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FINAL COURSE STUDY MATERIAL

PAPER 4

Corporate And Allied Laws

BOARD OF STUDIES
THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA
PREFACE

The liberalisation and globalisation of our economic policies in tune with the global changes
brought several reforms in the Corporate and Allied Laws of our country. A scheme of well-
structured Corporate and Allied Laws is sine qua non for the corporate growth. These laws
have to be amended and fine tuned from time to time in accordance with the changes that are
taking place within the country as well as outside.
Indian Corporate and Allied Laws were once best known for their control that inhibited the
growth of corporate sector. If an economy is to sustain and grow rapidly, there is absolute
need for a change in the outlook of law. A number of external factors especially the WTO
compulsions and relevant developments compelled the Government from time to time, to have
a closer look at the existing laws and introduce appropriate amendments to the various
corporate laws.
The Government took several initiatives and series of action plan by brining more
amendments in Corporate and Allied Laws in the last 2-3 years and new legislations were
brought into force taking into account the global crisis in corporate governance.
The preparation and updating of study material is a continuous process and in the process
inputs from various sources, literature, have gone into the thought process for benefiting the
students in enrichment of their knowledge. Our special thanks to Shri Deepak Kumar Khaitan
FCS, Kolkata, in preparation of the study material relating to The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the
Prevention of Money Laundering Act, 2002, Shri Bishnupada Sarkhel relating to The Banking
Regulation Act, 1949, and Shri Amit Kumar Das relating to The Insurance Act, 1949, and The
Insurance Regulatory and Development Authority Act, 1999.
We hope that students will find this study material very user friendly and in case of any queries
that they may have while reading the material, the same may be addressed to the Board of
Studies. While writing your queries, it is advisable to ensure that where a single mail contains
queries relating to different subjects, the queries are given clearly under different subject
headings. Also, it is advisable not to include any queries other than subject queries and this
shall enable us to respond you quickly.
You may also note that the Board of Studies has constituted a consultative group of faculty to
provide on-line help to students pursuing Chartered Accountancy Course. This group will react
to the queries and respond within a reasonable time limit. Students with their queries in any
subject may contact the group at guidance @icai.org with their subject-related problems and
suggestions. Students who do not have the facility to get guidance for solving their academic
problems arising in the course of their preparation may feel free to take advantage of this
scheme. Students can also address their queries (subject and other queries separately) to the
Board of Studies by post. [Director of Studies, ICAI, C-1, Sector-1, Noida-201301 (U.P.)].
SYLLABUS

PAPER – 4: CORPORATE AND ALLIED LAWS

(One paper - Three hours - 100 marks)

SECTION A : COMPANY LAW (70 MARKS)

