UNIT - II Company Law PDF

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UNIT II
Company Law
Major principles Nature and types of companies, Formation, Memorandum and Articles of Association, Prospectus,
Power, duties and liabilities of Directors, winding up of companies, Corporate Governance.
A company means a group of persons associated voluntarily together for the attainment of a common
goal either, social or economic
Company - Meaning
According to section 3(1) (i) of The Companies Act, 1956, Company means a company formed and
registered under this Act or an existing company. An existing company means a company formed and registered under
any of the previous companys law.
Nature of a Company:
1. Separate Legal Entity

A company in Law is regarded as an entity separate from its members. It has an independent corporate
existence.
2. Limited Liability (accountability or responsibility)

In case of a company limited by share where, the liability of a member is limited up to the amount
remaining unpaid on the shares held by a member, or a company limited by guarantee, where the liability of
members is limited to such amount as the members may undertake to contribute to the assets of the company, in
the event of its being wound up.
3. Perpetual (long lasting or continuous) Succession

The term perpetual existence means the continued existence. The death, insolvency or unsoundness of
mind of its members or transfer of shares by its members does not in any way affect the existence of the
company. Members may come and members may go but the company goes on forever. The company can be
compared with flowing river where water (members) keeps on changing continuously, still the identity of the
river (company) remains the same.
4. Common Seal
The term Common Seal means the official signature of the company. Since the company being an
artificial person cannot sign its name on a document, every company is required to have its common seal with its
name engraved on the same. This seal acts as the official signature of the company. Any document bearing the
common seal of the company and duly witnesses by at least two directors will be binding on the company.
5. Transferability of Shares
The shares of a public company are freely transferable. A shareholder can transfer association, even a public
limited company can put certain restrictions on the transfer of shares but it cannot altogether stop it. A
shareholder of public company possessing fully paid up shares is at liberty to transfer his shares to anyone he
likes in accordance with the manner provided for in the articles of association of the company.
6. Separate property
The company is the real person in which all its property is vested and by which it is controlled, managed,
and disposed of.
www.stmarysmba.co.cc
7. Capacity to Sue (take a legal action)
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A Company can Sue and can be sued in its corporate name.
Lifting or Piercing the Corporate Veil
From the juristic point of view, a company is a legal person distinct from its members. This principle is referred as the
veil of Incorporation.
o There is a Fictional Veil between the company and the members
o The human ingenuity however started using this veil of corporate personality blatantly
(unashamedly) a cloak for fraud or improper conduct. Thus, it became necessary for the courts
(NCLT- National Company Law Tribunal) to break through or lift the corporate veil or crack the
shell of corporate personality and look art the persons behind the company who are the real
beneficiaries of the corporate fiction.
Exceptions
The various cases in which the corporate veil has been lifted are as follows.
1. Protection of Revenue
2. Prevention of fraud or improper conduct
3. Determination of Character of a company whether it is enemy
4. Where the company is a sham (fraud)
5. Company avoiding legal Obligations
6. Company acting as Agent or trustee of the shareholders
7. Avoidance of Welfare legislations
8. Protecting public Policy
Statutory Exceptions
1. Number of members below statutory minimum
2. Failure to refund application money
3. Misdescription of companys name
4. Fraudulent trading
5. Holding and Subsidiary Companies
Types or Kinds or Classification

of companies
On the Basis On the Basis

Of On the Basis
Of
Incorporation Of Number
Ownership
of Members
On the Basis
Of On the Basis of
Liability Control
1. On the Basis of Incorporation
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i. Statutory Companies
These are companies which are created by a special Act of the Legislature. Example is Reserve Bank of
India, the State Bank of India.
ii. Registered Companies
A registered company is one, which is registered in accordance with the provisions of the Companies Act
of 1956 and also includes the existing companies. By existing company means that a company formed and registered
under any of the previous laws
2. On the Basis of Liability

On the basis of liability, an incorporated company may either be
i. a company limited by shares
ii. a company limited by guarantee
iii. an unlimited company
i. Company Limited by Shares
A Company limited by shares is a company in which the liability of its members is limited by its
memorandum to the amount unpaid on the share respectively held by them.
The companies limited by shares may be either public companies or private companies.
If a member has paid the full amount of shares, then his liability shall be nil.
ii. Company Limited by Guarantee
A Company limited by guarantee is a company in which the liability of its members is limited by its
memorandum to such an amount as the members may respectively undertake to contribute to the assets of the company
in the event of its being wound up.
iii. Unlimited Company
An unlimited company is a company in which the liability of its members is not limited by its
memorandum.
In other words, the liability of members is unlimited.
The members of such companies may be required to pay companys losses from their personnel property.
3. On the Basis of Number of Members
Private Company
Public Company
I . Private Company
A private company means a company which has a minimum paid up capital of Rs.1, 00,000 or such
higher paid up capital as may be prescribed, and by its articles-
a) Restricts the right to transfer its shares, if any
b) Limits the number of its members to fifty, and
c) Prohibits any invitation to the public to shares in or debentures of the company.
d) Prohibits any invitation or acceptance of deposits from persons other then its members, directors or their relatives
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ii. Public Company

The Public company means a company which is either
not a private company and has a minimum paid up capital of Rs 5,00,000 or such higher paid-up capital
as may be prescribed:
or
is a private company, which is subsidiary of public company.
Special Privileges of a Private Company
i. Number of Members: a private company may have only 2 members
ii. Allotment before minimum subscription: a private company can allot shares before the minimum subscription is
subscribed for or paid
iii. Prospectus or statement in lieu of prospectus:

may allot shares without issuing a prospectus or delivering to the registrar a statement in lieu of
prospectus.
iv. Issue of new shares:

when a public company issues new shares, after the expiry of 2 years from its formation or at any time
after the expiry of 1 year from the date of first allotment of shares, whichever is earlier, a private company has first to
offer these shares to the existing equity share holders pro rata. However, the members in a general meeting may, by a
special resolution, decide otherwise.
There is no such provision in case of private companies.
v. Kinds of shares: a private company may issue share capital of any kind, and with such voting rights, as it may think
fit.
vi. Commencement of Business: a private company can commence business immediately on incorporation.
vii. Index of members: need not keep any index of members.
viii. Statutory meeting and statutory report: need not hold statutory meeting or file with the registrar the statutory
report.
ix. Demand for Poll: even one member having the right to vote and present in person or by proxy (substitute) may
demand a poll. If the number of members present in more than 7, two members present in person or by proxy may
demand a poll.
x. Managerial Remuneration: The rule of overall maximum managerial remuneration does not apply to a private
company which is not a subsidiary of a public company; the overall managerial remuneration must not exceed 11
percent of the net profits.
xi. Number of Directors: A private company need not have more than two directors
xii. Rules regarding directors: The rules regarding directors of a private company are less stringent.
o Legal Position of a Private company:

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The legal position of a private company is in most respects similar to that of a public company, and
even if one member holds practically all the shares, the company is a distinct person.
When does a private company become a public company?
a. Conversion by Default:
Where a default is made by a private company in complying with essential requirements of a
private company, the company ceases to enjoy the privileges and exemptions conferred on a private company.
a. Conversion by Choice or Volition (wish or desire):
A private company which becomes a public company shall also
(i) File a copy of the resolution (declaration or decision) altering the articles, within 30 days of
passing thereof, with the registrar;
(ii) Take steps to raise its membership to at least 7 if it is below that number on the date of
conversion, and also increase the number of its directors to more than two if it is below that number;
(iii) Alter the regulations contained in the articles which are inconsistent with those of a public
company.
Conversion of Public Company into a Private Company:
- By passing special resolution

