
statement was caused by the refusal of a person responsible to supply the necessary
particulars as to his material interests.
12.17.7 Legal Provisions regarding Reconstruction and Amalgamation. A
reconstruction or amalgamation may take any of the following forms: 1.By sale of
undertaking)2.8y sale of shares; and 3. By a scheme of arrangement.
By sale of undertakiag. According to s.394, where an application is made to the
Court under s.391 and it is shown to the Court that the compromise or arrangement
has been proposed for the purpose of a scheme of reconstruction of any company
or amalgamation of two or more companies and that under the scheme the whole
or any part of the undertaking, property or liabilities of any company is to be
transferred to another company, the court many make provisions for all or any of
the followingmatters:
(a) the transfer to the transferee company of the whole or any part of the
undertaking, property or liability of any transferor company;
540 Business Law
(b) the allotment or appropriation by the transferee company of any shares,
debentures, policies or other like interests in that .o-puny 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 proceeding
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 person who within such time and in such
manner as the Court directs, dissents 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.
Howeveq, the Court shall not sanction any compromise or arrangement for the
amalgamation of a company, which is being wound up, with utry oth". company
unless the Court has received a report from the CLB or the Registrar that the uifuiit
of the company have not been conducted in a manner prejudiiial to the interests of
its members or to public interests.
Thus, where the only purpose for which the transferor company was created was
to facilitate the transfer of a building to the transferee compiny without attracting
the capital gains tax and the dissolution of the transferor company was soughi
without winding up, the Court refused to sanction to the schem e lzuoocl polymcr
Ltd. , In re (1977) 47 Comp . Cas. 5971.
A certified copy of the Court's order should be filed by the company with the
Registrar within 30 days of the passing of the order.
By sale of shares (s.395). sale of shares is the simplest process of amalgamation or
takeover. shares are sold and registered in the name of the purchasing company.
The selling shareholders receive either compensation or shares in the acquiring
comPany. In case certain shareholders dissent, s.395 contains provisions ior the
compulsory acquisition by the transferee company of shares of the dissenting
minority. The shares may be acquired on the same terms on which the shares of th6
approving shareholders are to be transferred to it. This will prevent the minority
shareholders from demanding too high a price for their shjres. section 395 lays
down as follows:
1. \zvhere the transferee company has offered to acquire the shares or any class
of shares of the transferor company, the scheme or contract embodying sucir offer
has to_be approved by the shareholders concemed within 4 months. Tlie approval
must be given by the holders of not less than 9/ 10ths in value of the shares whose
transfer is involved. In computing 9/10ths value of shares, the shares already
held by the transferee company or its nominee or subsidiary are excluded.
2. If the offer is approved, the transferee company may, atany time within 2
months of the expiry of the said 4 months, give a noiice to ihe dissenting
If the transferee company already holds in the transferor company shares of the
class whose transfer is involved, to a value more than 1 / 10th of tire total value of all
shares in that company, then the above provisions will not apply and the transferee
company cannot acquire the shares of the dissenting members. Howeveq. it may
still acquire the shares if: (a) it offers the same terms to all the shareholders of th-e
same class; and @) the shareholders who approve of the scheme, besides holding
not less than 9 / 10th'in value of the shares, are also not less than 3 / 4ths in numbei
of the holders of those shares.
3. where the transferor company or its nominee or subsidiary already holds in
the transferor comPany more than 9/ 10ths in value of shares of the class transferred
may be agreed or as ordered by the Court, on the application of the transferee

company or the shareholder.
4. where notice has been given by the transferee company to the dissenting
shareholders expressing its desire to acquire their shares and the Court has not
acquire under the section (i.e., s.395). Thereupon, the transferor company shall
register the transferee company as the holder of those shares and infoim the
dissentin$ shareholders of the fact within one month of registration. The transferor
company will also deposit the amount so received in a separate bank account to be
held in trust for the holders of shares in respect to which such amount has been
received.
Furthe{, the following provisions are to apply in relation to every offer of a scheme
or contract involving the transfer of shares or any class of shares in the transferor
company to the transferee company:
(a) Every such offer or every circular containing such offer, or every
recommendation by the directors of the transferor company to its shareholders to
accept such offeq, must be accompanied by such information as may be prescribed
by the Central Govemment.
542 Business Law
(b) Every such offer must contain a statement by or on behalf of the transferee
company, disclosing the steps it has taken to ensure that necessary cash will be
available.
(c) Every circular containing or recommending acceptance of such offer mustbe
presented to the registrar for registration and no such circular canbe issued until
it is so registered.
(d) The registrar may refuse to register any such circular which does not contain
thg prescribed information as per clause (a) above, or which sets out such
information in a manner likely to give a false impression.
(e) An appeal may be made to the Court against an order of the registrar refusing
to register such circular.
Any person responsible for issue of a circular containing

an offer involving transfer
of shares under a scheme or contract without getting the same registered shall be
punishable with fine upto Rs 500.
12.17.8 Amalgamation of Companies in National Interest (s.395). Where the
Central Govemment is satisfied that it is essential in the public interest that two or
more companies should amalgamate, then the CentralGovemmentmay order the
amalgamation of those companies into a single company with such constitution,
with such property, powers, rights, interests, authorities and privileges and with
such liabilities, duties and obligation as may be specified in the order.
Every member or creditor of each of the companies after 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. To the extent the rights or interest of such member
or creditor against or in the company resulting from the amalgamation are less
than the 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 concemed
by the company resulting from the amalgamation.
The Govemment, before making the order, must: (a) send a draft copy of the
proposedorder to each of the companies concerned; (b) have 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
the companies concerned, or from shareholders therein, or from any creditors
thereof.
Copies of every order made under s.396 must, after it has made, be laid before both
Houses of Parliament as soon as possible.
72.17.9 Preservation of Books and Papers of Amalgamated Company. Section
396,4' requires that the books and papers of a company, which has been
amalgamated with or whose shares have been acquired by another company,
must not be disposed of without the prior permission of the Central Government.
The Central Govemment, before granting such permission, may appoint a person
to examine the books and papers for the purpose of ascertaining whether they
contain any evidence of the commission of an offence in connection with the
promotion or formation, or the management of the affairs, of the first mentioned
company or its amalgamation or the acquisition of its shares.
PART 1B -WINDINC UP OF COMPANIES

Winding up of a company is the process whereby its life is ended and its property
administered for the benefit of its creditors and members. An adminishator, called
a 'liquidator', is appointed and he takes control of the company, collects its assets,
pays its debts and finally distributes any surylus among the members in accordance
with their rights. In simple words winding up means applying the assets of a
company in the discharge of its liabilities and retuming any surplus to those
entitled to it, subject to the cost of doing so. The statutory process by which this is
achieved is called 'liquidation'. Winding up of a company differs from insolvency
of an individual inasmuch as a company cannot be made insolvent under the
insolvency law Besides, evell a solvent company may be wound up.
1.2.18.1 Modes of Winding up. A company may be wound up in any of the
following three ways: A. Compulsory winding up under an order of the Court.
B. Voluntary winding up. C. Voluntary winding up under supervision of the Court.
12.\8.2 Winding up by the Court. Winding up by the court, also called compulsory
winding up, may be ordered in cases mentioned in s.433. The court will make an
order for winding up on an application by and of the persons enlisted in s.439.
Courtshaaing jurisdictionto windup (s.10). The courthaving jurisdiction to wind
up a company is the High Court having jurisdiction in relation to the place at
which the registered office of the company concerned is situated, except to the
extent to which jurisdiction has been conferred on any District Court or District
courts subordinate to the High Court. However, winding up of a company with a
paid up share capital of Rs 5 lakhs or more must take place in the High Court.
Grounds for compulsory winding up [s. 33@)]. A company may be wound up by
the court on the following grounds:
I. Special rcsohttion. The company maf, by special resolution, resolve that it be
wound up by the court. The resolution may be passed for any cause whatsoever.
However, the court may not order winding up if it finds it to be opposed to public
interest or the interest of the company as a whole.
2. Default inholding statutory meeting.If default is made in delivering the statutory
report to the Registrar or in holding the statutory meeting, the company may be
ordered to be wound up. Petition on this ground can be presented either by the
Registrar or by a contributory. If it has to be filed by any other person it should be
filed before the expiration of 14 days after the last day on which the statutory
meeting ought to have been held $.a39 Q)1.
3. Failure to commencebusiness. If a company does not commencebusiness within
a year from incorporation or suspends business for a whole year, it may be ordered
to be wound up. Failure to commence or to carry on business is not treated as a
544 Business Law
has no intention of
company will not be
on, such as a trade
scribed, InMttrlidhar
that there is no intention to carry on the business'.

But where the chances of resuming business are gloomy, the court may order for
the winding up of the company lRtrya Bharati Ltd o. Registrar of Contpanies. (L969)
Comp.L.l.296l.
Howeveq, inEasternTelegraphCompany Ltd.,ir.re (1947), it was held that where a
holding company of
was previously doing,
ess for the whole year,
4. Refutction in nrcntbership. rf the number of members is reduced below the

statutory minimum of 7 in a public company or 2 in a private company, the company
may be ordered to be wound up.
5. Inability to pay debts. The court may order a company to be wound up if it is

unable to pay its debts. According to s.434, a company shall be deemed to be
unable to pay its debts if: (a) A creditor for more than Rs 500 has served on the
company atits registered office a demand
the companyhas for three weeks thereafter
the sum to the reasonable satisfaction of
process issued on a judgement or order in favour of a creditor of the company is
retumed uhsatisfied in whole or in part; or (c) it is proved to the satisfaction of ihe
court that the company is unable to pay its debts, taking into account its contingent
and prospective liabilities.
ntingent and
d all its debts
n of its assets
and liabilities shows that it will
or may shortly be unable to do so. Inability is to be
seen in the commercial sense of a running enterprise and not in the sense of
liquidation, i.e., if the company cannot meet its current demand, even though its
assets, when realised, would exceed its liabilities, it will be deemed to be unable to
pay its debt and may be wound up.
But the important condition to be fulfilled is that the creditor should have a complete
title to the debt and the debt must have become payable. where there is abonafide
dispute regarding the debt, the company cannot be charged to have neglected to
pay it.
Elements of Company Law S4S
6. Just and eryitable. The court may also order for the winding up of a company
if it is of the opinion that it is just and equitable that the company should be wound
up. In exercising its power on this ground, the court shall give due weight to the
interest of the company, its employees, creditors and shareholders and the interest
of the general public. The relief based on the just and equitable clause is in the
nature of a last resort when other remedies are not efficacious enough to protect
the general interests of the company. while in the above five cases definite
conditions should be fulfilled but in the Just and equitable' clause the entire
matter is left to the 'wide and wise' direction of the court. The winding up must be
just and equitable not only to the persons applyingbut also to the company and to
all its shareholders. lHind Oaerseqs Pat. Ltd. a. R.P. Jhunjhunwala (7977) ASIL. XIII]
A few of the examples of Just and equitable'grounds on the basis of which the
Court may order the winding up are given below:
(i) When the substratum of the company has gone. The substratum of a company is
deemed to be gone where its objects have failed or become impossible of achievement.
[Re-Bleriot Aircraft Co. (1916) 63T.L.R. 255]. In this case a company was formed to
acquire the English portion of M. Bleriot's aircraft business. M. Bleriot refused to
carry out the contractbecause he found that it was not in a position to carry out the
contract;inter alia,lthadnot got the necessary working capital. Held, the substratum
of the company had gone. Howeveq, a temporary difficulty which does not knock
out the company's bottom shall not be permitted to become a ground for liquidation
lRe-ShahSteamNaaigationCo. (1908) 10Bom. L.R.1071. The substratumof a company
cannot be said to have gone or disappeared even where its sole undertaking is
sold so long as there is some other business coming within the objects stated in its
I
memorandum which it can carry on (Re Kiston Co. Ltd. ). In r e Kaithal and Gener aI
Mills Co. Ltd. (7957) 31 Comp. Cas.467, the Court laid down the following tests to
determine as to whether the substratum of the company has disappeared: (a) where
the subject matter of the company has gone; or (b) the object of which it was
incorporated has substantially failed; or (c) it is impossible to carry on the business
of the company except at a loss which means that there is no reasonable hope that
the object of trading at a profit can be attained; or (d) the existing or probable assets
are insufficient to meet the existing liabilities.
$) When there is a complete deadlock in the nnnagement. A company will be wound

up on this ground even though it is making good profits. InRe-YenidjeTobacco Co.
Ltd. A and B, the only shareholders and directors of a Private Limited company
became so hostile to each other that neither of them would speak to the other
except through the secretary. Held, there was a complete deadlock and consequently
the company was wound up.
(iii) Wherethecompanywasfornrcdforfraudulentorillegalptrposes.Forthispulpose,
fraud in the prospectus or in the manner of conducting company's business is not
sufficient. It must be shown that the original object of creating the company was
fraudulent or illegal IReT. E. Brismend €t Sons Ltd. (1897)7 Ch.45l.
(iv) Where the principal sharcholders haue adopted an aggressiac or opprcssiae policy
towards the ninority lR. Sabapathy Rao a. Sabapathy Press Ltd. AIR (L925) Mad. 4891.
546 Business Law
However, the Court will order winding up only when it is satisfied that it is
impossible for the business of the company to be carried on for the benefit of the
company as a whole because of the way in which voting power is held and used.
(v) Whenthecompanyisa'bubble',i.e.,itneverhadanyrealbusinesslRe-London
and Country CoaI C. (1.867) L.R.3 Eq. 3551.
(vi\ Where the business of the company cannot be carried except at loss. But, mere
apprehension on the part of some shareholders that loss instead of gain will result
has been held to be no ground lRe-Mahamandal Shastra Praknshik Samiti Ltd. (1.917 )
ls AU L.7.1931.
Similarly, tnRe-Shah Steamship Naaigation Co. [(1901) 10 Bom. L.R. 107]. it was
observed that'The Court will notbe justified in making winding up order merely
on the ground that the company has made losses and it was likely to make further
losses.
(vii) Where a priaate company is in essence or substance a partnership, it may be ordered
to be wound up if such circumstances exist under which it would be just and
equitable for the court to order for the dissolution of the partnership firm. In Re-
Daais and Coltett Ltd. [(1935) Ch. 693] one member improperly excluded the other,
who held half the shares, from taking part in the company's business. HeId, the
company be wound up.
(vii) Requirements for Inaestigation \A/here directors were making allegations of
dishonesty against each other in respect of defalcations of the funds of the
company, the company was ordered to be wound up on the ground that it was a
case in which the conduct of some of the officers of the company required an
investigation which could only be obtained in a winding up by the Court [Re
Varieties Ltd. (1,893) 2 Ch. 2351.
Who may petition (s. 439). A petition for the compulsory winding up of a .o-puny
may be presented by: 1. the company itself by the passing of a special resolution; or
2. any creditor or creditors, including any contingent or prospective creditor or
creditors; or 3. a contributory or conhibutories; or 4. any combination of creditors,
company or contributories acting jointly or separately; or 5. the Registrar; or 6. any
person authorisedbythe Central Govemment, asper s.243.7.rheofficial Iiquidator
(s.aaO).
The company [s.a39(1) (a)].A company may make a petition for its windi.g rp,
when themembers of the companyhave so resolvedbypassinga specialresolution.
However, it is not very common for companies to apply for winding up orders
since, if desired, they have only to pass a special resolution for voluntary winding
up under s.484 of the Act. But, where the directors find the companytobe insolvent
due to circumstances which ought tobe investigated by the Court, they may file a
petition for winding up order on behalf of the company. ln such circumstances, a
director may make a petition even without obtaining the sanction of the general
meeting of the company lState of Madras o. Madras Electric Tramway Ltd. AIR (1956)
Mad.1811.
Eiements of Companylaw S4Z
Creditor's petition [s.a39 (1) (b)]. A creditor has a right to a winding up. If he can
prove that he claims an undisputed debt and that the company his failed to
discharge it. The word 'Creditor' includes secured creditor, debentqre holder and
a trustee for debenture holders. It is not even necessary that the secured creditor
should give up his security lrn Re-India Electric works (7969) 2 Comp. L.T. 1691. A
contingent orprospective creditor (such as the holder of a bill of exchange not yet
matured or of debentures not yet payable) is also entitled to petition foiwinding
up the comPany. But, he must give a reasonable security for iosts and establish i
primafacie case for winding up [s.439 (8)].A policy holder of a life assurance
company is not creditor and he cannot apply for the winding up the company.
sometimes a creditor's petition is opposed by other creditors. In such cases the
Courtmayascertain the wishes of themajority of the creditors. Howeveq, the opinion
of the majority of creditors does not bind the court. The question will ultimately
depend upon the state of the company. If the company is commercially insolvent
and the object of trading at a profit cannot be attained, winding up order will
follow as a matter of course.
A creditors'petition is generallybased on the gtound that the company is unable
to pay its debts. He will not ordinarily be heard to urge that a winding up order
should be made because the substratum of the company is gone which is Lsually
the proper concem of the company's shareholderslBttkhtiarpur Bihar Light Rly. co.
Ltd. o. Union of India, AIR (1954) Cal.499l.
However, if the debt of a petitioning creditor is disputed no order for winding up

canbemade lMd. AminBroso.Dominitionof lndia, AIR(1952) Cal.323l Butthemere
fact that the creditor files a suit for the realisation of the debt, when his petition for
windingup the company is alreadypending does not debarhim fromproceeding
with his petition for winding up the company. lCentral Bank of lndia a. sakhaii .
Mining andEngineeringlndustriesPot. Ltd. (1977)ASIL XIII42zl. The reasonbeing
that a winding up proceeding is not merely for the benefit of the petitioner, but foi
that of all contributories and all creditors
Contributory's petition [s.439(1) (c)]. A 'contributory' means any person liable to
contribute to the assets of a company in the event of its being wound up. But for
this purpose the terrn 'contributory' includes a holder of furly paid ihares. A
'contributory', however, may petition only: (i) on the ground that the number of
members is reduced below the statutory minimum of seven members in case of
public company and two in case of a private company; (ii) on any other ground if
the shares in respect of which he is a contributory or some of them were originally
allotted to him, orlhave been held by him and registered in his name for at least six
out ofthe eighteen months preceding the commencement of the winding up, or/
have devolved uponhim through the death of the formerholder.
Example. A transfer though executed and stamped in June, 1997, was registered in
october, 1998. The shareholder presented a winding up petition in December, 1.99g.
Held,thepetition was not valid since she had not held shares for six months as required
by the Act.
548 Business Law
A holder of fully paid shares is a contributory for the purpose of a petition not
because he is liable to contribute but because he may have an interest in the assets
in a winding up. The section provides: "A contributory shall be entitled to present
a petitionforwindingup a companynotwithstanding thathe maybe the holder of
fully paid-up shares, or that the company may have no assets at all or may have no
surplus assets left for distribution among the shareholders after the satisfaction of
its liabilities."
The legal representative of a deceased shareholder may petition. Even an insolvent
shareholder, whose name is still there on the register, may, at the instance of the
assignee, petition.
lointpetition [s.a39(1) (d)].By all or any of the parties specified above. This means
that any combination of the company, the creditors and the contributories can
present a petition for winding uP.
The registrar [s.a39(1) (e)]. The registrar may file a petition where: (i) a default is
made in deliveringthe statutoryreport tohim or inholding the statutorymeeting;
or (ii) the company has not commenced its business within a yeal from its
incorporation; or (iii) the number of its members has fallen below the statutory
minimum; or (iv) the financial condition of the company, as disclosed in its balance-
sheet orfromthe report of a special auditor appointed under s.233A or any inspector
appointed under Ss.235 to237 it appears that it is unable to pay its debts, or (v) it
is just and equitable that the company be wound up.
The petition on the ground of default in delivering the statutory report or holding
the siatutorymeetingcannotbepresentedbefore the expiration of 74days after the
last day on which the statutory meeting ought to have been held. In any case, the
registrar cannot present the petition unless sanctioned by the Central Govemment.
Thi Central Govemment shall give its approval only after an opportunity of being
heard has been given to the comPany. Further, such petition must be filed within a
reasonable time of the obtaining of the sanction, failing which the court shall not
recognise the sanction, as valid. lRegistrar of Companies a. AII lndia Groundnut
SyndicateLtd 55 Bom. L.R. 3121.
Central gopernment petition (s.243). The Central Government may petition for
windingup where it appears fromthe report of inspectors appointed to investigate
the affairs of a company under s.235 that the business of the company has been
conducted for fraudulent or unlawful purposes. The Govemment may authorise
any person to act on its behalf for the purpose. [s.439 (1) @)] .
Officialliquidator's petition (s.440). An official liquidator may present a petition for

winding up by the Court where a company is being wound up voluntarily or
subject to the supervision of the court. The court, howevet, shall not make a winding
up order unless it is satisfied that the voluntary winding up or winding up subject
.to the supervision of the Court cannot be continued with due regard to the interest
of the creditors or contributories orboth'
Commencement of zuindingup (s.447). The winding up of a company by the court
shall be deemed to commence at the time of the presentation of the petition for the
winding up. If no order for winding up is made and the winding up petition is
dismissed, the date of presentation of the winding up petition has no relevance. As
sttch,untilraindingup ordu ismade,the companywillhnaeio comply withtherequirements
of the Companies Act as are required of company not ztsound try. Alio the words ,shall be
deemed to commence'indicate that although the winding up of a company does
not in fact comm€nce at the time of the presentation of the petitiotr, it nevertheless
shall be taken to commence from that time if and when the winding up order is
made. However, where before the presentation of a petition for the winding up of
a company by the Courf a resolution has been passed by the company for voluniary
winding up, the winding up of the company is deemed to haveiommenced at the
time of the passing of the resolution.
Procedure for zainding up order. (1) The winding up petition must be presented to
the prescribed authority. It may be recalled that it is primarily the High Court
which has the jurisdiction to wind up companies under s.10. The Central
Govemmentmay, however, empower any DistrictCourtto exercise that jurisdiction
in respect of small companies with the paid-up capital of not more than Rs 5 lakh
and having registered office within the district. (The Court may allow the company
sought to be wound up to show cause against the admission of the winding up
petition and no one else, not even creditors, inclined to oppose the winding up
lUnion of Indiao. Shalimar Works Ltd. (1977) 47 Cornp.Cas.6641.
(2) After the presentation of the petition but before the hearing, application may
be made to the courtbyeither the company, creditor or contributoriei:la) To appoint
a provisional liquidator to safeguard the assets pending the hearing. Before making
such appointment, however, the court must give notice to the company so as to
enable it to make its representation in the matter unless, for reasons to be recorded
in writing, it thinks fit to dispense with such notice. The powers of the provisional
liquidator are the same as those of a liquidator unless limited by the court (s.450).
(b) to stay any pending action against the company (*MZ).
(3) On hearing a winding up petition, the court may [s.443(1)]: (i) dismiss it,
with or without costs; or (ii) adjoum the hearing conditionally or unconditionally;
or (iii) make any interim order that it thinks fiU or (iv) make an order for winding
up the company with or without costs, or any other order that it thinks fit.
The court cannot, however, refuse to make a winding up order on the ground only
that the assets of the company have been mortgaged to an amount equal to or in
excess of those assets or that the company has no assets. "Where the petition is
presented on the ground that it is just and equitable that the company should be
wound up, the court may refuse to make an order of winding up if it is of the
opinion that some other remedy is available to the petitioners and that they are
acting unreasonablyin seeking to have the company wound up instead of pursuing
that other remedy." ls.aa3 Q)1.
\rVhere the petition is presented on the ground of default in delivering the statutory
report to the registrar or in holding the statutory meeting, the court may: (a) instead
of making a winding up ordeq, direct that the statutory report shallbe delivered or
that a meeting shall be held; and (b) order the costs to be paid by persons who, in
the opinion of the court, are responsible for the default [s.aa3 (3)].
550 Business Law
In all matters relating to the winding up of a company, the court may have regard
to the wishes of creditors or contributories of the company as proved to it by any
sufficient evidence and for the purpose may direct that their meetings may be held
or conducted as directed by the court (s.557).
Consequence of winiling up order.The consequence of the winding up order by the
Court are as follows:
1. The court must, as soon as the winding up order is made, cause intimation
thereof to be sent to the official liquidator and the Registrar @.aaa).
2. The petitioner and the company must also file with the Registrar within 30
days a certified copy of the order [s.445(1)]. The Registrar should file with himself
a certified copy of the winding up order of the court when himself is a petitioner
under s.439.If defaultis made in filing the certified copy of the ordeq, the petitioner,
or the company and every officer of the company who is in default, shall be
punishable with fine upto Rs 100 for every day during which the default continues
(s.aa5).
3. The Registrar should then make a minute of the order in his books relating to
the company and notify in the Official Gazette that such an order has been made
[s.aas(2)].
4. The order for winding up is deemed to be a notice of discharge to the officers
and employees of the company, except when the business of the company is
continued [s.a45(3)].
5. The order operates in the interests of all the creditors and all the contributories,
no matter who is fact asked for it $.aa7).
6. The Official Liquidator, by virtue of his office becomes the liquidator of the
company and takes possession and control of the assets of the company (s.449).
7. All actions and suits against the company are stayed, unless the court
gives leave to continue or commence proceedings (s.446). In Official Liquidator
a.DhartiDhan(P) LIdIASIL(1977)4291, the Supreme Courtheld that a stayorderis
not mandatory and a stay should not be granted if the object of applying for it
appears to be merely to delay adjudication on a claim and thereby to defeat
justice.
8. Any suit or proceeding pending in any other court shall be transferred to the
court in which the winding up of the company is proceeding [s. 6(3)].
9. All the power of the Board of Directors cease and the same are then exercised
by the liquidator [Ss.491 & 505].
10. On the commencement of winding up, the limitation ceases to run in favour
of thecompany.
11. Any disposition of the property of the company and any transfer of shares in
the company or alteration in the status of members made after the commencement
of winding up shall, unless the court otherwise orders, be void [s.536(2)].
12. Any attachment, distress or execution put in force, without leave of the court,
against the estate or effects of the company after the commencement of the winding
up shallbe void [s.537 (a)]butnot for dues payable to Govemment [s.537(2)].
13. Any sale held, without leave of the court, of any of the properties or effects of
the company after the commencement of winding up shall be void [s.537(b)].
14. Any floating charge created within 12 months preceding the commencement
of winding up is void unless it is proved that the company after the creation of the
charge was solvent, except as to, any cash advanced at the time of or subsequent to
the creation of the charge or to any interest on that amount @ 5% or such other rate
notifiedby the Central Govemment (s.5345).
The secured creditor is outside the winding up and can realise his security without
the leave of the winding.tp court, though if he files a suit or takes other legal
proceedings for the realisation of his security he is bound to obtain the leave of the
winding up court and it will automatically, be granted [Supreme Court :.l:.M.K.
Ranganathana. Goaernment of Madras. (1955) 25 Comp. Cas. 3441.
Statement of alfairs tobe made to the liquiilator (s.454). \Alhen a winding up order
is made by the Court, the directors of the company must make to the liquidator a
statement as to the affairs of the company, stating the following particulars: (i) the
debts and liabilities of the company; (ii) the assets of the company, showing
separately the cash in hand and in bank, if any; (iii) the name, residence and
occupation of each creditor stating separately the amount of secured debts and
unsecured debts; (iv) the debts due to the company and thename, residence and
occupation of each person from whom the sum is due and the amount likely tobe
realised therefrom.
The object of such a statement is to give the liquidator an idea as to the financial
affairs and liabilities of the company. The creditors and contributories of the
company can inspect the statement. The statement should be made within 21 days
(or such extended time not exceeding 3 months as the official liquidator or court
may for special reasons allow) after the relevant date. The relevant date is the date
of the winding up order by the court or where a provisional liquidator is appointed,
the date of his appointment. The statement must be submitted and verified by
affidavitby one or more of the persons who, at the relevant date are the Directors
and by the person who at that time is the Manager, Secretary or other Chief officer
of the company. Defaulter shall be punishable with imprisonment upto 2 years or
with fine upto Rs 100 for every day during which default continues or with both.
Committee of inspedion The Court may, at the time of making an order of winding
of a company or at any time thereafter, direct that there shall be appointed a
committee of inspection to act with the liquidator. In such a case the liquidator
must, within 2 months from the date of such direction convene a meeting of the
creditors of the company for the purpose of determining who are tobe members of
the committee. Within 1,4 days from the date of the creditors meeting (or such
further time as the court in its direction may grant for the purpose), the liquidator
should convene a meeting of the contributories to consider the decision of the
552 Business Law
creditors'meeting with respect to the membership of the committee. It is open to

