SUBJECT- COMPANY LAW

Q.No.2. What is misstatements in prospectus. Explain the extent of civil and criminal liability of such
misstatements.
 Introduction
One of the main advantage of incorporation of company is it invites the public to invest their money
in it by way of shares and debentures or deposits. For this purpose, the company has to be inform
about the various details of the company such as its object and its nature of business to enable the
public to decide whether to contribute or not to contribute. For the assurance of the public the
company will issue a document called Prospectus by which a company exhibits its repaying capacity,
its resources, reasons for the development, profits etc. Further it is to be noted that every company
need not go for borrowing if its promoters are stronger enough and successful with their own financial
arrangements. The prospectus is needed only when the company wants to procure money from the
public in return of shares and debentures. People want to invest their money in sound and profitable
company. Prospectus gives the information about the profitability, soundness and prosperity of the
company. The basic object and fundamental function of the prospectus is to attract the public.
Prospectus is an invitation to offer it is not a direct offer.
 MEANING AND DEFINITION OF PROSPECTUS:
In order to finance its activities, a company needs capital which is raised by a company by the
issue of a prospectus inviting deposits or offers for shares and debentures from the public. The central
theme of a prospectus, from the money point of view, is that it sets out the prospectus of the company
and the purpose for which the capital is required. The prospectus is the basis on which the prospective
investors from their opinion and take decisions as to the worth and prospects of the company.
According to section 2 (70) “prospectus means any document described or issued as a prospectus
and includes any notice, circular, advertisement or other document inviting offers from the public for
the subscription or purchase of any securities of a body corporate”.
In other words, any document inviting deposits from the public or inviting offers from the public
for the subscription of shares or debentures of a company is a prospectus.
 Meaning of misstatement of prospectus
Prospectus constitutes the contract between the company and the person who purchases the
shares or debentures. The persons who are behind the company have all the knowledge as to the
present and future of the company but, the investing public do not know anything about the company.
Therefore the prospectus must describe all the matters very clearly it must not misrepresent or conceal
any facts of the company. The prospectus containing false, misleading, ambiguous, fraudulent
statements of the facts of the company are called as misleading or misstatement of prospectus. The
people who want to purchase shares in a company are entitled to true and correct facts of the
company. The prospectus must therefore tell the truth and nothing but the truth this is known as
‘golden rule as to the framing of prospectus’.
 Liabilities for Mis statement of Prospectus:
If the investor is cheated by the company or by directors, promoters and all experts of the
company, they have both criminal and civil remedies by imposing civil and criminal remedies.

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 1. Civil Liability [section- 35]:
A company or any officer of the company induces the investors the civil liabilities will be imposed
on such wrong doers. A person who has subscribed for shares on the faith of misleading prospectus
he has certain remedies.
 Remedies against the company: The person who has been induced to subscribe for shares may
a) Rescind the Contract:
Where the prospectus contains misstatement the contract to purchase shares is voidable at the
option of the aggrieved party. The shareholders is entitled to rescind the contract to take shares
and he will have to return the shares allotted and his name will be removed from the register of
members and money paid by him to the company shall also be returned to that person.
b) To Claim Damages:
In case where prospectus contains wrong statements the injured person is entitled to claim for
damages. This remedy is available even after the company goes into liquidation and the sufferer in
order to claim damages he has to prove 3 things:
i) That the person who had issued the prospectus was not authorised to issue
ii) That the person who had issued the prospectus were known that the statement was wrong and
iii) That the subscriber had suffered loss on account of fraudulent mis representation in the
prospectus.
 Remedies against the Promoters, BOD and Experts:
Any person who has purchase shares and debentures on the faith of the prospectus containing
wrong statement may sue every directors, promoters and experts of the company for claiming any
of the following remedies.
a) Claim Damages:
Directors, Promoters and Experts who is authorised to issue prospectus are liable to compensate
the sufferer. However it is immaterial whether this is the prospectus or not it is the director who
supposed to know what is true and what is untrue.
b) Damages for non compliance of section-26:
If any directors, promoters or experts fail to follow the provisions of section 26 then the aggrieved
person can ask for the remedy before the court by filing the suit against the wrong doers.
c) Damages under Indian Contract Act 1872:
The aggrieved person can bring an action among directors, promoters and experts can claim
remedies under Indian Contract Act 1872, i.e., the right to rescind the contract for their negligence
and the company may goes into liquidation.

