handout unit 2 company law

Suchitta Koley FCS, FICA

Company Secretary

5/34 Old Rajendra Nagar, New Delhi 110 060Tel :- 91-11-573 5757, 575 7945; 98-100-82385

e-mail: [email protected], [email protected]

Handout on Company Law

Unit 2

mailto:[email protected]

mailto:[email protected]


Company Secretary

Handout on Company Law – Unit 2National Institute of Financial Management, Faridabad

IA&AS Probationers

Capital

Share Capital

Definition

A share is a share in the share capital of a company, and includes stock except where a distinction between stock and share is expressed or implied [S 2(46)]

An exhaustive definition of share has been given by Farwell J. in Barland's Trustees vs. Steel Brothers in the following words

“A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose, of liability in the first place, and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se”.

The Supreme Court of India has approved the above definition of share in the Commissioner of Income Tax vs. Standard Vacuum Oil Company, wherein it has observed,

“By a share in a company is meant not any sum of money but an interest measured by a sum of money and made up of diverse rights conferred on its holder by the articles of the company which constitute a contract between him and the company.” Thus, a share (i) measures the right of a shareholder to receive a certain proportion of the profits of the company when it is a going concern and to contribute to the assets of the company when it is being wound up; and (ii) forms the basis of the mutual covenants contained in the articles binding the shareholders inter se.

In another case Supreme Court defined a share as

"a right to participate in the profits made by a company, while it is a going concern and declares a dividend, and in the assets of the company when it is wound-up [Bucha F. Guzdar v. Commissioner of Income-tax, Bombay LR 617 (SC)].

Nature of a share

A 'share' is not a sum of money but is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual 'covenants' entered by all the shareholders inter-se [Borland's Trustees v. Steel Bros. & Co. Ltd. [1901] 1 Ch, 279 (Ch.D.)]

A share is a chose-in-action. A chose-in-action implies the existence of some person entitled to the rights, which are rights in action as distinct from rights in possession, and until the share is issued no such person exists. [Sri Gopal Jalan & Co. v. Calcutta Stock Exchange Association Ltd. [1963] 33 Compo Cas. 862 (SC).]

In India, a share is regarded as 'goods'. Section 2(7) of the Sale of Goods Act, 1930 defines 'goods' to mean any kind of movable property other than actionable claims and money and includes stock and shares. However, section 82 of the Companies Act, while recognising shares as movable property, suggests that they shall be transferable only in the manner provided by the articles of the company.

Section 82, in this regard reads:

The shares or other interest of any member in a company shall be movable property transferable in the manner provided by the articles of the company. In Vishwanathan v.East India Distilleries [1957] 27 Compo Cas. 175, it was observed:

A share is undoubtedly movable property but it is not movable property in the same way in which a bale of cloth or a bag of wheat is movable property. Such commodities are not brought into existence by legislation, but a share in a company belongs to a totally

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different category of property. It is incorporeal in nature, and it consists merely of a bundle of rights and obligations."

A share is not a negotiable instrument

A share is an expression of proprietary relationship between a shareholder and the company [CIT V. Associated Industrial Development Co. [1969] 2 Compo U 19].

Certain interesting and comprehensive observations were made regarding nature of a share in Shree Gopal Paper Mills Ltd. V. CIT [1967] 37 Compo Cas. 240 (Cat). The learned Judge observed:

The statutory meaning of share covers the three phases of the share, share when it is a part of the share capital still remaining unexploited by the company; share when it is exploited by the company finding a shareholder and lastly, when the share is converted into stock.

The first phase arises because under the company law every company limited by shares has nominal or authorised or registered share capital. This capital is one of the essential features in the company's constitution. It is to be mentioned in the memorandum of association and the capital so mentioned is to be divided into shares of a fixed amount. The capital is usually fixed at some round figures according to the requirements of the company assessed by the promoters of the company. Therefore, it seems that the first part of the definition of the word 'share' refers to the share in this limited sense when the share is still in the womb of the company or in the shell of the company and has no shareholder

The second phase arises when it attracts section 82

Therefore, the share when it becomes associated with a member becomes a movable property. It is, however, not a movable property whose transfer is solely regulated by the Sale of Goods Act

Its transfer is also governed by the Companies Act and/or Articles of the Company. Each share again bears a distinguishing number. It may be noticed that certificate of shares is not the shares or a share

Under section 84 a certificate, under the common seal of the company, specifying any share or stock held by any member, shall be a prima facie evidence of the title of the member to the shares or stock therein specified. Hence, a share certificate is not the share; it is only a prima facie evidence of the title to the share

Section 82 says it is a movable property. It is, however, not a tangible property for it is not the share certificate; it only consists of a bundle of rights and obligations. A share can be either in the first phase or stage or in the second phase or stage. It remains either in its shell as a part of the capital or resides in a shareholder. It cannot be suspended in any intermediate phase or stage.

Use of the word "Capital" In different senses

In Company Law, the "Capital" is the share capital of a company, which is classified as:

Nominal, Authorised or Registered Capital: This is the sum stated in the memorandum of association of a company limited by shares as the capital of the company with which it is registered. It is the maximum amount which the company is authorised to raise by issuing shares. This is the capital, on which It had paid the prescribed fee at the time of registration, hence also called Registered Capital. The amount of nominal capital is fixed on the basis of the projections of fund requirements of the company for Its business activities.

Issued Capital: It Is part of the authorised or nominal capital which the company Issues for the time being for public subscription and allotment. This Is computed at the face or nominal value.

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Subscribed Capital: It is that portion of the issued capital at face value which has been subscribed for or taken up by the subscribers of shares in the company. It is clear that the entire issued capital mayor may not be subscribed.

Called up Capital: It Is that portion of the subscribed capital which has been called up or demanded on the shares by the company e.g., where Rs. 5.00 has been called up on each of 40,000 shares of a nominal value of Rs. 10.00, the called up capital is Rs. 2,00,000.00.

Uncalled Capital: It is the total amount not yet called up or demanded by the company on the shares subscribed, which the shareholders are liable to pay as 'and when called, e.g., in the above case, uncalled capital is Rs. 2,00,000.00.

Paid-up-Capital: It Is the part of the total called up amount which is actually paid by the shareholder e.g., as above, if only Rs. 1,90,000.00 is actually paid by the shareholders the paid-up capital is taken as Rs. 1,90,000.00 only.

Unpaid Capital: It is the total of the called-up capital remaining unpaid i.e., Rs. 10,000.00 from above or the difference between called up and paid-up capital.

Reserve Capital: It is that part of the uncalled capital of a company which the limited company has decided by special resolution in terms of Section 99 of the Companies Act, 1956, not to call except in the event and for the purpose of the company being wound up and thereafter that portion of the share capital shall not be capable of being called up except in that event and for those purposes, e.g.. of the Rs. 5.00 per share uncalled capital Rs. 2.00 per share may be resolved to be kept as reserve capital. (Reserve capital should not be confused with capital reserve, which is created out of profits).

Capital Reserve: Capital Reserve is created out of profits or earnings which are not ordinarily distributable among shareholders of the company as opposed to revenue reserve which is free for distribution to members. Statutory Capital Reserves are the "securities premium account" and "the capital redemption reserve account". Non-Statutory Capital Reserve may arise in many ways, e.g., where a fund Is set aside out of the profits to replace assets which are wearing out, such as heavy machinery, or where reserve is created out of profits made on sale or revaluation of assets. Reserve created out of revaluation of assets Is also known as capital reserve.

Capital Assets: These assets constitute fixed capital and circulating or working capital. Fixed capital assets comprises of assets acquired for retention and use, e.g., building and machinery. Circulating or working capital assets consists of assets manufactured or acquired for sale at a profit.

Fixed and Circulating Capital: Fixed capital comprises of that part of capital which is invested in fixed assets acquired for retention and use, e.g., land, buildings, plant and machinery, whereas circulating or floating capital is that part of capital which is invested in acquiring current assets like stock of goods, bills of exchange, cash, etc. It is required for use in the day-to-day business operations and keeps on circulating.

Working Capital: Working Capital is represented by the excess of current assets over current liabilities.

Loan or Debenture Capital: It is the money raised by a company by the issue of debentures and is not capital in the true sense of the term, but a borrowing. It is the money borrowed and so is a debt due by the company. The debenture holders are, therefore, the creditors of the company and not shareholders.

Preference and Equity Share Capital: The share capital of a public company may consist of only two kinds of shares – Preference Shares and Equity Shares.

A preference share has a preference in regard to payment of fixed amount of dividend or fixed rate of dividend and preferential right of the repayment of capital in the event of winding up of company. With regard to payment of dividend, preference shares may be cumulative or non-cumulative. Equity shareholders are

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entitled to the residue of the divisible profits. if any, after the preference shareholders have received their fixed rate of dividend (Section 85)

Two Types of Share Capital [S 86]

Preference Share Capital

Equity Share Capital

With Voting Rights

With differential rights as to voting, dividend or otherwise, as may be notified

equity share capital may be with similar rights or with different rights as to dividend, voting or otherwise In accordance with the Companies (Issue of Share Capital with Differential Voting Rights) Rules; 2001 which have come into force on 9th March, 2001

Kinds of Preference Shares

Cumulative preference shares. The divided payable on these shares goes on accumulating till it is fully paid off. All preference shares are assumed to be cumulative, unless the contrary is stated in the Articles of the company. A cumulative preference share has a right to claim the fixed dividend to pay dividend only if it has sufficient profits available for distribution.

Non-cumulative preference shares. In the case of non-cumulative preference shares, the dividend shall be payable only out of the profits of the current year. If it is not paid in a particular year, it is lost and the arrears of dividend cannot be carried forward. In other words, the unpaid dividends cannot be accumulative.

Participating preference shares. Participating preference shares are not only entitled to a fixed rate of dividend, but also to a share in the surplus profits which remain after the claims of the equity shareholders have been met. If the articles are silent, all preference shares are deemed to be non-participating.

Non-participating preference shares. Non-participating preference shares are entitled to only a fixed rate of dividend and do not share in the surplus which belongs to the equity shareholders.

Convertible preference shares. The holders of these shares have a right to convert them into equity shares within certain, usually pre-defined period.

Non-convertible preference shares. The preference shares without a right of conversion into equity shares are known as non-convertible preference shares.