the meeting of the contributories to accept the decision of the creditors'meeting
with or without modifications or to reject it. The liquidator must apply to the court
for directions as to what the composition of the committee shall be and who shall
be members thereof . However, it will not be necessary to seek directions in this regard
ushere the meeting of the contributories accept the decision of the creditors' meeting in its
mtirety.
with his creditors, or is absent from five consecutive meetings of the committee
without the leave of the members, he shall cease to remain a member'
Generalpowers of the court
as the Court thinks fit.

2. Se
the asse
For this
the list
contributories in their own right and those who are contributories as being
representatives of, or liable for the debts of others'
case of a limited company, there is any director or manager whose liability is

unlimited, he shall have the same right of set off as described in (a) above; (c) in the
ed or unlimited when all the creditors have
any account whether to a cQntributory from
by way of set off against any subsequent call.
4. Payment intobankof moneys due to company (s.471). The court may order any
contributory, purchaser or otherperson fromwho anyrnoney is due to the company
to pay the money into the public account of Lndia in the Reserve Bank of India
instead of to the liquidator.
5. Powertoexcludecreditorsnotproaingintime(s.474).Thecourtmayfixatimeor
times within which creditors are to prove their debts or claims. In such a case, if the
creditors fail to establish their claims in time, they may be excluded from the
benefit of any distribution made.
6. Adjustmentofrightsofcontributories(s.475).Thecourtisempoweredtoadjust
the right of the contributories among themselves and distribute any surplus among
the person entitled thereto.
7. Power to order costs (s.476). The court may, in the event of assets being
insufficient to satisfy the liabilities, make an order for the payment out of the asset,
of the costs, charges and expenses incurred in the winding up, in such order of
priority inter se as the court thinks just.
8. Power to summon persons suspected of haoing property of company, etc. (s.477).

The court may summon before it any officer of the company or person known or
suspected to have in his possession any property or books or papers of the company
or known or suspected to be indebted to the company. Any such person may be
examined on oath. The court may also require him to produce any books and
papers in his custody or power relating to the company; but where he claims any
lien onbooks orpapers produced byhim, the productionmustbe without prejudice
to that lien.
If any officer or person surunoned, afterbeing paid or tendered a reasonable sum
for his expenses, fails to appearbefore the court at the time appointed without any
valid reason, the court may cause him to be apprehended and brought before the
court for examination
9. Power to order public examination of promoter, directors etc. (s.478). Where the
Official Liquidator has made a report to the court, stating that in his opinion a
fraud has been committed by any person in the promotion or formation of the
company, or by any officer of the company since its formation, the court may direct
that person or officer may appear before the court and be publicly examined.
Examinationshallrelate to the promotion orformation or the conductof thebusiness
of the company, or as to his conduct and dealings as an officer thereof. Official
Liquidator, any creditor or contributory may take part in such examination. The
court may put such questions to the person examined as it thinks fit. The person
shall be examined on oath and must answer all such questions as the court may
put or allow to be put, to him. Notes of the examination must be taken in writing
and must be read over to or by and signed by the person examined and may
thereafter be used in evidence against him. Statement so recorded shall be open to
the inspection of any creditor or contributory at all reasonable times.
70. To order the appointnrcnt of a committee of inspection (already discussed)
77. Pozuer to arrest a contrihftory intending to abscond (s.479). At any time (either
before or after making a winding up order), the court may, on proof of probable
554 Business Law
cause for believing that a contributory is about to quit l:rdia or otherwise to abscond
or is about to remove or canc
payment of calls or of avoiding
cause: (a) the contributory to
court may order; and (b) his books and papers and movable property be seized
and safely kept until such time as the court may order.
72. Power to order for dissohttion of the company (s.481.). When the affairs of a
companyhavebeencompl
the liquidator cannot proce
and assets or for any other
circumstances of the case that an order of dissolution of the company should be
made, the court shall make an order that the company be dissolved from the date
continues.
on the expiry of 5 years from the date of dissolution, the name of the company
should be struck off the Register. But within 2years of the date of the dissolution
on application by the liquidator of the compa
appears to the court to be interested, the court ma
as the court thinks fit, declaring the dissolution
order is passed, such proceedings may be taken as might have been taken if the
company had not been dissolved (s. 559).
12.78.3 voluntary winding up. winding up by the creditors or members without
any intervention of the court is called 'voluntary winding up', In voluntary
winding uP, the company and its creditors are left to settle theii affairs without
cessary. Winding up
olventand runninga
rily, e. g., in pursuance
) if the company in general meeting

inding up where the period fixed by
as expired or the event has occurred
on which under the Articles the Company is to be dissolved; (2) if the company
resolves by special resolution that it shallbe wound up voluntarily (s.aga).
company and every officer of the company who is in default shall be punishable
with fine which may extend upto Rs 50 for every day during which the default
continues (s.485).
Elementsof Companylaw 555
Consequences of aoluntary winding up.The consequences of voluntary winding up
are as follows:
1. A voluntary winding up is deemed to commence at the time when the

resolution for voluntary winding up is passed (s.a86). This will be so even when
after passing a resolution for voluntary winding up, a petition is presented for
winding up by the court (s.441).
2, The company, from the commencement
on its business except so far as may be require
although the corporate state and powers of
dissolution $.a87).
3. All transfer of shares and alterations in the status of members, made after the
commencement, are void unless sanctioned by the liquidator (s.536).
4. A resolution to wind up voluntarily operates as notice of discharge to the
employees of the company (Fowler a. CommercialTimes Co.) except: (a) when the
liquidation is only with a view to 'reconstruction' lMidland Counties BankLtd. a.
Attwood (1905) 7 Cg.357l or (b) when business is continued by the liquidator for
the beneficial winding up of the company.
5. On the appointrnent of the liquidator, all the powers of the Board of Directors,
managing director or'manager'shall cease except (s.491): (a) for the purpose of
giving notice to the Registrar about the name of the liquidator appointed, or
(b) insofar as the company in general meeting or the liquidator may sanction the
continuance of their powers.
12.18.4 Tp"s of Voluntary Winding up. Voluntary winding up may be of two
types:
(a) Members'Voluntary winding up.

(b) Creditors' Voluntary winding up.
12.18.5 Members'Voluntary Winding up. Members'Voluntary winding up is
possible only when the company is soksent and is able to pay its liabilities in Followtng
fttll.
are the important provisions regarding members'voluntary winding up.
L. Declaration of solaency (s.488). Where it is proposed to wind up a company
voluntarily, its directors, or in case the company has more than two directors, the
majority of the directors, may at a meeting of the Board, make a declaration verified
by an affidavit, to the effect that they have made a full enquiry into the affairs of the
company and that having done so, they have formed the opinion that the company
has no debts, or that it will be able to pay its debts in full within such period not
exceeding 3 years from the commencement of the winding up as may be specified
in the declaration. In order to be effective, this declaration must be: (i) made within
five weeks immediately preceding the date of passing of the windi.g rp resolution
by the members; (ii) delivered to the Registrar for filing before the said date;
(iii) accompanied by a copy of the report of the auditors of the company on the
profit and loss account prepared since the date of the last account and the balance-
556 Business Law
sheet of the conpany made out as on the last mentioned date and also embodies a
statement of the company's assets and liabilities as at that date.
Any director of a company making a declaration under this section without having
reasonable grounds for the opinion that the company will be able to pay its debts
in full within the period specified in the declaration, shall be punishable with
imprisonment for a term which may extend to six-months, or with fine upto
Rs 5,000 or with both. If the company is wound up in pursuance of a resolution
passed within the period of five weeks after making the declaration, but its debts
are not paid or provided for in full within the period specified in the declaration,
it shall be presumed, until the contrary is shown, that the director did not have
reasonable grounds for his opinion.
If the above provisions are not complied with, the winding up shall not be a
members' voluntary winding up lvosica as. landa Rttbber works AIR (1950) East
Punjab 1801 and in such case provisions (s.490 and 498) relating to members
voluntary winding up cannot apply and if liquidator is appointed in pursuance
of s. 490 or 498 such appoinfrnent would be bad in law. In such a case the provisions
relating to creditor's voluntary winding up (Ss. 500-509) should be followed and
the violation of these provisions will make the winding up proceedings void ab
initio (M. Kakshminh o. Registrar of Companies, kiaandntm-unrrported case decided by
the Kerala High Court) and if default is made in calling a meeting of the creditors
then the company and the director's' as the case may be, shall be punishable with
fine which may extend to Rs 1,000 and in the case of default by the company, every
officer of the company who is in default, shall be liable to the like punishment [s.
500 (6)1. The court may, if moved by the company or its shareholders, instead of
treating the winding up proceedings as invalid, direct the company to convene the
creditors meeting lLight of Asia lnsurance Company,I.L.R. 1940 (2) Cal.325l. The
above rules will be applicable even where a declaration of solvency has heenfiled
but in accordance with the provisions of s.a88(2).
The company, however, may pass a fresh resolution for its windi^g up the after
and complying with the requirements of s.488 (Declaration of Solvency).
2. Appointment and remuneration of liquidators (s.490). The company in general
meeting must: (a) appoint one or more liquidators for the purpose of winding up the
affairs and distributing the assets of the company; and @)fix the remuneration,if
any, to be paid to be liquidator or liquidators.
Any remuneration so fixed cannot be increased in any circumstances whateaer, whether
with or withottt the sanction of the cor.Lrt. No liEtidator shall take charge of his office unless
his remuneration is fixed. Further, if a aacancy ocutrs by death, resignation or othertuise
in the office of the liquidator appointed by the company, the company in general
meeting may, subject to any arrangement with its creditors, fill the vacancy. For
this purpose a meeting may be convened by any contributory or the continuing
liquidator or by the court on the application of any of them (s.492).
3. Board's power to cease. On the appointment of a liquidator, all the powers of
the Board of Directors and of the Managing or whole-time directors or manager
Elements of Companylaw SS7
shall cease except for pulpose of giving a notice of such appointrnent to the Registrar.
But their powers may continJe if ianctiglgd uy thl'general body
or Ey the
liquidator so far as the sanction applies (s.491).
Tlle Tongy to the dis-qsnlint members should be paid before the company is
dissolved and should be raised in such manner as may be determined
uy'spetut
resolution.
specifying the time, place and object

one month before the meeting in the
circulating in the district where the
within one week after the meeting, the liquidator must send to the Registrar and
the official Liquidator each, a copy of the aicount and the retum regardiig
holding
558 Business Law
of the meeting. In case quorum was not present at the meeting called, he must
report accordingly.
On receipt of the above documents, the Registrar will register them and the official
liquidator shall make a scrutiny of the books and papers of the company and
report to the court, the result of his scrutiny. If the report of the Official Liquidator
shows that the affairs of the company have not been conducted in a manner
prejudicial to the interest of its members or to public interest, then, from the date of
submission of report of the court, the company shall be deemed to be dissolved. In
the case of an unfavourable report, the court shall direct the Official Liquidator to
make a further investigation of the affairs of the company. On receipt of the report
of the Official Liquidator on such further investigation, the court may either make
an order that the company stands dissolved with effect from the date specified in
the order or make such order as the circumstances of the case brought out in the
reportpermit.
12.18.6 Creditors'Voluntary Winding up. The procedure in a creditors'voluntary
winding up is based upon the assumption that the company is insolvent. From the
beginning, meetings of creditors are held in addition to those of the members. The
chief power to appoint the liquidator is in the hands of the creditors and there is
provision for the appointment of a committee of inspection, if desired, to which is
left the fixing of the liquidator's remuneration. The detailed provisions as enlisted
in Ss.500 to 509 are given below:
Meeting of Creditors (s.500). \A/hen no statutory declaration of solvency has been
made and filed as required by the Act, the Board of Directors, acting onbehalf of
the company must summon a meeting of the creditors, for the same day or the next
day after the meeting at which the resolution for voluntary rvinding up is to be
proposed. Notice of the meeting have to be sent by post to the creditors
simultaneously with the sending of the notices of the meeting of the coinpany.
Notice of the meeting should alsobe advertised in the Official Gazette and in two
newspapers circulating in the district of the registered office or principal place of
business of the company.
The Board of Directors must prepare and lay before the meeting a statement of the
position of the company's affairs, together with a list of its creditors and the
estimated amounts of their claims. Violation of s.500 is punishable with fine which
may extend to Rs 1,000.
Notice to registrar. A copy of any resolution passed at the creditors' meeting must be
filed with the Registrar within 10 days of the passing thereof. If default is made
then the company and every guilty officer shall be punishable with fine which
may extend to Rs 50 for every day of the default (s.501).
Appointment of liquidator (s.502). The creditors and the members at their respective
first meetings may nominate a person to be liquidator for the purpose of winding
up the affairs and distributing the assets of the company. If the creditor and the
members nominate different persons, the creditor's nominee will as a rule be the
liquidator. But any directoq, member or creditor may apply to the court for an order
that the company's nominee or the Official Liquid ator or some other person should
be appointed. If no person is nominated by the creditors, the members'nominee
shall be the liquidator. Vacancies in the office caused by death, resignation or otherwise
may be filled by creditors, except where the liquidator was originally appointed by
or by the direction of the court, when the court will on application fill the vacancy.
Committee of inspection (s.503).The creditors at their first or any subsequent meeting

may, if theythinkftt,appoint acommitteeof inspectionof not more thanfiaemembers.lf
such committee is appointed, the company may, either at the meeting at which the
winding up resolution is passed, or at a later meeting, appoint five persons to
serve on the committee. If the creditors object against the persons appointed by the
company, then the matter will be referred to the court for the final decision. The
powers of such committee are the same, as those of a Committee of Lrspection
appointed in a compulsory winding up.
Fixing of liquidator's remuneration (s.504). The remuneration to be paid to the
liquidator or liquidators has to be fixed by the committee of inspection or if there is
no much committee, by the creditors. Where the remuneration is not so fixed, it
mustbe determinedbythe court. Anyremuneration once fixed shallnotbe increased
in any circumstances, whatever, whether with or without sanction of the court.
Board's powers to cease on appointment of liquidator (s.505). On the appointment of
liquidator, all the powers of the Board of Directors shall cease, except in so far as
the committee of inspection, or if there is not such committee, the creditors in
general meeting, may sanction the continuance thereof.
Duty of liquidator to call meeting of company and of creditors at the end of each year
[s.508].In the event of the winding up continuing for more than one year, the
liquidator must call a general meeting of the company and a meeting of the creditors
at the end of the first year, from the commencement of the winding up and at the
end of each succeeding year, or as soon thereafter as may be convenient within 3
months from the end of the year or such longer period as the Central Governrnent
may allow. Further, he may lay before the meeting an account of his acts and
dealings and of the conduct of winding up during the precedingyea\ together
with a statement in the prescribed form and containing the prescribed particulars
with respect to the proceedings and position of the winding up.
Final meeting and dissoltttion (s.509). As soon as the affairs of the company are fully
wound up, the liquidator must: (a) make up an account of the winding up, showing
how the winding up has been conducted and the property of the company has
been disposed of; and (b) call a general meeting of the company and a meeting of
the creditors for the purpose of laying the account before the meeting and giving
any explanation thereof .
Each such meeting must be called by advertisement and must specify the time,
place and objects thereof and must be published at least one month before the
meeting in the Official Gazette and also in some newspaper circulating in the
district where the registered office of the company is situated.
Within one week after the date of the meetings, the liquidator shall send to the
Registrar and the Official Liquidator a copy of the account and a retum of the
meeting held [s.509 (3)].
560 Business Law
The Official Liquidator, after scrutiny of the books and papers of the company,
shall make a report to the court. If this report states that the affairs of the company
have not been conducted in a manner prejudicial to the interest of the company or
public then from the date of the submission of the report the company shall be
deemed to be dissolved; otherwise the court will ask Official Liquidator to make
further investigation and may, after that report, order that the comPany shall stand
dissolved from the specified date [s.509 (6)].
12.78.7 Distinction Between Members'Voluntary Winding up and Creditor's
VoluntaryWindingup
1. Members'voluntary winding up can be resorted to by solvent companies
and thus requires the filing of a 'declaration of solvency'by the directors of the
companywiththe Regishar; Creditors'windingup, on the otherhand, is resorted
to by insolvent companies.
2. In members'voluntary winding up there is no need to have creditor's meeting.

But in the case of creditors' voluntary winding up, a meeting of the creditors must
be called immediately after the meeting of the members.
3. Liquidatol, in the case of members'winding up is appointed by the members.

But in the case of creditors'voluntary winding up, if the members and creditors
nominate two different persons as liquidators, creditors' nominee shall become
the liquidator.
4. In the case of creditor's voluntary winding up, if the creditorsso wish a

'Committee of Inspection'may be appointed, In the case of members'voluntary
winding up, there is no provision for any such committee.
12.L8.8 Voluntary Winding up Under Supervision of the Court. At any time after
a company has passed a resolution for voluntary winding up, the court may make
an order that the voluntary winding up should continue subject to the supervision
of the court (s.522). Application for such supervision order may be made either by
a creditor, a contributory, the company, or the liquidator.
"One advantage of having a supervision order is that the liquidator is allowed to

occupy the same position and exercise the same power (subject to restrictions
where necessary) as a voluntary liquidator. At the same time the advantage of a
compulsory vrinding up as regards stay of suib and other proceedings and making
and enforcing calls etc., are also secured and the court is empowered to exercise all
the powers which it can exercise in a compulsory winding up.... In truth, a
supervision order is an amalgam of both - a voluntary winding uP and a winding
up by court as it is made on such terms and conditions as the court thinks just"
(AaadhBeharil,inN. Rnjaramano. Hindustan BrownBoaeri Ltd. XI - ASIL 7975,224).
Such an order is passed by the court under the following circumstances: (i) The
resolution for winding up was obtained by fraud; or (ii) The rules relating to
winding up order are not being observed; or (iii) The liquidator is prejudicial or is
negligent in collecting the assets.
The court, in such a case, gets the same powers as it has in the case of compulsory
winding up under order of the court. The court may also appoint an additional
liquidator or liquidators. It may also remove any liquidator and fill any vacancy
occasioned by the removal or by death or by resignation (s.524). A liquidator so
appointed shall have the same powers, be subject to the same obligations and in
all respects stand in the same position as if he had been appointed in accordance
with the provisions of the Act relating to the appointment of liquidator in voluntary
winding up, subject, however, to any restrictions the court may impose (s.525).
Unless the court imposes restrictions on the exercise of any powers by the liquidatol,
he will have all the powers conferred on a liquidator in voluntary winding up
[s.526(1)]. The court will have as wide powers as in compulsory winding up. The
court may stay suits or legal proceedings. It can make <.rr enforce calls and all other
orders necessary for beneficial winding up of the company [s.526(2)].
Powers of court to order compulsory zainding up (s.527). The court may pass an order
for compulsory winding up superseding the order of winding up under its
supervision. The court may then appoint a person who is the liquidatot either
provisionally or permanently to be liquidator in winding up by the court in addition
to and subject to the control of Official Liquidator.
Dissolution of conpany.In the case of winding up under the supervision of the

court, the company is deemed to be dissolved from the date the order of the court is
issued to that effect. The court will issue such an order when the affairs of the
company have been completely wound up and the liquidator has made
an application to the court requesting it to order for the dissolution of the
comPany.
Where a companyhas been dissolved according to the due process of law, (except
under s.560 - defunct companies) on the expiry of 5 years from the dat'e of
dissolution of the company, the name of the company should be struck off the
Register after nothing against its name that it has been dissolved.
72.18.9 Liquidators. The commencement of winding up of a company does not

put an end to the existence of the company. Its assets are to be realised and distributed
among the debenture holders, creditors, shareholders etc. For the purpose,
somebody has to act as an agent of the company. Such agent is called liquidator.
For the purpose of filing Income Tax Return for the income eamed during the
winding up it has been held that the liquidator will be regarded as principal
officer of the company (Mysore Spm Silk MiIIs Ltd.).
Rules relating to their appointment, rights, powers and duties can be discussed under
the following heads: 1. In compulsory windinBvp.2.In voluntary winding up. 3.
In voluntary winding up subject to supervision of the court.
Liquidators in compulsory winding up
Appointment of fficial liquidator. On a winding up order being made in respect of
company, the official liquidator, by virtue of his office becomes the liquidator of the
co-pany $. aa\.However, the court has no power to appoint private persons as
562 Business Law
liquidators. An official liquidator is attached to each High Court and is appointed

by the Central Govemment. The 'Official Receiver' attached to District Court for
insolvency purposes shall be the official liquidator attached to the District Court
(s.aa8).
Prooisional liquidator. After presentation of the petition but before the hearing,
applicationmaybe made to the courtby the company or creditors or contributories
to appoint a provisional liquidator to safeguard the assets pending the hearing.
The powers of a provisional liquidator are the same as those of a liquidator unless
limitedbythe court. As soon as windingup order is made, the provisional liquidator
becomes the liquidator of the company (s.a50).
Committee of inspection to act with Liquidator. (already explained).