2. Criminal Liability[section-34]:
A public company generally does the business throughout the country and also beyond the
boundaries of country. All the investors may not have the unity, legal awareness and time to invest
money in legal expenses, therefore the law itself imposes severe criminal liability upon the
directors, promoters and every experts.
Where a prospectus, issued, circulated or distributed which includes any statement which is untrue
or misleading, every person who authorises to issue such prospectus shall be punishable with
imprisonment for a term which shall not be less than six months but which may extend to ten years
and shall also be liable to fine which shall not be less than the amount involved in the fraud, but
which may extend to three times the amount involved in the fraud.

Q.No.5. What is Winding up of a Company? Briefly explain the circumstances under which a company
may be wound up by the Court.

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MEANING OF WINDING UP:
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 released from the assets, and the surplus , if any, is then distributed among the members in proportion
to their holdings in the company.
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 debt and finally distributes any surplus among the members in accordance with their
rights.

MODES OF WINDING – UP (SECTION 270):

There are two modes of winding up of a company, namely.,
1. Winding up by the Tribunal; or
2. Voluntary winding up.

I.WINDING UP BY THE TRIBUNAL

Winding up of a company under the order of a Tribunal is also called as “Compulsory Winding Up”.

CIRCUMSTANCES FOR WINDING UP BY TRIBUNAL (SECTION 271):

A company may be wound up by the Tribunal on a petition filed under Section 272 of the Act.
The company may be wound up by Tribunal-
1. If the Company is Unable to Pay its Debts (sub – section 2 of Section 271):
A company may be wound up by the Tribunal if it is unable to pay its debts. In this stage company
has reached a stage where it is commercially insolvent, which means that the company is unable
to pay its debts or liabilities as they arise in the ordinary course of business.
A company shall be deemed to be unable to pay its debts, if the company has to pay the sum
within twenty – one days after the receipt of demand or to provide adequate security or re –
structure or compound the debt to the reasonable satisfaction of the creditor
2. Special Resolution of the Company:
Winding up under this is not common because normally the members of the company prefer to
wind up the company voluntarily for in such a case they shall have voice in its winding up. If the
company has resolved by special resolution that the company be wound up by the Tribunal.
3. Against the Sovereignty of India:
If the company has acted against the interests of the sovereignty and integrity of India, its security
of the State, friendly relations with foreign States, public order, decency or morality then the
Tribunal may order for the winding up of a company.
4. If a Company is Sick:
If the Tribunal has ordered the winding up of the company in case of a sick company.
5. If the Affairs of the Company is Fraudulent:
If, on application by the Registrar or the Government, the Tribunal is of the opinion that the affairs
of the company has been conducted in a fraudulent manner or the company was formed for
fraudulent and unlawful purpose or the persons concerned in the formation or management of
its affairs have been guilty of fraud, misfeasance or misconduct in connection therewith and that
it is proper that the company be wound up.
6. Default in Submitting the Financial Statements or Annual Returns with the Registrar:

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 If the company has made a default in filing with the Registrar its financial statements or annual
returns for immediately preceding five consecutive financial years.
7. Just and Equitable Grounds:
If the Tribunal is of the opinion that it is just and equitable to wind up the company then they can
do so. 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 Equity must be rest with the judicial
discretion of the Tribunal depending upon the facts and circumstances of each case.
The Tribunal may order winding up under the ‘Just and Equitable’ clause in the following
circumstances:
1. When the Substratum of the Company is Gone: The main purpose or basis 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.
2. When the Management is carried on in Such a Way that the Minority 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 the interest of minority shareholders.
3. Where there is Deadlock in the Management of the Company: When the shareholding
is more or less equal and there is a case of complete deadlock in the company on account
of lack of probity 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.
4. Where the Public Interest is likely to be Prejudiced: Where the concept of prejudice to
public interest is introduced, it would appear that the Tribunal winding up a company will
have to take 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.

PETITION FOR WINDING UP (SECTION 272):

A petition to the Tribunal for the binding up of a company shall be presented by –
a) The company;
b) Any creditor or creditors, including any contingent or prospective creditor or creditors;
c) Any contributory or contributories;
d) All or any of the person in above clauses together;
e) The Registrar;
f) Any person authorised by the Central Government in that behalf; or
g) In case the company has acted against the interests of the sovereignty and integrity of India, its
security of the State, friendly relations with foreign States, public order, decency or morality, by the
Central Government or State Government.
The Registrar shall not be entitling to present a petition for winding up on the grounds the
Registrar shall not present a petition on the ground that the company is unable to pay its debts unless it
appears to him either from the financial condition of the company as disclosed in its balance sheet or from
the report of an inspector appointed under section 210 that the company is unable to pay its debts. The
Registrar shall obtain the previous sanction of the Central Government to the presentation of a petition.
The Central Government shall not accord its sanction unless the company has been given a reasonable
opportunity of making representations.

