Company Law

Answer in 2-3 sentences

Q.1 What is foreign security?

Ans:- Foreign security means any security created or issued outside India and the principal or
the interest on which is payable in any foreign currency or is payable outside India.

Q.2 What is Director identification number?

Ans:- DIN is a unique Identification Number allotted to an individual who is appointed as a

director of a company

Q.3 What is repatriation of foreign exchange?

Ans:- It is obligation of any person resident in India to take steps repatriate back to India all
the foreign exchange which is due or has accrued and realized to such person within such
reasonable time and manner as prescribed.

Q.4 What is floating charge?

Ans:- Floating charge refers to a charge that is created on the assets of circulatory nature. It is
a charge on future assets.

Q.5 What is deemed prospectus?

Ans:- Section 25 (1) of company law 2013. When a company allows or agrees to allot any
securities of the company, the document is considered as a deemed prospectus via which the
offer is made to investors.
Q.6 What is debenture?

Ans:- Section 2(30) of the Companies Act, 2013 define “debenture" which includes debenture
stock, bonds or any other instrument of a company evidencing a debt, whether constituting a
charge on the assets of the company or not. It is a debt to a company.

Q.7 What is cumulative shares?

Ans:- Cumulative preference shares give shareholders the right to receive cumulative dividend
payouts from the company even if they are not profitable.

Q.8 Who is Subsidiary company?

Ans:- Sec 2(46) of the Companies Act, 2013 defines as follows: “Holding company”, in
relation to one or more other companies, means a company of which such companies are
subsidiary companies.

Q.9 Who is nominee director?

Ans:- A director nominated by any financial institution in accordance with the requirements of
any legislation now in effect, or of any agreement, or appointed by any Government, or any
other person to represent its interests is defined as a nominee director under Section 149 (7) of
the Companies Act, 2013.

Q.10 What is investor education and protection fund?

Ans:- The Central Government introduced the Investor Education and Protection Fund (IEPF)
to protect investors' interests and promote awareness. It is established under Section 125 of the
Companies Act, 2013 ('Act').
Q.11 What is red herring prospectus?

Ans:- A Red Herring Prospectus contains all the valuable information regarding the company
which intends to raise funds from the public by selling its shares.

Q.12 Who is promoter?

Ans:- A person who has control over the affairs of the company, directly or indirectly whether
as a shareholder, director or otherwise; A person who is in agreement with whose advice,
directions or instructions the Board of Directors of the company is accustomed to act.

Q.13 What is fixed charges?

Ans:- A fixed charge is a specific and identifiable asset or a property.

Q.14 Who is proxy?

Ans:- A proxy is a person who represents a member in the shareholders' meeting of a company,
with a legal document that could prove their authority.

Q.15 Distinction between a company and a partnership?

Ans:- Partnership Firm is a mutual agreement between two or more persons to run the business
and share profit and loss mutually. Company is an association of persons with a common
objective of providing goods and services to customers.

Q.16 What is joint venture?

Ans:- A joint venture is a commercial agreement in which the parties involved agree to form a
new entity, sharing assets, equity and revenue.
Q.17 Who is authorized person under FEMA 1999?

Ans:- As per Section 2(c) of FEMA, “Authorised person” means an authorized dealer, money
changer, offshore banking unit, or any other person which is authorized under Section 10(1) of
FEMA to deal in foreign exchange or foreign securities.

Q.18 What is Export under Foreign Exchange Management Act (FEMA) 1999?

Ans:- Exports are defined as movable goods produced within the boundaries of one country,
which are traded with another country.

Q.19 Who is alternative Director?

Ans:- As per Section 161(2) of companies act 2013, Alternate director is a person who is
appointed by the Board of Directors, as a substitute to a director who may be absent from India,
for a period which isn't less than three months.

Q.20 When does transmission of shares takes place?

Ans:- Transmission of shares takes place when registered member dies or is adjudicated
insolvent or lunatic by competent court.

Q.21 What is tenure of appointment of an auditor?

Ans:- Every company shall appoint subsequent auditor who hold the office from the date of
first annual general meeting till the conclusion of sixth annual general meeting.

Q.22 What is meant by dividend?

Ans:- Section 2(35) of the Companies Act, 2013, defines the term “dividend” as any
distribution of profits by a company to its shareholders, whether in cash or in kind. It includes
bonus shares, but does not include the distribution of assets on liquidation of a company.
Q.23 How can company alter its name clause?

Ans:- As per the Companies Act 2013, a company may change its name by passing a special
resolution in the general meeting and receiving approval from the Registrar of Companies
(ROC) and the Central Government.

Q.24 What is voluntary winding up?

Ans:- A voluntary liquidation is a self-imposed windup and dissolution of a company that
has been approved by its shareholders.

Q.25 Give any two instances of current account transactions under FEMA 1999?

Ans:-

1. Going abroad for employment.

2. Going abroad to emigrate to the country.
3. Maintenance of close relatives abroad.
4. Travel for business, attending a conference or specialized training or for meeting
medical expenses or check-up abroad for medical treatment/ check-up.
5. Going abroad for medical treatment.
6. Going abroad for studies.

Q.26 What is government company?

Ans:- As per Section 2(45) of companies act 2013, Government company means any company
in which not less than fifty-one percent of the paid-up share capital is held by the Central
Government, or by any State Government or Governments, or partly by the Central
Government and partly by one or more State Governments, and includes a company which is
a subsidiary company of such a government company.

Q.27 What is one person company?

Ans:- Section 2(62) of Companies Act 2013, defines a one-person company as a company that
has only one person as to its member.
Q.28 What shall be the Quorum of meetings of board?

Ans:- As per Section 174(1) quorum for Board meeting shall be one-third of total strength or
2 directors whichever is higher.

Q.29 What is current account transaction?

Ans:- Section 2(j) of FEMA states that 'Current Account Transaction' means a transaction.
other than a capital account transaction. It includes following - Payment due in connection with
foreign trade, other current business, services.

Q.30 What is Shelf Prospectus?

Ans:- Section 31 of the Companies Act, 2013. Shelf prospectus is issued when a company or
any public financial institution offers one or more securities to the public.

Q.31 Who can be appointed as an auditor?

Ans:- Section 141 of Companies act 2013, (1) A person shall be eligible for appointment as an
auditor of a company only if he is a chartered accountant in practice.

(2) Where a firm is appointed as an auditor of a company, only the partners who are Chartered
Accountants in practice shall be authorised by the firm to act and sign on behalf of the firm.
SHORT NOTES

Q.1 Advantages of Forming company?

Ans:- Section 2(20) of the Companies Act, 2013 defines a company to mean a company
incorporated under this Act or under any previous company law.

A company is a legal entity formed by the individuals to engage in business activities. It is

characterized by limited liability, separate legal status, and ownership through shares.
Companies aim to generate profits while adhering to regulations and often have various
departments for operations, management, and marketing.

A company is a business organization created by individuals, groups, or organizations to

conduct business. It is an artificial legal entity separate from its owners and has a distinct legal
identity. It can enter into contracts, own assets and property, it can sue or can be sued in its
name, and conduct business activities. Forms of the company include sole proprietorship,
partnership, or corporation, and operate in various industries and sectors.

It is formed by filing articles of incorporation or articles of association with the relevant

government agency. It outlines the company’s purpose, ownership structure, management, and
other details. The ownership of a company is represented by shares, which can be bought and
sold on a stock exchange or privately.

It can have one or more shareholders or owners who are not liable for its debts beyond the
amount of capital invested. This is known as limited liability and is one of the key advantages
of a company. A board of directors usually conducts a company’s management. Also, a group
of executives are responsible for making strategic decisions and overseeing the company’s day-
to-day operations.

A company is a more significant form of business. A company is a term used to describe a

collection of individuals who have gathered to conduct business or reach an agreement. A
company is a legal body with a unique status and personality from the persons who make up
its membership. It’s called a body corporate because the people who make it up are combined
into one body and given legal status by incorporating it according to the law. Incorporation of
a company refers to the process of legally forming a company or a corporate entity. Advantages
of incorporation of a company are limited liability, transferable shares, perpetual succession,
separate property, the capacity to sue, flexibility and autonomy. Incorporated businesses offer
many more advantages over sole proprietorship companies or partnership companies.

1. Independent corporate existence: The company’s distinguishing attribute is its

independent corporate existence. A corporation formed under the legislation is given a
corporate identity. As a result, it has its own identity and assets that are different from those of
its members.

2. Limited liability: “One of the primary benefits of doing business under the corporate form
of organization is the privilege of restricted liability for business debts.” As a distinct person,
the firm owns its own assets and is bound by its liabilities. A member’s obligation as a
shareholder is limited to the amount contributed to the company’s capital up to the nominal
value of the shares owned.

3. Perpetual succession: An incorporated firm has perpetual succession. It’s a living thing
that never dies. It indicates that the company’s membership may change from time to time, but
the company’s continuity is unaffected. The corporation shall remain the same entity, with the
same privileges and immunities, estates, and belongings, despite the whole change in
membership. Individual members’ deaths or insolvencies have no effect on the company’s
continued existence. Members may come and go, but the business can continue indefinitely.

4. Separate property: Because a corporation is a legal entity separate from its shareholders, it
can possess, enjoy, and dispose of the property in its own name. Although its shareholders
contribute funds and assets, they are not the sole or joint proprietors of its property. The
company is the legal entity in which all of the firm’s assets are vested and through which it is
managed, controlled, and disposed of.

5. Transferable shares: The capital of the firm is made up of shares. The shares are considered
moveable property and are readily transferable under specific conditions. The member shares
are moveable property, according to Section 44 of the Companies Act 2013, and can be
transferred from one person to another in the manner stipulated by the article.

6. Capacity to sue and be sued: A corporation is a legal entity that may sue and be sued in its
own name. All legal actions taken against the firm must be filed in the company’s name. When
a firm suffers damage, it has the right to sue in order to safeguard its good reputation. It can
sue for defamatory statements made about it that are likely to harm its company or property.
7. Professional management: The business sector can attract an increasing number of
professional managers. The environment of independent functioning of managers in the
organization allows young management graduates to acquire outstanding managing talents.
Companies can develop the businesses that they can provide.

8. Finances: The corporation is the only form of corporate organization that is permitted to
raise money through public subscription, either through shares or debentures. Furthermore,
public financial institutions are more ready to lend to corporations than to other types of
commercial organizations. Companies also have the sole right to borrow money and provide
security in the form of a floating charge.

Q.2 Kinds of share capital?

Ans:- Shares are defined under Section 2(84) of the Companies Act, 2013, as share in the share
capital of a company and includes stocks.

Share capital is responsible for keeping the business operation and functioning smooth and
running. Its indispensable role in the structure of a limited company and the enhancement of
market reputation makes it vital for owners.

Shares are issued by companies to raise capital from investors. This capital is intended to
further development and growth of the business of the company. A share represents the interest
of a shareholder in the company, and this interest is measured for the purpose of liability and
dividend. It attaches various rights and liabilities to the shareholder.

Companies have a requirement of share capital for the purpose of financing their operations.
The share capital of the company will increase with the issuance of new shares.

Share capital is of two types namely, equity share capital and preference share capital. Equity
share capital is generated by raising of funds from the investors and preference share capital is
obtained by the issuance of preference shares.

Types of Share Capital

1. Authorized, Nominal or Registered Share Capital

Every company has to specify the amount of capital it wishes to register within its
Memorandum of Association. The amount thus stated is termed registered, authorised or
nominal capital.

Fundamentally, it is the amount of money a company is allowed to raise through public

subscription. Its size can be increased or decreased as per requirement by meeting the
prescribed method.

2. Issued Capital

It makes up that part of the nominal capital which is offered for public subscription in the form
of shares. It must be noted that a company may refrain from issuing the entire registered capital
in a single go. Based on their requirement, a company may raise this capital from time to time.

Under any given situation, issued capital must not exceed the authorised capital. Generally, it
includes all the shares which have been allotted to vendors, the public, signatories of the
memorandum of association, etc.

3. Unissued Capital

Typically, it is made up of that portion of nominal capital which is yet to be issued. In simpler
words, unissued capital can be described as the difference between a company’s nominal capital
and issued capital.

4. Subscribed Capital

The subscribed capital is referred to as that part of issued capital that is subscribed by the
company investors. It is the actual amount of capital that the investors have taken.

5. Called Up Capital

The amount of share capital that the shareholders owe and are yet to be paid is known as called
up capital. It is that part of the share capital that the company calls for payment.

6. Fixed Capital

The said capital comprises fixed assets used in the company. The most prominent examples of
fixed capital include – equipment, land, furniture, buildings, etc.

7. Reserved Capital
This particular capital cannot be called by the company unless it is winding up or being
liquidated. A reserve capital can be created by passing a special resolution with a 3/4th majority
vote in its favour.

8. Circulating Capital

Fundamentally, this capital is a part of the subscribed capital. It is mostly available in the form
of operational goods and assets like bills receivable, bank balance, book debts, etc.

Q.3 Annual general meeting?

Ans:- An annual general meeting (AGM) is an annual gathering of a company’s shareholders

and board of directors. Usually, the directors and shareholders get to meet each other at an
AGM. At an AGM, the directors of the company present the company’s annual report
containing the company’s performance and strategy for the shareholders.

The Companies Act (2013) mandates that every Private Limited Company or a Public Limited
Company must hold an Annual General Meeting to ensure that their shareholders are updated
about the management’s performance, administration, and decision-making processes.

All companies except One Person Company (OPC) should hold an AGM after the end of each
financial year. A company must hold its AGM within a period of six months from the end of
the financial year, i.e. within 30 September every year. The time gap between two annual
general meetings should not exceed 15 months.

However, in the case of a first annual general meeting, the company can hold the AGM within
nine months from the end of the first financial year. In such cases where the first AGM is
already held, there is no need to hold any AGM in the year of incorporation.

Procedure to hold an AGM

The company must give a clear 21 days’ notice to its members for calling the AGM. The notice
should mention the place, the date and day of the meeting, and the hour at which the meeting
is scheduled. The notice should also mention the business to be conducted at the AGM. A
company should send the notice of the AGM to:

• All members of the company including their legal representative of a deceased member
and assignee of an insolvent member.
 • The statutory auditor(s) of the company.

• All director(s) of the company.

The notice may be given in writing through speed post or registered post or via electronic mode.
The notice should be sent to the address of the member as per the records of the company.

In the case of electronic communication, the notice should be sent to the e-mail address of the
member as per the records of the company. The notice can be text typed in an email or an
attachment to an email. The notice of the AGM should be placed on the website of the company
or any other website as may be mentioned by the government.

An AGM can be called at a notice period shorter than 21 days if at least 95% of the members
entitled to vote in the meeting agree to the shorter notice. The consent may be given in writing
or through electronic mode.

Agenda of an Annual General Meeting

The matters discussed or business transacted in an AGM consists of:

• Consideration and adoption of the audited financial statements.

• Consideration of the Director’s report and auditor’s report.

• Dividend declaration to shareholders.

• Appointment of directors to replace the retiring directors.

• Appointment of auditors and deciding the auditor’s remuneration.

• Apart from the above ordinary business, any other business may be conducted as a
special business of the company.

The ordinary business of the company will be passed by an ordinary resolution where the votes
cast in favour are more than the votes cast against the resolution.

However, in case of special business transactions, the resolution may be passed as an ordinary
resolution or a special resolution, depending on the applicable legal provisions. A special
resolution requires at least 75% votes in favour of the resolution.

An AGM should be conducted during the business hours between 9 a.m. and 6 p.m. only. The
meeting can be conducted on any day, which is not a national holiday, including holidays
declared by the Central Government. The meeting can be held at any place which is within the
limits of the city or town or village in which the registered office is situated.

A government company can also hold its AGM at any other place as the Central Government
may approve. An unlisted company can hold an AGM at any place in India after obtaining
consent from its members in writing or in electronic mode. In the case of a Section 8 company,
the Board decides the date, time and place of the AGM as per the directions given in a general
meeting of the company.

Quorum of the AGM

In the case of a private company, two members present at the meeting shall be the quorum for
the AGM. In the case of a public company, the quorum is:

• Five members present at the meeting if the number of members is within one thousand.

• Fifteen members present at the meeting if the number of members is more than one
thousand but within five thousand.

• Thirty members present at the meeting if the number of members is more than five
thousand.

Members Rights in AGM

The members (including shareholders) of the company are entitled to attend and vote at the
AGM. Members can cast their votes by a physical ballot or postal ballot or through e-voting.
Members can appoint proxies to attend an AGM and vote on their behalf only when it is a poll
vote. The proxy should be appointed in writing, and the proxy form should be signed by the
member.

In case the proxy is appointed by a corporate shareholder, the proxy form should be signed and
sealed by an authorised signatory of the corporate. The members can elect one among
themselves as the chairman of the meeting. However, if the articles of association of the
company provide for a chairman, such person shall chair the AGM of the company.

Q.4 Buy back of shares?

Ans:- Buy-back is the process by which Company buy-back it’s Shares from the existing
Shareholders usually at a price higher than the market price. When the Company buy-back the
Shares, the number of Shares outstanding in the market reduces/fall. It is the option available
to Shareholder to exit from the Company business. It is governed by section 68 of the
Companies Act, 2013.

Companies buy back shares for a number of reasons, such as to increase the value of remaining
shares available by reducing the supply or to prevent other shareholders from taking a
controlling stake.

Modes of Buy Back of Shares

A Company may buy-back its Shares or other specified Securities by any of the

following method-

From the existing shareholders or other specified holders on a proportionate basis through
the tender offer;

From the open market through

1. Book-Building process

2. Stock Exchange

Provided that no buy-back for fifteen percent or more of the paid-up capital and reserves of the
Company can be made through open market.

From odd-lot holders.

Purpose of Buy back of shares

Increasing share price

When a company buys back its share from a market, the total number of shares available in the
market decreases. This measure is usually taken when a company feels undervalued in its share
prices.

With shares being taken out of circulation, their supply decreases, and the law of the market
comes into play: when a commodity becomes rare, more people seek to buy it, and the price
increases. We see a hike in the price of the remaining shares. So even though the total profit
remains the same, the earnings per stock of the company increase.
Investment in itself

Buy-back of securities by a company can also be a way for the company to invest in itself.
When they purchase their shares, they become their investors. This could prove to be profitable.

Returning Surplus cash to the shareholder

This is like a bonus or reward to the current shareholders. When the company has surplus cash,
it could let its shareholders avail of its benefits too. The companies buy back their shares from
the market, and the shareholders profit from this.

Exit route to shareholders

The stock prices of a previously great company could begin to collapse, and a great number of
enthusiast buyers could suffer losses. Therefore, when a company’s shares are thinly traded,
undervalued, or falling in price, the companies offer an exit route to the shareholders.

Companies purchase their shares back from the shareholders, which release them, and they get
money in return. This might not always be profitable.

Increase in return of capital

A company could achieve the following objectives via a buy-back of securities.

• The return-on-investment rate for the company increases

• The return on the net worth of the company also improves

• The long-term shareholder value for the company grows

Condition to Buyback of Shares

As per Section 68 of the Companies Act, 2013 the conditions for Buy-back of shares are-

1. Articles must authorise otherwise, Amend the Article by passing Special Resolution in
General Meeting.
2. For buy-back we need to pass Special Resolution in General Meeting, but if the buy-
back is up to 10%, then a Resolution at Board Meeting need to be passed.
3. Maximum number of Shares that can be brought back in a financial year is twenty-five
percent of its paid-up share capital.
4. Only fully paid-up shares can be brought back in a financial year.
 5. The buy-back should be completed within a period of one year from the date of passing
of Special Resolution or Board Resolution, as the case may be.
6. A Company should extinguish and physically destroy shares bought back within 7 days
of completion of the buy-back.

Q.5 Appointment of directors?

Ans:- According to the Companies Act 2013, only an individual can be appointed as a member
of the board of directors. Usually, the appointment of directors is done by shareholders. A
company, association, a legal firm with an artificial legal personality cannot be appointed as a
director. It has to be a real person.

The Companies Act, 2013 does not contain an exhaustive definition of the term “director”.
Section 2 (34) of the Act prescribed that “director” means a director appointed to the Board of
a company. A director is a person appointed to perform the duties and functions of director of
a company in accordance with the provisions of the Companies Act, 2013.

Appointment of Directors

In public or a private company, a total of two-thirds of directors are appointed by the

shareholders. The rest of the one-third remaining members are appointed with regard to
guidelines prescribed in the Article of Association.

In the case of a private company, their Article of Association can prescribe the method to
appoint any and all directors. In case the Articles are silent, the directors must be appointed by
the shareholders.

The Companies Act also has a clause that permits a company to appoint two-thirds of the
company directors to be appointed according to the principle of proportional representation.
This happens if the company has adopted this policy.

Nominee directors will be appointed by third party authorities or the Government to tackle
mismanagement and misconduct. The duties of directors are to act honestly, exercise
reasonable care and skill while performing their duties on behalf of the organization.

Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum
number of 3 directors in the case of a public company, two directors in the case of a private
company, and one director in the case of a One Person Company. A company can appoint
maximum 15 fifteen directors. A company may appoint more than fifteen directors after passing
a special resolution in general meeting and approval of Central Government is not required.

Appointment of Managing Directors

A managing director must be an individual (a real person) and can be appointed for a maximum
period of five years.

A managing director of a pre-existing company can be appointed as a managing director of

another company as long as the board of directors of the first company are aware and approve
of this new appointment.

Conditions for Appointing Directors

The following conditions are applicable when appointing a director:

1. He or she should not have been sentenced to imprisonment for any period, or a fine
imposed under a number of statutes.

2. They should not have been detained or convicted for any period under the Conservation
of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

3. He or she should have completed twenty-five (25) years of age, but be less than the age
of seventy (70) years. However, this age limit is not applicable if the appointment is
approved by a special resolution passed by the company in general meeting or the
approval of the Central Government is obtained.

4. They should be a managerial person in one or more companies and draws remuneration
from one or more companies subject to the ceiling specified in Section III of Part II of
Schedule XIII.

5. He or she should be a resident of India. ‘Resident’ includes a person who has been
staying in India for a continuous period of not less than twelve (12) months immediately
preceding the date of his or her appointment as a managerial person and who has come
to stay in India for taking up employment in India or for carrying on business or
vocation in India.

6. Every listed company shall appoint at least one-woman director within one year from
the commencement of the second proviso to Section 149(1) of the Act. Every other
public company having paid up share capital of Rs. 100 crores or more or turnover of
 Rs. 300 crore or more as on the last date of latest audited financial statements, shall also
appoint at least one-woman director within 1 years from the commencement of second
proviso to Section 149(1) of the Act.

Q.6 Theory of corporate personality?

Ans:- As per the law, a corporation is an artificial person. It has the ability to enjoy rights, fulfil
its duties and hold property in its own name. Hence, the concept of corporate personality is a
singular creation of the law. The best example of this is the corporate personality of a company
under the Companies Act, 2013.