Powers of liquidntor (s.457). The 'Liquidator'can exercise certain powers with the
sanction of the Court; he also has certain powers which he can exercise on his own
i.e., without the sanction of the court. These are as follows:
(A) Withthesanctionofthecourt.Theliquidatorshallhavepowerto:(i)irstituteor
defend any suit, prosecution, or other legal proceeding, civil or criminal, in the
name and on behalf of the company; (ii) to carry on the business of the company so
far as may be necessary for the beneficial winding up of the company; (iii) to sell
the immovable and movable property and actionable claims of the companyby
public auction or private contract with power to transfer the whole or part thereof
to any person or body corporate; (iv) to raise any money required on the security of
the assets of the company; (v) to do all such other things as may be necessary for
winding up of the affairs of the company and distribution of its assets; (vi) to
appoint an advocate, attomey or pleader entitled to appear before the court to
assist him in the performance of his duties (s.459); (vii) to compromise calls, debts
and otherpecuniary liabilities with contributories or debtors and take any seiurity
in discharge of any such claim and give a complete discharge in respect thereof
(s.5a6).
The court may,by order, provide that the liquidator may exercise any of the above
powers without the sanction or intervention of the court. However, it shall stillbe
subject to controlby the court (s.5a8).
@) Without the sanction of the court [s.a57Q)]. The liquidator is empowered to

exercise the following powers without obtaining the sanction of the court (i) to do
all acts and to execute, in the name and on behalf of the company, all deeds,
receipts and other documents and for the purpose to use when necessary the
company's seal; (ii) to inspect the records and returns of the company on the files
of the Registrar withorrt payment of any fee; (iii) to prove, rank and claim in the
insolvency of any contributory, for any balance against the estate and to receive
dividends in the insolvency, in respect of thatbalance, as a separate debt due from
the insolvent and ratably with the other seParate creditors; (iv) to draw, accept,
make and efrdorse any bill of exchange, promissory note or hundi in the name and
on behalf of the companyi (v) to take out, in his official name, letters of
administration to any deceased contributory and to do in his official name any
Elements of Companylaw 56g
other actnecessary for obta a contributory
of his estate which cannot the company;
(vi) to appoint an agent to s unable to do
himself.
Duties of liquiilator. The principal duties of a liquidator may be summarised as
follows:
1. He must conduct equitably and impartially all proceedings in the winding
up according to the provisions of the law and must perform such duties in reference
thereto as the court may impose (s.451).
2. He must bring into his custody and control the property of the company
(s.a56).
3. He must submit a preliminary report to the court, as to: (a) the amount of
capital issued, subscribed and paid-up and the estimated amount of assets and
liabilities, giving separately, under the heading of assets particulars of (i) cash and
negotiable securities; (ii) debts due from contributories; (iii) debts due to the company
and securities, if any, available in respect thereof; (iv) immovable and movable
properties belonging to the
failed, as to the cause of the
is desirable as to any matter
company or the conduct of the business thereof.
This report must be made, as soon as practicable after the receipt of the statement
of company's affairs, but not later than 6 months from the date of the winding up
order. In his report he may also state, if he thinks fit, whether in his opinion any
fraud has been committed in connection with the promotion, formation or conduct
of the company on the basis of such report a public examination those person rnay
be conducted (s.a55).
4. Within 2 months from the date of the direction of the court, the liquidator
must call a meeting of the creditors for determining the persons who are to be
members of the Committee of Inspection, if such committee is to be appointed.
Within 14 days of the meeting of the creditors the liquidator must call a meeting of
the contributories to consider the decision of the creditors (s.464).
5. He must keep all sums received by him, on behalf of the company into some
scheduled bank, unless the court otherwise allows payment in a non-scheduled
bank (s.553).
6. The liquidator shall keep, in the manner prescribed, proper books in which
he shall cause entries or minutes to be made of proceedings at meetings and of
such other matters as maybe prescribed (s.451).
7. He must, at least twice in each yeat present to the court an account of his
receipts and payment as liquidator. The account must be in the prescribed form
and mustbe made in duplicate. The court gets the account audited, keeps one copy
thereof in its records and delivers the other copy to the Registrar for filing. Each
564 Business Law
copy shall, ditor, contributorY or

peiion inte oPY of the accounts so
auditedby G'a64'
LiqtLidators in aoluntary winding up
ints have alreadY been

e to call meeting of the
. i.g.
Common p oints as rcgatcls liquidatots in zt oluntary utinding up
Restriction untarY
liquidator cts as a
liquidatoa le with
fine upto Rs 1,000 (s.513)'
tiqtti
Notice by , the liquidator
must Publish a notice of his
appointment Rs 5o for every
day of default shallbe attracted.
Powers of liquidator (s.512)
business of the company so far as may be neces

of company;3. to sell immovable and movable
the company;4. to raise, on the security of the assets of the company, any money
required.
@) However the following powers which are exercisable by the liquidator in

compulsory liquidation (without any sanction) can be exercised without any
sanction: L. to execute all deeds, receipts and other documents under the seal of the
company; 2. to draw, accept, make and endorse any bill of exchange, hundi or
promissory note in the name and on behalf of the compan y; 3. to prove, rank and
claim in-the insolvency of the contributory;4. to inspeci therecordof the company
on the file of Registrar of company, without making any payment; 5. to exercise the
Powers of the court of settling the list of contributories; 6. to exercise the powers of
the court of making calls; 7. to do any other act necessary for obtaining piyment of
any money due from a contributory; 8. to call general meeting of the company, for
any purpose he may think fit.
The liquidator must pay the debts of the company and adjust the right of the
contributories among themselves. Where several liquidators are appointed, they
shall exercise the above powers as determined at the time of their appointment or
jointly, by at least two of them.
However any contributory or creditor may apply to the court, and the court may
control the exercise of the above powers by the liquidators.
Duties of liquidator. 1. to satisfy himself that the resolution appointing him was
validly passed. 2. to send a notice of his appointment to the Registrar (s.516). 3. to
take possession of company's assets and to see that they are intact.4. to prepare a
list of debts and claims. 5. to settle the list of contributories fixed for the purpose. 6.
to dispose off the assets of the company to the best advantage and collect, as far as
practicable, all outstanding debts due to the company. Subject to preferential
payments, the assets of the company shallbe applied in satisfaction of list liabiliti'es
paripasnt and to distribute among members according to their rights (s.511).7.to
apply the proceeds of realisation in the prescribed manner. 8. to file retums at the
end of the first year and then every 6 months during the continuation of the winding
up. 9. to convene the general meeting of the company at the end of every yeaq,
during liquidation and present the arurual accounts threat (s.508). 10. At the end
of windingup, to call general meeting and lay before it the account of the winding
up and within one week of this meeting file a return with the Registrar (s.509).
Liqtddatorc in aoluntary winding up sttbject to the ntperaision of the court (s.s26).The
rules relating to his appointnent, remuneration, powers and duties are same as in
case of voluntary winding up except that the court may impose some restrictions
on his powers. Irvhere restrictions do not apply, he shall exercise those powers
without the sanction or intervention of the court as if the company was being
wound up altogether voluntarily [s.526(1)].
Status of a liquidator.In compulsory winding up, he is an officer of the court as well
as arr agent of the company. In voluntary winding up he is an agent of the company
and not an officer of the court. He may be liable in damages to a creditor or
contributory forbreach of his statutory duty. Butheisnota trustee of thecompany's
566 Business Law
assets. Property of the company is not vested in him. But, still, he is in a fiduciary
position in relation to the company and will be held liable for Paying and invalid
claim.
12.18.L0 Dissolution of Companies. A company is said to be dissolved when it
ceases to exist as a corporate entity for all practical PurPoses but it is not the
extinction of the company. The company is kept, after dissolution, in'suspended
animation' for 2 years. The dissolution of a company may be declared by the court,
under s.559, within a period of two years from the date of dissolution. Thus,
within a period of 2 years from the date of dissolution, the company can be revived
by the court by declaring the dissolution void. The court will do so at the application
by the liquidator of the company or by any other person who apPears to the court
to be interested in this [s.559 (1)]. It will be the duty of the applicant to file a copy of
the above order of the court, with the Registrar, within 30 days after the making of
the order [s.559(2)].
Moiles of Dissoh.fiion. Dissolution of a comPany may be brought about in any of

the following three ways:
(1) In casc of defltnct conryanics - By remoaal of its nanre from the Register of Companies
(s. 550).If the Registrar has reason to believe that a company is not carrying on
business, he is empowered to adopt the procedure prescribed by s.560 and strike
out the company's name from the register as being 'defunct'. This may be done
whether the company is a going concern or in liquidation.
(2) ln purmance of amalgamation or reconstruction. By order of the court without
winding up, i.e., where a reconstnrction or amalgamation is being carried under
s.394(b)(ia),
(3) ln purxtance of the zainding up of the conryany,
Dissolution of defunct companies (s.560). A defunct comPany means a comPany

which has never commenced business or which is not carrying onbusiness. Section
560 lays down the procedure for the dissolution of defunct companies, without
resorting to the winding up machinery. The procedure is as follows:
1. \A/here the Registrar has reasonable cause to believe that a company is not
carrying on business or is not in operation, he shall send to the company by post
a letter inquiring whether the company is carrying on business or is in operation.
2. If the Registrar does not within one month of sending the letter receive any
answer thereto, he shall, within 14 days after expiry of the month, send to the
company by post a registered letter referring to the first letter and stating that no
answer thereto has been received and that, if an answer is not received to the
second letter within one month from the date thereof, a notice willbe published in
the Official Gazette, with a view to striking the name of the company off the Register.
3. If the Registrar either receives an answer from the company to the effect that
it is not carrying onbusiness or is not in operation, or does not within one month
after sending the second letter receive any answer, he may publish in the Official
Gazette and send to the company by registered post a notice tha!, at the expiration
Elements of CompanyLaw 567
of3 months from the date of that notice, the name of the company, unless cause is
shown the contrary, be struck off the register and the company willbe dissolved.
The dissolution of the company in the above stated manner, shall not, however,
affecf (a) the liability, if any, of every director, manager or other officer who was
exercising any power of management and of every member of the company. In
other words, such persons shall be liable as if the company had not been dissolved;
and ft) the power of the court to wind up a company.
Restoration of the name of the company.If a company or any member or any
creditor feels aggrieved by the removal of the company's name from the Register of
companies, the court may, on an application by the aggrieved party, any time
within 20 years from the publication in the Official Gazette of the notice of striking
off thename of the company, order that thename of the company shouldbe restored
in the Register. Power of the court to order for restoration of company's name is
discretionary and willbe given when the court is satisfied that: (1) after restoration,
the company will be in a position to carry on its business; or (2) at the time of
striking off, the company was carrying on business or was in operation; or (3) it is
just and equitable that the company's name be restored.
The court may also, on passing such an order, give such directions and make such
provisions as seem just for placing the company and all other persons in the same
position, as nearly as may be, as if the name of the company had notbeen struck
off.
A certified copy of the court's order must be delivered to the Registrar and upon
such delivery the company shall be deemed to have continued in existence as if its
name had notbeen struck off.
Dissolutioninpursuance of amalgamation [s.394(7)J. The court may, eitherby the

order sanctioning the compromise or arrangement orby a subsequent orde1, make
provision for the dissolution, without winding up, of the company whose
undertaking, property or liabilities, either wholly or in part, under the scheme of
amalgamation or construction, is transferred to another company.
But no such order shall be made by the court unless the official liquidators has, on
scrutiny of the books and papers of the company, made report to the court that the
affairs of the company have not been conducted in a manner prejudicial to the
interest of its members or to public interest. The court can, howevel, within 2 years
declare the dissolution void (already explained).
Dissolution in pursuance of winding up.The corporate existence of a company
continues through winding up till it is dissolved. It may be dissolved as follows:
(A) ln case of compulsory winding up (s.48L). The Court will make an order
dissolving a company if: (i) the affairs of the company have been completely wound
up (i.e. assets collected and liabilities paid as far as practicable); or (ii) the liquidator
cannot proceed with the winding up for want of funds and assets or for any other
reasons whatever; or (iii) it is just and reasonable in the circumstance of the case
that an order of dissolution of the company should be made.
568 Business Law
on making of the order of the dissolution, the company shall be dissolved from the
date of thJorder ts. a8 (1)1. The official liquidator shall file a coPy of the order of
dissolution within 30 days of making of thc order $'a9\'
(B) In case of nrcmbers' aohmtary winding rry G.497): As soon as the official
Liquidator, afier scrutinizing the books, accounts and papers o{ the comPany/
,rrut"r a report to the court thit the affairs of the company have not been conducted
in a mannêr prejudicial to the interest of its members or to public interest, then
from the date of the submission of the report to the court, the company shall be
have not been
deemed to be dissolved. \,Vhere the liquidator reports that the affairs
so conducted, the court shall directhim to make further investigation and submit
his second report to the court and may order that the company shall stand
dissolved
from a date specified in that order [s'497(b)]'
(C) lncaseofcreditorsaohmtarywindingttp(s.509).sameasabove[s.509(6)].The
Court can, however, declare the dissolut on void within 2years'
When a company hasbeen dissolved according to the due process of law, except
when such dirrol rtior, is under s.560, on the expiry of 5 years from the date of
dissolution of the company, the name of the company should be struck off the
Register of Companies ufte. noting against its name that it has been dissolved'
the
Thus in case of defunct companies, diisolution and extinction takes place at
same time but in other cases extinction follows 5 years after'
PART 19 _ GAININC PRACTICAL EXPERIENCE
12.119.1 Ob j ective-type Questions

1. State whether the following statements are true or false: (i) There are five
membersinapubliccomPany.anyshal]haveatleastthreehe
directors. (iii) The promoter is trustee for the company
fro-o*r. ilu) ntti.t"t of assoc by a private company at the-
of
iime of incorporation. (v) A company can be registered under the name and style
its business without a certificate to com

the fundamental charter defining the objects and limiting the powers of
a company'
(xii)
1"qfn" memorandum of a .o*putty
ito.o-puty can finance the purlhaie b'y
its own ihares. (xiv) Under certain circ
own
, evidence of
shares or finance their purchase. (xv) A share certificate is conclusive
its holder's title to shaies. (xvi) A stock is always fully paid up'
(xvii) shares are
a comPanYb
Persons who
allottedbY
tansm
get shares due to
d of directors
6f a public comPany ital and free

."r"rlu", of the company. (xx) A company can issue debentures with voting rights'
(xxi) A company must hold its first annual general meeting within a period of not
year. (xxv) A company need not transfer any amount to reserve so long as its
dividend is restricted to 10% orbelow. (xxvi) A firm, canbe appointed as a comPany
company requires at least three directors. (xxxiv) A private comPany may Pay any
amount of re-muneration to its manager. (xxxv) Messers.l.B €t Sons are appointed
director of Patni & Co. Ltd.
2. In each set of statements, only one is correct. Write the correct statement:
(A) (i) The statutory meeting of a company is held within 6 months of the
certificate to commence business. (ii) No comPany can make political
contribution. (iii) A public company can give loans to its directors only up to 30
per cent.
(c) (i) A public company can never be converted into a private company.
(ii) Allohnmt of shares before the opening of the subscription lists is void. (iii) A
public company can have two or more managing directors.
12.19.2 Practical Problems
1. Advise A siatic Goaernment Seutrity Life Assurance Co. Ltd. whether it can seek
quentlyformed,
ound thatithas
seek injunction
di
to
Advise the company. [Hint. The company can make the proposed alteration if
under the existing circumstances the cinema business may conveniently or
advantageously only be combined with its existing business. Diversification is
not prohibited. See s.17(1).1
570 Business Law
3. A company is engaged in jute business. The members unanimously pass a
resolution to start business in rubber. The proposed alteration in the objects clause
is submitted to the Company Law Board for its approval. Advise the Board if the
same could be approved or not. [Hint. It should give the approval. The new business
is not inconsistent with the existingbusiness. See s.17(1).1
4. A document on which a company borrowed a sum of money was executed

by the managing director, who was the chief functionary of the company and to
comply with the requirements of the articles the signature of two other directors
were forged. Can the companybe allowed to deny liabilityunder this document?
[Hint. No, the company will not be allowed to deny liability on the document in
question. A company may be held liable for fraudulent acts if its officers acting
under their ostensible authority on its behalf. Though it is a case of forgery and
therefore the transaction is void ab initio for want of consent and therefore the
lender could not have taken advantage of the doctrine of Indoor management.
However, a company cannot defeat a bona fide creditor 's claim for recovery of the
money on the ground of fraud of its own officers.l
5. The articles of a company provided that the shares of a member who became
bankrupt would be offered for sale to other shareholders at a certain price. Is the
provision binding on the shareholders? [Hint. Yes, the provision would be binding
on the shareholders. Articles is a contract between the members and the company.
See also BorelandTrustee a. Steel Bors I Co. Ltd.l
6. The shareholders at an annual general meeting passed a resolution for the
payment of dividend at a rate higher than that recommended by the Board of
Directors. Examine the validity of the resolution. [Hint. The resolution is not valid.
The shareholders declare the dividend atrate recommendedby the Board. However,
they can reduce the rate but cannot increase it.]
7. A company issued a prospectus advertising that the company has a great
potential with "tumover of a million bags of cement in a year. It is discovered later
that while the company has the installed capacity of one million bags, it had never
produced more than 6 lack bags of cement in a year. A buyer of shares seeks
remedy against the misleading statement. Would be succeed? [Hint. Yes, he would
be succeed.]
8. A limited company is formed with its articles stating that one Mr. Srivastava
shallbe the solicitor for the company and thathe shallnotbe removed except on
the grounds of misconduct. Can the company remove Mr. Srivatava from the
position even though he is not guilty of misconduct? [Hint. Yes, the company can
remove him .See EIey a. Posiae Goaernment Security Life Assttrance Co.f
9. A company, in which the directors hold majority of the shares, altered its
articles so as to give power to directors to require any shareholder, who competed
with the company's business, to transfer his shares, at their full value, to any
nominee of the directors. S had some shares in the company. Is S bound by the
alteration? [Hint. Yes, S shall be bound by the alteration. The altemation is in the
general interest of the company.l
Elements of Company Law SZI
10. The plaintiffs contracted with a director of the defendant company and gave
him a cheque under the contract. The director could have been authorised .rid".
Inaestmutt Company.l
11. In a prospectus issued by a company, the Managing Director stated that the
company had paid dividend every year durin g792r-27 ,which was a fact. However,
the company had sustained losses during the relevant period and had paid
dividends out of secret reserves accumulated in the part. Examine the consequence
of the observation made by the Managing director- [Hint. A allottee of shares can
terminate the contract and claim return of price and damages. see Rex u,. Keystant.l
12 ' br a private limited company it is discovered that there are, in fact, 54 members.
of a private company. See s.3(1) (iii).1
13. Two joint Hindu families carry on together a business as joint owners. The
first family consists of 3 brothers and their respective sons, being 12 in number.
The second family consists of the father, 4 major sons and 2 minor sons. Is the
business illegal? [Hint. The business is not illegal. Minors are not to be counted.
There are only 20 major persons - the maximum number of an association for
carrying on a non-bankingbusiness withoutbeing incorporated s.11.1
15. All the seven signature on a memorandum of association were forged by one
person and a certificate of incorporation was obtained. Is the certificaie of
incorporation valid?
16. X and Co. Ltd. intended to buy a rubber estate in Peru. Its prospectus contained
extracts from an experts report giving the number of rubber tries in the estate. The
report was inaccurate. will any shareholder buying the shares of the company on
572 Business Law
the
the
lHi
the
shares. But, his claim against those responsible for issue of prospectus shall not
succeed since they made the statement on the basis of the report of an expert whom
they believed to be competent. However, the expert can be proceeded against.
Sees.62(27).1
17. A prospectus issued by a company contained a promise of subscription of a

substantial amountby some persons so as to induce the public to subscribe. The
plaintiff who was allotted L0 shares alleges material misrepresentation. Decide.
[Hint. Those responsible for making such a statement in the prospectus shall be
held liable. See Ss.62, 63, 68 and 69 of the companies Act, 1956.]
18. R has placed a sum of Rs 1,000 in fixed deposit with M.P Sugar Mills Ltd. In
spite of several reminders, the company has not repaid the deposit. Advise R.
19. A comPany issued a prospectus containing material misstatements of facts.
Relying on the prospectus Mr. Gullible purchased shares from the market. Would
the company be liable in damages to him? Can he rescind the contract?
20. The capital of X Ltd. is Rs 50 lakhs, consisting of equity share capital of Rs 40
lakhs and redeemable preference share capital of Rs 10 lakhs. The preference
share capital is to be redeemed before 31't December 1998. The company is running
in losses and its accumulated losses aggregated to Rs 15 lakhs. The company
wants to borrow Rs 20 lakh from Financial Institution to improve its working and
also to redeem the preference share capital. Advise. [Hint. Refer to s.80. The
preference shares can be redeemed out of only two sources and no other. The
borrowing from financial institution for redemption of preference shares is not
provided for. The amount may, however, be borrowed for improving its working
capital.l
21. A shareholder approached a director and sold him shares in the company.
The director had known at the time of the contract that negotiations were on foot
for the purchase by an outsider of all the shares of the company at a higher figure.
The shareholder sued to rescind the contract. Advise him. [Hint. He would not
succeed; there is no fraud on the part of the director.]
22. A public limited company with a paid up capital of Rs 50,00,000 equity
shares of Rs 10 each wants to reduce its capital to Rs 10,00,000 by converting the
equity shares of Rs 10 each to Rs 2 each. Is it possible to do so? If so, explain the
provisions of the companies Act in thus regard.
23. Abuys from B 400 shares in a company on the faith of a share certificate
issued by the company. A tenders to the company a transfer deed duly executed
together with B's share certificate. The company discovers that the certificate in
the name of B has been fraudulently obtained and refuses to register the transfer.
Advise A. [Hint. A has a right to be registered as a shareholder or receive
compensation from the company as a share certificate works as an estoppel against
thecompany.l
24. 40 out of 100 members of a Company submitted a requisition for holding of

an extraordinary general meeting in order to remove managing director from office.
On the failure of the company to call the meeting, the requisitionists themselves
called the meeting at the registered office of the company. On the appointed day,
they could not hold the meeting at the registered office, as it was kept under lock
and keybythemanagingdirectorhimself. The membersheld themeetingelsewhere
and adopted a resolution removing the managing director from office. Is the
resolution valid? [Hint. The resolution is valid. See s.169. Also it was held in R'
Chettiar a. M. Chettair that where a meeting is called by the requisitionists and the
registered office is not made available to them, the meeting may be held anywhere
else.l
25. A company served a notice of a general meeting upon its members. The
notice stated that a resolution to increase the share capital of the company would
be considered at such meeting. A shareholder complains that the amount of the
proposed increase was not specified in the notice.Is the notice valid? [Hint. The
given notice is not a valid notice under s.173, since the details on the item to be
considered are lacking. The information about the amount is a material fact with
reference to the proposed increase of share capital.]
26. Ameeting was properly convened and was subsequently adjoumed by the
chairman. No fresh notice is given for the adjoumed meeting which is held
subsequently. State whether the adjoumed meeting is valid. [Hint. The adjoumed
meeting in question is valid as per s.174.1
27. One general meeting was called by a company in Decembet, 1997 ' This
meeting was adjourned to March, 1998 and then held. Subsequent meeting was
held in February, 7999.Is the company liable for any irregularity? [Hint. Unless
permission of the Register has been obtained for extension of time which may be
granted upto a period of 3 months under certain special circumstances, the company
shall be convicted under 5.766. The meeting held in March 1998 is actually the
meeting of December 1997. The next meeting is held in February 1999' Thus the
meeting for 1998 has been missed. And in every calend ar yeat there is to be a
meeting.l
28. The secretary of a company, while sending out to members of the comPany
notice of a special resolution to be proposed at the annual general meeting
inadvertently omitted to send notice to one member. The resolution was passed at
the meeting. Discuss whether the resolution is valid or not. [Hint. The resolution is
valid since the omission to send the notice is not intentional, but only inadvertent.
Sees.172(32).1
29. Acompany is entitled to commence business from May, 1994. Which is the
earliest date on which the company may hold its statutory meeting? [ Hint. 1"t June
1994. See s.165.1
30. The directors of a company borrow Rs 50,000 from A on a transaction which

is ultra aires the company. Discuss the rights of A against the company and its
directors. [Hint. A can hold directors personally liable. The company canbe held
574 Business Law
liable only if *re money has been used to pay ultraaires debts of the company or in
case any assets havebeen purchased for the company, these maybe attached.]
31. In conducting the affairs of a company, the directors are found guilty of
delay, bungling and faulty planning, which have resulted in losses and fall in
prices of the shares of the company. Members holding 1/ 10,t of the voting power
in the company apply to the Central Govemment for investigation on the ground
that the circumstances establish fraud on the part of the directors. Is the appointrnent
of an inspector justified under the circumstances? [Hint. Yes, the appointment is
justified. See s.235.1
32. The Board of directors of a public company met on three times in the previous
year, the fourth meeting though called, but not held for want of quorum on two
occasions successively. Discuss whether any provisions of the Companies Act
have been contravened. [Hint. There is no contravention. See Ss. 285 and 288(2).]
33. X Co. Ltd. wants to make a contract with a partnership. Four of the five
directors of the company are partners of such partnership. How can the contract
be executed? [Hint. Then contract may be executed by the general body of
shareholders by passing an ordinary resolution to that effect. Also see s,299.1
34. X holds shares and directorship in a number of companies. X is proposed to
be as a director of a company seamed Asian Ltd. State the requirements of law
necessary to be complied with by him before and after be joins the Board of Asian
Ltd. [Hint. (i) X should resign one of the directorships, iJ he is already a director of
more than 20 companies. (ii) He should give his consent in writing (s.26Q before
joining the board of Asian Ltd. (iii) He should file his consent with the Registrar of
Companies within 30 days of the date of joining. (iv) He should disclose the nature
and extent of his interest in other companies (s.299). (v) He should acquire the
qualification shares, if any prescribed by the Articles of Asian Ltd. in case he does
not own the same already.]
35. Under the Articles, the directors of a company had power to borrow up to
Rs 1,00,000 without the consent of the general meeting. The directors themselves
lent Rs 2 lakhs to the company without such consent and took debentures. Answer
the following questions. (i) Is the company liable for Rs 2 lakhs? (ii) If not, for what
amount, if any, is the company liable? [Hint. As the directors had knowledge of the
irregularity, the company could not be held liable for anything more than the
amountallowed tobeborrowed under the Articles. Thus the companycanbeheld
liable only for Rs 1 lakh. This case comes under the exception to the Doctrine of
Lrdoor Management.]
36. X,Y andZ are three shareholders in a company representing three distinct
groups of shareholders. At one stage, when the company needs additional funds
and therefore seeks to issue fresh shares, Z maintains that the new shares be
issued to theexistingshareholderproportionately. Xand Ymanageto getmajority
shareholders to pass a special resolution to the effect that the shares shall directly
offered to the public. Can Z seek a remedy on the ground of oppression of minority?
[Hint. No, there is no remedy available to him as provisions of s.81 have not been
contravened.]
Elemmtsof Companylaw SZs
12.19.3 Self-test Questions
Me aning and N ature of a Comp any
1. Define a company.
2. What are the characteristics of a company?
3. (a) state the principles of law laid down in saromon a. saloman&
- co. (b) \a/hat
are the statutory exceptions to the decisi onin Salomon,s case?
4. "The legal personality of a company is distinct and different from its members
individually and collectively." Comment and point out the circumstances when
the separate of a company is disregarded by the courts.
I4/hat do you understand by the concept of corporate personality? Under

_5.
what circumstances is lifting of corporate veil possible?
6. Distinguish between a public limited company and private limited company.
7. ]r'/hat are the provisions of the Companies Act, 1956 for the conversion of
(i).a private company into a public company; and (ii) a public company into a
private company.
__
8. Explain clearly the meaning of lifting of the corporate veil of a company.
Under what circumstances may the courts lift the veil of a company.
9' Explain the meaning of 'perpetual succession' and a 'common seal, in the
case of a company.
10. Enumerate the circumstances under which a company may be allowed to

dispense with the word 'Limited'from its name.
11' Explain (i) a company limited by guarantee (ii) a one-man company and
(iii) an association not for profit.
12. M/hat is your legal opinion on: "There are five members in a public company.,,
13. IA/hen does a private companybecome a public company?