Redeemable preference shares. A company limited by shares, if authorised by its articles, may issue preference shares which are to be redeemed or repaid after a certain fixed period.

Irredeemable preference shares. Irredeemable preference shares constitute permanent capital of the company. These shares cannot be refunded before the winding up of the company.

Reduction of Capital

A company limited by shares or a guarantee company with a share capital is permitted to reduce its share capital by Section 100 in any of the following ways :

Extinguish or reduce. By extinguishing or reducing the liability on any of its shares in respect of share capital not paid up.

Cancel. By canceling any paid-up capital which is lost or unrepresented by available assets.

Pay off. By paying off any paid-up capital which is in excess of the needs of the company.

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By court. By any other method approved by the court.

Procedure. The following procedure is to be followed for effecting a reduction in share capital :

Company limited by shares. A company limited by shares or a guarantee company with a share capital is permitted to reduce its share capital. [Sec. 100(1)].

Authorised by articles. Reduction in share capital can be effected when it is authorised by articles of association of the company. If the articles do not give this power to the company, they may be altered by special resolution to enable the company to reduce its share capital. It is of no avail, where this authority is contained in the memorandum only.

To pass a special resolution. The company must pass a special resolution effecting the reduction in share capital. [Sec. 100(1)].

An application to the court. After having passed the special resolution for reducing the share capital, the company must apply to the court for an order confirming the reduction in share capital. The court must look after the interest of shareholders and creditors. [Sec. 101(1)].

Interest of creditors. The special resolution of the company reducing the share capital must in all cases be confirmed by the court and the court is empowered to enquire into the objection that may be raised by the creditors in that behalf, unless the court directs not to make such an enquiry. If the reduction of share capital involves : (i) diminution of liability in respect of unpaid share capital; or (ii) payment to the shareholder of any paid-up share capital; and (iii) in any other case if the court so directs, every creditor of the company is entitled to object to the reduction. Only such creditors are entitled to object the reduction to whom the company owes a debt which would have been provable in the winding up of the company.

The court should settle the list of creditors entitled to object and issue public notice fixing a day or days within which creditors who are entered on such list are to claim to be so entered or to be excluded from the right of objecting to the reduction.

Interest of shareholders. Before sanctioning the scheme of reduction of share capital, the court must also look after the interest of shareholders. Court should see that the scheme for reduction of capital is fair and equitable to all kinds of shareholders.

Order confirming the reduction. The court may make an order confirming the reduction of share capital on such terms and conditions as it thinks fit, if it is satisfied that every creditor entitled to object has consented to the reduction or that his debt has been discharged or secured by the company.

To add “and reduced” word to the name of company. The court may also order the company to add the words and reduced to the name of the company for such period as may be specified in the order, and these words will be deemed to be part of the Company's name for such specified time [Sec. 102].

Production of Court order before the registrar. The order of the court confirming the reduction must be produced before the Registrar and a certified copy thereof, along with minutes should be filed with him for registration. On such registration by the Registration, the resolution for reduction of share capital as confirmed by the court takes place. Notice of the registration shall be published in such a manner as the court may direct.

The Registrar shall certify registration of the order and the minutes in hand. The Certificate of Registrar to this effect is a conclusive evidence that all the requirements of the Act regarding the reduction of share capital have been complied with and that the share capital is such as is stated in the minutes. (Sec. 103).

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Once the certificate has been issued by the Registrar, the reduction in share capital cannot be upset towards on the ground that the company had not by its articles of association the power to reduce its share capital or the special resolution for reduction was invalid.

Liability of members on reduction. Section 104 of the Act provides for liability of members regarding the reduced shares. A member of the company shall be liable to make the payment of the amount deemed to have been unpaid on his shares, which would be equal to the amount deemed to have been paid up on his shares, and reduced value of shares as fixed by minutes of reduction. But in one case the members may be made liable to pay the original nominal value of shares. This will happen when a creditor entitled to object to the reduction has been left out of the list of such creditors by reason of his ignorance of the proceedings and the company is unable to pay the amount of his debt. In these circumstances the court may order the members to pay upto the original nominal value of the shares held by them.

Reason for reduction in share capital.

The share capital of the company may be more than enough for its present and future needs, and so, it may return the surplus capital to the shareholders.

The paid-up capital of the company is sufficient and it may refrain from calling up the unpaid portion of share money.

Some of the capital may in fact have been lost or diminished e.g., share of Rs. 100 may represent assets worth Rs. 50. The company may wish to write off the lost capital.

Reduction under the first two above will reduce the funds available to the creditors.

Reduction under the third above affects the rights of different classes of shareholders as well as the interest of the members of the public who may be induced to take shares in the company.

Company not to buy its own shares directly or indirectly [S 77]

Buy – back of shares under S 77A is an exception

Board may buy back 10% of the Equity Capital in a year

Upto 25% of the Equity Capital can be bought back [in a year] with the authority of “Special” Resolution of the Members

Shares so bought back shall be extinguished

Transfer of Shares & Debentures

The right of transfer of shares is given to shareholders under section 82 of the Companies Act, 1956 which states that the shares shall be movable property transferable in the manner as laid down in the Articles of Association. The Articles of Association may impose restrictions on the transfer but the right of transfer cannot be snatched away.

Where the articles of the company contained a clause that on the bankruptcy of a member, his shares would be sold to other members and at a price fixed by the directors, this was held to be valid. (Borland Trustees vs. Steel Brothers and Co. Ltd. (1901) 1 Ch. 279).

In case of a private company, the right to transfer shares is closely restricted. Section 3(1)(iii) of the Act provides that the Articles of Association of a private company shall restrict the right to transfer its shares, if any.

Procedure for the Transfer of Shares

Application for transfer. An application for the registration of transfer of shares may be presented either by the transferor or the transferee [Sec. 110(1)].

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Transfer of partly-paid up shares. If the application for the registration of a transfer of shares is made by the transferor in respect of partly paid-up shares, the company must give the notice of it to the transferee. If the transferee does not make any objection within two weeks from the date of the receipt of the notice, the company may enter the name of transferee in the Register of Members [Sec. 110(2)].

To file a stamped instrument of transfer with company. Instrument of transfer shall be duly stamped and signed by both the transferor and the transferee. Otherwise transfer of shares will not be registered. It must contain particular regarding the name, address and occupation of the transferee. [Sec. 108(1)].

Transfer should be in the prescribed form. Every instrument of transfer must be in the prescribed form and presented before being signed by the transferor, to the prescribed authority who shall stamp thereon the date of presentation. It should be delivered to the company. (i) In case of listed shares before the closing of the register of members according to the law for the first time after the date of the presentation of the prescribed form to the prescribed authority or within two months from the date of such presentation, whichever is later. (ii) In any other case within two months from the date of presentation of the prescribed authority. [Sec. 108(A)].

Procedure where instrument of transfer is lost. Where it is proved to the satisfaction of the Directors that the instrument of transfer has been lost, the company may, on an application in writing made to it by the transferee and bearing the stamp required for instrument of transfer, register, transfer on such terms as to indemnity as the Board of Directors may think fit. [Sec. 108(1)].

Proposed transfer to be placed before the meeting of Board. The request for the transfer of shares has to be placed in the meeting of the Board of Directors. The directors of the company exercise their powers subject to the provisions of the Articles of Association of the Company. Following are the two situations in this connection.

The Articles of Association may not contain any clause empowering the directors to refuse the transfer of share. In this situation, the shares will be assumed to be freely transferable and the directors of the company will be presumed to have no power to refuse the registration of transfer.

The Articles of Association of the Company may contain clause empowering directors to refuse the transfer of shares.

Notice in case of refusal to register transfer. If the company refuses to register the transfer of shares, its notice must be given to transferor and transferee within two months from the date on which the instrument of transfer was delivered to its. If the notice is not given within this period the company and every officer of the company who is in default shall be punishable with a fine upto Rs. fifty per day till the default continues [Sec. 111(1 and 2)].

Remedies in case of refusal. When the company refuses to register the transfer, the aggrieved person has got the following remedies:

He can appeal to the Company Law Board [Sec. 111(2)].

He can also bring a suit to get his name registered by virtue of transfer under the General Law.

Appeal to the Company Law Board

According to Sec. 111, in case of a public company or its subsidiary private company, a special right of appeal to the Company Law Board is available, to the transferor or the transferee, against the arbitrary action of the directors in refusing to register a proposed transfer of shares. The appeal must be lodged within two months of either the notice of refusal or of the failure to register the transfer within the specified period of 2 months, as the case may be, together with a fee as prescribed by the Company Law Board not exceeding Rs. 500.00

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The Company Law Board, after receiving the petition, shall issue notice to the company, the transferor and the transferee in order to provide them an opportunity to make their representation. If the refusal dues not seem to be justified, the Company Law Board will issue an order to the company to register the transfer, which must be given effect to, within 10 days of the receipt of the order. If default is made, fines and penalties are to be imposed on the company and on every defaulting officer upto Rupees one thousand with a further fine exceeding to Rupees one hundred from every day during which the default continues.

By virtue of this special right of appeal, free transferability of shares of public companies is almost secured by the Companies Act. It is not, however, incumbent upon the aggrieved party to prefer the appeal to the Company Law Board and it may very well choose to come directly to the court (Nazamunnessa Begum vs. Vidya Sagar Cotton Mills Ltd.)

Position of tranferee, if the appeal fails. The ordinary result of a refusal to register a transfer of shares is that the transferor will be the trustee for the transferee, in respect of the rights relating to the shares or if the transferee so chooses he may sue the transferor for return of the consideration for the transfer under Sec. 65 of the Indian Contract Act, 1872.

Where a transfer of shares is refused the transferor continues to be the legal owner thereof so far as the company is concerned.

Free Transferability and Registration of Transfers of Listed Securities of Companies

Borrowing Powers

A private company can exercise its borrowing powers immediately after its incorporation. But a public company can exercise its borrowing powers only after the receipt of ‘certificate of commencement of business’. [Sec. 149(1)].

In the case of public companies, simultaneous issue of shares and debentures just after the incorporation is allowed. [Sec. 149(5)].