Level of Knowledge: Advanced knowledge


Objective:
To be able to analyze and apply various provisions of the Companies Act in
practical situations
Contents:
1. The Companies Act, 1956, Rules and Regulations thereunder in its entirety with specific
reference to
(a) Accounts and audit
(b) Dividend
(c) Directors - powers, managerial remuneration
(d) Meetings, powers of the Board and related party transactions
(e) Inspection and Investigation
(f) Compromises, Arrangements and Reconstructions
(g) Prevention of Oppression and Mismanagement
(h) Revival and Rehabilitation of Sick Industrial Companies
(i) Corporate Winding up and Dissolution
(j) Producer Companies
(k) Companies incorporated outside India
(l) Offences and Penalties
(m) E-governance
2. Corporate Secretarial Practice – Drafting of Resolution, Minutes, Notices and Reports
SECTION B : ALLIED LAWS (30 MARKS)
Objective:
To develop ability to analyse the requirements of laws stated in the Section.
Contents:
3. An overview of the following laws –
(a) The Securities and Exchange Board of India Act, 1992, Rules, Regulations and
Guidelines issued thereunder.
(b) Securities Contracts (Regulation) Act, 1956
(c) The Foreign Exchange Management Act, 1999
(d) The Competition Act, 2002
(e) The Banking Regulation Act, 1949, The Insurance Act, 1938. The Insurance
Regulatory and Development Authority Act, 1999. The Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002
(f) The Prevention of Money Laundering Act, 2002
4. Interpretation of Statutes, Deeds and Documents.
CONTENTS
PAGE NO.
SECTION A: COMPANY LAW
CHAPTER 1: ACCOUNTS AND AUDIT ............................................................ 1.1 – 1.18
1.0 Maintenance of Books of Accounts ................................................................. 1.1
1.1 Nature of Books of Account............................................................................ 1.1
1.2 Persons who can Inspect ............................................................................... 1.2
1.3 Place of Maintenance of Books of Account ..................................................... 1.2
1.4 Period of Maintenance ................................................................................... 1.2
1.5 Persons Responsible for Maintenance & Penalty............................................. 1.2
1.6 Laying of Annual Accounts and Balance Sheet................................................ 1.3
1.7 Form and Contents of Balance Sheet and Profit and Loss Account. ................. 1.3
1.8 Deviation from Accounting Standards ............................................................. 1.4
1.9 Authentication of Annual Accounts ................................................................. 1.5
1.10 Board's Report .............................................................................................. 1.5
1.11 Directors' Responsibility Statement (Section 217 (2AA) ................................... 1.6
1.12 Disclosures in Board's Report ........................................................................ 1.6
1.13 Right of Members to Copies of Balance Sheet and Auditors' Report ................. 1.7
1.14 Filing with the Registrar ................................................................................. 1.8
1.15 Holding & Subsidiaries Accounts .................................................................... 1.8
1.16 Qualifications of an Auditor (Section 226) ..................................................... 1.10
1.17 Disqualifications of Auditors ......................................................................... 1.10
1.18 First Auditors............................................................................................... 1.10
1.19 Subsequent Auditors [Section 224 (1)].......................................................... 1.11
1.20 Auditors' Appointment by Special Resolution [Section 224A (1)] .................... 1.11
1.21 Re-Appointment of Retiring Auditor .............................................................. 1.11
1.22 Ceiling on Number of Audits......................................................................... 1.12
1.23 Filling up Casual Vacancy ............................................................................ 1.13
1.24 Remuneration of Auditors ............................................................................ 1.13
1.25 Removal of Auditors .................................................................................... 1.13
1.26 Powers of Auditors ...................................................................................... 1.14
1.27 Duties of Auditors ........................................................................................ 1.14
1.28 Audit of Accounts of Branch Office of Company ............................................ 1.16
1.29 Signature of Audit Report, etc. (Section 229) ................................................ 1.17
1.30 Special Audit (Section 233A)........................................................................ 1.17
1.31 Audit of Cost Accounts (Section 233B) ......................................................... 1.17
CHAPTER 2: DIVIDEND .................................................................................... 2.1 – 2.6
2.0 Manner and Time of Payment......................................................................... 2.1
2.1 Compulsory Transfer to Reserves: ................................................................. 2.2
2.2 Transfer of Higher Percentage of Profits to Reserves ...................................... 2.2
2.3 Declaration of Dividend out of Past Reserves ................................................. 2.3
2.4 Declaration of Interim Dividend ...................................................................... 2.3
2.5 Time Limit ..................................................................................................... 2.4
2.6 Unpaid or Unclaimed Dividend (Section 205A) ................................................ 2.4
2.7 Payment of Unpaid or Unclaimed Dividend (Section 205B) .............................. 2.4
2.8 When Dividend to be kept in Abeyance? (Section 206A).................................. 2.4
2.9 Investor Education & Protection Fund (Section 205C) ..................................... 2.5
2.10 Payment of Interest out of Capital (Section 208) ............................................. 2.5
CHAPTER 3: DIRECTORS, POWERS, MANAGERIAL REMUNERATION........... 3.1 – 3.66
3.0 Introduction ................................................................................................... 3.1
3.1 Legal Position of Directors ............................................................................. 3.1
3.2 Appointment of Directors ............................................................................... 3.2
3.3 Share Qualification for Directors................................................................... 3.19