14. Write a short note on holding company and its subsidiary.
15. \Ahat are government companies? \A/hat are the special provisions in the
companies Act pertaining to this class of companies?
16. write short notes o1 the following: (i) minimum members of a company.
(ii) maximum members of a company.
17. Write a short note on'Public Financial Institutions,.
Formationof aCompany
1. Write a short note on certificate of incorporation.
2. Write a short note on corunencement of business.
3. 1 /ho is a promoter?
576 Business Law
4. State the usual steps to be taken in the formation of a company under the
companies Act, 1956.
5. Write a note on duties and liabilities of promoters.
6. Is a contract made before incorporation of a proposed company binding on
It?
7. Write a short note on 'consequences of incorporation of a company'.
8. Can a company be incorporated under the Companies Act without the words
'Limited' and / or'Private Limited' as the case may be? if so explain.
Memor andum of As s o ci atio n
1. Define memorandum of association. What does it contain?
2. How are alterations made in a memorandum of association?
3, What are the clauses tobe stated in the memorandum of association?
4. Explain the procedure for change of a registered office of a company from
one state to another.
5. Discuss the provisions of the Companies Act with regard to alterations of
objects of the company.
Articles of Association
1. Define articles of association.
2. Can articles of association be altered?
3. State the relation of a memorandum of association with the articles of

association.
4. Explain the doctrine of ultra aires in the context of joint stock companies.
5. What do you understand by constructive notice of the memorandum and
articles of association of a limited company?
6. Explain and illustrate the rule known as the Doctrine of Lrdoor Management.
What are the exceptions to this rule?
7. Explain
the rule laid down tn the Royal British Bank a. Ttrguand and state the
exceptions to the rule.
8. Explain the interrelationship of Doctrine of Constructive Notice with the
Doctrine of Indoor Management. State the exceptions, if any, to the Doctrine of
[ndoor management.
9. Under what circumstance the doctrine of 'Indoor Management' is not
applicable.
10. State the limitations on the powers of a company to alter its articles of
association.
Ptospectus
1. \tVhat is a prospectus? Who are liable for misstatements in a prospectus?
Explain the extent of civil and criminal liability for such misstatements.
2. Write a short note on statement in lieu of prospectus.
3. What is a prospectus? How does it differ from a statement in lieu of

prospectus?
4. State the restrictions and limitations on inviting and accepting deposits by
companies.
5. (a) \a/hat is a misstatement in a prospectus? (b) V/hat are the defences available
to a director for any misstatement in a prospectus
6. (a) Explain the term brokerage under the Companies Act, 1956. (b) State the
conditions which are to be fulfilled for the payment of underwriting commission
under the Companies Act,1956.
7. Discuss the remedies available to an allottee who had applied for shares on
the faith of a false prospectus.
8, Mention cases in which a prospectus is not required to be issued by a public

comPany.
9. In what way does the companies Act, 1956 regulate the acceptance of public
deposits by the public companies?
10. Explain the provisions of the Companies Act regarding acceptance of deposib
bycorn-panies.
Shar e s and Shar e C ap it aI
1. Define 'share' and 'stock' and distinguish between the two.
2. Write a short notes on the following: (i) Issue of shares at premium (ii) Issue
of shares at discount.
3. Describe the procedure for alteration of share capital.
4. Distinguishbetween'Reserve capital' and'Capital reserye'.
5. Describe the procedure for reduction of share capital.
6. Write short notes on: (i) Right shares (ii) Bonus shares
7. A company limited by shares intends to buy some of its own shares.

Advise.
8. How and subject to what conditions can loan and debentures be converted
into shares.
9. Explain the provisions regarding the increase of the subscribed capital by a
public company by allotment of further shares.
578 Business Law
10. Explain the right of preemption when further capital is issued.
11. Can company purchase its own shares? Explain the provisions of the
Companies Act, in this regard.
Allotment of Shares
1. Distinguishbetween share certificate and share warrant.
Membership
1. How is membership of a company acquired?
2. Can the following be members of a company? (i) a minor; (ii) a registered

parbnership firm; (iii) an unregistered partnership; (iv) a woman.
3. Distinguish between a member and a shareholder.
4. How does one cease to be a member of a company?
5. State the provisions of the Companies Act,7956 relating to maintenance of
the register of members and index of members of a company.
6. Write short notes on: (i) Annual Retum (ii) Reissue of forfeited shares.
7. Distinguish between forfeifure and surrender of shares.
8. Explain the different ways through which a person may become member of
a comPany.
Transfer and Ttansmission of Shares
1. The Articles of association of a public limited company empower the Board

of Directors to refuse registration of transfer of its shares without assigning any
reasons. Is it valid? Explain the provisions regarding refusal to tran'sfer
shares.
2. Explain the circumstances under which a public limited company may refuse
to register the transfer ofshares.
3. Write a short note on transmission of shares.

4. Distinguish between transfer and transmission of shares.
Bonouings (Incluiling Debentures) and Registration of Charges
1. What are the legal requirements which a company must comply with while
borrowing?
2. What is ultraairesbonowing? What remedies are available to a lender if a
company resorts to ultra airesborrowing.
3. V1y'hat are the restrictions imposed on the borrowing powers of the Board of
Directors?
4. What is a debenture? \Ay'hat are the different kinds of debentures that may be
issued by a company?
5. Distinguishbetween share and debenture.
6. A Ltd Co. wants to issue debentures of Rs 50 laktrs with an option to debenture
holders to convert50% debentures intoequity aftertwo years. Advise the company.
7. \A/hat are the remedies available to debenture holders for the realisation of
their security.
8. What is a floating charge?
9. Explain the circumstances in which a 'floating charge'becomes fixed.
10. Distinguishbetween floating and fixed charge.
11. What charges are registered under the Companies Act,1956?
12. \tVhat is the effect of non-registration of a registrable charge?
13. All investnents made by a company must be held by it in its own name. Are
there any exceptions to this rule.
G ener aI Me etings an d Pr o ce e dings
L. What are the different kinds of general meetings of a company?

2. Define statutory meeting of a public company.
3. Give the contents of a statutory report.
4. Summarise the provisions as regards annual general meeting.
5. What are the provisions of the Companies Act, 1955 in respect of an
extraordinary general meeting to be held on requisition?
6. Define extraordinary general meeting.
7. Write a short note on the powers of Company Law Board to call meetings.
8. Write short notes on: (i) Notice of a meeting (ii) Proxy (iii) Voting by poll
(iv) Resolutions (v) Explanatorystatement (vi) Quorum
9. Discuss the requisites of a valid meeting.
10. Discuss the provisions of the Companies Act, 1956 relating to resolution
requiring special notice mentioning the matters for which special notice is required.
L1. Explain the procedure for ascertaining the sense of general meeting of a
company.
Account, Auilit an il Dioi dends
1. What books of account is a company incorporated under the Companies

Act, 1956bound to maintain?
2. Give the provisions of the Companies Act, 1956 relating to the preparation
authentication, circulation, adoption and filing of the annual accounts of a
company.
580 Business Law
3. How is an auditor appointed? \A/hat are the matters tobe stated in his report?
4. Write a short note on qualifications and disqualification of auditors.

5. State briefly the provisions of the Companies Act,1956 relating to the
appointment of the first auditor of a company.
6. State the law relating to appointment and remuneration of auditors.
7. Write notes on (i) special audit and (ii) cost audit. Discuss the powers and
duties of auditors with reference to leading cases.
8. (a)IA/hat is dividend? (b) \AIhat are the conditions to be fulfilled before a
company may declare and pay dividend? (c) To whom should such a dividend be
paid.
9. Discuss the provisions of the Companies Act, 1956 relating to payment of
dividends on shares.
10. \Atrhat changes have been introduced by the Companies (Amendment) Act,
1999 in provisions relating to audit and accounts.
11. Write a short note on: (i) Investof, Education and Protection Fund (ii) National
advisory committee on Accounting standards.
ln sp e cti on an d Ino e stigati on
1. Discuss the powers of the Central Government for Investigation and
Inspection.
2. Distinguish between Inspection and Investigation.
3. When may the Central Govemment order investigation into the affairs of a
company?
4. Enumerate the powers of the inspectors appointed by the Central Govemment
to investigate into the affairs of the company.
5. Describe the manner in which the Central Govemment may dispose of an
inspectors' report.
Managementof Company
1. Are company directors trustees or agents of the company? Explain your
answer with reasons.
2. How is a director (i) appointed and (ii) removed from office?
3. \i/hat are the disqualifications of a person for appointment as the director of

a company?
4. Can a director resign from his office?

5. \4trho can be a director? State the modes of appointment of directors?
6. "The Companies Act does not lay down any academic or shareholding
qualifications for a director". Examine the statement critically.
7. state in relation to a public company: (i) Ia/hen additional directors can be
appointed and for what period? (ii) when an alternate director can be appointed
and for what period? (iii) How the office of a director is filled in case oi i casual
vacancy and for what period?
8. When can Board of Directors appoint directors?
9. State the circumstances under which a director would vacate office.
10. (a) can the directors delegate their powers? (b) Describe the provisions as
regards qualifications of directors.
Total strength of the Board of Directors of a company is ten. How many
.11.
directors are liable to retire by rotation at the next annuai general meeting?
12. When
representati
profitheldb
respect ofho
apply if a director of a private company is appointed as managing director of the
company on a monthly salary of Rs 10,000.
13. Discuss the rights of members of a company to remove a director before the
expiry of his tenure?
1-4. State the reqrrirements of the Companies Act with respect to contracts in
which particular directors are interested.
15. How many meetings of a Board of Directors of a company must be held in a
year and at what intervals?
L6. Define Managing Director and state the statutory provisions regarding his
appointment and remuneration.
17. \ y'hat are the
powers of directors that cannotbe exercised without the approval
of members givenin a generalmeeting?
L8. Distinguish between managing director and whole-time director.
19. Discuss the-powers of the central Govemment to remove the managerial
personnel on a reference made to the Company Law Board.
20. Can a director be paid compensation for loss of office?
-
zt. .w!1t are the provisions of the Companies Act relating to the powers of the
board of directors of a company, the manner of exercise of such powers and the
restrictions on such powers?
22. tdhat are the duties of directors of a company?
23. Discuss the liabilities of directors.

24. write shortnotes on: (i) altemate director (ii) managerial remuneration.
lnter-Corp orate Lo ans and Inoestments
f . iAtrhat are the conditions imposed by s.372 A as regards investments of a
comPany.
582 Business Law
2. Discuss the provisions relating to inter-corporate loans and investments.
3. 'All investments made by a company must be held lay it in its own name'
Discuss.
4. Discuss the law and state the procedure relating to inter-corporate loans.
Preoention of Oppression anil Mismanagement

1. Explain the true scope of the rule in Foss a. Harbof fle on the majority rule and
minority rights state the exception to the rule.
2. "ltis an elementary principle of law relating to joint stock companies that
the court will not interfere with the intemal management of companies acting
within their powers and in facthas no jurisdiction to do so". Elucidate.
3. State the provisions of the Companies Act on prevention of oppression and
mismanagement.
4. Explain the remedies available to a member of a company against oppression
and mismanagement.
5. I4lhat are thebasic features of the principle of 'majority rule'and 'minority

right'in a company?
6. State the powers of the Court and the Central Govemment of prevent
oppression and mismanagement.
7. (a) \A/hat are the powers of the Company Law Board to prevent oppression
and mismanagement? (b) Under what circumstances can these powers be
exercised? (c) \,Vho can apply to Company Law Board for relief in case of oppression
and mismanagement.
8. Explain the powers of the Central Govemment to appoint directors on the

. Board of a company to prevent oppression and mismanagement.
C ompr o mi s e an il Atr an gement
1. Explain the meaning of 'compromise'.lAy'hat procedure mustbe followed by

a companyto give effect to a compromises when such a companyis a goingconcem.
2. Explain the term 'compromise', 'arrangement', 'teconstruction' and
'amalgamation'.
3. I4trho can apply to court for compromise or arrangement?
4. Who is a dissenting shareholder in case of 'amalgamation' of companies?
What are the provisions with regard to the acquisition of shares of dissenting
shareholders?
5. Summarise the provisions of s.395 relating to takeover of a company by
acquisition of its shares.
5. Write a shortnote on'amalgamation in public interest'.
Winiling up of Comp anies
1. What is winding up?
2. Discuss the circumstances in which a company may be wound
up by the
court.
3. Explain the circumstances in which a company may be wound up by the
court on the ground that the company is unable i"pi1 its iebts.
4. I4/hat are the circumstances in which a company may be wound
up on the
ground that it is just and equitable to wind ,p a cbrrrp"nyi
, s. .st1!e
the grounds on which the registrar of companies may present
a petition
for winding up of a company.
6. IA/hat is the effect of a winding up order passed by the court?
7. Define the term'contributory'. Discuss the liability of members of a company
in the event of its being wound up.
8. state the liabilities of contributories as present and past members.
9. Explain the procedure to wind up a company voluntarily.
10. what powers
of the court to order winding up subject to its
319_the
supervision? I4/hat are the consequence r of such an order?
11. What are the powers of the official liquidator?
12. Il/hat is a defunct company? what procedure is followed to dissolve it?
13' I /hat is the difference between winding up and dissolution?
14' state the different modes by which a company maybe dissolved.
15. Can a company dissolved be revived?
CHAPTER 13
lnformation Technology Act, 2000
Ouflines
1. ScopeoftheAct
2. Definitions
3. Digital Signature
4. ElectronicGovemance
5. Athibution, Acknowledgement and Despatch of Electronic Records
6. Secure Electronic Records and Secure Digital Signatures
7. Regulation of Certifying Authorities
8. Digital Signature Certificates
9. Duties of Subscribers
10. Penalties and Adjudication
1L. Cyber Regulations Appellate Tribunal
12. Offences
13. Network Service Providers
14. Miscellaneous
- Self-test Questions
PART I- SCOPE OF THE ACT

13.1.1 Obiectives of the Act. The objectives of the Act as reflected
in the preamble
to the Act are:
-
(i) toprovidelegalrecognitionfor
data interchange and othermeans of
to as "electronic commerce", which invol
methods of commtrnication and storage
(ii) to facilitate electronic filing of documents with the government agencies;
(iii) to facilitate electronic storage of data in place of paper-based methods of
storage of data.
(iv) to amend the Indian Penal code, the trdian Evidence Ac t,7g72, theBanker ,s
Book Evidence Act, 1891, and the Reserve Bank of India Act, 7934, and,
(v) to provide for matters connected therewith or incidental thereto.
Information Technology Act, 2000 5g5
TheGenera Nafions p the
Model Law doptedby ion
on Internati resolution the
13'1.2 Commencement, and application. It extends to the whole of India and

save as otherwise provided in this Act, it applies to any offence or contravention
thereunder committed outside India by any person.
This Act is not applicable to the following:
(i) a negotiable instrument as defined in s. 13 of the Negotiable lrstruments Act,
1881;
(ii) a power-of-attomey as defined in s. 1A of the power of Attomey A ct,7gg2;
(iii) a trust as defined in s. 3 of the Indian Trust Act, 1882;
(iv) a will as defined in s. 2(h) of the Indian succession Act, rg2sincluding any
other testamentary disposition by whatever name called;
(v) any contract for the sale or conveyance of immovable property or any interest
in such property;
(vi) any such class of documents or transactions as maybe notified by the Central
Government in the Official Gazette.
The President of India gave his assent to the Act on June g, 2000.
PART 2 - DEFINITIONS
section 2 defines the various expressions occurring in the Act. These are given
below.
means
ical, or
twork.
@) adilressee" means a person who is intended by the originator to receive the
"
electronic record but does not include any intermediary.
(c) " ailjuilicating officer" means adjudicating officer appointed under s. a6 (1).
(d) "affixing digital signature" with its grammatical variations and
cognate expressions means adoption of any methodology or procedure by a
Person for the purpose of authenticating an electronic record by means of digital
signature.
586 Business Law
(e) " appropriate goaetnment" rrreants as -
respects any matter
(i) enumerated in List II of the seventh schedule to the Constitution;
(ii) relating to any State law enacted under List III of the Seventh Schedule to
the Constitution;
(iii) the state Govemment and in any other case, the Central Government.
.(f) "asymmetic crypto system" rneans a system of a secure key pair consisting
of private key for creating a digital signature and a public key to verify the digital
a
signature.
(g) "Certifying Authority", means a person who has been granted a licence to
issue a Digital Signature Certificate under s.24.
Qt) " certification practice statement" means a statement issued by a Certifying

Autholity to specify the practices that the Certifying Authority employs in issuing
Digital Signature Certifi cates,
al or other high-speed data
, arithmetic, and memory
or optical impulses, and
communication facilities which are connectea o. r"tjt?Tl""l;: ::ffft?,#
computer system or computer network.
Q) "computet network" means the interconnection of one or more computers

through-
(i) the use of satellite, microwave, terrestrial line or other communication
media; and
(ii) terminals or a complex consisthg of two or more interconnected
computers whether or not the interconnection is continuously maintained.
Q<) "computer tesorffce" means computer, computer system, computer network,

data, computer database or software.
Q) "computer systet{'means device a including input

excluding
and output support devices and programmiblet
and capable of being used in conjuncti which contain
computer programmes, electronic instructions, input data, and output data, that
performs logic, arithmetic, data storage and retrieval, communication control and
other functions.
(m) "Controller" meansthe Controller of Certifying Authorities appointed under
s.77(7).
(n) "cyber AppellateTribwtal" means the Cyber Regulations Appellate Tribunal
established under s. 48.
(o) "data" means a representation of information, knowledge, facts, concepts or
instructions which are being prepared or have been prepared in a formalised
Information Technology Act,2000 587
mannel and is intended to be processed, is being processed or has been processed

in a computer system or computer network, and may be in any form (including
computer printouts, magnetic or optical storage media, punched cards, punched
tapes) or stored intemally in the memory of the computer.
(p) "digital signature" means authentication of any electronic record by a
subscriber by means of an electronic method or procedure in accordance with the
provision of s. 3.
(q) "Digital Signature Certificate" means a Digital Signature Certificate issued

under s. 35( ).
(r) "electronic form" with reference to information means any information
generated, sent, received or stored in media, magnetic, optical, computer memory
or similar device.
(s) "electronic tecord" means data, record or data generated image or sound
stored, received or sent in an electronic form.
(t) "function" in relation to a computer, includes logic, control, arithmetical
process, deletion, storage and retrieval and communication or telecommunication
from or within a computer;
(u) "information" includes data, text, images, sound, codes computer
programmes, software and databases.
(v) "intermediary" wilhrespect to any particular electronic message means any
person who on behalf of another person receives, stores or transmits that message
or provides any service with respect to that message.
(w) "key pair" in an asymmetric crypto system, means a private key and its
mathematically related public key, which are so related that the public key can
verify a digital signature created by the private key,
(x) "lata" includes any Act of Parliament or of a State Legislature, Ordinances
promulgated by the President or a Governor, as the case may be, Regulations
made by the President under article 240, Bills enacted as President's Act under
sub-clause (a) of clause (1) of article 357 of the Constitution and includes rules,
regulations, bye-laws and order's issued or made thereunder.
(y) "licence" means a licence granted to a Certifying Authority under s. 24.
(z) "originator" means a person who sends, generates, store or transmits any
electronic message or causes any electronic message to be sent, generated, stored
or transmitted to any other person but does not include an intermediary.
(za) "prescribed" means prescribed by rules made under this AcU
(zb) "private key" means the key of a used pair used to create a digital signature.
(zc) "public key" means the key of a key pair used to verify digital signature and
listed in the Digital Signature Certificate.
(zd) "secure system" means computer hardware, software and procedure that-
588 Business Law
(a) are reasonably secure from intrusion and misuse;
@) provide a reasonable level of reliability and correct operation;

(c) are reasonably suited to performing the intended functions; and
(d) adhere to generally accepted security procedures.

(ze) " security procedrte" means the security procedure prescribed under s. 1,6by
the Central Govemment.
(zf) "subscribef' rrrearts a person in whose name the Digital Signature Certificate
is issued.
(zg) "Verify" in relation to a digital signature, electronic record or public key,
with its grammatical variations and cognate expressions means to determine
whether-
(a) the initial electronic record was affixed with the digital signature by the
use of private key corresponding to the public key of the subscriber;
(b) the initial electronic record is retained intact or has been altered since
such electronic record was so affixed with the digital signature.
PART 3 - DIGITAL SIGNATURE

Section 3 provides as follows:
(1) Any subscriber may authenticate an electronic record by affixing his digital
signature.
(2) The authentication of the electronic record shall be effected by the use of
asymmetric crypto system and hash function which envelop and transform the
initial electronic record into another electronic record.
The "hash function" means an algorithm mapping or translation of one
sequence of bits into another, generally smaller set known as "hash result" such
that an electronic record yields the same hash result every time the algorithm is
executed with the same electronic record as its input making it computationally
infeasible (a) to derive or reconstruct the original electronic record from the hash
result produced by the algorithm; (b) that two electronic records can produce the
same hash result using the algorithm.
(3) Any person by the use of a public key of the subscriber can verify the electronic
record.
(4) The private key and the public key are unique to the subscriber and constitute
a functioning key pair.
PART 4 _ ELECTRONIC COVERNANCE
In this part we shall explain sections 4 to 16.

