CORPORATE LAW NOTES

SAKALESH

Company LawArticles of AssociationArticles of Association(AA)are the rules regulations and bye-laws

for the internal management of the affairs of the companyAA next only in importance to the MA. AA are framed with the

object of carrying out the aims and objectives as set out in the MA.

Contents of AA :1.Share Capital,rights of share holders,variation of these

rights,payment of underwriting commission.

Contents of AA [Continued].2.Lien on shares.3.Transfer of shares 4.Transmission of shares5.Forfeiture of shares 6.Conversion of shares in to stocks7.Calls on shares8.Share warrants9.Alteration of Capital10.General Meetings and Proceedings thereat11.Voting rights of members ,voting & proxies12.Directors,their appointment,remuneration,qualifications, powers and proceedings of Board of Directors (Board).13.Manager14.Secretary15 .Dividends and reserves16.Accounts ,audit and borrowing powers.17.Capitalization of profits18.Winding up.

Form and signature of Articles

• The Article shall be – a)printed, b)divided in to paragraphs,and c)signed by each subscriber of the Memorandum(who shall add his address,description and occupation,if any)in the Articles.

Limitations to Alterations(AA).

1.Must not be inconsistent with the Act. [Eg., alteration can’t give powers to company to buy it’s own shares].2.Must not conflict with Memorandum.3.Must not sanction anything illegal.

Cont’d…..Limitations to alteration[AA]

• 4.Must be for the benefit of the company. [Brown Vs British Abrasive Wheel

Co.Ltd.]1919• 5.Must not sanction anything illegal.• 6.Must not increase liability of members[unless there

is a written consent].• 7.Alteration by special resolution only. [Even clerical errors must be set right by a special

resolution].

…Limitations to alterations[AA] Cont’d

• 7.Breach of contract.• 8.Approval of Central Government when a private co. is

converted in to public co.• 9.No power of the court to amend Articles.• 10.Alteration may be with retrospective effect. The Articles may be altered from a back date [Eg., the inclusion of a lien clause which gives the company a

lien on fully paid shares of members for debts incurred both before and after the inclusion of the clause.

Regulations required in case of an unlimited company,company limited by guarantee and private company limited by shares[Sec.27]

• 1.Unlimited Company:• In case of an unlimited company ,the Articles

shall state—• No .of .Members with which company is to be

registered• If it has a share capital,the amount of share

capital with which company is to be registered.[Sec.27(1)]

2.Company limited by guarantee

• In case of company limited by guarantee,the Articles shall state the,

* No .of members with which company is to be registered.[Sec27(2)]

3.Private Company:• In the case of a private company, having share

capital,Articles shall contain provisions which :- * restricts the right to transfer it’s shares * limits the no.of. Members to 50(not including

employee members –past or present) *prohibit any invitation to the public to subscribe for

it’s shares and debentures the company.[Sec27(3)].

Companies which must have their own Articles(Sec.26).• A) Unlimited Companies

• B) Companies Limited by Guarantee

• C)Private Companies Limited by shares

Form & Signature of Articles

• The Articles shall be , * printed, * divided in to paragraphs & * signed by each subscriber of the Memorandum( who

shall add his address,description and occupation,if any) in the presence of at least one witness who will attest the signature and like wise add his address,description and occupation if any.

Procedure for Alteration of Articles of Association• COMPANIES HAVE BEEN GIVEN VERY WIDE POWERS TO

ALTER THEIR ARTICLES• A company may by passing special resolution,alter regulations

contained in it’s Articles anytime.• A copy of every special resolution altering the Articles shall

be filed with the Registrar within 30 days of it’s passing.• Any alteration so made in the Articles shall be as valid as if

originally contained in the Articles.[Sec.31(1)].

Legal Effect of Memorandum & Articles

• The MA & AA ,when registered ,bind a company and the members thereof to the same extent as if they respectively had been signed by the company and to each member.

• The legal implications of these documents may be discussed as to how far these documents bind:

1.Members to the company:• As between the members and the company ,the Memorandum and

Articles constitute a binding contract . Eg.,[Borland’s Trustee v/s. Steel Bros.Co.Ltd]1901. The Articles of the company as altered provided that that the shares of a

member who became bankrupt should be sold to certain persons at a fair price .B ,a share holder, became bankrupt and his trustee inbankruptcy claimed that he was not bound by the altered Articles.Held, Articles were a personal contract between B and the company,and as such B and his trustee were bound.

2.Company to members:

• A company is bound to the members: A company is bound to the members in the same

manner as the members are bound to to the company .It can,therefore,exercise it’s rights ,as against any member ,only in accordance with the Memorandum and Articles.

A member can obtain an injunction restraining a company from doing an ULTRA VIRES act.

Eg.,[Wood v/s Odessa Waterworks Co.Ltd.,]1889

• The Articles of O.W .Co. provided that the directors may with the sanction of the company at general meeting declare a dividend to be paid to the members.A resolution was passed to give the shareholders debenture bonds instead of paying the dividend in cash.

A member filed a suit to restrain the directors from acting on the resolution as it was not in accordance with the Articles of the company.The directors were restrained from acting on the resolution.

3.Members inter se[Among themselves].

• The Articles &Memorandum constitute a contract between them [ all members]and also binding on each member as against the other or others.Such a contract can ,however ,be enforced through the medium of the company.

Eg.,[Rayfield v/s Hands]1960.• The Articles of a company provided that if a member wanted

to transfer his shares ,he must inform the directors of his intention and the directors must take the said shares equally between them at a fair value.The directors refused to take the shares and argued that the Articles did not impose any liability upon them.

• Held the directors were obliged to take the shares .The Articles imposed an obligation on them not as directors but as members of the company (I.e., in their capacity as members )and it was not necessary for the company to be a party to that action.

4. Company to the outsiders:• The Articles do not constitute any binding contract between

the company and an outsider.• An outsider cannot take advantage of the Articles to found a

claim there on against the company.This is based on the general rule of law that a stranger to a contract cannot acquire any rights and liabilities under the contract.

• If the Articles provide that the company on incorporation shall purchase certain property and appoint the vendor as one of the directors ,the vendor ,on becoming a shareholder ,cannot sue the company on the basis of the Articles.

Eg.,[Eley v/s Positive Government Association Co.]1876.

• The Articles of a company provided that E should be the solicitor of the company for life and could be removed from office only for misconduct.E took office and became a shareholder. After some time the company dismissed him without alleging misconduct.E sued the company for damages for breach regulations in the Articles.

Held, the Articles did not constitute any contract between the company and an outsider and as such no action would lie.

Constructive Notice of Memorandum &Articles

• Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and Articles of Association,which on registration with the Registrar assume the character of public documents.

This is known as Constructive Notice of Memorandum and Articles

Doctrine of Indoor Management• There is one limitation to the Doctrine of Constructive Notice of

Memorandum and Articles of a company.

“The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned,everything has been regularly done.”

The outsiders need not enquire in to the regularity of the internal proceedings as required by MA &AA.

This limitation of the doctrine of Constructive Notice is known as “Doctrine of Indoor Management”.

Turquand Rule[Doctrine of Indoor Management.]

• Royal British Bank V/s Turquand[1856] The directors of a company had issued a bond to T .They had the

power under the Articles to issue such such bond provided they were authorized by a resolution passed by the shareholders at a general meeting of the company.Held,T could recover the amount of the bond from the company on the ground that he was entitled to assume that that the required resolution had been passed.[This is also known as Doctrine of Indoor Management or Turquand’s rule.].

Exceptions to the Doctrine of Indoor Management.

• 1 .Knowledge of irregularity:Where a person dealing with a company has actual or constructive notice of the irregularity as regards internal management ,he cannot claim the benefit under the rule of indoor management .

Eg., for Knowledge of Irregularity.

• [T.R.Pratt(Bombay)Ltd v/s.Sassoon Co.Ltd.]1936. Company A lent money to Company B on mortgage of it’s

assets.The procedure laid down in the Articles for such transactions was not complied with.The directors of two of companies were the same.Held,the lender had notice of the irregularity and hence the mortgage was not binding.

2 .Negligence: Where a person dealing with a company could discover the irregularity if he had made proper inquiries,he cannot claim the benefit of the rule of indoor management.

Eg., for Negligence.

• [A L Underwood v/s. Bank of Liverpool]1924. The sole director of a company in this case paid

in to his own account checks drawn in favor of the company .Held the bank was liable as it ought to have made proper inquiries before creating the account of the director.

3. Forgery:[Ruben v/s. Great Fingall Cosolidated Co.Ltd.(1906)]

• A company can never be held bound for forgery.Eg; A share certificate was forged by a secretary of a company.The secretary then issued it to R under the seal of the company .R, the holder of the certificate ,claimed to be entitled to be registered as the holder of the shares.Held the certificate did not confer any right on the shareholder.

4. Acts outside the scope of apparent authority:

• If an officer of a company enters in to a contract with a third party and if the act of the officer is beyond the scope of his authority,the company is not bound.

Eg., [Kreditbank Cassel V/s Schenkers Ltd(1927)].A branch manager of a company drew and indorsed bills of exchange on behalf of the company.He had no authority from the company to do so .Held company was not bound.

PROSPECTUS: Definition

• [Section 2(36)] defines a prospectus as, “any document described or issued as a prospectus

and includes any notice,circular,advertisement or other document inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in or debentures of a body corporate”.

Dating of Prospectus.[Sec.55].

• A prospectus issued by or on behalf of a company must be dated and that date is, unless the contrary is proved,taken as the date of publication of prospectus.

Registration of Prospectus.[Sec.60]

• A prospectus can be issued by or on behalf of a company or in relation to an intended company only when a copy thereof has been filed with the Registrar for registration.

Registration must be made on or before the date of publication of prospectus. A copy must be signed by everyone who is named therein as director or proposed director of the company,or by his agent authorized in writing.

Cont’d……(Registration of prospectus)[Sec.60.]

• The prospectus must be issued to the public within 90 days of the date on which a copy thereof is delivered to Registrar for registration.

• If a prospectus is not issued within this period,it is deemed to be a prospectus,a copy of which has not been delivered to the Registrar.

Penalty for Non-Registration.

• If a prospectus is issued without a copy thereof has not been delivered to the Registrar for registration , or without the necessary documents or the consent of the experts, the company and every person, who is knowingly a party to the issue of prospectus,shall be punishable with fine which may extend to Rs. 5000/-.

Objects of Registration.• (1) To keep an authenticated record of the terms and

conditions of issue of shares or debentures,and

• (2) To pinpoint the responsibility of the persons issuing the prospectus for statements made by them in the prospectus.

