UNIT 2

COMPANY LAW

QUESTION 1 Dividend : Declaration of Dividend, Management of Unpaid Dividend, Unpaid

Dividend , Account Investor Education and Protection Fund, Punishment for failure to distribute
dividends

DIVIDENDS
 Dividend refers to a reward, cash or otherwise, that a company gives to its shareholders. Dividends can
be issued in various forms, such as cash payment, stocks or any other form.
 A company's dividend is decided by its board of directors and it requires the shareholders' approval.
 Section 2(35) of the Companies Act, 2013 (“Companies Act”) defines “dividend”, stating that it
includes any ‘interim dividend’.
 It is given in proportion to the amount paid for each share held by the shareholders if so authorized by
the Articles of Association of the company (Section 51, Companies Act).
 All companies except Non-Profit Organizations, i.e., companies registered under Section 8, can
declare a dividend.

SOURCES OUT OF WHICH DIVIDEND CAN BE PAID

 There are three sources from which dividends may be declared, namely-
 CURRENT YEAR'S PROFITS- A company can pay current year profit only after
providing for the depreciation only in the accordance with sub section (2) of section 205.
 PAST PROFITS REMAINING UNDISTRIBUTED- A company can pay from past profit
remaining, which falls after the companies amendment Act (1960) after providing for the
depreciation only in the accordance with those provisions and remaining undistributed.
 MONEY’S PROVIDED BY GOVERNMENT- Where the Central and the State
government has guaranteed the payment of the dividend by the company, dividend must be
paid out of the money provide the by such government.

PROCEDURE TO UNPAID DIVIDEND & MANAGEMENT OF UNPAID DIVIDEND (SECTION 124)

PROCEDURE RELATING

 Where a dividend has been declared by a company but has not been paid or claimed within thirty
days from the date of the declaration to any shareholder
 Those shareholder entitled for the payment of the dividend, the company shall, within seven days
from the date of expiry of the said period of thirty days,
 Transfer the total amount of dividend which remains unpaid or unclaimed to a special account to
be opened by the company in that behalf in any scheduled bank to be called the Unpaid Dividend
Account.
 The company shall, within a period of ninety days of making any transfer of an amount to the Unpaid
Dividend Account,
 Prepare a statement containing the names, their last known addresses and the unpaid dividend to be
paid to each person and place it on the website of the company,
 If any, and also on any other website approved by the Central Government for this purpose, in such
form, manner and other particulars as may be prescribed.
 If any default is made in transferring the total amount to the Unpaid Dividend Account of the
company, it shall pay, from the date of such default, interest on so much of the amount as has not
been transferred to the said account,
 At the rate of twelve per cent. per annum and the interest accruing on such amount shall ensure to
the benefit of the members of the company in proportion to the amount remaining unpaid to them.

 Any person claiming to be entitled to any money transferred to the Unpaid Dividend Account of
the company may apply to the company for payment of the money claimed.
 Any money transferred to the Unpaid Dividend Account of a company in pursuance of this section
which remains unpaid or unclaimed for a period of seven years from the date of such transfer
shall be transferred by the company
  Along with interest accrued, if any, thereon to the Fund established under sub-section (1) of section
125 and the company shall send a statement in the prescribed form of the details of such transfer to the
authority which administers the said Fund and that authority shall issue a receipt to the company
as evidence of such transfer.
 All shares in respect of which dividend has not been paid or claimed for seven consecutive years
or more shall be transferred by the company in the name of Investor Education and Protection
Fund along with a statement containing such details as may be prescribed
 If a company fails to comply with any of the requirements of this section, the company shall be
punishable with fine which shall not be less than five lakh rupees but which may extend to twenty-five
lakh rupees and every officer of the company who is in default shall be punishable with fine which
shall not be less than one lakh rupees but which may extend to five lakh rupees.
 Any claimant of shares transferred above shall be entitled to claim the transfer of shares from
Investor Education and Protection Fund in accordance with such procedure and on submission of
such documents as may be prescribed.
 For the removal of doubts, it is clarified that in case any dividend is paid or claimed for any year
during the said period of seven consecutive years, the share shall not be transferred to Investor
Education and Protection Fund.

ACCOUNT INVESTOR EDUCATION AND PROTECTION FUND

 Investor Education and Protection Fund (IEPF) has been established under Section 205C of the
Companies Act, 1956 by way Companies (Amendment) Act, 1999 for promotion of investors'
awareness and protection of the interests of investors
 The Central Government introduced the Investor Education and Protection Fund (IEPF) to protect
investors' interests and promote awareness. It is established under Section 125 of the Companies
Act, 2013 ('Act'). The unpaid or unclaimed amounts belonging to a company's investors are pooled and
credited into the IEPF.

