COMPANY LAW

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Unit-1
Introduction

Company and its Characteristics; types of companies including one-person company, small company and dormant
company; association not for profit; illegal association and Limited Liability Partnership (LLP); formation of
company and LLP,on-line filing of documents, promoters, their legal position, pre-incorporation contract;
Administration of Company Law [including National Company Law Tribunal (NCLT), National Company Law
Appellate Tribunal (NCLAT), Special Courts].

COMPANY AND ITS CHARACTERISTICS

Meaning and definition of company The term "Company" was originally derived from 2 Latin words Com (means
together) Panis (means bread/meal) Thus the term "Company" was originally used for that group of person who
took their meal together. According to Section 2(20) of Companies Act, 2013, company means a company
incorporated (formed and registered) under this Act or under any of the previous companies laws. Lord Justice
Lindley has defined a company as “an association of many persons who contribute money or money’s worth to a
common stock and employ it in some trade or business and who share the profit and loss arising therefrom. The
common stock so contributed is denoted in money and is the capital of the company. The persons who contributed
to it or form it, or to whom it belongs, are members. The proportion of capital to which each member is entitled is
his “share”. The shares are always transferable although the right to transfer them may be restricted

.” Features Following are the main characteristics of company form of business:

1) Corporate personality: Being an artificial person, a company is a legal entity different and separate from its
promoters, members, directors, and other stakeholders. It has its own corporate name and works under that name. It
can hold its assets in its own name, can sue or be sued in its own name, can borrow/lend funds, open bank
accounts, enter into contracts in its own name Any of its shareholders or directors or other officers cannot be held
liable for the acts of the company even if he/it holds the entire share capital. Further, the shareholders or individual
School of Distance Education Corporate Regulations Page 6 directors are not the agents of the company and so they
cannot bind the company by their personal acts. Company means a company incorporated (formed and registered)
under this Act or under any of the previous companies laws (like Companies Act, 1956).

2) Limited liability: According to Section 3(2), a company may be a company limited by shares A company limited
by shares means the liability of the members towards the company is limited to the amount unpaid on their shares
only. a company limited guarantee A company limited guarantee means the liability of the members towards the
company is limited to the amount of guarantee prescribed in the MOA. Further, in such companies the members can
be made liable only in the event of winding up of the company. an unlimited company An unlimited company
means here the liability of the members is unlimited towards company. But, in none of the above cases, members
can be made liable to anyone else except the company for any act of the company or directors.

3) Perpetual Succession: Perpetual Succession means existence forever. According to Section 9, from the date of
incorporation mentioned in the certificate of incorporation, every company has perpetual succession. A company is
an artificial person created by law; therefore it can be dissolved or wind up by law. In other words, members may
come and go, but the company can go forever.

4) Separate Property: A company is a separate legal entity having its own corporate name. It can hold properties in
its own name. No member can claim himself to be the owner of the company’s property during its existence. In
other words, the property of a company is not the property of the individual members.

5) Transferability of Shares: According to Section 44 of Companies Act, 2013 the shares or debentures or other
interest of any member in a company shall be movable property, transferable in the manner provided by the articles
of the company. According to Section 2(68) (i) of Companies Act, 2013, a private company may restrict the right to
transfer its shares through its AOA. But generally, a public company cannot restrict the transfer of its shares.

6) Capacity to sue and be sued: A company is a separate legal entity having its own corporate name. Therefore,
according to Section 9, a company may sue or may be sued in its own name (not in the name of its directors or
members).

7) Contractual Rights: A company is an artificial person created by law. Therefore like a natural person, it can enter
into a contract in its own name through its agent (directors or other authorised persons).

8) Demutualization (separation of management and ownership): Demutualization means separation of management

and ownership. Under company form of business, management (directors) is different from owners (members).
Members of the company do not get engaged into day-to-day business of the company. Members appoint directors
who run companies on their behalf. Such directors may or may not be members of the company.

9) Common Seal: On incorporation, a company may have a common seal. Since a company has no physical
existence, therefore it has to act through its agents only. To put restriction on the misuse of the powers of those
agents, contracts entered into by anyone on behalf of the company may be under the common seal of the company.
Thus common seal acts as the official signature of the company. Now, after the Companies (Amendment) Act,
2015, it is not compulsory for the company to have a common seal. Thus a company may or may not have a
common seal.

i) Classification on the basis of Incorporation:

There are three ways in which companies may be incorporated.

(a) Statutory Companies: These are constituted by a special Act of Parliament or State Legislature. The provisions
of the Companies Act, 2013 do not apply to them. Examples of these types of companies are Reserve Bank of
India, Life Insurance Corporation of India, etc.

(b) Registered Companies: The companies which are incorporated under the Companies Act, 2013 or under any
previous company law, with ROC fall under this category.

(ii) Classification on the basis of Liability: Under this category there are three types of companies:

(a) Unlimited Liability Companies: In this type of company, the members are liable for the company's debts in
proportion to their respective interests in the company and their liability is unlimited. Such companies may or may
not have share capital. They may be either a public company or a private company.

(b) Companies limited by guarantee: A company that has the liability of its members limited to such amount as the
members may respectively undertake, by the memorandum, to contribute to the assets of the company in the event
of its being wound-up, is known as a company limited by guarantee. The members of a guarantee company are, in
effect, placed in the position of guarantors of the company's debts up to the agreed amount.

(c) Companies limited by shares: A company that has the liability of its members limited by the memorandum to
the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares. For
example, a shareholder who has paid Rs. 75 on a share of face value ` 100 can be called upon to pay the balance of
Rs. 25 only. Companies limited by shares are by far the most common and may be either public or private.

(iii) Other Forms of Companies

(a) Associations not for profit having license under Section 8 of the Companies Act, 2013 or under any previous
company law;

(b) Government Companies;

(c) Foreign Companies;

(d) Holding and Subsidiary Companies;

(e) Associate Companies/Joint Venture Companies

(f) Investment Companies

(g) Producer Companies.

(h) Dormant Companies Private Company According to Section 2(68) of the Companies Act, 2013

“​Private Company​” means a company having a minimum paid-up share capital of one lakh rupees or such higher
paid-up share capital as may be prescribed, and which by its articles, – a) restricts the right to transfer its shares; b)
except in case of One Person Company, limits the number of its members to two hundred: Provided that where two
or more persons hold one or more shares in a company jointly, they shall, for the purposes of this clause, be treated
as a single member: Provided further that – a) persons who are in the employment of the company; and b) persons
who, having been formerly in the employment of the company, were members of the company while in that
employment and have continued to be members after the employment ceased, shall not be included in the number
of members; and c) prohibits any invitation to the public to subscribe for any securities of the company;

Public Company

According to Section 2(71) of the Companies Act, 2013 “public company” means a company which – a) is not a
private company; b) has a minimum paid-up share capital of five lakh rupees or such higher paid-up capital, as may
be prescribed: Provided that a company which is a subsidiary of a company, not being a private company, shall be
deemed to be public company for the purpose of this Act even where such subsidiary company continues to be a
private company in its articles. As per section 3 (1)

(a), a public company may be formed for any lawful purpose by seven or more persons, by subscribing their names
or his name to a memorandum and complying with the requirements of this Act in respect of registration. Associate
Company As per Section 2(6), “Associate Company”, in relation to another company, means a company in which
that other company has a significant influence, but which is not a subsidiary company of the company having such
influence and includes a joint venture company. Explanation to section 2(6) provides that “significant influence”
means control of at least twenty per cent of total share capital, or of business decisions under an agreement.

SMALL COMPANY AND DORMANT COMPANY

SMALL COMPANY

According to Companies Act 2013, Small company means the company which satisfies the following conditions:-

- It has paid up share capital of not more than 50 lakhs.

 - It has annual turnover of not more than 2 crores.
- OPC is a type of small company.

To become a Small Company, a Private Company requires to fulfill both of the conditions prescribed above.

Features Of Small Company

1. Small company is a Private Company.

2. It has limited Area of operation.
3. It has a fewer number of employees.
4. Companies Act 2013 provides certain benefits to Small Company.
5. It holds a limited amount of Investment.
6. It has Separate legal entity from its owners.
7. The status of a Small Company may change from year to year as capital and turnover changes every year.

Privileges

Companies Act 2013 provides certain benefits to the Small company which includes:-

● Every company is required to hold 4 Board Meetings in a year. While a Small Company needs to hold only
2 Board meetings in a calendar year i.e. one board meeting in each half of the calendar year. However the
gap between the two board meetings should not be less than 90 days.
● In case of Small Company, the Annual Return can be signed by Company Secretary alone or if there is no
CS, by a single Director only.
● A Small company does not require to maintain a Cash flow statement as a part of its Financial Statements.
● Every company needs to change its auditor by rotation according to Section 139(2) of Companies Act 2013.
However Small company need not comply this section and hence is exempt from the requirement of this
section.
● A Small Company does not require to report in its Audit Report regarding Internal Financial controls and
the operating effectiveness of the company.
● In case of Small Company, Companies Act prescribes lesser penalties as compared to every other company.

DORMANT COMPANY

Dormant company is in the Sec 455 of the companies act of 2013,

A dormant company is an excellent opportunity to start a company for a future project or hold an asset/intellectual
property without having significant accounting transactions* On the other hand if a company has not filed its
annual returns for two consecutive years then such a company will also be called as a dormant company.

455 (1) Where a company is formed and registered under this Act for a future project or to hold an asset or
intellectual property and has no significant accounting transaction, such a company or an inactive company may
make an application to the Registrar in such manner as may be prescribed for obtaining the status of a dormant
company.

Explanation.—For the purposes of this section,—

(i) “inactive company” means a company which has not been carrying on any business or operation, or has not
made any significant accounting transaction during the last two financial years, or has not filed financial statements
and annual returns during the last two financial years;

(ii) “significant accounting transaction” means any transaction other than—

(a) payment of fees by a company to the Registrar;

(b) payments made by it to fulfil the requirements of this Act or any other law;

(c) allotment of shares to fulfil the requirements of this Act; and

(d) payments for maintenance of its office and records.

(2)The Registrar on consideration of the application shall allow the status of a dormant company to the applicant
and issue a certificate in such form as may be prescribed to that effect.

(3) The Registrar shall maintain a register of dormant companies in such form as may be prescribed.

(4) In case of a company which has not filed financial statements or annual returns for two financial years
consecutively, the Registrar shall issue a notice to that company and enter the name of such company in the register
maintained for dormant companies.

(5) A dormant company shall have such minimum number of directors, file such documents and pay such annual
fee as may be prescribed to the Registrar to retain its dormant status in the register and may become an active
company on an application made in this behalf accompanied by such documents and fee as may be prescribed.
(6) The Registrar shall strike off the name of a dormant company from the register of dormant companies, which
has failed to comply with the requirements of this section.

Association not for profit

There are three forms of non profit associations in India :-

1.​ ​Trust –

· a trust is a three party relationship in which the first party transfers his/her property to the second
party for the benefit of the third party.

· For example, if a rich person (first party) transfers his land to an education trust (second party) to
build a school and use it for the benefit of the poor children (third party), then the rich person is
called the ​author​, educational trust becomes the ​trust and the poor children will be called the
beneficiaries​.

· Trusts are governed by the ​Indian trust act, 1882.

2.​ ​Societies –

· Society is a group of persons (minimum 7) who are associated together for a common purpose. The
purpose may be related to promoting any literary, charitable or scientific work, which may work for
the benefit of its members or a particular group of people.

· societies usually have a monthly or an annual subscription for its members and charge a one time
fee for the non members who avail their services.

· Example – social clubs, all types of cooperative societies, libraries etc.

· Societies are governed by the societies act 1860.

3.​ ​Section 8 companies –

· There is a separate section in the companies act that deals with the legislation of the non profit
organisations incorporated as companies. A company is referred to as ​Section 8 Company when it
registered as a Non-Profit Organization (NPO) i.e. when it has motive of promoting arts, commerce,
 education, charity, protection of environment, sports, science, research, social welfare, religion and
intends to use its profits (if any) or other income for promoting these objectives.

NOTE – since this chapter deals with more of the companies act, more weighage is given to the section 8
companies in the discussion. The above information is given for knowledge purpose only. If interested, one can find
more details about trust and societies on

https://keydifferences.com/difference-between-trust-and-society.html#Definition

https://ngosindia.com/ngo-registration/difference-between-trust-society-and-company/

​Section 8 companies (NPO’s) –

Definition – ​the section 8 of companies act defines a not for profit organisation as:-

When it is proved to the satisfaction of the Central Government that a person or

an association of persons proposed to be registered under this Act as a limited company—
(a) has in its objects the promotion of commerce, art, science, sports, education,
research, social welfare, religion, charity, protection of environment or any such other
object;
(b) intends to apply its profits, if any, or other income in promoting its objects;
and
(c) intends to prohibit the payment of any dividend to its members

Features of a section 8 company:-

· ​Incorporated for social welfare ​- This type of company incorporated for charity, social welfare, social
promotion, their main aim is to promote social welfare and work for society, not to earn profits. Their main
objects depict the reasons for their incorporation, objects are like Sports, Promote commerce, art, science,
education, research, social welfare, religion, charity, protection of the environment, or any such other object.
· ​No minimum capital - As compared to other companies, section 8 companies don’t require any prescribed
minimum paid-up share capital.

· ​Licensed by the government – these companies are recognized and licensed by the government. This makes
receiving donations easier for them as the public would have trust in them.

· ​No dividend distribution - ​This form of company’s doesn’t issue a dividend to its members, because it is
restricted from the law. They cannot distribute their earned profit as dividends to its member; they can use their
profit in promoting their business objectives.

· ​Minimum members – ​atleast two members are required to incorporate a NPO, who will become the
directors of the company.

· ​Principle documents – ​like any other company registered under the companies act, a section 8 company too
has to have a memorandum of association and article of association, in which its charitable purpose has to be
mentioned.

· ​Firms as members – ​unlike a regular company, a firm can be appointed to the board of the NPO.

Advantages/benefits of a NPO:-

· ​Limited liability – ​a NPO maybe a private limited or a public limited company who’s owners
have a limited to their share of capital.

· ​Separate legal entity – ​like any other company, NPO’s also have an existence separate from its
owners which means the NPO can own property and incur debt in its name and has a perpetual
existence. ​A NPO need not add a prefix or a suffix as Ltd or Pvt Ltd

· ​Economic activity – ​a NPO can carry out any type of legal business to finance its objectives.
 They are also given ​tax exemption for the revenues they earn from such activity. However, they’re
not allowed to distribute the profits among the owners and use it only for its objectives.

· ​No minimum capital – ​unlike a regular company, a NPO has no obligation to raise a minimum
capital to get the certificate of incorporation. As per company law 2013, you can start a private
limited company with 0 paid-up capital.

· ​Tax exemption for donors – ​it means that donations made to these institutions are taxed partially
or not taxed at all by the government. For example if a person earns 10,000 and donates 2000 to a
NPO, then he’ll have to pay tax on 8000 only.

Disadvantages of NPO :-

· ​Limited purpose – ​the operations of a section 8 company are restricted to areas specified in the section 8 of
the companies act. In case the NPO ventures out of its specified field then it may attract penalty, may be taxed
or its license may be cancelled by the government.

· ​No remuneration payable – ​the directors do not receive any profits for the efforts they have put in and in
some cases they might receive a nominal salary. The same is with the employees as most of the people doing
the field work for the company are volunteers who may not stick with the company for a long period of time.

· ​Misuse – ​NPOs are being widely misused in India to park the illegal funds of various businessmen and
politicians due to its ease of registration and tax exemption status.

· ​Not allowed to accept deposits - ​Section 8 Company is not allowed to raise capitals by way of deposits but
they can accept donations from the general public. There is no limitation to domestic donations but there are
some restrictions on the foreign donations.

​Illegal association

According to section 464 of the companies act,2103 an illegal association is :-

· A company, association of persons or a partnership having more than 50 members (20 in case of banking
business).

· Carrying out operations for a purpose of earning profits.

· One which is not registered under Indian companies act or any other law.

All such entities that have the above characteristics are considered as illegal associations.

Exceptions:-

The section 464 shall not be applied in the following cases

1. ​Hindu Undivided family​ – the section 464 shall not apply to a HUF even if it exceeds 50 members.

2. ​Association not for profit – any trust, society or a section 8 company that carries out charity activities and
doesn’t function with a aim of earning profit is exempted from this rule.

