Unit III

Transfer of Shares

Shareholders have the ability to transfer their shares to existing shareholders or third parties. This
allows shareholders to sell their shares. Some examples are as follows:

 Shareholders want to transfer shares to existing shareholders

 Shareholders want to exit company by transferring to existing or third parties
 Succession Planning (transferring shares to spouse or siblings)
 Company Takeover
 Company Restructuring or putting a group in place

The Memorandum and Articles of Association and shareholders agreements should be reviewed
prior to any transfer for any restrictions on the transfer of shares.

A transfer of shares must be approved by the Directors and the appropriate stamp duty should be
paid to the Revenue Commissioner. The Company should then write up the Register of Members
and Register of Transfers and issue a new share certificate.

Debenture
A debenture is an acknowledgement of debts and written promise by the company to repay the
loans according to the terms laid down in the document. It represents the loan of the company.
It is one of the sources to raise capital and may be issued at any time before winding up.
Debentures are classified into three classes:

1. Registered Debentures and bearer debentures

2. Secured and unsecured debentures

3. Redeemable and perpetual debentures

4. Convertible debentures and non convertible

1. Registered debentures and bearer debentures:

Registered debenture is one which is registered in the name of a holder in the books of the
company. It is transferable in the same way as a share. Interest on such a debenture is payable to
the registered holder or the order of the registered holder.

A company may issue debentures payable to the bearer. These are negotiable instruments and the
title to them is, therefore, transferable by mere delivery. In case of bearer debentures, the
company keeps no register of debenture holders in respect of them. The coupons are attached to

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the bearer debenture for payment of interest and must be presented for payment to the company’s
bankers when the date of payment arrives.

2. Secured and unsecured debentures:

Debentures issued by a company may be secured or unsecured. Debentures which do not carry
any charge on the assets of the company are unsecured or naked debentures. In such a case the
debenture-holder is an ordinary unsecured creditor of the company.

When some assets or property of the company are charged in favour of the debenture-holder, the
debentures are deemed to be secure.

3. Redeemable and perpetual debentures:

Debentures issued by the company are generally redeemable. A redeemable debenture is one
under which the principal money is paid-off to the debenture-holder on the expiry of the fixed
term. Perpetual debentures are also known are irredeemable debentures. Such debentures are
payable only in the event of a winding up or on some serious default by the company or payable
at a remote period. If debentures are issued as irredeemable or perpetual, there would be no time
within which the company would be bound to pay them.

4.Convertible debentures and non convertible:

In the case of convertible debentures an option is given to the debenture-holders to convert them
into preference or equity shares at a stated rate of exchange after a certain period. In the case of
non convertible debentures, there is no option to the debenture-holders to convert them into
preference or equity shares.

Meetings

A company is an association of several persons. Decisions are made according to the view of the
majority. Various matters have to be discussed and decided upon. These discussions take place at
the various meetings which take place between members and between the directors.

Kinds of Company Meetings: Broadly, meetings in a company are of the following types :-

1. General Meetings :These are meetings where the members / shareholders of the
company meet and discuss various matters. Member’s meetings are of the following
types :-
A. Statutory Meeting: Statutory meeting is held only once in the lifetime of the
company. Such a meeting must be held within a period of not less than one month
or within a period not more than six months from the date on which it is entitled
to commence business. The following matters are discussed in this meeting:-
 Floatation of shares / debentures by the company
 Modification to contracts mentioned in the prospectus

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The purpose of the meeting is to enable members to know all important matters pertaining to the
formation of the company and its initial life history. The matters discussed include which shares
have been taken up, what money has been received, what contracts have been entered into, what
sums have been spent on preliminary expenses, etc.

The Board of Directors must prepare and send to every member a report called the "Statutory
Report" at least 21 days before the day on which the meeting is to be held. The report should be
certified as correct by at least two directors, one of whom must be the managing director. A list
of members showing their names, addresses and occupations together with the number shares
held by each member must be kept in readiness and produced at the commencement of the
meeting and kept open for inspection during the meeting.

Contents of Statutory Report must provide the following particulars:- (a)The total number of
shares allotted (b) The total amount of cash received by the company in respect of all shares
allotted. (c) An abstract of the receipts and payments and balance of cash and bank accounts in
hand. (d) Any commission or discount paid or to be paid on the issue or sale of shares or
debentures (e) The names, addresses and occupations of directors, auditors, manager and
secretary (f) Particulars of any contracts to be submitted to the meeting for approval and
modifications done or proposed.(g) If the company has entered into any underwriting contracts,
the extent, if any, to which they have not been carried out and the reasons for the failure.(h) The
arrears, if any, due on calls from every director and from the manager.(i) The particulars of any
commission or brokerage paid or to be paid, in connection with the issue or sale of shares or
debentures to any director or to the manager.

B. Annual General Meeting: Every company must in each year hold an annual general meeting.
Not more than 15 months must elapse between two annual general meetings. A notice of at least
21 days before the meeting must be given to members. The notice must state that the meeting is
an annual general meeting. The time, date and place of the meeting must be mentioned in the
notice. The notice of the meeting must be accompanied by a copy of the annual accounts of the
company, director’s report on the position of the company for the year and auditor’s report on
the accounts. The AGM must be held on a working day during business hours at the registered
office of the company or at some other place within the city, town or village in which the
registered office of the company is situated.

The following matters constitute ordinary business at an AGM :-

 Consideration of annual accounts, director’s report and the auditor’s report

 Declaration of dividend
 Appointment of directors in the place of those retiring
 Appointment of and the fixing of the remuneration of the statutory auditors.