- Change the articles of the company to includes the conditions as prescribed in sec. 3 (1) (iii) which make a
company private company.
- Alteration has effect only if approved by the central government .Where the alteration has been approved by
the central Government a printed copy of the articles as altered shall be filed by the company with the registrar within 1
month of the date of receipt of approval.
4. Classification On the Basis of Control
On the basis of control, companies may be classified into:

Holding companies, and
subsidiary companies
Holding companies:
A company in known as the holding company of another company if it has control over the other company.
Subsidiary companies:
A company in known as a subsidiary of another company when control is exercised by the later over
the former called a subsidiary company.
1. Company controlling composition of Board of directors.
2. Holding of majority of shares.
3. Subsidiary of another subsidiary.
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Flowchart explaining a Holding Company and a

Subsidiary company.
Company H
(Holding Company)
Company S 1
(Subsidiary of Company H)
Company S2
(Subsidiary of Company S1)
Company S3
(Subsidiary of Company S2)
5. Classification on the Basis of Ownership

i. Government Company
ii. Foreign Company
Government Company:
A government company means any company in which at least 51% of the paid up share capital is held by
the central government or by any state government or government or partly by the central government and partly by one
or more state governments and includes a company which is a subsidiary of a government company as thus defined.
Example: Hindustan Aeronautics Ltd.
Non-Government Company
A company which may not be termed as a government company as a defined in Section 617 is
regarded as a non-government company
Foreign Company
A foreign company means a company which is incorporated in a country outside India under the
law of that country.
One Man Company

This is a company (usually private) in which one man holds practically the whole of the share
capital of the company, and in order to meet the statutory requirement of minimum number of members, some dummy
members who are mostly his relations or friends, hold just 1 or 2 shares each.
The dummy numbers usually may be the nominees of the principal shareholder who is the virtual
owner of the business and who carries it with limited liability.
Prohibition of Large Partnerships (Sec. 11)

ILLEGAL ASSOCIATION:
A company, association or partnership consisting of more than 10 persons for the purpose of carrying on
banking business and of more than 20 persons for the purpose of carrying on any other business with the object of
earning profits can be legally formed only when it is registered under the companies Act, 1956 or is formed in pursuance
of some other Indian law or is a Joint Hindu Family carrying on Business as Such.
If the number of members in an association or partnership
Formation of Company
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Documents to be filed with the Registrar
1. Before a company is registered, it is desirable to ascertain from the Registrar of Companies. (For the
state registered office)
After the name is approved, the following documents duly stamped together with the necessary fees are
to be filled with the Registrar.
2. The Application should contain the following documents,

a. Memorandum of Association
b. Articles of Association
c. Statement of the Authorized Capital
d. Address of the registered office of the company should be done within 30 days
e. A list of directors
f. A underwriting in writing and signed by each director
g. Finally declaration may be signed by an Advocate of the Supreme\ High court
h. Items number e and f are not required in case of a private company
3. If the documents are in order, registrar will register the company,
4. The Registrar will be satisfied on the following points,

a. Relevant provision of the act have been complied with
b. Object of the company is lawful
c. Number of persons required under the act have subscribed and duly signed
d. Memorandum and Articles comply with the act
e. Statutory declaration properly made
5. If the registrar is satisfied with the above points, he will register the company
6. On refusal to register the company, he may be compelled to write a mandamus
7. On registration, Registrars will issue Certificate of Incorporation
8. From the date of Incorporation, the company becomes a Legal person
9. It is the birth certificate of a company
10. If the signature is done by one person, the certificate indicates that company was duly registered.
Memorandum of Association
It is one of the documents which have to be filed, with the registrar of companies at the time of Incorporation
It is the charter (license or agreement) of the company and defines its reason for existence
It contains the fundamental conditions upon which the company is allowed to be incorporated
The purpose of the memorandum is to enable shareholders, creditors and those who deal with the company to
know what is the permitted range of the activities of the enterprise
Purpose of Memorandum of Association
The purpose of Memorandum is two-fold

First, to enable the intending shareholders to know the purpose for which their money is going to be used and
within what field they are taking risk in making the investment.
Second, to enable the outsiders intending to deal with the company to know with certainty as to whether the
contractual relationship which they intend to enter into with the company is within its corporate objects or not
[Cotman v. Broughman, (1918) A.C. 514]
Printing and signature of Memorandum
The memorandum must be,

printed
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divided into paragraphs numbered consecutively, and
signed by at least 7 persons in case of a public company and by at least 2 persons in case of a private
company. The persons signing the Memorandum are known as subscribers to the Memorandum.
Each subscriber must give his address, description and occupation (if any).
The signature of each subscriber must be attested in the presence of at least one witness.
The witness must attest the signature and add his address, description and occupation (if any).
Contents of Memorandum
1. The Name Clause:
2. The Registered Office Clause:
3. The Objects Clause;
4. The Capital Clause
5. The Liability Clause;
6. The Association clause
1. The Name Clause

Undesirable name should be avoided
- Too similar name of another company
- Injunction if identical name adopted
- Limited or Private limited as the last words
2. The Registered Office Clause
- It should mention the registered office of the company
- It should mention the address of the company within 30 days
- It should mention the exact location of the district/state
3. The Objects Clause

The Company registered after the commencement of the Companies (Amendment) Act, 1965 must divide its object
clause into two sub-clauses, namely:
(a) Main Objects

This sub-clause covers the following two:
Main Objects of the Company to be pursued on its incorporation, and
Objects incidental or ancillary (additional) to the attainment of the main objects
(b) Other Objects

This sub-clause covers the other objects which are not included in Main Objects.
The Objects Clause Purpose
i. to enable the subscribers to the memorandum to know the uses to which their money may be put
ii. To enable creditors and persons dealing with the company to know what its permitted range of enterprise or
activities is
4. The Capital Clause
In case of limited companies by shares, this clause must state the amount of share capital with which the
company is to be registered and the division thereof into shares of fixed amount,
Such capital is called Authorized or Nominal or Registered capital. The fixed amount of a share is known as
Par or Nominal value of a share.
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The amount of authorized capital should be sufficiently high considering the immediate need of the business
and possible expansion in the near future. The stamp duty and registration fee are payable on the basis of amount
of authorized capital.
5. The Liability Clause
i. A Company limited by shares is a company in which the liability of its members is limited by its
memorandum to the amount unpaid on the share respectively held by them.
ii. A Company limited by guarantee is a company in which the liability of its members is limited by its
memorandum to such an amount as the members may respectively undertake to contribute to the assets of the company
in the event of its being wound up.
iii. An unlimited company is a company in which the liability of its members is not limited by its memorandum.
The members of such companies may be required to pay companys losses from their personnel property.
6. Association Clause
- It contains the consent of the members as regards the formation of the company and the number of
shares taken by each
- Each member should mention their name, address, business, qualification and
declare their name
-
The Memorandum of Association shall be signed by at least 7 subscribers (public company) and at least by 2
subscribers (private company).
The signature of each subscriber shall be attested by at least 1 witness who cannot be any of the other subscribers.
Doctrine of Ultra Vires
A company has the power to do all such things as are,

i. Authorized to be done by the Companies Act, 1956
ii. Essential to the attainment of its objects specified in the Memorandum
iii. Reasonably and fairly incidental to its objects
Everything else is Ultra Vires the company. Ultra means Beyond, and Vires means Powers
The term ultra vires a company means that the doing of the act is beyond the legal power and authority of the
company.
The purpose of these restrictions is to protect,
- investors in the company so that they know the purpose for which their money is going to be used
- creditors by ensuring that the companys funds are not wasted in unauthorized activities
Articles of Association
The Articles of Association or just Articles are the rules, regulations and bye-laws for the internal management of the
affairs of a company.
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The Articles are next in importance to the memorandum of association which contains the fundamental conditions
upon which alone a company is allowed to be incorporated.
Contents of Articles
1. Share capital, rights of shareholders, variation of these rights, payment of commissions, share certificates
2. Lien on shares
3. Calls on Shares
4. Transfer of shares (voluntary transfer of shares from one person to another)
5. Transmission of shares (transfer of shares from one person to another by operation of law)
6. Forfeiture (surrender or give up) of shares
7. Conversion of shares into stock
8. Share warrants
9. Alteration of capital
10. General meetings and proceedings there at
11. Directors, their appointment, remuneration, qualification, powers and proceedings of board of directors
12. Voting rights of members, voting and poll, proxies
13. Manager
14. Secretary
15. Dividends and reserves
16. Accounts, audit and borrowing powers
17. Capitalization of Profits
18. Winding up
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Distinction between Memorandum and Articles
Basis of Memorandum of Articles of