The object of the promoters or directors in issuing a prospectus is to make it as attractive as possible.

Importance of Prospectus• Prospectus is the window through which an investor can look

in to the soundness of a company’s venture.

The investors must,therefore,be given a complete picture of the company’s intended activities and it’s position.This is done through a prospectus which must secure the fullest disclosure of all material and essential particulars and lay the same in full view of all the intending purchasers of shares.

Contents of Prospectus

• The important contents of prospectus are as follows :

Part I of Schedule II:1.General Information.2.Capital Structure of the company.3.Terms of the Present Issue.4.Particulars of the issue

Cont’d….[Contents]

• 5.Company , management and project.• 6.Particulars in regard to the company and

other listed companies under the same management.

• 7.Outstanding Litigations.• 8.Management perception of risk factors.

1.General Information.• a] Name and Registered office address of the company. b] (i)Consent of the Central Government for the present

issue and declaration of the Central Government about non-responsibility for financial soundness or correctness of

statements. (ii)Letter of intent/Industrial License. c]Names of Regional Stock Exchange and other stock

exchanges where application made for listing of present issue.

[Cont’d]…….

• d] Provisions of sub-section(1) of the section 68A of the Companies Act,relating to

punishment [imprisonment up to five years]for fictitious applications for shares in or debentures of a company.[Sec.68B] about issue of shares & debentures[IPO] in dematerialized form ,if issue of securities more than rupees ten crore .

• e] Statement /declaration about refund of the issue, if minimum subscription of 90% is not received within 90 days from closure of the issue.

Gen.Information…[Cont’d].• f]Declaration about the issue of allotment

letters/refunds within a period of 10 weeks and interest in case of any delay in refund at the prescribed rate under section 73(2)/(2A).

g] Date of opening of the issue. Date of closing of the issue. h] Names and addresses of auditors and lead

managers.

Gen.Information….. [Cont’d]

• i] Name and address of trustee under debenture trust deed(in case of debenture issue).

• j] Whether rating from CRISIL/ICRA or any rating agency has been obtained for the proposed debenture /preference share issue. If no rating has been obtained,this should be answered as

“No”. If “Yes”the rating should be indicated.

Gen.Information [Cont’d].

• k] Underwriting of the issue. (Names and addresses of the underwriters

and the amount underwritten by them). l] A statement by the Board of Directors stating that- (i) All monies received out of the issue of shares or debenture to public shall be

transferred to a separate bank account other than the bank account. (ii)Details of all monies utilized out of the issue shall be disclosed under an

appropriate separate head in balance sheet of the company indicating the purpose for which such monies had been utilized;

(iii) Details of all unutilized monies out of the issue of shares or debentures,if

any,under appropriate head in the balance sheet.

2.Capital Structure of the company.

• a] Authorized,issued, subscribed and paid up capital.

• b] Size of present issue giving separately reservations for preferential allotment to promoters and others.c] Paid up capital:

* after the present issue * after conversion of debenture (if applicable).

3.Terms of the Present Issue

• a] Terms of payments.• b] Rights of the instrument holders • c] How to apply –availability of

forms,prospectus and mode of payment.• d] Any special tax benefits for the

company and it’s share holders.

4.Particulars of the issue.

• a] Objects:

• b] Project cost:

• c] Means of financing [including contributions of promoters]:

5.Company,management and project.

• a]History and main objects,and present business of the company.

b] Subsidiary(ies)of the company,if any.

c] Promoters and their background .

d] Names, addresses and occupation of manager,managing director and other directors including nominee directors and whole time directors (giving their directorships in other companies).

5. ………..Cont’de] Location of project.f] Plant and machinery ,technology,process ,etc.g] Collaboration ,any performance guarantee or assistance in marketing by the collaborators. h] Infrastructure facilities for raw materials and utilities like water ,electricity, etc.i] Schedule of implementation of the project and progress made so far ,giving details of land

acquisition ,civil works,installation of plant and machinery ,trial production,date of commercial production etc.

j] The products: (i)Nature of product/s-consumer/industrial and users. (ii) Approach to marketing and proposed marketing set up (iii) Export possibilities and export obligations,if any (in case of a company providing

any “service” particulars, as applicable, be furnished).k) Future prospects-expected capacity utilization during the first three years from the date of

commencement of production,and the expected year when the company would be able to earn cash profits and net profits. Stock market data for shares/debentures of the

company high/low price in each of the last three years and monthly high/low during during the last six months(where applicable).

6. Particulars in regard to the company and other listed companies under the same management:

Which made any capital issue during the last three[3] years.

• Name of the company.• Year of issue.• Type of issue(public/rights/composite).• Amount of issue. • Date of closure of issue.• Date of completion of delivery of share/debenture certificates.• Date of completion of project ,where object of the issue was financing of

a project.• Rate of dividend paid.

7.(a)Outstanding litigations pertaining to;[i] matters likely to affect Operation and finances of the company including disputed tax liabilities of any nature;and [ii] criminal prosecution launched against the company and the directors for alleged offences under the enactments under Companies Act 1956.

(b) Particulars of default ,if any, in meeting statutory dues, institutional dues, and towards instrument holders like debentures, fixed deposits and arrears on cumulative preferences shares,etc.

(c) Any material development after the date of the latest balance-sheet and it’s impact on performance and prospects of the company.

8.Management Perception of risk factors:

• [i.e., sensitivity to foreign exchange rate fluctuations,difficulty in availability of raw materials or in marketing of products,cost/time over run, etc].

Part II of Schedule II.

• A]. General Information. 1. Consent of Directors,Auditors,etc their

names and addresses. 2. Expert opinion obtained, if any. 3. Change,if any, in directors and auditors

during the last three years,and reasons thereof.

Continued………

• 4.Authority of the issue and details of resolution passed for the issue.

• 5.Procedure and time schedule for allotment and issue of certificates.

• 6.Names and addresses of company secretary,legal advisor,lead manager,co- manager,auditors,bankers to the company,bankers to the issue,and brokers to the issue.

B.Financial Information:The following reports shall also be set out in the prospectus.

• 1.Report by the auditors: A report by the auditors of the company with respect to;

a] it’s profits and losses and assets and liabilities.b] the rates of dividends paid by the company during the preceding five[5]years.

Continued……..

• 2] A report by the accountants.(who shall be be qualified under the Act

for the appointment as auditors of a company and who shall be named in the prospectus) on profits or losses of the business for the preceding five[5] financial years,and so on the assets and liabilities of the business on a date which shall not be more than 120 days before the date of the issue of prospectus.

Cont’d here……….

• This report is required to be given if the proceeds of the issue of the shares or debentures are to be applied directly or indirectly in the purchase of any business.

• 2 .A the similar report on the accounts of a body corporate by an accountant (who shall be named in prospectus)if the proceeds of the issue are to be applied in the purchase of shares of a body corporate becomes a subsidiary of the acquiring company.

C.Statutory and other information.

• 1.Minimum subscription.• 2. Expenses of the issue giving

separately fee payable to: a] Advisors. b] Registrars to the issue. c] Managers to the issue. d] Trustees for the debenture-holders.

Statutory and other information.[Cont’d]

• 3.Underwriting commission and Brokerage.• 4.Previous issue for cash,if any.• 5.Previous public or rights issue,if any: [During last five years]

a]Date of allotment ,Closing date, Date of refunds,Date of listing on

stock exchange.

Continued………..– b]If the issue(s) at premium or discount and the

amount thereof.– c]The amount paid or payable by way of premium,if

any ,on each share which had been issued within two years preceding the date of prospectus or is to be issued , stating the date or proposed dates of

issue and,where some shares have been or to be issued at a premium and other shares

of the same class at a lower premium ,or at par or at a discount ,the reasons for the differentiation and how any premiums received have been or to be disposed off.

Continued………….

• 6.Commission or brokerage on previous issue.• 7.Issue of shares otherwise than for cash .• 8.Debentures and redeemable preference shares

and other instruments issued by the company outstanding as on the date prospectus and terms of the issue.

• 9. Option to subscribe.

C.Statutory&other Information [Cont’d]

• 10.Details of Purchase of property:If the company proposes to acquire a

business which has been carried on for less than three years,the length of time during which the business has been carried on .

Continued……..

• 11.Details of directors,proposed directors ,whole-time directors their remuneration,appointment,

remuneration of managing directors,interests of directors,their borrowing powers and qualification shares.

Cont’d…….

• 12.Rights of members regarding voting,dividend,lien on shares and the process for modification of such rights and forfeiture of shares.

• 13.Restrictions if any,on transfer of shares and debentures

• 14.Revaluation of assets,if any during last 5 years.• 15.Material contracts and inspection of

documents.

Statements by experts.[Sec 57 to 59].

• 1.Experts to be unconnected with formation or management of the company.

‘Expert’ includes an engineer,a valuer,an accountant and any other person whose profession gives authority to a statement made by him.

• Expert’s consent to issue of prospectus containing statement by him.

OFFER FOR SALE-DEEMED PROSPECTUS[Sec.64].

• The provisions relating to a prospectus are very stringent and the duty of preparing and filing a prospectus in accordance with the law is extremely important.[Pramatha Nath Sanyal Vs. Kali Kumar Dutt (1925)Cal].These requirements used to be evaded by companies in the past by allotting the whole of an issue of shares or debentures to an Issuing House at a certain price.The Issuing House then published an advertisement(which obviously is not a prospectus)in the nature of an offer for sale inviting the members of the public to buy the shares or debentures at a higher price.

The provisions of Sec.64 are summed up as under.

• 1.Prospectus by implication: All documents containing offer of shares or

debentures for sale are included within the definition of the term ‘prospectus’,and are deemed to be ‘prospectus by implication by law’.Any document by which the offer for sale to the public is made by the Issuing House is for all purposes ,deemed to be a prospectus issued by thcompany.[Sec.64(1)].

1.Liability for damages for misstatement in the prospectus (Section.62).

• Every director,promoter and every person who authorizes the issue of the prospectus (no matter whether he has seen it or not) is liable to pay compensation to the aggrieved party(who subscribes for any shares or debentures on the faith of the prospectus) for loss or damage he may have incurred by reason of any untrue statement in the in the prospectus.

Section 64 continues…….

• 2.Intention to offer shares or debentures to the public:Normally,an allotment of,or an agreement to allot,any shares in or debentures to an Issuing House is deemed to have been made with a view to the shares or debentures being offered for sale.