13.4.1 Legal Recognition of electronic records (s. 4) . \A/here any law provides that
Information Technology Act, 2000 589
information or any other matter shall be in writing or in the type, written or printed
form, then notwithstanding anything contained in such law, such requirement
shall be deemed to have been satisfied if such information or matter is (a) rendered
or made available in an electronic form; and (b) accessible so as to be usable for a
subsequent reference.
13.4.2 Legalrecognition of digital signatures (s. 5). \A/here any law provides that
information or any other matter shall be authenticated by affixing the signature or
any document shall be signed or bear the signature of any person then,
notwithstanding anything contained is such law, sudr requirement shall be deemed
to have been satisfied, if such information or matter is authenticated by means of
digital signature affixed in such manner as may be prescribed by the Central
Govemment.
The expression "signed" as used above shall, with reference to a person, means
affixing of his handwritten signature or any mark on any document and the
expression "signature" shall be construed accordingly.
13.4.3 Use of electronic record and digital signatures in Government and its
agencies (s. 6). Where any law provides for the following:
(a) the filing of any form, application or any other document with any office,
authority, body or agency owned or controlled by the appropriate Govemment in
a particular manner;
(b) the issue or grant of any licence, permit, sanction or approval by whatever
name called in a particular manneri
(c) the receipt or payment of money in a particular manner.
Then, such requirement shall be deemed to have been satisfied if such filing, issue,
grant, receipt or paymenf as the case may be, is effected by means of such electronic
form as maybe prescribed by the appropriate Govemment.
Accordingly the appropriate Govemment may, by rules, prescribe (a) the manner
and format in which such electronic records shall be filed, created or issued; (b) the
maruler or method of payment of any fee or charges for filing, creation or issue any
electronic record.
13.4.4 Retention of electronic records (s. 7). \A/here any law provides that
documents, records or information shall be retained for any specific period then,
that requirement shallbe deemed to have been satisfied if such documents, etc., are
retained in the electronic form, if - (a) the information contained therein remains
accessible so as to be usable for a subsequent reference, (b) the electronic record is
retained in the format in which it was originally generated, sent or received or in a
format which can be demonstrated to represent accurately the information
originally generated, sent or received; (c) the details which will facilitate the
identification of the origin, destination, date and time of despatch or receipt of
such electronic record are available in the electronic record.
However the clause (c) does not apply to any information which is automatically
generated solely for the purpose of enabling an electronic record to be despatched
or received.
590 Business Law
Further this section is not applicable to any law that expressly provides
for the
retention of documents, records or informaiion in the fotm
of eieit onic records.
However, where o sd in the Official Gazette or Electronic

Gazette, then the d be deemed to be the date of the Gazette
which was first pu
PART 5 _ ATTRIBUTION, ACKNOWLEDCEMENT AND DESPATCH

OF
ELECTRONIC RECORDS
sectionll to13 provide matters conceming attribution, acknowledgement and
despatch of electronic records.
Further, honic record shall be

binding ctronic record byhim,
then unl cftonic record shall be
deemed
However, where the originator has not stipulated that the electronic record shall
be binding only on receipt of such acknowledgement, and the acknowledgement
has not been received by the originator within the time specified or agreed o1, if no
time has been specified or agreed to within a reasonable time, then the originator
may givenotice to the addresseestating thatno aclcrowledgementhasbeen received
byhim and specifying a reasonable timebywhich the acknowledgement mustbe
received by him and if no acknowledgement is received within the aforesaid time
limit he may, after giving notice to the addressee, treat the electronic record as
though it has never been sent.
13.5.3 Time and Place of despatch and receipt of electronic record (s. 13)
(1) Except as otherwise agreed to between the originator and the addressee, the
despatch of an electronic record occurs when it enters a computer resource outside
the control of the originator.
(2) Except as otherwise agreed between the originator and the addressee,'ihe
time of receipt of ar. electronic record shall be determined as follows -
(a) if the addressee has designated a computer resource for the purpose of
receiving electronic records: (i) receipt occurs at the time when the electronic
record enters the designated computer resource; or (ii) if the electronic record is
sent to a computer resource of the addressee that is not the designated computer
resource, receipt occurs at the time when the electronic record is retrieved by the
addressee;
(b) if the addressee has not designated a computer resource along with
specified timings, if an1u., receipt occurs when the electronic record enters the
computer resource of the addressee.
(3) Except as otherwise agreed to between the originator and the addressee, an
electronic record is deemed to the despatched at the place where the originatorhas
his place of business, and is deemed to be received at the place where the addressee
has his place of business.
( ) The provisions as given in (2) above shall apply notwithstanding that the
place where the computer resource is located may be different from the place
where the electronic record is deemed to have been received under (3).
(5) For the purposes of this section, (a) if the originator or the addressee has
more than one place of business, the principal place of business shall be the place
of business, (b) if the originator or the addressee does not have a place of business,
his usual place of residence shall be deemed to be the place of business; (c) "usual
place of residence", in relation to a body corporate, means the place where it is
registered.
PART 6 - SECURE ELECTRONIC RECORDS AND SECURE DICITAL

SICNATURES
Section 74 to 76 deal with these matters.
592 Business Law
13.5.1 Secure electronic record (s. 14). Where any security procedure
has been
applied to an electronic record at a specific point ofime, then
such record shall be
deemed to be a secure electronic record fiom such point
of time to the time of
verification.
f, by application of a security procedure

be verified that a digital signature, at the
the subscriber affixing it; (b) capable of
exclusivecontrolorthesubscriber"^diril.?.il1ili:nHrTf
relates in such a manner that if the electronic record was altered
t:il"";tr;ffi
the digital signature
f;
would be invalidated, then such digitar signature shall be deemedio
be a-secure
digital signature.
. 15). The Central Govemment shall for the purposes
ecurity procedure having regard to commercial
the time when ocedure was used, including _
transaction;
(a) the nature of the phistication of the partie, ,"Ith
reference to their technological volume of similar transaction
engaged in by other parties; (d) th labiJity of altematives offered to but rejected
by any party; (e) the cost of altemative procedures; and (f) the procedures
in general
use for similar types of transactiotrs o, co-munications.
PART 7 _ RECULATION OF CERTIFYING AUTHORITIES

section 77 to34 deal with the regulation of certifying authorities.
73.7.l Appointment of Controller and other officers (s. 17). The
Central
!ov9.1me1t m-ay, by notification in the official Gazette, appoint a Controller of
Certifying Authorities for the purposes of this Act. Also ii may appoint
such
n}1b9r of Deputy Controllers and Assistant Controllers it deems fit.Td controller
shall discharge his functions under this Act subject to the general control
and
directions of the Central Govemment. The Deputy ContrJllers and
Assistant
Controllers shall perform the functions assigned io them by the Controller
under
the general superintendence and control of ihe Controller.
The qualificatio_ns, experience and terms and conditions, of service

of Controller,
Deputy Controllers and Assistant Controllers shall be such as may be prescribej
The Head Office and Branch office of the office of the Controller
shall be at such
places as the Central Govemment may specify, and these may be
established at
such places as the Central Govemment nly think fit.
There shall be a seal of the office of the Controller.
13.7.2 Functions of Controller (s. 18). The controller may perform all or any of the
following functions:
(a) exercising supervision over the activities of the Certifying Authorities;
hrformation Technology Act, 2000 S9g
(b) certifying public keys of the Certifying Authorities;
(c) laying down the standards to be maintained by the certifying Authorities;
_(d) specifying the qualifications and experience which employees of the

Certifying Authorities should possess;
(e) specifying the conditions subject to which the Certifying Authorities shall
conduct their business;
(f) specifying the contents of written, printed or visual materials and
advertisements that may be distributed or used in respect of a Digital Signature
Certificate and the public key;
(g) specifying the form and content of a Digital signature Certificate and the key;
(h) specifying the form and manner in which accounts shall be maintained by
the Certifying Authorities;
(i) specifying the terms and conditions subject to which auditors may be
appointed and the remuneration to be paid to them;
(j) facilitating the establishment of any electronic system by a Certifying
Authority either solely or jointly with other Certifying Authorities and regutitioi
of such system;
ft) specifying the manner in which the Certifying Authorities shall conduct
their dealings with the subscribers;
(l) resolving any conflict of interests between the Certifying Authorities and the
subscribers;
(m) laying down the duties of the Certifying Authorities;
isclosure record of every certifying
be specified by regulations, which
the Controller may, if he is

s contravened any of the
anted recognition, he may,
the Offi cial G azette, revoke
such recognition.
13.7.4 Controller to act as Repository (s. 20). The Controller shall be the repository
of all Digital Signature Certificates issued under this Act. He shall
-"li",rse of
hardware, software and procedures that are secure from intrusion and misuse;
and observe such other standards as maybe prescribed by the Central Govemment
to ensure that the secrecy and security of the digital signatures are assured. Further
594 Business Law
he shall maintain a computerised database of all public keys in such a manner
that such database and the public keys are available to any member of the public.
13.7.5 Licence to Issue Digital Signature Certificates (s. 21). Any person may
make an application to the Controller for a licence to issue Digital Signature
Certificates. However, no such licence shall be issued unless the applicant fulfils
such requirements with respect to qualification, expertise, manpower, financial
resources and other infrastructure facilities, which are necessary to issue Digital
Signature Certificates as may be prescribed by the Central Government.
A licence so granted shall (i) be valid for such period as may be prescribed by the
Central Govemment; (ii) not be transferable or heritable; (c) be subject to such
terms and conditions as maybe specifiedby the regulations.
13.7 .6 Application for Licence (s.22). Every application for issue of a licence shall
be in such form as may be prescribed by the Central Govemment. Such an
application shall be accompanied by: (a) a certificate practice statement; (b) a
statement including the procedures with respect to identification of the applicant;
(c) payment of such fees, not exceeding Rs 25000 as may be prescribed by the
Central Govemmm! (d) such other documents, as may be prescribed by the Central
Govemment.
13.7.7 Renewal of licence (s. 23). An application for renewal of a licence shall be
(a) in such form; (b) accompanied by such fees, not exceeding Rs 5000 as may be
prescribed by the Central Govemment and shall be made not less than 45 days
before the date of expiry of the period of validity of the licence. Howeve4, an
application for the renewal of the licence made after the expiry of the licence may
be entertained on payment of such late fee, not exceeding Rs 500, as may be
prescribed.
13.7.8 Procedure for grant or rejection of licence (s. 24). The Controller may, on
receipt of an application under s, 21, after considering the docummts accompanying
the application and such other factors, as he deems fit, grant the licence or reject
the application. However, no application shall be rejected unless the applicant
has been given a reasonable opportunity of presenting his case.
13.7.9 Suspension of licence (s. 25). The Controller may revoke the licence, if he is
satisfied after making such inquiry as he may think fit, that a Certifying Authority
has (a) made a statement in, or in relation to, the application for the issue or
renewal of the licence, which is incorrect or false in material particular; (b) failed to
comply with the terms and conditions subject to which the licence was granted; (c)
failed to maintain the standards specified in s. 20; (d) has contravened any
provision of this Act, rule, regulation or order made thereunder. However, no
licence shallbe revokedunless the Certifying Authorityhasbeen given a reasonable
opportunity of showing cause against the proposed revocation.
Further, the Controller may, if he has reasonable cause to believe that there is any
ground for revoking a licence, by order suspend such licence pending the
completion of any enquiry ordered by him. However, no licence shall be suspended
Lrformation Technology Act, 2000 595
13.7.70 Notice of suspension of revocation of licence (s. 25). IrVhere the licence of
the Certifying Authority is suspended or revoked, the Controller such publish
notices of such suspension or revocation, as the case may be, in the database
maintained by him. And where one or more repositories are specified, the
Controller such publish notices of such suspension or revocation, as the case may
be, in all such repositories.
l3.7.ll Power To Delegate (s.27). The Controller may, in writing, authorise the
Deputy Controller, Assistant Controller or any officer to exercise any of the powers
of the Controller under s. 1.7.
13.7.i2 Power to Investi r or any officer
authorised by him in his contravention
of the provision of this A
13.7.13 Access to Computers and data (s.29). The Controller (or anyperson
authorised by him) shall, if he has reasonable cause to suspect thlt any
contravention of the provision of this, rules or regulations has been committed,
have access to any computer system, any apparatus, data or any other material
connected with such system, for the purpose of searching or causing a search to be
made for obtaining any information or data contained in or available to such
computer system. Also he is son incharge of, or
otherwise concemed with the etc., to provide him
with such reasonable technica consider necessary.
13.7.14 Certifying Authority to follow certain Procedures (s. 30). Every certifying
Authority shall- (a) make use of hardware, software, and procedures thai are
secure from intrusion and misuse; (b) provide a reasonable level of reliability in its
suited tothe ion; (c)
tha
to ensure digital
) observesuc ecified
13.7.16 Display of licence (s. 32). Every Certifying Authority shall display its
licence at a conspicuous place of the premises in which it carries on its
business.
13.7.17 surrender of licence (s. 33). Every Certifying Authority whose licence is
suspended or revoked shall immediately after such suspension or revocation,
surrender the licence to the controller.
596 Business Law
13.7.18 Disclosure (s.34). Every Certifying Authority shall disclose in the manner
specified by regulations the following: (a) its Digital Signature Certificate which
contains the public key corresponding to the private key used by that certifying
Authority to digitally sign another Digital Signature Certificate; (b) any certification
practice statement relevant there to; (c) notice of the revocation or suspension of its
Certifying Authority Certificate, if any, and (d) any other fact that materially and
adversely affects either the reliability of a Digital Signature Certificate, which that
Authority has issued, or the Authority's ability to perform its services.
Further, where in the opinion of the Certifying Authority an event has occurred or
any situation has arisen which may materially and adversely affect the integrity of
its computer system or the conditions subject to which a Digital Signature Cerfficate
was granted, then, the Certifying Authority shall (a) use reasonable efforts to notify
any person who is likely to be affected by that occurrence; or (b) act in accordance
with the procedure specified in its certification practice statement to deal with
such event or situation.
PART 8 - DICITAL SIGNATURE CERTIFICATES

Sections 35 to 39 deal with issue, suspension and revocation of digital signature
cerfficates.
13.8.1 Certifying Authority to issue Digital Signature Certificate (s. 35). Any
person may make an application to the Certifying Authority for the issue of a
Digital Signature Certificate in such form as may be prescribed by the Central
Government. Such an application is to accompany such fee not exceeding
Rs 25000 as may be prescribed by the Central Govemment, to be paid to the
Certifying Authority. Different fees may be prescribed for different classes of
applicants. Also the application must accompany a certification practice statement.
On receipt of the application, the Certifying Authority may grant the Digital
Signature Certificate or reject the application.
Howevel no such certificate shall be granted unless the Certifying authority is
satisfied that- (a) the applicant holds the private key corresponding to the public
key to be listed in the Digital Signature Certificate; (b) the applicant holds a private
key, which is capable of creating a digital signature; (c) the public key to be listed
in the certificate can be used to verify a digital signature affixed by the private key
held by the applicant. Also no application shall be rejected unless the applicant
has been given a reasonable opportunity of showing cause against the proposed
rejection.
13.8.2 Representations upon issuance of Digital Signature Certificate (s. 35). A
Certifying Authority while issuing a Digital Signature Certificate shall certify that:
(a) it has compiled with the provisions of this Act and the rules and regulations
made thereunder; (b) it has published the Digital Signature Certificate or otherwise
made it available to such person relying on it and the subscriber has accepted it; (c)
the subscriber holds the private key corresponding to the public key, listed in the
Digital Signature Certificate; (d) the subscriber's public key and private key
Information Technology Act,2000 S9Z
A Certifying Auth been issued by it at any

time, if it is of opin in the certifi.it" is falsl
or has been conce the certificate was not
Authority's private key or security system was
aterially affecting the Certificate's reliability, (d) the
insolvent or dead or where a subscriber is a firm or a
company, has been dissolved, wound up or otherwise ceased to exist. On revocation
of the certificate, the Certifying Authority shall communicate the same to the
subscriber.
However, the certificate shall not be revoked unless the subscriber has been given
an opportunity of being heard in the matter.
PART 9- DUTIES OF SUBSCRIBERS

Sections 40 to 42 enumerates duties of subscribers.
13.9.1 Generating key pair (s.
public key of which correspon
listed in the certificate has been
generate the key pair by applying the security procedure.
598 Business Law
13.9.2 Acceptance of Digital Signature Certificate (s. 41). A subscriber shall be
authorises
ository, or
Further, by accepting a Digital Signature Certificate, the subscriber certifies to all

the
the
the
contained in the certificate are true; (c) all information in the certifica," *"iil
within the knowledge of the subscriber is true.
13.9'3 Control of private key (s. 42).Every subscriber shall exercise reasonable
care to retain control of the private key corresponding to the public key listed in his
Digital Signature Certificate. Also he will take all steps to prevent its d.isclosure to
a person not authorised to affix the digital signature of the subscriber. Also if the
private key corresponding to the public key listed in the certificate has been
compromised, then the subscriber shall communicate the same to the Certifying
Authority.
PART l0 - PENALT|ES AND ADJUDTCATTON

Sections 43 to 47 deal with penalties and adjudication
13.10.1 Penalty for damage to computer, computer system, etc. (s. a3). A person
who without permission of the owner or any other person who is in charge of a
by
(a)
ter
in
computer, etc., in contravention of the provisions of this Ac! (h) charges the services
availed of by a person to the account of another person by tampering with or
manipulating any computer, etc.
etc.
"Computer of information, knowledge, facts,

concepts or video that are being prepared or
have been p ave been produced by a compute4
etc, and are
Information Technology Act, 2000 Sgg
"Damage" means to destroy, alte4, delete, add, modify or rearrange any computer
resource by any means.
13.10.2 Penalty for failure to fumish inf . If any person

who is required under this Act, etc., to (a) m or report to
the controller or the certifying Authority shall be liable
to a penalty not exceeding Rs one lakh and fifty thousand for each such failure; (b)
file any retum or furnish any information, books or other documents within the
times specified therefor in the regulations fails to file retum or fumish the same
within thetime specified therefor in the regulations, he shallbe liable to a penalty
not exceeding Rs 5000 for every day during which such failure continles; (c)
maintain books of accounts or records fails to maintain the same, he shall be liable
to a penalty not exceeding Rs 10,000 for every day during which the failure
continues.
13.1o.3 Residuary Penalty (s. 45). \rvhoever contravenes any rules or regulations
made under this Acg for the contravention of which no penalty has been separately
provided, shall be liable to pay a compensation not exceeding Rs 2500b to thb
person affected by such contravention.
13.10.4 any
person any
rule,re hail
appoint an officer not below the rank of a director to the Govemment of ftndia or an
Court for the purposes of sections 345 and346 of the Code of Criminal Procedure,
7973.
The Adjudicating officer shall give the person committing a contravention a
reasonable opportunity for making representation in the matter. Also the
Adjudicating officer, if satisfied that the person has committed the contravention,
he may impose such penalty or award such compensation as he thinks fit.
L3.10.5 Factors to be taken into account by the Adjudicating officer (s. 47). \A/hile
adjudging the quantum of compensation the Adjudicating officer shall have due
regard to the following factors, namely; (a) the amount of gain of unfair advantage,
600 Business Law
whenever quantifiable, made as a result of the default; (b) the amount of loss
caused to any person as a result of the defaul! (c) the repetitive nature of the
default.
PART I 1 - CYBER REGULATIONS APPELLATE TRIBUNAL
Sectioru43 to64 dealwith the establishment etc., of the CyberRegulations Appellate

Tribunal.
13.11.1 Establishment of CyberAppellate Tlibunal (s. 48). The Cmtral Govemment
shall, by notification, establish one or more appellate tribunals to be known as the
Cyber Regulations Appellate Tribunal'
lg.1-l.2 composition of cyber Appellate Tribunal (s. 49). The Tiibunal shall
consist of one person only, known as the presiding officer and be appointed, by
notification, by the Central Govemment.
13.11.3 Qualifications for appointment as Presiding officer of the Tribunal (s.
50). A person shall not be qualified for appointrnent as Presiding officer unless he:
(a) is, or has been, or is qualified to be, a judge of a High court, or (b) is or has been
a member of the India Legal Service and is holding or has held a post in Grade I of
that service for at least 3 years.
13.11.4 Term Office (s. 51). The Presiding officer shall hold office for a term of 5
years from the date on which he enters upon his office or until he attains the age of
65 years,whichever is earlier.
13.11.5 Salary, allowances and other terms and conditions of senrice of Presiding
officer (s. 52). The salary and allowances payable to, and the other terms and
conditions of service including pension, gratuity and other retirement benefits of
the presiding officer shall be such as may be prescribed. Howevel, neither the
salary and allowances nor the other terms and conditions of service of the Presiding
officer shallbe varied to his disadvantage after appointment.
13.11.6 Filling up of Vacancies (s. 53).If, for reason other than temporary absence,
any vacancy occurs in the office of the Presiding officer, then the Central
Govemment shall appoint another person to fill the vacancy'
lg.l]^.7 Resignation and Removal (s. 54). The Presiding officer may by notice in
writing addressed to the Central Government, resign his office. The Central
Govemment ,rnay,by order, removal the Presiding officer on the ground of proved
misbehaviour or incapacity.
13.11.8 Orders Constituting Appellate Tiribunal to be Final and not to invalidate
itspro Gove
as the stion'
before on th
in the constitution of the Tribunal.
13.11'9 staff of the cyber Appellate Tiibunal (s' 55)' The Central Govemment
shall provide the Tiibunal with such officers and employees as that Govemment
may think. These employees and officers shall discharge their functions under
general superintendence of the Presiding officer. Their salaries and allowances
and other conditions of service shall he such as may be prescribed by the Central
Govemment.
13.11.10 Appeal to Cybcr Regulations Appellate Tiibunal (s. 57). Any person
aggrieved by an order made by controller or an adjudicating officer may prefer an
appeal to the Tribunal. However, no such appeal shall lie from an order made by
an adjudicating officer with the consent of the parties. Every appeal shall be filed
within a period of 45 days from the date on which a copy of the order made by the
controller or the adjudicatingofficeris receivedby the person aggrieved. On receipt
of an appeal, the Tribunal may, after giving the parties an opportunity of being
heard, pass such orders thereon as it thinks fit, confirming, modifying or setting
aside the order appealed against.
13.11.11 Procedure and powers of the Tiibunal (s. 58). The Tribunal shall not be
bound by the procedure laid down by the Code of Civil Procedure. Instead it shall
be guided by the principles of natural justice and subject to the other provisions of
this and of any rules. Also the Tribunal shall have powers to regulate its own
procedure including the place at which it shall have its sittings.
Further, the Tribunal shall have the same powers as are vested in a Civil Court
under the Code of Civil Procedure, while trying a suit, in respect of the following
matters, namely: (a) summoning and enforcing the attendance of any person and
examining him on oath; (b) requiring the discovery and production of documents
or other electronic records; (c) receiving evidence on affidavits; (d) issuing
commissions for the examination of witnesses or documents; (e) reviewing its
decisions; (f) dismissing an application for default or deciding it ex parte; (g) a.y
other matter which maybe prescribed.
Further, every proceeding before the Tiibunal shall be deemed to be a judicial
proceeding.
ll.7l.l2Right to legal representation (s. 59). The appellant may either appear in
person or authorise one or more legal practitioners or any of its officers to present
his or its case before the Tribunal.
13.11.13 Limitation (s. 50). The provisions of the Limitation Act, 1963 shall, as for
as maybe, apply to an appeal made to the Tribunal.
13.11.14 Civil court not to have jurisdiction (s. 51). No court shall have jurisdiction
to entertain any suit or proceeding in respect of any matter which an adjudicating
officer or the Tribunal is empowered to determine. Further no injunction shall be
granted by any court or other authority in respect of any action taken or to be taken
in pursuance of any power conferred by or under this Act.
13.11.15 Appeal to High Court (s. 62). Any person aggrieved by any decision or
order of the Tiibunal may file an appeal to the High Court within 60 days from the
date of communication of the decision or order to him on any question of fact or
law arising out of such order
602 Business Law
13.11.15 Compounding of contraventions (s. 53). Any contravention under this