Distinction Association Association
It contains the It contains the internal

fundamental conditions rules and regulations
1.Contents upon which alone the relating to management
company is allowed to of internal affairs.
be incorporated
2. Fundamental / It is Fundamental It is subordinate to the

Subordinate document document. Memorandum

3. Compulsory or optional Every company must A public company

have its own limited by shares need
memorandum. have its own Articles. It
may adopt Table A as its
articles.
4.Relationship defined It defines the It defines the
relationship between relationship between
the company and the company and its
outsiders. members and members
only and as members
inter se.
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5. Alteration There are strict restrictions Articles can be easily
whether easy or on its alteration. Some of the altered by passing a
difficult conditions of incorporation special resolution.
contained in it cannot be
altered except with the
sanction of the National
Company Law Tribunal.
6. Binding Effect of Any act of the company An act is intra vires the
ultra vires act which is ultra vires the Memorandum but ultra
memorandum is wholly void vires the Articles may be
and cannot be ratified ratified by share-holders
(approve) even by the whole by passing a special
body of shareholders. resolution.
Doctrine of constructive notice (OR) constructive Notice of Memorandum and Articles
Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and
the Articles of Association.
These documents, on registration with the Registrar, assume the character of public documents.
This is known as constructive Notice of Memorandum and Articles.
The Memorandum and the Articles are open and accessible to all.
It is the duty of every person dealing with a company to inspect these documents and see that it is within
the powers of the company to enter into the proposed contract.
Doctrine of Indoor Management
The doctrine of indoor management is a limitation to the doctrine of constructive notice.
An outsider is presumed to know the constitution of a company but not what may or may not have taken place
within the doors that are closed to him.
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Exceptions to the doctrine of Indoor

Management
4. Acts outside the

Scope of
1. Knowledge of 3. Forgery
2. Negligence apparent
Irregularity
authority
1. Knowledge of Irregularity
Where a person dealing with a company has actual or constructive (useful or beneficial) notice of
the irregularity as regards internal management, he cannot claim the benefit under the rule of indoor management
2. Negligence
Where a person dealing with a company could discover the irregularity if he had made proper
inquiries, he cannot claim benefit under the rule of indoor management
3. Forgery
A company can never be held bound for forgeries committed by its officers.
4. Acts outside the Scope of apparent authority

If an officer of a company enters into a contact with a third party and if the act of the officer is beyond
the scope of his authority, the company is not beyond.
Prospectus
In order to finance its activities, a company needs capital which is raised by a public company by the issue of a
prospectus inviting deposits or offers for shares and debentures from the public.
A private company is prohibited from making any invitation to the public for any shares or debentures, hence, it
need not issue prospectus.
Prospectus - Definition
According to Section 2(36) prospectus means
any document described or issued a prospectus and includes any notice, circular, advertisement or other document
inviting deposits from the public or inviting offers from the public for the subscription or purchase of any shares in, or
debentures of, a body corporate.
the term `Prospectus` means a document which invites deposits from the public or invites offers from the
public to subscribe or buy the shares or debentures of the company.
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Thus, a prospectus is not an offer in itself but an invitation to make an offer.
Application for making a deposit or for purchase of shares or debentures constitutes an offer by the
applicant to the company. It is only on the acceptance of the offer, by the company, a binding contract
comes into existence.
The prospectus must be in writing. An oral invitation to subscribe for shares will not be considered
prospectus. Television or film advertisement cannot be treated as prospectus.
Contents of Prospectus
1. General Information
Name & address of registered office of the company
Details of letter of intent/industrial license
Name of stock exchange where listed
Date of opening, closing of the issue
Name, address of lead manager, bankers to the issue, brokers to the issue
Underwriting arrangement
2. Capital Structure of the company

Authorized, issued, subscribed, paid up capital of the company should be mentioned
Size of the issue
3. Details of the issues

Objects of the issues
Tax benefits available to the company
Rights of the instrument holders
Authority of the issues & details of resolution passed for the issues
Terms of payment
4. Details about the company management

History, main objects, present business of the company
Subsidiaries of the company
Promoters and their background
Name, address occupation of manager, managing directors relationship with the company
5. Details about the project

Cost of the project & means of financing
Location of the project
Plant & machinery for the projects
Infrastructure facilities for raw materials
Expected date of trial production and commercial production
Schedule of Implementation of the projects
8. Other Information
In respect of any issue made by the company and other listed companies under the same management, the
following details,
Name of the company, year of issue, types of issue, amount of issue & date of completion of the projects
Procedure and time schedule for allotment & issue of certificates
Management perception of risk factors

Procedure for making application & availability of forms, prospectus and mode of payment
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Changes in directors and auditors in the last 3 years
Misstatements in Prospectus and their consequences
If there is any misstatement of a material fact in a prospectus or if the prospectus is wanting in any material,
there may arise,
Civil (public or general) Liability

Criminal Liability (Illegal or against the law or unlawful)
Liability for Mis-statements in Prospectus
Civil Liability Criminal Liability
Against the Company Against the Directors,

Promoters and
Experts
Rescission Claim for Damages Compensation Damages

of Damages (Sec. 62) for
Contract Non-
compliance
(Sec, 56)
For Fraudulent For Innocent
Misrepresentation Misrepresentation
I. Civil Liability
A person who has been induced to subscribe for shares (or debentures) on the faith of a
misleading prospectus has remedies against the company, and the directors, promoters and experts.
1. Remedies against the company
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If there is a misstatement or withholding of material information in a prospectus, and if it has
induced any shareholder to purchase shares, he can,
i. Rescind (withdraw or cancel) the contract and,
ii. Claim damages from the company whether the statement is fraudulent or an innocent one.
i.Rescission of the contract

Any person, who takes shares on the faith of statements of fact contained in a prospectus, can apply
to the court for the rescission of the contract if those statements are false or fraudulent or if some material
information has been withheld.
ii. Damages for deceit

Any person, induced by a fraudulent statement in a prospectus to take shares is entitled to sue the
company for damages. He cannot both retain the shares and get damages against the company.
2. Remedies against the directors, promoters and experts

The persons who are liable to pay compensation for any loss or damage to subscribers for any
shares or debentures on the faith of a prospectus containing untrue statements are the,
(a) Directors at the time of the issue of the prospectus;
(b) Persons who have authorized themselves to be named as directors in the prospectus;
(C) Promoters; and
(d) Persons who have authorized the issue of the prospectus
II. Criminal Liability
Where a prospectus contains any untrue statement, every person who authorized the issue of the
prospectus is punishable with imprisonment which may extend to Rs. 50,000 or with both.
Directors
A Company in the eyes of the law is an artificial person