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 A petition presented by the company for winding up before the Tribunal shall be admitted only if
accompanied by a statement of affairs in such form and in such manner as may be prescribed.
A copy of the petition made under this section shall also be filed with the Registrar and the
Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal within sixty
days of receipt of such petition.

POWERS OF TRIBUNAL (SECTION 273):

The Tribunal, on receipt of a petition for winding up, may pass any of the following orders, namely—
1. dismiss it, with or without costs;
2. make any interim order as it think fit;
3. appoint a provisional liquidator of the company till the making of a winding up order;
4. make an order for the winding up of the company with or without cost; or
5. any other order as it think fit.
The Tribunal shall make the order within ninety days from the date of presentation of the
petition. Before appointing a provisional liquidator, the Tribunal shall give notice to the company
and afford a reasonable opportunity to it to make its representations. However, for special
reasons to be recorded in writing, the Tribunal may dispense with such notice. The Tribunal shall
not refuse to make a winding up order on the ground only that the assets of the company have
been mortgaged for an amount equal to or in excess of those assets, or that the company has no
assets. Where a petition is presented on the ground that it is just and equitable that the company
should be wound up, the Tribunal may refuse to make an order of winding up, if it is of the opinion
that some other remedy is available to the petitioners and that they are acting unreasonably in
seeking to have the company wound up instead of pursuing the other remedy.

Q.No.7. Who is a Director of Company? Explain the legal position of a director and how the directors of
a company are appointed.
Introduction:
The success of the company depends upon its proper management and administration. A
company in the eyes of 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 or a company is not able to manage its own affairs.
It must act only through human agency, although the real owners of the company are its shareholders
and it is their duty to manage the affairs of the company but, due to the following reasons it is not possible
for them to do so,

1. The number of shareholders in a company is very large and therefore it is not possible for all the
shareholders to participate in the management of a company.
2. The shareholders are scattered over a very wide areas and cannot come together for making
policies of the company.
3. It is therefore decided that the management of the company must be given to some elected
representatives of the shareholders known as the ‘Directors’.

A company as soon as gets the certificate of incorporation it becomes legal person. It is not seen
to human eyes. It is invisible but it does business, performs several functions through human
instrument who are called as the directors.

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 Meaning and Definitions of Directors:
The relationship of director and company is very hard to define that is why the companies Act
does not define the term directors completely. But generally “Directors includes any person who
occupying the position of directors by whatever name called”. This meaning is not clear but it
means that the person who performs the duties of the director is called as the directors of a
company.
According to section 2 (34) of the Companies Act 2013, “director” means a director
appointed to the Board of a company.
According to section 2(10) “Board of Directors” or “Board”, in relation to a company,
means the collective body of the directors of the company.
According to Lush “A director is a director or controller of the company’s affairs but he is
not a servant of a company”.
A director may therefore be defined as a person having control over the directors,
management and affairs of the company. They occupy a very important position in the structure
of a company and also they are the brain and heart of the company.

 Legal position of the Directors:

1. Directors as an Agents:
An agent is a person who acts for another person. Company is an artificial person created
by law. It cannot act itself therefore it has to act through the human agencies. The directors are
the human agency through which a company acts. As directors works on behalf of company they
are considered as legal agents of the company. However they should not act beyond the MOA
and AOA of the company.
2. Directors as Trustees:
A trustee is a person who holds some property in trust for another and he is a person who
manages some properties of another. The Directors of company are also act as trustees by
managing properties of shareholders in a company. The shareholders invest the amount in the
company and must be used in proper manner. Therefore, all the monitory transactions are kept
in the management of the directors in trust. Almost all the powers of directors are powers in trust
viz, to issue capital, to make calls, to forfeit shares, expenses of the company and the payments
etc. therefore the directors are considered as the trustees of the company but they are not the
trustees of individual shareholders.

 Appointment of Directors:
The success of the company depends upon the selection and appointment of the Board
of Directors. The companies Act 2013 has taken utmost care in this regard. It lays down several
provisions regarding the appointment and removal of directors.
Every company shall have a Board of Directors consisting of individuals as directors and
shall have—(a) a minimum number of three directors in the case of a public company, two
directors in the case of a private company, and one director in the case of a One Person Company;
and (b) a maximum of fifteen directors: Provided that a company may appoint more than fifteen
directors after passing a special resolution: Provided further that such class or classes of
companies as may be prescribed, shall have at least one woman director. Every company shall
have at least one director who has stayed in India for a total period of not less than one hundred
and eighty-two days in the previous calendar year.