C.Extraordinary General Meeting: Every general meeting (i.e. meeting of

members of the company) other than the statutory meeting and the annual general
meeting or any adjournment thereof, is an extraordinary general meeting. Such

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 meeting is usually called by the Board of Directors for some urgent business
which cannot wait to be decided till the next AGM. An explanatory statement of
the special business must also accompany the notice calling the meeting.

The Articles of Association of a Company may contain provisions for convening an

extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks fit,
call an extraordinary general meeting"

Class Meeting: Class meetings are meetings which are held by holders of a particular class of
shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to
vary the rights of that particular class of shares. At such meetings, these members discuss the
pros and cons of the proposal and vote accordingly.

2. Other Meetings:
A. Meeting of debenture holders: A company issuing debentures may provide for the
holding of meetings of the debenture holders. At such meetings, generally matters
pertaining to the variation in terms of security or to alteration of their rights are discussed.
B. Meeting of creditors: Sometimes, a company, either as a running concern or in the event
of winding up, has to make certain arrangements with its creditors. Meetings of creditors
may be called for this purpose.

Requisites of a valid meeting

The following conditions must be satisfied for a meeting to be called a valid meeting :-

1. It must be properly convened. The persons calling the meeting must be authorised to do
so.
2. Proper and adequate notice must have been given to all those who are entitled to attend
the meeting.
3. The meeting must be legally constituted. There must be a chairperson. The rules of
quorum must be maintained and the provisions of the Companies Act and the articles
must be complied with.
4. The meeting must be conducted in accordance with the regulations governing the
meetings.

A meeting without the minimum quorum is invalid and decisions taken at such a meeting
are not binding. The articles of a company may provide for a quorum without which a
meeting will be construed to be invalid. Unless the articles of a company provide for
larger quorum, 5 members personally present (not by proxy) in the case of a public
company(Five in case of Members upto 1000;Fifteen in case of Members more than
1000, upto 5000;Thirty in case of Members exceed 5000) and 2 members personally
present (not by proxy) in the case of a private company shall be the quorum for a general
meeting of a company.

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 Quorum refers to the minimum number of members who must be present at a meeting in
order to constitute a valid meeting.

Proxy
A member may appoint another person to attend and vote at a meeting on his behalf. Such other
person is known as "Proxy". A member may appoint one or more proxies to vote in respect of
the different shares held by him, or he may appoint one or more proxies in the alternative, so that
if the first named proxy fails to vote, the second one may do so, and so on.

The member appointing a proxy must deposit with the company a proxy form at the time of the
meeting or prior to it giving details of the proxy appointed.

Resolution

Resolutions mean decisions taken at a meeting. A motion, with or without amendments is put to
vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can be
passed at a properly convened meeting with the required quorum. There are broadly three types
of resolutions :-

1. Ordinary Resolution : An ordinary resolution is one which can be passed by a simple

majority of votes i..e.(votes cast in favour of the resolution exceed votes cast against it).
Generally this resolution is used for ordinary routine business of the company. For
example, to declare the dividend, to appoint the auditors, permission to the shares at
discount, to fix the remuneration of auditors. etc.
2. Special Resolution : The resolution which is passed by the majority of the shareholders
not less than three fourth is called special resolution. A copy of special resolution must be
filed with the registrar office within fifteen days. This resolution is used for special
purposes like, transfer the registered office from one province to other, To change the
Article of Association, To change the name of the company, To reduce the share capital
etc.
3. Resolution requiring Special Notice: There are certain matters specified in the
Companies Act, which may be discussed at a general meeting only if a special notice is
given regarding the proposal to discuss these matters at a meeting. A special notice
enables the members to be prepared on the matter to be discussed and gives them time to
indicate their views on the resolution. This is termed as resolution requiring special
notice.

Who can be appointed as a Director

Under the Companies Act, only an individual can be appointed as a Director; a corporate,
association, firm or other body with artificial legal entity cannot be appointed as a Director.

Number of directors

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  Every public company shall have 3 directors and any other company shall have at least 2
directors
 The Maximum number of directors of a company shall be specified in the articles. The
Act does not prescribe any maximum number of directors.
 Public Company: if the maximum No. exceeds 12, prior approval of the CG is required.
 Private Company: no such approval is required even if the no. exceeds 12.

Appointment of directors

1) First directors-If different persons are not named as first director in articles of the company,
the name of directors shall be determined in writing by the subscribers or a majority of them.
Where the articles are silent regarding the appointment of directors, the subscribers of the
memorandum, who are individuals shall be deemed to be the first directors of the company. They
shall hold office until the directors are appointed at the first annual general meeting.

2) Appointment by company-Appointment of subsequent directors is made at every annual

general meeting of the company. Section 255 provides that not less than two-thirds of the total
number of directors of a public company shall be rotational directors, i.e. liable to retire by
rotation and shall be appointed by the company in general meeting. The remaining directors, not
exceeding 1/3 of the total number, may be appointed on non rotational basis. In other words, not
more than one-third of the total number of directors can act as non-retiring directors i.e not
subject to retirement by rotation.

At every subsequent annual general meeting, out of the 2/3 directors liable to retire by rotation,
one-third must retire. If the number is not three or a multiple of three, then the number nearest to
one-third must retire from office. The directors to retire by rotation at every annual general
meeting must be those who have been longest in office since their last appointment.