3. An association of professionals which is governed by a special act such as limited liability partnership act
2008. Example – institute of charted accountants of India (ICAI).

Legal status of an illegal association:-

· All the members of the illegal association have unlimited liability.

· An illegal association cannot enter into contracts, own property, sue or be sued

· Illegal associations are entertained by the court for the process of winding up.

· The profits of illegal associations are subject to income tax.

Legal status of the members:-

· The members are individually responsible for all the actions of the association

· Every member of an association or partnership carrying on business in contravention of this law shall be
 punishable with fine which may extend to one lakh rupees and shall also be personally liable for all liabilities
incurred in such business.

​Limited liability partnership (LLP)

The Limited Liability Partnership (LLP) is viewed as an alternative corporate business vehicle that provides the
benefits of limited liability but allows its members the flexibility of organizing their internal structure as a
partnership based on a mutually arrived agreement. LLP’s are governed by the limited liability partnership (LLP)
act 2008. (The partnership act 1932 is not applicable to LLP’s).

Features of LLP:-

● Separate legal entity.

● Limited liability of partners.
● Perpetual existence – the LLP can continue even if one of the partners dies or retires.
● Rights and duties of a partner are governed by the partnership deed which is a mutual agreement between
the partners.
● LLPs are registered with the registrar of companies.
● Minimum two members are needed to start a LLP. There is no limit on the maximum number of partners.

Benefits:-

· ​Flexibility – ​unlike a company where a shareholder can not directly manage the company, LLPs allow all the
partners to directly take part in the management of the company until unless specified in the partnership deed.

· In a LLP, No partner is liable on account of the independent or unauthorized actions of other partners, thus
allowing individual partners to be shielded from joint liability created by another partner's wrongful business
decisions or misconduct.

· ​No minimum paid up capital – ​unlike a public or a private company, LLPs don not require any minimum
 paidup share capital for incorporation.

· There is ​no limit on the number of partners in a LLP. For a pvt ltd company it is 200 shareholders whereas for
a partnership it is 100.

· LLPs do not have to pay a dividend distribution tax.

· ​No compulsory audit – ​LLPs have to get audited only when,

Ø Their capital exceeds rs. 25 lakh

Ø Annual turnover exceeds rs. 45 lakh.

Disadvantages of LLP:-

· LLPs can not become public entities and raise capital from the public.

· Angel investors and venture capitalists prefer private limited companies over LLPs due to their
creditworthiness.

Kinds of companies The Companies Act, 2013 provides for the kinds of companies that can be promoted and
registered under the Act. The three basic types of companies which may be registered under the Act are:

(a) Private Companies;

(b) Public Companies; and

(c) One Person Company (to be formed as Private Limited).

Section 3 (1) of the Companies Act 2013 states that a company may be formed for any lawful purpose by—

(a) seven or more persons, where the company to be formed is to be a public company;

(b) two or more persons, where the company to be formed is to be a private company; or

(c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by
subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect
of registration Section 3 (2) A company formed under sub-section (1) may be either— (a) a company limited by
shares; or (b) a company limited by guarantee; or (c) an unlimited company.

On-line Registration of a Company.

Before you register your business, you must do all the other basic things like market research, finding a product fit
and ​naming the business​ so that you don’t face roadblocks during the registration process.
You cannot register a business unless you have a name and know what products or services, you’re planning to
offer customers. So do get that part out of the way.

Registering a business at a brick and mortar location can be a huge pain. India is a country that has some amount of
corruption and just to register your business, you may have to grease a lot of palms. It is far more convenient to do
all of this online because the process of online registration is a transparent one.

The following are all the steps you need to take to register a business in India:
➔ Visit the website of the Ministry of Corporate Affairs

To start the process of registering your business online, you need to go to the website of the Ministry of Corporate
Affairs. On this website, there are two forms that you need to locate. One is called DIR3 and the other is called
DSC. Fill out both these forms and then you can apply for the DIN online.

When filling out these forms, do keep in mind that there are certain documents that you will need as they have to be
submitted. These documents include proof of address, current occupation, passport, and educational qualifications.
You must also send passport size photographs.

Then you need to register for the Digital Signature Certificate, which is also known as the DSC. Without the DSC,
you cannot file an application for registration online. As was the case for the DIN, you need documents to file for
the DSC. These include passport, proof of address, passport size photo, educational qualifications, and current
occupation documents.

(Prepare the application

Once you have your DIN and DSC in place, you need to get on with the rest of the preparations for the application.
You have to start with filling out the electronic version of the 1A form. This form is related to the company name.
You have to send them at least 4 different company name options, although some people believe it is better to send
6. The names are then approved by the RoC based on their availability, and also whether they are appropriate.

The RoC can take 2 days to respond. When you are filling this form, you have to pay Rs 500 in fees. Once the name
is approved, you have to file for the registration of the company within the following 6 months. If you wait longer,
the process has to be started all over again.

➔ Draft the MoA and AoA

Your next step is to draft the Memorandum of Association (MoA) and Articles of Association (AoA). These are
legal documents and you can get in touch with lawyers in order to get them filed. The MoA lists out the different
business objectives of the company. The AoA lists out the daily operations of the company and its management
details. Each document has to be mandatorily signed by two people from the company. A witness needs to be
present when the signing is happening.

When these documents are created, you have to send them to the RoC so that they can vet it. It the RoC approves of
the documents, then you need to print them out so that you can get them notarized. Once that is done, you can file
them with the rest of the documents that are needed to register your business.

Once all of this is done, you need to pay the registration fees so that the business can be submitted for registration.
You have to register it in the state where you are working. If all goes well, the RoC will then give you a
Certification of Incorporation that means that your business is a registered one. As soon as that is done, you can
then start conducting your business.
TYPES OF COMPANIES
 FORMATION OF COMPANIES

1) A company may be formed for any lawful purpose by—

a) seven or more persons, where the company to be formed is to be a public company;

b) two or more persons, where the company to be formed is to be a private company; or

c) one person, where the company to be formed is to be One Person Company that is to say, a private company, by
subscribing their names or his name to a memorandum and complying with the requirements of this Act in respect
of registration: Provided that the memorandum of One Person Company shall indicate the name of the other person,
with his prior written consent in the prescribed form, who shall, in the event of the subscriber‘s death or his
incapacity to contract become the member of the company and the written consent of such person shall also be filed
with the Registrar at the time of incorporation of the One Person Company along with its memorandum and
articles: Provided further that such other person may withdraw his consent in such manner as may be prescribed:
Provided also that the member of One Person Company may at any time change the name of such other person by
giving notice in such manner as may be prescribed: Provided also that it shall be the duty of the member of One
Person Company to intimate the company the change, if any, in the name of the other person nominated by him by
indicating in the memorandum or otherwise within such time and in such manner as may be prescribed, and the
company shall intimate the Registrar any such change within such time and in such manner as may be prescribed:
Provided also that any such change in the name of the person shall not be deemed to be an alteration of the
memorandum.

2) A company formed under sub-section (1) may be either—

a) a company limited by shares; or

b) a company limited by guarantee; or

c) an unlimited company.

LLP

To register a Indian LLP, you need to first apply for a Designated Partner Identification Number (DPIN), which can
be done by filing eForm for acquiring the DIN or DPIN. You would then need to acquire your Digital Signature
Certificate and register the same on the portal. Thereafter, you need to get the LLP name approved by the Ministry.
Once the LLP name is approved, you can register the LLP by filing the incorporation form.
Step 1​ : Application for DIN or DPIN
All designated partners of the proposed LLP shall obtain “Designated Partner Identification Number (DPIN)”. You
need to file eForm DIR-3 in order to obtain DIN or DPIN. In case you already have a DIN (Director Identification
Number), the same can be used as a DPIN.
Step 2​ : Acquire/ Register DSC
The Information Technology Act, 2000 provides for use of Digital Signatures on the documents submitted in
electronic form in order to ensure the security and authenticity of the documents filed electronically. This is the
only secure and authentic way that a document can be submitted electronically. As such, all filings done by the
LLP(s) are required to be filed with the use of Digital Signatures by the person authorised to sign the documents.
Acquire DSC -A licensed Certifying Authority (CA) issues the digital signature. Certifying Authority (CA) means a
person who has been granted a license to issue a digital signature certificate under Section 24 of the Indian IT-Act
2000.
Register DSC - Role check can be performed only after the signatories have registered their Digital signature
certificates (DSC) with LLP application. To know about it click
Step 3​ : New User Registration
To file an eForm or to avail any paid service on LLP portal; you are first required to register yourself as a user in
the relevant user category, such as registered and business user. To register now click.
Step 4​ : Incorporate a LLP
Apply for the name of the LLP to be registered by filing ​Form 1 [zip](208KB) (Application for reservation or
change of name) for the same. After that depending upon the proposed LLP, file required incorporation ​Form 2
[zip](681 KB)​ ( Incorporation document and Subscriber’s statement)
Once the form has been approved by the concerned official of the Ministry, you will receive an email regarding the
same and the status of the form will get changed to Approved. To know more about e-Filing process click "All
About e-Filing"
Step 5​ : File LLP Agreement
After incorporation of LLP, an initial LLP agreement is to be filed within 30 days of incorporation of LLP. The user
has to file the information in Form 3 ( Information with regard to Limited Liability Partnership Agreement and
changes, if any, made therein).
Steps for on-line filing of documents for incorporation:
Step 1: Apply for name approval
Step 2: Preparation of documents for incorporation of company. After approval of name or proposed company, the
applicant has to prepare the following documents:

1. Declaration by first subscribers and first directors

2. Memorandum of Association
3. Articles of Association
 4. Declaration by Company Secretary/ Chartered Accountant/ Advocate/ Cost Accountant in practice in form
No. INC 8
5. NOC- No Objection Certificate from the owner of the property if any
6. Proof of Office address- Rental agreement or lease deed along with receipts.
7. Copy of utility bills
8. Proof of identity and residential addresses of subscribers.

Step 3: Fill the information in E-forms - FOrm : SPICE

Step 4: Preparation of MOA and AOA; E-form INC 33 (MOA), E-form INC 34 (AOA)
Step 5: Details of PAN and TAN
Step 6: Submission of all E-forms on MCA website
Step 7: Certificate of Incorporation
Section 7(1) Provides for detailed procedure for incorporation of the company.

PROMOTER

Promoter is the person who originates the idea for formation of a company and gives the practical shape to that
idea with the help of his own resources and with that of others.

According to section 2(69) of the Companies Act 2013:

“promoter” means a person—

(a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in
section 92; or

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or
otherwise; or

(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act:

Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity

Legal Position of a Promoter:

The promoter is neither a trustee nor an agent of the company because there is no company yet in existence. The
correct way to describe his legal position is that he stands in a fiduciary position towards the company about to be
formed.

Lord Cairns has correctly stated the position of promoter in Erlanger V. New Semberero Phophate Co. “The
promoters of a company stand undoubtedly in a fiduciary position. They have in their hands the creation and
moulding of the company. They have the power of defining how and when and in what shape and under what
supervision, it shall start into existence and begin to act as a trading corporation.”

From the fiduciary position of promoters, the two important results follow:

(1) A promoter cannot be allowed to make any secret profits. If it is found that in any particular transaction of the
company, he has obtained a secret profit for himself, he will be bound to refund the same to the company.

(2) The promoter is not allowed to derive a profit from the sale of his own property to the company unless all
material facts are disclosed. If he contracts to sell his own property to the company without making a full
disclosure, the company may either repudiate/rescind the sale or affirm the contract and recover the profit made out
of it by the promoter.

A promoter who wishes to sell his own property to the company must make a ful no l disclosure of his interest.

The disclosure may be made:

(i) To an independent Board of Directors, or

(ii) In the articles of association of the company, or

(iii) In the prospectus, or

(iv) To the existing and intended shareholders directly.

If the promoter fails to discharge the obligation demanded of his fiduciary position the company may rescind the
contract or may in the alternative choose to take advantage of the contract and sue the promoter for damages for
breach of his duty to the company.

Secret profits on the sale of property can be recovered from a promoter only when the property was bought and sold
to the company while he was acting as a promoter.

Remedies available to the company against a promoter

If a promoter makes any secret profit and does not disclose it, in that case a company has the following remedies
available against him.

1) Rescind the contract and recover the secret profit made by him

2) Retain the property, paying no more for it than what the promOter has paid depriving him of his profit.

3) Where the above remedies would be Inappropriate, the company may sue

PRELIMINARY CONTRACTS/PRE-INCORPORATION CONTRACTS MADE BY THE PROMOTERS

Preliminary contracts are those contracts which are made by the promoters with different parties on behalf of the
company yet to be incorporated. Such contracts are generally entered into by promoters to acquire some property or
right for and on behalf of the company to be formed.

The promoters enter into preliminary contracts, generally as agents or trustees of the company. Such contracts are
not legally binding on the company because two consenting parties are necessary to a contract whereas the
company is non​entity before incorporation.

The company has no legal existence until it is incorporated. It therefore follows:

1. That when, the company is registered, it is not bound by the preliminary contract.

2. That the company when registered cannot ratify the agreement. The company was not a principal with
contractual capacity at the time of contract. A contract can be ratified only when it is made by an agent for a
principal who is in existence and who is competent to contract at the time when the contract is made.

3. That if the agent undertook any liability under the agreement, he would be personally liable notwithstanding that
he is described in the agreement as an agent and that the company may have attempted to ratify the agreement.

4. The company cannot enforce the preliminary agreement.

The preliminary contracts made by promoters generally provided that if the company adopts the agreement the
promoter’s liability shall cease and if the company does not adopt the agreement within a certain time either party
may rescind the contract. In such a case promoter’s liability would cease after the lapse of fixed time.
Unit-2
Documents

Memorandum of association and its contents; Articles of association and its contents; prospectus and its types;
Misstatement in prospectus; Types of issue of shares for Public and Private companies, allotment and forfeiture of
share, Transfer and Transmission of shares; Member and their rights; Doctrine of constructive notice and indoor
management.

MOA and AOA

Memorandum of Association (MOA) is a document that contains all the fundamental data which are required for
the company incorporation. The Memorandum is the charter, which characterizes and limits powers and constraints
of the organization.
Articles of Association (AOA) is a document containing all the rules and regulations that govern the company. The
articles demonstrate obligations, rights, and powers of individuals, who are endowed with the responsibility of
running the organization and administration.

Memorandum of Association -Contents or Clauses:

The Memorandum of Association of a company limited by shares must contain the following contents or clauses:

1.​ The Name of the Company: The Name Clause:

The first clause of Memorandum of Association requires a company to state its name. The company being a legal
person, must have a name to establish its identity.

The Memorandum of Association of every company must state the name of company with the word ‘Limited’ as
the last word of the name in case of a public limited company and with “Private Limited” as the last word of the
name in case of private limited company.

2​. The Registered Office of the Company – Registered Office Clause or Situation Clause:

This clause of Memorandum states the name of the State where the registered office of the company is to situate.
This is required in order to fix the domicile of the company, that is, the place of its registration. The actual address
of the registered office is not required to be stated in the Memorandum of Association of the Company. But it is
enough to mention in the Memorandum the name of the State in which the registered office is to be situated.

3​. The Objects of the Company – The Object Clause:

This is the most important clause in the memorandum because it not only shows the object for which the company
is formed but also determines the extent of the powers which the company can exercise in order to achieve the
object or objects. Stating the objects of the company in the Memorandum of Association is not a mere legal
technicality but is a necessity of great practical importance.

The objects clause must state separately:

(i)​ Main Object:

This sub-clause has to state the main object to be pursued by the company on its incorporation and objects
incidental or ancillary to the attainment of main objects.

(ii) ​Other Objects​:

This sub-clause shall state other objects which are not included in the above clause.

4. ​The Liability of Shareholders – The Liability Clause:

This clause of Memorandum of Association has to state the nature of liability that the members incur. In case of a
company limited by shares, the members are liable only to the amount unpaid on the shares taken by them. In the
case of company limited by guarantee the members are liable to the amount undertaken to be contributed by them
to the assets of the company in the event of its winding up.

5. ​The Capital Clause​:

Every limited company having a share capital must state the amount of its share capital with which the company is
proposed to be registered and the division thereof into shares of a fixed denomination, in this clause This capital is
described as “registered”, “authorised” or “nominal” capital and the stamp duty is payable on this amount. There is
no legal limit to the amount of share capital.