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The directors in a company can be appointed in the following manner:
1. First Directors [section 152(1)]
At the time of the formation of a company the promoters of the company generally select some
prominent persons to act as the first directors of a company and also mention their names in the
company’s AOA. Where no provision is made in the articles of a company for the appointment of
the first director, the subscribers to the memorandum who are individuals shall be deemed to be
the first directors of the company until the directors are duly appointed and in case of a One
Person Company an individual being member shall be deemed to be its first director until the
director or directors are duly appointed by the member in accordance with the provisions of this
section.

2. By Annual General Meeting [section 152(2,3, 4, 5 and 6)]

Every subsequent director shall be appointed by the company in annual general meeting.
A person appointed as a director shall not act as a director unless he gives his consent to hold the
office as director and such consent has been filed with the Registrar within thirty days of his
appointment in such manner as may be prescribed.
At every annual general meeting, not less than two-thirds of the total number of directors
of a company shall, be persons whose period of office is liable to determination by retirement of
directors by rotation; and be appointed by the company in general meeting. At the first annual
general meeting of a company held next after the date of the general meeting at which the first
directors are appointed in and at every subsequent annual general meeting, one-third of such of
the directors for the time being as are liable to retire by rotation.

3. By Board of Directors[section 152(7):

The Board of Directors are empowered to appoint the following types of directors:
a) Additional Directors:
The BOD’s may appoint the additional directors from time to time. The number of additional
directors must not exceed the maximum strength fixed for BOD’s. the additional directors shall
hold office only upto the date of next annual general meeting.
b) Casual Vacancy:
Where the office of any director appointed by the company in general meeting is vacated before
the expiry of his term because of death, resignation, disqualifications, like insolvency, insanity the
directors shall appoint and will hold the office till the end of the term of directors in whose place
he is appointed.
c) Alternate Directors:
The BOD’s may appoint an alternate director to act for the original director during his absence for
a period of more than 3 months from the state. The alternate directors can hold office either till
the expiry of the term of office of the original directors or till the date of return of the original
director to the state.

4. By Third Parties:
With a view to ensuring that the loans advanced by third parties are used by the company for the
purpose for which they are advanced. Under such circumstances the articles of a company
authorise the third parties i. e., the vendors, debenture holders, banking companies, finance
corporations and creditors which have advanced loans to the company can appoint their
nominees as the directors of the company. The idea behind this appointment is that the money
advanced to the company has been utilised for same purpose for which it was borrowed.

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 5. By Central Government:
The central government may appoint such number of persons as a director for the period not
exceeding 3 years. The appointment of directors is made to protect the affairs of the company
which are unfair or harmful to any members or to any public the Central Government may appoint
the directors of the company. The directors so appointed are required to keep the Central
Government inform the affairs of the company.

Q.No.8. Write short note on any two of the following

 a. National Company Law Tribunal Introduction:
The new Act proposes constitution of a NATIONAL COMPANY LAW TRIBUNAL (NCLT) to
replace the COMPANY LAW BOARD (CLB) and also assume the jurisdiction of High Court as the
sanctioning authority in relation to reconstruction of companies. The proposed Tribunal was
challenged in Thiru R. Gandhi, President, Madras Bar Association vs. Union of India, wherein the
Madras High Court held that certain aspects of the tribunal were against the basic structure of
the constitution and thus unconstitutional. However, the Supreme Court of India on 11th May,
2010 ruled that the provisions of Companies (Second Amendment) Act, 2002 pertaining to
transfer of several judicial and quasi- judicial powers to NCLT are constitutionally valid subject to
amendments being made to make the Tribunal’s members independent. With the Supreme
Court’s green light, the Companies Act, 2013 now provides for the constitution of NCLT & National
Company Law Appellate Tribunal (NCLAT).

 Constitution of National Company Law Tribunal (Section 408):

The Central Government shall, by notification, constitute, a Tribunal to be known as the
National Company Law Tribunal consisting of a President and such number of Judicial and
Technical members, as the Central Government may deem necessary, to be appointed by it by
notification, to exercise and discharge such powers and functions as may be conferred on it by or
under this Act or any other law for the time being in force.