The company may fill up the vacancy by appointing the retiring director or some other person
thereto. If the place of the retiring director is not so filled, and the meeting has not expressly
resolved not to fill the vacancy, the meeting shall stand adjourned. If at the adjourned meeting
also the vacancy is not filled, and the meeting has not expressly resolved not to fill the vacancy,
the retiring director shall be deemed to have been re-appointed at the adjourned meeting.

3) Appointment of directors by directors

(i) As additional directors- If the Articles specifically so provides, the Board has the discretion,
where it feels it necessary to appoint Additional Directors who will hold office until the next
AGM. However, the number of Directors and Additional Directors together shall not exceed the
maximum strength fixed in the Articles for the Board.

(ii) Casual vacancies: Where a Director appointed at the AGM vacates office before his or her
term, the resulting vacancy may, subject to the Articles, be filled by the Board. Such person so
appointed shall hold office up to the time which the Director who vacated office would have held
if he or she had not so vacated such office.

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(iii) Alternate Director: If so authorized by the Articles or by a resolution passed by the
company in general meeting, the Board may appoint an Alternate Director to act for a Director
("Original Director"), who is absent for whatever reason for a minimum period of three months
from the State in which the meetings of the Board are ordinarily held. Such Alternate Director
will hold office until such period that the Original Director would have held his or her office.
However, any provision for automatic re-appointment of retiring Directors applies to the
Original Director and not to the Alternate Director.

4) Appointment by third parties-The articles may give right to debenture-holders, financial

corporations or banking companies who have advanced loans to the company to nominate
director on the board of the company. The number of directors so nominated should not exceed
one-third of the total strength of the board. They are not liable to retire by rotation.

5) Appointment by the central government-According to section 408 of the companies act, the
central government has the power to appoint directors for the purpose of prevention of
oppression and mismanagement. It provides that the central government may appoint such
number of directors on the board of the company as it may think fit to effectively safeguard the
interest of the company, its shareholders, or public interest. Such an appointment shall be for a
period not exceeding three years, and shall be made on the application of not less than 100
member or members holding not less than 1/10 th of the voting power of the company. Such
directors will not be required to hold any qualification shares, not they shall be liable to retire by
rotation.

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Remuneration of Directors

Section 197 of CA 2013 deals with the overall maximum managerial remuneration According to
this section, the total managerial remuneration payable by a public company, to its directors,
including managing director and whole-time director, and its manager in respect of any financial
year shall not exceed eleven per cent of the net profits of that company for that financial year
computed in the manner laid down in section 198 except that the remuneration of the directors
shall not be deducted from the gross profits.

However, a company in general meeting may, with the approval of the Central Government,
authorise the payment of remuneration exceeding eleven per cent of the net profits of the
company, subject to the provisions of Schedule V:

However, the remuneration payable to any one managing director; or whole-time director or
manager shall not exceed five per cent of the net profits of the company and if there is more than
one such directors, remuneration shall not exceed ten per cent of the net profits to all such
directors and manager taken together;

The remuneration payable to directors who are neither managing directors nor whole-time
directors (they are part time director) shall not exceed one per cent of the net profits of the
company if there is a managing or whole-time director or manager and three per cent of the net
profits in any other case.

If, in any financial year, a company has no profits or its profits are inadequate, the company shall
not pay to its directors, including any managing or whole-time director or manager, by way of
remuneration any sum except with the previous approval of the Central Government.

Disqualification of directors

A person shall not be capable of being appointed director of a company, if 

(a) he has been found to be of unsound mind

(b) he is an undischarged insolvent;

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

(d) he has been convicted by a Court of any offence involving moral turpitude and
sentenced in respect thereof to imprisonment for not less than six months, and a
period of five years has not elapsed from the date of expiry of the sentence;

(e) he has not paid any call in respect of shares of the company held by him,
whether alone or jointly with others, and six months have elapsed from the last
day fixed for the payment of the call; or
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 (f) an order disqualifying him for appointment as director has been passed by a
Court in pursuance of section 203 and is in force, unless the leave of the Court has
been obtained for his appointment in pursuance of that section.

          (g) such person is already a director of a public company which, -

(i) has not filed the annual accounts and annual returns for any continuous three financial years
commencing on and after the first day of April, 1999; or 
(ii) has failed to repay its deposit or interest thereon on due date or redeem its debentures on due
date or pay dividend and such failure continues for one year or more :    

Appointment of Managing Directors

A Managing Director must be an individual and can be appointed for a maximum term of
five years at a time. A person who is already a Managing Director / Manager of a
company can become the Managing Director of only one other company with the prior
unanimous approval of the Board of such company Alteration in Memorandum of
Association

Position of promoters in a company

The formation of a company is a lengthy process. It involves several stages. The first stage in the
process of formation is the promotion. At this stage the idea of carrying on a business is
conceived by a person or by a group of persons called promoters. For incorporating a company
various formalities are required to be carried out. The promoters perform these functions and
bring the company into existence. The promoters acquire and invest the initial capital for the
company. Once all the formalities are completed, the promoters hand over the authority to the
directors. A promoter can be a person or a registered company as well.

Legal Position of Promoters

The promoters of a company decide the scope of its business activities. They negotiate, if
necessary, for the purchase of an existing business. They instruct the solicitors to prepare the
necessary documents and secure the services of directors. They provide the registration fees and
carry out other duties involved in the formation of a company. They also make arrangements for
advertising and circulating the prospectus, and placing the capital.