It has no physical existence. It has neither soul nor a body of its own. As such, it cannot act in its own person
The Directors are the brain of the company, they occupy a pivotal (essential) position in the company
Definition - Directors
Director includes any person occupying the position of director, by whatever name called.
The important factor to determine whether a person is or not a director is to refer to the nature of the
office and its duties.
It does not matter by what name he is called. If he performs the functions of a director, he would be termed a
director in the eyes of the law even though he may be named differently.
A director may, therefore, be defined as a person having control over the direction, conduct, management
superintendence of the affairs of a company.
Any person in accordance with whose directions or instructions, the Board of the directors of a company is
accustomed to act is deemed to be a director of a company. But such a person shall not be deemed to be a
director if the Board acts on the advice given by him in a professional capacity.
Only individuals can be directors (Sec. 253), No body corporate, association or firm can be appointed director of
a company. Only an individual can be so appointed.
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Every public company (other than a deemed public company) shall have be at least 3 directors and every other
company (e.g., a private company, a deemed public company) at least 2 directors. [Sec. 252(1)].
Appointment of directors
Appointment of
First Appointment of Directors by the
Directors Directors by Central
Third Parties Government
Appointment of
directors by the Appointment of Appointment by
company Directors by Proportional
Directors representation
Appointment of directors
1. First directors (Sec. 254 and Clause 64 of Table A).
(a) The Articles of a company usually name the first directors by their respective names or prescribe the
method of appointing them.
(b) If the first directors are not named in the Articles, the number of directors and the names of the directors
shall be determined in writing by the subscribers of the Memorandum or a majority of them (Clause 64 of Table A).
(c) If the first directors are not appointed in the above manner, the subscribers of the Memorandum who are
individuals become directors of the company. They shall hold office until directors are duly appointed in the first annual
general meeting (Sec. 254
2. Appointed of directors by the company (Secs. 255 to 257, 263 and 264).
Directors must be appointed by shareholders in general meeting.

In the case of a public company or a private company which is a subsidiary of a public company, at least 2/3rd of
the total number of directors shall be liable to retire by rotation. Such directors are called rotational directors and
shall be appointed by the shareholders in general meeting.
Ascertainment of directors retiring by rotation and filling of vacancies (Sec. 256).
(i) At the annual general meeting of a public company or a private company which is a subsidiary of a public company
1/3rd (or the number nearest to 1/3rd of the rotational directors shall retire from office.
(ii) The directors to retire by rotation at every annual general meeting shall be those who have been longest in the office
since their last appointment.
(iii) At the annual general meeting at which a director retires by rotation, the company may fill up the vacancy (thus
created) by appointing the retiring director or some other person.
(iv) If the place of the retiring director is not filled up, the meeting may resolve not to fill the vacancy. If there is no such
resolution, the meeting shall stand adjourned till the same day in the next week.
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If at the adjourned meeting also, the place of retiring director is not filled up, nor is there a
resolution not to till the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned
meeting.
3. Appointed of directors by directors (Sec. 260, 262 and 313).

The directors of a company may appoint directors-
(i) As additional directors (Sec. 260).

Any additional directors appointed by the directors shall hold office only up to the date of the next annual
genera meeting of the company. The number of directors and additional directors must not exceed the maximum
strength fixed for the Board by the Articles [Patrakola Tea Co., Re, A.I.R. (1967) Ca. 406].
If the annual general meeting of a company is not held or cannot be held, the additional director shall vacate his
office on the day on which the annual general meeting should have been held.
If an additional director has been appointed as managing director also, the moment he ceases to be an additional
director, and he will cease to be the managing director.
(2) In a casual vacancy (Sec. 262).
In the case of a public company, or a private company which is a subsidiary of a public company, if the office of any
director appointed by the company in general meeting is vacated before his term of office expires in the normal
course, the resulting casual vacancy may be filled by the Board of directors at a meeting of the Board.
This power of the Board is subject to any regulations in the Articles of the company. By casual vacancy is
meant any vacancy which occurs by reason of death, resignation, disqualification, or failure of an elected
director to accept the office for any reason other than retirement by rotation.
A vacancy caused by the retirement of a director by rotation is not a casual vacancy; such a vacancy has to be
filled by the annual general meeting.
(3) As alternate director (Sec. 313).
An alternate director can be appointed by the Board if it is so authorized by

(i) the Articles of the company, or
(ii) a resolution passed by the company in the general meeting.
He shall act for a director, called the original director during his absence for a period of at least 3 months from
the State in which Board meetings are ordinarily held.
4. Appointed of directors by third parties.
The Articles under certain circumstances give power to the debenture-holders or other creditors, e.g., a
banking company or financial corporation, who have advanced loans to the company to appoint their nominees to the
Board.
The number of directors so appointed shall not exceed 1/3rd of the total number of directors, and they are
not liable to retire by rotation.
5. Appointed by proportional representation (Se. 265).
The Articles of a company may provide for the appointment of not less than 2/3rd of the total
number of directors of a public company or of a private company which is a subsidiary of a public company according
to the principle of proportional representation.
19
The proportional representation may be by a single transferable vote or by a system of
cumulative voting or otherwise. The appointment shall be made once in 3 years and interim (temporary or short-term
)casual vacancies shall be filled in the manner as provided in the Articles.
A single transferable vote or STV system is a type of proportional representation electoral system. In a single
transferable vote system, voters rank candidates in their order of preference by numbering the candidates on the
ballot. The candidates with the highest preferences are elected.
Cumulative voting is a process that allows shareholders to cast all the votes at their disposal for a single
candidate.
This type of voting system is understood to provide minority shareholders with stronger voice and vote in
matters that require the approval of a majority of the shareholders of a given corporation.
The idea is that the process of cumulative votes makes it possible for all shareholders to more directly influence
the outcome of an issue, such as the election of persons to open seats on the board of directors.
6. Appointed of directors by the Central Government (Sec. 408).
Sec. 408 empowers the Central Government to appoint such number of directors on the Board of a
company as the Tribunal may, by order in writing, specify as necessary to effectively safeguard the interests of the
company or its shareholders or the public interest.
The appointment will be for a period not exceeding 3 years on any one occasion.
The purpose of the appointment is to prevent the affairs of the company from being conducted either in the
manner-
(a) Which is oppressive (harsh or cruel) to any members of the company; or
(b) Which is prejudicial (harmful) to the interests of the company or to public interest?
20
The Tribunal may pass the above order on a reference made to it by the Central Government or on the application-
of not less than 100 members of the company, or
of members of the company holding not less than 1/10th of the total voting power therein.
Any director appointed by the Central Government shall not be required to hold any qualification shares nor
shall his period of office be liable to termination by retirement of directors by rotation.
Any such director may be removed by the Central Government from his office and another person may be
appointed in his place.
Powers of directors
Powers to be
General Powers exercised with the
of the Board approval of
Company in
General Meeting
Powers to be
Exercised at
Board Meetings
(1) General Powers of the Board (Sec. 291).
The Board of directors of a company is entitled to exercise all such powers and to do all such acts
and things as the company is authorized to exercise and do.
This proposition is, however, subject to two conditions:
First, the Board shall not do any act which is to be done by the company in general meeting.
Second, the Board shall exercise its powers subject to the provisions contained in the Companies Act, or in the
Memorandum or the Articles of the company or in any regulations made by the company in general meeting.
But no regulation made by the company in general meeting shall invalidate any prior act of the Board which
would have been valid if that regulation had not been made.
(2) Powers to be exercised at Board meetings (Sec. 292)-
The Board of directors of a company shall exercise the following powers on behalf of the company by means of
resolutions passed at the meetings of the Board, viz., the power to-
21
make calls on shareholders in respect of money unpaid on their shares;
issue debentures;
borrow moneys otherwise than on debentures (say through public deposits);
invest the funds of the company; and
make loans.
The Board may, by a resolution (declaration) passed at a meeting, delegate the last three powers to a committee
of directors or the manager or any other principal officer of the company, but the Board shall specify the limits
of such delegation.
Sec. 292 does not in any manner affect the right of the company in general meeting to impose restrictions and
conditions on the exercise by the Board of any of the powers specified in Sec. 292.
(3) Powers to be exercised with the approval of company in general meeting (Sec. 293).
The Board of directors of a public company, or of a private company which is a subsidiary of a public
company, shall exercise the following powers only with the consent of the company in general meeting:
(a) To sell, lease or otherwise dispose of (say under amalgamation [merger] scheme) the whole, or
substantially the whole, of the undertaking of the company.
(b) To remit or give time for repayment of any debt due to the company by a director except in the case
of renewal or continuance of an advance made by a banking company to its director in the ordinary course of business.
(c) To invest (excluding trust securities) the amount of compensation received by the company in respect
of the compulsory acquisition (acquirement) of any undertaking or property of the company.
(d) To borrow moneys where the moneys to be borrowed (together with the moneys already borrowed by
the company) are more than the paid-up capital of the company and its free reserves (that is to say reserves not set apart
for any specific purpose, e.g., balance in the share premium account, general reserve, profit and loss account, capital
redemption account). The amount of temporary loans raised from banks in the ordinary course of business is excluded.
The expression temporary loans does not include loans raised for the purpose of financing
expenditure of a capital nature.
(e) To contribute to charitable and other funds not directly relating to the business of the company or the
welfare of its employees, amounts exceeding in any financial year Rs. 50,000 or 5 per cent of the average net profits of
the three preceding financial years, whichever is greater. The Board may contribute up to Rs. 50,000 even if the
company is incurring a loss.
Every resolution passed by the company in general meeting to borrow moneys shall specify the total
amount up to which money may be borrowed by the Board of directors.
Likewise every resolution passed by the company in general meeting to contribute to charitable and other
funds shall specify the total amount which may be contributed to charitable and other funds in any financial year.
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Duties of directors
1. Fiduciary Other duties of