It may be any amount running into crores of rupees but denomination of each share should be Rs. 10 or 100 in the
case of equity shares and Rs. 100 in the case of preference shares. The amount of authorized capital should be
sufficiently high so that further issue of shares may easily be done to finance the expanding business.

An unlimited company having a share capital is not required to have the capital clauses in its Memorandum of
Association.

6.​ The Association or Subscription Clause:

Under this clause we have the “declaration of association”, which is made by the signatories of the Memorandum of
Association under their signatures duly attested by witness, that they desire to be formed into a company and that
they agree to the purchase of qualification shares, if any. Each subscriber must take at least one share.

Contents of Articles of Association

Contents of Articles of Association of a limited company is prescribed in Table-F of the Companies Act, 2013.
Generally, the contents of AOA are as follows:

• Interpretation
• Private Company

• Share Capital and Variation of Rights

• Preference Shares

• Alteration to Memorandum

• Control of Shares

• Shares held Jointly

• Increase of Capital

• Lien on Shares

• Calls on Shares and Transfer Of Shares

• Transmission of Shares

• Forfeiture of Shares

• Alteration of Capital

• Capitalization of Profits

• Buy-Back of Shares

• Issue of Shares in Kind

• General Meetings

• Proceedings at General Meetings

• Voting Rights and Proxy

• Directors

• Proceedings of The Board

• Chief Executive Officer, Manager, Company Secretary or Chief Financial Officer.

• Common Seal

• Borrowing Powers
• Operation of Bank Accounts

• Dividends and Reserve

• Accounts

• Audit

• Winding Up

• Secrecy

• Indemnity

• Execution Clause
Prospectus and its types

PROSPECTUS​- In general parlance prospectus refers to an information booklet or offer document on the basis of
which an investor invests in the securities of an issuer company. It has been defined under section 2(70) so as to
mean any document described or issued as a prospectus and includes a red herring prospectus referred to in section
32 or shelf prospectus referred to in section 31 or any notice, circular, advertisement or other document inviting
offers from the public for the subscription or purchase of any securities of a body corporate.

Red herring Prospectus under Explanation to section 32 has been referred to mean a prospectus which does not
include complete particulars of the quantum or price of the securities included therein.

Shelf Prospectus under Explanation to section 31 has been referred to mean a prospectus in respect of which the
securities or class of securities included therein are issued for subscription in one or more issues over a certain
period without the issue of a further prospectus.

The definition clarifies that any notice, circular, advertisement or any other document inviting offers from public
for the subscription or purchase of securities shall be included in the definition of Prospectus.

Matters to be stated in the prospectus

Every Prospectus shall state such information and set out such reports on financial information as may be specified
by the Securities and Exchange Board in consultation with the Central Government:

Provided that until the Securities and Exchange Board specifies the information and reports on financial
information under this sub-section, the regulations made by the Securities and Exchange Board under the Securities
and Exchange Board of India Act, 1992, in respect of such financial information or reports on financial information
shall apply.

SHELF PROSPECTUS-

Shelf Prospectus means a prospectus in respect of which the securities or class of securities included therein are
issued for subscription in one or more issues over a certain period without the issue of a further prospectus. In
simple terms Shelf Prospectus is a single prospectus for multiple public. Issuer is permitted to offer and sell
securities to the public without a separate prospectus for each act of offering for a certain period. Under the Act any
class or classes of companies, as the Securities and Exchange Board (SEBI) may provide by regulations in this
behalf, may file a shelf prospectus with the Registrar. Such prospectus is to be submitted at the stage of the first
offer of securities which shall indicate a period not exceeding one year as the period of validity of such prospectus.
The validity period shall commence from the date of opening of the first offer of securities under that prospectus,
and in respect of a second or subsequent offer of such securities issued during the period of validity of that
prospectus, no further prospectus is required.

An information memorandum is required to be filed by a company filing a shelf prospectus which shall contain all
material facts relating to

• new charges created,

• changes in the financial position of the company as have occurred between the first offer of securities or the
previous offer of securities and the succeeding offer of securities and

• such other changes as may be prescribed, with the Registrar within the prescribed time, prior to the issue of a
second or subsequent offer of securities under the shelf prospectus. According to the rules the information
memorandum shall be prepared in Form PAS-2 and filed with the Registrar along with the fee as provided in the
Companies (Registration Offices and Fees) Rules, 2014 within one month prior to the issue of a second or
subsequent offer of securities under the shelf prospectus.

The section also provides a benefitting provision for the investors, the proviso provides that where a company or
any other person has received applications for the allotment of securities along with advance payments of
subscription before the making of any such change, the company or other person shall intimate the changes to such
applicants and if they express a desire to withdraw their application, the company or other person shall refund all
the monies received as subscription within fifteen days thereof.

RED HERRING PROSPECTUS​-

Red herring Prospectus means a prospectus which does not include complete particulars of the quantum or price of
the securities included therein. In simple terms a red herring prospectus contains most of the information pertaining
to the company’s operations and prospects, but does not include key details of the issue such as its price and the
number of shares offered.

According to section 32 a company proposing to make an offer of securities may issue a red herring prospectus
prior to the issue of a prospectus. Such company proposing to issue a red herring prospectus shall file it with the
Registrar at least three days prior to the opening of the subscription list and the offer.

A red herring prospectus shall carry the same obligations as are applicable to prospectus and any variation between
the red herring prospectus and a prospectus shall be highlighted as variations in the prospectus.

Upon the closing of the offer of securities under this section, the prospectus stating therein the total capital raised,
whether by way of debt or share capital, and the closing price of the securities and any other details as are not
included in the red herring prospectus shall be filed with the Registrar and the Securities and Exchange Board.
ABRIDGED PROSPECTUS-

According to section 2(1) of the Act “abridged prospectus” means a memorandum containing such salient features
of a prospectus as may be specified by the Securities and Exchange Board by making regulations on this behalf.

Section 33 of the Act provides that no form of application for the purchase of any of the securities of a company
shall be issued unless such form is accompanied by an abridged prospectus. A copy of the prospectus shall, on a
request being made by any person before the closing of the subscription list and the offer, be furnished to him.

Nothing aforesaid shall apply if it is shown that the form of application was issued—

(a) in connection with a bona fide invitation to a person to enter into an underwriting agreement with respect to
such securities;

or

(b) in relation to securities which were not offered to the public. The penal provisions provide that a company
which makes any default in complying with the provisions shall be liable to a penalty of fifty thousand rupees for
each default.

Types of Issue of Shares for Private and Public Companies

The three basic steps of the procedure of issuing the shares are:
Allotment of Shares

The decision of the allotment of shares is taken by the company. Allotment of shares to its shareholders is called
Acceptance and is not possible until subscription. Minimum Subscription is the minimum amount stated in the
prospectus that is required to run the Business. It is unlikely that all the applicants will receive the allotment letter.
Some applicants receive regret letters and their application money is returned to them.

After Allotment of shares by the company, the shareholders have to pay the remaining amount due on shares
according to the procedures mentioned in the prospectus.
The minimum subscription amount of 90 percent of the issue is to be achieved by the company in 60 days from the
date of closure of the issue. In case if it is not met, the company will have to refund the entire subscription amount.
There is a relaxation of 18 days. For any delay after 78 days, the company will have to pay an interest of 6 percent
per annum as a penalty.

After the Acceptance of shares, the applicants become shareholders in the company.

Forfeiture of Shares

● Share forfeiture is the process by which the directors of a company cancel the power of a shareholder if he
does not pay his call money when the company demands for it.
● The company will give 14 days' notice; after 14 days if the shareholder does not pay the company will
forfeit his shares and strike his name from the register of shareholders.
● The company will not repay the funds received from the shareholder. In order to do a share forfeiture the
Articles of Association of the company should contain a provision for that.

28. If a member fails to pay any call, or instalment of a call, on the day appointed for payment thereof, the Board
may, at any time thereafter during such time as any part of the call or instalment remains unpaid, serve a notice on
him requiring payment of so much of the call or instalment as is unpaid, together with any interest which may have
accrued.

29. The notice aforesaid shall—

(a) name a further day (not being earlier than the expiry of fourteen days from the date of service of the notice) on
or before which the payment required by the notice is to be made; and

(b) state that, in the event of non-payment on or before the day so named, the shares in respect of which the call was
made shall be liable to be forfeited.

30. If the requirements of any such notice as aforesaid are not complied with, any share in respect of which the
notice has been given may, at any time thereafter, before the payment required by the notice has been made, be
forfeited by a resolution of the Board to that effect.

31. (i) A forfeited share may be sold or otherwise disposed of on such terms and in such manner as the Board thinks
fit.

(ii) At any time before a sale or disposal as aforesaid, the Board may cancel the forfeiture on such terms as it thinks
fit.

32. (i) A person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares, but
shall, notwithstanding the forfeiture, remain liable to pay to the company all monies which, at the date of forfeiture,
were presently payable by him to the company in respect of the shares.

(ii) The liability of such person shall cease if and when the company shall have received payment in full of all such
monies in respect of the shares.

Transfer and Transmission of Shares

Transfer of shares ​(Section 56)

The ​intentional transfer of title to shares, including the rights and duties by one person to another who is wishing
to become the member of the company. It is a voluntary act of the member done according to the articles of the
company. There are two parties involved in this process, transferor and transferee. The other parties include legal
representatives of the deceased or in case the concerned person is insolvent, subscribers to the memorandum, listed
or unlisted company. Transfer of shares is a very common and a normal course of transferring property.

The shares of the public company are freely transferable unless there is a provision made in the Articles of
Association. However, it is to be noted that the company, with a valid reason, can reject the transfer of shares. But
in the case of a private company, there is a restriction on the transfer of shares along with certain exceptions.

Transmission of shares

Many believe that both, transfer and transmission are the same terms but they are not. Transmission of shares
happens due to the ​operation of law i.e. in case if the registered shareholder passes away or becomes insolvent or
lunatic. Another situation when the transmission of shares happens is when the shares are held by a company, and it
is wound up. These shares are transferred to the legal representative of the deceased and to the official assignee of
the insolvent. The exchange of shares happens automatically when the owner dies and passes to the person’s
representative immediately or when a member declares his or her bankruptcy. When the transferee gives the proof
of entitlement of shares then the transmission is recorded by the company.

These are the steps to be followed for the transmission of shares

· When a common holding or legal successor is involved, the survivor who wishes to be handed over by statute
must file a precise application with the firm. The declaration must be preceded by appropriate documentation such
as the Death Certificate, Certificate of Succession, Examination, etc.

· The company then records the death certificate details and the owner shall be given a reference number.

· Upon presentation of documents, the company reviews the documents and, if the materials are in order,
approves the transmission request.
· Should the documents submitted with the application not be in order, the company shall, within 30 days,
notify the individual concerned of its refusal.

· The declared dividend will be payable to the legal representative until the shareholder’s death and the bonus
is received only after the shareholder has registered its name in the event that the shareholder has died.

Difference between Transfer and Transmission of Shares

Members and their Rights

Section 41​ of Companies Act, 1956 talks about who can become a member:

(1) The subscribers of the memorandum of a company shall be deemed to have agreed to become members of the
company, and on its registration, shall be entered as members in its register of members.

(2) Every other person who agrees in writing to become a member of a company and whose name is entered in its
register of members, shall be a member of the company.

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

Rights of the members:

The members of a company enjoy several rights and they are the ultimate authority in the matters of the company
and its management. Their rights can be grouped under three heads. They are detailed below:

1​. Statutory Rights​: These are the rights conferred upon the members by the Companies Act. These rights cannot be
taken away by the Articles of Association or Memorandum of Association. Some of the important statutory rights
are given below:

· Right to receive notice of meetings, attend, to take part in the discussion and vote at the meetings.

· Right to transfer the shares [in case of public companies].

· Right to receive copies of the Annual Accounts of the company.

· Right to inspect the documents of the company such as register of members, annual returns, etc.

· Right to participate in appointments of directors and auditors in the Annual General Meetings.

· Rights to apply to the Government for ordering an investigation into the affairs of the company.

· Right to apply to the Court for winding up of the company.

· Right to apply to the National Company Law Tribunal for relief in case of oppression and mismanagement
under Secs. 397 and 398.

2. ​Documentary Rights​: In addition to the statutory rights, there are certain rights that can be conferred upon the
shareholders by the documents like the Memorandum and the Articles of Association.

3. ​Legal Rights:​ These are the rights, which are given to the members by the General Law.
DOCTRINE OF CONSTRUCTIVE NOTICE AND INDOOR MANAGEMENT

In company law the doctrine of constructive notice is a doctrine where all persons dealing with a company are
deemed (or "construed") to have knowledge of the company's articles of School of Distance Education Corporate
Regulations Page 21 association and memorandum of association. The doctrine of indoor management is an
exception to this rule.

Doctrine of Constructive Notice​:

The Memorandum and Articles, on registration, assume the character of public documents. The office of the
Registrar is a public office and documents registered there are open and accessible to the public at large. Therefore,
every outsider dealing with the company is deemed to have notice of the contents of the Memorandum and Articles.
This is known as Constructive Notice of Memorandum and Articles. Under the doctrine of ‘constructive notice’,
every person dealing or proposing to enter into a contract with the company is deemed to have constructive notice
of the contents of its Memorandum and Articles. Whether he actually reads them or not, it is presumed that he has
read these documents and has ascertained the exact powers of the company to enter into contract, the extent to
which these powers have been delegated to the directors and the limitations to such powers. He is presumed not
only to have read them, but to have understood them properly. Consequently, if a person enters into a contract
which is ultra vires the Memorandum, or beyond the authority of the directors conferred by the Articles, then the
contract becomes invalid and he cannot enforce it, not-withstanding the fact that he acted in good faith and money
was applied for the purposes of the company.