Such a corporation under the law has a legal identity of its own. Such a corporation is
represented by its members and agents. However, unlike a natural person, these corporations
have a perpetual existence.

Such companies and corporations can sue and even be sued upon. Other such examples of
institutes with corporate personalities include banks, universities, corporate bodies, colleges,
an association of persons, etc.

Theories of Corporate Personality

1] Fiction Theory

As per the fiction theory, a corporation exists only as an outcome of fiction and metaphor. So,
the personality that is attached to these corporations is done purely by legal fiction.

The legal person is created only in the eyes of the law for a specific purpose. The theory was
propounded by Savigny and backed by Salmond and Holland.

2] Concession Theory

This is similar to the fiction theory. However, it states that the legal entity has been given a
corporate personality or a legal existence by the functions of the State. So as per this theory,
only the State can endow legal personalities, not the law.

3] Realist Theory

As per the realist theory, there is really no distinction between a natural person and an artificial
person. So, a corporate entity is as much a person as a natural person. So, the corporation does
not owe its existence to the state or the law. It just exists in reality. This is not a very practical
theory as it does not apply in the real world.

4] Bracket Theory

This is one of the more famous and feasible theories of corporate personality. The bracket
theory is also known as the symbolist theory which states that a corporation is created only by
its members and its agents.

So, the people who represent the corporation make up the corporation. The law only puts a
bracket around them for convenience purposes. So, we consider these members and the
corporation as one unit.

Q.7 Distinguish between private and public company?

Ans:- According to Sec. 2 (20) of The Companies Act, 2013, the term “company” means a
company incorporated under The Companies Act, 2013 or under any previous company law.

A company is a legal entity that is separate and distinct from its owners, with the ability to
conduct business, own assets, and assume liabilities. It is created and regulated by the laws of
the jurisdiction in which it is incorporated, and can be owned by individuals or other entities.

The Indian Companies Act, 2013 has replaced the Indian Companies Act, 1956. The
Companies Act, 2013 makes the provisions to govern all listed and unlisted companies in the
country. The Companies Act 2013 implemented many new sections and repealed the relevant
corresponding sections of the Companies Act 1956. This is a landmark legislation with far-
reaching consequences on all companies incorporated in India.

It is needless to say that we have a multitude of companies of various kinds. From corporate
companies to one person company, we have so many kinds of companies. Mainly these
companies can be classified on the basis of size of the company, number of members, control,
liability and manner of access to capital

Meaning of Private Company

According to section 2(68) of the Companies Act, 2013, “private company” is essentially
defined as a company having a minimum paid-up share capital as may be prescribed, and which
by its articles, restricts the right to transfer its shares. A private company must add the word
“Private” in its name. It can have a maximum of 200 members.

Examples of Private Companies

Private Companies:

1. Ola Cabs: A ride-hailing platform providing transportation services via a mobile app.

2. Swiggy: An online food delivery platform connecting customers with local restaurants.

3. Reliance Jio Infocom: A subsidiary of Reliance Industries, offering

telecommunications services and digital products.

Meaning of Public Company

Section 2(71) of the Companies Act, 2013, defines a “public company”. A public company
must have a minimum of seven members and there is no restriction on the maximum number
of members. A public company having limited liability must add the word “Limited” at the end
of name. The shares of a public company are freely transferable.

Examples of Public Company

1. Indian Oil Corporation.

2. Bharat Petroleum.
3. State Bank of India.
4. Oil and Natural Gas Corporation Limited (ONGC).

Difference Between Private and Public Company

Category Public Limited Company Private Limited Company

Meaning A public limited company is a A private company is a closely
joint stock company, that is not held company that does not
a private company, and the have its shares listed on any
shares of which are listed on a stock exchange and cannot be
stock exchange. openly traded.
Number of Members The minimum number of The minimum number of
members to start a public members needed to start a
 limited company is 7 and there private limited company is 2
are no restrictions on the and the maximum number of
maximum number of members members cannot exceed 200.
in a public limited company.
Paid Up Capital The minimum paid-up capital The minimum paid-up capital
needed for a public limited for a private company is Rs
company is Rs. 5,00,000. 1,00,000.
Transferability of Shares Shares of a public company Shares of a private limited
are available in the open company cannot be listed on
market and can be traded any stock exchange and
easily subject to the rules and cannot be traded in the open
regulations laid down by market.
SEBI.
Issue of Prospectus A public limited company A private company cannot
mandatorily needs to issue a issue a prospectus and a
prospectus and duly file it as statement in lieu of a
per the guidelines of the prospectus is issued.
Companies Act, 2013.
Subscription from the Public A public limited company is A private limited company is
entitled to accept subscriptions not allowed to have a
from the general public and subscription of its shares by
issue shares or debentures to the general public. This
raise capital. implies that such a company
cannot issue any shares or
debentures to the general
public for raising capital at
any point.
Allotment subject to A public company is restricted A private company has no
minimum subscription to allot shares until the such restrictions and are free
minimum subscription to allot their shares as per their
required as per its prospectus articles of association.
is achieved
 Directors The minimum number of The minimum number of
Directors in a public limited Directors in a private limited
company is 3. company is 2.
Appointment of Directors In a public limited company, In a private limited company,
the appointment of only one two or more Directors can be
Director can be done through a appointed through a single
single resolution. resolution.
Annual General Meeting The AGM of the company is to The AGM of a private limited
be held only at its registered company can be held
office or any place in the city anywhere.
where the registered office is
situated.
Meeting It is mandatory for the public There is no need for a private
company to hold statutory company to hold a statutory
meetings as per the provisions meeting as per the provisions
of section 165 of the of Companies Act, 2013.
Companies Act, 2013.

Q.8 Official liquidator?

Ans:- In general sense, liquidator is a person who conducts the whole process of liquidation.
When a company is about to wind up it is required to release the assets of the company and it
should be distributed among the “debenture holders”, “creditors” “shareholders” etc. For this
purpose, a person is appointed who does all the required things before the company “cease to
exist”. This person is called Liquidator under Company Law. So, liquidator comes into scene
in the time of winding up of a company. The process of winding up can be two types. 1.
Compulsory winding up; 2. Voluntary winding up.

As per the Section 359 of Companies Act 2013, a liquidator is a person generally appointed by
the court, unsecured creditors or by the shareholders of the company. He is the person who
liquidates assets (in most cases). The liquidator is mainly appointed when the company has
been insolvent and bankrupt. After his appointment, he takes control of all the assets, properties
of the organization and persons.
He has the legal power to act in different capacities on behalf of the company. For liquidation,
the liquidator can sell the assets of the company in the open cash market any other things having
equal value.

The main and important role of the liquidator is to investigate all affairs of the company, the
liquidator has to find out if any assets need to be recovered if those have been misplaced or
sold at a lower price than the market value. The liquidator has the liberty to reverse these types
of transactions.

Role of Liquidator

The liquidator is appointed for handling the liquidation process. Their main role and
responsibility are to manage all the activities, accounts, assets, etc. of the company and to
liquidate all these as per dues that need to be paid to the creditors. A liquidator can also pay
from the funds of the company if it is available.

Appointment of Official Liquidator

At the time of winding up of companies (by the court) central government appoints an official
liquidator who shall be attached to the high court. Official liquidator is a whole-time officer
but, in some cases, where the central government finds that there is not enough work for a
whole-time officer then in that cases a part time officer can be appointed. Central government
can appoint one or more than one deputy or assistant liquidator to assist the official liquidator.

Official liquidator works under the supervision of regional directors, on behalf of central
government the regional directors supervise them. When a high court passes an order for
winding up a company then the official liquidator attach with the said High Court take the
charge of the assets of the company, books of account etc. and finally liquidate the company
according the order of the high court.

The following people are eligible to be appointed as an official liquidator

1. “A member from the panel of the professional firm of

(a) Chartered accountants

(b) Advocates

(c) Company Secretaries

2. Body corporate approved by the central government

3. Whole time and part time officer appointed by the central government”

Duties of the Official Liquidator

Asset Realization

One of the primary responsibilities of the official liquidator is to identify and release the
company’s assets. This involves valuing and selling the assets to generate funds for distribution
among stakeholders.

Creditor Claims

The official liquidator is responsible for examining and verifying the claims made by creditors.
They must determine the legitimacy of these claims and ensure fair distribution of available
funds.

Report submitted by the official liquidator

After receiving the statement of affairs, the official liquidator has a duty to submit a

preliminary report to the court as soon as possible but within the 6 months after receiving the

statement of affairs.

Custody of companies’ property

After the winding order is made the official liquidator takes the custody and charge of the all

the property of the company.

Keeping books by liquidator

The liquidator shall keep a proper book. Any contributor or creditor can inspect this book

personally, or by his agents but it is the subject to the control of the court.

Powers of the Official Liquidator

Investigation

The official liquidator has the authority to investigate the affairs of the company, including its
past transactions, to identify any fraudulent activities or misconduct that may have contributed
to the company’s liquidation.

Legal Proceedings
The official liquidator can initiate legal proceedings on behalf of the company if it is deemed
necessary to protect the interests of the stakeholders or recover any outstanding debts.

Asset Preservation

To prevent any further loss or deterioration of the company’s assets, the official liquidator has
the power to take necessary steps to preserve and safeguard these assets during the liquidation
process.

Access to Records

The official liquidator is entitled to access all company records, documents, and accounts to
gather information required for the winding-up process.

Q.9 Cumulative and non-cumulative shares?

Ans:- Shares represent a shareholder’s ownership stake in a business. According to section

2(84) of the Companies Act, 2013, a “share” refers to a share in the share capital of a company
and includes stock. It indicates a shareholder’s interest in the business, calculated for the goals
of dividend and liability. It ties together several rights and liabilities. Public limited
corporations can finance their operations by issuing stocks. These shares come with a variety
of entitlements in addition to ownership rights. Some shares come with voting rights, a priority
dividend right, a share of the company’s surplus earnings, a share of the company’s losses, etc.

Companies issue shares to attract capital from investors who frequently make investments.
Companies use this money to further develop and expand their enterprises.

According to Section 43 of the Companies Act, the share capital of a company limited by shares
shall be of two kinds, namely Equity Share Capital and Preference Share Capital, unless
otherwise specified in the Memorandum of Association or Articles of Association of a private
company.

Preference Share

Preference shares, also known as preferred stock, which are shares of a company’s stock that
pay dividends to shareholders ahead of dividends on regular stock. Preference shareholders
may get the dividend as a set amount. Preference shareholders are given “priority” over equity
owners when it comes to receiving dividends. Preference shareholders are entitled to receive
payment from corporate assets before common stockholders and the company’s preference
shares have a fixed dividend, whereas common equity often does not. In contrast to common
shareholders, preferred stockholders normally do not have voting rights. The only resolutions
that the preference shareholders can vote on are those that directly affect their rights as
preference shares and those that call for the liquidation of the business or the repayment.

Types of Preference Shares

1. Cumulative Preference Share

2. Non-Cumulative Preference Share
3. Redeemable Preference Share
4. Irredeemable Preference Share
5. Participating Preference Share
6. Non-Participating Preference Share
7. Convertible Preference Share
8. Non-convertible Preference Share

Cumulative Preference Share

These shares come with a provision that entitles shareholders to receive dividends in
arrears. So, when a company does not make enough profits in a year to pay dividends, they
pay cumulative dividends in the following year.

Suppose a company Star Labs Private Limited issues cumulative preference shares for Rs.
1000 each and promises to pay 10% as dividend annually. Ideally, in a good economy,
shareholders would earn Rs. 100 on their investment. However, owing to low returns, the
company could only pay Rs. 50 as a dividend that year.

Subsequently, in the next year with the worsening condition, the company could not pay
the dividend of Rs. 100. Once profits were generated, the company decided to pay off the
current dividend along with the outstanding dividend of Rs. 150 to shareholders. So
cumulatively, the company paid Rs. 250 as dividend to shareholders.

Non-Cumulative Preference Share

These shares do not accumulate dividends. It is mostly because non-cumulative preference

shareholders are paid from the current year’s net profits.
 So, if a company is met with loss in a particular year, the outstanding dividends cannot be
claimed by shareholders from future profits.

Q.10 Surrender of shares?

Ans:- Surrender of shares is a process in which a shareholder voluntarily returns their shares
to the company, usually because they cannot pay for future calls on the shares. It is similar to
forfeiture, but instead of the company taking action to reclaim the shares, the shareholder
initiates the process.

Surrender of shares can only be accepted by a company under certain conditions and
limitations, such as when the articles of association authorise it or in cases where it is a shortcut
to the forfeiture of shares.

In other cases, the provisions for the surrender of shares in the articles will be void and the
court may order the restoration of the shareholder’s name in the Register of Members, if the
surrender of shares is deemed illegal.

Surrender of Shares vs Forfeiture of Shares

The act of forfeiting shares occurs when shareholders fail to make instalment payments, leading
to the cancellation of their share allotment. In contrast, surrender of shares takes place when
shareholders return their shares to the company for cancellation.

Surrender of shares can be a quick process to prevent the forfeiture of shares. If shareholders
default on payment and anticipate forfeiture, they can choose to voluntarily surrender of their
shares.

The company can accept such surrendered shares if there is a provision for it in the Articles of
Association (AoA) of the company.

The surrender of shares is considered a reduction of capital, similar to forfeiture. While

forfeiture is recognised by the Act, surrender is not.

However, the courts have accepted surrender based on the principle that it has the same effect
as forfeiture, with the main difference being that it is a proceeding taken with the acceptance
of the shareholder who is unable to retain and pay future calls on the shares.
A company can only accept surrender under conditions and limitations subject to which shares
can be forfeited and it should not be used to relieve a shareholder of their liability.

Procedure for surrender of shares

In terms of procedure, shares need not be surrendered in consideration of payment of money

or money’s worth by the company. Such a surrender would be beyond the legal rights of the
company and would amount to the purchase of its own shares.

There are only two cases where the surrender of shares is valid, provided it is authorised by the
articles of association. The first case is when shares are surrendered in exchange for new shares
of the same nominal value and the second is when shares are surrendered as a shortcut to
forfeiture of shares when all the circumstances for forfeiture have arisen.

The provisions in the articles for the acceptance or surrender of shares in all other cases, except
for the above two, will be void. If the surrender of shares is proved to be illegal, the court may
order the restoration of the plaintiff’s name in the Register of Members after the lapse of any
number of years, provided the shares have not been reissued or otherwise dealt with by the
company.

Surrender of shares provides an alternative solution to forfeiture of shares for shareholders who
cannot make future calls on their shares. It is a voluntary process where shareholders return
their shares to the company for cancellation. While the Companies Act does not specifically
provide for the surrender of shares, courts have recognized its legality under certain conditions
and limitations.

Case Law

Collector of Moradabad vs. Equity Insurance Co

The Collector of Moradabad vs Equity Insurance Co, AIR 1948 Oudh 197 case illustrates the
importance of surrender being legal and not used as a device to avoid liability. Under company
law, a shareholder cannot surrender their shares or the company accept the surrender unless it
falls within the rules relating to forfeiture of shares.
Q.11 Doctrine of constructive notice?

Ans:- A company has a separate legal entity which can be formed by an association of
individuals with the intention to carry out commercial activities to generate profit. The
formation and functioning of the company are governed by certain laws, rules and regulations.
The intention behind the enactment of such laws is to provide protection to the company, its
management as well as the outsider person who is contractually engaging with the company.

The doctrine of Constructive Notice implies that the Article of Association is well-known by
the outsider who seeks to hold any relation with the company in the near future because the
Article of Association of the Company is a public document and is available to everyone
according to Section 399 of the Companies Act, 2013.

From the time when the company is registered, the Article of Association and the Memorandum
of Association are considered the ‘public document.’ They are open for inspection by anyone
from the general public. It is therefore presumed that any person who is dealing with the
company is well equipped by its rules and regulations.

The rule of constructive notice extends not merely to Memorandum and Articles but also to all
the other documents which are required to be registered with the Registrar of Companies. But
for the documents that are filed with the registrar of companies for the sake of records only, the
doctrine of constructive notice doesn’t apply.

Constructive Notice and Actual Notice

Constructive notice implies legal notice although an actual notice was never given. A person
may not have actual notice, but he may still have constructive notice. Actual notice is when
knowledge of the incident or of any matter was actually given to that particular person. But it
should be possible that the person would reasonably know about the proceeding under the given
circumstance. For example, we often see legal notices being posted in newspapers, etc.

In a case, it was held that anyone who deals with the company is presumed to have not only
read its Memorandum of Association and Articles of Association but also properly understood
the real meaning of the provisions. Such notice is called Constructive Notice.

Characteristics of Doctrine of Constructive Notice

Constructive Notice, sometimes known as legal fiction, happens when courts assume parties
have the knowledge they do not have.
When serving an interested party becomes difficult due to the party ignoring the process server
at his door or being unable to be recognized when service is attempted, this notice is commonly
utilized.

Constructive notice is preferred above actual notice; for example, if the summons is duly served
with necessary papers, the case may be dismissed for lack of notice.

The individual who was duly served and received the constructive notice but did not get a
physical copy of the summons and supporting documents owing to any other cause would not
be entitled to dismiss the case on the grounds of failure of service in the constructive notice.

Effects of the Doctrine of Constructive Notice

According to the Constructive Notice thesis, it is the outsider. It is responsible for knowing the
papers that govern the company. He should be well-versed in all legal papers before signing
any deal with the firm. It is also the responsibility of the third party to comprehend the real
meaning of the provision and conditions included therein. According to the idea, corporate
bodies are preferred.

The Madras High Court disputed the scope of constructive responsibility in the case of Kotla
Venkataswamy vs. Rammurthy, AIR 1934 Mad 579. The question, in this case, was whether
the mortgage bonds were issued lawfully in line with the company’s AOA, therefore rendering
the business liable.

All deeds, checks, certificates, and other papers must be signed on behalf of the Company by
the Managing Director, the Secretary, and the Working Director before they are recognized
valid, according to Article 15 of the Company’s AOA.

The plaintiff accepted a mortgage deed signed by only the secretary and an executive director
in this case. According to the court, the plaintiff cannot bring a claim under this deed. The Court
went on to say that if the plaintiff had read the articles, they would have seen that a deed to
carry out the job required by the firm’s three authorized officials was badly signed, and they
would not have accepted such a deed.

Even though she may have acted in good faith and that her funds were used for the company’s
advantage, the bond is void.

Nonetheless, the court later developed a principle in Royal British Bank v. Turquand (1856)
6 E&B 327, holding that, while the third party should have notice of all the contents of the
MOA & AOA, they are not required to scrutinize internal matters and see whether the
corporation followed all internal procedures.

The doctrine of Constructive notice is often quoted as an unreal doctrine. The reason behind
this is that the doctrine is created by courts through judicial pronouncements and is an
imaginary doctrine. A number of contracts take place between the outsider and the company in
a day. The doctrine lays a duty on each and every outsider to have a notice of all the legal
documents of the company. This is done for the smooth and effective functioning of the
corporate world.

Q.12 Forfeiture of shares?

Ans:- Forfeiture of shares is a process of cancellation of shares by the company. In fact,

sometimes, the shareholders have to pay instalments for owning the shares. If the shareholder
fails to pay these instalments, his shares may be forfeited. However, the reasons and process of
forfeiture of shares must be included in the article of association.

Shareholding is a process of ownership of a company. Forfeiture of shares is an action taken

by the board of directors of a company to cancel the ownership of a shareholder when they fail
to pay the dues for owning the shares. By owning shares, a shareholder owns a part of the
company issuing the share. The Companies Act 2013 offers the rules and regulations related to
different types of shares, such as preferential and equity shares. The shareholders must pay all
dues they owe to maintain the ownership of the company.

Shares are forfeited if a shareholder fails to meet the holding, buying, or selling criteria. There
may be numerous requirements like transfer of Shares over a restricted period, payment of call
money, or even avoiding selling. In the case of Forfeiture of Shares, neither the shareholder has
any balance left on it, nor any profit from the share is offered to him. Moreover, the forfeited
share becomes an asset of the enterprise that issued it.

Forfeiture of shares may take place for numerous reasons, such as delay in instalments, non-
payment of dues, etc. However, for a company to forfeit shares, it must allow such action under
its Article of Association.
A shareholder’s shares are forfeited when he/she is unable to pay the call money owed. Call
money is the money that has to be paid by the shareholders as due on their shares. The following
impacts are seen immediately on the forfeiture of shares.

Procedure for forfeiture of shares

Forfeiture of shares is a serious step since it involves in depriving a person of his property as a
penalty of some act or omission. Accordingly, shares of members cannot be forfeited unless
the articles of the company confer such power on the directors. The forfeiture of a share should
happen only for the non-payment of the call on shares by the members and in accordance with
articles of the company. But forfeiture can also be made for any other reasons which are
specified in the articles of the company.

The following is the Procedure

In accordance with articles

Forfeiture of shares must be in accordance with the provisions contained in the articles of the
company to be treated as valid forfeiture. The power of forfeiture of shares must be exercised
bona fide and in the interest of the company.

Proper notice

A proper notice under the authority of board must be served to the defaulting shareholder. The
notice should mention that the shareholder has to pay the amount on a day specified which
would not be earlier than fourteen days from the date of notice served.

Resolution for forfeiture

If the defaulting shareholder does not pay the amount within the specified period mentioned in
the notice properly served to him, the directors of the company may pass a resolution forfeiting
the shares

Effects of Forfeiture of shares

Cessation of membership

A person whose shares have been forfeited ceases to be a member in respect of forfeited shares

Cessation of liability
The liability of a person whose shares have been forfeited comes to an end when the company
receives the payment in full of all such money in respect of shares forfeited.

Liability as past member

The liability of a former shareholder remains as a liability of a past member; to pay calls if
liquidation of the company takes place within one year of the forfeiture.

Forfeited shares become company’s property

The forfeited shares become the property of the company on forfeiture. Accordingly, these may
be re-issued or otherwise disposed of on such terms as in such manner which the board of
directors thinks fit.

Q.13 Quorum?

Ans:- The Companies Act, 2013 requires that a company established under the Act has to hold
General meetings as well as Board meetings periodically. To ensure that the companies follow
this regulation and that such meetings are held properly, it requires a quorum to be met for it to
be deemed as a valid meeting.

A ‘Quorum’ in simple words means the minimum number of members that have to be present
in a meeting. Under the Act, the quorum for a General Meeting, a Board Meeting and an
Extraordinary General Meeting is enumerated within its provisions.

Section 103 of the Act states the quorum required for a General Meeting. Under this Section,
unless the Articles of Association of the company provide for a larger quorum, the minimum
quorum must be:

For Public Company

• 5 members to be present on the date of the meeting being held, if the number of
members in the company does not exceed one thousand.

• 15 members to be present on the date of the meeting if there are more than one thousand
members but less than five thousand members.