Duties Directors
Duties of Care, Skill

And Diligence
(attentiveness)
1. Fiduciary duties.
As fiduciaries, the directors must-

(a) exercise their powers honestly and bonafide for the benefit of the company as a whole; and
(b) not place themselves in a position in which there is a conflict between their duties to the company and their
personal interests. They must not make any secret profit out of their position. If they do, they have to account for it to
the company.
Fiduciary duties owed to the company. The fiduciary duties of directors are owed to the company and not to the
individual shareholders.
An individual, corporation or association holding assets for another party, often with the legal authority and duty
to make decisions regarding financial matters on behalf of the other party.
A fiduciary is someone who has undertaken to act for and on behalf of another in a particular matter in
circumstances which give rise to a relationship of trust and confidence
(2) Duties of care, skill and diligence.
Directors should carry out their duties with reasonable care and exercise such degree of skill and
diligence as is reasonably expected of persona of their knowledge and status. He is not bound to bring any special
qualifications to his office.
Standard of care.
The standard of care, skill, and diligence depends upon the nature of the companys business and
circumstances of the case.
There are various standards of the care depending upon:
(a) the type and nature of work;

(b) division of powers between directors and other officers;
(c) general usages and customs in that type of business; and
(d) whether directors work gratuitously or remuneratively.
23
There is a brilliant exposition of directors duties in relation to a companys affairs in the following case:
City Equitable Fire Insurance Co. Ltd, Re, supra.
The directors of an insurance company left the management of the companys affairs almost
entirely in the hands of B, the managing director. Owing to Bs fraud a large amount of the companys assets
disappeared. B and the firm in which he was a partner had taken a huge loan from the company and the cash at the bank
or in hand included, pound 7,300 in the hands of the companys stock brokers, in which B was partner. The directors
never inquired as to how these items were made up.
Held, the directors were negligent. The Articles, however, protected the directors in this case
from liability as there was no willful neglect or default and consequently they were not held liable.
(3) Other duties of directors.
The other duties of a director are-

(1) to attend Board meetings.
(2) not to delegate his functions except to the extent authorized by the Act or the constitution of the company,
and
(3) to disclose his interest.
These duties have been discussed at appropriate places.
Liabilities of directors
Liability for
Liability to the Breach of
Third Parties Statutory
Duties
Liability for
Liability to the Acts of his
Company Co-directors
(1) Liability to third parties.

This may arise-
i. Under the Act.
ii. Independently of the Act
Under the Act. Liability of directors to third parties may arise in connection with the issue of a prospectus
which does not contain the particulars required by the Companies Act, or which contains material
misrepresentation.
Directors may also incur personal liability-
(a) on their failure to repay application money if minimum subscription has not been subscribed (Sec. 69).
24
(b) On an irregular allotment of shares to an allottee (and likewise to the company) if loss or damage is sustained
(Sec. 71).
(C) On their failure to repay application money if the application for the securities to be dealt in on a recognized
stock exchange is not made or is refused (Sec. 73).
(d) On failure by the company to pay a bill of exchange, hundi, promissory note, cheque or order for money or
goods wherein the name of the company is not mentioned in legible characters (Sec. 147).
Independently of the Act.
Directors, as agents of a company, are not personally liable on contracts entered into as agents on behalf of the
company.
But there are a number of exceptions to this rule. If a director fails to exclude personal liability, for instance, by
signing a negotiable instrument without mentioning the companys name and the fact that he is signing on
companys behalf, he is personally liable to the holder of such instrument. He is also personally liable if he acts
in his own name.
(2)Liability to the company.
The liability of director towards the company may arise from-
(a) Ultra vires acts. Directors are personally liable to the company in respect of ultra vires acts and it is not
necessary to prove fraud in such cases, e.g., when they pay dividends out of capital or when they dissipate (waste) the
funds of the company in ultra vires transactions. They are liable jointly and severally and, inter se, they have a right to
rate able (chargeable) contribution.
(b) Negligence.
A director may incur liability for the negligence in the exercise of his duties. There is no statutory
definition of negligence, and as such each case has to be decided after due consideration of the particular facts thereof.
The question to be answered in each case is: Has the director exercised the necessary care and shown the
necessary diligence in the discharge of his duties? If he has not, he is liable. If he has, there can be no question of
liability.
It is essential in an action for negligence that the company suffers some damage, as negligence without damage or
damage without negligence is not actionable.
Breach of trust.
Directors of a company, being in a fiduciary position, hold the position of trustees as regards its
money and property which comes into their hands and of the powers entrusted to them by the Articles. They must
discharge their duties as such trustees in the best interest of the company. They are liable to the company for any loss
resulting from breach of trust.
Directors are also accountable to the company for any secret profits they might have made in
transactions on behalf of the company.
(d) Misfeasance.
Directors are liable to the company for misfeasance which means willful misconduct of directors for
which they may be sued in a Law Court. (In case of misfeasance proceedings the directors may apply for relief under
Sec. 633.)
(3) Liability for breach of statutory duties.

There are numerous statutory duties of directors which they must carry out. Most of these duties relate to
maintenance of proper accounts, filing of returns or observance of certain statutory formalities. If they fail to
perform these duties, they render themselves liable to penalties.
25
(4) Liability for acts of his co-directors.

A director is not liable for the acts of his co-directors provided he has no knowledge and he is not a
party. His co-directors are not his servants or agents who can by their acts impose liability on him.
Winding Up of Companies
Winding up or liquidation of a company represents the last stage in its life.
It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are
paid off out of the realized assets (or from contributions from its members), and the surplus, if any, is then
distributed among the members in proportion to their holdings in the company.
The two terms winding up and liquidation are used interchangeably.