The power to borrow money is generally exercised by the directors of the company but the memorandum or articles of association or the statute provide for certain restrictions on their powers to borrow

Section 293 of the Act also limits the directors powers to borrow to the aggregate of ‘the paid-up capital of the company and its free reserves.’ It reads : “The Board of Directors of a public company or of a private company which is a subsidiary of a public company shall not, except with the consent of such public company or subsidiary in general meeting borrow the moneys where the moneys to be borrowed, together with the moneys already borrowed by the company (apart from temporary loans obtained from the company’s bankers in the ordinary course of business) will exceed the aggregate of paid up capital of the company and its free reserves, i.e., to say reserves not set apart for any specific purpose.”

If a company borrows money beyond the powers given to it in this respect by the Companies Act, the Memorandum of Association and the Articles of Association, is said to resort to ultra vires borrowing. In the eyes of law, the borrowing by the company or the directors in excess of the powers given are void ab initio.

Ultra vires borrowings are not recognised as a debt against the company and the lender of money can neither sue the company for the recovery of the debt, nor can he enforce any security given for such loan.

Ultra-vires Borrowings by a company by—

borrowing which is ultra vires the company, or

borrowing which is ultra vires the directors i.e., beyond the authority of directors.

Ultra Vires Borrowings

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Where a company borrows without or in excess of power conferred on it by the memorandum of association, the borrowings is ultra vires the company.

In the case of Introduction Ltd. vs. National Provincial Bank Ltd., Ch. 199, a company was formed with the main object of providing information and facilities to overseas visitors to the Festival of Britain in 1951. The Company later engaged in pig-breeding as its sole activity. For this purpose it borrowed money from a bank which took debentures as security. The bank was given a copy of the Memorandum of Association and it knew that the only business being carried on by the company was pig-breeding. It was held that the loan was for a purpose known to be ultra vires and, therefore the debentures were void.

Lender’s rights when borrowing is ultra vires. Where a borrowing is ultra vires a company, the lender has no legal or equitable debt against the company. As such he can have no rights against the company. As such he can have no rights against the company for the recovery of loan. (Re. National Permanent Building Society (1869), Ch. 809). An ultra vires borrowing creates no debts, either legal or equitable, on the part of the company (Re. Madras Native Permanent Fund Ltd. (1931). 1 Comp. Cas. 256) the lender has, however, in equity the following rights or remedies :

Identification and tracing [Restitution]. If the money lent to the company can be traced in the hands of the company in original form or even if it has been employed for the purchase of property which is still capable of identification, the ultra vires lender can obtain a tracing order and may claim that asset or money.

In the case of Sinclair vs. Bhougham, (1914) A.C. 389 Lord Parkar made the following observation in this regard :

“An ultra vires borrowing by persons affecting to act on behalf of a company or other statutory association does not give rise to any indebtness either at law or in equity on the part of such company or association. It appears to be also well settled that the lender in an ultra vires loan transaction has a right to what is known as a tracing order. A company or other statutory association cannot be itself or through an agent be a party to an ultra vires act. If its directors or agents affecting to act on its behalf borrow money which it has no power to borrow, the money borrowed in their hands is the property of the lender. At law, therefore, the lender can recover the money, so long as he can identify it, and even if it has been employed in purchasing property, there may be cases in which by ratifying the action of those who have so employed it, he may recover the property purchased.”

Injunction. The lender can restrain the company from spending the money by an injunction. But the lender must obtain the injunction against the company before it spends that money.

Subrogation. If the money borrowed ultra vires is used to pay off the debts of the company, the lender can subrogate to the rights of those creditors, i.e., he will step into the shoes of old creditors for the purpose of recovering his money.

In the case of Neath Building Society vs. Luce, (1889) 43 Ch. D. 158, a building society borrowed money to pay off principal and interest due on a mortgage. The borrowing was ultra vires. It was held that the lenders were subrogated to the rights of the creditors who were paid off.

However, if the original creditors had any priority, will not be able to claim any priority.

In the case of Re Wrexham, Mold & Connah’s Quay Rly. Co. Ltd., (1889) 1 Ch. 440, a company had exhausted its borrowing powers by issuing there different series of debentures, i.e., debentures A, debentures B, and debentures C, the first having priority over the second and the second over the third. A bank advanced money to the company to pay off the interest on the A debentures. The borrowing by the company was ultra vires. A receiver was appointed who had

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funds in hand sufficient to pay interest to the A debenture-holders but not enough to pay the B and C debenture-holders in full.

The bank claimed that—

before any interest was paid to the debenture-holders it was entitled to be repaid its advance, and

alternatively it was entitled to be repaid the sum lent by it to pay interest to the A debenture-holders before any payment was made to the B and C debenture-holders.

It was held that as the advance was not a void one, the bank became a legal creditor of the company to the extent to which the bank’s money was used to pay off the legal debt (i.e. the interest on the A debentures), but it was not entitled to any priority.

Suit against the directors. If the directors have exceeded their powers of borrowing the lender may sue them personally for breach of warranty of authority. (Weeks vs. Propert)

Borrowing Intra Vires the Company but Ultra Vires the Directors

Any borrowing which is intra vires the company but beyond the authority of the directors, is ultra vires the directors. If such borrowing is ratified, the company becomes liable to repay the money. Where such borrowing is not ratified by the company, the ‘doctrine of indoor managements’1 shall protect a lender provided he can establish that he advanced the money in good faith. The company may in turn proceed against the directors and claim indemnity.

Registration of Charges

Where in a transaction of value both parties evidence (show clearly) an intention that some property of the debtor, existing or future, shall be made available as a security for the payment of a debt, and the creditor shall have right to have it made available, there is a charge, though the security can be made available only through the court.

Charge may be of two types

Fixed charge;

Floating charge.

Fixed charge. A charge is said to be fixed charge when it covers ascertained and specific property such as land, buildings or heavy machinery. Where any particular property of the company is specifically charged in favour of debenture-holders, the company cannot dispose of the property, free of charge, without the consent of holders of the charge.

Even if it is disposed of the holders of the charge will have the first claim as against the buyer of the property.

The essence of fixed charge is that though the possession of the specified asset is with the company but the legal title belongs to the holders of the charge.

Floating charge. The floating charge is not attached to definite/specific property but covers property of a fluctuating type, i.e., stock-in-trade.

The characteristics of a floating charge are

It is a charge on a class of assets, present and future.

The class of assets charged must be one which in the ordinary course of business of the company would be changing from time to time.

Until some steps are taken to enforce the charge, the company may continue to deal with assets charged in the ordinary course of business.

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To create a floating charge, no particular form of words is necessary. Any words which show an intention to allow the company to continue to deal with the assets by sale, lease, mortgage etc. in the course of its business will create a floating charge. The advantage of such charge is that the company may continue to deal with the property charged.

A floating charge is an equitable charge on the assets for the time being of a going concern.

The nature of the floating charge has been ably summed up by Bukley L.J. in these words, “A floating security is not a future security. It is a present security, which presently affects all the assets which are included in it. But it is not a specific security. The holder of a floating security cannot affirm that any particular asset is specifically mortgaged to him.”

A floating charge does not necessarily cover the whole of the property of the company but may be confined to a specific portion of the assets. It is in the nature of such a charge that the company shall continue as a going concern and the debenture-holder has no power to interfere till his charge has become crystallised. Neither the ownership nor the possession is passed to the lender under this type of charge.

Crystallisation of a Floating Charge or When Does a Floating Charge – Becomes a Fixed Charge

When the company goes into liquidation; or

When the company ceases to carry on business; or

When a receiver is appointed; or

When default is made in the payment of principal money or interest and the debenture-holder brings an action to enforce his security.

A floating charge may also crystallise on the happening of an event specified in the charging deed.

Lord Macnaughten in Government Stock Co. vs. Manila Railway observed : “A floating security is an equitable charge on the assets for the time being of a going concern. It attached to the subject charged in the varying conditions in which it happens to be from time to time. It is the essence of such a charge that it remains dormant until the undertaking charged ceases to be a going concern or until the person in whose favour the charge is created intervenes. This right to intervene may, of course, be suspended by agreements. But if there is no agreement of suspension, he may exercise his right whenever he pleases after default.”

Registration of Charges

As per Sec. 124 of the Act the expression “charge” also includes a “mortgage.”

As per Sec. 125, following charges (including mortgages) are required to be registered with the Registrar of Companies within thirty days of their creation in order to be valid against the creditor and the liquidator. Seven days more may be allowed by the Registrar if there is sufficient cause for delay.

a charge for the purpose of securing any issue of debentures;

a charge on the uncalled share capital of the company;

a charge on any immovable property, or any interest therein;

a charge on any book debts of the company;

a charge, not being a pledge, on any movable property of the company;

a floating charge on the undertaking or any property including stock-in-trade;

a charge on calls made but not paid;

a charge on a ship or any share in a ship; and of 38

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a charge on goodwill or a patent, or on a trade mark, or on a copyright or a licence thereunder.

It is the duty of the company to send the above particulars to the Registrar, but registration may also be affected on the application of the creditor who may recover the registration fee from the company.

Effect of non-registration. Failure to register any registrable charge within the time allowed has the following consequences

The charge would be void against the liquidator and any creditor of the company. [Sec. 125(1)].

The debt in respect of which the charge was given remains valid as an unsecured debt. [Sec. 125(2)].

The money which the charge purports to secure becomes immediately payable. [Sec. 125(3)].

A penalty upto Rupees five thousand for every day during which the default continues may be imposed on the company and its every officer who is knowingly in default. [Sec. 142(1)].

Date of Notice Regarding Charges (Sec. 126)

Where any charge on any property of a company to be registered under Sec. 125 of the Act has been so registered, any person acquiring such property or any part thereof shall be deemed to have notice of the charge as from the date of such registration. Such a charge is binding on the company even on winding up.

Property Acquired Subject to Charge (Sec. 127)

Where the company acquires any property which is subject to a charge of any such kind which, if created by the company after the acquisition, would have required registration, the company must file the prescribed particulars of the charge together with a copy of the instrument creating the charge with the Registrar of Companies for registration within thirty days after the acquisition is completed.

In case of default, the company and every officer of the company who is in default, shall be punishable with fine which may extend to Rupees five thousand.