• 30 members to be present on the date of the meeting if there are more than five thousand
members.
For Private Company

In the case of a private company regardless of the number of members, two members must be
present for the quorum to be met for a meeting.

Non-Fulfilment of Quorum Requirement

Sub-clause (2) and (3) of Section 103 of the Act provides for when the quorum has not been
met. If the quorum is not present within half an hour of the time set for the meeting to begin,
then the following options will be applicable:

• The meeting will be adjourned, and it shall be held on the same day and at the same
time next week, or any other date and time as the Board may determine. If the meeting
is adjourned then the date, time and place of the meeting will be notified personally or
via advertisement. The advertisement must be published in both English as well as the
vernacular language in a newspaper which is in circulation at a place where the
registered office of the company is situated.

• The meeting, if called by requisitions under Section 100, shall stand cancelled.

• Under sub-clause (3), if the quorum is not present at the adjourned meeting, then the
members present shall be the quorum.

Quorum Required for a Board Meeting

A board meeting is a meeting that is held between the directors of a company. Such meetings
are held usually to take important decisions about the company. To make sure that such
decisions are not taken arbitrarily, the Act requires a quorum for the meeting and the decisions
taken in the meeting to be valid. Section 174 of the Act provides the quorum for a board
meeting.

Section 174 (1) of the Act

The quorum for a board meeting must be 1/3rd of the total number of directors or 2 directors
whichever is the higher number. Therefore, in case, there are only three directors in a company,
then at least two must be present even though 1/3rd would entail that only one director needs
to be present. If the directors are not physically present but take part in the meeting via any
audio/visual means, they too shall be considered part of the quorum.
Section 174(2) of the Act

In the case where the quorum for a board meeting is not present, the directors may only take
two courses of action:

• They may act for the purpose of increasing the number of directors to that fixed for the
quorum or,

• They may act to summon a general meeting.

Section 174(3) of the Act

Where the number of interested directors, i.e., directors who have invested in the company,
exceeds or is equal to 2/3rd of the board of directors, the number of not interested directors
present at the meeting has to be at least 2 for the quorum.

Section 174(4) of the Act

In the case where the board meeting could not take place due to the lack of the quorum, the
board meeting shall be adjourned. This is subject to the Articles of Association of the company.
Therefore, as long as the articles of the company states otherwise the meeting will be
adjourned.

The meeting will be adjourned to the same time and place as the original meeting on the same
day the following week. In the case where the adjourned date is a national holiday, then the
board meeting will be held at the same place and time on the following day.

Q.14 Equity Share?

Ans:- A share in the share capital of the company, including stock, is the definition of the term
‘Share’. This is in accordance with Section 2(84) of the Companies Act, 2013. In other words,
a share is a measure of the interest in the company’s assets held by a shareholder.

The Memorandum and Articles of Association of the company prescribe the rights and
obligations of shareholders. Further, a shareholder must have certain contractual and other
rights as per the provisions of the Companies Act, 2013.

Section 44 of the Companies Act, 2013, states that shares or debentures or other interests of
any member in a company are movable properties. Also, they are transferable in the manner
prescribed in the Articles of the company. Further, Section 45 of the Act mandates the
numbering of every share. This number is distinctive.

Kinds of Share Capital

According to Section 43 of the Companies Act, 2013, the share capital of a company is of two
types:

1. Preferential Share Capital

2. Equity Share Capital

Equity Share Capital

Shares which are paid dividends only when profits are left after the preference shareholders
have been paid fixed rate of dividends is known as Equity Shares. There is no fixed rate of
dividend in case of equity shares. The equity shareholders receive nothing if in any year there
are no profits or insufficient profits. They get a higher rate of dividend when the company earns
more profits. Equity share capital is returned only when preference share capital is returned in
full. Equity shareholders have voting rights and control the affairs of the company.

Through an Initial Public Offering, the company issues equity shares to the general public
(IPO). A primary market offering is an IPO. By subscribing to the IPO, you can subscribe for
the share. As soon as the stocks are allocated and listed on the stock exchange, you can easily
trade them. Popular stock exchanges in India include the National Stock Exchange (NSE) and
the Bombay Stock Exchange (BSE).

The face value, or book value, of an equity share determines its worth. The price of a company’s
shares will increase as more individuals purchase them. However, prices will decrease if more
individuals are selling. When the shares begin trading on the exchange, the prices are set by
supply and demand.

Types of Equity Shares

Authorised share capital: The maximum amount of capital that can be issued by a particular
company is known as authorised share capital. Companies can increase their permissible limit
to authorise shares after they have availed permission from respective authority and have paid
the required fees.
Issued share capital: Shares which a company offers to its investors are known as issued share
capital.

Subscribed share capital: It comprises of the part of issued share capital, which the investors
agree upon and accept.

Right shares: The shares that are issued to individuals after they have invested in equity shares
are known as right shares. They are issued to safeguard existing investor's ownership.

Sweat equity shares: As an appreciation for a job well-done, companies reward their
employees with shares. Such shares are known as sweat equity shares.

Directors with Paid-up capital: It forms the part of subscribed capital which the company
invests in their business.

Bonus shares: These shares are issued to the investors in the form of a dividend.

Features of Equity Shares:

Right to vote: Equity shareholders have right to vote and can participate in the management
of the business.

Permanent Capital: Equity shares are permanent capital of the business, as it is to be repaid
only at the time of liquidation of a company.

No charge on Assets: When funds are raised using equity shares, then there is no charge on
the assets of the company.

Higher Risks: Equity shares involve higher risks and are suitable for investors who are willing
to take risk for higher returns.

Costly: It is more costly than other sources of funds.

Creditworthiness: It provided creditworthiness to the company and confidence to prospective

loan providers.

Equity share Capital are of types of Voting Rights

1. With voting rights

2. With differential rights to voting, dividends, etc., in accordance with the rules.
In 2008, Tata Motors introduced equity shares with differential voting rights – the ‘A’ equity
shares. According to the issue,

• Every 10 ‘A’ equity shares have one voting right

• ‘A’ equity shares get 5 percentage points more dividend than the ordinary shares.

Due to the difference in voting rights, the ‘A’ equity shares traded at a discount to ordinary
shares with complete voting rights.

Q.15 Capital Account Transaction?

Ans:- As defined in Section 2(e) of the FEMA, "capital account transaction" means
transactions which alters the assets or liabilities, including contingent liabilities outside India,
of persons resident in India or assets or liabilities, in India, of persons resident outside India
and includes transactions referred to in section 6(3) of the FEMA.

Transactions covered under Section 6(3) of FEMA are as follows:

1. Transfer or issue of any foreign security by a person resident in India.

2. Transfer or issue of any security by a person resident outside India.
3. Transfer or issue of any security or foreign security by any branch, office or agency in
India of a person resident outside India.
4. Any borrowing or lending in foreign exchange in whatever form by whatever name
called.
5. Any borrowing or lending in rupees in any form or whatever name called between a
person resident in India and a person resident outside India.
6. Deposits between persons resident in India and persons resident outside India.
7. Export, import or holding of currency or currency notes.
8. Transfer of immovable property outside India, other than a lease not exceeding five
years by a person resident in India.
9. Acquisition or transfer of immovable property in India, other than lease not exceeding
five years by a person resident outside India.

Prohibited Capital Account Transactions

As per regulation No. 4 of the regulations, no person shall undertake or sell or purchase
foreign exchange to or from authorised representative for any capital account transaction.
 Therefore, unless capital account transaction is covered under Schedule I and Schedule II,
all other capital account transactions are prohibited.

Further, as per Regulation No. 4, No person resident outside India shall make investment
in India in any entity, where such entity is engaged or proposes to engage –

1. In the business of chit fund, or

2. As Nidhi Company, or

3. In agricultural or plantation activities or

4. In real estate business, or construction of farmhouses or

5. In trading in Transferable Development Rights (TDRs).

Power to impose restrictions on Capital Account Transactions (Section 6 of FEMA)

Power of Reserve Bank of India

1. As per Section 6(2) of Foreign Exchange Management Act (“FEMA”), Reserve Bank
of India, in consultation with the Central Government, may specify:

• Capital transactions, involving debt instruments, which are permissible.

• Limit up to which foreign exchange is permissible for such transactions.
• Any additional condition that is required to be fulfilled.
2. “Debt instrument” means any transaction as may be determined by the central
government in consultation with RBI.
3. Earlier, Section 6(3) contained a list of capital account transactions which the Reserve
Bank of India could have prohibited, restricted or regulated.

Power of Central Government

1. A new sub-section (2A) has been inserted in Section 6 of FEMA. As per Section 6(2A),
Central government, in consultation with RBI, may specify:

o Capital transactions, not involving debt instruments, which are permissible

o Limit up to which foreign exchange is permissible for such transactions

o Any additional condition that is required to be fulfilled

 2. Therefore, as per joint reading of Section 6(2) and Section 6(2A) of FEMA, both RBI
and Central Government are authorised to frame rules in relation with Capital Account
Transactions in consultation with each other.

3. However, with respect to debt instrument, only RBI is authorised to prescribe

conditions and limit.

4. Both Reserve Bank of India or the Central Government shall not impose any restrictions
on:

o Payment made for amortisation of loan or

o Payment made for not depreciation of direct investments in the ordinary course
of business

5. For other capital account transactions, a person is free to buy or sell foreign exchange.

6. As per Section 6(4) of FEMA, However, if a “person resident in India” possesses some
foreign currency which was earned by him at the time when he was “person resident
outside India” or such currency is inherited by him from a person who is resident
outside India. In such a case, that foreign currency can be used to hold, own, transfer
or invest in foreign currency, foreign security or any immovable property situated
outside India. Therefore, no restriction is applicable for foreign currency which was
earned while holding the status of person resident outside India.

Q.16 Registration of company?

Ans:- The Companies Act, 2013 details the regulations and company registration papers
essential for the incorporation of a company.

A company established in India cannot run its business without the registration certificate
granted by the Registrar of Companies (ROC). The ROC will issue the registration certificate
when the company complies with the provisions of the Act.

A company's legal status, liabilities, and privileges are established upon registration under the
Companies Act, promoting openness, responsibility, and legal observance. Completing certain
prerequisites, submitting required paperwork, and abiding by legal regulations are all vital steps
in the registration of a firm.
In the business world, company registration is extremely significant since it offers several
important advantages and safeguards. The Companies Act registration establishes a corporation
as a distinct legal entity in the first place. Because of this division, the corporation is guaranteed
to have separate rights, duties, and obligations from its owners or shareholders. Limited
liability is an important safeguard that protects owners' personal assets in the case of any legal
issues or monetary responsibilities.

Promoters

Section 2(69) of the Companies Act, 2013, defines promoters as an individual who: -

• Is named as a promoter in the prospectus or in the annual returns of the company.

• Controls the affairs of a company, directly or indirectly.

• Advises, directs, or instructs the Board of Directors.

Formation of a Company

Section 3 of the Companies Act, 2013, details the basic requirements of forming a company as
follows:

• Formation of a public company involves 7 or more people who subscribe their names
to the memorandum and register the company for any lawful purpose.

• Similarly, 2 or more people can form a private company.

• One person can form a One-person company.

To register and incorporate a company, an application needs to be filed with the Registrar of
Companies. The application is to be accompanied by the names of the members, memorandum
of association and articles of association and other important documents. These are also
required to be filed with the Registrar of Companies (ROC) of the state in which the company
is proposed to be incorporated.

Section 7 of the Companies Act, 2013, details the procedure for incorporation of a company.

To incorporate a company, the subscriber has to file the following company registration papers
with the registrar within whose jurisdiction the location of the registered office of the proposed
company falls.
• The Memorandum and Articles of the company. All subscribers have to sign on the
memorandum.
• The person who is engaged in the formation of the company has to give a declaration
regarding compliance of all the requirements and rules of the Act. A person named in
the Articles also has to sign the declaration.
• Each subscriber to the Memorandum and individuals named as first directors in the
Articles should submit an affidavit with the following details:

i. Declaration regarding non-conviction of any offence with respect to the

formation, promotion, or management of any company.

ii. He has not been found guilty of fraud or any breach of duty to any company in
the last five years.

iii. The documents filed with the registrar are complete and true to the best of his
knowledge.

• Address for correspondence until the registered office is set-up.

• If the subscriber to the Memorandum is an individual, then he needs to provide his full
name, residential address, and nationality along with a proof of identity. If the
subscriber is a body corporate, then prescribed documents need to be provided.
• Individuals mentioned as subscribers to the Memorandum in the Articles need to
provide the details specified in the point above along with the Director Identification
Number.
• The individuals mentioned as first directors of the company in the Articles must provide
particulars of interests in other firms or bodies corporate along with their consent to act
as directors of the company as per the prescribed form and manner.

Issuing the Certificate of Incorporation

Once the Registrar receives the information and company registration papers, he registers
all information and documents and issues a Certificate of Incorporation in the prescribed
form.

Corporate Identity Number (CIN)

 The Registrar also allocates a Corporate Identity Number (CIN) to the company which is a
distinct identity for the company. The allotment of CIN is from the company’s incorporation
date. The certificate carries this date.

Certificate of Commencement of Business

After receiving the certificate of incorporation, they can now start their own business. This
summation of the formation of a company is a quick version of reality. However, this is the
view of how a company is formed.

Maintaining copies of Company registration papers

The company must maintain copies of all information and documents until dissolution.

Q.17 Inspection and inquiry?

Ans:- Investigation, Inquiry and Inspection are defined in Chapter XIV of the Companies Act,
2013 under Sections 206 to 229 where the main objective of the Central Government was to
protect the interest of Shareholders so as to maintain transparency so that shareholders can
inspect investigate or inquire during situations where it could be mirrored that business of the
company was done in a fraudulent and unfair manner.

Power to investigate, inspect and inquire is vested in Section 206 of the Companies Act where
on scrutiny of any document filed by any company or information received by Registrar, he is
of opinion that further information or explanation of documents relating to the Company is
necessary he may by written notice require the company

(a) to furnish in writing such information or explanation or

(b) to produce such documents, within such reasonable time as may be specified in the notice.

Conduct of Inspection and Inquiry (Section 207)

• Where a Registrar or inspector calls for the books of account or other books and papers,
it shall be duty of every director, officer or other employee of the company to produce
all these documents to the Registrar or inspector.

• It shall also be duty of these persons to furnish statements, information or explanation

as the Registrar or inspector may require and shall render all assistance to the
Registrar or inspector in connection with the inspection.
 • The Registrar or inspector making an inspection or inquiry may—

1. make or cause to be made copies of books of account or other books and papers;
or
2. place or cause to be placed any mark of identification on such books in token of
the inspection having made.

• The Registrar or inspector making an inspection or inquiry shall have all powers of a
civil court under the Code of Civil Procedure, 1908 while trying a suit in respect of the
following matters, namely—

1. the discovery and production of books of account and other documents;

2. summoning and enforcing the attendance of persons and examining them on
oath; and
3. inspection of any books, registers and other documents of the company at any
place.
• Failure to comply with the requirement of provisions of this Section –
1. If any director or officer of the company disobeys the direction issued by the Registrar
or the inspector under this section, the director or the officer shall be punishable with
imprisonment which may extend to one year and with fine which shall not be less than
twenty-five thousand rupees but which may extend to one lakh rupees.
2. If a director or an officer of the company has been convicted of an offence under this
section, the director or the officer shall, on and from the date on which he is so
convicted, be deemed to have vacated his office as such and on such vacation of office,
shall be disqualified from holding an office in any company.

Power to call for information, inspection and inquiries (Section 206)

Information

• The Registrar may by a written notice require a company to:

1. furnish in writing information or explanation; or
2. to produce documents, within a given reasonable specified time.
• The Registrar may ask such information:
1. on scrutiny of any document filed by the company; or
2. on any information received by him.
• It shall be a duty of the company and of its officers:
 1. to furnish the information or explanation to the best of their knowledge and power; and
2. to produce the documents within the specified or extended time.

Inspection

• In case of inadequate information or unsatisfactory explanation, the Registrar may by

another written notice,
• call on the company to produce for his inspection such further books of accounts, books,
papers and explanations as he may require at such place and at such time as specified
in the notice.
• In this notice, the Registrar shall record his reason in writing for issuing the notice.
• The Central Government may, on satisfaction that circumstances so warrant, direct
inspection of books and papers of a company by an inspector.
• The Central Government may by general or special order authorise any statutory
authority to carry out the inspection of books of account of a company or class of
companies.

Inquiry

• If, after all this exercise, the Registrar is satisfied on the basis of

1. information available with or

2. furnished to him or
3. on representation made to him; that the business of the company is being
carried on (a) for a fraudulent purpose, (b) unlawful purpose or (c) not
in compliance with the provisions of this Act or (d) investors grievances
not being addressed;
• The Registrar may after informing the company of the allegation made against it by a
written order; call on the company in writing any information or explanation within
specified time and carry out such inquiry as he deems fit after giving the company a
reasonable opportunity of being heard.
• The Central Government may, on satisfaction that circumstances so warrant, direct the
Registrar or Inspector to carry out the inquiry under this sub section.
 • Where business of a company has been or is being carried on for a fraudulent or
unlawful purpose, every officer of the company who is in default shall be punishable
for fraud.

Q.18 Transfer and transmission of shares?

Ans:- The act of movement of an asset is termed as a transfer. The movement can be physical
movement or the ownership of the title of the asset or both. For securities, this movement can
be voluntary or operational by law. The transfer of shares is a voluntary act by the shareholder
and takes place by way of contract. Whereas, the transmission of shares takes place due to the
operation of law that is on the death of the shareholder or in an event where the shareholder
becomes insolvent/lunatic.

Meaning of Transfer of Share

Transfer of shares refers to the intentional transfer of title of the shares between the transferor
(one who transfers) and the transferee (one who receives). The shares of a public company are
freely transferable unless the company has a valid reason to disallow the same. The shares of a
private limited company are not transferable subject to certain exceptions. A transfer deed is
executed for the transfer of shares.

Meaning of Transmission of Share

Transmission of shares takes place due to the operation of law that is when the shareholder is
no more or has become lunatic or insolvent. It can also take place when the shareholder is a
company, and it has wound up. There is no transfer deed executed, and the transferee will be
given the rights to the shares, and the transmission is recorded only when the transferee gives
proof of entitlement to the shares. In case of the death of the shareholder, it will be transferred
to the legal representative and in case of insolvency to the official assignee.

Transfer of Shares

It will be affected only if a proper instrument of transfer, duly stamped, dated, and is executed
by or on behalf of the transferor and the transferee specifies all the details like name, address,
occupation if any of the transferee. It has to be delivered to the company by either party within
60 days from the date of execution along with a certificate of securities or letter of allotment
of securities as available. If the transferor makes an application for the transfer of partly paid
shares, then the company gives notice of the application to the transferee and the transferee
must give no objection to the transfer within 2 weeks from the receipt of the notice.

Transmission of Shares

It will be affected when the application of transmission of shares along with relevant documents
is valid. Execution of transfer deed is not required. The following are the relevant documents
for the transmission of shares

• Certified Copy of Death Certificate

• Self-Attested Copy of PAN

• Succession certificate/ Probate of Will/Will/ Letter of Administration/ Court Decree

• Specimen signature of successor

Time limit for delivery of a certificate in both cases

Every company must deliver the certificates of all securities transferred or transmitted within
1 month from the date of receipt of the instrument of transfer in case of transfer or intimation
of transmission as applicable unless prohibited by any provision of law or any order of Court,
Tribunal, or other authority.

Penalty in case of non-compliance

Where any default is made in complying with the above, the company shall be punishable with
a fine not be less than Rs. 25,000 but which may extend to Rs. 5,00,000, and every officer of
the company who is in default shall be punishable with a fine not be less than Rs.10,000 but
which may extend to Rs.1,00,000. While the transfer of shares and transmission of shares
intend a change in ownership of the title of the shares, the distinction lies in the fact that the
transfer of shares is voluntary and initiated by the transferee or transferor while transmission
of shares is operational by law and is initiated by the legal representative or receiver.

Q.19 Memorandum of association?

Ans:- Memorandum of Association is the most important document of a company. It states the
objects for which the company is formed. It contains the rights, privileges and powers of the
company. Hence it is called a charter of the company. It is treated as the constitution of the
company. It determines the relationship between the company and the outsiders. The whole
business of the company is built up according to Memorandum of Association. A company
cannot undertake any business or activity which is not stated in its Memorandum. It can
exercise only those powers which are clearly stated in the Memorandum.

Memorandum of Association is a document clearly displays the company’s relationship with

the outside world. It enables the creditor and shareholders to know the range of activities that
the company is permitted to be involved and authorises them to learn about the company’s
objectives. It is the legal document that has to be filed with the Registrar of Companies at the
time of incorporation of the company. It is mandatory for every company that wants to get
registered as a private/public limited to prepare the memorandum of association with the
registrar of the companies in order to get it incorporated. For this, it should be signed by at least
7 persons in the case of a public company and 2 persons in the case of a private company.

A memorandum (memo) is used to communicate something of immediate importance to

people within a business or organization. A memo can also be sent to people or firms that have
close or long-standing relationships, such as vendors or consultants. Like a business letter, a
memo is a permanent record of communication. Every company must have a memorandum in
place, they will all be in the same format and contain the same information. This includes:

• Company name

• Date of incorporation

• Type of company

• Act under which the company is registered

• Names and signatures of all subscribers (original shareholders or guarantors)

• Limited liability of shareholders or guarantors

Purpose of Memorandum of Association

• It allows the prospective shareholders to get a basic idea about the company and
understand the risks involved with their investments. It helps in understanding the law
of the company.
• The outsiders dealing with the company can obtain the objects of the company and
understand whether the contract between them fall within the object of the company. It
determines whether the deal between the companies is profitable or not.
Contents of MOA

According to the section 13 of Companies Act 2013 The memorandum of every company
should include-:

• Name of the company

• State where the company is registered

• Objects of the company

• Limited Liability

• Amount of share capital of the company is registered with the division of them in to
fixed amount.

Under Section 4 of the Companies Act 2013, a Memorandum of Association should comprise
of the following clauses as discussed below:

Name Clause

The first clause of Memorandum of Association requires a company to state its name. It is
mandatory to mention the name of the company while drafting the Memorandum of
Association. A company may select any name that it prefers but it should not be identical to an
existing company. The chosen name of the company as it appears in the Memorandum of
Association should be exactly the same as the one approved by the Registrar of Companies. A
Public Limited Company should end with the word “Limited” and likewise, a Private Limited
Company should end with the words “Private Limited”. A company is restricted from using
any name which may connect it to the government of the state, without obtaining prior
permission from the government.

The Registered office of the company

This clause of Memorandum states the name of the State where the registered office of the
company is to situated. This is required in order to fix the domicile of the company, that is, the
place of its registration. The Memorandum of Association of a company must contain the name
of the state where the company operates and the jurisdiction of the Registrar of Company must
be specified. It is mandatory for the company to have the registered office within 15 working
days. Likewise, the verification of the registered office must be completed in 30 days.
Object Clause

The objective for which the company is formed must be mentioned in the Memorandum of
Association. It is one of the key clauses because it not only determines the object of the
company but also help in determining the extent of power of the company to achieve the object
or objects.