According to Prof. Gower,
winding up of a company is a process whereby its life is ended and its property administered for the
benefit of its creditors and members. An administrator, called liquidator, is appointed and he takes control of the
company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with
their rights.
MODES OF WINDING UP
Also known as
Compulsory
Winding Up
1. Winding up by 2. Voluntary
The Tribunal Winding up
Members Voluntary Creditors Voluntary

Winding Up Winding Up
WINDING UP BY THE TRIBUNAL
1. Special resolution of the company

2. Default in delivering the statutory report to the Registrar or in holding statutory meeting
3. Failure to commence, or suspension of business
26
4. Reduction in membership
5. Inability to pay its debts
6. Just and equitable
Winding up by the tribunal (Secs. 433 to 483)

Winding up of a company under the order of a Tribunal is also known as compulsory winding up.
Groups for compulsory winding up (Sec. 433)

A company may be wound up by the Tribunal in the following cases:
1. Special resolution of the company [Sec. 433 (a)]. Winding up order under this head is not common because
normally the members of a company prefer to wind up the company voluntarily for in such a case they shall have a
voice in its winding up. Moreover, a voluntary winding up is far cheaper and speedier than a winding up by the
Tribunal.
2. Default in delivering the statutory report to the Registrar or in holding statutory meeting [Sec. 433 (b)].
A petition on this ground can be made either by the Registrar or by a contributory. In the latter case the
petition for winding up can be filed only after the expiry of 14 days from the day on which the statutory meeting ought
to have been held [Sec. 439 (7)].
The Tribunal may, instead of making a winding up order, direct that the statutory report is delivered or that a
statutory meeting is held. The Tribunal may order the costs to be paid by any persona who are responsible for the
default [Sec. 443 (3)].
3. Failure to commence or suspension of business [Sec. 433 (c).

The Tribunal exercises power in this case only if the company has no intention of carrying on its business or if it
is not possible for it to carry on its business.
If a company has not begun to carry on business within a year from its incorporation or suspends its business for
a whole year, the Tribunal will not wind it up if
(a) there are reasonable prospects of the company starting business within a reasonable time, and
(b) there are good reasons for the delay, i.e., the suspension of business is satisfactorily accounted for and
appears to be due to temporary causes.
4. Reduction in membership [Sec. 433 (d)].
If, at any time, the number of members of a company is reduced in the case of a public company, below 7
or in the case of private company, below 2, the company may be ordered to be wound up by the Tribunal.
If the company carries on business for more than 6 months while the number is so reduced every member
who is cognizant (aware) of the fact that it is carrying on business with members fewer than the statutory minimum, will
be severally liable for the payment of the whole of the debts of the company contracted after those 6 months (Sec. 45).
5. Inability to pay its debts [Sec. 433 (e)].
A company may be wound up by the Tribunal if it is unable to pay its debts. The test is whether the
company has reached a stage where it is commercially insolvent-that is to say, that its existing and probable assets
would be insufficient to meet the existing liabilities.
Commercially insolvent- means that the company is unable to pay debts or liabilities as they arise in
the ordinary course of business.
When is a company unable to pay its debts? According to Sec. 434, a company shall be deemed to be unable to pay
its debts in the following cases:
i. Demand for payment neglected.

27
If a creditor to whom the company is indebted for a sum exceeding Rs. 1,00,000 has served on
the company, at its registered office, a demand for payment and the company has for 3 weeks thereafter neglected to pay
or otherwise satisfy him, the company is unable to pay its debts. The demand may be signed by any agent or legal
adviser duly authorized or in the case of a firm, by such agent or legal adviser or by any member of the firm.
ii. Decreed debt unsatisfied.
If execution or other process issued on a decree or order of any Tribunal in favor of a creditor of the
company is returned unsatisfied in whole or in part, the company is deemed to be unable to pay its debt.
iii. Commercial insolvency.
A company is deemed to be unable to pay its debts, if it is proved to the satisfaction of the Tribunal that
the company is unable to pay its debts. In determining whether a company is unable to pay its debts, the Tribunal shall
take into account the contingent and prospective liabilities of the company also.
6. Just and equitable [Sec. 433 (f)].
The words just and equitable are of the widest significance and do not limit the jurisdiction of the
Tribunal to any particular case.
The principle of just and equitable clause baffles a precise definition. It must rest with the judicial discretion of
the Tribunal depending upon the facts and circumstances of each [Hind Overseas (Pvt.) Ltd. v. R.P.
Jhunjhunwalla, (1976) 46 Comp. Cas. 91 (S.C.)].
What is just and equitable clause?

It depends upon the facts of each case. The Tribunal may order winding up under the just and equitable
clause in the following cases:
1. When the substratum of a company is gone. The substratum of a company can be said to have disappeared only
when the object for which it was incorporated has substantially failed, or when it is impossible to carry on the business
of the company except at a loss, or the existing and possible assets are insufficient to meet the existing liabilities.
The substratum of a company disappears:
(i) When the very basis for the survival of the company is gone.
Pirie v. Stewart, (1904) 6 F. 847. A shipping company lost its only ship, the remaining asset being a paltry
sum of pound 363. A majority in number and value of shareholder opposed this and desired to carry on the
business as charter. Held, it was just and equitable that the company should be wound up.
(ii) When the main object of the company has substantially failed or become impracticable. Where a companys
main object fails, its substratum is gone and it may be would up even though it is carrying on its business in pursuit of a
subsidiary object.
German Date Coffee Co., Re (1882) 20 Ch. D. 169.
In this case, the objects clause of the German Date Coffee Co. stated that it was formed for the working
of a German patent which would be granted for making a partial substitute for coffee from dates and for the acquisition
of inventions incidental thereto and also other inventions for similar purposes. The German patent was never granted but
the company did acquire and work a Swedish patent and carried on business at Hamburg where a substitute coffee was
made from dates, but not under the protection of a patent.
Held, on a petition by 2 shareholders, that the main object could not be achieved and, therefore, it was
just and equitable that the company should be would up.
(iii) When the existing and probable assets of the company are insufficient to meet its existing liabilities.
Where a company is totally unable to pay off creditors and there is ever-increasing burden of
interest and deteriorating state of management and control of business owing to sharp differences between shareholders,
the Tribunal will order winding up.
28
2. When the management is carried on in such a way that the minority is disregarded or oppressed.
Oppression of minority shareholders will be a just and equitable ground where those who control the company
abuse their power to such an extent as to seriously prejudice (injustice) the interest of minority shareholders.
3. Where there is a deadlock in the management of the company.

When shareholding is more or less equal and there is a case of complete deadlock (standstill) in the
company on account of lack of probity (honesty) in the management of the company and there is no hope or possibility
of smooth and efficient continuance of the company as a commercial concern, there may arise a case for winding up on
the just and equitable ground.
Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch. 426.
A and B were the only shareholders and directors of a company with equal rights of management
and voting power. After a time they became bitterly hostile to each other and disagreed about the appointment of
important servants of the company. All communication between them was made through the secretary as they were not
so speaking terms with each other. The company made large profits in spite of the disagreement. Held, there was a
complete deadlock in the management and the company was ordered to be wound up.
4. Where public interest is likely to be prejudiced.

Having regard to the provisions of Sec. 397 and 398 (dealing with prevention of oppression and
mismanagement) where the concept of prejudice to public interest is introduced, it would appear that the Tribunal
winding up a company will have to take to into consideration not only the interest of shareholders and creditors but also
public interest in the shape of need of the community, interest of the employees, etc.
5. When the company was formed to carry out fraudulent or illegal business or when the business of the company
becomes illegal.
6. When the company is a mere bubble and does not carry on any business or does not have any property
7. Acting against the interest of the State.