3.4 Removal of Directors (Section 284) .............................................................. 3.21
3.5 Removal of Managerial Personal ................................................................. 3.22
3.6 Directors to act as a Board........................................................................... 3.25
3.7 Powers of Directors and Restrictions thereon................................................ 3.26
3.8 Duties of Directors ...................................................................................... 3.33
3.9 Directors not to hold Office or Place of Profit ................................................ 3.35
3.10 Liabilities of Directors .................................................................................. 3.38
3.11 Loans to Directors (Section 295) .................................................................. 3.41
3.12 Directorial Registers ................................................................................... 3.43
3.13 Political Contributions .................................................................................. 3.46
3.14 Managerial Remuneration ........................................................................... 3.47
3.15 Managing Director ....................................................................................... 3.53
3.16 Inter Corporate Loans and Investments (Section 372A) ................................. 3.55
3.17 Self-Examination Questions ......................................................................... 3.59
3.18 Answers to the Self-Examination Questions .................................................. 3.64
CHAPTER 4: MEETINGS, POWERS OF THE BOARD AND RELATED PARTY
TRANSACTIONS ............................................................................................. 4.1 – 4.22
4.0 Introduction ................................................................................................... 4.1
4.1 Meetings of Directors..................................................................................... 4.2
4.2 Protection Against Abuse of Fiduciary Capacity of Directors .......................... 4.12
4.3 Disclosure of Interest In Contracts................................................................ 4.13
4.4 Sole Selling Agents ..................................................................................... 4.19
CHAPTER 5: INSPECTION AND INVESTIGATION ............................................. 5.1 – 5.4
5.0 Inspection ..................................................................................................... 5.1
5.1 Investigation.................................................................................................. 5.1
5.2 Power Of Inspectors ...................................................................................... 5.2
5.3 Investigation Of Ownership Of Company (Section 247).................................... 5.3
5.4 Voluntary Winding up of Company, etc., not to stop Investigation
Proceedings (Section 250A) ........................................................................... 5.4
CHAPTER 6: COMPROMISE, ARRANGEMENTS AND RECONSTRUCTIONS ... 6.1 – 6.18
6.0 Compromise and Arrangement ....................................................................... 6.1
6.1 Reconstruction .............................................................................................. 6.1
6.2 Amalgamation of two Companies-Steps to be Taken by Both ......................... 6.13
6.3 Self-Examination Questions ......................................................................... 6.15
6.4 Answers to the Self-Examination Questions ................................................. 6.18
CHAPTER 7: PREVENTION OF OPPRESSION AND MISMANAGEMENT ......... 7.1 – 7.14
7.0 "Majority Rule" as Applied in the Management of A Company .......................... 7.1
7.1 Protection at Common Law ............................................................................ 7.1
7.2 Protection Under The Companies Act, 1956 .................................................... 7.1
7.3 Oppression and Mismanagement.................................................................... 7.2
7.4 Who May Apply To The Company Law Board When Oppression or
Mis-Management Is Complained of ? .............................................................. 7.3
7.5 Difference between Sections 397 and 398 ...................................................... 7.3
7.6 Powers of The Company Law Board on Application Under
Sections 397 or 398....................................................................................... 7.5
7.7 Powers of the Central Government: ................................................................ 7.6
7.8 General Observations on Remedy for Oppression Under
Sections 397 and 398 .................................................................................... 7.7
7.9 Distinction between various Remedies for Oppressions: .................................. 7.8
7.10 Powers Of Central Government To Remove Managerial Personnel on
the Recommendation of CLB ......................................................................... 7.9
7.11 Concept of Public Interest and its Impingement on Company Law .................. 7.10
7.12 Self-Examination Questions ......................................................................... 7.13
7.13 Answers to Self-Examination Questions........................................................ 7.14
CHAPTER 8: REVIVAL AND REHABILITATION OF SICK INDUSTRIAL
COMPANIES .................................................................................................... 8.1– 8.14
8.0 Definitions..................................................................................................... 8.1
8.1 Procedure For Revival And Rehabilitation ....................................................... 8.2
8.2 Inquiry Into Working Of Sick Industrial Companies (Section 424B) ................... 8.3
8.3 Powers Of Tribunal To Make Suitable Order On Completion Of Inquiry
(Section 424C) .............................................................................................. 8.5
8.4 Preparation And Sanction Of Schemes (Section 424D).................................... 8.5
8.5 Rehabilitation By Giving Financial Assistance (Section 424E) ........................ 8.10
8.6 Arrangement for Continuing Operations, Etc., During Inquiry (Section 424F) .. 8.11
8.7 Winding up of Sick Industrial Company (Section 424G) ................................. 8.11
8.8 Operating Agency to Prepare Complete Inventory, etc. (Section 424H) .......... 8.12
8.9 Direction not to Dispose of Assets (section 424I) .......................................... 8.12
8.10 Power of Tribunal to Call for Periodic Information (Section 424J) ................... 8.12