PUNISHMENT FOR FAILURE TO DISTRIBUTE DIVIDEND

 Punishment for the failure to distribute dividend is defined under section 125 of the companies act,
2013
 However, if declared dividend has not been paid on time, a warrant may be dispatched in respect
thereof within thirty days of the declaration of dividend of a company.
 In case of joint shareholders, dispatch the dividend warrant to the first named shareholder.
 According to section 127 of CA 2013, where a dividend has been declared by a company but has not
been paid or the warrant in respect thereof has not been posted within thirty days from the date of
declaration to any shareholder entitled to the payment of the dividend-
 TWO YEARS JAIL TO DIRECTORS: Every director of the company shall, if he is
knowingly a party to the default, be punishable with imprisonment which may extend to two
years; and
 AT LEAST 1,000 RUPEES FINE TO DIRECTORS: Such directors shall also be liable to
pay fine not less than 1,000 rupees for every day during which such default continues; and
 18% INTEREST ON UNPAID DIVIDEND: The Company shall be liable to pay simple
interest at the rate of 18% p.a. during the period for which such default continues.
QUESTION 2 - Borrowing power and effect of unauthorized borrowing.

ANSWER UNAUTHORIZED BORROWING

 It refers to those borrowings which are made without the authority or beyond the amount
prescribed in the article. Thus, borrowings beyond the prescribed authority are ultra vires (here, the
authority can be either expressed or implied)

EFFECTS OF UNAUTHORIZED BORROWING

 It refers to those borrowings which are made without the authority or beyond the amount
prescribed in the article.
 Thus, borrowings beyond the prescribed authority are ultra vires (here, the authority can be either
expressed or implied)
 There are four consequences of unauthorised borrowings are-
 NO LOAN: An ultra vires lender has no legal debt against the company. Such borrowings are
forbidden on the grounds of public policy.
 INJUNCTION: If the money advanced by the lender to the company has not been spent then
the lender can obtain an injunction to restrain the company from spending it.
 SUBROGATION: The total indebtedness of a company remains unaffected when a lawful
debt has been paid off with an ultra vires loan. In this way, the ultra vires lender is protected
against the loss and the burden of the company is not increased.
 IDENTIFICATION AND TRACING: If the money of the ultra vires lender is with the
company in its original form and is still capable of identification, then he can claim the money
from the company.

BORROWING POWER OF THE COMPANY

 Borrowings are an essential part of Companies. The option of borrowings depends on the need of the
companies and the nature of borrowings.
 Any irregular and irresponsible act may result in the insolvency of the company which may cause
considerable losses to them. So to facilitate the smooth functioning of the company and protect the
interests of shareholders, a company has to comply with various compliances under the
Companies Act, 2013.
 A private company can with the approval of members, borrow monies from its Members on following
terms and conditions-
 May borrow money for a period not less than six months and not more than 36 months.
 Provided that the company may, for its short term requirements may borrow money for a
period less than six months but not less than 3 months and the amount so borrowed
shall not exceed ten per cent. of the aggregate of the paid-up share capital, free reserves
and securities premium account of the company.
 The amount so borrowed shall not exceed 100% of aggregate of the paid up share
capital, free reserves and securities premium account.
 Company shall not borrow money at a rate of interest exceeding the maximum rate of
interest prescribed by the Reserve Bank of India for acceptance of deposits by non-banking
financial companies.
 EXEMPTION: The maximum limit for borrowing monies from members shall not apply to the
following classes of private companies, namely-
 A private company which is a start-up, for ten years from the date of its incorporation.
 A private company which fulfils all of the following conditions, namely-
 Which is not an associate or a subsidiary company of any other company Such a company
has not defaulted in the repayment of such borrowings subsisting at the time of accepting
deposits under section 73.
EFFECTS OF AN ACT WHICH IS ULTRA VIRES – ON BORROWINGS

 A Company is said to resort to ultra vires borrowing if it exceeds the authority given to it in this
respect by the Companies Act, the Memorandum and the Articles of the company. Any borrowing
which is made by an act which is ultra-vires will be void-ab-initio.
 It will not bind the company and company and outsiders cannot get them enforced in a court.
 Members of the company have power and right to prevent the company from making such ultra-
vires borrowings by bringing injunctions against the company.
 If the borrowed funds of the company are used for any ultra-vires purpose, then directors of the
company will be personally liable to make good such act.
 If the company acquires any property from such funds, the company will have full right to such
property.
 No estoppel or ratification can convert an ultra-vires borrowings into an intra-vires borrowings,
as such acts are void from the very beginning.
As no debtor and creditor relationship is created in ultra-vires borrowings only a remedy in rem and
not in personam is available.
QUESTION 3 Debenture: kinds Debenture Holders, Debenture Trustees

ANSWER DEBENTURE

 A debenture is one of the financial market tools that help businesses to raise money in the
market to grow their business.
 The word debenture is derived from the Latin word “debere” meaning to borrow or borrow
money.
 In the vernacular, a loan can be defined as acknowledging a loan issued by a company to a
third party under a common company logo.
 Section 2 (30) of the Companies Act, 2013, credit cards include loans issued by a company
as proof of debt incurred by that company, either by creating or not imposing a charge on
the company’s assets.