Register of Charges to be kept by the Registrar (Sec. 130)

The Registrar shall keep a register, in respect of each company, showing all the charges filed by the company for registration with him. He shall enter in the Register :

the date of creation of each charge or mortgage.

the amount secured by the charge.

short particulars of the property charged, and

the names of the persons entitled to the charge. If the charge is one to which the ‘holders of a series of debentures’ are entitled, then the particulars (as set out in Sections 128 and 129) to be entered in the Register are —

the total amount secured by the whole series;

the date of covering deed, if any, by which the security is created or defined;

the dates of the resolutions authorising the issue of series;

the names of trustees, if any, for the debenture-holder;

a general description of the property charged; and

the amount or rate per cent of the commission or discount, if any, paid to any person subscribing or procuring subscription for any debentures of the company.

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Such a register shall be open to inspection to the public on payment of a fee of fifty rupees for each inspection.

Index to register of Charges (Sec. 131)

The Registrar of Companies is also required to keep a chronological index, in the prescribed form, and with the prescribed particulars of the charges registered with him.

Certificate of Registration of Charge

The Registrar gives a certificate of the registration of any charge, and this certificate is conclusive evidence that the requirements of law as to the registration have been complied with (Sec. 132).

The company must cause a copy of this certificate to be endorsed on every debenture or debenture stock certificate issued by it and the payment of which is secured by the charge so registered.

A person who knowingly permits the delivery of any debenture without the required certificate endorsed upon it shall be punishable with fine which may extend to Rs. one thousand. [Sec. 133].

Appointment of Receiver

If any person gets a receiver appointed, he must give notice of the fact to the Registrar within thirty days of such appointment, and the Registrar of Companies shall enter the fact in the register of charges. Similarly, the receiver so appointed is required to give notice to the Registrar upon his ceasing to act as such and the Registrar shall enter the notice in the register of charges. [Sec. 137].

The Memorandum of Satisfaction

The fact that any registered charge is satisfied in full must be notified by the company to the Registrar within thirty days of such payment, who shall, after giving a proper show cause notice to the holder of the charge, enter a memorandum of satisfaction in the register of charges. [Sec. 138].

The Registrar of Companies may also record memorandum of satisfaction even if no intimation has been received by him from the company, on getting evidence to his satisfaction that any registered charge has been satisfied in whole or in part. [Sec. 139].

When the Registrar of Companies enters a memorandum of satisfaction in whole or in part in accordance with the above provisions, he shall furnish the company with a copy of the memorandum. [Sec. 140].

Rectification by Company Law Board of Register of Charges [Sec. 141]

The Company Law Board (CLB) is empowered to extend time for the registration of the charge or to order that the omission or mis-statement in the register of charges be rectified, if it is satisfied that the default was accidental or due to inadvertence or to some other sufficient cause or is not of a nature to prejudice the position of creditors or shareholders of the company, or that on other grounds it is just and equitable to grant relief.

The company or any interested person may apply to the Company Law Board for such an order.

It may be noted that where the Company Law Board extends the time for the registration of a charge, the order shall not prejudice any rights acquired in respect of the property concerned before the charge is actually registered.

Company’s Register of Charges [Sec. 143]

Every company shall keep at its registered office a register of charges and enter therein all charges specifically affecting property of the company and floating charges on the undertaking or any other property of the company, giving in each case :

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short description of the property charged :

the amount of the charge; and

except in the case of securities payable to the bearer, the names of the persons entitled to the charge.

Right to inspect copies of instrument creating charges and company’s register of charges

The copies of instruments creating charges and register of charges shall remain open during business hours (subject to reasonable restriction as the company in general meeting may impose, so that not less than 2 hours in each day are allowed for inspection) to the inspection of any creditor or member of the company without fee at the registered office of the company. [Sec. 144(1)].

The register of charges shall also be open, during business hours but subject to reasonable restrictions, to the inspection of any other person on payment of prescribed fee for each inspection at the registered office of the company. [Sec. 144(2)].

If the inspection of the said copies or register is refused, the company and every defaulting officer, shall be punishable with fine upto fifty rupees and with a further fine upto twenty rupees for every day during which the refusal continues. [Sec. 144(3)].

The Company Law Board may also by order compel immediate inspection of the said copies of register. [Sec. 144(4)].

Board of Directors

“Director includes any person occupying the position of directors by whatever name called.” [Sec. 2(13)]

This definition given by the Companies Act does not give the clear meaning of the word director, but it means that a person who performs the duties of a director will be deemed to be a direct or irrespective of the name by which he is called. Similar view was expressed in Re, Forest Dean Coal Mining Co. ‘It does not matter what you call them, as long as you understand what their true position is, what is that they are commercial men, managing a trading concern for the benefit of themselves and all other shareholders in it.”

“A director is the officer of the company.” [Sec. 2(30)]

Any person, in accordance with whose directions or instructions, the Board of Director of the company is accustomed to act, shall be deemed to be director of the company. [Sec. 303, Explanation (1)]

Only Individuals can be appointed [S 253]

Not less than 3 directors [Private Company 2] [S 252]

Not more than 12 Directors [S 258]

Any increase in AoA beyond 12 shall be with CG permission [S 259]

Private Company / Government Company not subject to this restriction

Legal Position/Status of Directors

The Act does not define the position/status of directors, and it is difficult to define the exact legal position of the directors of a company.

Although, the directors have been referred as the trustees, or the managing partner of the company, but in real sense they are none of them. Directors may be considered as the agent, trustees or managing partner for a particular moment and for the particular purpose.

In Imperial Hydropathic Co. vs. Hampson case Bowen, L.J. observed, “Directors are described sometimes as agents, sometimes as trustees and sometimes as

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managing partner. But each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose be considered.”

Position of Directors as Trustees

Legally a director is not the trustee. Legally speaking a director is not the trustee of the company. In the case Smith vs. Anderson, James L.J. observed, “A trustee is a man who is the owner of property and deals with it as principal, as owner and as master, subject only to an equitable obligation to account to some persons to whom he stands in relation of a trustee. The office of director is that on a paid servant of the company. A director never enters into a contract for himself, but he entres into a contract for his principal i.e., for the company of which he is a director or for whom he is acting.”

From this point of view, directors are not the trustees of the company, because they are not the legal owners of the properties of the company.

Directors as trustees of the Company’s property and money. Although the directors are not, properly speaking, the trustees, yet they are trustees of the company’s money and property and they are bound to deal with capital under their control as a trust. They must act in good faith and exercise their powers in the interest and benefit of the company.

In Re : Lands Allotment Co., Lindley L.J. observed, “Although directors are not, properly speaking, trustees, yet they have always been considered and treated as trustees of money which comes to their hands or which is actually under their control, and ever since joint stock companies were invented, directors have been held liable to make good moneys which they have misapplied upon the same footing as if they were trustees.”

Thus when directors pay dividend out of capital even though the company has not earned any profits, they are liable for breach of trust. [Re: Sharpe’s Case (1892) 1, Ch. 154]

Directors as trustees to the powers entrusted to them. The directors are the trustees in respect of powers entrusted to them. They must exercise these powers bonafide and for the benefit of the company as a whole. Examples of such powers are as follows :

the power of employing the funds of the company;

the power to declare dividend in the general meeting;

the power to make call;

the power of forfeiting shares;

the power of receiving payment of call in advance;

the power of approving the transfer of shares;

the power of accepting the surrender of shares;

the power of issuing the unissued shares of the company and making allotments thereof.

Directors not as trustees to the shareholders. It should be noted that directors occupy a fiduciary relationship only in relation to the company and not in relation to an individual shareholder. They are not trustees for any particular shareholder.

In case of Percival vs. Wright. “The Directors purchased shares from a shareholder when negotiations were being held by them for sale of the company at a very high price. They did not disclose this fact to the shareholder. It was held that the shareholder could not repudiate the contract on that ground.”

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Directors not as trustees to the outsiders. The directors are not as trustees to other persons entering into any contract with the company. [Re. City Equitable Fire Insurance C., (1925) Co. 407]

The position of directors as trustee can be briefly stated as under :

They are not trustees in the legal sense of the term.

They occupy a fiduciary position in relation to the company and they are considered trustees with respect to the company’s property and money.

They are also trustees as regards powers entrusted to them. They must exercise these powers bonafide in the interest of the company and they are accountable for secret profits made by them, if any.

They are not trustees of individual shareholders.

Position of Directors as Agents

The company being an artificial person cannot manage its affairs itself but the management of the company is entrusted to some human agency known as directors. They are the elected representatives of the shareholders. They run the business on behalf of the shareholders and may be termed as the agent of the company.

In the case Ferguson vs. Wilson, Cairns L.J. stated the position of the directors as, “They are merely agents of the company. The company itself cannot act in its own persons for it has no person, it can act ‘only through directors’ and the case is, as regards those directors, merely the ordinary case of principal and agent, for whenever an agent is liable, those directors would be liable. Where the liability would attach to the principal and the principle only, the liability is the liability of the company.”

In Great Eastern Railway vs. Turner, it was held that the directors are agents in the transaction which they enter into on behalf of the company.

To bind the company, the directors must act in the name of the company and within the scope of their authority. If the directors enter into a contract which is beyond their powers but within the powers of the company, the company, like any other principal, may ratify it (Grant vs. United Kingdom Switchback Rail Co.)

Where the directors enter into a contract which is ultra vires the company, the company cannot ratify it and neither the company nor the directors are liable on it. However the directors may be held liable for breach of implied warranty of authority. (Weeks vs. Property).

It is however not correct to say that directors are the agents of the company because agents are not elected but appointed and second thing that agents have no independent power while the directors have independent powers on certain matters.

Position of Directors as Officers

Under Sec. 2(30) of the Companies Act, the directors are the officers of the company. As officers, they may be held liable if the provisions of the Companies Act have not been fully complied with by them.

Position of Directors as Employees

The directors may be considered as the employees of the company also, because they work under a special contract of service with the company and are paid remuneration accordingly.

APPOINTMENT OF DIRECTORS

Appointment of Directors by Signatures to the Memorandum (Sec. 254 and Clause 64 of Table A)

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The Articles of a company usually name the first directors by their respective names or prescribe the method of appointing them.

If the directors are not named in the Articles of the Company, the number of directors and the name of the directors shall be determined in writing by the subscribers of the Memorandum or a majority of them. (Clause 64 of Table A)

If the first directors are not appointed in the above manner, the subscribers of the Memorandum who are individuals shall be deemed to be the directors of the company. They shall hold office until directors are duly appointed in the first annual general meeting. [Sec. 254]

Subsequent directors shall be appointed according to the provisions of Sec. 255 of the Act.