• 3.Additional Information: a]Worth of shares or debentures which are offered b]Issuing House to be deemed director. c]Signing of prospectus by at least two directors.

Mis-statements in prospectus and their consequences.

• The ‘Golden Rule’ for framing of prospectus.A prospectus is a document which holds out to the public as to

what a company is ,what it proposes to do and what it’s prospects are.

It invites deposits deposits from the public or invites offers from the public to subscribe to the share capital and debentures of the company.It is therefore but reasonable that there must be full,frank and honest disclosure of all material facts with scrupulous accuracy in a prospectus and no material fact should be mis-stated or with held.

Continued…….• Mis-statements and non-disclosure of material facts in a

prospectus are fatal to the contract for the purchase of shares and debentures.As such the greatest care is necessary in it’s preparation.The obligations imposed on those responsible for the issue of a prospectus are not only to state accurately all the relevant facts,but also not to omit any fact which may be relevant.This is the

‘golden rule as to framing of prospectus’ which was laid down in New Brunswick & Canada Rly &Land

Co.Vs.Muggerbridge,(1860).

Liability for Mis-statements in Prospectus:

• If there is any misstatement of material fact in a prospectus or if the prospectus omits any material fact , there may arise:

I. Civil Liability. II.Criminal Liability.

I.Civil Liability:Any person who has been induced to subscribe for shares on the faith of the statement in a prospectus that is untrue has has remedies against the company ,and it’s directors,promoters and experts.

I. Remedies against the company

• If there is a misstatement of material information in a prospectus,and if it has induced any shareholder to purchase shares he can—

(1)rescind the contract[rescission],and (2)claim damages from the company

whether the statement is fraudulent or an innocent one.

(1) Rescission of the contract.• Any person ,who takes shares on the faith of statements of

fact contained in a prospectus, can apply to the Court for the rescission of the contract if those statements are false or fraudulent or if some material information has been withheld .

He must, however, apply for the rescission within a reasonable time and before company goes in to liquidation.[Shiromani Sugar Mills Vs.Debi Parasad, (1950)]. But he will have to surrender the shares allotted to him to the company .He gets back the money paid by him along with the interest and his name will be deleted from the register of members.

A contract can be rescinded if the following conditions are satisfied:

• 1. Statements must be material misrepresentation of fact. 2. It must have induced the shareholder to take shares. 3. It must be untrue(in the form & context]. . [Rex Vs.Lord

Kylsant(1932)]. 4. The shareholder must have relied on the statement in the prospectus, while

applying for shares and he is not bound to verify the statement before relying on it [Peek Vs.Gurney(1872)]

5.The omission of material fact must be misleading before the rescission is granted.[Coles Vs.White City Greyhound Association Ltd.(1929)

6.The proceeding for rescission must be started as soon as the allot tee comes to know of a misleading statement in the prospectus.

(2).Damages for the deceit.

• Any person induced by fraudulent statement in a prospectus to take shares is entitled to sue the company for damages.He must prove the same matters in claiming damages for deceit as in claiming rescission of the contract.He cannot both retain the shares and get damages against the company.He must show that he has repudiated the shares and has not acted as a shareholder after discovering the mis-representation.

II.Remedies against the Directors,Promoters and Experts.

• The persons who are liable to pay compensation for any loss or damage to subscribers for any shares or debentures on the faith of a prospectus containing untrue statements are the---

(a)directors at the time of the issue of the prospectus;

(b)persons who have authorized themselves to be named as directors in the prospectus;

(c) promoters; and

(d)persons who have authorized the issue of the prospectus.

(1)Liability for damages for the misstatement in the prospectus[Sec.62]

• Every director ,promoter and every person who authorizes the issue of the prospectus (no matter whether he has seen or not)is liable to pay compensation to the aggrieved party(who subscribes for any shares or debentures on the faith of the prospectus) for loss or damage he may have incurred by reason of any untrue statements in the prospectus.

Defences of directors,promoters,etc[Sec.62(2)].

• Section 62(2) provides that a director,promoter or any other person who authorizes the issue of the prospectus which contains untrue statements is not liable to pay compensation to the aggrieved party[allotee] provided---

[Cont’d]…..Defences of directors,promoters, etc.

• (a) he withdrew his consent before of the prospectus and that it was issued without his authority or consent;

• (b)the prospectus was issued without his knowledge or consent and that on becoming aware of it’s issue,hence forth with gave reasonable public notice that it was issued without his knowledge or consent;

Cont’d…

(c) after the issue of prospectus and before allotment there under ,he, on becoming aware of any untrue statement therein, withdrew his consent to the prospectus and gave reasonable public notice of the withdrawal and of the reason thereof;

(d) he had reasonable ground to believe that the statement was true and he, in fact , believed it to true;

II.Criminal LiabilityWhere a prospectus contains any untrue statement,every person who

authorized the issue of the prospectus is punishable with imprisonment, which may extend to 2 years or with a fine which may extend to Rs 50,000/- or with both.

The punishment for issuing an application for shares or debentures that is not accompanied with the with the prospectus is a fine which may extend to Rs 50,000/-.

PENALTY for fraudulently inducing persons to invest money (Sec.68) is that he[director/promoter etc] shall be punishable with imprisonment up to 5 years or with a fine which may extend up to Rs 1,00,000/-.

Issue and allotment of shares in a fictitious name(Sec.68-A)

• Any person who- (a) makes in a fictitious name an application to

a company for acquiring/subscribing for shares therein, or

(b)otherwise Induces company to allot,or register any transfer of shares there in to him,

shall be punishable with imprisonment up to 5 years.

Statement in lieu of prospectus(Sec.70).

• Where a public company does not invite public to subscribe for it’s shares but arranges to get money from private sources(Issuing Houses), it need not issue a prospectus to the public.In such a case the promoters are required to prepare a draft prospectus known as, “statement in lieu of prospectus”

Cont’d….

• A company having share capital,which does not issue a prospectus ,can allot any of it’s shares or debentures only when at least three(3)days before the allotment of shares or debentures there has been delivered to the Registrar for registration a “statement in lieu of prospectus”.

Allotment only when minimum subscription received.

• No allotment of any shares can be made unless the amount stated in the prospectus as minimum subscription has been subscribed ,and the payable on application for the amount so stated has been paid to and received by the company. A company making any rights or public issue of shares,debentures etc. must receive minimum of 90% subscription against the entire issue before making any allotment of shares or debentures to the public.If this minimum amount of 90 % is not received,the entire amount collected with application has to be refunded to the applicants at the end of 120 days from the opening of the subscription list.If there is a delay in refund of such amount by more than 10 days,the company will pay interest at the rate of 15 per cent per annum for the delayed period.

Commencement of business[sec.149].

• All kinds of companies ,whether limited by shares,limited by guarantee or unlimited companies can commence business immediately after their incorporation,whereas a public company can do so only after it obtains a “a certificate of commencement of business”.

Cessation of membership

• A person may cease to be a member of a company-

1.By an act of the parties. 2.By operation of law.

1.Cessation of membership by the act of the parties:

• A person may cease to be a member of a company-1]If he transfers his shares to another person.2]If his shares are forfeited.3]If the company sells it’s shares under some

provision in it’s Articles.[e.g., to enforce a lien].4]If he rescinds the contract to take shares on the

ground of misrepresentation in the prospectus or on the ground of irregular allotment.

5]If redeemable preference shares are redeemed.6]If he surrenders his shares,where surrender is

permitted.7]If share warrants are issued to him in exchange of

fully paid shares.

2.Cessation of membership by operation of law.

• This covers the following cases: 1.Insolvency:The shares of an insolvent vest in the Official

Receiver or Assignee.When the Official Receiver or Assignee transfers his shares to another person,the insolvent ceases to be member on the registration of the transferee as a member.But the insolvent remains a member as long as his name appears on the register of members of a company

2.Death:The deceased member’s estate ,however ,remains liable until the shares are registered in the name of his legal representative.

3.Sale of shares in execution of a decree of Court. 4.Winding up of the company: During the winding up of the

company a member continues to be liable as a contributory and is also entitled to share in the surplus assets,if any.

RIGHTS AND LIABILITIES OF MEMBERS

• RIGHTS OF MEMBERS:

1.Statutory Rights.2.Documentary Rights.3.Legal Rights.4.Proprietary Rights.5.Remedial Rights.

RIGHTS AND LIABILITIES OF MEMBERS

• Liabilities of members: The liability of the members depend upon the nature of company.

a]Company with unlimited liability.

b]Company Limited by shares. c]Company Limited by guarantee. d]Liability in the event of winding up of a company.

1.Statutory Rights:

• These are the rights which are conferred on the members by the Companies Act.These rights cannot be taken away or modified by any provision in the Memorandum and Articles.

Some of the Statutory Rights of a member are, for example,to…..

• a]Have shares offered in priority in case of increase of capital [sec.81].

• b]transfer of shares [sec.82]• c]receive a share certificate [sec.113]• d]inspect the register of members, register of debenture-holders and

copies of annual returns[sec.163]• e]apply to Company Law Board for calling an annual general meeting

when the Board of Directors [BODs] of the company fails to call such a meeting [sec.167]

• f]receive notice to attend and vote at meetings[sec172].• g]apply to the Company Law Board for calling an extra ordinary meeting of the company where it is impracticable to call such a meeting

[sec.186].

Cont’d……..• h] receive copies of annual accounts of the company [210 and 219]. i] participate in appointments of directors and auditors in the annual

general meetings.[sec.224&225].

j] make an application to the Company Law Board for ordering an investigation in to the affairs of the company[sec.235].

k]present a petition to the Company Law Board for relief in case of oppression and mismanagement [sec.399]

l] petition to the High Court for the winding up of the company [sec.439]..

2.Documentary Rights.

• These are the rights given to members by the Articles and Memorandum of Association.

3.Legal Rights.

• These are the rights which are given to the members by the general law,e.g., in case of any misstatement or concealment of a material fact in a prospectus and has been allotted shares or debentures ,can avoid the contract claim damages under general law.

4.Proprietary Rights.

• 1.The right to participate ratably in dividend distribution when

ordered in the discretion of directors ;

• 2.The right to participate in the distribution of assets when the company goes in to liquidation;

• 3.The right to equality and honesty in the treatment by the directors and majority shareholders in corporate transactions affecting his interests ,such as new issue of shares;

CONT’D[4.Proprietary Rights]

• 4.The right to be registered as a share holder in the company’s books, subject only to valid and authorized transfer of shares;and

• 5.The privilege of immunity from from personal liability of company’s debts.