Part may, either before or after the institution of Adjudication proceedings, be
compounded by the controller or the adjudicating officer, as the case may be.
However, such sum shall not exceed the maximum amount of the penalty which
may be imposed for the contravention so compounded.
The benefit of compounding shall not be available to a person who commits the
same or similar contravention within a period of 3 years from the date on which
the contravention was previously compounded.
73.11.77 Recovery of Penalty (s. 54). A penalty imposed, if it is not paid, shall be
recovered as an arrear of land revenue. Also the licence (or the Digital Signature
Certificate) shallbe suspended till the penalty is paid.
PART 12 _ OFFENCES
Sections 65 to 78 make provisions as regards offences committed under the Act.
73.12.1 Tampering with Compu ter Source Document (s. 55). \A/hoever knowingly
or intentionally conceals, destroys or alters or intentionally or knowingly causes
another to conceal, destroy or alter any computer source code used for a computeq,
(or computer programe, or computer system or comPuter network), when the
computer source code is required tobe kept or maintainedby law for the timebeing
in force, shall be punishable with imprisonment up to 3 years, or with fine which
may extend up to Rs 2 lakh, or with both.
The expression "computer source code" means the listing of programes, computer
commands, design and layout and programme analysis of computer resource in
any form.
73.12.2 Hacking with Computer System (s. 65). Whoever with the intent to cause
or knowing that he is likely to cause wrongful loss or damage to the public or any
person destroys or deletes or alters any information residing in a computer resource
or diminishes its value or utility or affects it injuriously by any means, commits
hacking. Furtheq, whoever commits hacking shall be pturished with imprisonment
up to 3 years, or with fine which may extend to Rs 2 lakh, or with both.
73.72.3Publishing of information which is obscene in electronic form (s. 57).
Whoever publishes or transmits or causes to be published in the electronic form,
any material which is lascivious or appeals to the prurient interest or if its effect is
such as to tend to deprave and corrupt persons who are likely, to read, see or hear
the mattet shall be punished on first conviction with imprisonment of either
description for a term which may extend to 5 years or with fine which may extend
to Rs 1 lakh. In the event of a second or subsequent conviction the imprisonment
may extend to 10 years and the fine may extend to Rs 2lakh.
73.12.4 Power of the controller to give directions (s. 68). The controller may, by
ordet direct a Certifying Authority or any employee of such authority to take such
measures or cease carrying on such activities as specified in the order if those are
necessary to ensure compliance with the provisions of the Act, rules or any
regulations made there under. Any person who fails to comply with any such
order shall be guilty of an offence and shall be liable on conviction to imprisonment
for a term not exceeding 3 years or to a fine not exceeding Rs 2 lakh or both.
13.12.5 Directions of Controller to a subscriber to extend facilities to decrypt
information (s. 69). If the controller is satisfied that it is necessary or expedient so
to do in the interest of the sovereignty or integrity of India, the security of the state,
friendly relations with foreign states or public order or for preventing incitement
to the commission of any cognizable offence, for reascns to be recorded in writing
by order, direct any agency of the government to intercept any information
transmitted through any computer resource. In such a case, the subscriber or any
person in charge of the computer resource shall extend all facilities and technical
assistance to decrypt the information. If he fails to provide the necessary assistance,
then he shall be punished with an imprisonment for a term which may extend to
7 years.
73.72.6 Protected System (s. 70). The appropriate government may declare that
any computet computer system or computer network to be a protected system. It
may authorise persons to have access to the protected system. Any person who
secures access or attempts to secure access to a protected system without authority
from the appropriate govemment shall be punished with imprisonment of either
description for a tern which may extend to 10 years and shall also be liable to fine.
13.12.7 Penalty for misrepresentation (s. 71). Whoever makes any
misrepresentation to, or suppresses any material fact from, the controller or the
certifying Authority for obtaining any licence or Digital Signature Certificate, shall
be punished with imprisonment for a term which may extend lo2years, or with
fine which may extend to Rs 1 lakh, or with both
13.12.8 Breach of confidentiality and privacy (s.721. Any person, (empowered
under the Act) rivho has secured access to any electronic record, book, register,
correspondence, information, document or other material, and he, without the
consent of the person concemed, discloses the same to any other person shall be
punished with imprisonment for a team which may extend to 2 years, or with fine
which may extend to Rs L lakh, or with both.
13.12.9 Penalty for Publishing Digital Signature certificate false in certain
particulars. (s. 73). No person shall publish a Digital Signature Certificate or
otherwise make it available to any other person with the knowledge that (a) the
Certifying Authority listed in the certificate has not issued it; or (b) the subscriber
listed in the certificate has not accepted it, or (c) the certificate has been revoked or
suspended unless such publication is for purpose of verifying a digital signature
created prior to such suspensions or revocation.
13.12.10 Publication for fraudulent purpose (s.741. Whoever knowingly creates,

publishes or otherwise makes available a Digital Signature Certificate for any
fraudulent or unlawful purpose shall be punished with imprisonment for a team
which may extend to 2 years, or with fine which may extend to Rs L lakh, or with
both.
604 Business Law
73.72.77 Act to apply for offence or contravention committed outside India (s.
75). The provisions of this Act shall apply also to any offence or contravention
committed outside India by any person irrespective of his nationality. For this
application, it is necessary that the act or conduct constituting the offence or
contravention involves a computer, computer system or computer network located
in India.
\3.12.72 Confiscation (s.761. Any computeq, computer system, floppies, compact
disks, tape drives or any other accessories related thereto, in respect of which
provision of this Act, rules, order or regulations made thereunder has been or is
being contravened, shall be liable to confiscation.
73.12.73 Penalties and confiscation not to interfere with other punishments
(s.77). No penalty imposed or confiscation made under this Act shall prevent the
imposition of any other punishment to which the person affected thereby is liable
under any other law for the time being in force.
13.72.14 Power to investigate offences (s. 78). Notwithstanding anything
contained in the Code of Criminal Procedure, a police officer not below the rank
of Deputy Superintendent of Police shall investigate any offence under this
Act.
PART 13 - NETWORK SERVICE PROVIDERS

There is only one sectron (i.e.; s. 77) which provides that network service providers
shall not be liable in certain cases. No person providing any service as a network
service provider shall be liable under this Act, rule or regulations for any third
party information or data made available by him if he proves that the offence or
contravention was committed without his knowledge or that he had exercised all
due diligence to prevent the commission of such offence or contravention.
The expression 'network service provider'means an intermediary. The 'third party

information' means any information dealt with by a network service provider in
his capacity as an intermediary.
PART 14-MISCELLANEOUS
Some of the important miscellaneous provisions are summarised as under.
Section 80 enumerates the power of police officer and other officers to enter any
public place and search and assist without warrant any person found therein
who is reasonably suspected of having committed or of committing or of being
about to commit any offence under this Act.
Section 81 declares that this Act shall have overriding effect, i.e., it shall have effect
notwithstanding anything inconsistent therewith contained in any other law for
the time being in force.
Section 82 declares that Conholler, Deputy Controller, Assistant Controllers shall

be public servants within the meaning of s. 21 of the Indian Penal Code.
Section 83 empowers tions to any State
Govemment as to the C 6f the provision of
this Act, or of any rule,
Section 84 provides for protection of action taken in good faith. Accordingly no
suit, prosecution or other legal proceeding shall lie against the Cenhal Govemment,
the Stat adjudicating officer
q,
and the which is in good faith
done or , regulations or orders
made thereunder.
Section 85 makes a specific provision in the case of companies. Accordingly

where a Person committing a contravention of any of the provisions of this Act or
rule, etc., is a company, every person who, at the time the contravention was
committed, was in charge of, and was responsible to, the company for the conduct
of business of the company, as well as the compant shall be guilty of the
contravention and shall be. liable to be proceeded against and punished
accordingly. However, he shall not be liable to punishment if he proves that the
contravention took place without his knowledge or that he exercised all due
diligence to prevent such contravention.
Further, if contravention of any of the provisions of the Act or rule, etc., has been
a
committed by a company and it is proved that the contravention has taken place
with the consent or connivance of, or is attributable to any neglect on the part of,
any directo4, manager, secretary or other officer of the company, then he shall also
be deemed to be guilty of the contravention and shall be liable to be proceeded
against and punished accordingly.
For the purpose of this section, "Company" means any body corporate and inchrdes
a firm or other association of individuals; and "director" in relation to a firm,
means a partner in the firm.
Section 86 empower the Central Govemmmt to make provisions when any difficulty
arises in giving effect to the provision of the Act.
Section STempowers the Central Govemment to make rules trnderthe Act.
section 88 provides for constitution of the Cyber Regulation Advisory committee.

It shall consist of a chairperson and such number of other cfficial and non-official
members representing the interests principally affected or having special
knowledge of the subject-matter as the Central Govemment may deem fii. The
Committee shall advise: (a) the Central Govemment either generally as regards
any rules or for any other purpose connected with this Act; (b) the Controller in
framing the regulations under this Act.
Section 89 empowers the Controller to make regulations under the Act.
Sec tomakerules. Sectionsgl-g4provide
for e1860,thelndian EvidenceActlgT2,
the Barlkers'Books Evidence Act, L891 and the Reserve Bank of India Act, 1934.
606 Business Lau'
PART 15 _ CAININC PRACTICAL EXPER]ENCE
13.15.1 Self-TestQuestions
1. Describe the objectives of the IT Act, 2000
2. Enumerate the instruments, documents or transactions to which IT Act is
not applicable.
3 i) Certifying Authority; (ii) Computer Resource;
(iii) (v) privateKey; (vi) public fey; (vii) Asymmetric
Cry
4. Who may authenticate an electronic record? How is it effected?
5. write short notes on: (i) Legal recognition of electronic records, (ii) Legal
recognition of digital signatures, (iii) Retentions of electronic records.
6. Describe the provisions as regards attribution, acknowledgement and
despatch of electronic records.
7. Describe the provisions as regards secure electronic records and secure digital
signatures.
8' Describe the provisions as regards appoinknent of the controller of Certifying
Authorities.
9. Discuss the functions of the controller.
10. Who can grant a licence to issue Digital Signature Certificates? Give the
requirements a person must complete for getting the licence.
11. In w\igh cases the licence to issue Digital signature Certificates can be'
suspended or revoked?
12. who is authorised to issue a Digital signature Certificate? I4trhat type of

representations are made by the Certifying Authority at the time of issue of a
Digital Signature Certificate?
13. Explain the duties of the subscriber.
14' 14/hat penalty is provided for damage to computer, computer system or
computernetwork?
15. Enumerate the power of the Adjudicating officer.
16' Give provisions relating to establishment and composition and functions of
the Cyber Appellate Tribunal.
17. write explanatory notes on the following: (i) Tampering with computer source
documents; (ii) Hacking with computer system; (iii) Protected system; (iv)
Breach of confidentiality and privacy; (v) Offences by companies.
CHAPTER I4
The Patents Act, 1957
Outlines
1. ScopeandCommencementof theAct
2. Inventions not Patentable
3. Application for Patents
4. Examination of Application
5. Exclusive marketing rights
6. Oppositiontograntofpatent
7. Anticipation
8. Provisions for secrecy of certain inventions
9. Grant and sealing of patents and rights conferred thereby
10. Patents of Addition
11. Amendment of Applications and Specifications
72. Restoration of Lapsed Patents
13. Surrender and Revocation ofpatents
1,4. Register of Patents
15. Patent Office and its Establishment
76. PowersofControllerGenerally
17. working of Patents, Compulsory Licences, Licences of Right and
Revocation
18. Use of Inventions for Purposes of Govemment
19. Suits Conceminglnfringements of patents
20. PatentAgents
- Self-test Questions
PART I _ SCOPE AND COMMENCEMENT OF THE ACT
September,1970.
608 Business I-aw
l4.l.2.Definitions and Interpretations (s. 2): The Act defines certain expressions
used therein.
Assignee: It includes the legal representative of a deceased assignee, references to

the a-ssignee of any Person include references to the assignee of the legal
representative or assignee of that person.
Controller: It means the Controller General of Patents, Design and Trade Marks.
Convention application: It means an application for a patent made by a foreign
national of a convention country.
Convention country: It means that country which offers the reciprocal right to an
Indian citizen to apply for a patent in that country.
District courh It has the meaning assigned to that expression by the Code of Civil
Procedure,1908.
Exclusive licence: It means a licence from a patentee which confers on the licensee,
or on the licensee and xclusion of all other
persons (including the patented invention.
And "exclusive license
Food: It means any article of nourishment and includes any substance intended
for the use of babies, invalids or convalescents as an article of food or drink'
Government
a department
or State Act
Govemment company as defined in s. 617 of the companies Act, 1956' It also
includes the Couniil of ftientific and lndustrial Research and any other institution
which is financed wholly or for the major partby the said council.
Invention: means any new and useful (i) art of
manufacture; (ii) machine, aPparatus or other by
manufacture, and includes ut y and useful
" nd
ê*
an alleged invention.
chemical substances, which are ordinarily used as intermediates in the preparation

or manufacture of any of the medicines or substances above referred to.
Patent It means a patent granted under this Act'
patent Agenh It means a person for the time being registered under this Act as a
patent agent.
The Patents Act,1957 609
Patented article and Patented process mean respectively an article or process in

respect of which a patent is in force.
Patentee: It means the person for the time being entered on the register as the
grantee or proprietor of the patent.
PART 2 _ INVENTIONS NOT PATENTABLE
Three sections i.e., 3 - 5 deal with this topic.

Section 3 lists the following as not being inventions within the meaning of the Act
and therefore, are not patentable:
(a) an invention which is frivolous or which claims anything obvious or contrary
to the well established natural laws;
(b) an invention, the primary or intended use of which would be contrary to law
or morality or injurious to public health;
(c) the mere discovery of a scientific principle or formulation of an abstract
theory;
(d) the mere discovery of any new property or new use for a known substance or
of the mere use of a known process, machine or apparatus unless such known
process results in a new product or employs at least one new reactant;
(e) a substance obtained by a mere admixture resulting only in the aggregation
of the properties of the components thereof or a process for producing such
substance;
(f) the mere arrangement or re-arrangement or duplication of known devices
each functioning independently of one another in a known way;
(g) a method or process of testing applicable during the process of manufacture
for rendering the machine, apparatus or other equipment more efficient or for the
improvement or restoration of the existingmachine, apparatus or other equipment
or for the improvement or control of manufacture;
(h) a method of agriculture or horticulture;
(i) any process for the medicinal, surgical, curative, prophylactic or other
treatment of human beings or any process for a similar treatment of animals or
plants to render them free of disease or to increase their economic value or that of
theirproducts.
Section 4 provides that an invention relathg to atomic energy is not patentable.
Section 5 provides that in respect of food, medicine or drug, patents are granted
only for the process of manufacture of the substance but not the substance itself.
However, in respect of substance itself intended for use, or capable of being used
as medicine or drug (except chemical substance) which is already used as
intermediate, patent can be granted in the manner provided in the Act.
610 Business Law
Further, in respect of substances produced by chemical processes including alloys,
optical glass, semi-conductors and inter-metallic compounds) patents are granted
only for the methods or processes of manufacture but not for the substance itself.
PART 3 -APPLICATIONS FOR PATENTS
Sections 6 to tt deal with applications for patents.

14.3.1 Persons entitled to apply for patents (s. 6). A patent application can be
made by (a) any person claiming to be the true and first inventor of the invention;
or (b) any person being the assignee of the person claiming to be the true and first
inventor in respect of the right to make such an application, or (c) the legal
representative of any deceased person, who immediately before his death was
entitled to make such an application.
The patent application may be made by any of the above persons either alone or
jointly with any other person.
14.3.2 Form of application (s. 7). Every application for a patent shall be for one
invention only. The application is to be made in the prescribed form (available in
the patent office), and is to be filed in the patent office. Where an application is
made by virtue of an assignment of the right to apply for a patent for the invention,
there shall be fumished with the application and within such period as may be
prescribed after the filing of the application, the proof of the right to make the
application.
Every application under this section shall state that the applicant is in possession
of the invention and shall name the owner claiming to be the true and first inventor.
However, then the application shall contain a declaration that the applicant
believes the person so named to be the true and first inventor.
Further every such patent application made by a citizen of India id to be
accompanied by a provisional or a complete specification. However, in the case
where the patent application is made lay a foreign national of a convention country
then the patent application is to be accompaniedby a complete specification.
14.3.3 Information and undertaking regarding foreign applications (s. 8). The
Act makes special provisions for patent applications. Every foreign application
shall contain information setting out the name of the country where the application
is being pursued, the serial number and date of filing of the application and such
other particulars as may be prescribed. Further, the foreign patent-applicant is
required to give an undertaking that up to the date of acceptance of the complete
specification by the Controller he would keep the Controller informed in writing of
the details and development in any patent application filed outside India.
14.3.4Provisional and complete specification (s. 9). The patent application should
be accompanied by a provisional or complete specification. \A/here the application
is accompanied by a provisional specification, a complete specification should be
filed within 12 months from the date of filing the application. If this is not done,
the application shall be deemed to be abandoned. The time period of 12 months
may be extended to 15 months if such request for extension is accepted by the
controller.
14.3.5 Contents of specification (s. 10). A description of the invention is called the
'specification'. The grant of patent should describe the invention and begin with
a title sufficiently indicating the subject matter to which the invention relates.
Drawings m ay, and shall, if the Controller so requires, be supplied for the purpose
of any specification. A^y drawings so supplied shall, unless the Controller
otherwise directs, be deemed to form part of the specification. Further, in any
particular case, if the Controller may require that an application should be further
supplemented by a model or sample of anything illustrating the invention.
Howeveq, suchmodelor sample shallnotbe deemed to formpartof the specification.
A specification may be provisional or complete. A provisional specification gives

the initial description of an invention when the application is filed. The Act does
not lay down as to what should be the contents of a provisional specification. On
the other hand, a complete specification is such which enables a reasonably well
informed artisan, technologist, or skilled person, dealing with the subject matter
with which he is familiar to make the thing so as to make it available for the public
at the end of the protected period. This section lists the contents of a complete
specification. These are: (i) fully and particularly describe the invention and its
operation or use and the method by which it is to be performed, (ii) disclose the
best method of performing the invention which is known to the applicant and for
whichhe is entitled toclaimprotection; and (iii) end with a claimor claims defining
the scope of the invention for which protection is claimed, (iv) the claim or claims
should relate to a single invention only and should be clear and succinct and be
fairly based on the matter disclosed in the specification; (v) the drawings, if required
to be supplied by the conholleq, shall form part of the specification; (vi) a declaration
as to inventorship of the invention.
14.3.5 Priority dates of claims of a complete specification (s.11). The Act provides
for a priority date for each claim of a complete specification.
PART 4 - EXAMINATION OF APPLICATIONS

Sections 12 to 24 deal with the examination of applications for grant of patents.
Examination of application (s. 12). \ /here a complete specification has been filed
in respect of an application for a patent then the Conholler shall refer both the
application and the complete specification to an examiner for making a report to
him as regards: (i) whether the application complies with the requirements of the
Act and the Rules, (ii) whether there exists any ground of objection to the patent;
(iii) whether the invention has already been published or claimed by any other
Person.
Search for anticipation by previous publication and by prior claim (s. 13). For the
purpose of submitting report to the Controller, the examiner shall make a search in
the publications available in the patent office, specifications of prior applications
and specifications of patents already granted. This will help him coming to the
672 Business Law
conclusion whether the invention under examination by him has already been
published or claimed or is the subject matter of existing or expired patents.
Consideration of report of examiner by Controller (s. 14). Where there are some
objections to the grant of application, the same shall be communicated to the
applicant. He shall, where i-f so required by the applicant, give him an opportunity
of beingheard.
Power of Controller to refuse or require amended applications in certain cases

(s. 15). Where the Controller is satisfied that the application does not comply with
the requirements of law, he may either (a) refuse to proceed with the application; or
(b) require the application, specification or drawings to be amended to his
satisfaction before he proceeds with the application. Further, if it appears to him
that the invention claimed in the specification is not an invention within the
meaning of, or not patentable under the Act, he shall refuse the application.
Power of Controller to make orders respecting division of application (s. 15). In
the following two situations, an applicantmay file a further application where the
claims of the complete specification relate to more than one invention: (a) at any
time before the acceptance of the complete specification of the first application; (b)
with a view to remedy the objection raised by the Controller.
Power of Controller to make order respecting dating of application(s. 17). At any
time after the filing of an application and before acceptance of the complete
specification, the Controller may, at the request of the applicant, direct that the
application shallbe post dated to such date as maybe specified in the request, and
proceed with the application accordingly. However, no application shall he post
dated to a date later than 6 months from the date on which it was actually made.
Power of Controller in cases of anticipation (s. 18). Where it appears to the
Controller that the invention so far as claimed in any claim of the complete
specification has been anticipated was in s.13, he may refuse to accept the complete
specification unless the applicant (a) establishes that the priority date of the claim
of his complete specification is not later than the date on which the relevant
document was published; or (b) amends his complete specification.
Power of Controller in case of potential infringement (s. 19). \A/here it appears to
the Controller that an invention in respect of which an application for a patent has
been made cannot be performed without substantial risk of infringement of a
claim of any other patent, he may direct that a reference to that other patent shall be
inserted in the applicant's complete specificationby way of notice to the public.
Power of Controller to make orders regarding substitution of applicants, etc. (s.
20). If the Controller is satisfied, on a claim made at any time before a patent has
been granted that by virtue of any assignment or agreement in writing made by the
applicant or one of the applicants for the patent orby operation of law, the claimant
would; if the patent were then granted, be entitled thereto or to the interest of the
applicant therein, or to an undivided share of the patent or of that interesf then the
Controller may direct that the application shall proceed in the name of the claimant
The Patents Act,1957 6Ig
or in the names of the claimants and the applicanf or the other joint applicant or
applicants, as the case maybe.
Time for putting application in order for acceptance (s. 21). For putting the
application in order for acceptance, the applicant has to make the ametrdme.rts as
desired by the Controller. If such amendments are not made within 15 months
being made by the applicant.