8.11 Misfeasance Proceedings Section (424K) ..................................................... 8.13
8.12 Penalty for certain offences (section 424L) ................................................... 8.13
CHAPTER 9: CORPORATE WINDING UP AND DISSOLUTION......................... 9.1 – 9.56
9.0 Introduction ................................................................................................... 9.1
9.1 Dissolution of Company ................................................................................. 9.2
9.2 Winding-up by Tribunal ................................................................................ 9.13
9.3 Voluntary Winding up................................................................................... 9.24
9.4 General Provisions on Winding-up................................................................ 9.37
CHAPTER 10: PRODUCER COMPANIES .................................................... 10.1 – 10.34
10.0 Introduction ................................................................................................. 10.1
10.1 Definitions................................................................................................... 10.6
10.2 Objects and Formation of a Producer Company ............................................ 10.8
10.3 Memorandum Of Producer Company (Section 581F) ....................................10.11
10.4 Articles of Association (Section 581G) .........................................................10.11
10.5 Inter-State Co-Operative Societies ..............................................................10.14
10.6 Management ..............................................................................................10.17
10.7 General Meetings .......................................................................................10.22
10.8 Share Capital and Member Rights ...............................................................10.25
10.9 Finance, Accounts and Audit .......................................................................10.25
10.10 Penalties....................................................................................................10.28
10.11 Amalgamation, Merger or Division ...............................................................10.28
10.12 Resolution of Disputes ................................................................................10.31
CHAPTER 11: COMPANIES INCORPORATE OUTSIDE INDIA ....................... 11.1 – 11.8
11.0 Foreign Companies ..................................................................................... 11.1
11.1 Application of Sections 592 to 602 to Foreign Companies (Section 591)......... 11.1
11.2 Documents, etc., to be Delivered to the Registrar By Foreign Companies....... 11.1
11.3 Return to be Delivered to Registrar where Documents are Altered ................. 11.3
11.4 Accounts of Foreign Company...................................................................... 11.3
11.5 Obligation to State Name of Foreign Company .............................................. 11.4
11.6 Service on Foreign Company ....................................................................... 11.4
11.7 Penalties..................................................................................................... 11.5
11.8 Effect of Company's Failure to Comply with the Provisions of Part XI
of The Companies Act Relating to Companies Incorporated Outside India ...... 11.5
11.9 Registration of Charges, Appointment of Receiver and Books of
Account (Section 600) ................................................................................. 11.5
11.10 Fees For Registration of Documents............................................................. 11.6
11.11 Registration of Prospectus ........................................................................... 11.7
11.12 Requirements as Regards Prospectus .......................................................... 11.7
CHAPTER 12: OFFENCES AND PENALTIES ............................................... 12.1 – 12.18
12.0 Types of Penalties ....................................................................................... 12.1
12.1 Offences – Continuing or Not ....................................................................... 12.1
12.2 Non-Cognizable Offences ............................................................................ 12.2
12.3 Offences Compoundable – Section Wise List ................................................ 12.2
CHAPTER 13: E-GOVERNANCE.................................................................. 13.1 – 13.18
13.0 MCA 21 Project ........................................................................................... 13.1
13.1 Set up of MCA ............................................................................................. 13.1
13.2 MCA 21 Program ......................................................................................... 13.2
13.3 Program Scope ........................................................................................... 13.2
13.4 Front Office ................................................................................................. 13.2
13.5 Back Office ................................................................................................. 13.3
13.6 Key Benefits................................................................................................ 13.3
13.7 Some FAQs on E-filing ................................................................................ 13.4
13.8 Details of New Forms and Fees.................................................................... 13.7
CHAPTER 14: OTHER RELEVANT MISCELLANEOUS PROVISIONS OF THE
COMPANIES ACT, 1956 .............................................................................. 14.1 – 14.22
14.0 Application of The Companies Act, 1956 to Companies Formed or
Registered Under Previous Companies Act................................................... 14.1
14.1 Companies Authorised to Register under The Act ......................................... 14.1
14.2 Guarantee Company .................................................................................... 14.7
14.3 Government Companies............................................................................... 14.9
14.4 Provisions for Removal of Administrative Difficulties ....................................14.12
14.5 Powers of the Central Government ..............................................................14.15
14.6 General Provisions .....................................................................................14.17
CHAPTER 15: CORPORATE SECRETARIAL PRACTICE - DRAFTING OF RESOLUTION,
MINUTES, NOTICES AND REPORTS............................................................ 15.1– 15.34
15.0 Definition .................................................................................................... 15.1