 POWER TO SEEK ASSISTANCE (SECTION 429):

The Tribunal may in order to take into custody or under its control all property, books of
account or other documents request in writing the Chief Metropolitan Magistrate, Chief Judicial
Magistrate or District Collector within whose jurisdiction any such property, books of account or
other documents of a company are situate or found to take possession thereof. The magistrate
or collector shall –
(a) take possession of such property, books of account or other documents; and
(b) cause the same to be entrusted to the Tribunal or other person authorised by it.
The Magistrate or Collector may take steps and use force as may be necessary. No such
act shall be called in question on any court or before any authority on any ground whatsoever.

B. Essentials of Company Meeting

Meetings are must for every organisation or association to discuss matters and to take decisions
on important issues. Meetings are required to be held by a concerned authority periodically. The word
meeting is not defined anywhere in the Companies Act of 2013. Generally a meeting may be defined as
gathering, assembling or coming together of two or more persons for discussion and transaction of some
lawful business. For proper working of the company it is necessary to that the shareholders meets as often

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as possible and discuss the matters and take important decisions. There must be atleast 2 persons to
constitute a meeting.

Requisites or Essentials of a Valid Meeting:

Followings are the requisites or essentials for valid meeting,

1. Proper Authority:
The meeting must be conducted by a proper authority otherwise the meeting will not be valid
meeting. The proper authority to conduct a meeting of a company is BOD’s . in the absence of
BOD’s the proper authority to conduct the meeting would be the Company Secretary. If the
directors of a company do not call the meeting then the NCLT shall become proper authority to
call such meetings.

2. Proper Notice[sec-101]:
The second important essentials of a valid meeting is that a proper notice of the meeting should
be given to all those who are entitled to attend the company meeting. The notice must be given
atleast 21 days before the date of meeting. The notice must be in writing, it must specify the
place, date and time of the meeting. The object of the notice is to make aware the shareholders
with the agenda of the meeting so that they may decide the matters intelligently. Every member
of a company, every directors, every auditor, every shareholders, creditors, debenture holders or
authorities are entitled to get the notice. Notice may be send either personally or through post.

3. Quorum[sec-103]:
The next requirement of a valid meeting is the presence of a quorum in the meeting. Any business
transacted at a meeting without a quorum is invalid. The main purpose of the quorum is to avoid
taking decisions at a meeting by small majority of persons which may not be accepted by large
majority of members.
Quorum means minimum number of members who must be present in a meeting. it is
the AOA of a company which fixes the quorum for different meetings of the company according
to the size and the nature of the company business. But the companies Act fixed 2 members as
the minimum to attend the quorum in case of private companies and the 5 members in case of
public company
If the quorum is not present within half-an-hour from the time appointed for holding a
meeting of the company, the meeting shall stand adjourned to the same day in the next week at
the same time and place, or to such other date and such other time and place as the Board may
determine. If at the adjourned meeting also, a quorum is not present within half-an-hour from
the time appointed for holding meeting, the members present shall be the quorum.

4. Proxy[sec-105] :
A proxy is an authorised agent of the member of a company to attend the meeting. Any member
of a company entitled to attend and vote at a meeting of the company shall be entitled to appoint
another person as a proxy to attend and vote at the meeting on his behalf provided that a proxy
shall not have the right to speak at such meeting and shall not be entitled to vote except on a poll.
Proxy need not be a member of a company; a minor cannot be appointed as proxy. The letter of
appointing a proxy must be in writing in proper form and must be signed by the appointer.

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5. Chairman of the Meeting[sec-104]:
Every meeting must have a chairman to presided over and conduct meeting. The meeting is not
considered valid if it not presided by a chairman. The chairman is the person responsible for
smooth conduct of the meeting. He is the chief authority to control the meeting. The entire
responsibility for the smooth conducting of the meeting lies on his shoulders. Therefore, he must
be an efficient and experienced person. The chairman of the meeting will be appointed by the
BOD’s or the members presented at the meeting shall elect one of them as the chairman of the
meeting.

6. Agenda :
The term agenda literally means “things to be done” in relation to the meetings of a company. It
means that the programme of business to be transacted at the meeting. The preparation of
agenda is considered necessary for the conduct of any meetings systematically without any
confusion. The agenda is usually prepared by the company secretary. All the items included in the
agenda must be serially arranged while preparing the agenda following principles should be clear
and exact:
1. It should be clear and exact;
2. It should be in a summary form;
3. The routine items should be put first and other matters later;
4. All the items included in the agenda should be within the scope of the meeting.