A promoter is not an agent of the company which he promotes because a company cannot have
an agent before it comes into existence. But certain fiduciary duties, like an agent, have been
imposed on him under the Companies Act. As such he is said to be in a fiduciary position (a
position full of trust and confidence) towards the company and the original allottee of shares.
Consequently, a promoter must make full disclosure of the relevant facts, including any profit
made to the shareholders of the company.

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He must not make any secret profits out of the transactions he makes on behalf of the company.
It is to be observed that it is not the profit made by the promoter which the law forbids, but the
non-disclosure of it. If full disclosure is made to an independent Board of Directors or to the
shareholders, the profit is permissible.

Promoters have in their hands the creation and molding 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.

Legal Position Directors of a Company

Directors are the persons appointed by the company to direct and manage the affairs of the
company. They are described sometimes as agents, sometimes as trustees and sometimes as
managing partners.

The directors hold an extremely important position in the administration and management of a
Company. The directors actually work in different capacities at different times to ensure that the
company is run in a legal and an efficient manner.

Directors are viewed as agents of the company for the conduct of business of the company. A
company cannot act by itself; it acts only through its directors. Directors act on behalf of the
company. The directors cannot be held personally liable for any default of the company. Like
agents, directors should conduct business of the company with care, skill and diligence possessed
by them. They are accountable for all of company’s assets under their control, and the profits
from assets of the company.

Directors are also described as trustees of the company as they stand in fiduciary capacity
towards the company. Their acts and dealings must be for the benefit of the company. They must
exercise their powers honestly in the interest of the company and all the shareholders and not
their own interest.

However, in the legal sense directors are not trustees. A trustee is the legal owner of the trust
property and contracts in his own name. Directors, on the other hand, are paid agents or officers
of the company and conduct business for the company. Directors of a company have fiduciary
relationship with the company as well as the shareholders.

Alteration in MOA

Joint Stock Companies Act made no provisions for the alteration of a memorandum. Amended
Companies Act 1862 permitted a company to change its name and its authorized share capital,
but forbade any other alteration. Subsequent acts have extended the range of alteration that may
be made. The CA Act 1985 S.2 (7) provides: A company may not alter conditions contained in
the memorandum except in the case in the mode and to that extent, for which express provision
is made by this Act.  

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Alteration of Name Clause

Alteration of the name of a company can be effected by two methods.

By special Resolutions and Permission of the government: The section provides that the name
of a company may be changed at any time by passing a special resolution at a general meeting of
the company and with the written approval of the central government.

After the alteration of name of the company, the registrar should write the new name in the place
of old name. Accordingly the certificate of newly incorporated company should be issued. With
the change of the name of the company the power and responsibilities are not changed.

Alteration of Registered Office Clause

A company may change the situation of its registered office for the smooth running of its
business and the realization of its objects.

If the registered office of the company is to be shifted from one place to another in the same city
or town, the board of directors must pass a resolution to that effect and give the name address of
its registered office to the ROC within 30 days after the date of the change of address. 

If the company wants to shift its registered office from one town to another in the state, it shall
pass a special resolution to that effect at its general meeting and send the notification to the
registrar within 30 days. It shall give the new address of its registered office to the registrar.  

Sometimes the company shifts from one state to another. This kind of shifting is a much more
complicated affair. In the first place, a special resolution is required and in the second,
confirmation by the Company Law Board can confirm the alteration.

Alteration of Object Clause

It is very difficult to alter the objects In the first place, the company has to call a general meeting
of its members and pass a special resolution and file a certified copy of the resolution with the
central government.

After this, the application for proposed alteration is filed with the central government. The
application shall be scrutinized by the government before confirming the alteration.

A certified copy of the order of the central government shall be filed by the company with the
ROC along with the printed copy of the altered memorandum within three months from the date
of the order. The registrar shall register the same and certify the registration within one month of
the date of filing such documents.  

Alteration of Capital Clause

The procedure for the alteration of share capital and the power to make such alteration are
generally provided in the Articles of Association If the procedure and power are not given in the

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Articles of Associational, the company must change the articles of association by passing a
special resolution. If the alteration is authorized by the Articles, the following changes in share
capital may take place:
1. Alteration of share capital [Section 94-95]
2. Reduction of capital [Section 100-105]
3. Reserve share capital or reserve liability [Section 99]
4. Variation of the rights of shareholders [Section 106-107]
5. Reorganization of capital [Section 390-391]
Alteration of Liability Clause

Ordinarily the liability clause cannot be altered so as to make the liability of members unlimited.
Section 38 states that the liability of the members cannot be increased without their consent. It
lays down that a member cannot by changing the memorandum or articles is made to take more
shares or to pay more the shares already taken unless he agrees to do so in writing either before
or after the change.
A company, if authorized by its Articles, may alter its memorandum to make the liability of its
directors or manager unlimited by passing a special resolution. This rule applies to future
appointees only. Such alteration will not affect the existing directors and manager unless they
have accorded their consent in writing [Sec 323].
Section 32 provides that a company registered as unlimited may register under this Act as a
limited company. The registration of an unlimited company as a limited company under this
section shall not affect any debts, liabilities, obligations or contracts incurred or entered into by
the company before such registration.

Prevention of operation and mismanagement

Oppression

The oppression of small/minority shareholders takes place by majority shareholders who control
the company.

Mismanagement

 Mismanagement is not uncommon in companies. It means mismanagement of resources by

following means:

1. Absence of basic records of the company.

2. Drawing considerable expenses for personal purposes by directors/management of the
company.
3. Not filing documents with the Registrar of Companies relating to compliances under the
Companies Act.
4. Misuse of companies finances.
5. Sale of assets at very low prices
6. Violation of provisions of law and memorandum or article of association of the company.
7. Making Secret Profits
8. Diverting company funds for personal use of directors
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 9. Continuation in office by director beyond the specified term and not holding any
qualification shares.