15.1 Certain Companies to have Secretaries ........................................................ 15.1
15.2 Qualifications of Secretary ........................................................................... 15.2
15.3 Position of Secretary ................................................................................... 15.3
15.4 Appointment of Secretary............................................................................. 15.5
15.5 Duties of a Company Secretary .................................................................... 15.6
15.6 Company Correspondence & Reports ..........................................................15.11
15.7 Record Maintenance and Filing of Documents..............................................15.15
SECTION B: ALLIED LAWS
CHAPTER 16: THE SECURITIES AND EXCHANGE BOARD OF INDIA
(SEBI) ACT, 1992........................................................................................... 16.1.16.62
Unit I
16.0 Introduction ................................................................................................. 16.1
16.1 Purpose of the Act ....................................................................................... 16.1
16.2 History of the Legislation ............................................................................. 16.2
16.3 Short Title, Extent and Commencement ........................................................ 16.3
16.4 Definitions................................................................................................... 16.3
16.5 Establishment of SEBI Board ....................................................................... 16.4
16.6 Powers & Functions of SEBI [Section 11]...................................................... 16.6
16.7 Penalties....................................................................................................16.17
16.8 Guidelines, Regulations And Rules Under The SEBI Act...............................16.21
Unit II
SEBI (Disclosure and Investor Protection) 2000 .......................................................16.23
CHAPTER 17: SECURITIES CONTRACTS (REGULATION) ACT, 1956 ............ 17.1-17.28
17.0 Introduction ................................................................................................. 17.1
17.1 About Corporatisation & Demutualisation of Stock Exchanges ....................... 17.2
17.2 Highlights of New Legislation on Securities Laws. ......................................... 17.3
17.3 Definitions (Section 2) ................................................................................. 17.4
17.4 Recognition of Stock Exchanges .................................................................. 17.6
17.5 Granting of Recognition (Section 4) .............................................................. 17.7
17.6 Power of Central Government to Make Rules (Section 8)..............................17.11
17.7 Power to Stock Exchange to Make Bye-Laws (Section 9)..............................17.11
17.8 Power of SEBI (Section 10).........................................................................17.14
17.9 Penalties (Section 23).................................................................................17.18
17.10 Offences By Companies (Section 24) ..........................................................17.22
17.11 Title to Dividends (Section 27) ....................................................................17.23
17.12. Right to Receive Income from Collective Investment Scheme (Section 27A) ..17.24
17.13 Act Not to Apply in Certain Cases (Section 28) ............................................17.26
17.14 Power to Make Rules (Section 30)...............................................................17.26
17.15 Power of SEBI to Make Regulations (Section 31) .........................................17.28
CHAPTER 18: FOREIGN EXCHANGE MANAGEMENT ACT, 1999 ................ 18.1 – 18.44
18.0 Introduction ................................................................................................. 18.1
18.1 Broad Structure of FEMA ............................................................................. 18.1
18.2 FEMA, 1999 And FERA, 1973 a Comparison ................................................ 18.2
18.3 Preamble, Extent, Application And Commencement of FEMA, 1999 .............. 18.4
18.4 Definition (Section 2) ................................................................................... 18.5
18.5 Analysis Of Important Definitions.................................................................. 18.8
18.6 Regulations And Management Of Foreign Exchange ....................................18.12
18.7 Authorised Person (Section 10) ...................................................................18.23
18.8 Contraventions and Penalties In Brief ..........................................................18.25
18.9 Adjudication and Appeal .............................................................................18.30
18.10 Directorate of Enforcement .........................................................................18.38
18.11 Miscellaneous ............................................................................................18.39
CHAPTER 19: THE COMPETITION ACT 2002 .............................................. 19.1 – 19.50
19.0 Introduction ................................................................................................. 19.1
19.1 Why MRTP Act Needed A Fresh Look?......................................................... 19.2
19.2 What is Competition?................................................................................... 19.2
19.3 Competition Policy And Law ......................................................................... 19.2
19.4 Competition Laws In UK And US .................................................................. 19.3
19.5 Competition Act, 2002 ................................................................................. 19.4
19.6 MRTP Act, 1969 & Competition Act, 2002 ..................................................... 19.4
19.7 Main Ingredients Of Competition Law ........................................................... 19.5
19.8 Definitions................................................................................................... 19.5
CHAPTER 20: OVERVIEW OF BANKING REGULATION ACT, 1949, THE INSURANCE
ACT, 1938, THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT,
1999, THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY INTEREST ACT, 2002 ................................. 20.1– 20.48
THE BANKING REGULATION ACT, 1949 ................................................................ 20.1
20.0 Introduction ................................................................................................ 20.1
20.1 Different Provisions Of Banking Regulation Act 1949 .................................... 20.2