Right of shareholders to share in the assets of a co.

• An incorporated company’s assets are the property of the company and not of it’s shareholders.

• No shareholder,therefore,has any right to any item of property owned by the company for he has no legal or equitable interest therein. He is entitled to a share in the profits while the company continues to carry on business and a share in the distribution of the surplus assets when the company is wound up.

5.The Remedial Rights.

• These include:• 1 .The right to information and inspection of company’s record;

2.The right to sue the company to prevent or remedy mismanagement or unauthorized acts and to compel the company to enforce it’s rights.

Right of shareholder to share in the assets of the company

• An incorporated company’s assets are the property of the company and that of it’s shareholders. shareholder, therefore, has any right to any item of property owned by the company for he has no legal or equitable interest therein.He is entitled to share in the profits while the company continues to carry on business and share in the distribution of surplus assets when the company is wound up.

Liability of members.

• The liability of members of a company depends on the nature of a company.

1.Company with unlimited liability:

Each member is liable in full for all the debts contracted by the company during the period he was a member.

Cont’d..[Liability of members]

• 2.Company Limited by Shares: Each member is liable to pay the full

nominal value of the shares held by him.If he has already paid a part of the amount on the shares,his liability is limited to the unpaid amount on the shares in respect of which he is a member.

Cont’d..[Liability of members]

• 3.Company Limited by Guarantee: Each member is liable to contribute the amount guaranteed by him to be paid in

the event of winding up of the company.

Register of Members:

– Every company shall keep a register of it’s members and enter therein the following particulars:……………

Register of Members[Sec.150]

• The Register of members contains the following particulars;

• [a] Name and address,and the occupation of each member.

• [b] If the company has a share capital,the shares held by each member and the amount paid,or agreed to be paid, on those shares.Each share shall be distinguished by it’s member.

Cont’d.[Register of Members.]

• [c]The date at which each person was entered in the register as member.

• [d]The date at which any person ceased to be a member. If the company has converted any of it’s shares in

to stock and given a notice of the conversion to the Registrar,the register shall show the amount of stock held by each member instead of shares.

Maintaining the Register of..

• If any default is made in maintaining the register in the above manner, the company and every officer of the ,who is in default, shall be punishable with a fine which may extend up to Rs. 500/- for every day during which the default continues.

INDEX OF MEMBERS[Sec.151]

• Every company with more than 50 members shall keep an index of members along with the register of members.The register itself maybe kept in such a way as to constitute an index. The index may also be in the form of a card index.Any alteration in the register of members shall be noted in the index within 14 days of the alteration.Every officer of co. in default shall be punishable with Rs.500/-.

Place of keeping,&inspectionof Register of members [S.163].

• The register and index of members shall be kept at the registered office of the company.These may,however, be kept at any other place within the city,town or village in which the registered office of the company is situated provided –

• Special resolution copy to be filed with the Registrar approving such a place where Register and Index can be kept.

Cont’d…….

• A company’s register of members is a public document and open to public for inspection during business hours for at least 2 hours each day,except when the register is closed.A member can inspect it without paying any fee.But an outsider can inspect it on payment of Rs.10 with effect from 15 th July,1988.

Power to close Register [Sec.154].

• A company may close the register of members for a total period of 45 days in a year and not exceeding 30 days at any one time.The company shall give at least 7 days’ previous notice of the disclosure of the register by advertisement in some newspaper circulating in the district in which the registered office is situate.

Register to be original evidence

• Register to be prima facie evidence[Sec.164] of matters contained in it.

• Thus where a person’s name is entered in the register of members of a company to his knowledge ,he is deemed to be a member and such an entry throws onus on him of proving that he is not a member.

Rectification of register of members [Sec.111].

• If – (a)the name of any person

(i) is without the sufficient cause, entered in the register of members of a company,or

(ii) after having been entered in the register,is,without sufficient cause,or

[Cont’d]Rectification of Register of Members.

• (b)default is made ,or unnecessary delay takes place ,in entering the register the fact of any person having become, or ceased to be, a member(including a refusal to register a transfer of shares).

• The person aggrieved, or any member of the company, or the company, may apply to the Company Law Board for rectification of the register.The Company Law Board may ,after hearing the parties, either reject the application or direct rectification of the register and also direct the company to pay damages,if any,sustained by any party aggrieved.

Cont’d……..• The above provisions shall apply in relation to the rectification

of the register of debenture-holders as they apply in relation to the rectification of the register of members.

• If default is made in giving effect to the orders of the company Law Board under Section. 111, the company and every officer of the company,who is in default, shall be punishable with fine which may extend to Rs 1000/- and with further fine which may extend to Rs 100/- for every day after the first day after which the default continues.

ANNUAL RETURN

• Every company shall file with the Registrar an annual return containing certain particulars.This enables the Registrar to make in his records the necessary changes that occurred in the constitution of the company during the year.

Annual Return of the Company having Share capital.(Sec.159)

• Every company having share capital ,shall,within 60 days from the date of the annual general meeting ,file every year with the Registrar a return known as the “Annual Return”.The return shall contain the following particulars regarding—

• (1) The Registered office address of the company.• (2)If any part of the register of it’s members and debenture

holders is kept in a foreign country, the name of the country and the address of the place where it is kept.

Cont’d…

• 3.The shares and debentures,giving a summary ,distinguish wherever possible between shares issued for cash,bonus shares, and shares other than bonus shares issued as fully or partly paid otherwise than in cash.

• 4.Particulars of the indebtedness of the company in respect of all shares(including mortgages) which are required to be registered with the Registrar.

Cont’d…….

• 5.A list containing the names,addresses, descriptions and occupations,if any, of members and debenture holders, past and present, and stating the number of shares or debentures held

by each.• 6.Particulars with respect to directors,

managing directors, managers, and secretaries,past and present.

Con’t……

• If any of the five preceding returns has given full particulars required as to past and present members and the shares held and transferred by them and the shares held by them.

• The copy of the annual return filed with the Registrar shall be signed by director and by the manager or secretary ,if any ,or by 2 directors.

Cont’d……..

• The return shall be accompanied with a certificate signed like wise stating, that the return states facts as they stood on the day of the annual general meeting.

• The fact that no annual general meeting was held is no justification for not complying with the requirements of Sec.159

Annual Return of a company not having share capital:

• It shall state the following particulars: 1. The Registered Office Address Of Co. 2.The names of members and respective dates on

which they became members and the names of persons who ceased to be members since the date of the last AGM and the dates on which they ceased to be members.

Cont’d…….

• 3. All such particulars with respect to the persons who,at the date of the return,were the directors,it’s manager and it’s secretary;

• 4. A statement containing the particulars of the total amount of indebtedness of the company in respect of charges which are to be registered with the registrar.

Cont’d…..

• The copy of the Annual Return filed with the Registrar shall be signed by a director and by the manager or secretary , if any,or by two directors.

• The return shall be accompanied with a certificate signed likewise stating, that the return states facts as they stood on the day of annual general meeting.

SHARE CAPITAL

• Share capital means the capital raised by a company by issue of shares.The word ‘Capital’ in connection with a company may be used in the following senses:

• 1. Authorized,Nominal or Registered capital. This is the nominal value of the shares which a

company is authorized to issue by it’s Memorandum of Association. This is the maximum capital which the company will have during it’s life time unless it is increased.

CONT’D……..• 2.Issued and Subscribed Capital: Issued capital is the nominal value of shares which are

offered to the public for subscription. A company does not normally issue all it’s shares at once, so

that issued capital in such a case is less than the nominal capital.The issued capital can never exceed the nominal capital.Some times all shares offered to the public are not taken up.In such a case that part of issued capital which is taken up by the public is called the subscribed capital.

Cont’d…….

• 3.Called up capital: This is that part of the issued capital which has

been called on the shares. 4.Paid up Capital: This is that part of the issued capital which has been

paid up by the shareholders or which is credited as paid up on the shares.

Cont’d……..

• 5.Uncalled Capital: This is the reminder of the issued capital

which has not been called.The company may call this amount any time,but this is subject to the terms of issue of shares and the provisions of the Articles.

Cont’d……….

• 6.Reserve Capital: That part of uncalled capital which can be called

only at the time of and for the purposes of winding up of the company is known as ‘ reserve capital’.It is available only for the creditors on the winding up of the company.

Kinds of Share Capital

1.Preference Share Capital2.Equity Share Capital

1.Preference Share Capital:Preference share capital means in case of a company limited by shares, that part of the capital of the company which carries a preferential rights as to –[a] payment of dividend during the life time of the company; and [b] return of capital on winding up [Sec.85(1)].

Cont’d….

• 2.Equity Share Capital:Equity share capital means, with reference to a company limited by shares, all share capital which is not preference capital.[Sec.85(2)].

ALTERATION OF CAPITAL[Sec.94]

A limited company having a share capital may, if so authorized by it’s Articles, alter it’s share capital as follows , that is to say ,it may-

• a]increase it’s authorized share capital by issuing new shares; b]consolidate and divide all or any part of it’s share capital in to shares of smaller amount :

c]Convert fully paid shares in to stock. d]Cancel shares which have not been taken up.

Reduction of Capital

• The law regards the capital of a company something sacred and permits it’s reduction only when all the formalities as required by Sections.100 to 103 of the companies are complied with.

• Reduction of Capital with the consent of the court: Under Section 100, a company limited by shares or a company limited by guarantee and having a share capital may, if so authorized by it’s Articles, by a special resolution , reduce it’s share capital .This is however subject to confirmation by the Court.

Cont’d…….• The company may reduce it’s share capital in any of the following ways: (a) It may extinguish or reduce the liability on any of it’s shares in

respect of share capital not paid up[Sec.100(1)(a)]. E.g., A Limited, a company limited by guarantee and having a share

capital, has a share capital of Rs 10,00,000/- consisting of 1,00,000 shares of Rs 10/- each,Rs 6/- per share being paid up.The directors feel the company would not require the uncalled amount of Rs 4/- per share.The company may, after complying with legal formalities, extinguish the remaining liability of uncalled share capital at the rate of Rs 4/- per share.

Cont’d……..• (b)It may,either with or without extinguishing, or reducing liability on

any of it’s shares cancel any paid up share capital which is lost ,or is un-represented by available assets [Sec.100(1)(b)].

E.g., Due to heavy trading losses,B Limited,a company limited by shares, reduces it’s equity shares of Rs 10 each, fully paid up ,to Rs 2 per share. If the company extinguishes liability on these shares , Rs. 10 per shares, will become shares of Rs 2 each fully paid up.If the company does not extinguish liability on these shares ,the Rs 10 shares will continue to be shares of Rs 10 each,Rs.2 per share paid up.