The acts of mismanagement may not necessarily be of majority but can be by any person in the
day to day management of the company.

Legal Aspects-Oppression and mismanagement is governed by section 397 and 398 of the
Companies Act. It plays a crucial role in prevention of the oppression and mismanagement. To
protect the interest of minority shareholders, the Companies Act defines certain rights as
enumerated below:

 The Rights of shareholders

Special resolution is required for changing the registered office from one state to
Section 17:
another and for changing the objects of the company.

Section 21
Changes of name of company require a special resolution.
& 22

Section 31 Alteration of articles can be done through a special resolution.

 Issue of shares at discount should be authorized by the resolution of the general

Section 79
meeting.

Section79  Issue of sweat equity shares should be authorized by special resolution in general
A meeting.

 When further shares are offered to persons other than the existing shareholders, a
Section 81
special resolution should be passed to that effect.

 An equity shareholder has a right to vote on every resolution placed before the
Section 87 company and his voting right on a poll is in proportion to his share of the paid up
equity capital.

Section 94  Alteration of share capital requires consent of shareholders in general meeting.

Section
 Reduction of share capital requires passing of a special resolution.
100

The shareholders who are against the reduction of share capital and who did not
Section
vote in favour of the resolution under section 100 can apply to the court for
107
cancellation of reduction (not less than ten per cent shareholders).

Section  Share allotment letters and share certificates should be delivered to the
113 shareholders within three months of allotment and within two months of the

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 registration of transfers.

 The register of member, index of registers, certificates, documents, etc. can be kept
away from the registered office within the same city etc. if it is so approved by the
Section
special resolution. The index, registers, returns, etc. should be open to the
163
inspection of any member or debenture holder or any other person and extracts can
be taken there from.

Section  The annual general meeting should be held in each year and the gap between two
166 such meetings should not exceed fifteen months.

Section
 Members are entitled to notice of every meeting of the company.
172

Section  A member can inspect the minutes of proceedings of general meeting and he is
196 entitled to be furnished within a week with a copy of minutes on payment of a fee.

Section  The balance sheet and profit and loss account should be laid before the annual
210 general meeting.

Section  Board’s report should be attached to every balance sheet laid before the annual
217 general meeting.

 A copy of every balance sheet and profit and loss account, auditor’s report, board’s
Section
report should not less than 21 days before the annual general meeting be sent to
219
every member.

Section  Auditor’s (other than first and casual auditors) should be elected by members at
224 annual general meetings.

 Members holding not less than one tenth of total voting power or not less than 200
Section
members may appeal to the Company Law Board for investigation of the affairs of
235
the company.

Section  Not less than two thirds of the total number of directors of a public company
255 should be appointed at general meetings.

Section
 The board of directors can be increased or reduced by an ordinary resolution.
258

Section
 Special notice shall be required of any resolution to remove a director.
284

Section  The register of directors can be inspected by any member.

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304

Section  The remuneration payable to directors including the managing and wholetime
309 directors by public companies is subject to the approval of members.

Legal Remedies

Section 397and 398 of the Companies Act covers the remedies for preventing oppression and
mismanagement:

Section 397

1. Any members of a company who complain that the affairs of the company are being conducted in a
manner prejudicial to public interest or in a manner oppressive to any member or members may apply
to the Company Law Board for an order under this section.

2. If, on any application under sub-section (1) the Company Law Board is of opinion that the company’s
affairs are being conducted in a manner prejudicial to public interest or in a manner oppressive to any
member or members, the Company Law Board may take suitable action.

Section 398

Members of company who complain-

(a) That the affairs of the company are being conducted in a manner prejudicial to public interest or in a
manner prejudicial to the interests of the company, or

(b) That a material change (not being a change brought about by, or in the interests of, any creditors
including debenture holders, or any class of shareholders of the company) has taken place in the
management of control of the company whether by an alteration in its Board of Directors, or managers
or in the ownership of the company’s shares or if it has no share capital in its membership, or in any
other manner whatsoever and that by reason of such change, it is likely that the affairs of the company
will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of
the company.

The members may apply to the Company Law Board for an order under this section, provided such
members have a right so to apply in virtue of section 399.

If, on any application the Company Law Board is of opinion that the affairs of the company are being
conducted as aforesaid or that by reason of any material change as aforesaid in the management or
control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the
Company Law Board may, with a view to bringing to an end or preventing the matters complained of or
apprehended, make such order as it thinks fit.

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Appointment of Managing Directors

A Managing Director must be an individual and can be appointed for a maximum term of five years at a
time.

A person who is already a Managing Director / Manager of a public company or a private company
subsidiary of a public company can become the Managing Director / Manager of only one other
company (whether private or public) with the prior unanimous approval of the Board of such company.
However, no such restrictions are applicable to a Manager or a Managing Director of "pure" private
companies.

In case of a public company or a private company that is a subsidiary of a public company, if the
appointment is not in accordance with Parts I and II of Schedule XIII of the Companies Act, such
appointment must be approved by the Central Government.