Every person dealing with the company is presumed to have read these documents and understood them in their
true perspective. This
is known as ‘Doctrine of Constructive Notice’. Even if the party dealing with the company does
not have actual notice of the contents, it is presumed that he has “constructive notice” of them.
Examples:
(i) One of the articles of a company provides that a bill of exchange to be effective must
be signed by two directors. A bill of exchange is signed only by one of the directors.
The payee cannot claim under the bill.
(ii) In Kotla Venkataswamy v. Ramamurthy AIR (1934) Mad. 579, the articles provided
that all deeds and documents of the company shall be signed by the managing
director, secretary and working director. A mortgage deed was accepted with
secretary and working director’s signature only. Held, the deed was invalid.
(iii) Similarly, if a person enters into a contract which is beyond the powers of the
company, he cannot acquire any right under the contract against the company.
Doctrine of indoor management
The doctrine of indoor management follows from the doctrine of ‘constructive notice’ laid down in various judicial
decisions. The hardships caused to outsiders dealing with a company by the rule of ‘constructive notice’ have been
sought to be softened under the principle of ‘indoor management’. It affords some protection to the outsiders
against the company. According to this doctrine, after satisfying themselves that the proposed transaction is intra
vires the memorandum and articles, persons dealing with the company are not bound to enquire whether the internal
proceedings were correctly followed. They are entitled to assume that the internal proceedings relating to the
contract are regular as per the memorandum and articles. When an outsider enters into a contract with the company,
he is presumed to have knowledge of the provisions of memorandum and articles as per the doctrine of constructive
notice. But he is not required to go beyond that and to enquire whether the internal proceedings required by these
documents have been regularly followed by the company. They need not enquire whether the necessary meeting
was convened and held properly or whether necessary resolution was passed properly. They are entitled to take it
for granted that the company had gone through all these proceedings in a regular manner. This is known as the
Doctrine of Indoor Management.
Exceptions to the Doctrine of Indoor Management
No benefit under the doctrine of indoor management can be claimed by a person under the following
circumstances:
1) Knowledge of Irregularity​ :
Where a person dealing with the company has actual or constructive notice of any irregularity in the internal
proceedings of the company.
Examples :-
● The articles of a company empowered the directors to borrow up to 1,000.
They could exceed the limit of 1,000 with the consent of the company in general meeting.
Without such consent, they borrowed 3,500 from themselves and took debentures. The company
refused to pay the amount. Held: Their debentures were good to the extent of 1,000 only as they
had notice of the internal irregularity [Howard v. Patent Ivory Co., (38 Ch. D. 156)].
● In the case of T.R. Pratt(Bombay) Ltd. v. E.D. Sassoon & Co. Ltd.[4] Company A had lent money to
Company B for mortgaging its assets. The procedure for the same which was laid down in the Articles for
such nature of transactions were not complied with. The Directors of both the companies were the same. It
was held by the Court that the lender was aware of such an irregularity and hence the transaction was not
binding.
● X and Y are two directors of a company. A transfer of shares in the company had been approved by both X
and Y. X was not validly appointed and Y was disqualified by reason of being the transferee itself. These
 material facts were known to the Transferor of the shares; Hence the transfer of shares was not binding and
stood ineffective.
2) No knowledge about the contents of Article​ :
Where a person did not in fact consult the Memorandum and Articles of the company and consequently did not act
on knowledge of these documents.
Example: T was a director in the investment company. He, purporting to act on behalf of
the company, entered into a contract with the Rama Corporation and took a cheque from the
latter. The articles of the company did provide that the Directors could delegate their powers to
one of them. But Rama Corporation never read the articles. Later, it was found that the directors
of the company did not delegate their powers to T. Plaintiffs relied on the rule of Indoor
Management. Held: They could not, because they did not know the existence of the power to
delegate. [Rama Corporation v. Proved Tin and General Investment Co. (1952) 1 All ER 554].
3) ​Negligence​ :
Where a person dealing with the company was negligent and, had he not been negligent, could have discovered the
irregularity by proper enquiries.
Examples :
● The articles of a company provided that the business of the company was to be managed by the directors .
The sole director and the principal shareholder of the company paid cheques in favor of the company into
his own account. The bank collected the cheques and credited him with the proceeds. An action was brought
against the bank by the company on behalf of the debenture holders. The bank sought to rely on the rule in
Royal British Banks v. Turquand. It was held that the bak was not entitled to do so because the fact that the
director had paid the cheques into his own account and the bank should have enquired as to whether the
company had a separate banking account[A. L. Underwood v. Bank of Liverpool (1924) 1 K. B. 775].
● For example, in the case of Anand Bihari Lal v. Dinshaw & Co.[6] The Plaintiff had accepted a transfer of a
company’s property from the accountant of the company. It was held by the court that the transfer is void in
nature as such a transaction was beyond the scope of the accountant’s authority. It was the duty of the
plaintiff to check the power of attorney that was executed in favour of the accountant by the company.
4) ​Forgery​ :
Where a person dealing with the company relies upon a forged document or the act done by the company is void.
School of Distance Education Corporate Regulations Page 22 .It is pertinent to note that the Doctrine of Indoor
Management does not apply in cases where an outsider relies on a document which is forged in the name of the
company. A company can never be held liable for the forgeries committed by its officers.
● For example, In the case of Ruben v. Great Fingall Ltd.[5] The Plaintiff was a transferee of the share
certificate issued under the seal of the defendant company. The certificate was issued by the Company’s
secretary who has forged the signature of the two directors of the company and affixed the seal of the
Company. The plaintiff, in this case, had contended that whether the signature was forged or genuine comes
 under the purview of the internal management of the company, therefore the company shall be held liable
for the same, But it was held by the court that the doctrine of Indoor Management has never extended to
cover a forgery. Lord Loreburn had interpreted that an outsider dealing with companies is not bound to
inquire into their indoor management and will not be affected by any irregularities of which they are
unaware of.

5) ​Acts outside the apparent authority​ :

Where a person enters into a contract with an agent or officer of the company and the act of the agent/officer is
beyond the authority granted to him. In such a case, the outsider cannot seek any remedy under the doctrine of
Indoor Management simply because Articles did not delegate the power to the officer to do such acts. The outsider
can only sue the company under the doctrine of Indoor Management if the officer had the delegated power to act on
those grounds.
Examples :
● In the case of Kreditbank Cassel v. Schenkers Ltd.[7], the branch manager of the company had endorsed a
few bills of exchange in the name of the company in favour of a payee to whom he was personally indebted.
The Company did not give him any authority to do so. It was held by the court that the company was not
bound. Additionally, it was also stated that if the officer of the company commits fraud under his apparent
authority on behalf of the company, then the company will be held liable for the act of fraud committed by
the officer.
● The same can be observed in Sri Krishna v. Mondal Bros. & Co.[8] The manager of the company had the
apparent authority under the Memorandum and Articles of Associations of the company to borrow money.
The manager borrowed money on a hundi but did not place the same in the strongbox of the company. It
was held by the court that the company was bound to acknowledge the hundi, As the creditor had a bona
fide claim for recovering the money on the grounds of fraudulent acts done by the officer of the company.
Unit-3
Management

Director and its Classification including Women directors, Independent director, Small shareholder’s director;
Disqualifications, Director Identification Number (DIN); Their appointment; Legal positions, powers and duties;
removal of directors; Key Managerial Personnel.

Director

As per ​Section 2(34)​ of Companies Act 2013 Director means a director appointed to the Board of a Company.

Minimum Directors Required in company -

One Person Company - One Director.

Private Limited Company - Two Directors.

Public Limited Company - Three Directors.

Types of directors

1. Residential Director - As per Section 149(3) of Companies Act,2013 every company shall at one
director who has stayed in India for a total Period of ​not less than 182 days in ​the Previous calendar
year.

2. Independent Director

3. Small Shareholders Directors – appointed upon notice of not less than 1000 shareholders or 1/10​th of
the total shareholders (whichever is lower)

4. Women Directors

5. Additional Directors - A person could be appointed as an additional director and can occupy his post
until the next Annual General Meeting. In absence of the AGM, such term would conclude on the date
on which such AGM should have been held
 6. Alternate Director - Alternate director refers to a personnel appointed by the Board, to fill in for a
director who might be absent from the country, for more than 3 months

7. Shadow director - A person, who is not appointed to the Board, but on whose directions the Board is
accustomed to act, is liable as a Director of the company, unless he or she is giving advice in his or her
professional capacity

8. Nominee Directors - They can be appointed by certain shareholders, third parties through contracts,
lending public financial institutions or banks, or by the Central Government in case of oppression or
mismanagement.

INDEPENDENT DIRECTOR

According to sub-section (6) of section 149 of the Companies Act, 2013 an independent director in relation to a
company, means a director other than a managing director or a whole-time director or a nominee director,—

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b) (i) who is or was not a promoter of the company or its holding, subsidiary or associate company;

(ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate
company;

(c) who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or
their promoters, or directors, during the two immediately preceding financial years or during the current financial
year;

(d) none of whose relatives has or had pecuniary relationship or transaction with the company, its holding,
subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross
turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower,
during the two immediately preceding financial years or during the current financial year;

(e) who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of the company
or its holding, subsidiary or associate company in any of the three financial years immediately preceding the
financial year in which he is proposed to be appointed;

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed, of—

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its
 holding, subsidiary or associate company; or

(B) any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such
firm;

(iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives
twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding,
subsidiary or associate company or that holds two per cent. or more of the total voting power of the
company; or

(f) who possesses such other qualifications as may be prescribed.

- As per sub section 4 of Section 149 of the Companies Act 2013, every ​listed public company is
mandatorily required to have ​at least one-third of the total number​ of directors as independent directors

Unlisted public companies​ must appoint ​at least two​ independent directors in the following circumstances:

i. if the paid up share capital exceeds Rs.10 crores;

ii. if the turnover exceeds Rs.100 crores;

iii. if the aggregate of all the outstanding loans, debentures and deposits exceeds Rs 50 crores.

Appointment

1. The Independent Director has to submit the Consent to act as Director in FormDIR-2 to the Company.

2. The Independent Director has to submit a declaration that he/ she is not disqualified to be appointed as a Director
as per provisions of Section 164(1) & (2) of the Companies Act, 2013 in Form DIR-8 to the Company.

3. The Independent Director has to submit a declaration of independence as per Section 149(6) of the Companies
Act, 2013 before his/her appointment. Such declaration has to be placed before the 1st Board Meeting in which he/
she participates as a director and the subsequent first board meeting in each financial year.

4. As per Schedule IV(IV)(4) to the Companies Act, 2013 the Company will have to issue the appointment letter to
the Independent Director. Also the terms and conditions of Independent Director’s appointment have to be posted
on the company’s website.

5. Lastly the Company has to file the consent of Independent Director with Registrar of Companies within 30 days
of his/her appointment in Form DIR-12​;

Resignation

1. An Independent Director may resign from his/her office by giving a notice in writing to the Company.

2. Within 30 days from the date of receipt of such notice the Board shall file same with Registrar of Companies in
Form DIR- 12.

3. The director shall also forward a copy of resignation along with detailed reasons for the resignation to the
Registrar of Companies within 30 days of resignation.

Removal

1. A Company may, by ordinary resolution, remove a director, before the expiry of his period after giving a
reasonable opportunity of being heard.

2. A special notice is required for any resolution, to remove a director under this section, or to appoint somebody in
place of a director so removed.

3. The vacancy shall be filled within a period of not more than 180 days.

Functions of Independent Directors

(1) help in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy,
performance, risk management, resources, key appointments and standards of conduct;

(2) bring an objective view in the evaluation of the performance of board and management;

(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of
performance;

(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk
management are robust and defensible;

(5) safeguard the interests of all stakeholders, particularly the minority shareholders;

(6) balance the conflicting interest of the stakeholders;

(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior
management and have a prime role in appointing and where necessary recommend removal of executive directors,
key managerial personnel and senior management;

(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management
and shareholder’s interest.
Term of Office​ – 5 years

Liability​ – only in respect of acts of omission or commission by a company which had occurred in his knowledge.

Remuneration ​- an independent director shall not be entitled to any stock option. He may receive remuneration by
way of sitting fee, reimbursement of expenses incurred for participation in the Board and other committee meetings
and profit related commission as may be approved by the members

WOMEN DIRECTORS

A company, whether a public company or a private concern, will be required to mandatorily appoint at least one
woman director if it fulfils any of the following criteria:

1. It is a listed company whose securities are listed on any stock exchange.

2. It is a company having paid-up capital of Rupees 100 crore or more, and a turnover of Rupees 300 crores or
more.

The penalty for non-compliance of provision extends to a fine of Rs.10,000 with a further fine of Rs.1000 per day if
the contravention continues

Eligibility

DIN-Director Identification Number:​ A director identification number is a unique director identification number
which has to be obtained by every director. Every director can have only one DIN. Therefore, firstly women
directors need to obtain DIN to become a director.

Consent to become a Director​: Women directors need to give the consent in form DIR-2.

Filing of Application​: Within 30 days of appointment of the director the proposed women director has to file form
DIR-12 with the registrar of companies

Roles

Women director has to play the role like any other director. She is also responsible for improving corporate
credibility and governance standards of a company.
Women Directors can hold a maximum of twenty directorships that includes the sub-limit of ten public companies.

Term - The Tenure of the appointment of women director is till the next Annual General Meeting from the date
Appointment, and can resign at any time she wishes by giving notice to the Company

Small shareholders director

Section 151 of the Companies Act, 2013 read with the Companies (Appointment and Qualification of Directors)
Rules, 2014 (Chapter 11) deals with the appointment of director elected by Small Shareholders.

According to Section 151 of the Companies Act, 2013 every listed company may have one director elected by
“small shareholders”. For the purpose of this section, “small shareholder” means a shareholder holding shares of
nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.

Rule 7 of companies act 2013 laid down the terms and conditions for appointment of Small Shareholder’s Director.
Let’s critically evaluate eligibility, qualification, procedural requirements, duties, tenure and vacation of Small
Shareholders’ Director.

Eligibility:

A listed company, May upon notice of not less than 1000 or one-tenth of the total number of small shareholders,
whichever is lower, have a Small Shareholders’ Director elected by the small shareholders. A listed company may
suo moto (on its own accord) opt to have a director representing small shareholders. Thus the Small Shareholder’s
Director’s appointment is optional and made available to listed companies only.

Qualification / Industry Experience:

The Companies Act, 2013 does not prescribe any qualifications or minimum industry experience criteria for
candidature as Small Shareholder’s Director of the applicable company.

Independence:

Such Director, directly or indirectly, should not be appointed or associated in any other capacity with the company
for a period of 3 years from the date of cessation as a Small Shareholder’s Director.
Further it is stated that if proposed director is qualified under Section 149 (6) for appointment as an independent
director and has given declaration for his independence under Section 149 (7) then such director shall be considered
as an independent director.

Procedural requirements:

i) Notice: The small shareholders intending to propose a person as a candidate for the post of Small Shareholder’s
Director shall leave a signed notice of their intention with the company at least 14 days before the meeting
specifying their details and proposed director’s details.

ii) Contents of notice: The details include name, address, shares held and folio number etc. of small shareholders
and proposed director. If the proposed director does not hold any shares in the company, the details of shares held
and folio number need not be specified in the notice.

iii) Statement/ Declaration: The notice shall be accompanied by a statement signed by the proposed director for the
post of small shareholders’ director stating :

a. proposed director’s Director Identification Number (DIN) :

For allotment of Director Identification Number (DIN) application in the Form DIR-3 pursuant to Section 153 of
The Companies Act, 2013 & Rule 9(1) of The Companies (Appointment and Qualification of Directors) Rules,
2014 has to be made.

b. that proposed director is not disqualified to become a director under the Act;

Intimation in Form DIR- 8 in terms of Companies (Appointment and Qualification of Directors) Rules, 2014 to the
effect that proposed director is not disqualified under sub-section (2) of Section 164 of the Companies Act, 2013
has to be provided to the company.

and

c. proposed director’s consent to act as a director of the company:

Consent in the form of Form DIR-2 pursuant to Rule 8 of the Companies (Appointment and Qualification of
Directors) Rules, 2014 has to be submitted to the company.
iv) MBP- 1 in terms of Companies (Meetings of Board and its Powers) Rules, 2014:

Section 184 of the companies act 2013 cast duty on every director of the company to give a notice of his/her
engagement in any other company or to disclose all interested entities in the first meeting of the board of director of
the company of a financial year in prescribed format as MBP-1.

v) Digital Signature Certificate in Class II or Class III as per Information Technology Act, 2000 has to be obtained.

vi)The company has to file DIR- 12 (Particulars of appointment of directors and the key managerial personnel and
the changes among them) in terms of Companies (Appointment and Qualification of Directors) Rules, 2014 within
30 days from the date of appointment of Small Shareholder’s Director.

Tenure:

Small Shareholder’s Director shall not be liable to retire by rotation. His/ her tenure as small shareholders’ director
shall not exceed a period of 3 consecutive years. On expiry of tenure, such director shall not be eligible for
re-appointment.

If the person is not eligible for appointment according to Section 164, then he/she can’t be appointed as Small
Shareholder’s Director.

Duties and Liabilities:

The following duties and liabilities have been imposed on the directors of companies, by Section 166 of the
Companies Act 2013: —

• A director of a company shall act in accordance with the Articles of Association (AOA) of the company.

• A director of the company shall act in good faith, in order to promote the objects of the company, for the
benefits of the company as a whole, and in the best interests of the stakeholders of the company.

• A director of a company shall exercise the duties with due and reasonable care, skill and diligence and shall
exercise independent judgment.

• A director of a company shall not involve in a situation in which he/she may have a direct or indirect
interest that conflicts, or possibly may conflict, with the interest of the company.

• A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to
himself/ herself or to his/her relatives, partners, or associates and if such director is found guilty of making any
undue gain, he/she shall be liable to pay an amount equal to that gain to the company.

• A director of a company shall not assign his/her office and any assignment so made shall be void.

• If a director of the company contravenes the provisions of section 166 of the Companies Act, such director
shall be punishable with fine which shall not be less than Rs.1,00,000/- but which may extend to Rs. 5,00,000/-.

Vacation of Office:

Small shareholders’ director shall vacate the office if –

I. He ceases to be a small shareholder, on and from the date of cessation;

ii. He incurs any of the disqualifications specified in Section 164;

iii. The office of the director becomes vacant in pursuance of Section 167;

iv. he ceases to meet the criteria of independence as provided Section 149 (6) .

Maximum limit for holding office as Small Director

Such director shall not hold the office of small shareholders’ director in more than 2 companies. If second company
is in competitive business or is in conflict with business of the first company then he/she shall not be appointed in
second company.

Conclusion:

Previously as per Companies Act, 1956, public companies having paid up capital of Rs.5 Crores or more and
having 1000 or more small shareholders had option to appoint director elected by small shareholder. Now as per
Companies Act, 2013 only listed companies meeting same threshold criteria of paid up capital of Rs.5 Crores or
more and having 1000 or more small shareholders can exercise option to appoint Small Shareholders’ Director.