20.2 Applicability Of The Banking Regulation Act, 1949 ........................................ 20.4
20.3 Business of Banking Companies .................................................................. 20.4
20.4 Reserve Fund (Section 17) ............................................................................ 20.6
20.5 RBI’s power to control loans & advances granted by banking company ............... 20.6
20.6 Accounts and balance sheet (section 29) ........................................................ 20.7
20.7 Audit .......................................................................................................... 20.7
20.8 Some Important Recent Changes:- ..............................................................20.12
20.9 Conclusion .................................................................................................20.12
THE INSURANCE ACT, 1938..................................................................................20.14
20.10 Introduction: ...............................................................................................20.14
20.11 Important Definitions:..................................................................................20.14
20.12 Provisions Related To Insurance: ................................................................20.15
20.13 Insurance Association Of India, Council Of Association And Committee ........20.19
20.14 Tariff Advisory Committee And Control Of Tariff Rates: ................................20.19
20.15 Solvency Margin, Advance Payment Of Premium And Restrictions
on the Opening Of A New Place Of Business ...............................................20.20
20.16 Provident Society: ......................................................................................20.20
20.17 Insurance Cooperative Societies: ................................................................20.21
20.18 Mutual Insurance Companies And Cooperative Life Insurance Societies: ......20.21
20.19 Re-Insurance:.............................................................................................20.22
20.20 Miscellaneous Matters: ...............................................................................20.22
20.21 Conclusion: ................................................................................................20.23
THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY ACT, 1999
20.22 Introduction ................................................................................................20.25
20.23 Important Definitions...................................................................................20.25
20.24 Insurance Regulatory And Development Authority: (Sections 3-12) ...............20.26
20.25 Transfer Of Assets, Liabilities, Etc. Of Indian Insurance Regulatory
Authority (IIRA) To Insurance Regulatory Development Authority (IRDA)
(Section 13) ...............................................................................................20.27
20.26 Duties, Powers And Functions Of Authority: Sec – 14...................................20.27
20.27 Finance, Accounts And Audit: Sections 15 – 17 ...........................................20.27
20.28 Other Matters: Sections 18 – 32 ..................................................................20.28
THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND
ENFORCEMENT OF SECURITY INTEREST ACT, 2002
20.29 Introduction ................................................................................................20.30
20.30 Important Definitions...................................................................................20.30
20.31 Regulation Of Securitisation And Reconstruction Of
Financial Assets Of Banks And Financial Institutions....................................20.32
20.32 Enforcement Of Security Interest.................................................................20.38
20.33 Central Registry .........................................................................................20.43
20.34 Offences And Penalties ..............................................................................20.44
20.35 Miscellaneous Matters ................................................................................20.45
20.36 Self Examination Questions ........................................................................20.47
CHAPTER 21: PREVENTION OF MONEY LAUNDERING ACT, 2002............. 21.1 – 21.14
21.0 Introduction ................................................................................................. 21.1
21.1 Definitions................................................................................................... 21.1
21.2 Punishment For The Offence of Money Laundering ....................................... 21.5
21.3 Obligation of Banking Companies, Financial Institutions and Intermediaries ... 21.5
21.4 Appellate Tribunal ....................................................................................... 21.6
21.5 Special Courts............................................................................................. 21.8
21.6 Authorities Under The Act ............................................................................ 21.9
21.7 Reciprocal Arrangement for Assistance in Certain Matters and Procedure
for Attachment and Confiscation of Property ................................................21.12
21.8 Disclosure of Information ............................................................................21.12
21.9 Recovery of Fines.......................................................................................21.13
21.10 Power to Remove Difficulties.......................................................................21.13
21.11 Conclusion .................................................................................................21.13
21.12 Self Examination Questions ........................................................................21.14
CHAPTER 22: INTERPRETATION OF STATUTES, DEEDS
AND DOCUMENTS ..................................................................................... 22.1 – 22.20
22.0 Introduction ................................................................................................. 22.1
22.1 Why do we need interpretation/construction? ................................................ 22.4
22.2 Rules of interpretation/construction .............................................................. 22.5
22.3 Internal aids to interpretation/construction ...................................................22.14
22.4 External aids to interpretation/construction ..................................................22.17
22.5 Rules of interpretation/construction of deeds and documents........................22.19
22.6 Self-examination Questions ........................................................................22.20
SECTION A