Qualifications of directors

The Companies Act does not prescribe any qualifications for Directors of any company. The Companies
Act does, however, limit the specified share qualification of Directors which can be prescribed by a
public company or a private company that is a subsidiary of a public company, to be five thousand
rupees Rs. 5,000

In addition to the qualifications for membership in the Board provided for in the Corporation Code,
Securities Regulation Code and other relevant laws, the Board may provide for additional qualifications
which include, among others, the following:

1. At least a college graduate or, in the absence of such college degree or formal education, with
sufficient experience in managing a business;

2. At least twenty-one (21) years old;

3. Shall have been proven to possess integrity and probity;

4. Shall be prudent.

5. Practical understanding of the business of the corporation;

6. Membership in good standing in relevant industry, business or professional organizations; and

7. Previous business experience.

Doctrine of indoor management

The doctrine of indoor management says that outsiders dealing with the company are entitled to
assume that everything had been regularly done so far as its internal proceedings are concerned.

1) Knowledge of irregularity

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2) Acts are void ab initio and forgery

3) No knowledge

4) Negligence

Advantages and disadvantages of incorporation of a company

1) Limited liability – The owners of the corporation (the shareholders) are generally not liable for
the debts and obligations of the corporation unless they have provided a personal guarantee.

2) Perpetual existence – The existence of the corporation is not affected by a change in the people
that own or manage the corporation. The shareholders, directors and officers may retire or sell their
shares, but the corporation continues in existence.

3) Capital acquisition – Corporations can issue various classes of shares (in addition to other debt
instruments such as bonds in order to raise capital. This is an attractive feature to investors because it
allows for partial ownership of the corporation.

4) Tax advantages – There are tax advantages also, such as lower income tax rates and the carrying
forward of losses from previous years to offset profits in subsequent years.

5) Mergers & acquisitions – A corporation can merge or amalgamate with another corporation.

6) Professional management- A company is capable of attracting professional managers. It is due

to the fact that being attached to the management of the company gives them the status of business or
executive class.

Disadvantages of Incorporating

1) Start-up costs – a corporation is more expensive to form and organize than other methods of
carrying on business.

2) Record keeping requirements – A corporation is required to maintain corporate records, elect

directors, hold directors and shareholders’ meetings, and provide shareholders with financial
information, among other duties.

3) Annual filings – corporations are required to file annual government returns.

4) Double taxation of dividends – Income generated by a corporation is taxed at both the

corporate level and shareholder level. A corporation must pay taxes on its income and the shareholders
must pay taxes on the dividends (the profits they receive from the corporation).

5) Formality - Incorporation requires a number of formalities to be complied with both as to the

formation and administration of affairs.

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Importance of Memorandum

Memorandum is the fundamental document of a company which contains conditions upon which the
company is incorporated. This document is important for the following reasons.

• Memorandum defines the limitations on the powers of the company established under the Act.

• The whole structure of the company is built upon memorandum.

• It explains the scope of activities of the company. The investors know where their money will be
spent and outsiders also know the nature of activities the company is authorized to take up.

• It is a basic document of the company with regard to its constitution

• It is a charter of the company which sets out its written goals.

Lifting the corporate veil

A company is an artificial person different for its members and directors. In the eyes of law it has a
separate corporate personality. It has its own corporate name. It works under that name. In normal
circumstances company cannot be considered as agent or trustee of its members. Therefore members
and directors of a company cannot be held liable for any act of that company.

This concept is known as Corporate Veil. Means only company can be held liable for an act done in the
name of the company.

But, as per company laws, a company can be created for lawful purpose only. If a company is created for

• dishonest use

• fraudulent purpose

• unlawful purpose

• evading taxes

• any other purpose which is against the public interest

Concept is very simple. Company cannot work or think on its own. Its directors and members are its
mind and body. Therefore, company can’t do anything wrong own its own. Thus, for any wrong act in
the name of company, members/directors can be held liable.

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This concept is called “Lifting of Corporate Veil”.

It is in the interest of the members in general and in public interest to identify and punish the persons
who misuse the medium of corporate personality.

In the following circumstances different courts found it necessary to lift the corporate veil and punish
the actual persons who did wrong or unlawful acts under the name of company:

Protection of Revenue The Court may ignore the Separate Legal Entity status of a Company, where it is
used for tax invasion or circumventing tax obligation. (Sir Dinshaw Maneckjee Petit)

Determination of enemy character of the Company Company being an artificial person cannot be
enemy or friend. But during war, it may become necessary to lift the corporate veil and see the persons
behind it to determine whether they are friends or enemy. This is due to the reason that though a
company enjoys Separate Legal Entity but its affairs are run by individuals. (Daimler Co. Ltd. Vs
Continental Tyre & Rubber Co. Ltd.)

Prevention of fraud Where a Company is used for committing frauds or improper conduct, Court
may lift the corporate veil and look at the realities of the situation. (Jones vs Lipman)

Protection of public policy The Court shall lift the Corporate Veil without any hesitation to protect
the public policy and prevent transaction opposed to public policy.

Some more important topics

(b) Independent directors

The Companies Act, 2013 makes the role of independent director very different from that of executive
directors. An independent director helps a company to protect the interest of minority shareholders and
ensures that the board does not favour any particular set of shareholders. The role the independent
directors play in a company broadly includes improving corporate credibility, governance standards, and
the risk management of the company.

Section 149(6) of the Companies Act, 2013 provides the criteria for independent directors. Some of
them are as follows –

• The individual concerned must possess high integrity and relevant industrial experience.

• The individual or his/her relatives should not have been an employee of the company during the
previous three fiscal years.

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• The individual should not be a promoter of the company concerned or its subsidiaries.

• The individual should not hold more than 2% voting rights in the company either by himself or
his relatives combined together.