Disqualifications of Directors

Under company law, a director can be disqualified for any of the following reason:

1. He is of an unsound mind and is declared so by the court.

2. He is insolvent.

3. He is in the process of declaring insolvency and his application is pending.

4. He has been convicted by a court of any offence (whether or not involving moral turpitude) and has been
imprisoned for at least six months. However, if a person has been convicted of any offence and has served a period
of seven years or more, he shall not be eligible to be appointed as a director in any company.

5. If an order has been passed disqualifying him of being appointed as a director by a court or Tribunal.

6. He has not paid any calls with respect to any shares of the company held by him, whether alone or jointly
with others, and a period of six months has elapsed from the last day fixed for the payment of the call.

7. He has been convicted of offences dealing with related party transactions at any time during the last
preceding five years.

8. He has failed to acquire a Director Identification Number.

Effects of Disqualification

Once disqualified, a person is not eligible for being appointed as Director of that company or any other company.
This restriction is imposed for a period of five years or as the case may be. Since the year 2017, the Ministry of
Corporate Affairs (MCA) has been strictly enforcing these provisions of the Companies Act. It has recently
published the names of the disqualified Directors on the government website.

Remedies against Disqualification

In case of disqualification, a director can appeal to the National Company Law Appellate Tribunal (NCLAT).
He/she can temporarily ask for a stay order. Under the Companies Act 2013, an order disqualifying a Director does
not take effect within the next 30 days of it being passed. As soon as an appeal is initiated, the disqualified person
will still continue to be a director for the next seven days. Within this period, he can file his annual returns to stay
the order of disqualification. However, there exists no procedure to reappoint a disqualified director. He can only be
reappointed after a period of five years has elapsed from the date of disqualification.

Director Identification Number (DIN)

DIN is Director Identification Number allotted by the central government to any person intending to be a Director
or an existing director of a company. It is a unique 8 digit number, which has a lifetime validity. An individual can
have only one DIN but he can be the director of 2 or more companies.

Where is DIN used?

Whenever a return, an application or any information related to a company will be submitted under any law, the
director signing such return, application or information will mention his DIN underneath his signature.

How to apply for DIN?

1. SPICe form: Application for allotment to the proposed first directors in respect of a New company shall 7
2. DIR- 3 Form: Any person intending to become a director is an already existing company shall have to make
an application in the eForm DIR-3 for the allotment of DIN

To apply for DIN the above form can be filed electronically, digitally signed and then upload it in the MCA portal.

Appointment of Directors

General provisions relating to appointment of directors:

 1. Except as provided in the Act, every director shall be appointed by the company in general meeting.
2. Director Identification Number is compulsory for appointment of director of a company.
3. Every person proposed to be appointed as a director shall furnish his Director Identification Number and a
declaration that he is not disqualified to become a director under the Act.
4. A person appointed as a director shall on or before the appointment give his consent to hold the office of
director in physical form DIR-2 i.e. Consent to act as a director of a company.
5. Articles of the Company may provide the provisions relating to retirement of the all directors. If there is no
provision in the article, then not less than two-thirds of the total number of directors of a public company
shall be persons whose period of office is liable to determination by retirement or by rotation and eligible to
be reappointed at annual general meeting.

Appointment of Directors by Articles

I] ​Appointment of first director:

The first directors of most of the companies are named in their articles. If they are not so named in the articles of a
company, then subscribers to the memorandum who are individuals shall be deemed to be the first directors of the
company until the directors are duly appointed. In the case of a One Person Company, an individual being a
member shall be deemed to be its first director until the director(s) are duly appointed

Appointment of Directors by Board of Directors

I] ​Appointment of Additional Director:

1. The board of directors can appoint additional directors, if such power is conferred on them by the articles of
association.
2. Such additional directors hold office only upto the date of the next annual general meeting or the last date
on which the annual general meeting should have been held, whichever is earlier.
3. A person who fails to get appointed as a director in a general meeting cannot be appointed as Additional
Director.

II]​ Appointment of Directors in casual vacancy:

The Companies Act empowers the Board to appoint the casual director subject to any regulation in the
Articles. The casual vacancy in the office of the director may exist due to retirement, resignation, insolvency
or any other reason. The casual director may hold his office only upto the period to which the original
director would have his office if he had not vacated.
III] ​ ​Alternate Director:
This Board may appoint the alternate director if the article authorises. The Board is empowered to appoint
the alternate director if the original director remains absent for more than three months from the date on
which the meeting is ordinarily held. Such alternate director shall hold office only for the period till the
original director returns.If it is proposed to appoint an Alternate Director to an Independent Director, it must
be ensured that the proposed appointee also satisfies the criteria for Independent Directors.

Appointment of Directors by Third Parties

The articles may permit the third parties for the appointment of director as their nominee, but the number of
directors so appointed should not exceed one- third of the total number of directors and they are not liable to retire
by rotation. The third party means the Vendor, Banking Company, Finance Corporation and Debenture holders.The
idea behind the appointment is that they may have the watch that money advanced to the company has been utilised
for same purpose for which it was lent.

Appointment of Directors by Proportional Representation

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

Appointment of Directors by Nomination

This new sub-section now provides for appointment of Nominee Directors. It states that subject to the articles of a
compauny, the Board may appoint any person as a director nominated by any institution in pursuance of the
provisions of any law for the time being in force or of any agreement or by the Central Government or the State
Government by virtue of its shareholding in a Government Company

Legal position of Directors

Position of Directors as Agent:

The company being an artificial person cannot manage its affairs itself but the management of the company is
entrusted to some human agency known as directors. They are the selected representatives of the shareholders.
They run the business on behalf of the shareholders and may be termed as the agent of the company.
An agent is a person who always acts on behalf of the principal, therefore the third party can hold only the principal
liable not the agent. Thus directors at as agents of the company they are acting on behalf of the company so the
directors cannot be held personally liable for any default of the company.

Position of Directors as Trustees:

A Trustee is a person who is vested with the legal ownership of certain property, which he has to administer for
benefits of others. Director is treated as trustees of the company, money, and property and of the powers entrusted
to and vested in them only as trustee and they have to use these powers for the benefit of the company.
A director of a company enjoys several powers where discretion is to be exercised, for instance the power to allot
shares,to make calls, to declare dividend, to forfeit shares, to allow or disallow a transfer of share, etc. All these
powers are to be exercised by the directors in the best interest of a company and not their personal interest.

Position of Directors as Officers:

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

Position of Directors as Employees:

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

Position of Directors as Managing Partner:

Directors have been described as the managing partners because, on the one hand, they are entrusted with
management and control of the affairs of the company, and on the other hand, they are usually important
shareholders of the company.

​Conclusion:​ Directors have sometimes been called as agents, trustees or commercial trustees and sometimes have
been called managing partners but directors of a company always stand in a fiduciary relationship with the
company as well as the shareholders when he acts as an agent or officers of a company.

Powers of board of directors [Section 179]

1. To make calls on shareholders in respect of money unpaid on their shares

2. To authorize buyback of securities under section 68
3. To issue securities, including debentures, whether in or outside India
4. To invest the funds of the company
 5. To grant loans or give guarantee or provide security in respect of loans
6. To approve financial statement and the Boards reports
7. To diversify the business of the company
8. To approve amalgamation, merger, or reconstruction
9. To take over a company or acquire a controlling or substantial stake in another company
10. To make political contributions
11. To appoint or remove key managerial personnel
12. To appoint internal auditors and secretarial auditors.

Duties of directors
1. To form policy and determine the objectives of a company
2. To delegate power to any committee if the articles permit
3. To issue instructions to subordinates for the implementation of policy to review the company’s progress
4. To appoint their subordinate officer, managing director, manager, secretary, other employees
5. To act in accordance with the Articles of the company providing that articles are subject to the provisions of
this act [ sec 166(1)]
6. To act in good faith in order to promote the objects of the company. However, the promotion of the objects
should be for the benefit of the company
7. To perform duties and due and reasonable care and diligence
8. Duty to not to achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives

Removal of directors [169]

(1) A company may, by ordinary resolution, remove a director, not being a director
appointed by the Tribunal under section 242, before the expiry of the period of his office after giving him a
reasonable opportunity of being heard:
Provided that nothing contained in this sub-section shall apply where the company
has availed itself of the option given to it under section 163 to appoint not less than two-thirds of the total
number of directors according to the principle of proportional
representation.
(2) A special notice shall be required of any resolution, to remove a director under this
section, or to appoint somebody in place of a director so removed, at the meeting at which he is removed.
(3) On receipt of notice of a resolution to remove a director under this section, the
company shall forthwith send a copy thereof to the director concerned, and the director,
whether or not he is a member of the company, shall be entitled to be heard on the resolution at the meeting.
(4) Where notice has been given of a resolution to remove a director under this section
and the director concerned makes with respect thereto representation in writing to the
company and requests its notification to members of the company, the company shall, if the time permits it
to do so,—
(a) in any notice of the resolution given to members of the company, state the
The fact of the representation having been made; and
(b) send a copy of the representation to every member of the company to whom
notice of the meeting is sent (whether before or after receipt of the representation by the company),
and if a copy of the representation is not sent as aforesaid due to insufficient time or for the
company’s default, the director may without prejudice to his right to be heard orally require that the
representation shall be read out at the meeting:
Provided that a copy of the representation need not be sent out and the representation
need not be read out at the meeting if, on the application either of the company or of any
Another person who claims to be aggrieved, the Tribunal is satisfied that the rights conferred by this
sub-section are being abused to secure needless publicity for defamatory matter; and the Tribunal may order
the company’s costs on the application to be paid in whole or in part by the director notwithstanding that he
is not a party to it.
(5) A vacancy created by the removal of a director under this section may if he had
been appointed by the company in general meeting or by the Board, be filled by the
appointment of another director in his place at the meeting at which he is removed provided special notice
of the intended appointment has been given under sub-section (2).
(6) A director so appointed shall hold office till the date up to which his predecessor
would have held office if he had not been removed.
(7) If the vacancy is not filled under sub-section (5), it may be filled as a casual
vacancy in accordance with the provisions of this Act:
Provided that the director who was removed from office shall not be re-appointed as a
director by the Board of Directors.
(8) Nothing in this section shall be taken—
(a) as depriving a person removed under this section of any compensation or
damages payable to him in respect of the termination of his appointment as a director as per the
terms of contract or terms of his appointment as director, or of any other appointment terminating
with that as director; or
(b) as derogating from any power to remove a director under other provisions of
this Act.

Key Managerial Personnel

The executive management of a company is responsible for the day to day management of a company. The
Companies Act, 2013, has used the term key management personnel to define the executive management. Every
company has top managerial personnel who takes decision and are responsible for the functioning as well as growth
of company. The bigger company the bigger responsibility of Board of Directors.

According to section 2(51) "key managerial personnel", in relation to a company, means—

(i) the chief executive officer or the managing director or the manager;

(ii) the company secretary;

(iii) the whole-time director;

(iv) the chief financial officer;

(v) such other officer, not more than one level below the directors who is in whole-time employment,

designated as key managerial personnel by the Board; and

(vi) such other officer as may be prescribed.

Chief Executive Officer

Under Section 2(18) of Companies Act, 2013, a person appointed as a chief executive officer of a company, as to
mean an officer of a company who has been designated as such by it.

Company Secretary

A Company Secretary or Secretary under Section 2(24) of the Act whose function is to report the Board about the
compliance of the provisions of the Act and other rules in relation to this Act. It also ensures that whether or not the
company is complying with the secretarial standards.

The whole-time director

under Section 2(94) of the Act which means a director in whole-time employment of the Company.

A whole-time Key Managerial Personnel shall not hold office in more than one company except in its subsidiary
company at the same time.
Chief financial officer

under Section 2 (19) of Companies Act,2013 is a person who leads the finance and treasury functions of a business
enterprise is designated as “CFO”, a CFO of the company should be the person who us appointed as CFO and not
engaged in any other manner (retainer or consultant) or by any other designation.

Manager

Manager as defined under Section 2(53) of Companies Act, 2013 is any individual who works under the control and
direction of the Board of Directors and is entrusted with the management of whole the affairs of the Company.

Companies obligated to appoint KMP (Key managerial Personnel)

According to section 203(1) read with Rule 8 of the ​Companies (Appointment and Remuneration of Managerial
Personnel) Rules, 2014​ the following companies are mandated to appoint a Whole-time KMP:

● Every Listed Company

● Public Companies having paid-up share capital of 10 Crore rupees or more.
● Public Companies Having paid-up share of 5 Crore rupees or more.
● Companies having paid-up share capital of 10 Crore rupees or more are mandated to appoint a Company
Secretary.

Procedure to appoint Key Managerial Personnel

1. Hold the Board meeting and pass the Board resolution containing the terms and conditions of the appointment of
key managerial personnel.

2. A whole time key managerial personnel shall not hold office in more than one company except in its subsidiary
at the same time.

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

4. On vacation of the office of a whole time Key Managerial Personnel, the resulting vacancy shall be filled-up by
the Board at a meeting of the Board within a period of 6 months.

5. File with the Registrar the Form MGT-14 and a return of appointment of a managing director, whole time
director or manager in Form MR-1 (Return of appointment of Managing Director, Whole Time Director and
Manager).
6. File DIR-12 (Particulars of appointment of Directors and the Key Managerial Personnel and changes among
them) along with the fee prescribed in Companies (Registration of Offices and Fees) Rules, 2014.

​Time limit for appointment of Key Managerial Personnel?

under the Companies Act, 2013 are notified with effect from 1​st April, 2014. So, at the time of commencement of
the Companies Act, 2013, a company is required to appoint Key Managerial Personnel within a period of six (6)
months from 1​st​ April, 2014.

Resignation of Key Managerial personnel

If during the course of business, Key Managerial Personnel resign from a company, the company shall be filled-up
by the Board at a meeting of the Board within a period of six (6) months from the date of such vacancy.

Appointment of managing director, whole time director or a manager (Sec 196)

Section 196 of the Companies Act, 2013 provides that no company shall appoint or employ at the same time a
Managing Director and a Manager. Further, a company shall not appoint or reappoint any person as its Managing
Director, Whole Time Director or manager for a term exceeding five years at a time and no reappointment shall be
made earlier than one year before the expiry of his term.

No company shall appoint or employ at the same time a Managing Director and a Manager.

No company shall appoint or continue the employment of any person as managing director, whole-time

director or manager who —

(a) is below the age of twenty-one years or has attained the age of seventy years:

(b) is an undischarged insolvent or has at any time been adjudged as an insolvent;

(c) has at any time suspended payment to his creditors or makes, or has at any time made, a composition with them;
or

(d) has at any time been convicted by a court of an offence and sentenced for a period of more than six months.

Appointment of a person who has attained the age of seventy years may be made by passing a special resolution in
which case the explanatory statement annexed to the notice for such motion shall indicate the justification for
appointing such person;
Where no such special resolution is passed but votes cast in favour of the motion exceed the votes, if any, cast
against the motion and the Central Government is satisfied, on an application made by the Board, that such
appointment is most beneficial to the company, the appointment of the person who has attained the age of seventy
years may be made.

Section 196(4) of the Companies Act, 2013 provides that subject to the provisions of section 197 and Schedule V, a
managing director, whole-time director or manager shall be appointed and the terms and conditions of such
appointment and remuneration payable be approved by the Board of Directors at a meeting which shall be subject
to approval by a resolution at the next general meeting of the company and by the Central Government in case such
appointment is at variance to the conditions specified in Schedule

V. Approval of the Central Government is not necessary if the appointment is made in accordance with the
conditions specified in specified in Part I of Schedule V to the Act.

The appointment of a managing director or whole-time director or manager and the terms and conditions of such
appointment and remuneration payable thereon must be first approved by the Board of directors at a meeting and
then by an ordinary resolution passed at a general meeting of the company.

Rule 3 of Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014

A company shall file a return of appointment of a Managing Director, Whole Time Director or Manager within
sixty days of the appointment, with the Registrar in Form No. MR.1 along with such fee as may be specified for this
purpose.

Section 196(5) provides that subject to the provisions of this Act, where an appointment of a managing director,
whole-time director or manager is not approved by the company at a general meeting, any act done by him before
such approval shall not be deemed to be invalid.

Procedure for appointment of Managing Director

Appointment of Managing Director is to be made according to Section 196 and its remuneration should be in
accordance with Section 197 and Schedule V of the Companies Act, 2013. Provisions relating to managerial
remuneration are not applicable to a private company, government company and Specified IFSC public company.