COMPANY LAW
1
(A) ACCOUNTS & AUDIT

1.0 MAINTENANCE OF BOOKS OF ACCOUNTS


Section 209 of the Companies Act, 1956 requires every company to maintain proper
books of account with respect to;
(a) all sums of money received and expended by the company and the matters in respect
of which receipts and expenditure takes places.
(b) all sales and purchases of goods by the company
(c) the assets and liabilities of the company
(d) in the case of a company engaged in production, processing, manufacturing or mining
activities, such particulars relating to utilization of materials or labour or other items of
costs as may be prescribed by the Central Government to any class of companies.

1.1 NATURE OF BOOKS OF ACCOUNT


Proper books of accounts shall not be deemed to be kept with respect to the matters
specified in Section 209(1) & (2),
(a) if there are not kept such books as are necessary to give a true and fair view of the
state of the affairs of the company or branch office, as the case may be, and to explain its
transactions and
(b) if such books are not kept on accrual basis and according to the double entry system
of accounting. [Section 209(3)]

1.2 PERSONS WHO CAN INSPECT


The following persons have the right to inspect the books of accounts.
(a) Directors of the Company [Section 209(4)]
(b) Registrar of Companies (Section 209 A)
(c) Such officer of Government as may be authorized by the Central Government in this
behalf (Section 209A).
1.2 Corporate and Allied Laws

The books of account and other books and papers shall be open to inspection by any
director during business hours. Inspection shall be made by the SEBI in respect of
matters covered under sections referred to in Section 55A. Shareholder has no statutory
right of inspection of the books of account unless the articles specifically provides for.

1.3 PLACE OF MAINTENANCE OF BOOKS OF ACCOUNT


The books of account are required to be kept at the registered office of the company.
However, the books can be kept at any other place in India as the Board of Directors may
decide. In such a case, the company should file with Registrar of Companies a notice in
writing giving the full address of the place where the books are kept. This notice should
be filed within 7 days of the Boards’ decision.

1.4 PERIOD OF MAINTENANCE


The books of account of every company relating to a period of not less than eight years
immediately preceding the current year together with the vouchers relevant to any entry in
such books of account shall be preserved in good order. In case of a company
incorporated less than eight years before the current year, the books of account for the
entire period preceding the current year together with the vouchers relevant to any entry
in such books of account shall be so preserved.