7. Voting and polling:

Company meetings are held for discussing specific issues relating to the workings of the company
and for taking decisions on the same matter. The sense of meeting is decided by putting questions
before the meeting to vote. There are different methods of voting but the important methods of
voting that are adopted in a company meetings are:
1. Voting by show of hands: it is the most common method adopted in a company meeting for
ascertaining the sense of the meeting. Under this method the members present in the
meeting indicate their opinion by raising their hands in favour of the proposal in a meeting.
2. Voting by Poll: under this method the members present in a meeting shall express their view
by casting their votes, either in favour of or against the proposal. Voting by poll is nothing
but a secret voting. Under this method the decision taken on the basis of the majority of the
votes.
3. Voting through electronic means: The Central Government may prescribe the class or classes
of companies and manner in which a member may exercise his right to vote by the electronic
means [ E-Voting].

8. Resolutions:
Business is transacted at a general meeting by passing resolution. Therefore, the resolution means
it is the decision of a meeting on a particular proposal. The resolution is nothing but a final
decisions taken in the meeting. Every items included in the agenda is put before the meeting for
the purpose of taking decisions. When the proposal is approved by a majority of members, it
becomes a resolution. Every resolution must be recorded in the minute’s book word by word.

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  Types of Resolutions:
1. Ordinary Resolution:
An Ordinary Resolution is that which is passed by a simple majority at any general
meeting of the shareholders. The resolutions may be passed by a show of hands or by poll or
electronically.

2. Special Resolutions:
A special resolution is one which is passed by atleast 3/4th majority of the members
voting at the general meeting in which such a resolution is passed. The votes cast in favour
of the resolution, whether on a show of hands, or electronically or on a poll, as the case may
be.

9. Minutes: Literally minutes refers to a note of preserve the memory of anything. So the minutes
of the meeting are the written records of business transaction and decision arrived at a meeting.
At the close of meeting and as soon as possible the secretary should draft the minutes of the
meeting. Great care has to be taken at the time of preparing the minutes. The companies Act
makes it obligatory on the part of every company to maintain minutes in every general meeting,
meeting of the boards and its committee when the minutes is prepared, it must be signed by the
chairman of the meeting.

C. DIVIDENDS
The word “dividend” has origin from the Latin word “dividendum’. It means a thing to be divided.
Every investor is aware that dividend is nothing but profits earned by the company and dividend amongst
the shareholders in proportion to the amount paid up shares held by them. Simply stated it is a return on
investment made by the shareholders. Dividend is paid by a company to its shareholders on a particular
date either out of profits or out of reserves. Declaration of dividend is usually one of the items of the
agenda of every AGM when directors recommend dividend

 Meaning and Definition of Dividend:

One of the main objects of companies is to earn profits which are distributed among
shareholders by way of ‘dividend’. In general sense ‘dividend’ is the share of the Company profits
distributed among the members.
According to section 2(35) “dividend” includes any interim dividend.
In Commissioner of Income-Tax v/s Girdhadas & Co. (pvt) Ltd., 1967, it was observed that
the term ‘dividend’ has two meanings:
(1) “As applied to a company which is a going concern, it ordinarily means the portion of the
profits of the company which is allocated to the holders of shares in the company.
(2) In case of a winding up of a company it means a division of the realised assets among the
creditors and contributories according to their respective rights”.

 RULES REGARDING DIVIDEND

1. Declaration of Dividend (SECTION 123):
A company shall declare dividend and pay it, only out of profit of the company for the
financial year or out of undistributed profit of any previous financial year or out of both. In case,
any guarantee give by any Government (Central or State), the company may dividend out of
money provided by that government for payment of dividend. Before declaration of dividend, a
company may transfer a portion from the profit to the reserves of the company. The company is

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free to decide the percentage for such transfer to the reserve. Where a company has no adequate
profit or any profit in a financial year or any accumulated profit to distribute as dividend, it may
declare dividend out of reserves in accordance with the rules made by the government. The
company may pay dividend only from free reserves, not from any other reserves.

2. Interim Dividend:
The Board of Directors may declare interim dividend during financial year out of surplus
in profit and loss account. In case, a company is incurring loss as per financials of latest quarter,
interim dividend shall not be higher than average dividend declared by the company during last
three financial years.