If the company has acted against the interests of the sovereignty and integrity of India, the security of the
state, friendly relations with foreign states, public order, decency or morality.
8. Winding up of a sick company.
If the tribunal is of the opinion that the company should be wound up under the circumstances specified
in Sec. 424G. The last two clauses in Sec. 333(i) have been added by the Companies (Amendment) Act, 2002.
Voluntary winding up (Secs. 484 to 520)

Voluntary winding up means winding up by the members or creditors of a company without interference by the
Tribunal. The object of a voluntary winding up is that the company, i.e. the members as well as the creditors are
left free to settle affairs without going to the Tribunal. They may however apply to the tribunal for any
directions if and when necessary
Circumstances in which a company may be wound up voluntarily (sec. 484)- A company may be wound up
voluntarily
1) By passing an ordinary resolution: When the period, if any, fixed for the duration of a company by
the Articles has expired, the company in general meeting may pass an ordinary resolution for its voluntary winding up.
The company may also do so when the event, if any, on the occurrence of which the Articles provide that the company
is to be dissolved, has occurred.
2) By passing a special resolution
29
A company may at any time pass a special resolution that it be wound up voluntarily. No reasons need be given
where the members pass a special resolution for the voluntary winding up of the company. Even the Articles cannot
prevent the exercise of this statutory right.
Commencement of voluntary winding up (Sec. 486)- A voluntary winding up shall be deemed to commence at
the time when the resolution (ordinary or special, as the case may be) for its voluntary winding up is passed.
Advertisement of resolution. (Sec. 485)

Within 14 days of the passing of the resolution for voluntary winding up of the company, the
company shall give notice of the resolution by advertisement in the Official Gazette, and also in some newspaper
circulating in the district of the registered office of the company
Types of voluntary winding up
A voluntary winding up may be a

members` voluntary winding up, or
creditors` voluntary winding up.
Members voluntary winding up
Declaration of solvency (Sec. 488).
In a voluntary winding up of a company if a declaration of its solvency is made in accordance with the
provisions of Sec.488, it is a members` voluntary winding up. The declaration shall be made by a majority of the
directors at a meeting of the Board that the company has no debts or that it will be able to pay its debts in full within 3
years from the commencement of the winding up. The declaration shall be verified by an affidavit (official declaration).
The declaration shall have effect only when it is
(a) made within five weeks immediately before the date of the resolution, and delivered to the Registrar
for registration before that date; and
(b) accompanied by a copy of the report of the auditors of the company on,
(i) the profit and loss account of the company from the date of the last profit and loss account to the latest
practicable date immediately before the declaration of solvency.
(ii) the balance sheet of the company and
(iii) a statement of the companys assets and liabilities as on the last mentioned date.
A winding up in the case of which a declaration has been made and delivered is referred to as a
members voluntary winding up, and a winding up in the case of which a declaration has not been so made and delivered
is referred to as a creditors` voluntary winding up.
Provisions applicable to a members` voluntary winding up

Secs. 490 to 498 shall apply in relation to a members` voluntary winding up (Sec. 489). The provisions of these
Sections are as follows:
1. Appointment and remuneration of liquidators (Sec. 490)
The company in general meeting shall appoint one or more liquidators for the purpose of winding
up its affairs and distributing the assets. It shall also fix the remuneration, if any, to be paid to the liquidator or
liquidators. Any remuneration so fixed shall not be increased in any circumstances. The liquidator shall not take charge
of his office before his remuneration is fixed as aforesaid.
2. Board's powers to cease on appointment of a liquidator (sec. 491).
30
On the appointment of a liquidator, all the powers of the Board of directors, the managing or whole-
time directors, and manager, shall cease except when the company in general meeting or the liquidator may sanction
them to continue.
3.Power to fill vacancy in office of liquidator (sec. 492) If a vacancy occurs by death, resignation or
otherwise in the office of any liquidator appointed by the company, the company in general meeting may fill the
vacancy. For this purpose a general meeting may be convened by any contributory or by the continuing liquidator or
liquidators, if any.
4. Notice of appointment of liquidator to be given to Registrar (Sec.493).
The company shall give notice to the Registrar of the appointment of a liquidator or liquidators. It shall
also give notice of every vacancy occurring in the office of liquidator and of the names of the liquidators appointed to
fill every such vacancy. The company shall give the notice within 10 days of the event to which it relates.
5. Power of liquidator to accept shares, etc. as the consideration for sale of property (Sec. 494).
6. Duty of liquidator to call creditors` meeting in case of insolvency (Sec.495)
If the liquidator is at any time of opinion that the company will not be able to pay its debts in full
within the period stated in the declaration, he shall forthwith summon a meeting of the creditors. He shall lay before the
meeting a statement of the assets and liabilities of the company. Thereafter the winding up shall become creditors
voluntary winding up.
7. Duty to call general meeting at the end of each year (Sec. 496).
In the event of the winding up continuing for more than 1 year, the liquidator shall call a general meeting
of the company at the end of the first year from the commencement of the winding up. Likewise, he shall call a general
meeting at the end of each succeeding year. He shall lay before the meeting an account of his acts and dealings and of
the conduct of the winding up during the year.
8. Final meeting and dissolution (Sec. 497). As soon as the affairs of the company are fully wound up, the liquidator
shall make up an account of the winding up, showing how the winding up has been conducted and how the property of
the company has been disposed of. He shall then call a general meeting of the company and lay before it the accounts
showing how the winding up has been conducted.
The meeting shall be called by advertisement

specifying the time, place and object of the meeting; and
published not less than one month before the meeting in Official Gazette, and also in some newspaper circulating
in the district the registered office of the company.
Within one week after the meeting, the liquidator shall sent to the Registrar and the Official Liquidator a copy
each of the account and shall make a return to each of them of the holding of the meeting and of the late thereof.
If a quorum is not present at the final meeting, the liquidator shall make a return that the meeting was duly called
but could not be held for want of quorum.
The Registrar on receiving the account and return shall register them. The Official Liquidator, on receiving
them, shall make a scrutiny, the books and papers of the company. The liquidator of the company present
officers shall give the Official Liquidator all reasonable facilities to make the scrutiny.
On such scrutiny the Official Liquidator shall make a report to the Tribunal. If the report shows that the affairs
of the company have been conducted in a manner not prejudicial to the interests of its members or to public
interest, then from the date of the submission of the report to the Tribunal, the company shall be deemed to be
dissolved.
9. Provisions as to annual and final meeting in case of insolvency (Sec.498)
If in the case of a members voluntary winding up, liquidator finds that the company is insolvent, Secs.
508 and 509 (what deal with the duty of the liquidator to call a meeting of the company of creditors at the end of each
31
year (Sec. 508) and final meeting and dissolution (Sec.509) in case of a creditors` voluntary winding up] shall apply
as if the winding up were a creditors` voluntary winding up and a members` voluntary winding up. It should be noted
that in such a case Secs. 508 and 509 shall apply to the exclusion of Secs. 496 and 497.
2. Creditors voluntary winding up

A voluntary winding up of a company in which a declaration of solvency is not made is referred to as a creditors`
voluntary winding up.
Provisions applicable to creditors` voluntary winding up
Secs. 500 to 509 shall apply in relation to a creditors voluntary winding up (Sec.499).
The provisions of these Sections are as follows:
Meeting of creditors (Sec. 500)
- The company shall call a meeting of the creditors of the company on the day on which there is to be
held the general meeting of the company at which the resolution for voluntary winding up is to be proposed, or on the
next day.
- It shall send notices of the meeting to the creditors by post simultaneously with the sending of the
notices of meeting of the company.
- It shall also cause notice of the meeting of the creditors to be advertised once at least in the Official
Gazette and once at least in 2 newspapers circulating in the district of the registered office of the company.
The Board of directors of the company shall cause a full statement of the position of the companys affairs
together with a list of the creditors and the estimated amount of their claims to be laid before the meeting. It
shall also appoint one of their members to preside at this meeting. It shall be the duty of the director so
appointed to attend the meeting and beside thereat.
2. Notice of resolution to be given to Registrar

Notice of any resolution passed at a creditors` meeting shall be given by the company the
Registrar within 10 days of the passing thereof.
3. Appointment of liquidator (Sec. 502).