Cont’d………..• (c) It may,either with or without extinguishing or reducing liability on

any of it’s shares, pay off any paid up share capital which is in excess of the requirements of the company[Sec.100(1)(c)].

E.g., C Limited, a company limited by shares, has equity share capital consisting of Rs 10 shares,fully paid up.The capital is in excess of the requirements of the company.The company, after complying with the legal formalities, returns Rs 4 per share .If the company extinguishes liability on these shares ,Rs 10 shares will become shares of Rs 6 each fully paid up.If the company does not extinguish liability on these shares ,the Rs 10 shares will continue to be shares of Rs 10 each, Rs 6 per share paid up.

Procedure for Reduction of Share Capital

• 1.Special Resolution: A company shall first pass a special resolution for reduction of capital(Sec.100). Power to reduce capital may be granted in the Articles of the company and it is not sufficient if the Memorandum alone makes provision there of.

• If the Articles do not grant such such power, they may be altered by a special resolution giving such powers.

Cont’d……..

• 2.Application to the Court: The company shall then apply to the Court by

petition for an order confirming the reduction of capital [Sec.101(1)].The main duty of the Court is to look after the the interests of the creditors and different classes of shareholders.The Court may fulfill this duty towards them in the following orders.

Cont’d……….

• (1).Interest of Creditors:(a) Every creditor of the company is entitled to

object to the reduction as a matter of right ,where reduction involves diminution of liability on any shares in respect of unpaid capital ,or repayment of amount already paid on any share[Sec.101(2)(a)].

Cont’d……….

• (b) The Court shall settle a list of such creditors as are entitled to object.It may publish notice ,fixing a day or days within which creditors not entered on this list may claim to be so entered, or may be excluded from the right of objecting to the reduction. [Sec.101(2)(b)].

Cont’d………

• (c ) Where a creditor entered on the list does not consent to reduction and his debt is not discharged or determined by the company,the Court may either have his interest secured or determined or, if it thinks fit,dispense with his consent [Sec.101(2)(c) and(3)].

Cont’d…….

• (d)If the Court is satisfied that every creditor of the company entitled to object has consented to the reduction or that his debt has been discharged or secured, it may make an order confirming the reduction on such terms and conditions as it thinks fit[Sec.102(1)].

Cont’d…..

• (2).Interest of Shareholders: The Court shall also see, before confirming

reduction of capital ,that the reduction is fair and equitable as between different classes of shareholders in the company. The scheme for reduction of capital is obviously fair if it involves proportion reduction of share capital in respect of all classes of shares.

Cont’d…….

• 3.Registration of Order of Court with Registrar.

The order of the Court confirming the the reduction shall be produced before the Registrar and a certified copy thereof along with the minute shall be filed with him for registration.

Cont’d……..

• When reduction takes effect: The resolution for reducing capital as

confirmed by by the order of the Court shall take effect on it’s registration by the Registrar [Sec.103(2)].

Notice of the registration shall be published in such manner as the Court may direct[Sec.103(3)].

Cont’d…….• Certification of Registration by Registrar: The registrar shall shall certify the registration of the order and the

minute under his hand. His certificate to this effect is shall be conclusive evidence that all the requirements of the Act with regard to reduction of share capital has been complied with and that the share capital is such as is stated in the minute.

The minute,then registered, shall be deemed to be substituted for the corresponding part of Memorandum and shall be valid and alterable as if had been originally obtained therein.[Sec.103(4) and (5)].

Cont’d……..

• Liability of members in respect of reduced shares[Sec.104]

In consequence of reduction of capital the liability of a member of the company ,past or present, shall not exceed in amount the difference between paid up value of the share and the reduced value of of the share.

Cont’……..

• Penalty: [Sec.105]If an officer knowingly conceals the name

of any creditor entitled to object or knowingly misrepresents the amount or nature of his claim or debts or abets or is privy to such concealment or misrepresentation, he shall be liable to imprisonment for a term which may extend to 1 year or with fine or with both.

Shareholders Right of Pre-emption

• If a company limited by shares proposes to increase it’s subscribed share capital by allotment of further shares after the expiry of 2 years from the formation of the company or after the expiry of 1 year from the first allotment of shares,whichever is earlier, it must first offer these new shares to the existing share holders in the ratio of shares held by them .

• This right of share holders to be offered new shares to them before they are offered to the public is known as “Share holders Right of Pre-emption”.

Cont’d…….

• Sec.81 lays down the following procedure in regard to further allotment of shares.

(1)Offer to the existing shareholders. (2)Notice of offer(Give at least 15 days). (3)Share holders Right of Renunciation. (4)Refusal by share holders. (5)Offer of new shares to outsiders.

Conversions of Debentures or Loans in to Shares

• Where a company has taken any loans from the Central Government by issuing any debentures or otherwise, the Government may, in the public interest, convert such debentures or loans in to shares in the company.

• The terms and conditions of such conversion should be such as appear reasonable to the Central Government in the circumstances of the company.

Cont’d……..

• In determining the terms and conditions of the conversion of loans and debentures in to shares, the Central Government must have due regard to –

(a) the financial position of the company. (b) the terms issue of debentures /terms of loans (c) the rate of interest on the debentures/loans (d) the capital of the company, it’s loan

liabilities, it’s reserves and it’s profits during the preceding 5 years, and

(e) the current market prices of shares of the co.

Voting Rights

• 1.Rights of Preference share holders : A preference share holder has a right to vote on those

resolutions which directly affect his rights.Any resolution for winding up of the company or for

the repayment or reduction of share capital is deemed directly to affect the rights of preference share holders.

Cont’d……..The holders of cumulative preference shares have a right to vote

on all resolutions of the company at any meeting if their dividend remains un paid for an aggregate period of at least 2 years preceding the date of commencement of meeting.

In case of non-cumulative preference shares, they have a right to vote on all resolutions of the company at any meeting if their dividends have remained unpaid for 2 financial years immediately preceding the meeting or any for any 3 years during a period of 6 years ending with the financial year preceding the meeting [Sec.87(2)].

Cont’d………

• 2.Rights of Equity Share holders: An equity shareholder of a company limited by

shares has a right to vote on every resolution placed before the company.His voting right on a poll is in proportion to his share of the paid up equity capital of the company[Sec.87(1)].

Issue of Capital-Reservation for Employees

• The Government has introduced a scheme of stock option to the employees and workers of companies to encourage their participation in management.

SHARES

• A share is a ‘share’ in the share capital of a company.• Share carries with it certain rights and liabilities while the

company is a going concern or while the company is being wound up.

• In this sense, it may be defined as ‘bundle of rights and obligations’.

• When the capital of a company is split in to certain units , each unit is called share.

Shares ……..[cont’d].

• A share is evidenced by a share certificate: A share certificate is issued by a company under it’s

common seal.It specifies the shares held by a member and is prima facie

evidence of the title of the member to the shares [Sec.84]. Each share is distinguished by a appropriate number. [Sec.83]. Nature of share:The shares of any member in a company are a movable

property.They are transferable in the manner, provided by the Articles of the company[Sec.82].

SHARE AND STOCK- Distinction:Stock is the aggregate of fully paid shares.

Only fully paid shares can be converted in to stock.

1. A Share may be partly paid or fully paid.2. Shares can be directly issued to the public. 3. Shares always bear distinctive numbers. 4. A share has a nominal value.

1.Stock is always fully paid.2.stock cannot be directly issued to the public.3. stock do not bear any distinctive numbers.4.Stock has no nominal value.

Kinds of shares

• Under the Companies Act,1956, a company can issue two types of shares,viz.,

(1)Preference Shares, and (2)Equity Shares.

Cont’d………

• Types of Preference Shares: 1. Cumulative - Preference Shares 2. Non-Cumulative- Preference Shares 3. Participative - Preference Shares 4.Non-Participative-Preference Shares 5.Convertible- Preference Shares 6.Non-Convertible -Preference Shares 7.Redeemable - Preference Shares

Application and allotment of shares:

• Application for shares is an offer by a prospective share holder to a company to take shares ; allotment is the acceptance by the company of the offer. [Agreement = offer plus acceptance],[an agreement enforceable by law is a contract]

• Allotment results in a binding contract between the company and outsiders.

Rules as to allotment

• 1.Minimum Subscription: No allotment shall be made of a company offered to the public for subscription unless—

a] the amount stated in the prospectus as the minimum subscription has been subscribed,&

b] the sum payable on application for such amount has been paid to and received by the company, whether in cash or by a cheque or other instrument which has been paid [sec.69(10)]

Cont’d……………….• A company making any rights /public issue of shares/

debentures must receive at least 90% subscription of the entire issue before making the allotment of shares/debentures to the public.

• If this amount is not received , the entire amount collected shall be refunded to the applicants at the end of 120 days from the opening of the subscription list.

• An allotment of shares made without application money being paid is invalid and the directors are guilty of misfeasance.

Rules as to allotment……….[cont’d]

• 2.Application money(Sec.69)

The amount payable on application on each share shall be at least 5 percent of the nominal amount of the share[Sec 69(3)].

Cont’d…………………

3. Statement in lieu of prospectus(Sec.70) Where a company having a share capital does not

issue a prospectus, it can not allot any shares or debentures only when at least three

before the first allotment of the shares or debentures, there has been delivered to the Registrar for registration a statement in lieu of prospectus.

This does not apply to a private company.

Cont’d…………………

4.Effect of Irregular Allotment(Sec.71) Allotment of shares is irregular when it has been made

by a company— (a) Without receiving minimum subscription,or (b) Where it has not issued a prospectus without filing

with the Registrar for registration a statement in lieu of prospectus at least 3 days before the first allotment of shares.

Cont’d…………..

• Any director, who has knowledge of the fact of the irregular allotment of shares, is liable to compensate the company and the allot tee respectively for any loss, damages or costs.

• Proceedings to recover any such loss,damages or costs can be commenced within 2 years from the date of the allotment.

Cont’d………• 5.Opening of the subscription list(Sec.72) When shares or debentures of a company are offered in pursuance of

prospectus issued generally , no allotment may be made until the beginning of the 5 th day from the date of the prospectus or on such later day as may be specified in the prospectus. This is known as ‘the opening of the subscription list’.

Eg.,Grace Ltd. Issued a prospectus to the general public inviting subscription for it’s shares in the form of a newspaper advertisement on Monday ,21 st January ,1991 .The earliest date on which subscription list of a company can open is Monday the 28 th January,1991.The following days are public holidays under the Negotiable Instruments Act ,1881:Saturday ,the 26 th January,1991 and Sunday 27 th January 1991.