Appointment of Directors by Company in the General Meeting (Secs. 255 to 257, 263 and 264)

Section 255 provides that subsequent directors shall be appointed by the company in general meeting. In the case of a public company or a private company which is a subsidiary of a public company, unless the Articles provide for the retirement of all directors at an annual general meeting, at last two-thirds of the total number of directors shall be liable to retire by rotation and shall be appointed by the company in general meeting. This means one-third of the total number of directors can be permanent directors. The remaining directors in the case of any such company and all the directors in the case of private company not being a subsidiary of the public company may be appointed as provided in the Articles. In the absence of any regulation in the Articles of the company, these directors shall be appointed by the company in general meeting.

The appointment or re-appointment of directors by a company in the general meeting is governed by the following provisions:

First appointment.

At the first annual general meeting of a public company or a private company which is subsidiary of a public company, held after the general meeting at which the first directors are appointed and at every subsequent annual general meeting, one-third (or the number nearest to one-third) of such of the directors for the time being as are liable to retire by rotation shall retire from office. [Sec. 256(1)].

The provisions are aimed at eradicating the mischief caused by self-perpetuating management. [Oriental Metal Pressing Works (Pvt) Ltd., vs B.K. Thakoor (1961) 31 Comp. 143 (S.C)].

The directors to retire by rotation at every annual general meeting of the company shall be those who have been longest in the office since their last appointment. But as between persons who became directors on the same day, those who are to retire shall be determined by mutual agreement or, in default, by lot. [Sec. 256(2)].

In B.R. Kundra vs. Motion Pictures Assn. (1976) 46 Comp. Cas, 339 (Det.), it was held that the directors cannot prolong their tenure by not holding the annual general meeting in time. They would automatically retire on the expiry of the maximum permissible period within which a meeting ought to have been held.

Reappointment.

At the annual general meeting at which a director retires by rotation the company may fill up the vacancy by appointing the retiring director or some other person there to. [Sec. 256(3)].

If the place of the retiring director is not filled up, and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the same day in the next week at the same time and place. If at the adjourned meeting also, the place of retiring director is not filled up, nor expressly resolved not to fill the vacancy, the

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retiring director shall be deemed to have been reappointed at the adjourned meeting except in the following cases :

When at any previous meeting, a resolution for his reappointment was put before the meeting, but was lost; or

When the retiring director has declined reappointment in writing;

When he has been disqualified; or

When the reappointment will not be valid unless it is made by passing a resolution, whether special or ordinary; or

When the meeting has expressly resolved not to fill up the vacancy. [Sec. 256(4)]

Appointment of a new director.

If a new director is to be appointed, a notice in writing shall be given to the company at least 14 days before the meeting. The notice shall be given by the person seeking appointment as director or by some member intending to propose him as director along with a deposit of Rs. 5,000. The deposit shall be refunded to the depositor if such person succeeds in getting elected as a director. [Sec. 257(1)]

The company shall inform the members at least seven days before the meeting about the candidature. It is no necessary for the company to serve individual notices upon the members if the company advertises such candidature not less than seven days before the meeting, in at least two newspapers. One of the newspapers must be in English language and the other in the regional language of the place where the registered office of the company is located.

This provision shall not apply to a private company unless it is a subsidiary of a public company. [Sec. 257(2)]

As per Sec. 264 of the Act, person who is being proposed as a candidate for the office of a director must sign and file with the company his consent in writing to act as a director, if appointed. This requirement does not apply to a director retiring by rotation.

Notice to the Registrar. The director must file his written consent to act as a director with the Registrar within 30 days of his appointment.

One resolution for two or more directors.

Appointment of directors of a public company must be voted individually by separate ordinary resolution, unless the company has in general meeting unanimously so resolved. In other words, each director shall be appointed by a separate resolution unless it is unanimously decided at the general meeting that more than one director may be appointed by a single resolution. Any resolution moved in contravention of this provision shall be void even if no objection was raised at the time of its being so moved. [Sec. 263].

Appointment of Directors by Board of Directors (Secs. 260, 262, and 313)

Additional Directors. Section 260 of the Companies Act empowers the Board to appoint additional directors and Articles of every company also confer his power to the Board. But the additional director shall hold his office upto the next annual general meeting. The number of directors including the additional director should in no case exceed the maximum number of directors as determined by the articles of the company.

Casual Director. The Companies Act empowers the Board to appoint the casual director subject to any regulation in the Articles. The casual vacancy in the office of the director may exist due to retirement, resignation, insolvency or any other reason. The casual director may hold his office only upto the period to which the original director would have his office if he had not vacated. [Sec. 262]

Alternate Director. This Board may appoint the alternate director if the article authorises. The Board is empowered to appoint the alternate director if the original

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director remains absent for more than three months from the state in which the meetings is ordinarily held. Such alternate director shall hold office only for the period till the original director returns [Sec. 313]

Appointment of Directors by Third Parties (Sec. 255)

The articles may permit the third parties for the appointment of director as their nominee, but the number of directors so appointed should not exceed one-third of the total number of directors and they are not liable to retire by rotation. The third party means the Vendor, Banking Company, Finance Corporation and Debenture-holders.

The idea behind the appointment is that they may have the watch that money advanced to the company has been utilised for same purpose for which it was lent.

Appointment of Directors by Proportional Representation (Sec. 265)

Directors are appointed individually either by show of hands or by ballot unless the Articles otherwise provide. If the Articles permit, a system of proportional representation may be adopted for the appointment of directors. The appointment may be made by the single transferable vote or by a system of cumulative voting. In this system, the minority shareholders may become in a position to have their representation in the Board of Directors. Such appointment is made once in three years and the casual vacancies are filled up according to the provisions of Secs. 262 and 265.

Appointment of Directors by the Central Government (Sec. 408)

According to Sec. 408, the Central Government may appoint the directors but not more than two in number and for the period not exceeding 3 years.

The appointment of directors is made to prevent the affairs of the company which are oppressive to any member or which are prejudicial to the public or company’s interest.

The Central Government may appoint the director on the application of not less than 100 members of the company or the members holding not less than 1/10th of the total voting rights. Such directors need not to retire annually and are also not required to have the qualification shares.

The Companies (Amendment) Act, 1974, empowers the Central Government to issue necessary directions to companies where an appointment of directors is so made. [Sec. 408(6)]

Further, the directors so appointed are required to keep the Central Government informed of the affairs of the company to enable it to take such timely action as may be required by exigencies of the circumstances. [Sec. 408(7)]

Qualifications of Directors

The Act does not lay down any academic or share-holding qualification for a director. There is a widespread misconception that a director must necessarily be a shareholder of the company. But if it is not so, unless the articles of the company provide otherwise, a director need not be a shareholder of the company. But usually the articles provide for certain qualification shares for the directors.

Qualification shares. If the articles of the company so provide then as per Sec. 270, the directors must obtain their qualification shares as follows :

The directors must obtain qualification shares within two months after their appointment unless they already hold shares.

If any provision in the articles requiring a person to hold the qualification shares before his appointment as a director or to obtain them within a period shorter than two months shall be void.

The nominal value of one qualification share must not exceed Rs. 5,000.

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Bearer share warrants will not be counted for the purposes of qualification shares.

If a director does not obtain qualification shares within two months of his appointment or thereafter does not possess such shares at any time, he ceases to be a director automatically.

The director should not obtain shares by way of gift from a promoter. He should make the payment for his qualification shares.

A director is required to hold qualification shares in his own right. It is also sufficient if he holds them as a trustee provided it does not appear on the register of members that he is a trustee.

Unless the articles provide otherwise, a joint holding will be sufficient for share qualification.

A person who acts as a director of a company without holding qualification shares even after the expiry of the period of two months from the date of his appointment shall have to vacate his office as a director and be punishable with a fine extending to Rs. 500.00 for every day from the date of expiry of the period of two months till the date he continues to act as a director. [Sec. 272]

Written consent. Every person proposed as a candidate for the office of a director has to sign and file with the company his consent to act as a director, if appointed (Sec. 264). However, the following persons have not to file such consent;

A person who is retiring from directorship by rotation or otherwise;

A person who has given notice of his candidature for directorship at the registered office of the company under Sec. 257.

However, a newly appointed director shall not act as a director unless he has also within 30 days of his appointment signed and filed with the Registrar his consent to act as such director. Filing of such a consent is not necessary in the case of following persons :

A director reappointed after retirement by rotation or immediately on the expiry of his term of office.

Additional or alternate director, or a person filling a casual vacancy in the office of a director under section 262 or appointed as a director or reappointed as an additional or alternate director immediately on the expiry of his term of office.

A person named as a director under its articles of association as first registered.

It is to be noted that only persons newly seeking appointments as directors have to file their consent to act as such. A person who is already a director and who is retiring at the annual general meeting but immediately seeking reappointment is exempted from filing the consent.

The provisions of this section are not applicable to an independent private company.

DISQUALIFICATION & VACATION OF OFFICE OF DIRECTORS

Disqualifications of Directors

The circumstances in which a person cannot be appointed as a director of a company are enumerated in Section 274. According to this section, a person cannot be appointed as a director of company, if—

he has been found to be of unsound mind by a competent court and the finding is in force;

he is an undischarged insolvent;

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

he has been convicted of an offence involving moral turpitude and sentenced to imprisonment for not less than six months and a period of five years has not elapsed since the expiry of his sentence;

he has not paid any call in respect of shares of the company held by him for a period of six months from the last day fixed for the payment;

he has been disqualified by an order of the Court under Sec. 203, of an offence in relation to promotion, formation or management of the company of fraud or misfeasance in relation to the company.

In case of Public Company:

The company has failed to file Annual Return and Balance Sheet for 3 continuous years

The company has failed to make payment of Dividend or make payment of Interest on Deposit or Redeem Matured Deposit or Redeem Matured Debenture

In addition to the disqualifications mentioned above, there is another disqualification, namely, the person ‘should not be a minor or older person under disability’ but should be one competent to contract.

A private company which is not a subsidiary of public company may by its Articles provide for additional grounds for disqualification.

Restriction of Number of Directorships

According to Secs. 275 to 279, a person cannot be appointed as a director for more than 20 companies at a time. If any person holds office for 15 companies as a director of a company, then no appointment can be made in any other company unless he vacates his office within fifteen days. If he does not vacate within fifteen days, new appointment shall be void. (Sec. 277) In calculating the number 15, the following shall be excluded :

An unlimited company.