Liability Clause

This clause of Memorandum of Association has to state the nature of liability that the members
incur. The liabilities of the members of the company must be clearly stated in the Memorandum
of Association. They may be limited by shares or by guarantee. In case of unlimited liability
company, the entire clause can be eliminated. When it is limited by guarantee the members of
the company are liable to pay the amount stated in the memorandum at the time of liquidation
of the company.

Capital Clause

Every limited company having a share capital must state the amount of its share capital with
which the company is proposed to be registered. This capital is described as “registered”,
“authorised” or “nominal” capital and the stamp duty is payable on this amount. The maximum
amount of authorised capital that can be generated by the members of the company is ought to
be specified in the Memorandum of Association.

Case Law

In the case of K. Leela Kumar v. Government of India, the Court held that Memorandum of
Association cannot contain anything contrary to Companies Act, 1956 however articles of
association in many cases deals with personal matters and may not be challenged on the above
ground.

In NEPC India Ltd. v. Registrar of Companies, the Court held that a complaint alleging that
a company was indulging in activities not mentioned in the objects clause of the Memorandum
of Association had to be filed within six months of the date of knowledge.
Q. 20 Extra ordinary general meeting?

Ans:- An Extraordinary General Meeting (an EGM) can be defined as a meeting of

shareholders which is not an Annual General Meeting (an AGM). It is held when some urgent
issue arises in the company or any situation of crisis occurred and it requires the input of all
senior executives and the Board.

The members/shareholders of a company can call for an extraordinary general meeting.

However, only certain members with a significant stake in the company are allowed to call for
an EGM. They are listed in the Companies Act, 2013 as follows.

• In case of a company having a share capital, members holding not less than one-tenth
of such paid-up capital of the company that carry voting rights in regard to that matter
as on the date of depositing the requisition;

• In the case of a company not having a share capital, members holding not less than one-
tenth of the total voting power in regard to that matter as at the date of deposit of the
requisition.

• EGM called by Board. Upon the receival of a valid requisition, the Board has a period
of 21 days to call for an EGM. The EGM must be held within 45 days from the day of
the EGM being called.

• EGM called by the requisitions – In case the Board fails to call for an EGM, it can be
called for by the requisitions themselves during a period of 3 months from the day the
requisition was deposited. If the EGM is held within this specified period of 3 months,
it can be adjourned to any day in the future after the 3 months.

Requirements for holding an EGM

A notice period of 21 days must be given to the members. However, there is an exception
to this rule. Where if 95% of the voting members consent, the EGM can be held at a shorter
notice.

Quorum Required for EGM

Unless the company’s Articles state otherwise, the following number of members are
required for a quorum.

• In the case of a public company: five members personally present; and

 • In the case of any other company: two members personally present.

Essentials of a Valid Requisition

The essentials of a valid requisition are listed down below as follows:

• Specify the issue for which the meeting is called

• Signed by requisitions; and
• Must be deposited at the company’s registered office.

The Function of Extraordinary General Meeting

The Companies Act of 2013 mandates that all matters discussed during an Extraordinary
General Meeting must be classified as special business. An EGM serves two primary purposes.
Firstly, it serves to inform shareholders about important matters pertaining to the company and
encourages their attendance whenever possible. Secondly, an EGM imposes a responsibility on
the company to provide shareholders with detailed information about the business to be
discussed in the form of an explanatory statement.

The explanatory statement, typically included in the notice for the EGM, provides shareholders
with details such as the nature of concern or interest (financial or otherwise) and any other
pertinent information required for them to make informed decisions.

Procedure for EGM

1. Convene Board Meeting to discuss the following

• Propose resolutions to be passed at the EGM of shareholders
• Fix the date, time, and place for convening the EGM
2. Issue and Dispatch Notices for the EGM.
3. Obtain Consent for shorter notice.
4. Attach a Statement to the Notice.
5. Ensure Quorum.
6. Elect Chairman.
7. Appointment of Proxies.
8. Voting.
Q.21 Articles of Association?

Ans:- Article of Association is a crucial document that defines the internal management
framework of a company. The Articles of Association outline the rules and regulations that
govern the conduct of a company’s affairs, including the powers and duties of its directors, the
rights of its members, and the procedures for decision-making and corporate actions.

Under Indian Company Law, the Articles of Association is a legal document that outlines the
rules and regulations governing the management and operations of a company. It is a key
document that defines the internal rules and procedures for the company’s shareholders,
directors, and officers, as well as the company’s relationship with its stakeholders.

The Articles of Association must be drafted and filed during the incorporation process of the
company. It includes various provisions, such as the company’s name, its registered office
address, the objectives of the company, the rights and obligations of its members, the number
of directors and their powers and duties, the rules for conducting meetings, and the procedure
for issuing and transferring shares. In addition, the Articles of Association also specify the
procedures for resolving disputes between the company and its shareholders or between the
shareholders themselves. They may also include provisions relating to the appointment and
removal of directors, the distribution of profits and losses, and the winding up of the company.

The Companies Act, 2013 provides a detailed definition and provisions related to the Articles
of Association in Section 2(5) and Section 5 respectively.

According to Section 2(5) of the Companies Act, 2013, the Articles of Association refers to the
document containing the rules and regulations that govern the management of the company’s
affairs.

Section 5 of the Companies Act, 2013 specifies that the Articles of Association must be in
accordance with the provisions of the Act and must be signed by each subscriber to the
memorandum of association in the presence of at least one witness who attests the signature.

Nature and Content of Articles of Association

The Articles of Association is a document that sets out the internal regulations and management
framework for a company. The components of the Articles of Association include:

Name clause – This clause defines the name of the company and specifies the legal form of
the business, whether it is a private or public company.
Registered office clause – This clause specifies the address of the registered office of the
company, which is the official address for all communication and legal proceedings.

Object clause – This clause defines the main objects and purposes of the company and
specifies the activities that the company is authorized to undertake.

Liability clause – This clause outlines the liability of the members of the company, whether it
is limited or unlimited.

Share capital clause – This clause defines the authorized share capital of the company, the
types of shares that can be issued, and the rights and privileges attached to each class of shares.

Management clause – This clause defines the powers, duties, and responsibilities of the
directors and the procedures for their appointment, removal, and remuneration.

General meetings clause – This clause outlines the procedures for convening and conducting
general meetings of the company, including the notice period, quorum, voting rights, and
resolution-making process.

Dividend clause – This clause specifies the rules and procedures for the distribution of
dividends to the shareholders.

Winding-up clause – This clause outlines the procedures for the winding up of the company
in case of bankruptcy, liquidation, or dissolution.

Scope of AoA

The Articles of Association and Memorandum of Association are two important documents that
a company must have as per the provisions of the Companies Act, 2013. The MOA defines the
fundamental objectives and scope of the company, while the AOA contains the rules and
regulations for the company’s management and operation.

The scope of the AoA is limited by the MoA, as the rules and regulations contained in the AoA
must be consistent with the objectives outlined in the MoA. The AoA must not exceed the scope
of the MoA and should not contain any provision that is ultra vires (beyond the powers) of the
company as specified in the MoA.

In the landmark judgment of Shyam Chand v. Calcutta Stock Exchange, the Supreme Court
of India held that the AoA of a company must not contain any provision that is beyond the
scope of the MoA. In this case, the Calcutta Stock Exchange had inserted a provision in its
AoA that allowed it to expel a member for conduct detrimental to the interest of the exchange,
even though this provision was not included in the MoA.

The Supreme Court held that the provision in the AoA was ultra vires the MoA and was
therefore void. The court emphasized that the scope of the AoA must be consistent with the
MoA and that any provision in the AoA that goes beyond the MoA is invalid.

This judgment highlights the importance of ensuring that the AoA is in line with the MoA, and
that any provision in the AoA must not exceed the scope of the MoA. Companies must take
care to ensure that their AoA is not ultra vires the MoA to avoid any legal disputes or challenges
to the validity of their AoA.
Answer in brief

Q.1 A proper balance of the rights of majority and minority shareholders is essential for
the smooth functioning of the company? Discuss?

Ans:- In the day-to-day working of a company, some decisions need to be taken regarding the
management of the company and these decisions are usually taken by the majority members.
In this process of decision-making, there may arise certain opportunities in which the interests
of the majority shareholders may come into conflict with the minority shareholders.

In such a case, if the decisions taken are not in the overall larger interest of the company as a
whole, but only serve the interest of a particular group, then the minority group whose interest
may have been violated can raise its voice against such an action.

With regard to shareholder rights, it has been rightly stated by palmer that “a proper balance of
the rights of majority and minority shareholders is essential for the smooth functioning of the
company”. It is reasonable to expect that in the matters of a company, whatever decisions that
are taken are done so in keeping in mind with the principles of natural justice and fair play. In
case of failure to do so, it is important that the interests of minority shareholders are to be
protected.

Section 397 to 409 of the Companies Act, 1956 states the provision in order to protect the rights
of minority shareholders and safeguard their interest against the oppressive acts of majority
shareholders.

Usually, the general rule is that the majority shareholder’s decision in a company binds the
minority. Therefore, it is only a majority of the members who can control the board of directors.
The majority is in the position where it is connected in every part of the company. They
maintain their rights without considering the interests of minorities which creates a dull effect.
They misuse their power to exploit the rights of the minority. In such a case, a proper balance
of rights of majority and minority shareholders is essential for the smooth functioning of the
company.

Majority Shareholder

A majority shareholder is a shareholder who owns and controls the majority of the stock of a
corporation or can cast the majority of votes in a company’s general meeting, and therefore
controls all the important aspects of running a company such as the appointment of directors,
managerial decisions; etc. It affects the minority shareholder’s rights who are effectively
deprived of their say in the running of the company.

An individual or a group that owns more than 50% of a corporation’s outstanding shares may
be termed as majority shareholder. This allows the majority shareholder to have outright control
of the company’s operations, particularly the election of its board of directors. Some majority
shareholders are not involved in the daily operations of the company, but most of them are
involved.

Generally, a majority shareholder has more power than all of the other shareholders combined
and in fact, the majority shareholders are often the founders of the company.

Minority Shareholder

In Section 395 of the Act, the dissenting shareholders are placed in the limit of 10% of shares.
Thus “Minority” can be defined as holding not more than 10% shares for the limited purpose
of their rights before the appropriate forum.

The Company Act, 1956 nowhere defines the term “Minority shareholders” as “Minority
shareholders” are those shareholders who have minority stakes in a company that is controlled
by a majority shareholder. The majority shareholders are usually the company’s parent but may
also be an individual or a group of connected shareholders. It is more common with smaller
companies and in emerging markets. It is understood as a shareholder who individually holds
less than half of the shares of the company and who accordingly, does not have management
rights or voting control.

Minority shareholders are those who have a minimum number of shares in the company. A
minority shareholder is not entirely impotent. The Companies Acts have always contained
provisions giving a minority shareholder leverage to prevent the overpopulation of the majority.

Principle of Non-Interference

The general rule states that during a difference among the members, the majority decides the
issue. If the majority crushes the rights of the minority shareholders, then the company law will
protect it. However, if the majority exercises its powers in the matters of a company’s internal
administration, then the courts will not interfere to protect the rights of the majority.
The principle that the will of the majority should prevail over the will of the minority in matters
of internal administration of the company was founded in the case of Foss v. Harbottle which
is today known as the rule in Foss v. Harbottle.

According to this principle, the courts will not, intervene at the instance of the shareholders, in
the management of a company it’s direct so long as they are acting within the powers conferred
on them by the articles of the company.

Q.2 What is the procedure for transfer of shares and explain the remedies available if a
company refuses to register transfer of share?

Ans:- The act of movement of an asset is termed as a transfer. The movement can be physical
movement or the ownership of the title of the asset or both. For securities, this movement can
be voluntary or operational by law. The transfer of shares is a voluntary act by the holder of
shares and takes place by way of contract.

Meaning of Transfer of Share

Transfer of shares refers to the intentional transfer of title of the shares between the transferor
(one who transfers) and the transferee (one who receives). The shares of a public company are
freely transferable unless the company has a valid reason to disallow the same. The shares of a
private limited company are not transferable subject to certain exceptions. A transfer deed is
executed for the transfer of shares.

Transfer of shares is done by Companies on regular basis. It plays a crucial role in the identity
of the Company. The Companies Act 2013 lays down the provisions related to the Company’s
transfer and transmission of shares.

Transfer of shares is when the title of shares is transferred from one person to another. The
person whose shares are getting transferred is called the ‘Transferor’ the person to whom the
shares are transferred is called the ‘Transferee’.

Procedure for Share Transfer

• The transferors and the transferee must inform the Company of transferring the shares.
• Execute an instrument in form SH-4 along with stamp duty. It should be duly signed by
both the transferor and transferee, and it should be given to the Company within 60
days from the date of execution instrument.
• Company should check Articles (AOA) for provisions for the transfer of shares.
• Board resolution for registration of transfer of shares.
• Within 1 month of receipt of SH-4 Company shall issue a share certificate to the
transferee.

Transfer of Shares

It will be affected only if a proper instrument of transfer, duly stamped, dated, and is
executed by or on behalf of the transferor and the transferee and specifies all the details like
name, address, occupation if any of the transferee. It has to be delivered to the company by
either party within 60 days from the date of execution along with a certificate of securities
or letter of allotment of securities as available. If the transferor makes an application for
the transfer of partly paid shares, then the company gives notice of the application to the
transferee and the transferee must give no objection to the transfer within 2 weeks from the
receipt of the notice.

Statutory Remedy Against Refusal to Transfer Shares Under Section 58 of the

Companies Act 2013

The process to be followed by the shareholders, if the company refuse to transfer their
shares. The power can be exercised by the shareholders as per the provisions of section 58
of the Companies Act, 2013.

Statutory Remedy Against Refusal to Transfer Shares In case of a Private Company

1. If a private company limited by shares refuses (whether in pursuance of any power of

the company under its articles or otherwise), to register the transfer of, or the transmission
of the right to any securities or interest of a member in the company, then the company
shall send notice of the refusal to the transferor and the transferee or to the person giving
intimation of such transmission, within a period of thirty days from the date on which the
instrument of transfer, or the intimation of such transmission, was delivered to the company.
2. Notice shall contain the reasons for refusal to register the transfer or

3. After receiving the refusal letter, the transferee may appeal to the Tribunal against the
refusal within a period of thirty days from the date of receipt of the notice or
 4. In case no notice has been sent by the company, within a period of sixty days from the
date on which the instrument of transfer or the intimation of transmission, was delivered to
the company.

Statutory Remedy Against Refusal of Transfer of Share in case of Public Company

1. If a public company without sufficient cause refuses to register the transfer of securities
within a period of thirty days from the date on which the instrument of transfer or the
intimation of transmission, is delivered to the company, the transferee may, within a period
of sixty days of such refusal or where no intimation has been received from the company,
within ninety days of the delivery of the instrument of transfer or intimation of
transmission, appeal to the Tribunal.

2. After receiving the appeal, the Tribunal, after hearing the parties, either dismiss the
appeal, or by order—

3. direct that the transfer or transmission shall be registered by the company and the
company shall comply with such order within a period of ten days of the receipt of the
order; or

4. direct rectification of the register and also direct the company to pay damages, if any,
sustained by any party aggrieved.

The order If a person contravenes the order of the Tribunal, he shall be punishable with
imprisonment for a term not less than one year but may extend to three years and with fine
not less than one lakh rupees which may extend to five lakh rupees.

Q.3 State the golden rule of framing prospectus? What are the remedies available for mis
representation in prospectus?

Ans:- The Companies Act 2013 is the governing legislation for companies in India and
provides regulations for various aspects of company operations, including public offers of
securities. When a company plans to issue securities to the public, it needs to prepare and file
a prospectus with the Registrar of Companies (ROC).

The Companies Act 2013 recognises several types of prospectus, each with its own
requirements and usage.
A prospectus is a legal document that contains important information about a company and its
securities, which are being offered to the public for subscription or purchase. It serves as a key
source of information for potential investors to make informed investment decisions.

A prospectus provides detailed information about the company’s financials, business

operations, management, risks, and other relevant information that investors need to know
before investing in the company’s securities.

In the context of company law, a prospectus is regulated by the Companies Act, which sets out
the requirements and guidelines for preparing and issuing prospectuses. The Companies Act
lays down the mandatory disclosures that must be made in a prospectus to ensure transparency
and investor protection. A prospectus must be registered with the regulatory authority before it
can be used for offering securities to the public.

Prospectuses are commonly used by companies when they intend to raise funds through public
offerings, such as initial public offerings (IPOs), follow-on public offerings (FPOs), and rights
issues. It is a crucial document that helps potential investors assess the risks and rewards
associated with investing in a company’s securities.

Prospectuses can come in various forms, such as a full prospectus, red herring prospectus, shelf
prospectus, abridged prospectus, or deemed prospectus, depending on the type of offering and
regulatory requirements. Each type of prospectus has its own specific features, usage, and
regulatory provisions that companies must adhere to while preparing and filing them.

Misstatement is the Prospectus

The prospectus is trusted on by the members of the general public for subscribing or purchasing
the securities and other instruments from the corporation and any misstatement by the
prospectus can lead to punishment. Misstatement in a prospectus occurs when a untrue or
misleading statement is included and issued in the prospectus. Any deletion and inclusion of
any matter which misleads the public is also a misstatement under Section 34 of this Act. For
instance, and statement which gives the incorrect location of the company’s office is
misstatement in the prospectus or any statement offering shares misleads the public is a
misstatement in a prospectus.

Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:

1. A statement included in a prospectus shall be deemed to be untrue, if the statement is
misleading in the form and context in which it is included.

2. Omission from the prospectus of any matter to mislead the investors.

The one who gives the consent and signs the prospectus is to blame for any misstatement in a
prospectus. The Managers, CS and also the Directors of the corporation are answerable for the
same. However, mere signing won’t result in liability for misstatement if the person who signed
the prospectus is neither a manager nor draws salary from that company.

In the case, Sahara India Commercial Corporation Ltd. v SEBI 31st October 2018, on
behalf of the Director of the company, the Company Secretary signed the prospectus using their
power of attorney and SEBI concluded that the CS wasn’t chargeable for the misstatement
within the prospectus as the Director of the corporate.

CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS

When any statement within the prospectus includes misleading or untrue information is
distributed then everyone who authorized the issue of the prospectus is liable under section 447
of this Act.

CIVIL LIABILITY FOR MISSTATEMENT

Section 62 of the Companies Act deals with the civil liability and makes the actual person
responsible to pay every single individual who has contributed for any share or debentures and
could have grieved any damages by believing the prospectus where false and misleading
information has been published.

Remedies for Misstatement in Prospectus

I. Remedies for civil liability

There are two remedies available against company:

i. Revocation of the Contract- The person who purchased the securities can cancel the
contract. The money will be refunded to him, which he paid to the company.

ii. Damages for Fraud- After revocation, the shareholders can claim damages from the
company by filing a case in the court.
Remedies against the Directors, promoters and the authorized persons who issued the
prospectus:

Damages for misstatement- Compensation will be given to the shareholders for the loss by
the directors, promoters and the authorized persons.

Damages for non-disclosure- Fine of Rs. 50000 and recovering the damages must be given
by the people who mislead the purchasers from the one that is chargeable for the damages.

Remedies for criminal liability

• Imprisonment up to 2 years or Rs. 50000 fine must beard by the people that mislead.

• Person who knowingly issued a misstatement is punishable for imprisonment up to 5

years or with a fine Rs. 100000 or both.

Case Law

New Brunswick Canada Railway V. Muggeridge

In this case, Justice Kindersley laid down the ‘golden rule’ for framing of a prospectus of a
company. In this case it was laid that, those who issue a prospectus withstand to the public
great advantages which will accrue to the persons who will take shares in the proposed
undertaking. On the faith of the details given in the prospectus, the people are invited to
take shares. Everything should be accurate and at its best knowledge in the prospectus.
Nothing should be stated in the prospectus which is not true in nature or is non- existing.
In simpler words, the true nature of the company’s venture must be disclosed in the
prospectus.

Golden Rule for Framing a Prospectus

The ‘Golden Rule’ for framing of a prospectus was laid down by Justice Kindersley in New
Brunswick & Canada Rly.

The Golden Rule in Prospectus has a meaning and a moral in it, which says whatever
information comes from the company to the public, through the medium of prospectus, must
be true, fair and accurate.

A company issues prospectus to attract the general public to purchase its shares, interested
people rely on the information presented in the prospectus and on the basis of which they desire
to make an investment in the shares of the issuing company. The public is invited to take shares
on the faith of the representations contained in the prospectus. The public is at the mercy of
company promoters.

According to the ‘Golden Rule’ the followings must be kept in mind when preparing the
prospectus of a company:

1. The prospectus must be an honest statement of the company’s profile; there must be no
misleading, ambiguous or erroneous reference to the company in its prospectus.

2. Every important aspect of a contract of the company should be clarified.

3. The contents of the prospectus should conform to the provision of the Companies Act.

4. The restrictions on the appointment of directors must be kept in mind.

5. The conditions of civil liability as laid down must have strictly adhered to issue and
registration of prospectus or legal requirement regarding the issue of the prospectus.

Q.4 Explain the legal position and duties of director?

Ans:- A company director is a professional person hired by the company to manage and run its
business. A director is defined under Section 2(34) of the Companies Act, 2013 as a person
(director) appointed to the Board of a company. No artificial person or entity can be selected
for the position of director in a company. Only an individual person can be appointed as a
director of a company.

If company is a separate legal entity, then the directors are basically termed as the mind and
will of the company. This is because they control the actions and behaviour of the company in
the business environment. To work in an efficient and effective manner, directors have to work
in different capacities many times.

The Companies Act, 2013 makes an attempt to elucidate the duties and responsibilities of the
directors of a company. The provisions of the Act clarify the roles, conduct, powers,
responsibilities, and duties of a director.

Section 149 of Chapter XI of the Companies Act, 2013 discusses some legal requirements of a
director in a company. They are as follows-

1. Public company- A minimum of 3 and a maximum of 15 directors shall be appointed.

2. Private company- A minimum of 2 and a maximum of 15 directors shall be appointed.

3. One person company- A minimum of only 1 director shall be there.

4. There should be at least 1 woman director and a minimum of 1 director must have
stayed in India for a minimum period of 182 days in the previous calendar year.

Types of Directors

1. Shadow Director.
2. De-facto Director.
3. First Director.
4. Additional Directors.
5. Ad-hoc Directors.
6. Alternative Directors.
7. Executive Directors.
8. Non-Executive Directors.
9. Woman Directors.
10. Independent Directors.