(d) Statement in lieu of prospectus

To raise capital from the general public, the first and foremost requirement of a public company is to
issue a prospectus. The statement in lieu of prospectus is issued when the company does not invite
public subscription.

Nevertheless, both the documents compile similar details. But there is a difference between prospectus
and statement in lieu of prospectus.

Prospectus encourages public subscription while statement in lieu of prospectus is to be filed with the
registrar. Capital is raised from general public in case of prospectus but in case of statement in lieu of
prospectus capital is raised from known sources.

Doctrine of frustration- After the parties have concluded a contract, events beyond their control may
occur which frustrate the purpose of their agreement, or render it very difficult or impossible, or as even
illegal, to perform. An example of this is where a hall, which has been booked for the performance of a
play, is destroyed by fire, after the contract has been concluded, but before the date of performance of
the play.

Thus, Frustration is an act outside the contract that makes it completion impossible, another good
example of this is in marine contracts where a delivery is specified for a certain date and time but the
crossing is so bad that the delivery cannot be made on time. This would be an example of frustration of
that part of the contract and no breach would be held as long as the goods were delivered at the
nearest possible time.

In simple words, the doctrine of frustration is a means of dealing with situations where events occur,
after the contract had been concluded, which render the agreement illegal, or impossible to perform.

Minority shareholders’ rights

Many provisions of Companies Act, 2013 deals with the situations where minority shareholders rights
have been protected and the same can be divided into various major heads. The rights of minority
shareholders are discussed below.

1) Right to apply to the company board for the oppression and mismanagement is provided under
the Section 399, which is, meeting 10% of shareholding or hundred members or one-fifth members limit.
However, central government under their discretionary powers has allowed any numbers of
shareholders to apply for the company board for the relief under Sections 397 and 398.

2) Companies Act, 2013 has empowered the corporate decision making of the minority shareholders
also. Under Section 151 of the Companies Act, 2013, listed companies are now required to appoint

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directors who are elected by the small shareholders i.e. shareholders holding shares of a nominal value
of not more than twenty thousand rupees.

1) E-Voting has been made mandatory for the listed companies with at least 1000 shareholders
which indeed will enhance the active participation and offers a platform to the minority shareholders in
the management of the company. This will also enable the minority shareholders to exercise their
power in the company.

(c) Types of Bailment: The main types of bailment are (Unit 1)

i) Gratuitous Bailment: Where the bailee does not charge any thing for the bailment it is called
gratuitous bailment.

ii) Bailment for Reward: When the bailor charges anything for his services it is called bailment for
rewards.

iii) Bailment for Use: When the bailor delivers an article to the bailee for use by the later in any
general or specific way, this is called a bailment for use.

iv) Bailment of safe custody: If valuable goods or even coins or notes in box are deposited for
protection, it is called bailment for safe custody.

v) Bailment for Mutual Benefit: When the bailor delivers his articles to another for repair or gives
his goods to carrier for carriage, it is known as bailment for mutual benefit.

vi) Bailment for Pledge: It is a contract whereby an article is deposited with a lender as security for
the payment of a loan or performance of a promise.

vii) Bailment for Finding of lost Goods: If a person already in possession of the lost goods of another,
he thereby becomes the bailee and the owner becomes the bailor.

Duties of promoters: The Companies Act contains no provision which states the duties of the promoters,
but cultural notions and legal trends have enumerated certain duties:

1) Initiator: The promoter originates the scheme for the formation of a company, he gets
memoranda and articles prepared, executed and registered and he deals with merchant bankers,
brokers and legal advisors.

2) Fiduciary agent: Promoters stand as a fiduciary agent of a company. As a fiduciary agent, the
following duties are done in his name:

(i) He should make all disclosures regarding accounts and formation so as to maintain transparency
at the time of transfer of management to the director.

(ii) He should not make any secret profit out of the promotion of the company.

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(iii) He should make all disclosures regarding transactions entered by him on behalf of the company
as promoter.

Liabilities of promoters: Section 56 and Schedule II. These sections require that the promoter state all
the contents of a prospectus, such as general information; capital structure of the company; terms and
conditions of the present issue; company management and its projects; and financial information such
as reports of editors, accountants, and the underwriting commission brokerage. The liability of the
promoter arises only with respect to original allotments of shares and would not extend to any further
allottees.

1) Civil Liabilities (Section 62): Civil liability arises when any person applies for the shares and
debentures on the faith of the prospectus, believing it to be true and later finds untrue statements and
records regarding the public issue of the company. Every such person may rescind the contract to take
the shares and claim damages.

2) Criminal liabilities (Section 63): Criminal liability arises like civil liability. Every promoter
authorizing the issue is punishable by imprisonment for a term up to two years, a fine up to Rs50,000
(US$1,200) or both.

3) Section 203: If any promoter is found to be involved in a activity which amounts to an offence
regarding the promotion, management or formation of a company, the court can bar such a promoter
from taking part in administration of the company for five years.

4) Section 478: The court can order a promoter liable to public examination when he is found to
have been involved in fraudulent activity at the time of promotion of the company.

5) Section 542: If, in the course of the winding up of a company, it appears that any business of the
company has been carried on with the intent to defraud creditors, the court may declare that any
persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be
personally liable.

Pre-incorporation contracts: If any promoter enters into any contract on behalf of the company before it
was actually incorporated, then the promoter shall be personally liable for non-fulfillment of the
contract unless it was rectified by the company after incorporation. Important changes from the
previous Companies Act of 1956.