A private company which is neither a subsidiary nor a holding company of a public company.

An association not carrying on business for profit.

Alternate directorship.

Vacation of Office by Directors

he fails to obtain or ceases to hold the share qualification required of him by the articles of the company;

he is found to be of unsound mind by a competent court;

he applies to be adjudicated an insolvent;

he is adjudged as insolvent;

he is convicted by a court of an offence involving moral turpitude and sentenced to imprisonment for not less than six months;

he fails to pay any calls on the shares held by him within six months from the date fixed for payment; unless the Central Government has by notification in the official Gazette removed this disqualification;

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

he (whether by himself or by any person for his benefit or on his account) or any firm in which he is a partner or any private company of which is a director; accepts a loan or guarantee or security for a loan from the company in contravention of Sec. 295;

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he does not disclose to the Board of directors of his interest in any contract or proposed contract with the company;

he is restrained by court from being a director for committing fraud or misfeasance in relation to the company under Sec. 203;

He is removed by the company in general meeting in pursuance of Sec. 284;

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

The office of a director is also vacated if he or any of his relative hold any office or place of profit in the company or its subsidiary in contravention of Sec. 314.

A private company which is not a subsidiary of a public company may by its Articles provide for additional grounds for vacating the office of a director.

REMOVAL OF DIRECTORS / VACATION OF OFFICE

Removal by shareholders (Sec. 284). The shareholders may remove the director before the expiry of term of his office for negligence and fraud. But for that, a special notice must be given to the company at least fourteen days before the meeting. On receipt of a copy of the same must be served to the director concerned.

The director is entitled to be heard on the resolution at the meeting. The company sends the representation of the director to all the members of the company. If the representation of the director to all the members of the company. If the representation is received late, the director may request to read it in the meeting. [Sec. 284]

The directors appointed by the Central Government, third party and director elected by proportionate system cannot be removed so.

Removal by central government [Sec. 388E]. The Central Government is empowered to investigate enquiry against the director of the company and can refer the same to the High Court for enquiry whether the person is fit to hold the office or not. The Central Government investigate an enquiry when the directors are performing their duty fraudulently, negligently and make default in carrying out their obligations, or the business is not running with sound business principles, or the company’s business has been running in a manner which is likely to cause serious damage to the trade, and or the business is conducted to defraud the creditors or the members of the company. After the decision of the High Court, the director is removed from his office and after this, such person cannot be appointed as director of a company for a period of five years after that.

Removal by court (Sec. 402). The court is also empowered to remove the director on an application for prevention of oppression or mismanagement. [Secs. 397 and 398]

When the person is so removed, he cannot claim compensation from the company. Moreover, he cannot be appointed as a director of a company for the period of five years after that. [Sec. 407]

Resignation by the Directors

There is no provision relating to the resignation by a director in the Companies Act. If there is any provision in the articles of the company giving right to a director to resign at any time, a director may resign in the manner provided in the articles of association. If there is no provision in the Articles, then the director may submit the resignation by sending a reasonable notice.

In the absence of any provision relating to resignation in the articles, it is well settled that a resignation once made takes effect immediately when the intention to resign is made clear. (T. Murari vs. State 1976)

The resignation may be oral. [Latchford Premier Cinema Ltd., vs. Ennion (1931) 2 Ch. 409]

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Once a director has resigned, he is not entitled to withdraw except with the consent of directors or the company [Glossop vs.Glossp (1907) 2 Ch. 370]

It may be noted that a resignation by director will not relieve him from any liabilities and obligations which he may have incurred while in office.

REMUNERATION OF DIRECTORS

The Companies Act does not give any right to the directors for drawing remuneration from the company but specifies the maximum and minimum limit of payment. It is the Articles of Association of every company which empower the directors to draw remuneration from the company. Before passing the Companies Act, 1956, it was deemed to be purely internal affair but now the payment is made under the Companies Act. The provisions of the Companies Act regarding remuneration are as follows :

Overall Limit to Managerial Remuneration

According to Sec. 198 of the Companies Act, the total managerial remuneration paid by a public company or subsidiary private company to its directors and managers, should not exceed 11 per cent of the net profits of the company. The net profit of the company is computed in the manner as laid down in Secs. 349, 350 and 351.

While calculating 11 per cent the fee payable to the directors is excluded. [Sec. 198(2)]

Minimum Remuneration in Case of Inadequate Profits

Section 198(4) as amended by the Companies (Amendment) Act, 1988, prohibits the payment of any sum by way of minimum remuneration where company has no profit or its profits are inadequate, except with the previous approval of the Central Government. However there is one exception to this rule. Where the appointment and remuneration of the managerial personnel is subject to the provisions of section 269 read with Schedule XIII to the Act, the Company can pay minimum remuneration (in spite of losses or inadequacy of profits) without the approval of the Central Government.

Meaning of the Term ‘Remuneration’

any expenditure incurred by the company in providing any rent-free accommodation or any other benefit or amenity in respect of accommodation free of charge;

any expenditure incurred by the company in providing any other benefit or amenity free of charge at a concessional rate;

any expenditure incurred by the company in respect of any obligation or services which but for such expenditure by the company would have been incurred by any of the persons aforesaid; and

any expenditure incurred by the company to effect any insurance on the life of, or to provide any pension, annuity or gratuity for any of the persons aforesaid or his spouse or child.

The term remuneration shall not include :

any sitting or attendance feet payable to directors for attending each meeting of the Board or a Committee thereof. [Sec. 198(2)]

remuneration payable for acting as technical expert. [Sec. 309(1)(b)].

A company is not allowed to make any tax-free payment of remuneration. [Sec. 200]

If the articles of the company do not provide for the payment of travelling expenses to the directors, they are not entitled to be paid travelling expenses incurred in attending meeting of the Board or committee thereof or a general meeting.

Remuneration to Managing / Whole – Time Directors / Manager

Effective Capital Maximum of 38

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Monthly Remuneration

Less than Rupees 1.00 Crore 75,000.00

Rupees 1.00 Crore onwards and upto Less than Rupees 5.00 Crore 1,00,000.00




Rupees 100.00 Crore and more 2,00,000.00

Provided that the remuneration is approved by

Remuneration Committee

Special Resolution

No default in payment to Term Lenders

Other conditions

he had not been sentenced to imprisonment for any period or to a fine not exceeding Rs. 1,000 for the conviction of an offence under any of the following acts, namely :

The Indian Stamp Act, 1899.

The Central Excise and Salt Act, 1944.

The Industries (Development and Regulation) Act, 1951.

The Prevention of Food Adulteration Act, 1954.

The Essential Commodities Act, 1955.

The Companies Act, 1956.

The Securities Contract (Regulation) Act, 1956

The Wealth Tax Act, 1957.

The Income-Tax Act, 1961.

The Customs Act, 1962.

The Monopolies and Restrictive Trade Practices Act, 1969.

The Foreign Exchange Regulation Act, 1973.

The Sick Industrial Companies (Special Provisions) Act, 1985

The Securities and Exchange Board of India Act, 1992

The Foreign Trade (Development and Regulation) Act, 1992

he had not been detained for any period under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1947;

he has completed the age of 25 years and has not attained the age of 70 years or the age of retirement, if any, specified by the company, whichever is earlier;

he is resident in India.

POWERS OF THE BOARD

General Powers [S 291]

Empowered to do everything the company is authorized to do except

As may be restricted by law

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As may be restricted by Articles of Association

Restriction prescribed by law

Absolute restriction

Restriction as to manner of exercise of certain powers

Absolute Restriction

To sell or lease any of the undertaking(s) [the whole of or substantial part of] of the company.

To allow time to the director for the repayment of the loan.

To invest money.

To borrow money in excess of paid-up share capital and free reserves.

Does not apply to temporary borrowings from the bankers in the ordinary course of business

To contribute money for charitable purpose exceeding Rs. 50,000 or 5 per cent of the average net profits of 3 years whichever is greater. [Sec. 293(1)]

Restriction as to manner of exercise of powers

Matters that can be decided only through Board Resolutions adopted in a meeting of the Board

Section 292:

The power to make calls on shares.

The power to Buy back shares

The power to issue debentures.

The power to invest funds.

The power to borrow money otherwise than on debentures.

The power to make loans

Filling up of casual vacancy [S 262]

Matters that require unanimous consent in a meeting

Making of investment, Giving of loans or guarantees [S 372A]

Appointment of such a person as Managing Director or Manager who is already a Managing Director or Manager of another company and is continuing in that capacity

COMPANY MEETING: MEANING AND DEFINITION

The word “meeting” is not defined anywhere in the Companies Act. Ordinarily, a company may be defined as gathering, assembling or coming together of two or more persons (by previous notice or by mutual arrangement) for discussion and transaction of some lawful business.

A company meeting may be defined as a concurrence or coming together of at least a quorum of members in order to transact either ordinary or special business of the company.

Some important definitions of meeting are given below.

In the case of Sharp vs. Dawes (1976), the meeting is defined as, “An assembly of people for a lawful purpose” or “the coming together of at least two persons for any lawful purpose.”

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According to P.K. Ghosh, “Any gathering, assembly or coming together of two or more persons for the transaction of some lawful business of common concern is called meeting.”

According to K. Kishore, “A concurrence or coming together of at least a quorum of members by previous notice or mutual agreement for transacting business for a common interest is meeting.”

From the above definitions of meeting, it can be concluded that meeting is the congregation of several persons in a particular place for the purpose of discussing some important matters and expressing their opinion on the questions raised.

Characteristics of a Company Meeting

The characteristics of a company meeting are as follows:

Two or more persons (who are the members of the company) must present at the meeting.

The assembly of persons must be for discussion and transaction of some lawful business.

A previous notice would be given for convening a meeting.

The meeting must be held at a particular place, date and time.

The meeting must be held as per provisions/rules of Companies Act.

One-Man Meeting

To convene a meeting, two or more persons must present. A meeting can not be constituted by one person. However, there are certain circumstances where one person can constitute a valid meeting.

Meeting convened by Central Government. Where the Central Government calls an annual general meeting under Sec. 167 of the Act, it may direct that one member of the company present in person or by proxy shall constitute the meeting.

Meeting Convened by Company Law Board. Where the Company Law Board calls a meeting under Sec. 186 of the Act (other than an annual general meeting), it may direct that one member present in person or proxy shall be deemed to constitute a valid meeting.