Cont’d………..• 6.Shares and debentures to be dealt in on a stock

exchange (Sec.73). Refusal of permission by stock exchange:

Right of appeal against refusal to Central Govt within 15 days from refusal:

All application money to be kept in separate bank account:

7.Return as to allotments(Sec.75):Within 30 days of allotment by a company, the company shall file with the Registrar a statement known as ‘return as to allotment’.

Calls on shares:

A ‘call’ is a demand made by a company on it’s share holders , in pursuance of a resolution of the Board of directors and terms of the Articles, to pay the whole or part of the balance remaining un-paid on each share.

• It may be made any time during the life time of the company or during winding up of the company.

Legal Provisions relating to calls:

• 1.Resolution of the Board[292(1)(a).• 2.Bona fide and for the benefit of the

company.• 3.Uniform basis[Sec.91].• 4.Calls in advance(if authorized by Articles)[Sec.92].

• 5. In order with Articles, amount, place and time of payment.

Share Certificate[Sec.113]• Time of Delivery: Every person whose name is entered as a member in the register of

members of a company has a right to receive a certificate of his shares. A share certificate shall be under the seal of the company, and shall

specify---1.The shares to which it relates2.The amount paid up thereon, and3.The name, address and occupation of the holder of the shares.4.It shall be signed by at least 2 directors and the secretary.

Cont’d……………

The company shall deliver certificates of shares within 3 months of the allotment of shares,or within 2 months after the application for registration of the transfer of any such shares.

The same provisions may apply to debentures.The Company Law Board [CLB]may extend the above periods

within which the debenture certificates are to be issued to a further period not exceeding 9 months.

Cont’d………….

• Object of Share Certificate: A share certificate under the seal of a company ,

specifying the shares held by a member is, prima facie evidence of the title of the member to such shares[Sec84(1)].

Cont’d………..

• Lost or defaced Certificate: A share certificate may be renewed or it’s duplicate be issued if such certificate-

(a)is proved to have been lost or destroyed, or (b)having been defaced torn, is surrendered to the

company [sec.84(2)].

Cont’d…………..

If the company with intent to defraud renews a certificate or issues a duplicate certificate, the company shall be punishable with fine which may extend to Rs 10,000/- and every officer shall be punishable with imprisonment up to 6 months or fine with Rs.10,000/- or with both [sec.84(3)].

Share warrant [Sec.114&115]

• A public company limited by shares may convert it’s fully paid-up shares in to share warrants.

• The bearer of share warrant is entitled to the shares specified therein.

• One great advantage of issuing share warrants is that shares can be transferred by mere delivery of the warrant.

• The registration of the transfer of shares in such a case with the company is not necessary.

Conditions for issue of share warrant.

• A public company limited by shares can convert it’s shares in to share warrant only when;

• 1.The shares are fully paid up.• 2.The Articles authorize the issue

of share warrants.• 3.Prior approval of the Central

Government.

DISTINCTION BETWEEN SHARE WARRANT & SHARE CERTIFICATE

• Share Warrant 1.Issued only by public companies. 2.Can only be issued by a public co. only if it is empowered to

do so by it’s Articles & has obtained prior approval of the Central Government.

• Share Certificate 1. Issued by both public as well as private companies. 2.No such power needed to be taken in the Articles of

Association, nor is the approval of the Central Government required.

Cont’d…………..

• 3.It can be issued only with respect to fully paid-up shares.

• 4.The holder of share warrant is not a member unless the Articles otherwise provide.

• 3.It can be issued even where the shares are partly paid up.

• 4.Holder of share certificate is a member of the company.

Cont’d…………

• 5.It is a negotiable instrument .

• 6.Can be transferred by mere delivery and no registration of transfer required.

• 5.It is not a negotiable instrument.• 6.Shares can be transferred by execution of

transfer deed and it’s delivery along with the share certificate.

Cont’d…………

• 7.Where a director is required to hold some qualification shares, a share warrant does not constitute such qualification shares.

• 8.A holder of share warrant cannot do so.

• 7.A share certificate does.

• 8.Holder of a share certificate can present a petition for the winding up of the company.

Cont’d…………..

• 9.Dividend due on a share warrant is advertised in news papers and is payable to the holder of the dividend warrant on presentation of the relevant coupon attached to the share warrant.

• 9. Dividend is paid to the holder of a share certificate by the issue of dividend warrant in his favor.

Cont’d……..

• TRANSFER OF SHARES.The shares or other interest of any member in a

company are movable property, transferable in the manner prescribed in the Act and the Articles of the company(sec.82).

CONT’D……………………..

Sec 82 and 111 permit the Board of directors to assume powers under the Articles of Association to refuse registration of transfer of securities(both shares or debentures) without assigning any reason.A provision, however, has been made for an appeal against such a refusal to the Company Law Board.

Power of Directors to reject transfer of shares.

• This may be discussed under two heads:1.Where the Articles contain no clause allowing

the directors to reject the transfer. In such a case,a share holder may freely

transfer his shares and may compel the directors to register the transfer.

Cont’d…………..

• 2.Where the Articles contain a clause empowering the directors to reject the transfer.

The Articles usually contain a clause giving power the directors to refuse transfer of shares without assigning reasons.But even in that case, the refusal must be guided by sound principles and must be in the interest of the company and subject to Sec.22-A(3)of the Securities Contracts(Regulation)Act,1956.

Forged Transfer

• An instrument of transfer of shares, on which the signature of the transferor is forged is called a forged instrument.Any transfer of shares effected on such instrument is a ‘forged transfer’.

The consequences of a forged transfer are as follows:1.Forged transfer is a nullity and it does not confer any

rights on transferee.2.The buyer[who relies on forged transfer] gets no right

to be registered as a share holder.

Blank Transfer:

• Blank transfer is a transfer whereby the transferor hands over to the buyer the share certificate and a blank transfer deed.

• In the blank transfer deed the transferor only fills in his name and signature.The buyer’s name and signature and the date of sale in the transfer form are left bank.

• The advantage in giving blank deed is that the buyer the buyer will be at liberty to sell it again without filling in his name and signature to a subsequent buyer.

Lien on shares

• ‘Lien ‘ means a right to retain possession of some property of another until some claim attaching to it is settled.

• The right of lien on shares is not conferred on a company by the Statute.It must be clearly provided for in the Articles.

• Company has first and paramount lien on all shares (not being fully paid up)for amount payable on the shares or for any amounts due from the member or his estate to the company.

Cont’d…………………..

• The company’s lien on shares also extends to the dividend payable thereon and the assets receivable by the shareholders upon winding up.

• It continues even after the death of the shareholder.

Cont’d………….

• Loss of lien: A company loses lien if- a]it registers a transfer of shares subject to the

lien of the transferee b]a member pledges his shares to a third party as

security for a loan & the company has notice thereof,and then incurs a liability to the company.In such a case, the pledgee has priority over the lien of the company.

Surrender of shares:• When the shareholder of a company voluntarily gives up his

shares, he is said to have surrendered them to the company.• Surrender of shares by a member to the company is valid- (1)Where the Articles give the directors the power to accept it

and it is accepted, in case of partly paid shares, to save the company from going through the formalities of forfeiture.Thus the surrender of shares which are not fully paid up can be accepted only where a forfeiture would be justified.

Cont’d……………….

• Surrender of partly paid shares, not liable for forfeiture, is unlawful, as it

(a) releases the shareholder from further liability in respect of shares,

(b)amounts to a purchase by the company of it’s own shares, thus resulting in reduction of capital without the sanction of the Court.

Cont’d…………………• (2) Where it is in accordance with the Articles and accepted in

case of fully paid shares in exchange for new shares of the same nominal value and the surrendered shares remain capable of re-issue.

• Surrendered shares can be re-issued in the same way as forfeited shares, if Articles authorize their re-issue.

• The ultimate effect of surrender and forfeiture of shares is the termination of the membership of a shareholder.

• Surrender is voluntary where as, forfeiture is at the instance of the company.m

Forfeiture of shares

• If a shareholder, having been called upon to pay any call on his shares, fails to pay the call, the company has two remedies against the shareholder,viz.,

• 1. It may sue him for the amount due.• 2.It may forfeit his shares, if the power to that

effect has been taken by the company in it’s Articles.

Transmission of shares

• Transmission of shares takes place on the death or insolvency of an individual member or if the member is a limited company, on it’s going in to liquidation.

• When the member of a company dies or is declared insolvent, his shares vest in his legal representative, or Official Assignee or Receiver respectively.

Cont’d………………

• The legal representative or Official Assignee or Receiver can validly transfer the shares to another person even though he himself is not a member.

• In case of transmission of shares ,the person to whom the shares are transmitted should make an application to the company for registration of shares in his name.

PURCHASE BY COMPANY IT’S OWN SHARES (BUY-BACK OF SHARES)[Sec77].

• The purchase of it’s own shares by a company is void and ultra vires the company.

• The following kinds of transactions are, however not prohibited:

1.The lending of money by a banking company in the ordinary course of it’s business.

Cont’d………..

2.The lending of money by a company to it’s employees with it’s employees with a view to purchase fully paid shares in the company and hold them by way of beneficial ownership.The word employee does not include directors and managers.

The maximum amount of loan made to an employee for this purpose can be up to the employee’s salary for a period of 6 months.

Buy-Back of Shares:Conditions• Buy-Back can be financed out of free reserves, securities premium

account and proceeds of an earlier issue.Conditions for buy-back: 1.should be authorized by the articles of the company;

2. 25% of total paid up capital and free reserves of the company is the limit for buy-back ;

3.debt equity- should not exceed 2:1 after buy back; 4. Shares should be fully paid-up;and should conform to

SEBI regulations.

Issue of Shares at Premium[Sec.78].

• A company can always issue shares at a premium. • The expression “premium”is not defined in the Act.It

means the value of any advantage measurable in terms of money which is conferred on shares issued by the company.

• This power of the company to issue shares at premium need not be taken in the Articles.

Issue of Shares at Discount[Sec.79].

• Conditions for issue of shares at discount: 1.Shares to be of class already issued. 2.Resolution of company sanctioned by

Company Law Board. 3.Maximum rate of discount. 4.Company working for a year. 5.Shares to be issued within 2 months of sanction

of Company Law Board.

DIVIDENDS

• One of the main objects of commercial enterprises is to earn profits which are distributed among the shareholders by way of “dividend”.