3. Dividend Account in Bank:

The amount of dividend and interim dividend shall be deposited in a separate account in
a scheduled Bank within five days from the date of declaration of such dividend. The dividend
shall be paid to shareholder or to his banker in cash not otherwise. However, issue of bonus shares
out of distributable profit or free reserve is permitted and not be deemed to be a violation of this
rule. Making a partly paid share, fully paid through payment from distributable profit and free
reserve is permitted. Any dividend payable in cash may be paid by cheque or warrant or in any
electronic mode to the shareholder.

4. Right of members pending Registration of (SECTION 126):

Where any instrument of transfer of shares has been delivered to any company for
registration and the transfer of such shares has not been registered by the company, it shall, —
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account unless the
company is authorised by the registered holder of such shares in writing to pay such dividend to
the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights shares and any issue of fully
paid-up bonus shares.

5. Punishment for failure to distribute Dividend (SECTION 127):

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, 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 with fine which shall not be less than one thousand rupees for every day during which such
default continues and the company shall be liable to pay simple interest at the rate of eighteen
percent per annum during the period for which such default continues.

6. Unpaid Dividend Account (Section 124):

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 entitled to 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.

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Q.No.9. Solve any two of the following problems
(a) Kumar was bearer debenture older of EMPHASIS Company. He transferred the same to Ramesh.
The Company refused to pay the amount with interest to him. Whether Ramesh can claim it.
‘Yes’ Ramesh can claim the amount with interest from the Company.
Because, the debentures is usually in the form of a certificate issued under the seal of the company. It
is an acknowledgement of indebtedness. It is usually provide for the payment of a specified sum at a
specified date. The holder of the debenture is a creditor of the company and is not a member of the
company.
Considered from the point of view of transferability of ownership, debentures may either be
registered or they may be bearer debentures. Registered debentures are payable to a registered holder
and are transferable in the same manner as shares.
The bearer debentures, also known as ‘unregistered debentures’ are payable to its bearer.
Bearer Debentures are transferable by mere delivery without any notice to the company. The bearer
debentures are transferable like a negotiable instrument by mere delivery. The person to whom a
bearer debenture is transferred becomes a “holder in due course” unless the contrary is shown, he is
entitled to recover the principal sum and the interest accrued thereon.
Company keeps no record for such debenture holders. Debenture Coupons are attached with
the Debenture Certificate and interest can be claimed by the Coupon holder. The holder of this
debenture names will not appear in the Register of Debenture Holders and also in the Debenture
Certificate. These are regarded as negotiable instruments and are transferable by delivery, and a
bonafide transferee for value is not affected by the defect in the title of the prior holder.
In Bechuanaland Exploration Co. v/s London Trading bank Ltd.,(1898): ‘B’ company held
debentures of an English Company, payable to bearer. It kept them in a safe of which the secretary
had the key. The secretary pledged the debentures with a bank as securities for a loan taken by him.
The bank took the debentures bonafide. The Court held that the bank was entitled to the debentures
as against the company.
In the present case also Mr. Ramesh being a bearer of debenture of EMPHASIS Company it is the
responsibility of the company to pay Mr. Ramesh the principal sum and the interest. From the above
provisions it is very much clear that the bearer of the debenture is entitled to claim his principal sum
and the interest as it is provided under Section 71 of the Companies Act, 2013.

From the above it is clear that the bearer debenture is entitled to claim the principal sum and the along
with the interest.

(b) The preferential shareholders were entitled to a preference divided at the rate of 10percent per
annum and it was specified in the AOA of the company. The company earned huge profit in the financial
year. Preferential shareholders are claimed 15 percent dividend in the company. The company was
refused to pay the 15 percent of dividend. Is the preferential shareholders are entitled for 15 percent
of dividend.

No the preferential shareholders are not entitled to claim 15% of the dividend from the surplus
profit of the company. Because, according to Section 43(2) of the Companies Act, 2013, “Preference
Shares” are shares which have preferential rights with respect to –

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 1.Payment of dividend, either as a fixed or an amount calculated at a fixed rate. Which may be either
be free or subject to income tax; and
2.Repayment of amount of share capital or share capital deemed to be paid up, whether or not, there
is preferential right specified in the memorandum or articles of the company.
But the Preference Shareholders may or may not carry such other rights.
 preferential right to any arrears of dividend
 A right to share in surplus profit by way of additional dividend.
 Right to be paid a fixed premium.
 Right to share in surplus assets in the event of winding up of after all kinds of capital have been
repaid.
 The preferential shareholders do not have normal voting rights in the company.