Class meetings of shareholders. Where one person held all the shares of a particular class, that member alone was held to constitute a valid meeting of that class of shareholders.

Meeting of one-man committee of board of directors. As per Rule 77 of ‘Table A’, the board of directors may delegate their works to a Committee which may have only one member. When the meeting of such Committee will be held, only one member will present and he alone was held to constitute a valid meeting.

COMPANY MEETINGS

Kinds of Company Meetings

Meetings of shareholders:

Statutory meeting;

Annual general meeting (AGM);

Extra-ordinary general meeting;

Class meetings.

Meetings of directors;

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Meetings of committee of directors.

Meetings of creditors.

Meetings of debenture holders.

MEETINGS OF DIRECTORS

At least one meeting in every three months. The directors of a company exercise most of their powers in a joint meeting called the meeting of the Board. In the case of every company, a meeting of the Board of Directors must be held:

at least once in every three months, and

at least four such meetings shall be held in every year. [Sec. 285]

In other words, no three months should pass without directors’ meeting being held, and no year should expire without at least four directors’ meetings having been held in it.

The object of this section is to ensure that the Board meetings are held at reasonably frequent intervals so that the directors may be in touch with the management of the affairs of the company.

However, the Central Government is empowered to relax the rule with regard to any class of companies (Section 285). The object of this provision is to save smaller companies having insufficient business to be transacted at Board meetings from unnecessary hardships and expenditure involved in holding them.

Notice of the meeting. Notice of every meeting of the Board of Directors must be given in writing to every director in India and at his usual address in India to every other director who is outside India for the time being (Sec. 286). A director has no power to waive his right of notice. Notice must be given to a director, even if he has stated that he will be unable to attend the meeting. (Young vs. Ladies Imperial Club)

There is no need to send notice, if the articles provide for meetings to be held at regular intervals e.g., monthly, the time and place being fixed. Also if all the directors should meet casually, and are willing to hold a meeting, the meeting can be held notwithstanding the absence of notice. (Smith vs. Paringa Mines Ltd.)

Unless the articles of the company provide a definite period of notice, a reasonable notice must be given of the Board meeting. What is a reasonable notice will depend on any particular case. If a proper notice is not given the proceedings are invalid unless all the directors are present at the meeting. (Harban vs. Phillips)

The notice should mention the place, time and date of the meeting. The day must be a working day and the time should be during business hours unless agreed otherwise by all the directors. It is not necessary to state in the notice the business to be transacted, unless the articles of the company or the Act so require.

Agenda. The term ‘agenda’ means things to be done. In the present context it is a statement of the business to be transacted at a meeting. It also sets out the order in which the business is to be dealt with. Though the Companies Act does not make it obligatory on the secretary to send an agenda or to incorporate the same in the notice of Board meeting, yet by convention it necessarily accompanies the notice calling the meeting.

When the agenda is enclosed with the notice each director gives due consideration to the proposed business and comes with necessary preparations for discussion in the meeting.

Quorum. There must be a proper quorum for every meeting. The quorum for Board Meeting should be at least two directors or one-third of total strength of the Board of Directors, whichever is more subject to a minimum of two directors. While determining the total strength, the vacancies are not counted. Again the directors who are interested in any of the resolutions to be passed at the Board meeting shall not be counted for the

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purpose of quorum of that resolution. If at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of directors, then the remaining directors who are not interested will be the quorum for that item, provided their number is not less than two [Sec. 283]. If the meeting of the Board could not be held for want of quorum then unless the articles otherwise provide the meeting shall automatically stand adjourned till the same day in the next week and at the same time and place. Where that day happens to be a public holiday then the meeting stands adjourned to the next succeeding day, at the same time and place. If a meeting could not be held for want of a quorum, it shall allright be counted towards the minimum number of meetings which must be held in every year under Sec. 285. [Sec. 288]

Meeting of the Committees of Directors

The Board of Directors may form certain committees and delegate some of its powers to them. These committees should consist of only directors. The delegation of powers to such committees is to be authorised by the Articles of Association and should be subject to the provisions of the Companies Act.

In a large company routine matters like Allotment, Transfer, Finance are handled by sub-committees of the Board of Directors. The meetings of such committees are held in the same way as those of Board Meetings.

Resolution by circulation

Notice along with detail notes to all directors in India

Address in India in other cases

Consent of majority of directors entitled to vote on the matter

To be confirmed at the next meeting

MEETINGS OF SHAREHOLDERS

The shareholders are the real owners of the company, but due to certain limitations they can not take part in the management of the company. They leave this to their representatives called the directors. For controlling the board of directors and their activities shareholders’ meetings’ are held from time to time. Meeting of shareholders can be classified as under.

Statutory Meeting

Every public company having share capital must convene a general meeting of shareholders within a period of not less than one month and not more than six months after the date on which it is authorised to commence its business. This is the first meeting of the shareholders of the company and it is held once in the whole life of the company.

The following companies need not to hold statutory meeting:

Private company.

Company limited by G—Uhtee having no share capital.

Unlimited liability company.

A public company which was registered as a private company earlier.

Notice of the meeting. The directors are required to send a notice of the meeting to all the members of the company at least 21 days before the date of the meeting stating that it is the ‘statutory meeting’ of the company. If the notice convening this meeting does not name it as the “Statutory Meeting” it will not amount to compliance with the provisions of this section. [Gardner vs. Iredale (1912) 1 Ch. 700].

Objects of statutory meeting. The statutory meeting is held to inform the shareholders about matters relating to incorporation, allotment of shares, the details of the contracts concluded by the company, etc. According to Stephenson, “Statutory

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Meeting is convened in order to afford the shareholders an opportunity for seeing what degree of success has attained the floatation of the company and in order that any special matters requiring their approval may be laid before them.”

Statutory report. The directors are required to prepare and send a report called the ‘Statutory Report’ to every member of the company at least 21 days before the date of the meeting. If the report is sent later it shall be deemed to have been duly forwarded if it is so agreed to by a unanimous vote of the members entitled to attend and vote at the meeting [Sec. 165 (2)]. A copy of this report should be sent to the Registrar.

The Statutory report must set out the following information:

Shares allotted. The total number of shares allotted distinguishing those allotted as fully or partly paid-up otherwise than in cash and stating in case of shares partly paid-up the extent to which they are so paid-up and in either case the consideration for which they have been allotted.

Cash received. The total amount of cash received by the company in respect of all the shares allotted, distinguished as aforesaid.

Abstract. An abstract of the receipts of the company and of the payments made thereout, upto a date within seven days of the date of the report, exhibiting under distinctive headings the receipts of the company thereout from shares and debentures and other sources the payments thereout and particulars concerning the balance remaining in hand and an account or estimate of the preliminary expenses of the company, showing separately any commission, or discount paid or to be paid on the issue or sale of shares or debentures.

Directors, auditors and other managerial personnel. The names, addresses and occupations of its directors and auditors and also of its manager and secretary, if any, and the changes which have occurred since the date of the incorporation.

Contracts. The particulars of any contract and the modification or the proposed modification of any contract which is to be submitted for the approval of the members at the meeting.

Underwriting contract. The extent to which the underwriting contract, if any, has not been carried out and the reason therefor.

Arrears of calls. The arrears, if any, due on calls from any director and the manager.

Commission and brokerage. The particulars of any commission or brokerage paid or to be paid to any director or to the manager in connection with the issue or sale of shares or debentures of the company.

Certification of Report. The statutory report must be certified as correct by not less than two directors; one of whom shall be the managing director, if any. The auditors of company then shall certify it as correct regarding the shares allotted, cash received in respect of such shares and the receipts and payment of the company. [Sec. 165 (4)]

A certified copy of the statutory report shall be filled with the registrar for registration immediately after the same has been sent to the members of the company. [Sec. 165(5)]

Annual General Meeting (AGM)

It is a meeting of shareholders which is held once in a year. The object of holding this meeting is to review the progress and prospects of the company and elect its office bearers for the coming year.

Holding the meeting. The first annual general meeting of the company is held within 18 months of its incorporation. After holding such meeting it is not necessary to hold any other annual general meeting in the year of its incorporation and in the next year. Subsequent annual general meeting must be held by the company each year within

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six months of the closing of the financial year but the interval between any two annual general meetings must not be more than fifteen months. The registrar is empowered to extend the time upto a period of three months except in the case of first annual general meeting.

Notice. The Board of Directors has to call Annual General meeting giving 21 days notice to all the members entitled to attend the meeting. However, such a meeting may be called with short notice, if it is agreed to by all the members to vote in the meeting. certified copies of Profit and Loss Account and Balance Sheet, Directors’ Report and Auditor’s Report should also be forwarded to the members at least 21 days before the holding of the meeting of the company.

Considering the importance of annual general meeting to shareholders it has been held that the directors must call the meeting even though the accounts are not ready or the company is not functioning.

Effect of non-compliance.

If default is made in holding the annual general meeting in accordance with the above provisions, the Central Government may on the application of any member of the company, call or direct for the calling of the meeting and give such directions for this purpose as it thinks proper. The directions may include that one member of the company present in person or by proxy shall be deemed to constitute the meeting. (Sec. 167)

If default is made in holding a meeting of the company in accordance with the above provisions, the company and its every officer who is in default shall be punishable with a fine which may extend to five hundred rupees and in case of continuing defaults, with a further fine which may extend to Rs. 250 for every day during which such default continues.

The business ordinarily transacted at this meeting are as follows:

Routine business.

Adoption of Annual Accounts, Directors’ report and Auditors’ Report.

declare the dividend.

elect the Directors in place of those retiring by rotation.

appoint auditors and fix their remuneration.

Special business.

borrowing power / creation of security

increase Authorised Capital.

alter the Articles of Association, many more

Extra-Ordinary General Meeting

Extra-ordinary meeting is a general meeting which is held between two Annual General Meetings. Extra-ordinary General Meeting is called to discuss any particular matter of urgent importance to the company. This meeting is called for the consideration of any specific subject, decision of which cannot be postponed to the next Annual General Meeting.

The Extra-ordinary General Meeting may be called by the Directors or may be convened by the shareholders if the Board of Directors does not arrange for it despite their requisition to call it.

Directors may call the Extra-ordinary General Meeting in accordance with the procedure laid down in the Articles of Association of the company.