1. Convene and hold a Board meeting after giving to all the directors due notice as required under Section

173 of the Companies Act, for transacting, inter alia, the following business:-

(a) take a decision on the person to be appointed as managing director after fully ensuring that he does not suffer
from any disqualification in Sections 164, 196, 203, Schedule V and any other provision of the Companies Act;
(b) approve the draft agreement to be signed and executed by and between the company and the proposed managing
director (it is not mandatory);

(c) fix time, date and venue for holding a general meeting of the company;

(d) approve notice of the general meeting along with the explanatory statement as required by Sections 101 and 102
of the Act after keeping in mind the requirements of Section 190 of the Act and

(e) to authorise company secretary to issue notice of the general meeting on behalf of the Board.

2. Hold the general meeting and get the resolution passed approving appointment of the managing director.

3. In case the appointment of the managing director is not in accordance with the provisions of Schedule V of

the Act, the company is required to obtain approval of the Central Government as per Section 201 of the Act.

4. For getting the approval of the Central Government under Section 201 certain formalities are to be

complied with:

(a) As required by Section 201 of the Act, the Company shall give a general notice to the members of the company
indicating the nature of the application proposed to be made, and

(b) this notice has to be published at least once in the principal language of the district in which the registered office
of the company is situate and circulating in that district and also once in English in an English newspaper also
circulating in that district,

(c) the company shall attach a copy of this notice with the application together with certificate as to the due
publication thereof.

(d) The application should be filed electronically in MR – 2 of the Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014 accompanied by the prescribed fees.

(e) The application should be made within 90 days from the date of such appointment.

Details of proposal need to be entered along with certain attachments as given below:
i. Copy of the calculation sheet of effective capital;
ii. Copy(ies) of Board Resolutions;
iii. Copy of resolution of Nomination and Remuneration Committee along with its composition and
certificate by the nomination committee that the remuneration is as per remuneration policy of the
company;
iv. Copy of shareholders resolution;
 v. certificate from auditor or company secretary of the company or company secretary in practice
with regard to compliance of Section 196;
vi. Certificate of no default in repayment of debts for continuous period of thirty days in the
preceding financial year from a director or company secretary of the company;
vii. No objection certificate from the financial institutions or banks to whom the company has
defaulted;
viii. copy of order of NCLT with scheme of revival of the company;
ix. Copy of Draft agreement between the company and the proposed appointee;
x. Newspaper clipping of notices published under section 201
xi. Copy of visa or passport in case the proposed appointee is foreign national;
xii. Copies of education or professional qualification certificate;
xiii. Statement as per item (iv) of third proviso of section II of Part II of Schedule V to the Companies
Act, 2013
xiv. Projections of the Turnover and net profits for next three years;
xv. Calculation of estimated profit under section 198 of the Act;
xvi. An application under Section 460 of the Act for condonation of delay;
xvii. Full and proper justification in favour of the proposal along with bio-data of the appointee;
xviii. Documentary proof regarding compliance of the provisions of Section 196 of the Companies Act,
2013 at the time of appointment/ re-appointment of the proposed appointee;
xix. Certificate by the secretary of the company or CA/CS in whole time practice to be notified
erstwhile;
xx. Details, if Applicant Company is a subsidiary of listed company;
xxi. Certificate from CA/CS in whole time practice along with calculation of excess remuneration paid
to the appointee
5. Execute the agreement, as approved by the Board, with the managing director.

6. Make necessary entries in the register of directors etc. and other records and registers of the company.

7. File the following documents with the ROC:

(a) The company should file with the ROC return of appointment of the managing director in Form MR - 1, within
sixty days as per Section 196(4) of the appointment and the return must be certified by the auditors of the company
or the company secretary or a secretary in whole-time practice. The Mandatory attachments for Form MR – 1:
i. Copy of Board Resolution,
ii. Copy of Shareholders Resolution
iii. Copy of letter of consent to act as managing director
iv. Copy of Central Government Approval
 v. Copy of certificate by nomination and remuneration committee

(b) Form DIR – 12 is to be filed with registrar for particular of appointment of a key managerial personnel, within
thirty days of the appointment.

(c) Form MGT – 14 for special resolution is to be filed with registrar within thirty days of the appointment.

8. Inform all concerned about the appointment of the managing director. It is advisable to issue a general notice in
newspapers about the appointment of the managing director.

Who can be a Company Secretary​?

Section 2(24) of the Companies Act, 2013 defines “company secretary” or “secretary” means a company secretary
as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed by a
company to perform the functions of a company secretary under this Act.

According to clause (c) of Sub-section (1) of Section 2 of the Company Secretaries Act, 1980, a company secretary
means a person who is a member of the Institute of Company Secretaries of India.

Therefore, ‘Company Secretary’ means a person who is a member of the Institute of Company Secretaries of India
(ICSI) and who is appointed by a company to perform the functions of a company secretary. The functions of
company secretary have been detailed in section 205 of the Act.

Meetings:​ Meetings of shareholders and board;

Types of meeting, convening and conduct of meetings, Quorum,Agenda, proxy forms, Minutes bookand Voting
Methods including postal ballot, Circular Resolution, e-voting; Committees of Board of Directors - Audit
Committee, Nomination and Remuneration Committee, Stakeholders Relationship Committee, Corporate Social
Responsibility Committee, Grievance Redressal Committee

Types of meetings

1.Board Meetings:Board meetings are meetings at the highest level, i.e. a meeting where board members or their
representatives are present. A company is not an actual entity but a legal one so it cannot take actions and make
decisions. The board of directors act as agents through which the company takes actions as well as makes decisions.
The ​board of directors​ is the supreme authority in a company and they have the powers to take all major actions and
decisions for the company. The board is also responsible for managing the affairs of the whole company.
2.Meetings of the shareholders:Shareholder meetings are popularly known as general meetings. A company
conducts meetings of its members for approval of certain business items such as appointments, vote on various
matters, hearing reports and presenting questions before the board as prescribed in the Act. There are various kinds
of shareholder meetings. The meetings to be held for seeking approval to ordinary business and special business are
called an annual general meeting and extraordinary general meeting respectively.

3.Meetings of the debenture holders:The debenture holders of a particular class conduct these meeting. They are
generally conducted when the company wants to vary the terms of security or to modify their rights or to vary the
rate of interest payable etc. Rules and Regulations regarding the holding of the meetings of the debenture holders
are either entered in the Trust Deed or endorsed on the Debenture Bond so that they are binding upon the holders of
debentures and upon the company.

4.Meetings of the creditors:Meeting of creditors may be called for any of the following purposes-

a)To enter into a compromise or arrangement between company and its creditors or company and its members.

b)To seek approval of creditors for amalgamation or reconstruction of a company.

c)To seek consent of the creditors for winding up of a company.

d)To meeting for Voluntary Winding up of the Company

Convening and Conduct of meetings:

“Chairman” means the Chairman of the Board or its Committee, as the case maybe, or the Chairman appointed or
elected for a Meeting.

“Meeting” means a duly convened, held and conducted Meeting of the Board or any Committee thereof.

“Minutes” means a formal written record, in physical or electronic form, of the proceedings of a Meeting.

“Quorum” means the minimum number of Directors whose presence is necessary for holding a Meeting.

Convening a Meeting
● Any Director of a company may, at any time, summon a Meeting of the Board, and the Company Secretary
or where there is no Company Secretary, any person authorised by the Board in this behalf, on the
requisition of a Director, shall convene a Meeting of the Board, in consultation with the Chairman or in his
absence, the Managing Director or in his absence, the Whole-time Director, where there is any, unless
otherwise provided in the Articles.

● The Chairman may, unless dissented to or objected by the majority of Directors present at a Meeting at
which a Quorum is present, adjourn the Meeting for any reason, at any stage of the Meeting.

Unless the Articles of the company provide otherwise, a Meeting adjourned for want of Quorum should be
held on the same day at the same time and same place in the next week. If that day happens to be a National
Holiday, then such adjourned Meeting should be held on the next succeeding day which is not a National
Holiday at the same time and place, unless the Articles of the company provide otherwise.

● A mere coincidental physical presence of all Directors at one place cannot constitute a Meeting.

● A Meeting may be held at any time. However, this should be practically construed to mean a convenient
time. As detailed deliberations are expected to take place in Board Meetings, it is desirable to have Meetings
during working hours, though the Meeting may continue beyond working hours.

In case the Articles provide for a specific time at or during which the Meetings should be held, the Meetings
should be held only at or during that time.

● A Meeting may be held at the Registered Office of the company or at any other place, including a remote
place. A Meeting may be held in India or abroad.

In case the Articles provide for a specific place/city in which the Meetings should be held, the Meetings
should be held only at that place/city. If a Meeting of the Board is held elsewhere, contrary to such clause in
the Articles, none of the decisions taken by the Board at such Meeting can be put into operation in any
manner.

● Any Director may participate through Electronic Mode in a Meeting, if the company provides such facility,
unless the Act or any other law specifically does not allow such participation through Electronic Mode in
respect of any item of business.
 ● A Director intending to participate through Electronic Mode should communicate his intention to the
Chairman or the Company Secretary of the company

● All the Directors may participate in a Meeting through Electronic Mode. In such a case, at least one person,
who may either be the Chairman or the Company Secretary or in the absence of the Company Secretary, any
other person duly authorised on this behalf, should be physically present at the scheduled venue of the
Meeting given in the Notice to enable proper recording, to safeguard the integrity of the Meeting and to
fulfill other requirements of law in this regard.

● It is not mandatory for companies to offer the facility of participation through Electronic Mode for its
Meetings.

Some provisions related to Extraordinary General Meeting:

● A single shareholder may also file the requisition for convening the Meeting provided that he has the
requisite voting rights or voting power as per Section 100 of the Act.
● In case a body corporate is a Member of another company, it can file the requisition for convening a
Meeting if it holds the required voting rights or voting power. Section 100 does not distinguish between a
requisitionist being a natural or an artificial person. Therefore, an artificial person may also submit the
requisition with the company.

Notice of a meeting:

● Notice in writing of every Meeting shall be given to every Member of the company. Such Notice shall also
be given to the Directors and Auditors of the company, to the Secretarial Auditor, to Debenture Trustees, if
any, and, wherever applicable or so required, to other specified persons.
● In addition to giving Notice to persons specified above, Court may direct issuance of Notice to some other
persons such as Court-appointed Chairman or observers. In such case the Notice should be given
accordingly.
● Any person who receives the notice of a General Meeting, ipso facto, is entitled to attend such Meeting.

In the case of Members, Notice shall be given at the address registered with the company or depository.

● When the Meeting is adjourned for thirty days or more, fresh Notice of the adjourned Meeting should be
given in the manner specified.
● Where irregular Notice has been given, Members may proceed to set aside the Meeting so convened and
compel the Directors to call a new Meeting after giving proper Notice.
● Notice shall be sent by hand or by ordinary post or by speed post or by registered post or by courier or by
facsimile or by e-mail or by any other electronic means.
● In case of companies having a website, the Notice shall be hosted on the website.
● Notice shall specify the day, date, time and full address of the venue of the Meeting.
● A General Meeting can be held on any day, including a public holiday or on a Sunday, unless such day is a
National Holiday.
● Notice shall contain complete particulars of the venue of the Meeting including route map and prominent
land mark for easy location.
● Notice shall clearly specify the nature of the Meeting and the business to be transacted thereat. In respect of
items of Special Business, each such item shall be in the form of a Resolution and shall be accompanied by
an explanatory statement which shall set out all such facts as would enable a Member to understand the
meaning, scope and implications of the item of business and to take a decision thereon. In respect of items
of Ordinary Business, Resolutions are not required to be stated in the Notice except where the Auditors or
Directors to be appointed are other than the retiring Auditors or Directors, as the case may be.
● In the case of an Annual General Meeting, the business to be transacted at the Meeting should be divided
into two parts – Ordinary Business and Special Business. All business other than Ordinary Business shall be
Special Business. However, in case of an Extra-Ordinary General Meeting, all business shall be Special
Business.
● Notice shall be issued by the Company Secretary or where there is no Company Secretary, any Director or
any other person authorised by the Board for the purpose.
● Notice convening a Meeting shall be given at least seven days before the date of the Meeting, unless the
Articles prescribe a longer period.
● The Agenda, setting out the business to be transacted at the Meeting, and Notes on Agenda shall be given to
the Directors at least seven days before the date of the Meeting, unless the Articles prescribe a longer
period.
● Each item of business requiring approval at the Meeting shall be supported by a note setting out the details
of the proposal, relevant material facts that enable the Directors to understand the meaning, scope and
implications of the proposal and the nature of concern or interest, if any, of any Director.
● Any item not included in the Agenda may be taken up for consideration with the permission of the
Chairman and with the consent of a majority of the Directors present in the Meeting.
● To transact urgent business, the Notice, Agenda and Notes on Agenda may be given at shorter period of
time than stated above, if at least one Independent Director, if any, shall be present at such Meeting.
Audit committee:

(1) The Board of Directors of every listed company and such other class or classes of companies, as may be
prescribed, shall constitute an Audit Committee.
(2) The Audit Committee shall consist of a minimum of three directors with independent directors forming a
majority:
Provided that the majority of members of the Audit Committee including its Chairperson shall be persons
with ability to read and understand the financial statement.
(3) Every Audit Committee of a company existing immediately before the commencement of this Act shall,
within one year of such commencement, be reconstituted in accordance with sub-section (2).
(4) Every Audit Committee shall act in accordance with the terms of reference specified in writing by the
Board which shall, inter alia, include,—
(i) the recommendation for appointment, remuneration and terms of appointment of auditors of the
company;
(ii) review and monitor the auditor’s independence and performance, and effectiveness of audit
process;
(iii) examination of the financial statement and the auditors’ report thereon;
(iv) approval or any subsequent modification of transactions of the company with related parties;
(v) scrutiny of inter-corporate loans and investments;
(vi) valuation of undertakings or assets of the company, wherever it is necessary;
(vii) evaluation of internal financial controls and risk management systems;
(viii) monitoring the end use of funds raised through public offers and related matters.
(5) The Audit Committee may call for the comments of the auditors about internal control systems, the
scope of audit, including the observations of the auditors and review of financial statement before their
submission to the Board and may also discuss any related issues with the internal and statutory auditors and
the management of the company.
(6) The Audit Committee shall have authority to investigate into any matter in relation to the items specified
in sub-section (4) or referred to it by the Board and for this purpose shall have power to obtain professional
advice from external sources and have full access to information contained in the records of the company.
(7) The auditors of a company and the key managerial personnel shall have a right to be heard in the
meetings of the Audit Committee when it considers the auditor’s report but shall not have the right to vote.
(8) The Board’s report under sub-section (3) of section 134 shall disclose the composition of an Audit
Committee and where the Board had not accepted any recommendation of the Audit Committee, the same
shall be disclosed in such report along with the reasons therefor.
(9) Every listed company or such class or classes of companies, as may be prescribed, shall establish a vigil
mechanism for directors and employees to report genuine concerns in such manner as may be prescribed.
Nomination and Remuneration Committee:

(1) The Board of Directors of every listed company and such other class or classes of companies, as may be
prescribed shall constitute the Nomination and Remuneration Committee consisting of three or more
non-executive directors out of which not less than one-half shall be independent directors:
Provided that the chairperson of the company (whether executive or non-executive)
may be appointed as a member of the Nomination and Remuneration Committee but shall not
chair such Committee.
(2) The Nomination and Remuneration Committee shall identify persons who are qualified to become
directors and who may be appointed in senior management in accordance with the criteria laid down,
recommend to the Board their appointment and removal and shall carry out evaluation of every director’s
performance.
(3) The Nomination and Remuneration Committee shall formulate the criteria for determining
qualifications, positive attributes and independence of a director and recommend to the Board a policy,
relating to the remuneration for the directors, key managerial personnel and other employees.
(4) The Nomination and Remuneration Committee shall, while formulating the policy
under sub-section (3) ensure that—
(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and
motivate directors of the quality required to run the company successfully;
(b) relationship of remuneration to performance is clear and meets appropriate performance
benchmarks; and
(c) remuneration to directors, key managerial personnel and senior management involves a balance
between fixed and incentive pay reflecting short and long-term performance objectives appropriate
to the working of the company and its goals:

Stakeholders relationship committee (grievance redressal committee):

It is the committee of a company that addresses the relation between the management and
the stakeholders of the company. The main objective of this Committee is to resolve the grievances
of security holders of the company. For listed companies the rights of stakeholders play a very
important role in the Corporate Governance of the Company. The listed entity shall constitute a
Stakeholders Relationship Committee to look into various aspects of interest of shareholders,
debenture holders and other security holders.
A stakeholder relationship committee should be formed when a listed company consists of more
than 1000 shareholders, debenture holders, debenture-holders, deposit-holders and any other security
holders at any time during a financial year.
 It should consist of at least 3 directors, one of them being independent. The chairperson of the
committee shall be a non-executive director. The meeting should happen at least once in a year.
Role of SR committee:
debenture-holders, deposit-holders and any other security holders at any time during a financial year
Review of measures taken for effective exercise of voting rights by shareholders
Review of adherence to the service standards adopted by the listed entity in respect of various
services being rendered by the Registrar & Share Transfer Agent
Review of the various measures and initiatives taken by the listed entity for reducing the quantum of
unclaimed dividends and ensuring timely receipt of dividend warrants/annual reports/statutory
notices by the shareholders of the company.