• The amount to be distributed as dividend is a matter internal management and the Courts do not interfere with the discretion of the directors and share holders in this regard.

Cont’d…………..• The provisions regarding dividend are contained in Sec.93 and

205-207. 1.Resolution at AGM. 2.Payment of dividend in proportion to paid up capital. 3.Dividend to be paid out only out of profits. 4.Transfer to the reserves up to 10% of profits. 5.Dividend payable only in cash. 6.Dividend to be payable out of current year’s profits.

Cont’d………….

• 7.Unpaid dividend account.• 8.Transfer to general account of the Central

Government.• 9.Payment of unpaid or unclaimed dividend.• 10.Dividend to be paid to the registered

shareholder.• 11.Penalty.• 12.Dividend, a debt from the date of declaration.

Borrowing powers of Company• A company needs money to finance it’s activities. • A part of this requirement is met by the issue of shares; for

the rest the company has to resort to public borrowing.• Every trading company, unless prohibited by the

Memorandum or the Articles, has implied power to give security for the loan by creating a mortgage or charge on it’s property.

• A non-trading company requires express power to borrow.This power, in case of such a company, must be taken in the Memorandum or the Articles.

Borrowing powers ……..• A public company having a share capital cannot exercise

borrowing power unless certificate of commencement of business is obtained by it[Sec.149(1)].

• The power of a company to borrow is exercised by the directors.

• [Sec293 (1)(d) prohibits the directors from borrowing money beyond the aggregate of the paid up capital of the company and it’s free reserves unless they have first obtained the sanction of the company in general meeting.

ULTRA VIRES BORROWING

• Borrowing by a company may be a borrowing which is-

1. Ultra vires the company, or 2. Intra vires the company but ultra vires the

directors.1.Borrowing ultra vires the company

If a company borrows money beyond it’s powers, the borrowing is ultra vires the company and is void.

Lender’s Rights

• Where the borrowing is ultra vires the company, the lender of money has no legal or equitable debt against the company.As such he can have no rights against the company for the recovery of the loan.

Cont’d……..

• The lender has,however, the following rights. (a)INJUNCTION: If the money lent to the company has not been spent , the

lender may get injunction to restrain the company from parting with the money.

(b)SUBROGATION: If the money borrowed has been used by the company in paying off it’s lawful debts, the lender will rank as a creditor up to the amount so used, and can recover from the company.

Cont’d……………..

• (c)Identification and Tracing: If then lender can identify his money or any property

purchased with it , he can obtain a tracing order and follow the property, i.e., he can claim the money or the property purchased with the money borrowed .The company in such a case regarded as holding the money lent on trust for the lender.

Cont’d……….

• (d) Recovery of damages: The lender under a transaction ultra vires the

directors may recover damages from the directors for breach of their warranty of authority.

Cont’d…………..

• 2.Borrowing intra-vires the company but ultra-vires the directors.

• If the borrowing is in excess merely of the powers of the directors but not the company, it can be ratified and rendered valid by the company.

• The company has the power to borrow but it has restricted the authority of the directors to borrow up to a certain amount.

DEBENTURES

• The most usual form of borrowing by a company is by the issue of debentures.

• According to Sec.2(12), ‘debenture’ includes debenture stock, bonds and any other securities of a company.

• In other words,debenture means a document which either creates a debt or acknowledges it.

• Debentures are commonly issued in a manner similar to the issue of shares through a prospectus.

Kinds of Debentures

• 1.Bearer or unregistered debentures• 2.Registered debentures• 3.Secured debentures• 4.Unsecured or naked debentures• 5.Redeemable debentures• 6.Perpetual debentures• 7.Convertible debentures

Cont’d………

• Debenture and debenture stock The difference between debenture and

debenture stock is the same as the difference between shares and stock.

Debenture stock is borrowed money consolidated in to one mass for the sake of convenience.

Cont’d………

• Debentures with voting rights not to be issued[Sec.117].

A company cannot issue any debentures carrying voting rights at any meeting of the company.

Issue of Debentures at Discount

• Debentures can be issued at a discount unless the Articles provide otherwise.

• The particulars of such discount in relation to issue of debentures must be filed with the Registrar for registration.

• Interest payable on debentures may be payable on debentures out of capital.

Remedies of debenture holders

• 1.He may sue for his principal and interest.

• 2.He may, if he wishes, petition under 439 for the winding up of the company by the Court on the ground that the company is unable to pay it’s debts.

FIXED AND FLOATING CHARGES

• The power of a company to borrow includes the power to create a charge on the assets.The charge includes mortgage also [Sec124].

• FIXED CHARGES:A fixed charge is one which is created on some ascertained and definite property of the company e.g., charge on land and building.

Cont’d…………….

• FLOATING CHARGES: A floating charge, on the other hand, is an equitable

charge which is created on some asset which is constantly changing,

e.g., a charge on stock in trade, book debts etc.Registrar of charges kept by the Registrar(Sec.130).

DIRECTORS

• A company, though a legal entity in the eyes of law, is an artificial person.

• It being a creation of law lacks both body and mind.

• The persons through whom a company acts and does it’s business, are termed as directors.They are collectively called as Board of Directors.

CONT’D……….

THE DIRECTORS ARE THE BRAIN OF A COMPANY: “ The Board of Directors are the brain and the only

brain of the company, which is the body, and company can and does act only through them ”.

It is only “when the brain(directors) functions that the(body) corporation is said to function”.

Definition of Directors[Sec.2(13)]

• The Companies Act,1956 defines “director” as any person occupying the position of a director, by whatever name called.

• The important factor to determine whether a person is or is not a director is to refer to the nature of the office of it’s duties.

Cont’d…………….

• A director may, therefore, may be defined as a person having control over the direction, conduct, management or superintendence of the affairs of a company.

• ONLY INDIVIDUALS CAN BE DIRECTORS[Sec.253]: A body corporate, association or firm cannot be appointed director of a company. Only an individual can be so appointed.

Cont’d……………..

• NO OF DIRECTORS: Every public company shall have at least three

directors [Sec.252(1)].And every other company at least two directors[Sec.252(2)].

Subject to this statutory limit,the Articles may prescribe the maximum and minimum number of directors of Board of directors.

Increase in directors more than 12 requires approval of Central government[Sec.259].

WHO CAN APPOINT DIRECTORS ?

• 1.The members of the first Board of Directors are usually appointed by Articles of Association or by the Prospectus.

In the absence of the same, the signatories of the Memorandum become the members of the first Board of Directors[Sec.255].

Appointment…..[Cont’d].

• 2.Unless the Articles provide that all directors shall retire in every AGM they are known as Directors by rotation.– The directors shall retire by rotation on the basis of

seniority i.e., on the basis of date of appointment. In case two directors are appointed on the

same day and one is required to retire, the selection shall be made either on the basis of agreement or by lot.

Appointment….[Cont’d].

• These directors are elected in the AGM by the shareholders.The retiring directors may be re-appointed.So in course of time at least two-third of the members of the Board will be appointed by the shareholders.[Sec.255-256].

Appointment…..[Cont’d].

• 3. Non- retiring members of the Board are nominated members of the institutional investors or the central government.They are also qualified to be appointed to the seats of the retiring members to be elected by shareholders.

Of course, the non- retiring members do not retire in the ordinary way.They hold office at the pleasure of the institutions nominating them.

Appointment….[Cont’d].

• 4. Casual vacancies may be filled by the Board of Directors subject to regulations in the Articles(Sec.262) such a director appointed in normal vacancy shall hold office during the un-expired part of the original director in whose place he is appointed.Additional directors are also appointed by the Board of Directors subject to the regulations in the Articles, who shall remain in office until the next AGM[Sec.260].

2.Appointment of Directors by the Board of directors

• The Board of directors may appoint directors— (a) As additional Directors(sec.260) Such additional directors hold office only up to the

date of the next AGM.The number of directors and additional directors must not exceed the maximum strength fixed for the Board by the Articles of the company.

Appointment…[cont’d].

• ADDITIONAL DIRECTORS ARE NOT TO BE COUNTED WHILE DETERMINING

THE NUMBER OF DIRECTORS WHO ARE TO RETIRE BY ROTATION AT THE ANNUAL GENERAL MEETING.

Appointment…[cont’d].

• (b) In a casual vacancy[Sec.262]. In case of a public company , or a private company

which is a subsidiary of a public company, the office of any director appointed by the company in the general meeting may be vacated before his term of office expires in the normal course.

Cont’d…………

In such a case, the resulting casual vacancy may be filled by the Board of Directors at a Board meeting.

A vacancy caused by the retirement of a director by rotation is not a casual vacancy; such a vacancy has to be filled by the AGM.

A person appointed in a casual vacancy will hold office only up to the date up to which the director in whose place he is appointed would have held office.

Cont’d……….

• (c)As alternate director(sec.313). The Board of Directors of a company may if so authorized

by it’s Articles or by a resolution passed by the company in general meeting, appoint an alternative director. He is to act for a director, called ‘the original director’,during his absence for a period of at least 3 months from the State in which meetings of the Board are ordinarily held.

An alternate director is not included in determining the maximum number of directorships a person may hold at a given time.

Cont’d……..

• 3.APPOINTMENT OF DIRECTORS BY THIRD PARTIES:

Articles under certain circumstances give power to the debenture holders or other creditors e.g., a banking company or a financial corporation, who have advanced loans to the company to appoint their nominees to the Board.

Cont’d……….

• The number of directors so appointed must not exceed 1/3 of the total number of directors and they are not liable to retire by rotation(sec.255).

4.Appointment of Directors by the Central Government[sec.408].

• The Central Government may appoint such number of directors on the Board of a company as the Company Law Board may specify as being necessary to effectively safeguard the interest of the company, it’s shareholders or the public interest.The period of appointment shall not exceed 3 years on any one occasion .The purpose of this appointment is to prevent the affairs of the company from being conducted.

APPOINTMENT OF DIRECTORS

• 1.First Directors: (a) The Articles of a company usually name the first

directors by their respective names or prescribe the method of appointing them.

(b) If the directors are not named in the Articles, the number of directors and the names of the first directors are determined in writing by the subscribers of the Memorandum or majority of them.

Cont’d…………

• (c).If the first directors are not appointed in the above manner, the subscribers to the Memorandum who are individuals become directors of the company.

• They hold office until directors are duly appointed in the first annual general meeting[Sec 254)].

Share Qualifications of Directors

• The Companies Act,1956 does not require a director to hold any shares at all.