As per the Companies Act, 2013, the Board of Directors is the primary agent of the
company. They are also trustees for the properties and assets held by the company in its
possession. This shows that the directors have to play multi-facet roles in the company’s
growth and welfare. Generally, the Board of Directors has to act on behalf of the company
on all related matters.

Legal Position of a Director

It is really difficult to explain as to what is the exact legal position of directors in a company.
There are certain explanations given by the judges for defining directors, sometimes as
agents, sometimes as trustees, and sometimes as managing partners. They are the persons
who are duly appointed by the company for the purpose of directing and managing the
company’s affairs. All the expressions to which directors are referred, like agents, trustees,
etc., are not exhaustive of their powers and responsibilities. It was observed in the case of
Ram Chand & Sons Sugar Mills Pvt. Ltd. v. Kanhayalal Bhargava (1966), that it is
really difficult to exactly explain the legal position of directors in a company. Judges have
summarised it as a multi-dimensional position which is held in the capacities of an agent,
trustee, or manager, even though these terms don’t hold the same meaning in a true legal
sense.

Directors as Agent

A company cannot independently take action in its own capacity and requires a
representative. This representative role is fulfilled by the directors, establishing a principal-
agent relationship.

In this relationship, directors possess the authority to act and make decisions on the
company’s behalf. Any contracts or transactions made on behalf of the company render the
company responsible, while the directors remain free from personal liability. Directors
merely sign and execute contracts on behalf of the company.

Director as a Trustee

Within a company, the legal position of director is also as a trustee. This trustee role implies
that directors manage the company’s assets and work in the best interests of the company.

A trustee is someone who can be entrusted with the company’s resources and acts to achieve
the company’s objectives rather than for personal gain. Furthermore, a trustee is granted
certain powers, such as share allocation, issuing calls, accepting or declining transfers, etc.,
which are referred to as powers in trust.

Director as a Managing Partner

Directors of a company act as representatives of the shareholders, carrying out their will
and objectives. They work on behalf of the shareholders and their interests, which grants
them significant powers and the ability to perform functions that are essentially proprietary
in nature.

Duties of the Directors

1. Duty of Good Faith: Directors are expected to act in good faith to promote the objects of
the company and in the best interests of its shareholders.

2. Duty of Reasonable Care, Skill, and Diligence: Directors are required to exercise
reasonable care, skill, and diligence in the performance of their duties. They should possess
the requisite knowledge and expertise to make informed decisions.
 3. Duty to Comply with the Act: Directors must ensure compliance with the provisions of
the Companies Act 2013 and other applicable laws and regulations. They should familiarize
themselves with the legal and regulatory framework governing the company’s operations.

4. Duty to Attend Board Meetings: Directors are obligated to attend board meetings and
actively participate in discussions and decision-making processes. They should be
adequately prepared for the meetings by reviewing relevant documents and seeking
clarifications, if required.

5. Duty to Maintain Confidentiality: Directors are responsible for maintaining the

confidentiality of the company’s confidential information, trade secrets, and other sensitive
matters.

6. Duty to Prevent Fraud: Directors have a duty to prevent fraud and take appropriate
measures to safeguard the assets and interests of the company. They should implement
internal control systems, risk management processes, and internal audits to mitigate the risk
of fraud.

Q.5 Explain in detail the provision in the companies act relating to prevention of
oppression and mismanagement?

Ans:- The terms oppression and mismanagement are not defined under the Companies Act,
2013. These terms are to be interpreted by the court depending upon the facts of each case.
Mismanagement refers to practices of managing the company incompetently and dishonestly.
Violation of Memorandum of Association, Articles of Association, or other statutory provisions
would amount to mismanagement.

Chapter XVI of the Companies Act, 2013 deals with the prevention of oppression and
mismanagement. The majority rule is normally followed in the company and thereby, courts
do not interfere to protect minority rights. However, prevention of oppression and
mismanagement is an exception to the rule.

The following are the grounds for making an application under Section 241:

(a) that the company’s affairs are being conducted in a manner that is prejudicial or oppressive
to a member or members, or in a manner that is prejudicial to the public interest, or in a manner
that is prejudicial to the company’s interests;
(b) that a material change has occurred in the company’s management or control, whether by
an alteration in the Board of Directors or management;

Mismanagement in company law

Mismanagement occurs when a company’s affairs are conducted in a manner that is detrimental
to the public interest or the company’s interests. Mismanagement is also said to occur when
there has been a material change in the ownership of the company’s shares or if it has no share
capital in its membership or in any other way, and it is likely that the company’s affairs will be
conducted in a manner prejudicial to public interest or in a manner prejudicial to the company’s
interests as a result of that change. Palmer explains that a proper balance of majority and
minority rights is necessary to run a smooth functioning of the company.

The Rule Foss v. Harbottle

• The first is the “Proper Plaintiff Rule,” which states that only the company can sue
directors or outsiders for any wrong or loss due to fraudulent or negligent acts. Members
of outsiders cannot sue on behalf of the company because of the principle of “Separate
Legal Entity,” which treats the company as a distinct legal person from its members.

• The second rule is the “Majority Principal Rule,” where the court will not interfere if
the alleged wrong can be ratified by a majority of members in a general meeting.

Exceptions to the Rule of Foss v. Harbottle

• Ultra Vires: If an action is taken by the company that is beyond the scope of its Articles
of Association, any member can bring legal action against it.

• Fraud on Minority: When the majority oppresses the minority and commits fraud,
even a single shareholder can initiate legal action to protect the minority’s rights.

• Oppression and Mismanagement: Shareholders have the right to seek legal action if
there is oppression or mismanagement within the company. They can approach the
tribunal or court under specific sections of the Companies Act.

• Individual Membership Rights: Members can enforce their rights against the
company, such as the right to vote or stand in elections.

• Derivative Action: Shareholders can bring an action on behalf of the company for
wrongs done, acting as representatives of other members whose relief is sought. This
 action is called a derivative action, and the company must be joined as a co-defendant
so that the company is bound by the judgment given.

Prevention of Oppression

Oppression refers to the deviation from fair play in relation to the conditions set out concerning
the rights of the shareholders. Oppression refers to the abuse of power in a company.

Remedy Against Oppression

The provisions of the Companies Act provide for remedial action against the oppression of the
majority against the minority. These provisions are included with an intention. It is to protect
the shareholders and safeguard the public interest. The right so conferred to the minority
shareholders through these provisions is known as “qualified minority rights”.

• The first remedy available to the affected minority is to apply to the tribunal. Under
section 241(1) of the Act, it is explained that if any members are disappointed that the
company’s matters are being carried out in a prejudicial, oppressive or in a manner that
is against the public interest, such persons may apply to the tribunal for relief.

• Further, it holds that any member who complains that a material change has been
brought about without protecting the interests of the shareholders, debenture holders
and so on, for which the material change is prejudicial, oppressive or is in a manner that
is against the public interest, the members may apply to the tribunal as in the manner
prescribed in section 244 of the Companies Act.

Prevention of Mismanagement

If the company affairs are being carried out in a prejudicial manner against public or company’s
interest, or if any material change is brought about management and control of the company,
then relief can be availed as per section 241(1)(b) of the Companies Act, 2013.

Material change here refers to any change brought or alteration made in the Board of Directors,
company shares ownership and so on. If there is proof that the affairs are being carried out in
a prejudicial manner, that will be sufficient for the relief.

Tribunal and its Powers

The tribunals have a wide power when it comes to the question of oppression and
mismanagement in the companies. The powers of the tribunals are provided under sections 241
and 242 of the Companies Act. The tribunal may make any order as it finds necessary to
regulate the conduct of the company’s affairs:

Winding up order: The tribunal may pass a winding-up order if it believes that the affairs of
the company are being conducted in an oppressive or prejudicial manner. Moreover, it affects
the interests and rights of the members as well as the public. But the tribunals avoid the same
because it will lead to a worse situation, and eventually, the company’s business will be dealt
with by the majority.

Interim relief as per section 242(4) of the Companies Act, 2013: Any party to the proceeding
can make an application for interim relief. This is to ensure proper regulation relating to the
conduct of affairs of the company.

Case Law

Hindustan Co-operative Insurance Society Ltd In Re

The insurance business was nationalized in 1956. A Life Insurance Company was acquired y
the Life Insurance Corporation of India, and also paid certain amount of compensation to the
company. The majority of shareholders did not want to distribute that compensation to the
minority shareholders. To achieve their object, they changed the objective clause of the
company by a majority.

Calcutta High court held that it was a clear instance of oppression of the part of majority
shareholder against minority and quashed the newly inserted objective clause and also ordered
for the payment of appropriate share amount to the majority shareholders.

Q.6 Who is official liquidator and what are his power and duties?

Ans:- In general sense, liquidator is a person who conducts the whole process of liquidation.
When a company is about to wind up it is required to realise the assets of the company and it
should be distributed among the “debenture holders”, “creditors” “shareholders” etc. For this
purpose, a person is appointed who does all the required things before the company “cease to
exist”. This person is called Liquidator under Company Law. So, liquidator comes into scene
in the time of winding up of a company. The process of winding up can be two types. These
are following below: 1. Compulsory winding up; 2. Voluntary winding up.
As per the Section 359 of Companies Act 2013, an liquidator is a person generally appointed
by the court, unsecured creditors or by the shareholders of the company. He is the person who
liquidates assets (in most cases). The liquidator is mainly appointed when the company has
been insolvent and bankrupt. After his appointment, he takes control of all the assets, properties
of the organization and persons.

He has the legal power to act in different capacities on behalf of the company. For liquidation,
the liquidator can sell the assets of the company in the open cash market any other things having
equal value.

The main and important role of the liquidator is to investigate all affairs of the company, the
liquidator has to find out if any assets need to be recovered if those have been misplaced or
sold at a lower price than the market value. The liquidator has the liberty to reverse these types
of transactions.

Role of Liquidator

The liquidator is appointed for handling the liquidation process. Their main role and
responsibility are to manage all the activities, accounts, assets, etc. of the company and to
liquidate all these as per dues that need to be paid to the creditors. A liquidator can also pay
from the funds of the company if it is available.

Appointment of Official Liquidator

At the time of winding up of companies (by the court) central government appointed an official
liquidator who shall be attached to the high court. Official liquidator is a whole-time officer
but, in some cases, where the central government found that there is not enough work for a
whole-time officer then in that cases a part time officer can be appointed. Central government
can appoint one or more than one deputy or assistant liquidator to assist the official liquidator.

Official liquidator works under the supervision of regional directors, on behalf of central
government the regional directors supervise them. When a high court passes an order for
winding up a company then the official liquidator attach with the said High Court take the
charge of the assets of the company, books of account etc. and finally liquidate the company
according the order of the high court.

The following people are eligible to be appointed as an official liquidator

1. “A member from the panel of the professional firm of

(a) Chartered accountants

(b) Advocates

(c) Company Secretaries

2. Body corporate approved by the central government

3. Whole time and part time officer appointed by the central government”

Duties of the Official Liquidator

Asset Realization

One of the primary responsibilities of the official liquidator is to identify and realize the
company’s assets. This involves valuing and selling the assets to generate funds for
distribution among stakeholders.

Creditor Claims

The official liquidator is responsible for examining and verifying the claims made by
creditors. They must determine the legitimacy of these claims and ensure fair distribution of
available funds.

Report submitted by the official liquidator

After receiving the statement of affairs, the official liquidator has a duty to submit a

preliminary report to the court as soon as possible but within the 6 months after receiving the

statement of affairs.

Custody of companies’ property

After the winding order is made the official liquidator takes the custody and charge of the all

the property of the company.

Keeping books by liquidator

The liquidator shall keep a proper book. Any contributor or creditor can inspect this book by

personally, or by his agents but it is the subject to the control of the court.

Powers of the Official Liquidator

Investigation

The official liquidator has the authority to investigate the affairs of the company, including
its past transactions, to identify any fraudulent activities or misconduct that may have
contributed to the company’s liquidation.

Legal Proceedings

The official liquidator can initiate legal proceedings on behalf of the company if it is deemed
necessary to protect the interests of the stakeholders or recover any outstanding debts.

Asset Preservation

To prevent any further loss or deterioration of the company’s assets, the official liquidator has
the power to take necessary steps to preserve and safeguard these assets during the liquidation
process.

Access to Records

The official liquidator is entitled to access all company records, documents, and accounts to
gather information required for the winding-up process.

Q.7 Explain the Doctrine of Indoor management along with exceptions if any?

Ans:- Section 2(20) of the Companies Act, 2013 defines the term Company as a body corporate
registered under Companies Act, 2013 or any other previous Law, and shall include all
companies (public or private). It is governed by its own constitution and framework in the form
of The MOA (Memorandum of Association) and AOA (Article of Association) which lays
down the powers, objectives, and functions of the company and the nature of its business.

They are registered with the Registrar of Companies under the Ministry of Corporate Affairs.
Thereby, it becomes imperative that any person who transacts any kind of business with the
company is conversant with all the rules and regulations of the company that are available in
the public domain. This apparent presumption is called the Doctrine of Constructive Notice.

Section 398 of the Companies Act,2013 is a specific regulation that requires the registrar to
inspect all of the incorporation documents since all documents registered with the registrar are
public documents.
According to Section 398(2) of the Act, The Central Govt. may, by notification, frame a scheme
to carry out the above provision through electronic forming. Section 399 of the Act allows any
person to inspect, take extracts from or make records of any document of any company which
has been registered with the Registrar of Companies. The section lays down that this right shall
be provided to the applicant on the payment of specified fees.

The right extends to the inspection of any public document of any company. Hence, the MOA
and AOA of the company are available for scrutiny at all times. The doctrine of constructive
notice was instituted under this provision whereby a person is expected to be aware of the
contents of any document which is available in the public domain.

Before a person plans to transact with a company, he must inspect all the documents related to
the company and ensure that the content of his transaction conforms to the rules of the company
and should also be aware of the individual powers and conditions of the company. And it is
considered to be the responsibility of the party entering into a contract to collect, read and
understand the documents.

The Doctrine of Indoor Management as an Exception to Doctrine of Constructive Notice

As the memorandum and articles of association of a Company are public documents, a person
dealing with the Company may have access to these documents and will be deemed to have
constructive notice of the contents of the memorandum and/or articles. However, an exception
to this doctrine was enunciated in the case of Royal British Bank v. Turquand in the form of
the Doctrine of Indoor Management and is also known as the Rule Turquand.

In the case of Royal British Bank v. Turquand, the directors of the Company had borrowed
money by issuing a bond. The Articles of Association of the company authorized them of such
an act, provided that a special resolution had to be passed by a resolution of the company in
the general meeting, to be authorised to borrow in this regard. The Directors gave a bond to
Turquand without the authority of any such resolution.

It was held that Turquand could sue the company on the strength of the bond since he was
entitled to assume that the necessary resolution had been passed.

It was observed by Lord Hatherly,

“outsiders are bound to know the external position of the company, but are not bound to know
its indoor management.”
While the Doctrine of Constructive notice can be invoked by the Company and does not operate
against the company. It operates against the person who fails to inquire and is not in his favour.

While on the other hand, the Doctrine of Indoor Management can be invoked by the person
dealing with the company and works in the favour of the outside and against the Company.

In the case of Royal British Bank v. Turquand the judiciary saw the gap in the legislation, and
this gap was filled through the doctrine of indoor management. The judge in their verdict stated
an outsider cannot be expected to know what happens behind the closed doors of the company,
in such a case man, irrespective of how prudent he/she is, cannot have knowledge of
information which hasn’t been public yet.

An outsider may come to know about the internal proceedings of a company only when the
same is delivered to him/her. In the absence of such conveyance, the outsider cannot be made
to suffer. The doctrine of indoor management thus provides protection to outsiders from what
happens in the internal proceedings of the company.

Exceptions to the Doctrine of Indoor Management

The Turquand rule or the law of indoor management is not applicable to the following cases:

The outsider has actual or constructive knowledge of an irregularity

In such cases, the rule of indoor management does not offer protection to the outsider dealing
with the said company.

The outsider behaves negligently

The rule of Indoor management does not protect a person dealing with a company if he does
not initiate an inquiry despite suspecting an irregularity. Further, this rule does not offer
protection if the circumstances surrounding the contract are suspicious. For example, the
outsider should get suspicious if an officer purports to act in a manner outside the scope of his
authority.

Forgery

The doctrine of indoor management is applicable to irregularities that affect a transaction

except for forgery. In case of a forgery, the transaction is deemed null and void.

Case Law

Varkey Souriar v. Keraleeya Banking Co. Ltd

In this case, it was held that a person dealing with a company does not need to enquire about
the internal proceedings of the company in furtherance of an obligation put on them through a
public document or otherwise. All that is expected from them is to ensure that the person
transacting the business has the authority to do so.

Q.8 Explain the provision relating to appointment of auditors?

Ans:- Auditor is a person or can be a firm of C.A. who is appointed by a company to having
an independent and objective to examine the financial statements of the Company. According
to Companies Act, 2013, defines as an auditor “an individual or a firm, including a limited
liability partnership (LLP), who is appointed by the company to conduct an audit of its financial
statements, as required under the Companies Act.

The auditor’s duties under the said act include verifying and auditing the financial statements
of the company to determine whether they provide a true and fair view of the financial position,
performance, and cash flows of the company. The auditor is also responsible for ensuring that
the company has maintained proper books of account and internal financial controls.

Furthermore, the auditor is required to report any instances of fraud, non-compliance with laws
and regulations, or other material weaknesses observed during the course of the audit to the
company’s management and the Board of Directors. The auditor is also required to provide a
report on the financial statements audited by them to the shareholders of the company at the
Annual General Meeting.

Appointment of Auditor

Section 139(1) of the said act deals with the appointment of a subsequent auditor and the
manner of appointment.

According to this section, every company shall appoint an auditor in its first AGM who shall
hold office from the conclusion of that meeting until the conclusion of the sixth AGM. After
that, the company shall appoint an auditor for a term of five consecutive years at a time, subject
to ratification by the members at every AGM.

The manner of appointment of an auditor is as follows:

• Appointment by Board of Directors: The Board of Directors shall appoint the first
auditor within 30 days of the registration of the company.
 • Appointment by Members: The members of the company shall appoint the
subsequent auditors at every AGM.

• Eligibility Criteria: The auditor appointed by the company must be a Chartered

Accountant in practice.

• Intimation to Registrar of Companies (ROC): The company shall intimate the

ROC about the appointment of the auditor within 15 days of the AGM.

• Removal of Auditor: The auditor can be removed from the office before the expiry
of his term only by a special resolution of the company after obtaining the prior
approval of the Central Government.

• Rotation of Auditors: The said act has also introduced the concept of rotation of
auditors. As per this, an auditor can hold office for a maximum of 5 consecutive years
in a company. After that, he has to be rotated with another auditor who is not
associated with the same firm.

Section 139(1) mandates the appointment of an auditor in the first AGM of the company and
subsequent auditors for a term of five consecutive years at a time. The appointment of the
auditor can be made by the Board of Directors or the members of the company, and certain
eligibility criteria and procedures need to be followed.

Appointment of a first Auditor in case of a company other than government company

In accordance with section 139(6) of the said act, if a company other than a government
company, if the Board of Directors fails to appoint the first auditor, then the members of the
company shall appoint the first auditor within 90 days at an Extraordinary General Meeting
(EGM).

The following steps must be followed for the appointment of the first auditor in case of a
company other than a government company:

• The Board of Directors shall propose the name of an auditor to be appointed as the
first auditor of the company.
 • The proposed auditor shall provide his consent and eligibility certificate as per the
provisions of the Act.

• If the Board of Directors fails to appoint the first auditor, the company shall hold an
EGM within 90 days of the incorporation of the company to appoint the first auditor.

• The members of the company shall pass an ordinary resolution to appoint the first
auditor, and the appointed auditor shall hold office until the conclusion of the first
AGM.

• The appointed auditor shall also provide his consent and eligibility certificate to the
company.

Appointment of First Auditor in case of a Government Company

• Section 139(7) of the said act deals with the appointment of the first auditor in the
case of a government company. In this section, the Comptroller and Auditor-General
(CAG) of India shall appoint the first auditor of a government company within 60
days from the date of registration of the company.
• The CAG may either appoint an auditor from the panel of auditors maintained by the
CAG, or he may appoint any other auditor qualified to be appointed as an auditor of a
government company.
• Once the CAG appoints the first auditor of the government company, the Board of
Directors of the company shall take necessary steps to convene the AGM of the
company to appoint the auditor for the first financial year. In the AGM, the
shareholders of the company shall appoint the auditor for the first financial year, who
shall hold office until the conclusion of the first AGM.

Rotation of an Auditor

Sections 139(2), 139(3), and 139(4) of the said acts are known as Rotation of an Auditor
and these are as:

• Section 139(2) – Appointment of a Subsequent Auditor: This section mandates

every company to appoint an auditor in each AGM after the first AGM until the
conclusion of the sixth AGM. The appointment shall be made by the shareholders of
the company.
 • Section 139(3) – Remuneration of Auditor: This section states that the remuneration
of the auditor shall be fixed by the Board of Directors or the Audit Committee. The
remuneration should be in accordance with the prescribed guidelines and should be
approved by the shareholders.

• Section 139(4) – Eligibility of an Auditor: This section lays down the eligibility
criteria for an auditor. The auditor must be a Chartered Accountant in practice and
should not be disqualified under Section 141.

Q.9 Define Member and how membership is acquired and how it is terminated?

Ans:- According to Section 2(55) of the Companies Act, 2013:

(1) The subscribers to the memorandum of a company who 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;

(3) Every person holding shares of a company and whose name is entered as a beneficial owner
in the records of a depository, shall be deemed to be a member of the concerned company.

Members

• In the case of a company limited by shares, the shareholders, in general, are the
members.
• In a company limited by guarantee, the persons who are liable under the guarantee
clause in its Memorandum of Association are members of the company.
• In an unlimited company, those persons who are liable to contribute the sums necessary
to discharge in full, the debts and liabilities of the company, in the event of its being
wound-up, are members.

A company member is a person who agrees to become a part of the company by entering their
name in the list of registered members, that is, the ‘Register of members’. The person
designated to become a member should have to accept the norms as a part of the company.
They also tend to hold the shares of the company under their names. In a limited company,
those who own shares are called members. But in an unlimited company, those people who
have liability claims in the company’s debts are the members.

Members are different from shareholders in some aspects. For example, shareholders own a
part of the company while the members do not. Members are appointed in a company that is
stated accordingly in the Companies Act 2013. However, shareholders are not listed in the act.
Each company should have a minimum number of members and shareholders limited to their
shares. You may officially become a company member once you sign the memorandum with
the appropriate details.

Modes of Acquiring Membership

Considering the imprinted in the Companies Act 2013, the membership of a company can be
acquired in the following ways:

• Subscribing to the memorandum.

• Written agreement.

• Shareholding.