Acceptance of complete specification (s. 221. \A/hen the objections of the Controller
have been satisfactorily rectified, within period mentioned in s. 21, then he may
accept the complete specification.
Advertisement of acceptance of complete specification (s. 23). On the acceptance

of a complete specificationunders.22, thenthe Controllershallcommunicate the
same to the applicant. Also he shall advertise in the official gazette the fact tirat the
specification has been accepted. Thereupon the application and the specification
with the drawings, if any, shall be open to public inspection.
Effect of acceptance of complete specification (s. 241. Onand from the date of
advertisement of the acceptance of a complete specification to the date of sealing of
a patent in respect thereof, the applicant shall have the privileges and rights of the
grant of patent. However he will not be entitled to institute infringement
proceedings until the patent is sealed.
PART 5 - EXCTUSIVE MARKETING RIGHTS

By the patents (Amendment) Act, 1999 sections24 Ato24F have been inserted.
These deal with the exclusive marketing rights to sell or distribute an article or
substance in hdia. This amendment has brought the Act in line with the provisions
of TRIPs Agreement of WTO to which India is a signatory.
Application for grant of exclusive rights (s. 24A). where an application for grant
of exclusive marketing rights to sell or distribute the article or substance in India
has been made in the prescribed form and manner and on payment of the
prescribed fee, the controller shall refer the same to an examiner for making a
report to him as to whether the invention claimed in the application is -
(i) an invention under s.2viz,new,useful and a fit subject matter for the grant
of a patent;
(ii) not an invention within the meaning of s. 3., or
(iii) an invention for which no patent can be granted under s. 4.
Accordingly, on the basis of the examiner's report the Controller shall decide
whether to grant exclusive marketing right or not.
61.4 Business Law
Grant of exclusive rights (s. 248). This section prescribes prerequisites and the
procedure for obtaining exclusive rights in India. For this purpose a foreign
applicant has to satisfy that (i) he has filed an application for patent in Lrdia
under s.5 for substantially the same invention as inhis country on or afterJanuary
1., 7995; (ii) a patent has been granted to him in his country on or after January 1,
1995 after the date of making a claim for a patent in India; (iii) he has obtained the
approval to sell or distribute the product on the basis of tests conducted on or after
fanuary 1, 1995 in his country after the date of making a claim for a patent in Lrdia;
(iv) he has obtained the approval to sell or distribute from the authority specified
by the central govemment in India.
For an lrdian applicant the requisites are: (i) he must have filed a patent application
for method or process of manufacture of the substance covered under s. 5 on or
after January 1,1995; (ii) he must have filed a patent application for the substance
itself under s. 5 after filing the said application for process; (iii) a patent must have
been granted to him for the said process in Lrdia on or after the date of making a
claim for a patent covered under s. 5., (iv) he must have obtained the approval to
sell or distribute, from the authority specified by the central govemment in India
on the basis of appropriate tests conducted on or after January 7,1995 after the
date of making a claim for a patent covered under s. 5.
It is onlywhen a person satisfies the above requisites thehe canmake an application

for the grant of exclusive marketing rights under s. 24A.
Compulsory licences (s. 24C). Under this section, an application for compulsory
licence canbemade within2 years from the date of approvalof exclusive marketing
right.
Special provisions for selling or distribution (s. 24D). \vVhere at any time after an
exclusive right under s. 248, has been granted, the central govemment is satisfied
that it is necessary in public interest to sell or distribute the article or substance
then it may either by itself or through any person authorised in writing on its
behalf do so.
Further, the central government may, by notification in the official gazefte and at
any tirne after an exclusive right to sell or distribute an article or a substance has
been granted direct, in the public interest and for reasons to be stated that the same
shall be sold at a price determined by an authority specified by it in this behalf.
PART 6 _OPPOSITION TO GRANT OF PATENT
Sections 25 to28 deal with the matters relating to opposition to grant of patents.
Opposition to grant of patent (s. 25). Any person interested to oppose the grant of
a patent may, within 4 months from the date of advertisement (in s. 24), give notice
of opposition in the prescribed form to the Controller. Such a person can oppose
the application on any one or more of the following grounds only:
(a) the applicant had wrongfully obtained the complete invention or a part
thereof from a person under or through whom he claims;
(b) the invention has been published before the priority date of the claim in any
(i) Indian specification or (ii) other document in India or else where;
(c) the invention has been the subject matter of a prior claim in an application
which is prior in time than the applicant's claim;
(d) the invention as claimed in the complete specification was publicly known
or publicly used in India before the applicant's claim;
(e) the invention as claimed by the applicant in his complete specification is
obvious and does not involve any inventive step;
(0 the invention is not patentable or its patenting is prohibited under the Act;
(g) the complete specification of the applicant does not sufficiently and clearly
describe the invention or the method by which it is to be performed.
Where given, the Controller shall notify the
applica nt and the opponent an opportunity to
be hear
In case of "obtaining", Controller may treat application as application of opponent

(s. 25). Where in an opposition proceeding to the grant of a paten! the Controller
finds that the invention sought to be patented has been obtained wrongfully from
the opponent, he may refuse the application on the ground of "obtaining". Lr such
a case, he may on request made by the opponent direct the application to proceed
in the name of the opponent, with the benefit of priority date attached to the
application.
Refusal of patent without opposition (s. 27). If at any time after the acceptance of
the complete specification and before the grant of a patent thereon, the controller
comes to know that the invention, so far as claimed in the complete specification, .
has been published before the priority date of the claim, then he may refuse to
grant the patent, unless the complete specification has been amended to his
satisfaction.
Mention of inventor as such in patent (s.28). If a person makes a request or claim
that he is the inventor of an invention in respect of a patent application then the
Controller shall mention his name as an inventor in the patent granted.
PART 7 - ANTICIPATION
The Controller shall not grant a patent if the result would be to stop a prior use of
the invention from continuing to use. However there are certain exceptions to this
as are contained in sections 29 to 33. According to these section, an invention
claimed in a complete specification shall not he deemed to have been anticipated
by reason only:
(i) that the invention was published in a specification filed in pursuance of an
application for a patent made in India before January 7, \912; or
(ii)that the invention was published before the priority date of the relevant
claim of the specification;
61,6 Business Law
(iii)
of the communication of the invention to the govemment to investigate the
invention or its merits;
(iv) of the display of the invention with the consent of the true and first inventor
at an industrial or other exhibition;
(v) that at any time within 1 year before the priority date of the relevant claim of
the specification, the invention was publicly worked in India;
(vi) that any matter described in the provisional specification was used in India
or published in India or elsewhere at any tirne after the date of the filing of that
specification.
PART 8 - PROVISIONS FOR SECRECY OF CERTAIN INVENTIONS

Sections 35 to 42 make certain provisions for secrecy of certain inventions. Where
in respect of an application for a patent, it appears to the Controller that the
invention is one of a class notified to him by the central govemment as relevant for
defence purpose, then he may give directions for prohibiting or restricting the
publication of information with respect to the invention or the communication of
sudr information to any persons specified in the directions. However the Controller
shall revoke the directions if the central govemment feels that the publication of
the invention would no longer be prejudicial to the defence of India.
Further, if in respect of an application for a patent any person contravenes any

direction as to secrecy given by the Controller, the application for patent shall be
deemed to have been abandoned and the patent granted, if any, shall be liable to be
revoked.
PART 9 - GRANT AND SEALINC OF PATENTS AND RIGHTS CONFERRED

THEREBY
Sections 43 to 53 deal with the grant and sealing of patents and the rights conferred
on the patentee.
Grant and sealing of patent (s. 43). Where the r
without any opposition or has been accepted aft s
have concluded, with a decision is favour of the r
shall grant the patent on a request being made by the applicant in a prescribed
form. Thus the patent shall be sealed with the seal of the patent office.
person to whom the patent ought to have been granted.
Date of Patent (s. 45). Every patent shall be dated as of the date on which the
complete specification was filed. The date of every patent shall be entered in the
Register maintained in the Patient office.
Form, extent and effect of patent (s. 46). Every patent shall be in the prescribed
form and shall have effect throughout Lrdia. Further a patent shall be granted for
one invention only.
Rights of patentee. Section 48 provides that the following rights are conferred on
provision for rights of co-owners of patents. Section 51 empowers the controller to

give directions to co-owners as to the sale or lease of the patent or any interest
therein. The court may grant of patent to true and first inventor where ii has been
obtained by another in fraud of him (s. 52).
Termof patent(s.53). Thetermofpatentisnotthesameforallkindsofinventions.
In respect of process patent relating to drugs and food, the term is 5 years froh the
date of sealing of the patent or 7 yearsfrom the date of patent (i.e. ihe date when
complete specification is filed) whichever is shorter. In respect of all others patents
the term is 14 years from the date of patent. However, India is under an obligation
of WTO agreement to increase the term of patent to 20 years in all cases.
PART 1O - PATENTS OF ADDITION

sections 54 to 56 deal with patents of addition. An application may be for a patent
in respect of any improvement in or modification of a patented invention (known
as main invention). The Controller may grant the patent for the improvement or
modification as a "patient of addition" the term of the patent of addition shall run
concurrently and terminate with the main patent. No renewal fee is payable for
the patent of addition so long as the main patent remains in force.
PART 11 -AMENDMENTOF APPLICATIONS AND SPECIFICATIONS

sections 57 - 58 deal with the amendment of applications and specifications.
Amendment of applications and specifications before Controller (s. 57). The
any person interested gives a notice opposing the amendment, then the Controller
shall give an opportunity to both the applicant and the opponent to be heard
before he decides the application.
618 Business Law
Amendment of specifications before High Court (s. 5g). After the sealing of the
patenf a Person other than patentee can apply to a High court for revocation of the
patent. However, the High Court may instead of revoking the paten! order
amendment of the specification to preserve the rights of the patentee.
to amendment of application or specification (s.

ication for a patent or a complete specification shall
laimer, correction or explanation. Further no such
amendment shall be allowed, except for the purpose of correcting an obvious
mistake.
PART I2 _ RESTORATION OF LAPSED PATENTS

Sections 60 - 62 make provision as regards restoration of patents which have been
lapsed.
Application for restoration of lapsed patents (s. 60). Where a patent has ceased to
have effect by reason of failure to pay any renewal fee within the prescribed time,
then an application may be made to the Controller within one year for the
restoration of the patent.
Procedure for disposal of applications for restoration of lapsed patents (s. 61). If
the Controller is satisfied that the failure to pay the renewal fee was unintentional
he shall advertise the application. Any person interested may oppose the
restoration. The Controller shall give to both the applicant and the opponent an
opportunity of being heard before he decides the application.
Rights of Patentees of lapsed patents which have been restored (s. G2). lA/hen a
patent is restored, the rights of the patentee shall be subject to such provisions as
may be prescribed.
PART 13 - SURRENDER AND REVOCATION OF PATENTS

sections 63 to 66 deal with the subject of surrender and revocation of patents.
surender of Patents (s. 63). A patentee rnay, atany time by giving notice to the
controller, offer to surrender his patent. Where such an offer is made, the controller
shall advertise the offer, and also notify every person whose name appears in the
ed may give notice
the procedure and
Revocation of patents (s. 54). The high court may revoke the patent (i) on a petition
by (a) any person interested; or (b) the central govemment, or (ii) on a counter claim
in a suit for infringement of the patent. Following are the grounds on which a
patentmaybe revoked;
(i) that the invention claimed in any claim of complete specification was claimed
already in a valid claim of the earlier priority date contained in complete
specification of another patent granted in India;
(ii) that the patent was granted on an application of the person not entitled to
apply for the patent;
(iii) that the patent was obtained wrongfully in contravention of the rights of the
petitioner;
(iv) that the claim of the complete specification is not an invention within the
meaningof theAct;
(v) that the inventiory as claimed, is not new having regard to what was publicly
known or used in India or elsewhere before the expiry date of the claim;
(vi) that the invention is obvious or does not involve any inventive step;
(vii) that the invention is not usefuli

(viii) that the complete specification does not sufficiently and fairly describe the
invention and the method by which it is to be performed;
(ix) that the scope of the claim of the complete specification is not sufficiently
and clearly defined or is not fairly based on the matter disclosed in the
specification;
(x) that the patent was obtained on a false suggestion or representation;
(xi) that the subject of the claim is not patentable under the AcU
(xii) that the invention claim was secretly used in India;
(xiii) that the claimed invention failed to disclose the requisite information and
undertaking regarding the foreign application;
(fv) that the applicant has contravened any direction for secrecy passed by
controller or the central govemmenti
(xv) that the leave to amend the complete specification was obtained by fraud;
(xvi) that the revocation which the central government consider is necessary in
the interest of security of India;
Also a patent may be revoked by the High Court on the petition of the Central
Govemmenf if the High Court is satisfied that the patentee has without reasonable
cause failed to comply with the request of the Central Govemment to make, use or
exercise the patented invention for the purposes of government.
Revocation of patent on directions from Central Government in cases relating to

atomic energy (s. 65). \A/here the Central Govemment is satisfied that a patent is
for an invention relating to atomic energy for which no patent canbe granted, then
it may dhect the controller to revoke the patent. Then the controller may revoke the
patent.
Revocation of patent in public interest (s. 55). \ /here the Central Govemment is of
opinion that patent or the mode in which it is exercised is mischievous to the state
or generally prejudicial to the public, it may make a declaration to that effect in the
620 Business Law
official gazette.It shall give an opportunity to the patentee to be heard before
making such a declaration. Then the patent ihall be deemed to be revoked.
PART 14 - RECISTER OF PATENTS

sections 67 to72 contain provisions as regards register of patents
Se-ction 67 provides that a Register of Patents shall be kept at
the patent office. The
following particulars are required to be entered:
(i) the names, addresses of grantees of patents;
(ii) notification of assignments and of transmission of patents, of licences under
patents, and of amendments, extensions, and revocations of patents; and
(iii) particulars of such other matters affecting the validity or proprietorship
of
patents.
No notice of any trust, whether express, implied or constructive, will be
entered in
the Register.
Section 69 provides for the registration of assignment, transmission etc.

of a patent.
section 70 empowers a registered grantee or proprietor to assign, or grant licences
under the patents.
PART 15 _ PATENT OFFICE AND ITS ESTABLISHMENT
The Controller General of patents, Design and rrade Marks is the

controller of
patents. For the purposes of the Act, the Central Govemment has appointed
The Patents Act,1957 62I
examiners and other officers. There is a seal of the patent office. During their
emplopnent in the patent office, employees cannot acquire or take directly or
indirectly any right or interest in any patent issued by the patent office. Also they
are not allowed to fumish information on a matter which isbeing or hasbeen dealt
with under this Act.
PART I6 _ POWERS OF CONTROLLER GENERALLY

Sections 77 to 87 confer certain powers on controller of patents. In any proceedings
before him under this Act, he shall have the powers of a civil court while trying a
suit under the code of civil procedure, 1908 in respect of certain matters. Further,
he may correct any clerical error in any patent or in any specification or other
document filed in pursuance of an application for patent or any clerical error in
any matter which is entered in the Register of Patents. Further, in any proceeding
under this Act before the controlleq, he may take oral evidence in lieu of, or in
addition to evidenceby affidavit, or may allow any party tobe cross-examined on
the contents of his affidavit.
PART 17 - WORKING OF PATENTS, COMPULSORY LICENCES, LICENCES

OF RIGHTAND REVOCATION
Sections 82 to 98 deal with these matters.
Section 84 provides that at any time after the expiration of 3 years from the date of
the sealing of a patent any person interested may make an application to the
controller alleging that the reasonable requirements of the public with respect to
the patented invention have not been satisfied or that the patented invention is not
available to the public at a reasonable price and praying for the grant of a
compulsory licence to work the patented invention.
Further, the application for a compulsory licence may be made by any person
notwithstanding that he is already the holder of a licence under the patent. No
person shall be estopped from alleging that the reasonable requirements of the
public with respect to the patented invention are not satisfied or that the patented
invention is not available to the public at a reasonable price by reason of any
admission made by him, whether in such a licence or otherwise or by reason of his
having accepted such a licence.
Further every application for the grant of a compulsory licence shall contain a
statement setting out the nature of the applicant's interest together with such
particulars as may be prescribed and the facts upon which the application is
based.
Section 85 provides the maters to be considered for granting the licence. In

determining whether or not to make an order in pursuance of the application for
grant of a licence, the controller shall take into account:
(a) the nature of the invention, the time which has elapsed since the sealing of
the patent and the measures already taken by the patentee or any licensee to make
full use of the invention;
622 Business Law
(b) the ability of the applicant to work the invention to the public advantage
and
(c) the capacity of the applicant to undertake the risk in providing capital and
working the invention if the application were granted.
section 84(5) provides that the controller, if satisfied that the reasonable
requirements of the public with respect to the patented invention have not been
satisfied or that the patented invention is not available to the public at a reasonable
price, may order the patentee to grant a licence upon such terms as he may deem
fit.
Section 86 provides that at any time after the expiration of 3 years from the date of
sealingof apatent, the central govemmentmaymake an applicationto the Controller
for an order that the patent may be endorsed with the words "Licences of right" on
the ground that the reasonable requirements of the public with respect to the
patented invention have not been satisfied or that the patented invention is not
available to the public at a reasonable price. The controller, if satisfied may make
an order that the patentbe endorsed with the words "licences of right". Section 87
enumerates certain patents which shall be deemed to be endorsed with the words
"licences ofright".
Section 88 provides for the effect of endorsement of patent with the words "licences
of right". In such a situation, any person who is interested in working the patented
invention in India may require the patentee to grant him a licence for the purpose
on such terms as may be mutually agreed upory notwithstanding that he is already
the holder of a licence under that patent. If the parties are unable to agree on the
terms of the license, either of them may apply to the controller to settle the terms
thereof.
Section 89 provides for revocation of patents by the controller for non-workihg. It

may sohappen that in spite of the grant of a compulsory licence or the endorsement
"Licences of right" havingbeenmade ordeemed to havebeenmade, the reasonable
requirement of thepublic with respect to thepatented invention remains unsatisfied
or that the patented invention is not available to the public at a reasonable price. In
such a situation the patent may be revoked by the controller on an application to
that effect eitherby the Central Govemment or any person interested.
Section 94 mentions the general purposes for granting the compulsory licences.
Licences are granted with a view to securing the following purposes:
(a) that patented inventions are worked on a commercial scale in Lrdia without
undue delay and to the fullest extent that is reasonably practicable;
(b) that the interests of any person for the time being working or developing an
invention in India under the protection of a patent are not unfairly prejudiced..
Section 95 mentions the terms and conditions of compulsory licences. In setting
the terms and conditions of a compulsory licence, the controller shall endeavour
to secure;
The Patents Act,\957 62g
(a) that the-royalty and other remuneration, if any,reserved to
the patentee or
other person beneficially entitled to the patent, reaionable, having regard
to the
.the
expenditure incurred by the patentee-in riaking the
ing it and obtaining a pateni and keeping it in force"and
p) t\t the patented invention is worked to the fullest extent by the person to
whom the licence is granted and with reasonabre protit to him;
(Sl ttt"t the patented articles are made available to the public at reasonable
Prrces.
However, no licence granted by the controller shall authorise the licensee
to import
the patented article or an artitle or substance made by a patented
process from
abroad where such importation would, but for sucn unthorisation,
constitute an
infringement of the rights of the patentee.
PART 18 _ USE OF INVENTIONS FOR PURPOSES OF GOVERNMENT

AND
ACQUtSITtON OF INVENTIONS By CENTRAL GOVERNMENT
Sections 99 to 103 make provisions as regards these matters. Section
99 defines the
meaning of the "use of.invention for puiposes of government,,. It
rays down that
such use will include (a).importation uy govemirent of any inveniion,
being a
machine, apparatus or other article covere-cl by a pate rt for tlie purpose
of mer&y
of govemments own use and (b) importationuy ti gor"*-"rit
oiu.y inventioi
being a medicine or a drug covered by a patent grante-d, " before the commencement
of the Act. Lr the case of ttre imngitation o.r rigdicine or drug cr. ue
government merely for its .(b),
own use like the distribution to
-ua" u, trr;
nospitat
or other medical institutions of govemment. "nylisp"t "ary
section 100 provides that at any time after the application for a patent had
been
filedat the patent office or patent has been granted, the central Govemment
may
use the invention for government purposds. Also in the following
situation th!
govemmentis entitled to makeuse of the invention withoutpaymeit
of royalty or
other remuneration to the application. In case the inventibn is used'by
ihe
govemmentbeforetheprioritydate of therelevantdaim of the complete specification
fixed by the applicant for giant of patent if there has een adrie record
of such
invention in a government document or tests or trial have been performed
by
govemment otherwise than in consequence of the communication
the patentee.
of i""e"tion i!,
But the govemment would have to pay royalty in case the invention
is used by it
without the same invention havingiome or, goremment record or been tried
or
tested. In such a case the government is liable to pay to the patentee
mutually
agreed compensation. If mutual agreement is not ariived at, the
compensation
payable to the patentee will be determined by the High court in accordance
with
the provisions of s. 103.
However, if 'he patented product involved is a medicine or a drug an
article of
food, the royalty and other remuneration payable to the patentee shall
not exceed
4 percent of the net ex-factory sale price in bulk of the paiented.
624 Business Law
Section 102 deals with the subject of acquisition of invention and patent by the
government. The Central Government can acquire an invention for a public
purpose, either before the grant or after the grant of the patent. The govemment
shall give a notice of acquisition to the applicant, or to the patentee or other person,
if any, appearing on the register as the case maybe. The applicant or the patentee
in such a case shall be paid compensation, as may be agreed upon between the
central govemment and the applicant or the patentee. If no such agreement is
arrived at, the compensation will be determined by the High Court in accordance
with the provisions of s.103.
PART 19 - SUITS CONCERNINC INFRINGEMENTS OF PATENTS

Sections 104 to 115 deal with the subject of suits conceming infringement of patents.
Section 104 provides for the jurisdiction of a court for suits to be instituted for
infringementof a patent. Section l05provides thata personmayobtain a declaration
from the court to the effect that the use by him of any process or the making, use or
sale of an article does not constitute infringement of a patent claim even though
the patentee or licensee has not alleged any infringement. Section 106 empowers
the court to grant relief in cases of groundless threats of infringement, including
an injunction (subject to such terms, if any as the court thinks fit) and damages or
an account of profit.
PART 20 _ PATENT AGENTS
Sections 1,25 to1,32 deal with the subject of patent agents. Section L25 provides for
a register of patent agents to be maintained by the controller. The register shall
contain the names and addresses of all persons qualified to have their names
entered under s.126. Section 126 provides for the following qualifications for a
person to be a patent agent: (a) he must a citizen of India and has completed 21
years of age; (b) he must possess a university degree and must be either an advocate
or one who has passed the written examination and (c) he has paid the necessary
fees. Section 127 confers certain rights on patent agents. Every registered patent
agent is entitled to practise before the controller and to prepare all documents,
transact allbusiness connected with patent applications and patents. Section 128
provides that a patent agent duly authorised by an applicant for patent (or a
patentee) may sign all applications and communications to the controller.
Section 129 provides that a person shall not practise as a patent agent unless he is
registered as such under the Act. Also a company or a body corporate is not
allowed to act as a patent agent.
PART 21 - GAINING PRACTICAL EXPERIENCE
14.21.1 Self-test Questions

1. \ /hat do you understand by the term 'Patent'?
2. Describe the procedure for obtaining a patent.
ThePatents Act,L957 625
3. Ia/hy are patents lapsed? How are they restored?
4. Mention the inventions which are not patentable under the Act.
5. \A/ho is entitled to apply to patents?
6. IA/hat do you understand by 'specification'? Distinguish between provisional

and complete specification.
7. Describe the provisions as regards examination of application for the grant

of a patent.
8. Write an explanatorynote on Exclusive Marketing Rights.
9. Write shortnotes on:

(i) Patents of addition (ii) Surrender of patents (iii) Revocation of patents (iv)
Register of patents (v) Reliefs for infringement (vi) PatentAgents.
10. Why are compulsory licences granted? What is the procedure for granting
such licences?
,)
CHAPTER t5
The Copyright Act, 1957
Outlines
1. Scope of the Act
2. Copyright, its Ownership and Term
3. Licences
4. CopyrightSocieties
5. Rights of Broadcasting Organisation and of Performers
6. IntemationalCopyright
7. Registration of Copyright
8. InfringementofCopyright
9. CivilRemediesforlrfringement
- Self-test Qrestions
PART 1 _ SCOPE OF THE ACT
1.5.1.1Introduction. The law relating to copyright is contained in the Copyright
Act,7957.It extends to the whole of India and came into force onJanuary 21,1958.
The Act has been amended in 1983, 1984,1992 and 1994 primarily to bring the
Indian law in conformity with the intemational conventions in general and Bern
Convention and the Universal Copyright Convention in particular. The objective
of the 1957 Act was to amend and consolidate the law relating to copyright as was
available atthat time.
Section 2 gives the interpretation of certain expressions as used in the Act. Sections
9-11 deal with Copyright Office and Copyright Board. These are sununarised below:
15.1.2 Interpretation of certain expressions