CSR committee:
CSR refers to the obligation of the company towards the social, economical and
environmental welfare of the general community. The committee that gives guidance, direction and
oversees the policies and contributions for the CSR activities of the company.
Any company having a net worth of Rs. 500 crores or a turnover of Rs. 1000 crores or a net profit of
Rs. 5 crore or more is required to constitute a CSR committee to carry CSR activities.
It should have at least 3 or more directors at least, one of which should be an Independent director.
In case of private and foreign companies 2 directors can be a part of the committee.

Quorum of Board Meetings:

174. Quorum for meetings of Board

(1) The quorum for a meeting of the Board of Directors of a company shall be one third
of its total strength or two directors, whichever is higher, and the participation of the
directors by video conferencing or by other audio visual means shall also be counted for the
purposes of quorum under this subsection.
(2) The continuing directors may act notwithstanding any vacancy in the Board; but,
if and so long as their number is reduced below the quorum fixed by the Act for a meeting of
the Board, the continuing directors or director may act for the purpose of increasing the
number of directors to that fixed for the quorum, or of summoning a general meeting of the
company and for no other purpose.
(3) Where at any time the number of interested directors exceeds or is equal to twothirds
of the total strength of the Board of Directors, the number of directors who are not
interested directors and present at the meeting, being not less than two, shall be the quorum
during such times.
 Explanation.—For the purposes of this subsection, “interested director” means a
director within the meaning of sub-section (2) of section 184.
(4) Where a meeting of the Board could not be held for want of quorum, then, unless
the articles of the company otherwise provide, the meeting shall automatically stand adjourned
to the same day at the same time and place in the next week or if that day is a national holiday,
till the next succeeding day, which is not a national holiday, at the same time and place.
Explanation.—For the purposes of this section,—
(i) any fraction of a number shall be rounded off as one;
(ii) “total strength” shall not include directors whose places are vacant.

Agenda of Board Meetings​:

The agenda serves as the roadmap for the ​board chair​.​ It helps him move from one meeting item to the next,
while addressing all business items and giving all board members an opportunity to participate. A board chair that
uses the board meeting agenda efficiently increases productivity by not dwelling too long on issues that are better
addressed in committees.
A clear agenda clarifies action items and designates who is responsible for addressing them, so that the board
makes progress. The agenda also drives the minutes of the meeting. This is important so that board members have a
comprehensive written plan to hold themselves accountable for following through on board business items.

The board agenda should be seen as a tool for doing board business in an efficient, fair, and productive manner. To
be effective, agendas should be used and followed with consistency and fidelity.

Proxy Forms For board meetings:

A ​Proxy Form​ is a document by which a registered member of a company appoints another person (the ​proxy​) to
attend a company meeting and vote on the member's behalf. Every member of a company that is entitled to attend
and vote at company ​meetings​ can either vote in person or through a ​proxy​.

Refer this link for proxy form example:

http://www.torm.com/uploads/media_items/proxy-voting-form-16-03-2011.original.pdf

Minutes of Meeting:

The Minutes of the Meeting of the Board shall be signed and dated by the Chairman of the Meeting or by the
Chairman of the next Meeting.
Minutes of the previous Meeting may be signed either by the Chairman of such Meeting at any time before the next
Meeting is held or by the Chairman of the next Meeting at the next Meeting.

Each and every page should be initialled and the last page of each Board Meeting should be signed by the Chairman
as mentioned above.

In case of electronically maintained Board meeting minutes, the chairman shall sign minutes digitally.

minutes can be prepared and maintained electronically but they should be properly timestamped.

Minutes Books shall be kept at the Registered Office of the company or at such other place as may be approved by
the Board and should be under the custody of Company Secretary if any, or any other person as authorised by
Board.

Minutes of all Meetings shall be preserved permanently in physical or in electronic form with Timestamp.

Once signed by the Chairman, shall not be altered. Hence, a number of alterations can be made in minutes but this
all should be done before getting them signed from the Chairman.

If no minutes are prepared, in respect of any Board Meeting, the company shall be liable to a penalty of twenty-five
thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand
rupees.

Voting right​ means the right of a member of a company to vote in any meeting of the company
or by means of postal ballot;
Voting by poll​ (Section109)
(1) Before or on the declaration of the result of the voting on any resolution on show of hands, a poll may be
ordered to be taken by the Chairman of the meeting on his own motion, and shall be ordered to be taken by him on
a demand made in that behalf,—

(a) in the case a company having a share capital, by the members present in person or by proxy, where allowed, and
having not less than one-tenth of the total voting power or holding shares on which an aggregate sum of not less
than five lakh rupees or such higher amount as may be prescribed has been paid-up; and

(b) in the case of any other company, by any member or members present in person or by proxy, where allowed,
and having not less than one-tenth of the total voting power.
As per Section 109 a poll may be demanded by such a number of members holding shares worth minimum value of
Rs. Five Lakh or 10% voting power in the Company.
Further, MCA vide its aforesaid General Circular has clarified that in case of Companies falling under Section 108
read with rule 20 the concept of demand for poll is redundant.

Manner of voting by shareholders present in meeting if Company falls under purview of Section 108:-

It has been clarified by the circular that since these companies are mandatorily required to provide e-voting facility
to its shareholders where the Principle of “One share – One vote” is recognized, therefore the meeting should be
regulated accordingly by the Chairman.

Regulation of meeting by the Chairman:-

The chairman is authorized to regulate the meeting by virtue of Section 109(6) & aforesaid circular. The procedure
has been jotted down in this article.

Voting by Show of Hands​ (Section 107)

As per Section 107, a resolution put to the vote of the meeting shall, unless a poll is demanded under section 109 or
the voting is carried out electronically, be decided on a show of hands.

At any general meeting, a resolution put to the vote of the meeting shall in the first instance be
decided on a show of hands. A declaration by the Chairman of the meeting of the passing of aresolution or
otherwise, by show of hands shall be conclusive evidence of the fact of passing of
such resolution or otherwise, unless a poll is demanded before or immediately on declaration by
Chairman.

Voting through Electronic Means ​(Section108)

As per Section 108 read with rule 20, every listed company and companies having more than 1000 shareholders
are required to give e-voting option to their shareholders.

Further, as per revised Clause 35B (2) of listing agreement applicable from 17th April, 2014 every listed company
agrees to provide to its shareholders who do not have access to e-voting facility, option to vote through postal
ballot.
But, as per the circular issued by MCA it not necessary for a company to provide postal ballot facility to
shareholders in case where rule 20 (i.e. e-voting) is applicable. This is however contradictory with Clause 35B (2)
of listing agreement.

As per decided case of Supreme Court, in case of listed companies listing agreement shall prevail in comparison to
company law. Therefore, in case of listed companies option for postal ballot is also to be provided to shareholders
who do not have access to e voting facility.

Postal ballot
According to section 2(65) of Companies Act, 2013, “postal ballot means voting by post through any electronic
mode. It includes voting by shareholders by postal or electronic mode instead of voting personally for transacting
business in a general meeting.

Each item proposed to be passed shall be in the form of a Resolution and shall be accompanied by an explanatory
statement. A company shall send notice and draft resolution by register post to all shareholders explaining the
reasons and requesting them to send their assent or dissent in writing on a postal ballot.

Circular resolution
Passing the Resolution by Circulation is an alternative method for urgent matters instead of convening the Physical
Board Meeting. Resolution shall be considered as passed when approved by the majority of Directors.

As per the provisions of Section 175 of Companies Act, 2013, For passing the Resolution by Circulation, the
resolution has to be circulated in draft with necessary papers, to all the directors, or members of the committee, as
the case may be, at their addresses registered with the company in India by hand delivery or by post or by courier,
or through electronic means(E-mail or fax) and has been approved by a majority of the directors or members, who
are entitled to vote on the resolution.

Power: However if not less than 1/3rd of the total number of directors of the company require that any resolution
under circulation must be decided at a meeting, the chairperson shall put the resolution to be decided at a meeting
of the Board.

Remote E Voting
Remote E Voting means facility of casting votes by a member using an electronic voting system from a place other
than venue of a general meeting
Cutoff Date
Cutoff date means a date not earlier than 7days before the date of general meeting for determining the eligibility to
vote by electronic means or in the general meeting

Unit-4
Dividends, Secretarial Audit and Reports

Dividends, Accounts, Audit:​Provisions relating to payment of Dividend, Provisions relating to Books of Account,
IEPF with relation to Dividends; Secretarial Audit and report; Board’s Report.

DIVIDEND

1. Meaning of Dividend

A dividend is a payment made by a company to its shareholders, usually as a distribution of profits i.e. a portion of
profits earned and allocated as payable to the shareholders yearly or whenever declared.

Section 2(35) of the Companies Act, 2013, simply states that “dividend” includes any interim dividend.

2. Types of dividend
● Dividend payable on the basis of Time (When declared)

Interim Dividend: ​When the Board of Directors declare dividend between two annual general
meetings of the company, such dividend is known as Interim dividend. According to section 123(3),
the Board of Directors of a company may declare interim dividend during any financial year out of
the surplus in the profit and loss account and out of profits of the financial year in which such
interim dividend is sought to be declared.

Final Dividend: When the dividend is declared at the annual general meeting of the company at the
recommendation of director, it is known as Final dividend. Section 102(2)

● Dividend payable on the basis of Nature of shares

Preference Shares: ​According to section 43 of the Companies Act, 2013 persons holding
preference shares, called preference shareholders, are assured of a preferential dividend at a fixed
rate during the life of the company.

Dividend is generally cumulative in nature and need not be paid every year in case of deficiency of
profits.

Types of Preference Shares on the basis of payment of dividend

Cumulative Preference Shares: ​A cumulative preference share is one that carries

the right to a fixed amount of dividend or dividend at a fixed rate. Such a dividend is
payable even out of future profit if current year’s profits are insufficient for the
purpose. This means that dividend on these shares accumulates unless it is paid in full
and, therefore, the shares are called Cumulative Preference Shares.

Non-cumulative Preference Shares: A non-cumulative preference share carries

with it the right to a fixed amount of dividend. In case no dividend is declared in a
year due to any reason, the right to receive such dividend for that year expires. It
implies that holder of such a share is not entitled to arrears of dividend in future.

Equity Shares: Equity shares are those shares, which are not preference shares. It means that they
do not enjoy any preferential rights in the matter of payment of dividend or repayment of capital.
The rate of dividend on equity shares is recommended by the Board of Directors and may vary from
year to year. Rate of dividend depends upon the dividend policy and the availability of profits after
satisfying the rights of preference shareholders.

● Declared means dividend should be declared as an ordinary resolution

 ● No dividend to be declared other than out of profits
● If inadequacy or obscene of profit, accumulated profits earned can be used but in accordance with
declaration and payment of dividend rules 2014
● Separate bank account to be created within 5 days from date of declaration
○ Depositories- regulatory bodies hold all the demat accounts of company like buying selling.
middlemen
● Dividend to be paid within 30 days of declaration
● If not paid as claimed within 30 days
○ Unpaid dividend account section 124- keep all money for 7 years with them in this account of the
company (with held)
● As a shareholder, you can claim the previous dividend within 7 years. If not claimed within that time, then it
gets transferred to investor education and protection fund. The company then has to fill form number DIV 5

Liability: if dividend is not paid within 30 days then every director in default be punishable with imprisonment for a
term of 2 years and fine of 1000 rs per day

Annual general meeting:shareholders cannot declare the final dividend at a rate of higher than the one
recommended by the board. However, they may declare the final dividend at a lower rate than the one
recommended.

( extra information given below about dividend)

1. Declaration of Dividend [Section 123]

According to this section:

(i) ​ Dividend shall be declared or paid by a company for any financial year only—

(a) out of the profits of the company for that year arrived at after providing for depreciation in
accordance with the provisions of section 123(2), or

(b) out of the profits of the company for any previous financial year or years arrived at after
providing for depreciation in accordance with the provisions of that sub-section and remaining
undistributed, or

[Note: Such depreciation shall be provided in accordance with the provisions of Schedule II.]
 (c) out of both (a) and (b); or

(d) out of money provided by the Central Government or a State Government for the payment
of dividend by the company in pursuance of a guarantee given by that Government.

(ii) ​ Transfer to reserves:​ A company may, before the declaration of any dividend in any financial
year, transfer such percentage of its profits for that financial year as it may consider appropriate to the
reserves of the company. Therefore, the company may transfer such percentage of profit to reserves
before declaration of dividend as it may consider necessary. Such transfer is not mandatory and the
percentage to be transferred to reserves is to be decided at the discretion of the company.

Example 1: Alma limited proposes to transfer more than 10% of the profits of the company to the
reserves for the current year, before the declaration of dividend @ 12%. Is Alma Limited allowed to
do so?

Answer: The amount to be transferred to reserves out of profits for a financial year has been left at the
discretion of the company acting vide its Board of Directors. Therefore, the company is free to
transfer any part of its profits to reserves as it deems fit.

Example 2: Brix Limited has earned a profit of Rs. 1,000 crores for the financial year 2016-17. It has
proposed a dividend @ 8.75%. However, it does not intend to transfer any amount to the reserves of
the company out of the profits earned. Can Brix Limited do so?

Answer: The amount to be transferred to reserves out of profits for a financial year has been left at the
discretion of the company acting vide its Board of Directors. The company is free to transfer any part
of its profits to reserves as it deems fit. There is no restriction to transfer any specific amount (i.e. even
no amount can be transferred) to the reserves before declaration of dividend.

(iii) ​ Declaration of dividend out of accumulated profits:​ Where a company, owing to inadequacy
or absence of profits in any financial year, proposes to declare dividend out of the accumulated profits
earned by it in previous years and transferred by the company to the reserves, such declaration of
dividend shall be made only in accordance with prescribed rules. [Second Proviso to section 123(1)]

Exemption​: The above proviso shall not apply to a Government Company in which the entire paid up
share capital is held by the Central Government, or by any State Government or Governments or by the
Central Government and one or more State Governments.
 (iv) ​ Declaration of dividend from free reserves:​ Dividend shall be declared or paid by a company
only from its free reserves. No other reserve can be utilized for the purposes of declaration of such
dividend.

(v) Declaration of dividend by set off of previous losses and depreciation against the profit of the
company for the current year: No company shall declare dividend unless carried over previous losses
and depreciation not provided in previous year or years are set off against profit of the company for the
current year.

For declaration of dividend out of accumulated profits, the Ministry of Corporate Affairs has provided
Rule 3 of the Companies (Declaration and Payment of Dividend) Rules, 2014. Thereby, when there is
inadequacy or absence of profits in any year, a company may declare dividend out of free reserves.
However, the following conditions shall be fulfilled before declaring dividend out of reserves:

(a) The rate of dividend declared shall not exceed the average of the rates at which dividend was
declared by it in the 3 years immediately preceding that year:

Rate of Dividend ≤ (RD​1​ +RD​2​ + RD​3​)/3

Where, RD​1​, RD​2​, RD​3​ are rates at which dividend was declared by it in the 3 years immediately preceding that
year.

However, this rule will not apply if a company has not declared any dividend in each of the 3
preceding financial years.

(b) The total amount to be drawn from such accumulated profits shall not exceed one- tenth of
the sum of its paid-up share capital and free reserves as appearing in the latest audited financial
statement.

Therefore,

Total amount that can ≤ 1/10 of (Paid up

be drawn from share capital +
accumulated profits Free reserves)

(c) The amount so drawn shall first be utilised to set off the losses incurred in the financial year
in which dividend is declared before any dividend in respect of equity shares is declared.
 (d) The balance of reserves after such withdrawal shall not fall below 15% of its paid up share
capital as appearing in the latest audited financial statement.