Subscribing to the Memorandum

Memorandum is a paper of agreement that clearly defines a member’s role and liabilities. A
memorandum acts as a tool for accepting weapons for the members. By accepting the
memorandum, they pledged to become a company member. Their names are enrolled in the
Register of members as a completion of the process. After that, if the members want to own
shares in the company, they will become the shareholders.

Written Agreement

By an application and allotment: A person who applies for shares becomes a member when
shares are allotted to him, a notice of allotment is issued to him and his name is entered on the
register of members.

By Transfer of Shares: A person can become a member by acquiring shares from an existing
member and by having the transfer of shares registered in the books of the company, i.e. by
getting his name entered in the register of members of the company.
By Transmission of Shares: On the death of a member, the person who is entitled under the
law to succeed to his estate, gets the right to have the shares transmitted and registered in his
name in the company’s register of members.

By Shareholding

Every person holding shares of the company and whose name is entered as a beneficial owner
in the records of the depository shall be deemed to be a member of the concerned company.

Termination of Membership

The termination of membership is the process of officially removing their name from the
‘Register of members’.

The following are the ways of removing one’s membership from the company:

1. Transfer of membership: One of the standard methods of removing a member from

the company. You can transfer your shares to your preferred person. After transferring
the shares, your name will be removed from the registered member of the company.

2. Transmission of membership: It slightly differs from the above mode of membership

removal. In this mode, your membership will be transferred to your future descendant.

3. Surrender of membership: The membership can also be removed by submitting your

part shares to the company with the board acceptance report.

4. Forfeiture of membership: It is unfortunate for a member to lose their share over

something. Also, your membership card will be terminated if they claim to sell their
share.

Q.10 What are the compulsory clause in the memorandum of association?

Ans:- The Memorandum of Association is a legal document that serves as a charter for a
company’s formation. It is a crucial document as it defines the company’s legal identity and
purpose. According to the Companies Act 2013 in India, a memorandum of association is one
of the documents that must be filed with the Registrar of Companies during the incorporation
process.
It sets out the fundamental and essential elements of a company, including its name, registered
office address, objectives, authorized share capital, and liability of members. The MOA
outlines the company’s scope of activities and serves as a guide to the company’s internal
operations.

The memorandum of association must comply with the requirements of the Companies Act and
include the mandatory clauses specified by the Act. Therefore, it is essential for entrepreneurs
and business owners to understand the significance of MOA and create it with utmost care and
attention to detail.

Purpose of Memorandum of Association

The main purpose of the Memorandum of Association is to define the legal identity and scope
of activities of a company. It serves as a charter for the company’s formation and sets out the
fundamental and essential elements of the company.

The memorandum of association outlines the company’s name, registered office address,
objectives, authorized share capital, and liability of members. It also specifies the objects for
which the company is formed and operates.

By defining these crucial elements, the MOA provides clarity and transparency to the
company’s stakeholders, such as investors, shareholders, creditors, and regulators. It serves as
a guide to the company’s internal operations and helps in ensuring that the company is managed
in accordance with the legal framework.

Seven important clauses of Memorandum of Association in Company Law

The contents of the memorandum are stated under Section 4 of the Companies Act of 2013. It
includes all the valuable information that the memorandum of association must include:

Name of Clause

According to the Companies Act 2013 in India, the name clause is a mandatory clause that
must be included in the Memorandum of Association of a company. It specifies the name of
the company and it should end with “Private Limited” in case of Private Company or “Limited”
in case of Public Limited Company.
The name of the company should be unique, and the Registrar of Companies must approve it
before the company’s incorporation. The name clause should also comply with the rules and
regulations laid down by the Ministry of Corporate Affairs. The name of the company should
not be identical or similar to any existing company, and it should not be offensive or violate
any copyright or trademark laws.

The name clause is a crucial part of the memorandum of association as it defines the legal
identity of the company and helps in identifying and differentiating it from other companies.

Registered Office Clause

The Registered Office Clause is a mandatory clause that must be included in the Memorandum
of Association of a company. It sets out the registered office address of the company, which is
the official address of the company where all legal notices, communications, and documents
will be sent.

The registered office must be situated in the same state where the company is incorporated.
The Registered Office Clause should include the full address, including the city, district, state,
and PIN code. It is important to note that any change in the registered office address must be
communicated to the Registrar of Companies within 30 days of the change.

The Registered Office Clause is a crucial part of the MOA as it establishes the official address
of the company and helps in determining the jurisdiction of the company for legal purposes.

Objective Clause

The Objective Clause specifies the objects and purposes for which the company is formed and
operated. The Objective Clause should clearly state the main objects, which are the primary
objectives of the company, and other objects, which are incidental or ancillary to the main
objects. The objects should be specific, definite, and not vague or ambiguous.

It also helps in protecting the interests of the stakeholders by ensuring that the company
operates within the legal framework and does not engage in any activities that are not specified
in the MOA.

Liability Clause

The Liability Clause is an essential clause that must be included in the Memorandum of
Association of a company according to the Companies Act 2013 in India. It specifies the
liability of the members of the company in case of any debts or losses incurred by the company.
In a company limited by shares, the liability of the members is limited to the unpaid amount of
the shares held by them. On the other hand, in a company limited by guarantee, the liability of
the members is limited to the amount they agree to contribute to the assets of the company in
case of its winding up.

The memorandum of association should clearly state the nature of the company’s liability,
whether it is limited or unlimited. It is important to note that any misrepresentation or false
statement regarding the liability clause can result in severe legal consequences.

Capital Clause

The Capital Clause is an important clause that must be included in the Memorandum of
Association of a company according to the Companies Act 2013 in India. It specifies the
authorized capital of the company, which is the maximum amount of capital that the company
can issue to its shareholders.

The Capital Clause should clearly state the amount of authorized capital, the number of shares,
and the nominal or face value of each share. The memorandum of association should also
specify the types of shares, such as equity shares, preference shares, or debentures, that the
company is authorized to issue.

Association Clause

The Association Clause is a fundamental clause that must be included in the Memorandum of
Association of a company according to the Companies Act 2013 in India. It specifies the name
of the company, the state in which the registered office is situated, and the objects for which
the company is formed.

The Association Clause should also include the names, addresses, occupations, and signatures
of the subscribers, who are the persons who have agreed to form the company and become its
members. The memorandum of association must be signed by at least seven subscribers in the
case of a public company, two subscribers in the case of a private company with a share capital,
and one subscriber in the case of a private company without a share capital.

The Association Clause is a crucial part of the MOA as it establishes the legal existence of the
company and defines its identity. It also helps in identifying the subscribers who have agreed
to form the company and become its members.

Subscription Clause
Who is signing the memorandum is stated in the Subscription Clause. Each subscriber must
specify how many shares he is purchasing. The memorandum must be signed by the subscribers
in the presence of two witnesses. A minimum of one share must be purchased by each
subscriber.

Q.11 What is winding up of company? What are the grounds under companies act 2013
by which tribunal may order winding up of the company?

Ans:- Winding up is a process in which life of a company is brought to end and property is
utilized for the benefit of members and creditors. It is a means by which dissolution of a
company is brought about. It involves permanently shutting down of business of the company.

The Companies Act, 2013, provides for two types of winding up: voluntary and compulsory.
Voluntary winding up occurs when the company’s directors or shareholders decide to wind up
the company voluntarily due to various reasons, including loss of profitability or inability to
pay debts. Compulsory winding up, on the other hand, is initiated by an external entity, such as
a creditor, and is usually done through a tribunal.

According to Section 272 of companies act, 2013 a petition of winding up shall be presented
to the tribunal by-

• The company

• Any contributory or contributories

• The registrar

• Any person on behalf of the government

When a petition is filed by any person eligible under section 272, the tribunal after studying
the application and analysing various facts, can confirm or set aside the case. On confirming
the tribunal will appoint a liquidator for carrying on further procedures under the process. When
the winding up order has been passed or liquidator has been appointed, no suit or other legal
proceeding shall be commenced, or if pending shall be proceeded with, by or against the
company, expect with the leave of tribunal and subject to such terms as the tribunal may
impose.

Winding up of the company by tribunal

Winding up of a company is a legal process that involves the closure of a company’s affairs
and the liquidation of its assets. The process can be initiated by the company or by an external
entity such as a creditor, and it can also be done through a tribunal. The purpose of winding up
is to bring an end to the company’s operations, discharge its debts, and distribute the remaining
assets among its shareholders.

Winding up of a company can be a complex and time-consuming process, involving multiple

stakeholders such as shareholders, employees, and creditors. It is governed by various laws and
regulations, and the process can differ depending on the circumstances and the type of winding
up.

The winding up process by tribunal involves various stages, including the appointment of a
liquidator to manage the liquidation process, the realization of the company’s assets, payment
of creditors’ dues, and distribution of the remaining assets among the shareholders. The tribunal
plays a crucial role in overseeing the winding up process and ensuring that it is done in a fair
and transparent manner. The winding up of a company by tribunal can have significant
implications for its stakeholders, including shareholders, employees, and creditors. It can result
in the loss of jobs, investments, and reputational damage for the company. Therefore, it is
important to ensure that the winding up process is conducted in an efficient and transparent
manner to minimize the negative impact on the stakeholders.

Grounds for Winding up of the Company

Under the Companies Act, 2013, there are various grounds on which a company can be wound
up by the Tribunal through compulsory winding up. These grounds are as follows:

1. Inability to pay debts: A company can be wound up if it is unable to pay its debts. This
means that if a company owes a debt of at least Rs. 1 lakh and has failed to pay it for a
continuous period of 21 days, the creditor can apply to the Tribunal for winding up of the
company. This provision is covered under Section 271 of the Companies Act, 2013.

2. Just and equitable: The Tribunal can also order the winding up of a company if it is of the
opinion that it is just and equitable to do so. This means that the company is unable to carry on
its business in accordance with its memorandum and articles of association or there are disputes
among the shareholders. This provision is covered under Section 271(1)(c) of the Companies
Act, 2013.
3. Oppression and mismanagement: If the affairs of a company are being conducted in a
manner that is oppressive or prejudicial to the interests of any member or members or the
company as a whole, the Tribunal may order the winding up of the company. This provision is
covered under Section 271(1)(b) of the Companies Act, 2013.

4. Regulatory non-compliance: A company may be wound up by the Tribunal if it has failed

to comply with any of the provisions of the Companies Act or any other law applicable to it.
This provision is covered under Section 271(1)(d) of the Companies Act, 2013.

5. Public interest: The Tribunal can also order the winding up of a company in the public
interest. This means that if the company’s activities are detrimental to the public interest, the
Tribunal can order its winding up. This provision is covered under Section 271(1)(f) of the
Companies Act, 2013.

In the case of M/s. Hindustan Gum and Chemicals Ltd. v. State of Rajasthan and Ors. the
Rajasthan High Court held that the winding up of a company on the ground of inability to pay
debts should not be a mere formality but should be based on sound and reasonable grounds.
The court further held that the creditor should be able to establish that the company is unable
to pay its debts and that the debt is bona fide.

Q.12 Discuss the doctrine of ultra vires with special reference to Ashbury Railway
Carriage and Iron Co. Ltd V/s Riche?

Ans:- The object clause of the memorandum of the company contains the object for which the
company is formed. An act of the company must not be beyond the object clause otherwise it
will be ultra vires and therefore, void and cannot be ratified even if all the member wishes to
ratify. This is called the doctrine of ultra vires. The expression “ultra vires” consists of two
words: ‘ultra’ and ‘vires’. ‘Ultra’ means beyond and ‘Vires’ means powers. Thus, the expression
ultra vires means an act beyond the powers. Here the expression ultra vires is used to indicate
an act of the company, which is beyond the powers conferred on the company by the objects
clause of its memorandum.

An ultra vires act is void and cannot be ratified even if all the directors wish to ratify it.
Sometimes the expression ultra vires is used to describe the situation when the directors of a
company have exceeded the powers delegated to them. Where a company exceeds its power as
conferred on it by the objects clause of its memorandum, it’s not bound by it because it lacks
legal capacity to incur responsibility for the action, but when the directors of a company have
exceeded the powers delegated to them.

Protection of Creditors & Investors

Doctrine of ultra vires has been developed to protect the investors and creditors of the company.
This doctrine prevents a company to employ the money of the investors for a purpose other
than those stated in the objects clause of its memorandum. Thus, the investors and the company
may be assured by this rule that their investment will not be employed for the objects or
activities which they did not have in contemplation at the time of investing their money in the
company.

This doctrine prevents the wrongful application of the company’s assets likely to result in the
insolvency of the company and thereby protects creditors. Besides the doctrine of ultra vires
prevents directors from departing the object for which the company has been formed and, thus,
puts a check over the activities of the directions. It enables the directors to know within what
lines of business they are authorized to act.

Origin of Doctrine of Ultra Vires

Doctrine of ultra vires has provided protection to the investors and creditors of the company. It
established its roots in 1875 when the Directors of the Company, Ashbury Railway Carriage
and Iron Company (Limited) v Hector Riche, House of Lords established the concept of
ultra-vires for the first time. A company called “The Ashbury Railway Carriage and Iron
Company,” incorporated under the Companies Act, 1862.

The objects listed in the object clause of memorandum of association were:

1. to make, and sell, or lend or hire, railway carriages and waggons,

2. and all kinds of railway plant, fittings, machinery, and rolling-stock;

3. to carry on the business of mechanical engineers and general contractors;

4. purchase, lease, work, and sell mines, minerals, land, and buildings;

5. to purchase and sell, as merchants, timber, coal, metals, or other materials,

6. and also to buy and sell any such materials on commission or as agents.

And clause 4 stated that activities beyond the scope of clause 3 will need a special resolution.
But the company agreed to give Riche a loan to build a railway from Antwerp to Tournai in
Belgium. Later, the company denied the agreement. Riche sued, and the company pleaded that
the action was ultra vires.

The House of Lords held that the Contract was Ultra vires and was against the Memorandum
of the company and thus, null and void and cannot be ratified by the members.

Ultra Vires Rules

This case established the ultra vires rules, which meant that a company only had legal capacity
to do what its objects clauses enabled it to do. In the case of Ashbury, had the transaction been
included in its objects clause, the company would have had the capacity, making it valid.
Another point to distinguish is that the memorandum in Ashbury talks about the objects clauses
restricting powers of the company. The difference between these is that objects are those parts
of the constitution which describe the activity a company is set up to carry on. Powers of a
company are the things it needs to be able to do to carry on the activity.

The difficulty with the ultra vires rules was that those dealing with a company would have to
check that it had capacity to enter into the contract by looking at its memorandum in the
Register of Companies, otherwise they risked finding themselves unable to enforce a contract
that the law would consider void unless the contract entered into was within its object clause.

Q.13 What is Prospectus? What are the remedies available for mis-statement in the
prospectus?

Ans:- The Companies Act, 2013 is the governing legislation for companies in India and
provides regulations for various aspects of company operations, including public offers of
securities. When a company plans to issue securities to the public, it needs to prepare and file
a prospectus with the Registrar of Companies (ROC).

The Companies Act 2013 recognises several types of prospectus, each with its own
requirements and usage.

A prospectus is a legal document that contains important information about a company and its
securities, which are being offered to the public for subscription or purchase. It serves as a key
source of information for potential investors to make informed investment decisions.
A prospectus provides detailed information about the company’s financials, business
operations, management, risks, and other relevant information that investors need to know
before investing in the company’s securities.

In the context of company law, a prospectus is regulated by the Companies Act, which sets out
the requirements and guidelines for preparing and issuing prospectuses. The Companies Act
lays down the mandatory disclosures that must be made in a prospectus to ensure transparency
and investor protection. A prospectus must be registered with the regulatory authority before it
can be used for offering securities to the public.

Prospectuses are commonly used by companies when they intend to raise funds through public
offerings, such as initial public offerings (IPOs), follow-on public offerings (FPOs), and rights
issues. It is a crucial document that helps potential investors to access the risks and rewards
associated with investing in a company’s securities.

Prospectuses can come in various forms, such as a full prospectus, red herring prospectus, shelf
prospectus, abridged prospectus, or deemed prospectus, depending on the type of offering and
regulatory requirements. Each type of prospectus has its own specific features, usage, and
regulatory provisions that companies must adhere to while preparing and filing them.

Misstatement in the Prospectus

The prospectus is trusted on by the members of the general public for subscribing or purchasing
the securities and other instruments from the corporation and any misstatement in the
prospectus can lead to punishment. Misstatement in a prospectus occurs when an untrue or
misleading statement is included and issued in the prospectus. Any deletion and inclusion of
any matter which misleads the public is also a misstatement under Section 34 of this Act. For
example, a statement which gives the incorrect location of the company’s office is misstatement
in the prospectus or any statement offering shares misleads the public is a misstatement in a
prospectus.

Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:

1. A statement included in a prospectus shall be deemed to be untrue, if the statement is

misleading in the form and context in which it is included.

2. Omission from the prospectus of any matter to mislead the investors.

The one who gives the consent and signs the prospectus is to blame for any misstatement in a
prospectus. The Managers, CS and also the Directors of the corporation are answerable for the
same. However, mere signing won’t result in liability for misstatement if the person who signed
the prospectus is neither a manager nor draws salary from that company.

In the case, Sahara India Commercial Corporation Ltd. v SEBI 31st October 2018, on
behalf of the Director of the company, the Company Secretary signed the prospectus using their
power of attorney and SEBI concluded that the CS wasn’t chargeable for the misstatement
within the prospectus as the Director of the corporate.

CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS

When any statement within the prospectus includes misleading or untrue information is
distributed then everyone who authorized the issue of the prospectus is liable under section 447
of this Act.

CIVIL LIABILITY FOR MISSTATEMENT

Section 62 of the Companies Act deals with the civil liability and makes the actual person
responsible to pay every single individual who has contributed for any share or debentures and
could have grieved any damages by believing the prospectus where false and misleading
information has been published.

Remedies for Misstatement in Prospectus

II. Remedies for civil liability

There are two remedies available against company:

iii. Revocation of the Contract- The person who purchased the securities can cancel the
contract. The money will be refunded to him, which he paid to the company.

iv. Damages for Fraud- After revocation, the shareholders can claim damages from the
company by filing a case in the court.

Remedies against the Directors, promoters and the authorized persons who issued the
prospectus:

Damages for misstatement- Compensation will be given to the shareholders for the loss by
the directors, promoters and the authorized persons.
Damages for non-disclosure- Fine of Rs. 50000 and recovering the damages must be given
by the people who mislead the purchasers from the one that is chargeable for the damages.

Remedies for criminal liability

• Imprisonment up to 2 years or Rs. 50000 fines must beard by the people that mislead.

• Person who knowingly issued a misstatement is punishable for imprisonment up to 5

years or with a fine Rs. 100000 or both.

Case Law

New Brunswick Canada Railway V. Muggeridge

In this case, Justice Kindersley laid down the ‘golden rule’ for framing of a prospectus of a
company. In this case it was laid that, those who issue a prospectus withstand to the public
great advantages which will accrue to the persons who will take shares in the proposed
undertaking. On the faith of the details given in the prospectus, the people are invited to
take shares. Everything should be accurate and at its best knowledge in the prospectus.
Nothing should be stated in the prospectus which is not true in nature or is non- existing.
In simpler words, the true nature of the company’s venture must be disclosed in the
prospectus.

Q.14 What is forfeiture of shares? Explain the rules relating to valid forfeiture?

Ans:- Shareholding is a process of ownership of a company. Forfeiture of shares is an action

taken by the board of directors of a company to cancel the ownership of a shareholder when
they fail to pay the dues for owning the shares. By owning shares, a shareholder owns a part of
the company issuing the share. The Companies Act 2013 offers the rules and regulations related
to different types of shares, such as preferential share and equity shares. The shareholders must
pay all dues they owe to maintain the ownership of the company.

Shares are forfeited if a shareholder fails to meet the holding, buying, or selling criteria. There
may be numerous requirements like transfer of Shares over a restricted period, payment of call
money, or even avoiding selling. In the case of Forfeiture of Shares, neither the shareholder has
any balance left on it, nor any profit from the share is offered to him. Moreover, the forfeited
share becomes an asset of the company that issued it.
Forfeiture of shares may take place for numerous reasons, such as delay in instalments, non-
payment of dues, etc. However, for a company to forfeit shares, it must allow such action under
its Article of Association.

Causes for Forfeiture of Shares

1. Non-payment of Calls: The most common cause for forfeiture of share is the non-
payment of calls. A ‘call’ is a demand made by the company for the payment of the
amount due on the shares. If a shareholder fails to pay this amount within the specified
period, the company may choose to forfeit their shares.

2. Violation of Company Rules: Forfeiture of share can also occur when a shareholder
breaches the rules laid down in the articles of association of the company.

3. Other Causes: There can be other scenarios where a company may exercise its right to
forfeit shares. These might be unique to the company’s articles of association or the
shareholder agreement. For example, the company may reserve the right to forfeit
shares if a shareholder is involved in activities that harm the company’s reputation or
interests.

Conditions for valid forfeiture of shares

Authority to forfeit

The power of Forfeiture of Share must be expressly given in the Articles of Association.
Accordingly, if no power is given in the Articles, no forfeiture can be made.

Default in Payment of calls

The shares can be forfeited only for the non-payment of calls and not for the default in
payment of any other debts.

In Accordance with the Articles

Forfeiture shall be valid only when the provisions of the Articles are strictly complied with.
Even a slight deviation from the provisions shall render the forfeiture invalid.

Bonafide and for the Benefit of the Company

The right to forfeit shares is in the nature of trust and so it can be exercised Bonafide and
only for the benefit of the company. The power cannot be exercised hastily or for private
ends.
 Board Resolutions

Forfeiture will be affected only by means of a Board resolution.

Notice to Defaulting Shareholder

Notice precedent to forfeiture must be given to the defaulting shareholder. In the matter of
forfeiture of shares, technicalities must be strictly observed. This notice must. give at least
14 days’ time for payment of such amount and must inform the member that in the event
of non-payment, his shares will be forfeited.

Q.15 Explain the rule in Foss V/s Harbottle with exceptions?

Ans:- A company has a separate legal personality, distinct and separate from the members who
compose it and so ‘it can sue and be sued in its own name’ . Decisions of a company are taken
by the shareholders and the board members represent the majority of the company.

In the day-to-day working of a company, some decisions need to be taken regarding the
management of the company and these decisions are usually taken by the majority members.
In this process of decision-making, there may arise certain opportunities in which the interests
of the majority shareholders may come into conflict with the minority shareholders.

In such a case, if the decisions taken are not in the overall larger interest of the company as a
whole, but only serve the interest of a particular group, then the minority group whose interest
may have been violated can raise its voice against such an action.

With regard to shareholder rights, it has been rightly stated by palmer that “a proper balance of
the rights of majority and minority shareholders is essential for the smooth functioning of the
company”. It is reasonable to expect that in the matters of a company, whatever decisions that
are taken are done so in keeping in mind with the principles of natural justice and fair play. In
case of failure to do so, it is important that the interests of minority shareholders are to be
protected.