Differences in Companies Act 1956 and 2013

Basis of difference Companies Act, 2013 Companies Act, 1956

1. Definition of "Listed Company"

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 Section 2(52): "listed company" means a company which has any of its securities listed on any
recognised stock exchange(Companies Act, 2013 )

Section (23A): "listed public companies" means a public company which has any of its securities
listed in any recognised stock exchange (Companies Act, 1956)

2. Definition of "One Person Company"

Section 2(62): "One Person Company" means a company which has only one person as a
Member. (Companies Act, 2013 )

No provision(Companies Act, 1956)

3. Definition of "Charge"

Section 2(16): "charge" means an interest or lien created on the property or assets of a company
or any of its undertakings or both as security and includes a mortgage. (Companies Act, 2013 )

No provision(Companies Act, 1956)

4. Financial Year
5. Companies must have their financial year ending on 31 Mar every year (Companies Act, 2013 )

Companies were permitted to have financial year ending on a date decide by Company (Companies Act,
1956)

6. Formats of Financial Statement

Schedule III (Companies Act, 2013 )

Schedule VI (Companies Act, 1956)

7. Max Shareholders in Pvt Ltd Company 200 excluding past and present employees (Companies
Act, 2013 ) 50 excluding past and present employees (Companies Act, 1956)

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 8. Issue of Share at discount Section 53 prohibits issue of shares at a discount However,
Section 54 permits issue of ESOPs to its employees at a discount. (Companies Act, 2013 )

Section 79 permitted issue of shares at a discount. (Companies Act, 1956)

Article of Association Table F applies where Companies Limited by shares does not adopt their own
Articles of Association. (Companies Act, 2013 )

Table A applied where Companies did not adopt their own Articles of Association. (Companies Act, 1956)

Interest in Calls in Arrears In the absence of a clause in the Articles of Association, the maximum
interest chargeable on Calls-in-arrears is 10% p.a. (Companies Act, 2013 )

In the absence of a clause in the Articles of Association, maximum interest chargeable on Calls-in-arrears
was 5% p.a. (Companies Act, 1956)

10. Interest in Calls in Advance In the absence of a clause in the Articles of Association, the maximum
interest payable on Calls-in-advance is 12% p.a. (Companies Act, 2013 )

In the absence of a clause in the Articles of Association, the maximum interest payable on Calls-in-
advance was 6% p.a. (Companies Act, 1956)

Companies Act 2013

Major changes related to the Balance sheet

The Revised Schedule VI to the Companies Act, 2013 became applicable to all companies for the
preparation of Financial Statements beginning on or from 1.4.2011.

1. The Revised Schedule VI prescribes only the vertical format for presentation of Financial Statements.
Thus, a company will now not have an option to use horizontal format for the presentation of Financial
Statements as prescribed in Old Schedule VI.

2. Current and non-current classification has been introduced for presentation of assets and liabilities in
the Balance Sheet.

3. Number of shares held by each shareholder holding more than 5 percent shares in the company now
needs to be disclosed.

4. Details pertaining to aggregate number and class of shares allotted for consideration other than cash,
bonus shares and shares bought back will need to be disclosed only for a period of five years
immediately preceding the Balance Sheet date including the current year.

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5. Any debit balance in the Statement of Profit and Loss will be disclosed under the head “Reserves and
surplus.

6. Specific disclosures are prescribed for Share Application money. The application money not exceeding
the capital offered for issuance and to the extent not refundable will be shown separately on the face of
the Balance Sheet. The amount in excess of subscription or if the requirements of minimum subscription
are not met will be shown under “Other current liabilities.”

7. The term “sundry debtors” has been replaced with the term “trade receivables.

8. “Capital advances” are specifically required to be presented separately under the head “Loans &
advances”.

9. Tangible assets under lease are required to be separately specified under each class of asset.

10. The Revised Schedule VI requires disclosure of all defaults in repayment of loans and interest to be
specified in each case.

11.The Revised Schedule VI introduces a number of other additional disclosures. Some examples are:

(a) Rights, preferences and restrictions attaching to each class of shares, including restrictions on the
distribution of dividends and the repayment of capital;

(b) Terms of repayment of long-term loans;

(c) In each class of investment, details regarding names of the bodies corporate in whom investments
have been made.

(d) Aggregate provision for diminution in value of investments separately for current and long-term
investments;

(e) Stock-in-trade held for trading purposes, separately from other finished goods.

Main changes related to Statement of Profit and Loss

1. The name has been changed to “Statement of Profit and Loss” as against ‘Profit and Loss Account’ as
contained in the Old Schedule VI.

2. Unlike the Old Schedule VI, the Revised Schedule VI lays down a format for the presentation of
Statement of Profit and Loss.

3. In addition to specific disclosures prescribed in the Statement of Profit and Loss, any item of income
or expense which exceeds one percent of the revenue from operations or Rs. 100,000 (earlier 1 % of
total revenue or Rs. 5,000), whichever is higher, needs to be disclosed separately.

4 In respect of companies other than finance companies, revenue from operations need to be disclosed
separately as revenue from (a) sale of products, (b) sale of services and (c) other operating revenues.

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5. Net exchange gain/loss on foreign currency borrowings to the extent considered as an adjustment to
interest cost needs to be disclosed separately as finance cost.

7. Break-up in terms of quantitative disclosures for significant items of Statement of Profit and Loss,
such as raw material consumption, stocks, purchases and sales have been simplified and replaced with
the disclosure of “broad heads” only.

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