In Re National Telephone Company Case, it was observed that the holder of a preference share may,
in addition to preferential rights as to dividend while the company is going on concern and share in
assets of the company in the event of its winding up, be entitled to a further dividend along with the
equity capital or arrears of dividend in the winding up or to participate in the surplus assets of the
company after the entire capital has been repaid in winding up. But this is subject to terms of issue
of the preferential shares contained in the MOA and AOA of the Company.

The preferential shareholders right to share in the dividend is already be fixed by the company’s AOA.
Therefore the company should distribute the dividend based upon the provisions contained in the
Companies AOA. Every preference shareholders are entitled to fixed rate of dividend in a company.
In case in any financial year if the company earns huge profit, the preference shareholders may have
the right to participate in the surplus profit of the company. But the preference shareholders cannot
claim it as a matter of their right. It is left to the discretionary power of the companies to decide
whether rate of dividend should be exceed and preference shareholders are entitled to share in the
surplus profit of the company or not. But in no case the preferential shareholder do not have the
right to claim share in the surplus profit of the company, they are entitled to claim the fixed rate of
dividend which is already fixed by the AOA of a company.

Thus in the present problem also the rate of dividend to be paid to the preference shareholders are
already fixed in the Companies AOA as a 10% per annum. But in the financial year company earned
huge profit. The preference shareholders are demanding from the company to pay the dividend at
the rate of 15%. The claim of the preference shareholders is not justifiable. As mentioned above they
are entitled to only fixed rate of dividend and in case of the surplus profit the preference shareholders
may or may not get share in the surplus profit of the company.

Therefore, from the above it is clear that the preference shareholders cannot claim the 15% of
dividend from the company as their right. It is left to the company to decide whether they can
participate in the surplus profit or not.

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(c) ‘X’ a minor was registered as a shareholder. After attaining majority he received dividend from the
company subsequently the company went into liquidation. ‘X’ denies liability as a shareholder. Decide
No ‘X’ cannot deny his liability at the time of winding up of a company.
Because, generally speaking, all persons who are competent to enter into a contract may become a
member of a company but a person of unsound mind and a minor, being incompetent to contract, cannot
be member of a company. A minor’s contract is absolutely void under the Indian Law of Contract but it
being voidable under English Law, it becomes valid on attainment of majority by the minor. In India also
a contract on behalf of a minor and for the minor’s benefit may be entered into by his natural or legal
guardian. Therefore, a transfer of fully paid shares in favour of a minor on the basis of a transfer deed
signed by his natural or legal guardian is perfectly valid, unless the Articles of the company expressly forbid
registration of such transfer. Likewise, an allotment of shares to a minor is valid if the shares are fully paid
but he shall incur no liability, whatsoever, during his minority.
In Palaniappa v/s Official Liquidator, it was held that a minor share holder has the option to
continue or not to continue as a member on attainment of majority. However, this option must be
exercised within a reasonable time on attainment of majority.
In Fazulbhoy Jaffar v/s Credit Bank of India Ltd., an infant was registered as a shareholder. After
attaining majority he continued to accept dividends from the company. The court held that under these
circumstances he is deemed to have opted for being permitted to continue as a shareholder of the
company. He is, therefore, estopped from denying that he is a shareholder when the company was being
wound up.
Further companies Act, 2013 makes it abundantly clear that the guardian of the minor can enter
into a written contract with the company on behalf of the minor and the minor may become member of
the company on the basis of such contract. Where the shares held on behalf of the minor are fully paid,
there will be no liability of any kind on the part of minor member in the event of winding up of the
company.
From the above it is clear that a minor can become a shareholder of a company through his natural
or legal guardian. After attaining the age of majority it is left to the minor to decide whether to continue
as a member or not to continue. Once he agreed to continue as a member of a company, he is entitled to
all the privileges of the company and he is entitled to have right to share in the dividend of the company.
As he is agreed to continue as a shareholder he is held liable to the company at the time of its winding up
if his shares are not fully paid. If the shares are already fully paid up then the minor is not liable to
company.
In the present problem it is very clear that ‘X’ minor who registered as a shareholder of a company.
After attaining his age of majority he received dividend from the company but subsequently the company
went into liquidation. Here in this stage ‘X’ is denying the liability of the company. As we discussed above
if it is fully paid up shares ‘X’ can easily deny the liability of the company at the time of its liquidation even
though he has received the dividends, but in case if the shares are not fully paid up, but he has received
the dividends then he cannot deny his liability as he is agreed to continue as a shareholder even after
attaining the age of majority, therefore his liability continues till his shares are fully paid up.

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