Section 397 to 409 of the Companies Act, 1956 states the provision in order to protect the rights
of minority shareholders and safeguard their interest against the oppressive acts of majority
shareholders.
Usually, the general rule is that the majority shareholder’s decision in a company binds the
minority. Therefore, it is only a majority of the members who can control the board of directors.
The majority is in the position where it is connected in every part of the company. They
maintain their rights without considering the interests of minorities which creates a dull effect.
They misuse their power to exploit the rights of the minority. In such a case, a proper balance
of rights of majority and minority shareholders is essential for the smooth functioning of the
company.

Facts of the case

In September 1835, the Victoria Park Company was established with the aim of developing
land near Manchester into a park and housing development. However, certain individuals,
including the directors and others, engaged in unlawful activities that diverted the company's
assets for personal gain. Minority shareholders Richard Foss and Edward Starkie Turton
brought attention to this misconduct, alleging misappropriation of company property,
fraudulent use of funds, unqualified directors, and the absence of proper company records.
They argued that these wrongdoers should be held accountable and a responsible receiver
should be appointed. This case, known as Foss vs. Harbottle, highlighted the need for legal
action against the directors due to the inability to reclaim company assets directly.

Judgement

In Foss vs. Harbottle, the judge ruled in favour of the defendants, stating that individual
shareholders or outsiders cannot bring legal action against wrongs done to a company. This is
because a company and its shareholders are legally separate entities. Section 21(1)(a) of the
Companies Act reinforces this principle, stating that only the company can sue or be sued in its
name. Shareholders cannot sue on the company's behalf, as any harm affects the company, not
its individual members. The court emphasized that the company should initiate legal action
against wrongdoers.

The judge's decision was based on precedents related to unincorporated companies and stressed
that minority shareholders must first exhaust internal avenues for redress. If the majority of
shareholders can approve the misconduct, the courts will not interfere, limiting the ability of
minority shareholders to take legal action when misconduct can be ratified.

The Rule Foss v. Harbottle

 • The first rule is the “Proper Plaintiff Rule,” which states that only the company can sue
directors or outsiders for any wrong or loss done due to fraudulent or negligent acts.
Members of outsiders cannot sue on behalf of the company because of the principle of
“Separate Legal Entity,” which treats the company as a distinct legal person from its
members.

Whereas the members of the company or any outsider cannot sue on its behalf because of
the principle of a separate legal entity which considers the company as a separate legal
person from all the members of the company, so it can sue and be sued in its own name.
This is the only reason why only a company can bring legal action or institute a legal
proceeding, not any member, in order to cover losses that have been suffered by the
company. A member of the company can take legal action on its behalf against the
wrongdoer only if they are authorized to do so by the board of directors or by an ordinary
resolution passed in a general meeting.

The origin of the formulation of this rule is found in the doctrine of indoor management.
According to Doctrine of Indoor Management, the court will not interfere with the internal
management of companies acting within their powers and it has no jurisdiction to do so. It
is a settled law that in order to redress a wrong done to the company or to recover money
damages alleged to be due to the company, the action should prima facie be brought by the
company itself.

• The second rule is the “Majority Principal Rule,” where the court will not interfere if
the alleged wrong can be ratified by a majority of members in a general meeting.

If the alleged wrongful act or omission can be confirmed or ratified by a simple majority
of members in the general meeting then in those cases the court is reluctant to interfere.
However, the application of these strict principles appeared to be harsh and unjust for the
minority shareholders as though a substantive right has been provided to them still, they
were barred from obtaining justice under the company and minority members have no
standing, due to their lesser strength. Thus, once a resolution is passed by the appropriate
majority of members, a dissenting member will nevertheless be bound by it.

Exceptions to the Rule of Foss v. Harbottle

• Ultra Vires: If an action is taken by the company that is beyond the scope of its Articles
of Association, any member can bring legal action against it.
 • Fraud on Minority: When the majority oppresses the minority and commits fraud,
even a single shareholder can initiate legal action to protect the minority’s rights.

• Oppression and Mismanagement: Shareholders have the right to seek legal action if
there is oppression or mismanagement within the company. They can approach the
tribunal or court under specific sections of the Companies Act.

• Individual Membership Rights: Members can enforce their rights against the
company, such as the right to vote or stand in elections.

• Derivative Action: Shareholders can bring an action on behalf of the company for
wrongs done, acting as representatives of other members whose relief is sought. This
action is called a derivative action, and the company must be joined as a co-defendant
so that the company is bound by the judgment given.

Q.16 Explain the circumstances which a company may be wound up by tribunal and its
powers?

Ans:- A company is a legal entity that is separate and distinct from its owners or shareholders.
It is created under the law of a country and can own assets, enter into contracts, and conduct
business in its own name. A company can be owned by one or more individuals or other entities,
and its ownership is represented by shares. The liability of the company’s owners or
shareholders is limited to the amount of their investment in the company, which provides a
measure of protection against personal liability for the company’s debts or obligations. The
term ‘company’ can refer to various types of entities, including corporations, partnerships, and
limited liability companies.

Winding up of a company is a legal process that involves the closure of a company’s affairs
and the liquidation of its assets. The process can be initiated by the company or by an external
entity such as a creditor, and it can also be done through a tribunal. The purpose of winding up
is to bring an end to the company’s operations, discharge its debts, and distribute the remaining
assets among its shareholders.

Winding up of a company can be a complex and time-consuming process, involving multiple

stakeholders such as shareholders, employees, and creditors. It is governed by various laws and
regulations, and the process can differ depending on the circumstances and the type of winding
up.

In the case of compulsory winding up, where the process is initiated by an external entity such
as a creditor, the court or tribunal plays a crucial role in overseeing the process and ensuring
that it is conducted fairly and transparently.

Voluntary Winding up

Voluntary winding up is a process where the shareholders of a company voluntarily decide to

wind up the company due to various reasons such as the expiration of the company’s lifespan,
inability to carry on the business, or the realization of the company’s objectives. The process
of voluntary winding up is regulated by the Companies Act, 2013. The process of voluntary
winding up involves the passing of a resolution by the shareholders for winding up the
company, appointment of a liquidator, and the liquidation of the company’s assets. The
liquidator is responsible for settling the company’s debts and distributing any remaining assets
among the shareholders.

Winding up of the company by the Tribunal

• The company may require to wound up by the tribunal under section 271 under the
following circumstances:
• In case the company does not pay the debts, and the debt of the creditor which is
exceeding Rs 1 lakhs is due and unpaid by the company within 21 days from the due
date, or any execution decree is passed in favour of the creditor or tribunal has a reason
that company will not pay off any debts then company would be liable for winding up.
• In case a company has made the provisions by passing a special resolution that wound
up is made by the tribunal.
• In case of sick companies, if no revival and rehabilitation is done, then tribunal may
order for the winding up of a company.
• In case the company is formed in a fraudulent manner, or it has reason to believe that
the activity of the business is conducted fraudulently then that company is liable to be
wound up by the tribunal.
• In case the formation of the company is for any unlawful purpose, or the management
of the company is guilty of misconduct or misfeasance, then winding up is necessary
by the tribunal.
 • In case the company fails to submit annual returns and financial statements of the last
five financial years continuously then the registrar makes the company defaulter and
liable for winding up.
• If the tribunal has the opinion that winding up of a company is necessary for the good
faith of the company.

Case Law

In the case of M/s. Hindustan Gum and Chemicals Ltd. v. State of Rajasthan and Ors. the
Rajasthan High Court held that the winding up of a company on the ground of inability to pay
debts should not be a mere formality but should be based on sound and reasonable grounds.
The court further held that the creditor should be able to establish that the company is unable
to pay its debts and that the debt is bona fide.

In the case of Miheer H. Mafatlal v. Mafatlal Industries Ltd. the Supreme Court held that
the ground of oppression and mismanagement should not be used as a tool for harassing the
management of the company or for seeking the winding up of the company. The court further
held that the oppression and mismanagement should be of such a nature that it makes it just
and equitable to wind up the company.

Q.17 Define Debentures and what is fixed charge and floating charge?

Ans:- The word ‘debenture’ has been derived from a Latin word ‘debere’ which means to
borrow.

As per Section 2(30) of Companies Act, 2013 “debenture” includes debenture stock, bonds, or
any other instrument of a company evidencing a debt, whether constituting a charge on the
assets of the company or not.
Debenture is most important instrument and method of raising the loan capital by the company.
A debenture is like a certificate of loan or a loan bond evidencing the fact that the company is
liable to pay a specified amount with interest and although the money raised by the debentures
becomes a part of the company's capital structure, but it does not become share capital.

The creation of a debenture acknowledges the fact that a debt is owed by the issuing company.
The term "debenture" includes:

• Stocks

• Bonds

• All other debt securities that were issued by the business

Ordinarily, a debenture is issued with secured borrowings and has either a floating or fixed
interest of a payment attached to it. In less common scenarios, a debenture is issued with
unsecured borrowings.

A debenture is considered a more secure way to invest in a business than purchasing shares
because the company must pay the interest on the debenture before any dividend payments can
be made to the shareholders. For example, if a company declares bankruptcy, the debenture
holders will receive payment before the shareholders. The main disadvantage to being a
debenture holder is that they have no control over the decision-making process of the company
because they control no shares in the business.

The business has to pay interest to the debenture holder during the period of the loan. A
debenture holder may take hold of some or all of the assets of the business as collateral. This
would be done to improve the odds of recovering the entire debt from the organization. When
a creditor takes control of the assets of a business, it carries a legal interest that the business
will not be allowed to sell the assets without receiving permission from the debenture holder
or paying off the debt.

Types of Debentures

• Unsecured debentures: There are no assets held as additional security.

• Redeemable debentures: Payable at the end of a specific period or through

instalments.
 • Irredeemable debentures: The business pays a specific interest rate regularly but
provides no data on when principal amount will be returned.

• Convertible debentures: Debentures that are convertible into shares or any other form
of security that are exercised by option of the company or the holder

• Subordinate debentures: Will be repaid after some other privileged debt has been
satisfied

• Convertible subordinate debentures: Is subordinate or subject to the prior repayment

of other outstanding debts but which can convert into another type of security

• Specific interest rate debentures: Issued with a specific interest rate.

• Zero-interest rate debentures: Do not carry a specific interest rate.

• Registered debentures: All details of the debenture holder are entered in a register
that's kept by the company.

• Bearer debentures: The company doesn't keep a record of the debenture holder.
Therefore, the debenture can be transferred by way of delivery.

• Sinking debentures: The repayment is secured because the company is making

systematic payments into a sinking fund.

A “Charge” is defined under section 2(16) of the Companies Act, 2013: Charge is an interest
or lien, it is created on the Property or Assets of a company or any of its undertakings or both,
it is created as a security for repayment of a loan, Charge includes mortgage.

Whenever a company borrows money by way of loans whether term loan or working capital
loans from financial institutions or bank or any other person by offering the company’s property
or assets as security, a charge is created on such property or assets of the company in favour of
the person who lends money to the company.

Types of Charges

Fixed Charge

A fixed charge is a type of security interest that is attached to a specific asset or piece of
property, such as real estate or equipment. This means that the lender has control over the asset,
and the borrower cannot sell or dispose of the asset without the lender’s consent. Fixed charges
are typically used to secure loans, including term loans, or working capital loans, for large
assets, such as property or equipment. This is because fixed charges offer lenders a high degree
of security. If the borrower defaults on the loan, the lender can seize the asset and sell it to
recoup their losses.

A Fixed charge can be: A mortgage on a property. A charge on equipment. A charge on

intellectual property. Generally, a Fixed Charge is created by way of “Mortgage”, or “Deposit
of Title Deeds” usually called as the “Instrument creating or modifying the charge”.

Floating Charge

A floating charge is a type of security interest that is attached to a changing pool of assets, such
as inventory, accounts receivable, and intellectual property. This means that the lender does not
have control over the assets, and the borrower can sell or dispose of the assets without the
lender’s consent. Floating charges are typically used to secure loans for businesses that have a
lot of current assets, such as inventory and accounts receivable. This is because floating charges
offer lenders a high degree of flexibility. If the borrower defaults on the loan, the lender can
seize the assets that are subject to the charge, even if the assets have been sold or disposed of.

A floating charge can be: A charge on inventory. A charge on accounts receivable. A charge on
intellectual property. Generally, the asset under a floating charge is secured by way of
“Hypothecation Deed” usually called as the “Instrument creating or modifying the Charge”.

Fixed Charge Floating Charge

A charge on a specific asset or group of A charge on a company's general assets that
assets. can change over time.
The asset or assets are specified in the charge The assets subject to the charge are not
document. specified in the charge document.
The lender can take possession of the assets The lender cannot take possession of the
if the borrower defaults on the loan. assets until the borrower defaults on the loan.
Examples: mortgages, liens, and pledges Examples: debentures, bank loans, and
working capital facilities
The interest in the assets is specific and not The interest in the assets is floating and not
floating specific
The assets are more secure as the lender has The assets are less secure as the lender has a
a specific interest in the assets floating interest in the assets
Q.18 What are the Civil, Criminal and Tortious remedies against companies?

Ans:-

Q.19 What are the preliminary contract? Explain the conditions for enforcement of
preliminary contracts?

Ans:-

Q.20 What are meetings in a company? Explain the types of shareholders meetings?

Ans:- A company is considered as a legal entity separate from its members in the eyes of law.
All the affairs of the company are practically carried out by the board of directors. The board
of directors of a company carries out these affairs within the limitations of their powers, as
invoked by the articles of association of the company. The directors also exercise certain
powers of their own with the consent of other members of the company.

The consent of the other members is ensured at the general meetings held by the company. Any
mistakes committed by the board are rectified by the shareholders (who are also considered as
owners of the company) at the meetings of the company.

The shareholders’ meetings are conducted for the shareholders to give their verdict on the
decisions and steps taken by the board of directors.

Meetings are a crucial part of the management of a company as mentioned in the Companies
Act, 2013.

Meetings enable the shareholders to know the ongoing proceedings of the company and allow
the shareholders to deliberate on certain issues.

There are various types of meetings held by a company.

Statutory Meeting

A statutory meeting is held once during the life of a company. Generally, it is held just after a
company is incorporated. Every public company, limited either by shares or by guarantee, must
positively hold a statutory meeting as soon as the company is incorporated.
A statutory meeting should be held between a minimum period of one month and a maximum
period of six months after the commencement of business of the company.

A meeting before a period of one month cannot be considered as a statutory meeting of the
company.

The notice for a statutory meeting should mention that a statutory meeting is going to be held
on a specific date.

Private companies and government companies are not bound to hold any statutory meetings.

Procedure of the Statutory Meeting

The board of directors must forward a statutory report to every member of the company. This
report must be sent at least 21 days before the meeting. Members attending the meeting may
discuss topics regarding the formation of the company or topics related to the statutory report.

• No resolutions can be taken in the statutory meeting of the company.

• The main objective of the statutory meeting is to make the members familiar with the
matters regarding the promotion and formation of the company.

• The shareholders receive particulars related to shares taken up, moneys received,
contracts entered into, preliminary expenses incurred, etc.

Annual General Meeting

An Annual General Meeting, as the name suggests, is a general meeting, which is held on a
yearly basis. According to section 166 of the Companies Act, all companies must hold Annual
General Meetings at stipulated time intervals. The notice for an Annual General Meeting must
contain all the particulars of the meeting. However, the time to hold the first Annual General
Meeting for a company is relaxed to 18 months from the date of incorporation.

• As per section 166(1) of the Companies Act, a company is not bound to hold any general
meetings till the first Annual General Meeting is held.
• One more relaxation provided by section 166(1) of the Companies Act is that with the
registrar’s consent, the date of an Annual General Meeting can be postponed.
• This date can be postponed to a maximum time period of three months.
• However, this relaxation is not applicable for the first Annual General Meeting.
 • A company may not hold an Annual General Meeting in a year if the extension of the
date of the meeting is made under the consent of the registrar.
• However, the reasons for the extension of the meeting should be genuine and should be
properly justified.

As per section 166(1) of the Companies Act, the time gap between two Annual General
Meetings must not exceed fifteen months. According to section 210 of the Companies Act, a
company must present a report containing the accounts of all the profits and losses. In case the
company is not trading for profit, an income and expenditure account report must be made.

AGM is subjected to Three Rules

• The meeting must be held every year.

• A maximum gap of 15 months is allowed between two Annual General Meetings.

• The meeting must be held within six months from the preparation of the balance sheet.

Extra Ordinary Meeting

Any general meeting of a company is considered to be an extraordinary general meeting, except

the statutory meeting, an Annual General Meeting or any adjournment meeting. Such types of
meetings can be fixed by the directors at any time that seems appropriate to the directors.
However, the meetings must be held in accordance with the guidelines mentioned in the articles
of association of the company.

These meetings are held generally for the transaction of the business of a special character.
Various administrative affairs of a company, which can be transacted only by resolutions passed
in general meetings, are carried out in these meetings.

It is not possible for the members of the company to wait for the next Annual General Meeting
for clearance of such issues. The articles of association of a company, therefore, provides
freedom to conduct extraordinary general meetings to sort out such issues.

By Board of Directors

If some business of special importance requires an approval of the members of the company,
the board of directors may call for an extraordinary general meeting of the company. Going in
accordance with the articles of association of the company, the board of directors of a company
may call for an extraordinary general meeting whenever they feel appropriate.
The power of a director to convene an extraordinary general meeting must be exercised at a
board of directors’ meeting as in the case of all the powers exercised by the director.

On Requisition of Members

The members of the company may also request for an extraordinary general meeting to be
conducted. A request for holding an extraordinary general meeting can be made by the members
–

• Holding at least 10% of the company’s paid up share capital and having the right to
vote on the context of the matter to be discussed at the meeting.

• Holding 10% of voting powers of the members in case the company has no capital.

• Preference shareholders can also call for a general meeting if the proposed resolution
is going to affect their interest.

Q.21 Define the term directors as per companies act 2013? What are the different types
of directors?

Ans:- A corporation is an artificial person that is invisible, intangible, and exists only in the
eyes of the law.” A company has “no mind that may have knowledge or intention and does not
have the power to fulfil its purpose and must therefore act through living persons.” Therefore,
in a company there are managers. However, a director means “a manager appointed to a
company’s board.” The Board of Directors means the group of managers.

The landmark case of Ferguson v. Wilson held that directors are the agents of a company. A
company is not a real person and can function only through its directors. Thus, the relationship
that a director shares with his company is like a principal and agent. When a director signs on
behalf of the company, it is the company that is held liable and not the director.

Section 149 of the Companies Act, 2013 discusses the composition of directors in a company
i.e., the composition of a Board of a company should be as follows:

Public Company

Minimum number of directors – 3

Maximum number of directors – 15

Private Company

Minimum number of directors – 2

Maximum number of directors – 15

One Person Company

Minimum number of directors – 1

Types of Directors

The Companies Act refers to the categories of directors which are as follows:

Executive Director

Executive directors are internal professionals i.e. they are internal to the organization and are
involved in the daily functions of the company. Any person who is a full-time employee of the
company (i.e. whole-time director) or who is responsible for the day-to-day operations of the
company (i.e. managing director) will be called an Executive Director. Thus, an Executive
Director can be designated as Managing Director and whole-time Director.

Managing director or a whole-time director can be appointed for a maximum period of 5 (five)
years. They are eligible for re-appointment. The re-appointment can be done for the next term
but after the one year of the expiry of the current term.

The minimum age of a director should be 21 years. And the maximum age should be 70 years.
For a person above 70 years, shareholder’s approval in the General meeting is required.

Managing Director: A Managing Director is a director who has significant management

powers over the affairs of the company, subject to the supervision, control, and direction of the
Board in question.

Whole-time Director: A Whole-time Director is defined as “a director who is employed full-

time by the company, devotes his entire working day to the company in question, and has a
significant personal interest in the company as his source of income.”

Small Shareholder: A company may have a director elected by small shareholders. A small
shareholder is defined as a shareholder who owns shares with a nominal value of no more than
Rs. 20000 or such other amount as may be prescribed.
Women Directors: “Section 149 of the Companies Act, 2013, read with Rule 3 of the
Companies (Appointment and Qualification of Directors) Rules, 2014, requires every listed
company and public company with paid-up share capital of not less than Rs. 100 crore or a
turnover of Rs. 300 crore or more to appoint at least one-woman director.” “There is no
prohibition on the appointment of a female relative of a director to a company’s board of
directors. Furthermore, there is no proposal to impose such a restriction.”

Nominee Directors: Explanation of Subsection 7 of Section 149 of the Act defines it as “a

director nominated by any financial institution in accordance with the provisions of any law in
force at the time, or of any agreement, or appointed by any Government, or any other person
to represent its interests.” Their appointment is mentioned in subsection 3 of section 161 of the
act.

First Directors: Individuals appointed by the subscribers to the company’s memorandum of

incorporation. They are usually listed in the articles of incorporation. They will be considered
as a first director until the directors are elected at the annual general meeting.

Additional Director: Provisions of Section 161(1) of the Companies Act, 2013 deal with the
Additional Director. Where there is heavy pressure of work on the Board of directors then the
Board of directors can appoint an additional director, if authorized by the Articles of
Association of that company.

Alternate Director: Provisions of Section 161(2) of the Companies Act, 2013 deal with
Alternate directors. When a director of a company is not in India for more than (3) three months
then an alternate director can be appointed on the behalf original director. An alternate or an
alternative director act on behalf of the director who is not in the office due to being away for
more than 3 months.

Casual Vacancy Director: Provisions of Section 161(4) of the Companies Act, 2013 deal with
a casual vacancy director. Before understanding who is a casual vacancy director, it is important
to understand the meaning of casual vacancy. Casual vacancy means a vacancy in the office
due to the reasons of death, resignation, disqualification, incapacity, and removal. Thus, a
director assuming office due to any of these reasons will be considered as a casual vacancy
director. The vacancy arising in the office of the director shall be considered as a casual vacancy
if such a director was appointed by a shareholder in a general meeting. Only the shareholder
will have to make a valid appointment with such a director. The concept of a casual vacancy
director applies only to public companies.
De facto Director: “A person who is not actually appointed as a director, but acts as one and
is held out by the company as such, is considered a De Facto Director.”

Q.22 What is transfer of shares? Explain the term Share certificate?

Ans:- The act of movement of an asset is termed as a transfer. The movement can be physical
movement or the ownership of the title of the asset or both. For securities, this movement can
be voluntary or operational by law. The transfer of shares is a voluntary act by the Shareholder
and takes place by way of contract. Whereas, the transmission of shares takes place due to the
operation of law that is on the death of the Shareholder or in an event where the shareholder
becomes insolvent/lunatic.

Meaning of Transfer of Share

Transfer of shares refers to the intentional transfer of title of the shares between the transferor
(one who transfers) and the transferee (one who receives). The shares of a public company are
freely transferable unless the company has a valid reason to disallow the same. The shares of a
private limited company are not transferable subject to certain exceptions. A transfer deed is
executed for the transfer of shares.