VARIOUS KINDS OF DEBENTURE

 UNSECURED/SECURED DEBTS - As the name implies, a debenture issue can be

secured by a loan or payment on the company premises and if the same is not secured it
is known as an unsecured (nominal collateral) debenture.

 CONVERTIBLE/NON- CONVERTIBLE DEBENTURES- Debentures disbursements

may be of these two types too, which means that they can be converted into equity shares
on a specified date or for the occurrence of a particular event as determined in the
Debenture Trust Deed.

 REDEEMABLE/IRREDEEMABLE DEBENTURES- Redeemable debentures mean that

the debentures will be redeemed at the end of the expiry period and non-redeemable
debentures mean that the company will not be able to repay its loans and only interest will be
paid to creditors until the company wishes to redeem or cancel debts.

DIFFRENCE BETWEEN SHARE HOLDER AND THE DEBENTURE HOLDER

SHARE HOLDER DEBENTURE HOLDER

1.) Shareholders are the owners of the company 1.) Shareholders are the owners of the company

2.) Shareholders actively participate in the decision 2.) Debenture holders cannot participate in the
making process of the company. decision making process.

3.) Shareholders are entitled to receive dividends, 3.)Since they have lent money to the company,
which is basically a share in the profits of the debenture holders are entitled to receive interest.
company.

4.) Despite generating profits, a company may choose 4.) Whether it generates profits or not, a company is
not to pay dividends to its shareholders. obligated to pay interest to its debenture holders.
BEARER DEBENTURE

 These are debentures that can be transferred by way of delivery and the company does not
keep any record of the debenture holders Interest on debentures is paid to a person who
produces the interest coupon attached to such debentures.

PARI-PASSU DEBENTURE

 Pari Passu Debt means any Funded Debt of either of the Issuers, whether outstanding on the
Issue Date or thereafter created, incurred or assumed, unless, in the case of any particular
Funded Debt, the instrument creating or
 Evidencing the same or pursuant to which the same is outstanding expressly provides that
such Funded Debt shall be subordinated in right of payment to the Notes.

DEBENTURE TRUST DEED

 SECTION 71 (7) OF THE COMPANIES ACT, 2013 provides for a debenture trust deed for
securing any issue of debenture s which shall be open for inspection to any member or debenture-
holder of the company and he shall be entitled to obtain copies of such trust deed on payment of
prescribed fee.
 Sub-section (10) provides that in case failure to comply with the above provision, the company shall be
liable to pay interest on the debenture when it is due and the Tribunal after hearing the parties may
order the Company to pay the principal with interest.
 A debenture trust deed is an instrument that a company executes in favour of a debenture trustee,
thereby appointing them and defining their role and duties to protect the interest of debenture holders
before debentures are offered for public subscription.
 A company has to execute a debenture trust deed within sixty days from the date of allotment of
debentures.
 As per the circular issued by the SEBI, The company will have to create a charge as specified in the
offer document in favour of the debenture trustee.

DEBENTURE TRUSTEES

 A debenture trustee means a trustee of a trust deed for securing any issue of. debentures
of a body corporate.
QUESTION 4 CHARGE AND MORTGAGE

ANSWER CHARGES AND MORTGAGES

 Charge as per section 2(16) of the Companies act 2013 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.
 A mortgage is the transfer of an interest in specific immoveable property for the purpose
of securing the payment of money advanced or to be advanced by way of loan, an existing
or future debt or the performance of an agreement which may give rise to pecuniary
liability.

DIFFERENCE BETWEEN CHARGES AND MORTGAGES

CHARGES MORTGAGES

1.) A charge may be created through Act of 1.) A mortgage is created by Acts of the parties
parties or by operation of Law

2.) A Charge may be in perpetuity 2.) A Mortgage is for a fixed term

3.) In case of charge, no personal liability is 3.) A simple mortgage carries personal liability
created. But where a charge is the result of a unless excluded by express contract.
contract, there may be a personal remedy.

4.) There is no such transfer of interest in the case 4.) A mortgage is a transfer of an interest in a
of a charge. Charge does not operate as transfer specific immovable property.
of an interest in the property and a transferee of
the property gets the property free from the
charge provided he purchases it for value without
notice of the charge.