Example: ​A Public Company has been declaring dividend at the rate of 20% on equity shares
during the last 3 years. The Company has not made adequate profits during the year ended 31st
March, 2017, but it has got adequate reserves which can be utilized for maintaining the rate of
dividend at 20%. Advise the Company as to how it should go about if it wants to declare dividend
at the rate of 20% for the year 2016-17, as per the provisions of the Companies Act, 2013.

Answer: In the given case, the company has made adequate profits for the current year. However, it
can declare dividend out of accumulated profits. Hence, the company can declare a dividend of 20%
provided it has the required residual reserve (after such payment) of 15% of its paid up capital and
free reserves as appearing it its latest audited financial statement. The company should have the
dividend recommended by the Board and put up for the approval of the members at the Annual
General Meeting as the authority to declare dividend lies with the members of the company.

(vi) ​ Depositing of amount of dividend:​ In terms of section 123(4), the amount of the dividend,
including interim dividend, shall be deposited in a scheduled bank in a separate account within 5 days
from the date of declaration of such dividend.

This sub-section shall not apply to a Government Company in which the entire paid up share capital is
held by the Central Government, or by any State Government or Governments or by the Central
Government and one or more State Governments or by one or more Government Company.

(vii) ​Interim Dividend:

According to section 123(3), the Board of Directors of a company may declare interim dividend during
any financial year out of the surplus in the profit and loss account and out of profits of the financial year
in which such interim dividend is sought to be declared.

However, in case the company has incurred loss during the current financial year up to the end of the
quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall
not be declared at a rate higher than the average dividends declared by the company during the
immediately preceding three financial years.

The Board of directors may declare interim dividend and the amount of dividend including interim
dividend shall be deposited in a scheduled bank in a separate bank account within 5 days from the
date of declaration of such dividend.
 Example: ​Wilson Limited is facing loss in business during the current financial year 2016-17. In the
immediate preceding three financial years, the company had declared dividend at the rate of 8%, 10%
and 12% respectively. To maintain the goodwill of the company, the Board of Directors has decided to
declare 12% interim dividend for the current financial year. Is the act of Board of Directors valid?

Answer: Interim dividend shall not be declared at a rate higher than the average dividends declared by
the company during the immediately preceding three financial years [i.e. (8+10+12)/3 =30/3=10%].
Therefore, decision of Board of Directors to declare 12% of the interim dividend for the current
financial year is not tenable. They can declare a maximum 10% interim dividend.

(viii) ​Payment of dividend: According to section 123(5):

(a) Dividends are payable in cash. Dividends that are payable to the shareholder in cash may
be paid by cheque or warrant or in any electronic mode.

(b) Dividend shall be payable only to the registered shareholder of the share or to his order or to
his banker.

(c) This sub-section shall apply to the Nidhis company, subject to that any dividend payable in
cash may be paid by crediting the same to the account of the member, if the dividend is not
claimed within 30 days from the date of declaration of the dividend.

(d) Nothing in sub-section 5 of section 123, shall prohibit the capitalization of profits or
reserves of a company for the purpose of issuing fully paid-up bonus shares or paying up any
amount for the time being unpaid on any shares held by the members of the company.

Payment of dividend

1. Payable in
- Cash
- cheque
- Warrant
- any electronic mode

2. Payable to
- the registered shareholder of the share, or
- to his order, or
- to his banker
 3. Nidhi Co.
- any dividend payable in cash may be paid by crediting the same to the account of the
member, if the dividend is not claimed within 30 days from the date of declaration of the
dividend.

Example: ​The Director of Som Limited proposed dividend at 12% on equity shares for the financial
year 2015-16. The same was approved in the annual general meeting of the company held on 20th
September, 2016. The Directors declared the approved dividends.

Mr. Ninja was the holder of 1,000 equity shares on 31st March, 2016, but he has transferred the shares
to Mr. Raj, whose name has been registered on 20th May, 2016. Who will be entitled to the above
dividend.

Answer: According to section 123(5), dividend shall be payable only to the registered shareholder of
the share or to his order or to his banker. Facts in the given case state that Mr. Ninja, the holder of
equity shares transferred the shares to Mr. Raj whose name has been registered on 20th May 2016.
Since, he became the registered shareholder before the declaration of the dividend in the Annual general
meeting of the company held on 20th September 2016, so, Mr. Raj will be entitled to the dividend.

(ix) ​ Prohibition on declaration of dividend: ​The Act by virtue of Section 123 (6) specifically
provides that a company which fails to comply with the provisions of section 73 (Prohibition on
acceptance of deposits from public) and section 74 (Repayment of deposits, etc., accepted before the
commencement of this Act) shall not, so long as such failure continues, declare any dividend on its
equity shares.

(x) ​Prohibition on section 8 companies :​ According to section 8(1), the companies having licence
under Section 8 (Formation of companies with Charitable Objects, etc.] of the Act are prohibited from
paying any dividend to its members. Their profits are intended to be applied only in
promoting the objects of the company.

Exception under 127

1. Dividend could not be paid by reason of ​operation of any law​;

2. Shareholder gave directions ​regarding payment of dividend, AND
 ○ those directions cannot be complied with and the same has been communicated to him;
3. Dispute regarding right ​to receive dividend;
4. Dividend has been ​lawfully adjusted ​against any sum due from shareholder to Co.; or
5. for ​any other reason​, the failure to pay/ post dividend/ warrant witing prescribed time, was not due to any
default on the part of the company.

ACCOUNTS.
Section 128 of the Companies Act, 2013 read with the Companies (Accounts) Rules, 2014 makes it clear that a
Company shall keep books of accounts, relevant books and papers and financial
statements at its registered office only.

This means that a Company can keep its Books of Accounts at any place in India. However, intimation in form
AOC-5 is mandatory within 7 days of passing of Board Resolution along with copy of such board resolution. The
form does not required professional certification and proof of such address is not mandatory to be provided in the
form.

However the proviso to Scction 128 provides that all or any of the books of account aforesaid and other relevant
papers may be kept at such other place in India as the Board of Directors may decide and where such a decision is
taken, the company shall, within seven days thereof, file with the Registrar a notice in writing giving the full
address of that other place.

Secretarial Audit and Report

‘Secretarial Audit’ is introduced by the recently enacted Companies Act, 2013. It is a process to check compliances
made by the Company under Corporate Law & other laws, rules, regulations, procedures etc. It is a mechanism to
monitor compliance with the requirements of stated laws and processes. Periodically examination of work is
necessary to point out errors & mistakes and to make a robust compliance mechanism system in an organization.

Every company needs to comply with hundreds of Laws, rules, regulations. These laws are complex and
non-compliances would attract major risk to the company. Periodically inspecting the records of the company gives
exact information whether, and if so, to what extent the Company has complied with the laws applicable to the
Company.

Secretarial Audit gives comfort to the regulators, stakeholders and management that company has disciplined
approach to evaluate and improve effectiveness of risk management, control, and governance processes

TO WHICH COMPANIES SECRETARIAL AUDIT IS MANDATORY?

As per section 204 of the Companies Act, 2013 read with Companies (Appointment and Remuneration of
Managerial Personnel) Rules, 2014, following companies are required to obtain ‘Secretarial Audit Report’ form
independent practicing company secretary;

(1) Every listed company

(2) Every public company having a paid-up share capital of Fifty Crore rupees or more; or

(3) (b) Every public company having a turnover of Two Hundred Fifty Crore rupees or more.

“Turnover” means the aggregate value of the realisation of the amount made from the sale, supply or distribution of
goods or on account of services rendered, or both, by the company during a financial year. [Section 2(91)]

Secretarial Audit is also mandatory to a private company which is a subsidiary of a public company, and which falls
under the prescribed class of companies

WHO CAN BE APPOINTED AS SECRETARIAL AUDITOR?

Only a member of the Institute of Company Secretaries of India holding certificate of practice (company secretary
in practice) can conduct Secretarial Audit and furnish the Secretarial Audit Report to the Company.

APPOINTMENT OF SECRETARIAL AUDITOR

As per Rule 8 of the Companies (Meetings of Board and its powers) Rules, 2014, Secretarial Auditor is required to
be appointed by means of resolution passed at a duly convened Board meeting and resolution for appointment shall
be filed with Registrar of Companies within 30 days in E-form MGT-14.

It is advisable for the Secretarial Auditor to get the letter of engagement from the company.Secretarial Auditor
should formally accept the letter of engagement. Further, as a prudent corporate practice, it is advisable that change
in the Secretarial Auditor during the year is reported to the members in the Board’s Report.

The Companies Act, 2013 has empowered secretarial auditor and has given him all rights and powers as given to
statutory auditors. As per section 204 of the Companies Act, 2013, the secretarial auditor company shall be entitled
to require from the officers of the company such information and explanation as he may consider necessary for the
performance of his duties as auditor.

PUNISHMENT FOR DEFAULT

Sub-Section 4 of Section 204 of the Companies Act, 2013, provides that if a company or any officer of the
company or the company secretary in practice, contravenes the provisions of section 204 of the Act, the company,
every officer of the company or the company secretary in practice, who is in default, shall be punishable with fine
which shall not be less than 1 lakh rupees but which may extend to 5 lakh rupees.
Moreover as per sub section (15) of section 143 of the Companies Act, 2013, if a secretarial auditor, has reason to
believe that an offence involving fraud is being or has been committed against the company by officers or
employees of the companys, he shall immediately report the matter to the Central Government within such time and
in such manner as may be prescribed. Failure to do so shall attract a fine which shall not be less than 1 lakh rupees
but which may extend to 25 lakh rupees.

BOARD’s Report

The Board’s Report is the most important means of communication by the Board of Directors of a company with its
shareholders. It is a comprehensive document which serves to inform the shareholders about the performance and
various other aspects of the company, its major policies, relevant changes in management, future programmes of
expansion, modernization and diversification, capitalization or reserves, etc. The Board’s Report enables not only
the shareholders but also the lenders, bankers, government and the public to make an appraisal of the company’s
performance and provides an insight into the future growth and profitability of the company. The Companies Act,
2013 is based on enhanced disclosures and transparency. The Board’s Report is a document, preparation of which
requires thorough understanding of the subject. The Act requires the Board of Directors to disclose on various
parameters including the risk management, board evaluation, implementation of Corporate Social Responsibility, a
statement of declaration given by independent directors. The Secretarial Audit Report is also required to be annexed
to the Board’s Report. It is mandatory for the Board of Directors of every company to present financial statement to
the shareholders along with its report, known as the “Board’s Report” at every annual general meeting. Apart from
giving a complete review of the performance of the company for the year under report, material changes till the date
of the report, the report highlights the significance of various national and international developments which can
have an impact on the business and indicates the future strategy of the company. The Board’s Report enables
shareholders, lenders, bankers, government, prospective investors, all the stakeholders and the public to make an
appraisal of the company’s performance and reflects the level of corporate governance in the company. The matters
to be included in the Board’s Report have been specified in Section 134 of the Companies Act, 2013 and Rule 8 of
the Companies (Accounts) Rules, 2014. Apart from this, under Sections 67, 92, 129, 131, 135, 149, 160, 168, 177,
178, 188, 197, 204 of the Companies Act, 2013, relevant information has to be disclosed in the Board’s Report. The
Board’s Report of companies whose shares are listed on a stock exchange must include additional information as
specified in the SEBI (LODR) ,2015.

Unit-5
Winding Up

Concept and modes of Winding Up.

Insider Trading, Whistle Blowing: Insider Trading; meaning & legal provisions;

The winding up or liquidation of a company is the process by which a company’s assets are collected and sold in
order to pay its debts. Any money remaining after all debts, expenses and costs have been paid off are distributed
amongst the shareholders of the company. When the winding up has been completed, the company is formally
dissolved and it ceases to exist.

MODES OF WINDING UP

As per section 270 of the Companies Act 2013, the procedure winding up of a company can be initiated either

a) By the tribunal or,

b) Voluntary

As per new Companies Act 2013, a company can be wound up by ​a tribunal​ in the below mentioned
circumstances:

1. When the company is unable to pay its debts

2. If the company has by special resolution resolved that the company be wound up by the tribunal.

3. If the company has acted against the interest of the integrity or morality of India, security of the state, or has
spoiled any kind of friendly relations with foreign or neighboring countries.

4. If the company has not filled its financial statements or annual returns for preceding 5 consecutive financial
years.

S. If the tribunal by any means finds that it is just & equitable that the company should be wound up.

6. If the company in any way is indulged in fraudulent activities or any other unlawful business, or any person or
management connected with the formation of the company is found guilty of fraud, or any kind of misconduct.

VOLUNTARY WINDING UP OF A COMPANY:

The company can be wound up voluntarily by the mutual decision of members of the company, if:

● The company passes a Special Resolution stating about the winding up of the company.
● The company in its general meeting passes a resolution for winding up as a result of expiry of the period of
its duration as fixed by its Articles of Association or at the occurrence of any such event where the articles
provide for dissolution of company.

Insider Trading- meaning

The Act of 2013 prohibits insider trading and any insider as defined in the Act if found guilty of insider trading will
be subject to penalty which provides for jail term upto five years and/or monetary penalty. The Act defines insider
trading( S 195(1)(a) and `Price Sensitive Information’, (S 195(1)(b)). The Act of 1956 did not have any provision
against insider trading. The SEBI Regulations on Insider Trading monitored such activity which was in place from
1992. The provision included in S 195 deals with actions of directors, key managerial persons, any other person or
their agents dealing with securities or their agents based on `​non-public ​price sensitive information’ directly or
indirectly.
The Companies Act,2013 in S 2 ( 77) defines `relative’ to mean with `​reference to any person, means any one who
is related to another, if –

(i) they are members of a Hindu Undivided Family’

(ii) they are husband and wife; or

(iii) one person is related to the other in such a manner as may be prescribed.​ ’

Insider Trading’ as per the SEBI ( Prohi

bition of Insider Trading) Regulation,2015 compared to the Companies Act,2013.

The Regulation defines `Insider’ in a different manner and includes any person who is connected with the company
having access to unpublished price sensitive information. So the definitions of `insider’ differs.

The Companies Act,2013 states about `non-public price sensitive information’ and the Regulation states about `
unpublished price sensitive information​.’

The Act of 2013 refers to Directors, Key Managerial Persons and any other person of their agents acting directly or
indirectly who could be booked for violation of S 195.

The Regulation refers to `connected persons’ who could be charged with an act of insider trading.

The Regulation in R 2 (f) defines an` immediate relative.’ So a relative within the provisions of the Regulations
may not be a relative within the meaning of the Act of 2013.

As per the Regulations any connected person found guilty of insider trading within the meaning of the current
Regulations will be subject to the following penalty:

S 15 G of the SEBI Act,1992 as amended lays down that if any insider :

(i) either on his own behalf or on behalf of any other person, deals in securities of a body corporate listed on any
stock exchange on the basis of any unpublished price sensitive information; or

(ii) communicates any unpublished price sensitive information to any person, with or without his request for such
information except as required in the ordinary course of business or under any law; or

(iii) counsels, or procures for any person to deal in any securities or any body corporate on the basis of unpublished
price sensitive information,
he shall be liable to a penalty of twenty-five crore rupees or three times the amount of profits made out of insider
trading, whichever is higher.

The Act of 2013 provides for jail term upto five years if any person contravenes the provisions of S 195.

There is no jail term under S 15G of the SEBI Act,1992 as amended.

​Whistle blowing​: Concept and Mechanism- Insolvency code.

The term "whistle-blowing" originates from the practice of British policemen who blew their whistles whenever
they observed commission of a crime. Whistle blowing means calling the attention of the top management to some
wrongdoing occurring within an organization.

A whistleblower may be an employee, former employee or member of an organisation, a government agency, who
has the willingness to take corrective action on the misconduct.

1. Internal: A WhistleBlower may be within the organization who discloses any illegal, immoral or illegitimate
practices to the employer. He/she may be an Employee, Superior officer or Any designated officer

2. External : A WhistleBlower may be outside the organization who discloses any illegal, immoral or illegitimate
practices to the company. He/She may be Lawyers, Media, Law enforcement and Watchdog agencies

Insolvency Code

The Insolvency and Bankruptcy Code has been introduced with an object of maximization of the value of the
assets, promoting entrepreneurship ,availability of credit, resolution of insolvency within the time bound manner
and balancing the interest of all stakeholders including alteration of priority of payments to the Govt.