Adaptation. It means, (i) in relation to a dramatic work, ttre conversion of the work
into a non-dramatic work; (ii) in relation to a literary work or an artistic work the
conversion of the work into a dramatic work by way of performance in public or
otherwise; (iii) in relation to a literary or dramatic work, any abridgement of the
work or any version of the work in which the story or action is conveyed wholly or
mainly by means of pictures in a form suitable for reproduction in a book, or in a
newspaper, magazine or similar periodical; (iv) in relation to a musical work, any
arrangement or transcription of the work; and (v) in relation to any work, any use
of such work involving its rearrangement or alteration.
The CopyrightAct,T9,T 627
Work of Architecture. It means any building or structure having an artistic character

or design, or any model for suchbuilding or structure.
Artistic Work. It means - (i) a painting, sculpture, a drawing (including a diagram,
a
map, chartre plan), an engraving or photograph whether ornot any such work
a
possesses artistic quality; (ii) a work of architecture; and (iii) any other work of
artistic craftsmanship.
Author. It means, in relation to (i) a literary or dramatic work, the author of the
work; (ii) a musical work, the composer; (iii) an artistic work other than a
photograph, the artist; (iv) a photograph, the person taking the photograph; (v) a
cinematography film or sound recording, the producer; and (vi) any literary,
dramatic, musical or artistic work which is computer-generated, the person who
causes the work to be created.
Broadcast. It means communication to the public (i) by any means of wireless

diffusion, whether in any one or more of the forms of signs, sounds or visual
images; or (ii) by wire; and includes a re-broadcast.
Cinematograph Film. It means any. work of visual recording on any medium
produced through a process from which a moving image may be produced by any
means. Also it includes a sound recording accompanying such visual recording
and "cinematograph" shall be construed as including any work produced by any
process analogous to cinematography including video films.
Communication to the Public. It means making any work available for being seen
or heard or otherwise enjoyed by the public directly orby any means of display or
diffusion other than by issuing copies of such work regardless of whether any
member of the public actually sees, hears or otherwise enjoys the work so made
available.
Explanation. Forthe purposes of this clause, communication through satellite or
cable or any other means of simultaneous communication to more than one
household or place of residence including residential rooms of any hotel or hostel
shall be deemed for the communication to the public.
Composer. In relation to a musical work, a composer means the person who

composes the music regardless of whether he records it in any form of graphical
notation.
Computer. It includes any electronic or similar device having information
processing capabilities.
Computer Programme. It means set of instructions expressed in words, codes,
schemes or in any other form, including a machine readable medium, capable of
causing a computer to perform a particular task or achieve a particular result.
Copyright Society. Itmeans a society registered under s.33(3).
Delivery. Lr relation to a lecture, includes delivery by means of any mechanical
instrument or by broadcast.
629 Business Law
Dramatic work. It includes any piece of recitation, Choreographic work or
entertainment in dumb show, the scenic arrangement or acting, form of which is
fixed in writing or otherwise but does not include a cinematograph film.
Exclusive Licence. It means a licence which confers on the licensee or on the
licensee and persons authorised by him, to the exclusion of all other persons
(including the owner of the copyright), any right comprised in the copyright in a
work. Exclusive licensee shallbe construed accordingly.
Indian work. It means a literary, dramatic or musical work - (i) the author-of
which is a citizen of India; or (ii) which is first published in Lrdia; or (iii) the author
of which, in the case of an unpublished work is, at the time of the making of the
work, a citizen of India.
Infringing Copy. It means, in relation to (i) a literary, dramatic, musical or artistic
work, a reproduction thereof otherr.rzise than in the form of a cinematographic film;
(ii) a cinematographic film, a copy of the film made on any medium by any means;
(iii) a sound recording, any other recording embodying the same sound recording,
made by any meansi (iv) a programme or performance in which such a broadcast
reproduction right or a performer's right subsists, the sound recording or a
cinematographic fitm of such prograrune or performance; it is not asked to join if
such reproduction, copy or sound recording is made or imported in contravention
of the provisions of this Act.
Literary work. It includes computer programmes, tables and compilations

including computer databases.
Musical work. It means a work consisting of music and includes any graphical
notation of such work but does not include any words or any action intended to be
sung, spoken orperformed with the music.
Performance. In relation to performer's right, it means any visual or acoustic
presentation made live by one or more performers.
Performer. It includes an actor, singer, musician, danceq, acrobaf juggler, conjurer,
snake charmet a person delivering a lecture or any other person who makes a
performance.
sound Recording. It means a recording of sounds from which such sounds may
be produced regardless of the medium on which such recording is made or ttre
method by which the sounds are produced.
work. It means any of the following work - (i) a literary, dramatic, musical or
artistic work; (ii) a cinematograph film; (iii) a sound recording.
15.1.3copyright office and Copyright Board. The goverrunenthas established a
copyright office under the control of the Registrar of copyrights. Also the Central
Govemment has appointed certain Deputy Registrars of copyrights.
The Government has also constituted a Copyright Board. The Registrar of
copyrights is the secretary of the Board. The Copyright Board shall be deemed to
The Copyright Act,7957 629
the a civil court. The copyright Board consists of a Chairman and not less than
onwhois,
judge of a
including
PART 2 _ COPYRICHT, ITS OWNERSHIP AND TERM
This part yright subsists and works in which it

does not ning of copyright. Also the term and
ownershi
making of the work, a citizen of India or domiciled in India, and (iii) in the case of
a work of architecture, the work is located in India.
recording shall not affect the

or substantial part of which,
is made.
In the case of work of architecture, copyright shall subsist only in the artistic
character and design and shall not extend to processes or methods of construction.
15.2.2 Meaning of copyright (S.14). The term ,copyright, means the exclusive
- right,
by virtue of, and subject to the provision of the Act:
or an adaptation of the work, any of the acts specified in relation to the work in (i)
to(vi);
630 Business Law
(b) in the case
clause (a) above;
computer progra
hire on earlier oc
(c) roduc
inclu a two
dime (ii) to
public; (iii) to issue copies ing copies already in
circulation; (iv) to include film; (v) to make any
adaptation of the work; (vi) of the work any of thl
acts specified in relation to
15.2.4 No copyright except as provided in the Act (s. 15). No person shall be
entitled to copyright in any work, otherwise than under and in aicordance with
the provisions of this Act.
L5.2-5 Ownership of copyright (s. 1Z). The author of the work is recognised to be
the first owner of the copyright therein. This is however, subject to some exceptions
givenbelow:
owner of the copyright in the work.

is taken or a painting or portrait is drawn or an engraving
i-s made on payment at the instance of any pe.sorr,
such
f any dgreement to the contrary, shall be the flrst owner of
The CopyrightAct,Tg1T $1,
4. If any personhas delivere

the first owner of the copyright.
behalf of any other person, th
copyright therein.
5. In the case of govemment work, the govemment is the owner of the copyright
in the absence of any agreement to the contrary.
6. In the case of a work made or first published by or under the direction or
control of any public undertaking, such public undertaking shall, in the absence
of any agreement to the contrary, be the first owner of the copyright therein.
7. If a work is considered to be a work of a certain international organisation
under s. 41, then the intemational organisation shall be the first owner of the
copyright therein.
15.2.6 Assignment of copyright. section 18 provides that the owner of the copyright
in an existing work, or the prospective owner of copyright in a future work, may
assign to any person the copyright, either wholly or partially, and either generally
or subject to limitation and either for the whole term of the copyright or any part
thereof. However, in the case of the future work, the assignment shall take effect
only when the work comes into existence.
Section 19 describes the mode of assignment. The assignment of copyright in any
work shall be valid only when it is in writing, signed by the assignor or by his only
authorised agent. Furtheq, the assignment shall specify the rights assigned, its
duration and territorial extent, and the amount of royalty payable. If the period of
assignment is not stated, then it shall be deemed to be 5 years from the date of
assignment. In case territorial extent of assignment of the rights is not specified,
then it shallbe presumed to extend within India.
Section 19A makes provisions as regards disputes relating to assignment. Any
dispute arising with respect to assignment of copyright or any term of the
assignment, shall be decided by the Copyright Board.
section20 provides for the kansmission of copyrightinmanuscriptby testamentary
disposition. The owner of a copyright in any literary, dramatic or musical work or
any artistic work, which is not published during his life time, may transmit the
copyright in that work, by making a bequest in favour of any person in his will.
Section 21 provides for the right of an author to relinquish copyright in his work
by givingnotice to the Registrar of copyrights.
15.2.7 Term of copyright. Section 22 provides that copyright shall subsist in any
literary, dramatic, musical or artistic work (other than a photograph) published
within the lifetime of the author until60 years from the beginning of the calendar
632 Business Law
year next following the year in which the author dies. Section 23 provides for the
term of copyright in anonymous and pseudonymous worls. In the case of a literary
dramatic, musical or artistic work (other than a photograph), which is published
anonymously or pseudonymously, copyright shall subsist until60 years from the
beginning of the calendar year next following the year in which the work is first
published. However if the identity of the author is disclosed before the expiry of
the said period, copyright shall subsist until 60 years from the beginning of the
calendar year following the year in which the author dies.
Section 24 provides for term of copyright in posthumous works. Where copyright
subsists at the date of death of the author and adaptation of which has not been
published before that date, the copyright will subsist until60 years of from the
published.
Section 25 provides that in the case of a photograph, the copyright shall subsist
until 60 years from the beginning of the calendar year next following the year in
which the photograph is published. Section 26 provides that copyright in
cinematograph film shall subsist until 60 years from the begiruring of the calendar
year next following the year in which the film is published. Section 27 provides
that copyright shall subsist is a sound recording until60 years from the beginning
of the calendar year next following the year in which the work is first published.
Section 28 provides that in the case of govemment work where govemment is the
first owner of the copyright therein, copyright shall subsist until60 years from the
beginning of the calendar year next following the year in which the work in first
published. Section 28A provides that in the case of a work, where a public
undertaking is the first owner of the copyright therein, copyright shall subsist
until 60 years from the beginning of the calendar year next following the year in
which the work is first published. Lastly, s.29 provides that in the case of a work of
an intemational organisation, copyright shall subsists until 60 years from the
published.
PART 3 - LICENCES
15.3.1 Licence by owners of copyright. Section 30 provides that the owner of the
copyright in any existing work or the prospective owner of the copyright in any
future workmay grant any interestin the rightby licence inwriting signedbyhim
or by his duly authorised agent. But in the case of a licence relating to copyright in
any future work, the licence shall take effect only when the work comes into
existence.
15.3.2 Cornpulsory licence in works withheld from public. Section 31 provides

that at any time during the term of copyright in any Indian work which has been
published or performed in public a complaint may be made to the Copyright
Board that the owner of copyright in the work (a) has refused to re-publish or
allow the republication of the work or has refused to allow the performance in
public of the work and by reason of such refusal the work is withheld from the
-=
The Copyright Act,I957 6g3
public; or (b) has refused to allow communication to the public by broadcast of
such work or in the case of a sound recording the work recorded in such sound
recording, on terms which the complainant considers reasonable.
Then the Copyright Board, after giving the owner of the copyright in the work a
reasonable opportunityof being heard and after holding such inquiry as it may
deem necessary, may, if it is satisfied that the grounds of such reruiat u." tot
reasonable, direct the Registrar of copyrights to grant to the complainant a licence
to republish the work, perform the work in public or communicate the work to the
may be. The licence may contain any terms and
may determine and the compensation payable to
15.3.3 Compulsory Licence in unpublished Indian works (s.31A). \ /here in the

case of an Indian work, the author is dead or unknown or cannot be traced or the
translation in any language, also publish his proposal in one issue of any daily
newspaper in that language.
where an application is made to the Copyright Board, it may, direct the Registrar
of copyrights to grant to the applicant a licence to publish the work or a tranJhtion
thereof in the language mentioned in the application subject to the payment of
such royalty determined. Thereupon the Registrar of copyright shall grant the
licence to the applicant.
L5.3.4 Licence to produce and publish translation (s. 32). Any person may apply
to the Copyright Board for a licence to produce and publish a translation of a
literary or drarnatic work in any language after a period of z years for the first
publication of the work. Also, an application may be made for a licence to translate
foreign literary or dramatic work, after three years from its publication. Every
application shall state the proposed retail price of copy of the translation of ttre
work.
The Copyright Board may, after holding such inquiry as maybe prescribed, grant
to the applicant a licence notbeing an exclusive licence, to produce and publish
a translation of the work in the language mentioned in the application.
PART 4 _ COPYRIGHT SOCIETIES

15.4.1 Registration of a copyright society (s. 33). No person or association of
persons shall commence or carry on business of issuing or granting licences in
respect of any work in which copyright subsists or in respect of any other rights
conferred by this Act except under or in accordance with the registration granted
634 Business Law
The Central Government may, having regard to the interests of the authors and
However, the Central Government shall not ordinarily register more than one
copyright society to do business in respect of the same classof works.
The if it is satisfied that a copyright society is being
man al to the interests of the owners of rights concemed,
canc ociety after such inquiry as may be prescribed.
Further, if the Central Govemment is of the opinion that in the interests of the
tration
such a
ge the
Administration of rights of owner by copyright society (s. 34). A copyright

society may accept from an owner of rights exclusive authorisation to adminisier
any right in any work. But he shall have the right to withdraw such authorisation
without prejudice to the rights of the copyright society under the contract.
administrator of their rights.
PART 5 _ RIGHTS OF BROADCAST]NC ORCANISATION AND OF

PERFORMERS
or,rmer of the right, he will be deemed to have infringed the broadcast reproduction
rights:
(a) re-broadcast the broadcast; or
;t:-'
The Copyright Act,7957 635
@) causes the broadcast to be heard or seen by the public on payment of any

charges; or
(c) makes any sound recording or visual recording of the broadcas| or
(d) makes any reproduction of such initial recording or visual recording where
such initial recording was done without licence or, where it was licensed for any
purpose not envisaged by such licence; or
(e) sells or hires to the public, or offers for such sale or hire, any such sound
recording or visual recording referred to in (c) or (d) above.
15.5.2 Perf ormer's right (s. 38). If any person during the subsistence of a performer's
right, without the consent of the performe4, does any of the following acts in respect
of the performance or any substantial part thereof, he will be deemed to have
infringed the performer's right:
(a) makes a sound recording or visual recording of the performance, or
(b) reproduces a sound recording or visual recording of the performance which
was made without the performer's consen|
Acts not constituting infringement of a performer's rights (s. 39). The following
acts do not constitute infringement of a performer's right in his performance: (a)
the making of any sound recording of or visual recording for private use of the
person making such recording or society for the PurPose of bonafide teaching or
research, or (b) fair dealing of excerpts of a performance in the reporting of current
events or for bonafdercview, teaching or research; (c) other acts with any necessary
adaptations and modification which do not constitute infringement of copyright
under s.52.
PART 6 - TNTERNATIONAL COPYRIGHT

Section 40 authorises the Central Govemment to extend copyright protection to
foreign works. Accordingly the Central Govemment made the Intemational
copyright order,!997.
Section 41 provides that works made or published by certain International
Organisations are granted copyright protection in India . Accordingly, the Central
Govemmentpassed the copyright (IntemationalOrganisations) Order (1958) under
which copyright protection was granted to certain Intemational Organisations.
PART 7 _ REGISTRATION OF COPYRICHT

Sections 44 to 50 deal with the registration of copyright. Section 44 provides for a
Register of copyright to be kept in the copyright office. The names or titles of the
*oiks, the names and addresses of authors, publishers and owners of copyright
and certain other prescribed particulars are entered in the Register. Section 45
provides that entries in the Register of copyrights are made when the author or
publisher of, or owner of or other Person interested in the copyright of or other
person interested in the copynght in, any work makes an application to the Registrar
636 Business Law
Section 50 A provides that every entry made in the Register or the particulars
of
any work entered, the correction or rectification shall be published by
the Regiskar
in the Official Gazette.
PART 8 _ INFRINGEMENT OF COPYRIGHT

section 51 provides that copyright in a work shall be deemed to the infringed in
the following cases:
The reproduction of a literary, dramatic, musical or artistic work in the form

of a
cinematograph film shall be deemed to the infringing copyright.
Certain acts not to be infringement of copyright. (s. 52). This section specifies acts
which do not constitute an infringement of copyright. These are:
(a) A fair dealing with a literary, dramatic, musical or artistic work, not being a
computer programme, for the purposes of (i) private use, including research;
[ii)
criticism or review, whether of that work or of anv other work.
-\<
The Copyright Act,1.9S7 637
(b) The making of copies or adaptation of a computer progranune by the lawful
possessor of a copy of such computer prog.a*m6, from suih copy (ij
in order to
utilise the computer programme for ttre purpose for which it was'supplied; (ii)
or
to make ba&up copies purely as a tempbrary protection against loss,
destruction
or damage in order only to utilise the Computer p.og.urrile for the purpose
for
which it was supplied.
(c)A fair dealing with a literary dramatic, musical or artistic work for the purpose
9{..9no1ir,t current events - (i) in a newspaper, ma gazineor similar periodical, or
(ii) by broadcast or in a cinematograph film or by ireans of photographs.
(d) The reproduction of a literary, dramatic, musical or artistic work for the
purpose of a judicial proceeding or for the purpose of a report of a judicial
proceeding.
(e) The reproduction or publication of literary dramatic, musical or artistic work
in any work prepared by the Secretariat of a Legislature exclusively for the use of
itsmembers.
(0 The reproduction of any literary, dramatic or musical work in a certified
copy made or supplied in accordance with any law for the time being in force.
(g) The reading or recitation in public of any reasonable extract from a published
-.
literary or dramatic work.
_ ft)
The publication in a collection, mainly composed of non-copyright matter
bonafide intended for the use of educationai institutions and sodlicribed in the
title and any advertisement issued by or on behalf of the publisher, of short
T
passages from published literary or dramatic works.
(i) The reproduction of a literary, dramatic, musical or artistic work (i) by.a
teacher or a pupil in the course of instruction; or (ii) as part of the questions tobe
answered in an examination; or (iii) in answer to such questions.
(j) The perforrnance, in the course of the activities of educational institution of a
literary dramatic or musical workby the staff and students of the institution, or of
a cinematograph film or a sound recording, if the audience is limited to
such staff
and students, the parents and guardians of the students and persons directly
connected with activities of the institution or the communicaiion to such an
audience of a cinematograph film or sound recording.
ft)- The making of sound recordings in respect of any literary, d.ramatic or musical
work, if (i) sound recording of that work have been made byor with the licence or
consent of the owner of the right in the work; (ii) the petjo.r making the sound
to make the sound recordings, has
hich the sound recordings are to be
in respect or ar such r?Tq recordinss ,:T";nT;t^1'f,lti,T^ff"T""r11'"Tillif:

Copyright Board in this behalf.
(l) The causing of a recording to be heard in public by utilising it, (i) in an
enclosed room orhallmeant for the common use of iesidents in residelitial premises
638 Business Law
(not being a hotel or similar comrnercial establishment) as part of the amenities

provided exclusively or mainly for residents, therein; or (ii) as part of the activities
of a club or similar organisation which is not established or conducted for profit'
(m) Th" performance of a literary, dramatic or musical work by an amateur club
or society, if the performance is given to a non-paying audience or for thebenefit of
a religious institution;
(n) The reproduction in a newsp aPer,na1azine or other periodical of an article
on current eionomic, political, social or religious topics, unless the author of such
article has expressly reserved to himself the right of such reproduction.
(o) The publication in a newspaper, magazine or other periodical of a report of
a lecture delivered in public.
The making of not more than three copies of a book (including a pamphlet,
(p)
music, map, chart or plan) by or under the direction of the person in charge
sh-eet of
of a public literary for the use of the library if such book is not available for sale in
India.
(q) The reproduction for the purpose of research or private study or with a view
to publication, of an unpublished literary, dramatic or musical work kept in a
library, museum or other institution to which the public access.
(r) The reproduction or publication of (i) any matter which has been published
in any Official Gazette except an Act of a Legislature; (ii) any Act of a Legislature
subject to the condition that such Act is reproduced or published together with
any commentary thereon or any other original matter; (iii) the report of any
committee, commission, council, board or other like body appointed by the
Govemment if such report has been laid on the Table of Legislature, unless the
reproduction or publication of such report is prohibited by the Governmenl; (iv)
any judgment or order of a court, tribunal or other judicial authority, unless the
reproduction or publication of such judgment or order is prohibited by the court,
the tribunal or other judicial authority, as the case maybe.
(s) The production or publication of a translation on in any lndian language of
an Act oia Legislature and of any rules or orders made thereunder (i) if no
translation of such Act or rules or orders in that language has previously been
produced or published by the Govemment; or (ii) where a translation of such Acts
or rules or orders in that language has been produced or published by the
govemment if the translation is not available for sale to the public.
(t) The making or publishing of a painting, drawing, engraving or photograph
of iwork of architecture or photograph of a work of architecture or the display of
a work of architecture.
(u) The making or publishing of a painting, drawing, engraving or photograph
of a sculpture, or other artistic work falling under s. 2(e) (iii)' if such work is
permanently situated in a public place or any premises to which the public has
access.
The CopyrightAct,Ig'T $9
(v) The inclusion ina cinematograph filrn of
-Jr) any artistic work permanently
situated in a public place.or any prernises to which the public has access;
or (ii)
any other artistic work, if such inclusion is only by wZy of background
or is
otherwise incidental to the principal matters reprlsented in the film.
(w) The use by the author of an artistic work where the author
- of such work in
not the owner of the copyright therein, of any mould, cast, sketch, plan,
model or
study made by him for the purpose of the work.
(x) The reconstruction of a building or structure in accordance with the
architectural drawings or,plans by refeience to which the building or structure
was originally constructed.
(y) tn relation to literary, dramatic or musical work recorded or reproduced in
any cinematograph film, the exhibition of such fiIm after the expiration of the
term
of copyrighttherein.
(z) Th9 mlking of an ephemeral recording, by a broadcasting organisation using
its own facilities for its own broadcast by i broadcasting orginiJation of a worl
which it has rhe right to broadcast, and the retention of suih rEcording for archival
purposes on the ground of its exceptional documentary character.
(za)The performance of a literary, dramatic or musical work or the
communication to- the public of such work or of a sound recording in the
course of any bonafidereligious ceremony or an official ceremony heli by the
Central Govemment or the state Government or any local auth'ority.
owner of the copyright in such work; (c)

the year of its publication.
In the case of a video fiIm in respect of any work, the following particulars are to be
displayed in the video film, when exhibiir d. Also it is n"""ri-ry thut on the video
cassette or other container thereof the following particulars are shown.
inematograph film required to be certified for exhibition

f the Cinematograph Act,7952, a copy of the certificate
Film Certification;
@) the name and address of the person who has made the video film and a
declaration by him that he has obtained the necessary licence or consent from the
owner of the copyright in such work for making such video film; and
(c) the name and address of the owner of the copyright in such work.
PART 9 _ CIVIL REMEDIES FOR INFRINCEMENT
Section 55 prov sue in the district court having

jurisdictionand byway of njunction,damagej
640 Business Law
accounts and otherwise as are conferr
v-ed by gn order made by the court

days of the date of the order to the
y of execution of the order till the
stany final decision or order of the Registrar

of thedate of the orde1, with the Coplright
yany final decision or order of Ure Copyri[ht
date of such decision or order, upp"utio [n"
PART 1O _ GAININC PRACTICAL EXPERIENCE
15.10.1 Self-test euestions

1' Define the folrowing te.m as used in the Copyright Act, 7g57: (i)
Artistic
yvork; (ii) Cinematogr"pl ; (iii) Copyright ;'cieiy; (i;)-dr"*atic
I,]-
(v) Performer; (vi) Copyright Board work ;
2. Enumerate the works in which copyright subsists.

3. What is the importance and meaning of copyright?
4. Who is the owner of copyright in different works?
5. Is it possible to assign copyright? summarise the provisions as regards
as given
this
in the Copyright Act, f 957.
6. Describe the term of copyright for different works.
7 th."l are the provisions as regards issue of compulsory licences
of
copyrights?
8' I^/hat do you understand by copyright society? Describe the provisions
as
regards the copyright society ur ir, tT',e copyrigrriA;i;i95t.'-
fr'outr
9. Enumerate the rights of broadcasting organisation and
of performers.
Give the provisions as regards International copyright
^10' as given in the
Copyright A ct,7957 .
11' Is registration of copyright mandatory under the

law? Describe the procedure
of registration of copyright. -
12. When is it that there is an infringement of copyright?
13. What are the acts which are not infringement of copyrights?
14' Mention the civil remedies available for infnngement
of copyright.

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CHAPTER IZ

Elements of Company Law

7. Perpetual existence. A company being an artificial person cannot be

lndia (s.50). \ /here a company has any business or transaction in

it were under its common seal,

and are responsible for the perpehation of fraud.

where y company fornred is against pttblic interest or pttblic policy,for the

(vi) lMere the per cent shares in a utbsidiary company and.

ly:i)^Y!*: breach of economic offence is in olaed. lsantamt Ray a. union of tndia

(vlir) where company is used as a medhmr to aaoid zuelfare legislation.

report on the membership of any company

12.1.4 Classification of companies. Companies can be classified into three

treated as a single member; ^:'T""",'il:;1il:::ff

5. A private company can commence business immediately after receiving the'

Following are the specialprivileges available to a private company:

(8) A private company is not required to hold a statutory meeting or to file a

(2) The word 'Private'should be added before 'Limited'.

(1) that other controls the composition of its Board of Directors; or

Control of composition of board of direcfors. The composition of the Board of Directors

3. Where a directorship is held by an individual nominated by the company or

In determining whetlrcr one company is a subsidiary of another, following shall be

1. Any shares held or power exercisable by the other company in a fiduciary

l2.7.ll One-man Company. A membermayhold virtually the entire share capital

Govemment Companies are as much govemed by the provisions of the Companies

PART 2 - FORMATION OF A COMPANY

in the formation of the company, or by a Person named in the articles as a director,

This provision prevents the reopening of matters prior

In another ca se of lubilee Cotton Mills Ltd. a. Laais,the Registrar issued

As it shall be explained later, a company can do only such acts as by its

PART 3 _ MEMORANDUM OF ASSOCIATION

12.3.1 Meaning and Purpose. The Memorandum of Association of a company is

if a company is practically defunct, it is not a bar to registration of a new

Key words Required outhorised copitol (Rs.)

Penaky.If a companydoesnotpaintoraffixitsname and the address of itsregistered

specimen liability clause in a memorandum of association of guarantee company

The associationclause [s.13(a)(c)]. Atthe end of the memorandumof everycompany

2. Any act done outside the express or implied objects is ultraaires.

4. In case a company is about to undertake an ultra aires act, the members of a

If through inadvertence or otherwise, a company has been registered with a name

Registrar will also make the necessary

(a) s b another premises in

(t a special resolution is required to be passed at a general meeting of the

(d) Change of rcgistered ffice from one state to anothet state.

Section of the registered offic

wilt editors of the company, the Registrar

Distributors of India Ltd. a. Registrar of

_] fl carry onitsbusiness more economically and more

In Re, scientific potiltry

Likewise, cyclistsTouring Ctttb Ltd. was not allowed to change its

To amalgamate wilh any other company or body

A printed or a typewritten copygf th9 special resolution is

If default is made in filing the notice, the company and

Consolidation and nLb-diaision of shares. Consolidation is

Once a resolution hu:l": passed, copy of the resolution is required to be sent

up shares into stockby

t be issued in the first instance. It is necessary

PART 4 -ARTICLES OF ASSOCIATION

The Articles of association of a company have a contractual force between