Shareholders holding at least one-tenth of the paid-up share capital of the company can make a requisition to the Board of Directors to convene such a meeting.

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If no such meeting is convened within 21 days of their requisition, shareholders may themselves convene the meeting within 3 months from the date of their requisition.

A notice of 21 days has to be given to members indicating the nature and particulars of the resolutions to be discussed.

The special resolutions passed at Extra-ordinary General Meeting have to be filed with the Registrar within 30 days.

If due to any reason it is impracticable to hold extra-ordinary general meeting the Company Law Board may order to call such meeting either on its own initiative or on the application of any director or any member of the company who are entitled to vote at the meeting. Section 186 of the Companies Act empowers the Company Law Board to call only extra-ordinary general meeting and not the annual general meeting of the company.

Class Meetings

When the meeting of particular class of shareholders takes place such as preference shareholders meetings, it is known as class meeting. Such a meeting can be attended only by that class of share-holders. The articles define the procedure for calling such meeting. Such a meeting is called for the alteration in the rights and privileges of the shareholders and for the purpose of conversion of one class of shares into another.

Notice – 21 days [S 171] – must state the date, time, place and agenda of meeting [S 172]

Can be served by [S 53]

Post – deemed to be delivered on expiration of 48 hours

Personal delivery

Advertisement in press

Explanatory Statement [S 173] – must give an explanatory statement disclosing all material facts etc

Quorum [S 174] – 5 [2 in case of a private company] members present in person

Authorised representative of company members / government [where government is member] to be treated as member in person and shall have right to appoint proxy

Chairman of meeting

Chairman of the Board to chair in normal course else

Any one of the directors present else

Members present shall elect one of themselves

Proxy

Every member has right to appoint a proxy who need not be a member

This must be stated in the notice prominently

Proxy can not speak unless AoA empowers them

Can be appointed by executing in any one of the two formats as per Sch IX

Must be deposited at the registered office at least 48 hours before the meeting

Any stipulation of more than 48 hours shall be invalid [can be reduced]

Company shall not suggest

However can make suggestion on request

Member can inspect by giving 3 days advance notice

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Inspection can be made starting 24 hours befor the meeting and until conclusion of meeting

Voting

By show of hands

Result declared by Chairman final

Poll

Can be demanded / declared by

Chairman on his own

Members having requisite eligibility

Public Company –

Holding 10% voting power

Holding 10% of paid-up capital

Or Rs 50,000 paid-up value

Private company – 1 if less than 7 present / 2 if 7 or more present

Voting power can be restricted by AoA in the event of default of payment of call

No other restriction on voting power valid

Should be taken

Immediately in case of

Appointment of chairman

Question of adjournment

Within 48 hours in other cases

Chairman to appoint 2 scrutinizers

One shall be a member who is not an employee if one such member available

Member’s Resolution

Members holding 5% voting power

100 number or aggregate of Rs 1000.00 thousand paidup value of shares

Requisition in writing 6 weeks in advance

Notice issued after requisition deemed to be 6 weeks in advance

Special Resolution

Stated in notice

Proposed as such

Votes in favour at least three times votes against ignoring votes not exercised

Minute book

Authentic record of proceedings

Bound book with pages pre-numbered

Entries to be made with 30 days

Signed by the chairman with 30 days

By chairman of next board meeting [alternative method only in case of board meetings]

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Conclusive evidence of proceedings

ACCOUNTS

The shareholders provide capital to the company for running the business. They are in a way, the owners of the company. All of them cannot take part in managing the affairs of the company as their number is usually much more than the number of directors who manage the company. But they have every right to know as to how their money has been dealt with by the directors in a particular period. This is with perhaps compulsory disclosure through annual accounts has been provided under the Companies Act. as a method of furnishing information to the shareholders by the directors about the working and financial position of the company enabling them to exercise a more intelligent and purposeful control over the affairs of the company. For preparation of annual accounts the maintenance of proper books of account is a must.

Books of Account to be kept by a Company

Section 209 of the Companies Act requires every company to keep at its registered office proper books account with respect to---

all sums of money received and expended by the company and the matters in respect of which the receipt and expenditure take place;

all sales and purchases of goods company; and

the assets and liabilities of the company.

in the case of a company engaged in production, processing, manufacturing or mining activities such particulars relating to utilisation of material or other items of cost as may be prescribed relating to certain class of companies as the Central Government may require.]

Place of keeping Books of Accounts

To be kept at Registered Office

At any other place by informing ROC in Form 23AA

Branch Books to be kept at the relevant branch

Accounting to be

Nearest rupee

Double entry principles

Accrual basis

Accounting Year not more than 15 months

Can be upto 18 months with the prior permission of Registrar

No minimum period prescription

No fixed period

Can start on any day and end on any day

Example – Diwali Year!

This period is referred to as the Financial Year

Balance Sheet & Profit and Loss Account

To be made for every Financial Year

Format as per Schedule VI – Part I

Any one of the two forms

Horizontal

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Vertical

Must reflect True & Fair view of State of Affairs

No format for P & L Account

Schedule VI – Part II explains matters to be dealt with in the P & L Account

Additional disclosures as per Schedule VI – Part II & Part III

Abstract as per Schedule VI – Part IV

Holding Companies to annex Balance Sheet etc of the Subsidiary companies

Statement relating to all subsidiaries also to be annexed

Director’s report to make specific comments

Must be laid before a General Meeting [AGM] within 6 months of end of FY

Balance Sheet along with Profit and Loss Account, Auditor’s Report and Director’s Report

Copies must be sent to members at least 21 days in advance of meeting

Three copies to be filed with ROC within 30 days of meeting

If no meeting is held, copies to be filed within 30 days of the last date by which meeting should have been held

Signing of Balance Sheet etc

By the Manager or Secretary

Two Directors [including Managing Director, if there is one {in that case there will be no Manager}]

Presented to the auditors after signing

AUDIT

Need of Audit

Divorce of management from ownership

Accounts of all Companies must be audited

Chartered Accountant or a firm of CAs can be appointed as Auditor

Disqualifications for appointment:

Body Corporate

Officer / employee of the Company or their employee

Person who is indebted to the Company for an amount more than 1,000.00 rupees

Internal Auditor

Cost Auditor

Person holding shares in the Company

Appointment

First Auditor

By the Board within 1 month of incorporation

Failing which – by general meeting

Failing which – by Central Government

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Members shall appoint the Auditor thereafter

After First Auditor

Shall be appointed at every Annual General Meeting

Shall hold office from the conclusion of the AGM where appointed and until the conclusion of the next following AGM

Shall have the right of reappointment

If not reappointed, company will need to follow procedure for removal of auditor

Special notice

Approval of Central Government

Can however resign on their own at any time

Can also optionally forego reappointment

Appointment at AGM shall be made by Ordinary Resolution

Special Resolution required in case the Government holds [directly or indirectly] 25% or more of the capital

Limits as to number of appointments

Not more that 20 audit assignments

If paid up capital of company is more than Rs 25.00 lacs – not more than 10 such companies within overall limit of 20

Private companies not to be included in these limits

In case of firms limit to be aggregated based on the number of partners [less limits utilized personally]

Vacancy in office

Can be filled by Board except in case of resignation

Vacancy arising out of resignation shall be filled by General Meeting

Right of Auditor

Access to all books of accounts, papers, writings

Access to all such other record as may be reasonable needed for the audit

Example:

Extracts of director’s minutes but not the whole minute book

Reappointment except the first auditor

Accept report of internal auditor and depend on same

Accept report of branch auditor and depend on same

Sign audit report

Receive notice of AGM and attend the same

No voting right

Right to present audit report to the members

Duties / Responsibility

Work with professional competence

Report all deviations / variations / departures from the law in the report

However only a “Watchdog” and not a “Blood Hound”

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Ensure “True and Fair” nature of the Balance Sheet etc

Highlight all adverse observations / remarks / qualifications

Report disqualification of directors in case disqualified under S 274(1)(g)

Personal responsibility of the auditor signing the report

Social Audit

Manufacturing and Other Companies Audit Report Order [MAOCARO]

Now replaced by Corporate Audit Report Order [CARO]

Report to deal with social aspect of business

Accounting policies – soundness and fairness and consistency thereof

Consumption and Valuation of materials /stocks

Verification of assets

Managerial remuneration

Depreciation

Government dues

Employee dues – ESI / PF / Superannuation contributions and payments

Various such other matter

Cost Audit

Applicable only to such companies as may be notified by the CG

To be appointed by the Board with the approval of CG

Report to be submitted within 120 days of end of F-Year

Government Company

Auditor to be appointed by the Comptroller and Auditor General of India

CAG shall direct the manner of conduct of audit

Shall annex their comment on the report before presentation to the Parliament

Audit Committee comprising of “Independent” Directors

Chairman must attend AGM

Review Balance Sheet etc before presentation to the auditors

Lay down accounting policies

Ensure consistency

Review draft report of auditor before finalisation

DIRECTOR’ REPORT

To be attached with Balance Sheet etc and shall deal with:

Financial status

Reserves

Achievements and future outlook

Research and development and absorption of technology

Conservation of:

Energy

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IA&AS Probationers

Foreign exchange

Detail particulars of employees:

Remuneration in excess of Rs 24.00 lacs per annum

Remuneration in excess of Rs 2.00 lacs per month in case employed for less than a year

Full and detailed explanation of adverse remarks / observations / qualification of the auditors made in their report

Statement of due compliance

DIVIDEND

Payable out of profits of the year only

In case of past losses, at least unabsorbed depreciation must be fully absorbed

Else permission of CG needed

Must be paid in cash only

Must be approved by a General Meeting

Board may declare Interim Dividend from time to time

Shall need final ratification of General Meeting

Amount of dividend must be:

Deposited in separate bank account for the purpose within 05 days of declaration

Paid out of that account within 30 days of declaration

Unclaimed / unpaid amount at the end of 30 days should be transferred to “Unpaid/Unclaimed Account” with 7 days thereafter

Any claim after such transfer shall be paid out of this account

Payment shall be made for 7 years only

Within 7 days after 7 years, must be deposited into “Investor Education and Protection Fund” created by CG

No claim can be made thereafter

Quantum of dividend if more than 10%, compulsory transfer of certain sum to General Reserve

Payment of dividend out of reserves also possible in exceptional circumstances

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handout unit 2 company law

Documents