REGISTRATION OF CHARGES

 The Companies Act, 2013 requires all companies to file the requisite particulars with the
ROC for all security created over the assets of the company.
 The process of creating a security over assets of the company is referred to as registration
of charges or creation of charges.
QUESTION 5 Share Nature, Issue, Types, Allotment, Underwriting, Share Capital,
Reduction of share Capital, Transfer and Transmission of securities .

ANSWER SHARE CAPITAL

 Section 2(84) of the Companies Act, 2013 “share” means a share in the share capital of a company
and includes stock.
 It represents the interest of a shareholder in the company, measured for the purposes of liability and
dividend. It attaches various rights and liabilities.
 As per Section 43 of the Companies Act, the share capital of a company limited by shares shall be of
two kinds-
 Equity share capital or
 Preference share capital, unless otherwise provided by MOA or Articles of Association
(hereinafter referred to as “AOA”) of a private company.

TYPES OF SHARE CAPITAL

 Basically there are two kinds of shares defined under Companies Act first is Preference share capital,
second is Equity share capital and the third is Bonus share capital they are further categorized as-
 PREFERENCE SHARE CAPITAL- The capital that a company raises through the issuance of
preference shares is termed as preference share capital. Preference Shares, as the name suggests are the
shares in which shareholders get the profit of the company in form of dividends before Equity
shareholders at a fixed dividend rate.
 Cumulative Preference Shares And Non Cumulative Preference Shares

 Participating Preference Shares And Non-participating Preference Shares

 Redeemable Preference Shares And Irredeemable Preference Shares

 EQUITY SHARE CAPITAL- means the capital raised by a company by issuing the shares to the
general public. Equity share capital is also known as risk capital. To meet the fund requirements, the
companies make an offer to the public to be a part of the company by subscribing to its share.
 Sweat Equity Shares

 BONUS SHARE CAPITAL- Bonus shares are always issued to existing members. According to Article
63, a company is free to issue fully paid up bonus shares to the members out of its Securities
Premium Account, its free reserves and Capital Redemption Reserve Account.

 In Standard Chartered Bank v. The Custodian, the court stated that such kind of shares can be
described as a distribution of capitalized undivided profit.

ALLOTMENT OF SHARES

 An allotment of shares is when a company issues new shares in exchange for cash or otherwise. Such
allotment of new shares increases the company’s share capital. Private companies can allot new
shares only after filing the “Return of Allotment of Shares” transaction via BizFile+.
 Public companies limited by shares can allot new shares anytime and must file the “Return of
Allotment of Shares” transaction within 14 days from the date of allotment.
 The company’s constitution may give its directors the power to decide on the number of new shares to
be issued, the terms which they will be issued and the price subject to compliance with Section 161 of
the Companies Act
 Shares may be allotted for cash or for a consideration otherwise than in cash. Some reasons include -

 Due to a contract, which can be written or not.

 Due to a provision in the company’s constitution.
UNDERWTING OF THE SHARES

 Underwriting of shares is the sale and purchase of shares on a stock market by an underwriter or
group of underwriters.
 There are three kinds of underwriting, namely loans, securities, and insurance. Underwriting is a
crucial process in the financial world because it helps investors make profitable investment decisions.

ISSUE OF SHARES

 The issue of shares is the procedure in which enterprises allocate new shares to the
shareholders. Shareholders can be either corporates or individuals.

 The enterprise follows the rules stipulated by Companies Act 2013 while circulating the
shares.

 The Issue of Prospectus, Receiving Applications, Allocation of Shares are 3 key

fundamental steps of the process of issuing the shares.

TRANSFER OF SHARE

 Section 56(4) of the Companies Act, 2013 provides for the transfer of share under the
depository system. Under this section when a company is doing a transfer of shares or other
securities through a depository, then one should inform the details of allotment of shares or
securities immediately to the depository.

CALL ON SHARES

 Calls on shares means the demand made by the company on its shareholders holding
partly paid shares to pay part or full unpaid amount on the shares.
 The first essential requirement for a valid allotment is that of minimum subscription. The
amount of minimum subscription has to be declared in the prospectus at the time when shares
are offered to the public.

TRANSMISSION OF SECURITIES

 Transfer procedures are the means by which the ownership of a stock (or other security)
moves from one party to another.
 While transfer of shares relates to a voluntary act of the shareholder, transmission is brought
about by operation of law.
 The word 'transmission' means devolution of title to shares otherwise than by transfer, for
example, devolution by death, succession, inheritance, bankruptcy, marriage, etc

REDUCTION OF SHARE CAPITAL

A reduction of capital occurs where a company reduces the amount of its share capital. A company
may reduce its share capital in a variety of ways, for example, it can extinguish or reduce the liability
on any of its shares in respect of share capital not paid up, cancel any paid-up share capital that is lost
or not represented by available assets (known as a loss reduction) or repay any paid-up share capital in
excess of the company’s wants