The creditors and the members at their respective meeting may nominate a liquidator. If they nominate
different persons, the creditors` nominee shall be the liquidator. But any director, member or creditor of the company
may apply to the Tribunal for an order that the person nominated as liquidator by the company or any other Tribunal
within 7 days after the nominate, on which the nomination was made by the creditors.
If no person is nominated by the creditors, the person nominated by the members shall be the liquidator.
Likewise, if no person is nominated by the company, the person nominated by the creditors shall be the
liquidator.
4. Appointment of committee of inspection (Sec. 503).

The creditors at their meeting may, if they think fit, appoint a committee of inspection consisting
of not more than 5 persons. If such a committee is appointed, the company may also at a general meeting appoint not
more than 5 members to the committee. However, the creditors may, if they think fit, dissolve that all or any of the
persons appointed by the company ought to be members of the committee of inspection. If the creditors and members
do not agree on a common list, the Tribunal may constitute a committee of inspection.
5. Liquidators remuneration (Sec.504),
The committee of inspection, if there is no such committee, the creditors, may fix the
remuneration of the liquidator. Where the remuneration is not so fixed, it shall be determined by the Tribunal. The
remuneration shall not be increased in any circumstances.
6) Boards powers to c ease on appointment of liquidator (Sec.505).

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On the appointment of a liquidator, all the powers of the Board of directors shall cease. But the
committee of inspection, or if there is no such committee, the creditors in general meeting, may sanction the continuance
of the Board.
7) Power to fill vacancy in office of liquidator (Sec.506).
If a vacancy occurs by death, resignation or otherwise, in the office of a liquidator (other than a
liquidator appointed by, or by the direction of, the Tribunal), the creditors in general meeting may fill the vacancy.
8) Power of liquidator to accept shares, etc., as consideration for sale of property (Sec. 507).
The provisions of Sec. 494 shall apply in the case of a creditors` voluntary wounding up.
However the powers of the liquidator under Sec. 494 shall not be exercised except with the sanction either of the
Tribunal or of the committee of inspection.
9) Duty of liquidator to call meeting at the end of each year (Sec.508).
The liquidator shall call a general meeting of the company and a meeting of the creditors every year,
within 3 months from the close of every year. This will be so if the winding up continues for more than 1 year. He shall
lay (put down ) before the meeting an account of his acts and dealings and of the conduct of winding up during the
preceding year and position of the winding up.
10) Final meeting and dissolution (Sec. 509)
As soon as the affairs of the company are fully wound up, the liquidator shall make up an account
of the winding up showing how the winding up has been conducted and how the property of the company has been
disposed. He shall then call a general meeting of the company and a meeting of the creditors for the purpose of laying
the account before the meeting and giving explanation thereof. Thereafter the procedure shall be the same and laid
down in Sec.497.
Corporate Governance
Corporate governance is the set of processes, customs, policies, laws, and institutions affecting the way a corporation
(or company) is directed, administered or controlled. Corporate governance also includes the relationships among the
many stakeholders involved and the goals for which the corporation is governed. The principal stakeholders are the
shareholders, the board of directors, employees, customers, creditors, suppliers, and the community at large.
A corporate stakeholder is a party that can affect or be affected by the actions of the business as a whole
33
Parties to corporate governance
Parties involved in corporate governance include the regulatory body (e.g. the Chief Executive Officer, the board of
directors, management, shareholders and Auditors). Other stakeholders who take part include suppliers, employees,
creditors, customers and the community at large.
A board of directors often plays a key role in corporate governance. It is their responsibility to endorse the
organizations strategy, develop directional policy, appoint, supervise and remunerate senior executives and to
ensure accountability of the organization to its owners and authorities.
Directors, workers and management receive salaries, benefits and reputation, while shareholders receive capital
return.
Customers receive goods and services; suppliers receive compensation for their goods or services. In return these
individuals provide value in the form of natural, human, social and other forms of capital.
Principles of corporate governance
Commonly accepted principles of corporate governance include:
1) Rights and equitable treatment of shareholders: Organizations should respect the rights of shareholders and
help shareholders to exercise those rights. They can help shareholders exercise their rights by effectively
communicating information that is understandable and accessible and encouraging shareholders to participate in
general meetings.
2) Interests of other stakeholders: Organizations should recognize that they have legal and other obligations to all
legitimate stakeholders.
3) Role and responsibilities of the board: The board needs a range of skills and understanding to be able to deal
with various business issues and have the ability to review and challenge management performance. It needs to
be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. There
are issues about the appropriate mix of executive and non-executive directors.
4) Integrity and ethical behavior: Ethical and responsible decision making is not only important for public
relations, but it is also a necessary element in risk management and avoiding lawsuits. Organizations should
develop a code of conduct for their directors and executives that promotes ethical and responsible decision
making. It is important to understand, though, that reliance by a company on the integrity and ethics of
34
individuals is bound to eventual failure. Because of this, many organizations establish Compliance and Ethics
Programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
5) Disclosure and transparency: Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide shareholders with a level of accountability. They should
also implement procedures to independently verify and safeguard the integrity of the company's financial
reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure
that all investors have access to clear, factual information.

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1. Separate Legal Entity

2. Limited Liability (accountability or responsibility)

3. Perpetual (long lasting or continuous) Succession

Lifting or Piercing the Corporate Veil

Types or Kinds or Classification

On the Basis On the Basis

2. On the Basis of Liability

i. Company Limited by Shares

iii. Unlimited Company

3. On the Basis of Number of Members

a) Restricts the right to transfer its shares, if any

b) Limits the number of its members to fifty, and

c) Prohibits any invitation to the public to shares in or debentures of the company.

ii. Public Company

Special Privileges of a Private Company

i. Number of Members: a private company may have only 2 members

iii. Prospectus or statement in lieu of prospectus:

iv. Issue of new shares:

vii. Index of members: need not keep any index of members.

o Legal Position of a Private company:

When does a private company become a public company?

Conversion of Public Company into a Private Company:

- By passing special resolution

4. Classification On the Basis of Control

On the basis of control, companies may be classified into:

Flowchart explaining a Holding Company and a

5. Classification on the Basis of Ownership

One Man Company

Prohibition of Large Partnerships (Sec. 11)

2. The Application should contain the following documents,

3. If the documents are in order, registrar will register the company,

4. The Registrar will be satisfied on the following points,

Purpose of Memorandum of Association

The purpose of Memorandum is two-fold

Printing and signature of Memorandum

The memorandum must be,

1. The Name Clause

3. The Objects Clause

(a) Main Objects

(b) Other Objects

4. The Capital Clause

5. The Liability Clause

Doctrine of Ultra Vires

A company has the power to do all such things as are,

The purpose of these restrictions is to protect,

4. Transfer of shares (voluntary transfer of shares from one person to another)

6. Forfeiture (surrender or give up) of shares

7. Conversion of shares into stock

10. General meetings and proceedings there at

12. Voting rights of members, voting and poll, proxies

15. Dividends and reserves

16. Accounts, audit and borrowing powers

17. Capitalization of Profits

Basis of Memorandum of Articles of

It contains the It contains the internal

2. Fundamental / It is Fundamental It is subordinate to the

Basis of Memorandum of Articles of

3. Compulsory or optional Every company must A public company

Basis of Memorandum of Articles of

Doctrine of constructive notice (OR) constructive Notice of Memorandum and Articles

This is known as constructive Notice of Memorandum and Articles.

Doctrine of Indoor Management