Transfer of shares is done by Companies on regular basis. It plays a crucial role in the identity
of the Company. The Companies Act 2013 lays down the provisions related to the Company’s
transfer and transmission of shares.

Transfer of shares is when the title of shares is transferred from one person to another. The
person whose shares are getting transferred is called the ‘Transferor’ the person to whom the
shares are transferred is called the ‘Transferee’.

Procedure for Share Transfer

• The transferor and the transferee must inform the Company of transferring the shares.
• Execute an instrument in form SH-4 along with stamp duty. It should be duly signed by
both the transferor and transferee, and it should be given to the Company within 60
days from the date of execution instrument.
• Company should check Articles of Association (AOA) for provisions for the transfer of
shares.
• Board resolution for registration of transfer of shares.
 • Within 1 month of receipt of SH-4 Company shall issue a share certificate to the
transferee.

Transfer of Shares

It will be affected only if a proper instrument of transfer, duly stamped, dated, and is
executed by or on behalf of the transferor and the transferee specifies all the details like
name, address, occupation if any of the transferee. It has to be delivered to the company by
either party within 60 days from the date of execution along with a certificate of securities
or letter of allotment of securities as available. If the transferor makes an application for
the transfer of partly paid shares, then the company gives notice of the application to the
transferee and the transferee must give no objection to the transfer within 2 weeks from the
receipt of the notice.

Share Certificate

A share certificate is a certificate issued to the members by the company under its common
seal specifying the number of shares held by him and the amount paid on each share.

According to Section 45 of the Companies Act, 2013 each share of the share capital of the
company shall be distinguished with a distinct number for its individual identification.
However, such distinction shall not be required, as per provision to Section 45, if the shares
are held by a person whose name is entered as the holder of a beneficial interest in such
share in the records of a depository.

In terms of Section 46(1) of the Act, a certificate under the common seal of the company is
prima facie evidence of the title of the person to the shares specified therein. The certificate
is the only documentary evidence of title in the possession of the shareholder. But it is not
a warranty of title by the company issuing it.

Section 46 (2) states that a duplicate certificate of shares may be issued if such certificate

(a) is proved to have been lost or destroyed; or

(b) has been defaced, mutilated or torn and is surrendered to the company.

The Securities and Exchange Board of India has mandated companies registered in India to
issue the share certificates within two months of its incorporation. If the company issues
additional shares to existing or new shareholders, the company must issue share certificates
within two months from the original allotment dates of such shares.
Advantages and Disadvantages of issuing a Share Certificate

The issuance of share certificates allows companies to keep track of their shareholders, which
is needed when the company calls a board meeting or distributes dividends. Furthermore, it
also brings transparency in the process of investing as the share certificates contain all the
important details about the transactions. However, a major disadvantage is the tedious clerical
work which demands time and money on the company’s part.

In the process of issuing share certificates, the company usually needs an entire team of
employees to manage the process and ensure the share certificates comply with the governing
law. In case the share certificates are physically issued, they can get lost or stolen, forcing the
company to repeat the process of issuing share certificates to the shareholders.

Details to be provided in a Share Certificate

Every share certificate issued in India should contain the below mentioned:

1. Name of issuing Company

2. CIN no. (Corporate Identification Number) of such Company

3. Address of the company’s registered office

4. Name of owners of such shares

5. Folio number of member

6. Number of shares which is represented by such share certificate

7. An amount which is paid on such shares

8. Distinct number of the shares

Q.23 Who is the promoter in a company? Explain the legal position of promoters?

Ans:- Promoters play a crucial role in establishing a company right from its inception stage.
An individual or a group of people who come up with the concept of starting a business are the
promoters of a company. They carry out the required processes to establish the firm.

As per Section 2(69) of the Companies Act, 2013, promoter means any of the following
persons:
 • A person named as a promoter in the prospectus or identified by the company in its
annual return in Section 92.

• A person who controls the company affairs, indirectly or directly, whether as a director,
shareholder or otherwise.

• A person in accordance with whose directions, advice or instructions the Board of

Directors of a company are accustomed to act.

Types of Promoters of a Company

Professional promoter: A professional promoter is an expert in promoting the business during

its formation or inception. They transfer the ownership of the business to shareholders when it
is established in the market.

Financial promoter: A financial promoter is a promoter who invests capital or money and has
a sizable company share. They promote banks or financial institutions. They aim to assess the
market's financial situation and start a company at the right moment.

Managing promoter: A managing promoter helps in company formation. They also get the
managing rights in the company after it is formed.

Functions of a Promoter

1. The formation of an idea and forming the company and exploring the possibilities.
2. To conduct the negotiation for the purchase of a business.
3. To collect the member for the signing of the MOA and the AOA.
4. To decide the name of the company, location of the registered office, amount and form
of share capital.
5. To get the MOA and the AOA drafted and printed.
6. To arrange for the minimum subscription.
7. To arrange for the registration of the company and certificate of incorporation.

Duties of the Promoters

Disclose hidden profits

The first duty of the promoters is to be loyal to the business and not involve in malpractice.
They should not earn secret or hidden profits while carrying out promoting activities such as
buying a property and selling it for a profit without disclosing it.
To disclose all the material facts

The promotor of the company must disclose all the material facts and information, relating to
the company’s business and formation with the relevant stakeholders.

Duty to disclose the private arrangement

It is the duty of the promoter to disclose all the private arrangements resulting in him profit
from the promotion of the company.

Rights of a Promoter

Right to Indemnity

Promoters are jointly and severally accountable for any hidden profits made by any of them
and false statements made in the prospectus. All the promoters are individually and equally
responsible for the company’s affairs. Thus, one promoter can claim the compensation or
damages paid by him/her from the other promoters.

Right of preliminary expenses

A promoter is entitled to reimbursement for preliminary expenditures incurred for the

company’s establishment, such as solicitors’ fees, advertising costs and surveyors’ fees.

Right of remuneration

A promoter has the right to receive remuneration from the company unless a contract to the
contrary. The company’s Articles of Association can also provide that the directors can pay an
amount to the promoters for their services. However, the promoters cannot sue the company
for remuneration unless there is a contract.

Legal Position of a Promoter

The promoter is neither a trustee nor an agent of the company because there is no company yet
in existence. The correct way to describe his legal position is that he stands in a fiduciary
position towards the company about to be formed. They behave in a fiduciary capacity for the
company. They take actions and activities to create the company and pay the preliminary costs
related to its incorporation, such as stamp duty, registration and professional fees. They have a
fiduciary duty towards the company and are liable for any profits made by them personally in
company deals.
Q.24 Discuss all necessary steps involved in incorporation of company?

Ans:- According to Sec. 2 (20) of The Companies Act, 2013, a “company” means a company
incorporated under The Companies Act, 2013 or under any previous company law.

A company is a “legal” person. A company thus has legal rights and obligations in the same
way that a natural person does. Companies Act deals with everything from the incorporation
of a company to its winding up.

The formation of a company according to the Companies act 2013, Section 3[1] details the
basic requirement to constitute a company. In the case of a public company 7 or more persons
are required to form a public company. In the same way, two or more people can form private
company and one person is required to form a One Person Company.

Section 7[2] of the Companies Act, 2013, specifies the procedure for incorporation of a
company. To incorporate a company the subscriber needs to file the company registration paper
with the registrar within who’s jurisdiction the location of the registered company falls.

Types of Companies

11. Public Company

12. Private Company
13. One Person Company

The Steps Involved in Incorporation of a Company are as follows:

1. Ascertaining Availability of Name

The first step in the incorporation of any company is to choose an appropriate name. A company
is identified through the name it is registered. The name of the company is stated in the
memorandum of association of the company. The word Limited should be there in the end if it
is a Public Company and the word Private Limited in the end of the name if it is a Private
Company.

To check whether the chosen name is available for adoption, the promoters have to write an
application to the Registrar of Companies of the State. A 500 rupee is paid with the application.
The Registrar then allows the company to adopt the name given and they fulfil all legal
documentation formalities within a period of three months.

2. Preparation of Memorandum of Association and Articles of Association

The memorandum of association of a company can be referred to as its constitution or rulebook.
The memorandum states the field in which the company will do business, objectives of the
company, as well as the type of business the company plans to undertake. It is further divided
into five clauses:

1. Name Clause

For a public limited company, the name of the company must have the word ‘Limited’ as
the last word.

For the private limited company, the name of the company must have the words ‘Private
Limited’ as the last words.

2. Registered Office Clause

It must specify the State in which the registered office of the company will be situated.

3. Objects Clause

It must specify the objects for which the company is being incorporated.

4. Liability Clause

It should specify the liability of the members of the company, whether limited or unlimited.

5. Capital Clause

This is valid only for companies having share capital. These companies must specify the
amount of Authorized capital divided into shares of fixed amounts.

Articles of Association

Articles of Association is basically a document that states rules which the internal management
of the company will follow. The article creates a contract between the company and its
members. The article mentions the rights, duties, and liabilities of the members. It is equally
binding on all the members of the company.

3. Printing, Signing and Stamping, Vetting of Memorandum and Articles

The Registrar of Companies often helps promoters to draw up and draft the memorandum and
articles of association. Above all, with promoters who have no previous experience in drafting
the memorandum and articles.
Once these have been vetted by the Registrar of Companies, then the memorandum of
association and articles of association can be printed. The memorandum and articles are
consequently divided into paragraphs and arranged chronologically.

The articles have to be individually signed by each subscriber or their representative in the
presence of a witness, otherwise, it will not be valid.

4. Power of Attorney

To fulfil the legal and complex documentation formalities of incorporation of a company, the
promoter may then employ an attorney who will have the authority to act on behalf of the
company and its promoters. The attorney will have the authority to make changes in the
memorandum and articles and moreover, other documents that have been filed with the
registrar.

5. Payment of Registration Fees

A prescribed fee is to be paid to the Registrar of Companies during the course of incorporation.
It depends on the nominal capital of the companies which also have share capital.

8. Certificate of Incorporation

If the Registrar is completely satisfied that all requirements have been fulfilled by the company
that is being incorporated, then he will register the company and issue a certificate of
incorporation. As a result, the incorporation certificate provided by the Registrar is definite
proof that all requirements of the Act have been met.

Formation of One Person Company

Section 2(62) of Companies Act defines a one-person company as a company that has only one
person as to its member. Furthermore, members of a company are nothing but subscribers to
its memorandum of association, or its shareholders. So, an OPC is effectively a company that
has only one shareholder as its member.

Features of a One Person Company

Private Company: Section 3(1)(c) of the Companies Act says that a single person can form a
company for any lawful purpose. It further describes OPCs as private companies.

Single Member: OPCs can have only one member or shareholder, unlike other private
companies.
Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the
sole member of the company has to mention a nominee while registering the company.

No perpetual succession: Since there is only one member in an OPC, his death will result in
the nominee choosing or rejecting to become its sole member. This does not happen in other
companies as they follow the concept of perpetual succession.

Minimum one director: OPCs need to have minimum one person (the member) as director.
They can have a maximum of 15 directors.

No minimum paid-up share capital: Companies Act, 2013 has not prescribed any amount as
minimum paid-up capital for OPCs.

Formation of One Person Companies

A single person can form an OPC by subscribing his name to the memorandum of association
and fulfilling other requirements prescribed by the Companies Act, 2013. Such memorandum
must state details of a nominee who shall become the company’s sole member in case the
original member dies or becomes incapable of entering into contractual relations.

This memorandum and the nominee’s consent to his nomination should be filed to the Registrar
of Companies along with an application of registration. Such nominee can withdraw his name
at any point in time by submission of requisite applications to the Registrar. His nomination
can also later be cancelled by the member.

Q.25 Explain the provisions of women director in a company as per companies act 2013?

Ans:- Every company needs to have minimum directors as specified by the Companies Act,
2013. The directors play a crucial role in the management of the company. The Act introduced
the concept of the appointment of two new directors, i.e. women directors and independent
directors, to the Board of Directors of a certain class of companies.

As per the Companies Act, 2013, it is mandatory to appoint at least one-woman director as a
board member in certain types of companies. The penalty for non-compliance of provision
extends to a fine of Rs.10,000 with a further fine of Rs.1000 per day if the contravention
continues.
The second provision of Section 149(1) of the Act provides that a certain class of companies
should at least have one woman director on its board. Rule 3 of Rules provides that the
following certain class of companies must appoint at least one-woman director on its board:

• Every listed company.

• Every other public company having:

• Paid-up share capital of Rs.100 crore or more, or

• Turnover of Rs.300 crore or more.

When a company fulfils the above two conditions, it must appoint a woman director to its board
within six months of the condition fulfilment date. The paid-up share capital or turnover shall
be considered as of the last date of the latest audited financial statements.

Appointment of Woman Director

The Process to appoint a Woman Director is as follows:

• The proposed woman director has to submit her consent to act as a director in the
company and file intimation about her disqualification to the company.
• The company should conduct a general meeting and obtain the shareholders’ approval
for the appointment of the woman director through a resolution.
• In the case of listed companies, it must disclose the general meeting proceedings to the
stock exchange before 24 hours from the general meeting conclusion and also post it
on its website within two working days.
• The company should make the required entries in the director and key managerial
personnel register and the register of contracts in which the woman director is
interested.
• The company board should fill up any intermittent vacancy of a woman director before
three months from the date of vacancy or the next board meeting, whichever is earlier.
A woman director can be a non-executive director or an executive director.

Tenure of Woman Director

The tenure of the appointment of a woman director is till the next Annual General Meeting
(AGM) from the date of appointment. She is entitled to a re-appointment at the general meeting.
However, the tenure of a woman director is liable to retirement by rotation as per Section 152(6)
of the Act as applicable to other directors. She can also resign at any time by giving notice to
the company.

Penalty for Non-Compliance of Appointment of Woman Director

No specific penalty is prescribed under the Act for the non-appointment of a woman director.
Thus, the penalty under Section 172 of the Act applies in case of non-compliance regarding the
appointment of a woman director. Section 172 of the Act lays down that the company and every
officer in default will be punished with a fine that shall not be less than Rs.50,000 but may
extend up to Rs.5,00,000.

Roles of a Woman Director

Women director has to play the role like any other director. Women can take up a role of
Nominee Director who will be nominated by a party in the company to take care of its interest.
Also, Women can take up a role of Independent Director who is not liable to retire by rotation.

Women Directors can hold a maximum of twenty directorships that includes the sub-limit of
ten public companies. Any contravention on this part shall be subjected to a fine ranging
between Rs.5000-Rs.25000.

Vacancy in the Position of a Women Director

A Woman Director may leave the company on any reasons such as resignation, removal,
automatic vacation or retirement by rotation before the expiry of her term as a Director. The
Board of Directors must fulfil this vacancy known as intermittent vacancy within a period of
three months.

A company can also have more than one woman director and the vacancy caused by one of
them will not be considered as an intermittent vacancy, as the company still satisfied the
Companies Act of 2013 with respect to Women Directors.

Alternative Director

In case of absence of a Woman Director for a period of not less than three months, the board
must appoint an alternative director to ensure the smooth functioning of the company. The
alternative director shall leave the firm after the return of the woman Director. In case of more
than one woman director, it is optional for the company to appoint an alternative director.
Q.26 What are charges? Why registration of charges is required?

Ans:- Section 2(16) of the Companies Act, 2013 defines charges to mean interest or lien created
on the property or assets of a company or any of its undertakings or both as security and
includes a mortgage.

Generally, a charge means a right created to the lender over the assets in order to secure
repayment of the loan. It is one of the methods by which the borrower can get the loan
sanctioned by providing the assets as a security/collateral. In this case, only the rights over the
assets would be secured rather than creating ownership interest against the lender. This is easier
in the case of corporate entities because the same entity can use assets over which the loan was
approved of.

Although the companies act, 2013 includes mortgages in the definition of the charges but
charges are different from mortgages. Typically, a mortgage creates an ownership interest over
the security used for the loan, but a charge only creates rights to the lender over the security.
But the Transfer of Property Act distinguishes charge from mortgage and rather connects them
in its definition.

According to Section 100 of the Transfer of Property Act, 1882, where an immovable property
of one person is by an act of parties or operation of law made security for the payment of money
to another and the transaction does not amount to a mortgage, the latter person is said to have
a charge on the property, and all the provisions which apply to a simple mortgage shall, so far
as may be, apply to such charge.

The following are the essential features of the charge which are as under:

1. There should be two parties to the transaction, the creator of the charge and the charge holder.

2. The subject-matter of charge, which may be current or future assets and other properties of
the borrower.

3. The intention of the borrower to offer one or more of its specific assets or properties as
security for repayment of the borrowed money together with payment of interest at the agreed
rate should be manifested by an agreement entered into by him in favour of the lender, written
or otherwise.

Kinds of Charges
There are generally two kinds of charges which are created over the assets by the entities. They
are as follows:

Fixed charges

These charges are created against specific property which is identifiable and certain and doesn’t
change over time or through the period of the loan.

Floating Charges

These charges are not against any specifically identifiable property as well as it covers
properties which are floating or uncertain such as stock-in trades, debtors etc.

Need for Creating Charge on the Company’s Assets

Almost all the large and small companies depend upon share capital and borrowed capital for
financing their projects. Borrowed capital may consist of funds raised by issuing debentures,
which may be secured or unsecured, or by obtaining financial assistance from financial
institution or banks.

The financial institutions/banks do not lend their monies unless they are sure that their funds
are safe and they would be repaid as per agreed repayment schedule along with payment of
interest. In order to secure their loans, they resort to creating right in the assets and properties
of the borrowing companies, which is known as a charge on assets. This is done by executing
loan agreements, hypothecation agreements, mortgage deeds and other similar documents,
which the borrowing company is required to execute in favour of the lending institutions/ banks
etc.

Registration of Charge

According to Section 77(1) of the Act, It shall be the duty of every company to create a charge
within or outside India, on its property or assets or any of its undertakings, whether tangible or
intangible, and situated in or outside India, to register the particulars of the charge signed by
the company and the charge-holder together with the instruments, if any, creating such charge
in such form, on payment of such fees and in such manner as may be prescribed, with the
Registrar within thirty days of its creation

In simple terms, the above section imposes a duty upon the entity creating charge to register
the particulars which were signed/attested by the entity and the lender along with filling up the
prescribed forms and prescribed fees.
The category of the charges has also been given in the provision, it states that every charge
shall be registered either created within or outside India. The charge created over any property
or undertakings of the entity irrespective of being tangible or intangible is mandated to be
registered under the Act. The period within which the charge has to be registered is of thirty
days.

As per Section 78 of the Act, in the event of the entity failing to register the charge within the
specified period, the lender in whose favour the charge is created can apply to register. The
registrar seeks the reasoning for the failure of registration at the earliest and the lender is
entitled to recover the amount paid for any ordinary or additional fees and such entity has to
give the expenditure incurred by the lender for such registration of charges.

Effects of Registration

If a charge is registered it comes along with its perks, be it either to the charge holder or the
entity creating the charge. The certificate issued acts as proof to the public that there has been
a charge created over the property and the charge holder holds good interest in the same. As
said earlier the certificate also acts as conclusive proof that the charge over the property is
registered and no one can question the same. Besides, a company registering its charges under
the act shall not have to face the consequences of non-registration. If the charge is not registered
then;

1. The Charge shall be void.

2. The creditors can’t claim any benefits over the charged property (but could be eligible
to recover their dues).

3. The penalty for contravention is a fine prescribed under the act and might also be
imprisoned.

Q.27 Differentiate between Equity share Capital and Preference share?

Ans:- A share is a unit of ownership in a company and has an exchangeable value that is
influenced by market forces. As per Section 43 of the Companies Act, 2013, a company’s share
capital is of two types, namely – equity shares and preferential shares.

The major point of difference between equity shares and preference share pertains to voting
rights and distribution of dividends.
Equity Shares

Equity Share Capital is the funds generated by a company through issuing Equity shares (also
known as ordinary shares). It consists of company shares that the owners decide to sell to
individual investors and institutions in the stock market. The Equity Shareholders become
stakeholders in the organisation, and these investors are eligible for both ownership and voting
rights in the company to select their management. Equity shares come with voting rights, and
its holders are also entitled to receive surplus and claim company assets.

The company’s management determines the rate of dividend to be distributed among such
shareholders. Moreover, these shares are transferable and can be transferred without
consideration.

The Equity Shareholders do not get a fixed rate of dividend. The dividend amount depends on
the surfeit capital with the company after paying to the preference shareholders.

They get a percentage of the company’s profits, but only after preference shareholders get their
dividend.

Types Equity Share Capital

1. Authorised share capital

2. Subscribed share capital
3. Issued share capital
4. Paid-up share capital
5. Bonus share
6. Sweat Equity Share.

Preference Share

The capital that a company raises through the issuance of preference shares is termed as
preference share capital.

This share comes with a fixed rate of dividend and a preferential right to avail profits and claim
assets during liquidation.
Like equity shares, preference shareholders are also partial owners of a company. However,
they are not entitled to voting rights and hence do not really possess the power to control or
influence company-oriented decisions.

Preference Shareholders have the first right to claim the company’s assets whenever the
company decides to wind up their operations.

Preference Shareholders have the first claim to their dividend.

The Preference Shareholders get a fixed rate of dividend.

Preference Shares have features of both debt and equity investment. They are also known as a
hybrid security option for their investors.

Types of Preference Share

1. Cumulative Share
2. Non-Cumulative Share
3. Redeemable Preference Share.
4. Non- Redeemable Preference Share.
5. Convertible Preference share.

Difference between Equity Share and Preference Share

Category Equity Share Preference Share

Definition Equity Share Capital is the Preference Share Capital is
funds that a company has the funds that a company has
generated by issuing Equity generated by issuing
shares. preference shares.
Dividend Rate The Dividend Rate is The Dividend Rate in the
changeable or fluctuating in case of Preference Share
the case of Equity Share Capital is not changeable.
Capital.
 Voting Rights Equity Shareholders have Preference Shareholders do
voting rights in the selection not have any voting rights in
of the management. the selection of the
management.
Bonus Shares Equity shares are entitled to Preference shares do not
receive bonus against offer bonus against existing
existing shareholdings. shareholdings.
Capital repayment It is Repaid at the End. It is Repaid before the Equity
Shares.
Redemption Equity Shares cannot be Preference Share can be
Redeemed. Redeemed.
Claim to assets of the Equity Shareholders do not Preference Shareholders
Company have any right to claim their have a right to claim over the
assets whenever the company’s assets whenever
company decides to wind up the company decides to wind
their operations. up their operations
Preference in Paying Equity shareholders get Preference shareholders get
Dividend second preference when the the first preference when the
company pays a dividend. company pays a dividend.
Risk Equity Shareholders are at a Preference Shareholders are
higher risk compared to at a lower risk compared to
Preference Shareholders. Equity Shareholders.