• The Articles of a company usually require it’s directors to hold a certain number of shares.Such shares are called Qualification shares.

• The nominal value of qualification shares should not exceed Rs.5000.

The position of Directors

• It is very difficult to pinpoint the exact legal position of the directors of the company.Directors act in different positions:

Directors as agents, Directors as employees, Directors as officers, and Directors as trustees.

Directors as agents

• Company acts through Directors, who in the eyes of law are agents of the company.The general principles of law of agency regulate in most of the respects of the relationship of company and directors.

• The directors are not personally liable for the contracts provided they act within the scope of their authority and do not make contracts in their own name.If they exceed their powers given to them by MA and AA.

Directors as employees

• There is nothing to prevent a director from being a servant of the company.

• As they are not permanently wedded to the company

Directors as officers

• For certain matters under the Companies Act, directors are treated as officers of a company.

• As such they are liable to certain penalties if the provisions of Companies Act are not strictly complied with.

• Directors occupy important office of directorship.

Cont’d…………..

• Directors as Trustees: 1. Trustees of a company’s money and property in

the sense that they must account for all the company’s money and property over which they exercise control.

2.Trustees of the powers entrusted to them in the sense that they must exercise their powers honestly and in the interest of the company and the share holders and not in their interest.

Cont’d……….

• Directors are trustees for the company and not for the individual shareholders. Further they are not trustees for third persons who have made contracts with the company.

E.g.,PERCIVAL Vs.Wright(1902).

In this case , the directors bought shares from a shareholder, while they were negotiating for the sale of the company to another at a very high price but they did not disclose this fact to the shareholder. Held the purchase of the shares was void.

Cont’d……..

• Although the directors are loosely called trustees, they are not trustees in the strict sense of the term.

The correct view is that they stand in fiduciary relationship to the company and are really only quasi trustees.

Number of Directorships• A person cannot hold office at the same time as director in more than 15

companies[Sec.275].• In calculating the number of companies of which a person may be a

director, the following companies shall be excluded.viz.,

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

b] An unlimited company; c]An association not carrying on business for profit or which prohibits the

payment of a dividend; and d] a company in which such person is only an alternate director.

Disqualifications of Director(sec.283)

• The following persons are disqualified for appointment as directors of a company:

1. A person of unsound mind. 2.An un-discharged insolvent. 3.A convict. 4.A person whose calls in respect of shares of the

company held by him have been in arrear for more than 6 months.

5.A person who is disqualified for appointment as director by an order of the Court under Sec.203 on the ground of fraud or misfeasance.

VACATION OF OFFICE OF DIRECTORS [SEC.283].

• The office of the director of a company becomes vacant if-

a] he fails to obtain qualification shares within 2 months of appointment as per Articles of the company.

b]he is adjudged to be of unsound mind; c]he applies to be adjudicated to be insolvent; d]he is adjudged an insolvent. e] he is convicted by Court of any offence

Cont’d…………..

• f] if he fails to pay any call in respect of shares of the company held by him within 6 months from the last date fixed for the payment of the call.

• g]he absents himself from 3 consecutive meetings of the Board of directors , or from all meetings of the Board for a continuous period of 3 months, whichever is longer,without obtaining leave of absence from the Board;

Cont’d…………..

• h] he becomes disqualified by an order of the Court

• i] he fails to make disclosure to the Board of Directors with regard to to any contracts with the company in which he is directly or indirectly interested;

• j] he is removed before the expiry of his period of office by an ordinary resolution.

REMOVAL OF DIRECTORS

• Directors may be removed by- 1.SHAREHOLDERS [Sec.284]. 2.CENTRAL GOVERNMENT [288B-288E]. 3.COMPANY LAW BOARD [SEC.402].

Remuneration to Directors

• The remuneration payable to the directors of a company, including any managing director is determined either by the Articles of the company or by special resolution passed by the company in general meeting.

Overall maximum Remuneration

• The total managerial remuneration to the managing/whole time directors and CEO of a public company or a private company which is a subsidiary of a public company in respect of any financial year must not exceed 11% of net profits of the company.

• The percentage above said is exclusive of any fees payable to directors for attending meetings of the Board of Directors or any committee thereof.

Rules regarding directors’ remuneration

• 1. Director may receive remuneration by way of fees for each meeting of the board.

• 2.A whole time or managing director may be paid remuneration either by way of

monthly payment or at a specified percentage of net profits of the company or partly by one way partly by the other. Except with the approval of the Central Govt. such remuneration must not exceed 5% of net profit for one such director.

Cont’d…………………..

• 3. A whole time director or a managing director who receives commission from the company is not entitled to receive a commission or remuneration from any subsidiary of the company.

• 4.A company shall not pay to any officer or employee remuneration free of tax.

• 5.The above rules are not applicable to private companies.

Loans to Directors[Sec.295]

• Without obtaining the previous approval of the Central Government a company must not, directly or indirectly, make any loan to:

(a) any director of the company or to directors of it’s holding company or to any partner or relative of any director.

Cont’d……..• b]any firm in which any such director or relative is a

partner;• c]any private company of which any such director is

a director or member;• d] any body corporate at whose meeting any director

or directors control 25% of the total voting rights;and• e] any body corporate whose Board of Directors or

manager is accustomed to act in accordance with the directions of the Board of Directors, or any director or directors , of the lending company.

Meetings of Directors

• Directors of company exercise most of their powers at the meetings of the Board.The Companies Act contains the following provisions relating to Board meetings:

• 1.Number of meetings:Every public company or a private must hold a meeting

of it’s directors at least once in every three months and at least 4 such

meetings must be held in every year.

Cont’d…..• 2.Notice of meetings: A written notice of every meeting Board meeting must be

given to every director [at the given address](Sec.286). 3.Quorum for meetings:Quorum for the meeting of the Board is

1/3 rd of it’s total strength or 2 directors whichever is higher[Sec.287(2)].

If the meeting of the Board cannot be held for want of quorum automatically it stands adjourned till same day in the next week.

However Articles may provide otherwise[Sec.288(1)]

Powers of Board• General Powers of the Board [Sec.291]. The Board of Directors of a company is entitled to exercise all powers and

to do all acts and things which the the company is authorized to do.This is however subject to the provisions(conditions) of the Act.

• There are two such conditions: First, the Board shall not do any act which is to be done by the company in

general meeting, Second, the Board shall exercise it’s powers subject to the provisions

contained in that behalf in the Companies Act, or in the Memorandum or Articles of the company or in any regulations made by the company in general meeting[Sec.291(1)].

Cont’d…..

• 2.Powers to be exercised only at meeting[Sec.292]• The Board of Directors of a company(public and private both)

must exercise the following powers on behalf of the company by means of resolutions passed at meetings of the Board, viz., the power to-

(a) make calls on shares; (b) issue debentures; (c ) borrow money otherwise than on debentures;

Cont’d………

• (d) invest the funds of the company; and• (e) make loans.

There are certain other powers which must be exercised only at the meeting of the board

• (a)To fill vacancies in the Board(sec.262);• (b)To sanction or give consent for certain contracts in

which particular directors, their relatives and firms are interested(sec297).

Cont’d……..

• (c )to receive notice of disclosure of shareholdings of directors(sec.308)

• (d)To appoint managing director a person who is already managing director of another company

(Sec.316 & 386);

• (e)To make investments in companies in the same group(sec.372).

Cont’d…….

• Restrictions on powers (Sec.293) Directors [private and public companies] shall

exercise the following powers only with the consent of shareholders in general meeting;

1.To sell ,lease or otherwise dispose of the whole, or substantially the whole, of the undertaking of the company.

Cont’d…….

• 2.To give time for repayment of any debt due to the company by any director.

• 3.To invest the amount of compensation received by the company in respect of compulsory acquisition of any undertaking or property of the company.

Cont’d…..

• 4.To borrow moneys where the money to be borrowed, in excess of paid capital and free reserves,

• 5.To contribute to charitable and other funds not directly relating to the business of the company or welfare of it’s employees, amounts exceeding in any financial year Rs.50,000 or 5% of the average net profits of the 3 preceding financial years, whichever is greater.

Duties of Directors

• Directors occupy the key position in the management and administration of the company.

• Their duties are usually regulated by the Articles of the company.

• There are also some (duties or) statutory obligations on the directors:

• The general duties of directors may be classified as(1)fiduciary duties,(2)duties of care,skill and diligence, and(3)other duties.

Duties of directors……….

• 1. Fiduciary Duties: The fiduciary duties of directors are basically identical

with those of any person in a fiduciary position.They must exercise their powers, (a) honestly,and

(b) in the interest of the company and shareholders.

As fiduciaries they must not place themselves in a position in which there is a conflict between their duties to the company and their personal interests.

Cont’d………….

• 2.Duties of Care,Skill and Diligence:

Directors should carry out their duties with such care, skill and diligence as is reasonably expected from persons of their knowledge and status.

If they fail to exercise due care in exercise of their duties, they are guilty of negligence.

Cont’d……..

• The standard of care, skill and diligence would, however, vary with—

(a) the type and nature of work; (b) the division of power between

directors and other officers; (c) the general usages and customs of that

type business; and (d) whether directors work gratuitously or

remuneratively.

There is a brilliant exposition of directors’ duties in relation to a company’s affairs in the following leading

case:City Equitable Fire Insurance Co., Re(1925) The directors of an insurance company left the management

of the company’s affairs almost entirely in the hands of B, the managing director.Owing to B’s fraud, a large amount of the company’s assets disappeared. B and the firm in which he was a partner had taken a huge loan from the company,and the cash at bank or in hand included 7,300 pounds in the hands of company’s stock brokers, in which B was a partner.The directors never inquired as to how these items were made up.

Cont’d……..

• Held, the directors were negligent. [However, in this case, the Articles protected

the directors from liability except in case of willful neglect or default and consequently the directors were not held liable].

In discharging these duties director--

• (a) must act honestly;• (b) must exercise such degree of skill and diligence as would

amount to the reasonable care which an ordinary man might be expected to take in the circumstances on his own behalf;but

• (c) need not exhibit in the performance of his duties a greater degree of skill than what can reasonably be expected of a person of his knowledge and experience; in other words , he is not liable for mere errors of judgment;

Cont’d……..

• (d) is not bound to give continuous attention to the affairs of his company, his duties are of an intermittent nature to be performed at periodical board meetings and the meetings of any committee to which he is appointed and though not bound to attend all such meetings.

Cont’d……..

• 3.Other Duties: [a] to attend Board Meetings [b]not to delegate his functions [to disclose his interest.