1.5 PERSONS RESPONSIBLE FOR MAINTENANCE & PENALTY


The following persons shall be responsible for the failure of maintenance of proper books
of account
(a) where the company has a managing director or manager, such managing director or
manager and all officers and other employees of the company; and
(b) where the company has neither a managing director nor manager, every director of the
company.]
Penalty for default is imprisonment upto 6 months or fine upto Rs.10,000/- or both, if the
persons mentioned above fail to take all reasonable steps to ensure that the provisions of
Section 209 are duly complied with by the company or default has been committed by
their own willful Act. Further a person shall be sentenced to imprisonment only if the
offence was committed willfully [Section 205(5)].
In any penal proceedings, it shall be a defense to prove that a competent and reliable
person was charged with the duty of seeing that these requirements are complied with
and that he was in a position to discharge that duty [proviso to Section 205(5)]. The
person so charged with responsibility of compliance with provisions of Section 209 is
punishable with imprisonment upto 6 months or fine upto Rs.10, 000/- or both [Sections
205(7)]. Similar provisions are therein Section 211 [Section 211(7) and (8)].
Accounts & Audit 1.3

Even if the company is managed by Managing Director, it is possible for the Board of
Directors to make the Chief Accountant responsible to ensure compliance with Sections
209 and 211 [Section 209(7) and Section 211(8)]. Managing Director may also charge the
Chief Accountant with such duty by issuing a memo or office order. No person shall be
sentenced to imprisonment for any such offence unless it was committed willfully. Where
a director or any other officer has been convicted of an offence, he shall on and from the
date on which he is so convicted shall be disqualified for holding such office in any
company for a period of five years from such date.

1.6 LAYING OF ANNUAL ACCOUNTS AND BALANCE SHEET


At every annual general meeting of a company the Board of directors of the company shall
lay before the company—
(a) a balance sheet as at the end of the period specified in sub-section (3); and
(b) a profit and loss account for that period.
In the case of the first annual general meeting of the company, the profit and loss account
shall relate to the period beginning with the incorporation of the company and ending with
a day which shall not precede the day of the meeting by more than nine months and in the
case of any subsequent annual general meeting of the company, to the period beginning
with the day immediately after the period for which the account was last submitted and
ending with a day which shall not precede the day of the meeting by more than six
months, or in cases where an extension of time has been granted for holding the meeting
under the second proviso to sub-section (1) of section 166, by more than six months and
the extension so granted. The period to which the account aforesaid relates is referred to
as a “financial year” may be less or more than a calendar year, but it shall not exceed
fifteen months.
If any person, being a Director of a company, fails to take all reasonable steps to comply
with the provisions of this section, he shall, in respect of each offence, be punishable with
imprisonment for a term which may extend to six months, or with fine which may extend to
ten thousand rupees, or with both:

1.7 FORM AND CONTENTS OF BALANCE SHEET AND PROFIT AND LOSS
ACCOUNT.
Every balance sheet of a company shall give a true and fair view of the state of affairs of
the company as at the end of the financial year and shall, subject to the provisions of this
section, be in the form set out in Part I of Schedule VI, or as near thereto as
circumstances admit or in such other form as may be approved by the Central
Government either generally or in any particular case; and in preparing the balance sheet
due regard shall be had, as far as may be, to the general instructions for preparation of
balance sheet under the heading “Notes” at the end of that Part.
1.4 Corporate and Allied Laws

Similarly every profit and loss account of a company shall give a true and fair view of the
profit or loss of the company for the financial year and shall, subject as aforesaid, comply
with the requirements of Part II of Schedule VI, so far as they are applicable thereto.
Insurance or banking company or any company engaged in the generation or supply of
electricity, or to any other class of company for which a form of profit and loss account
has been specified in or under the Act governing such class of company are exempted
from the purview of Section 210. The Central Government may, by notification in the
Official Gazette, exempt any class of companies from compliance with any of the
requirements in Schedule VI if, in its opinion, it is necessary to grant the
Every profit and loss account and balance sheet of the company shall comply with the
accounting standards. The expression “accounting standards” means the standards of
accounting recommended by the Institute of Chartered Accountants of India constituted
under the Chartered Accountants Act, 1949 (38 of 1949), as may be prescribed by the
Central Government in consultation with the National Advisory Committee on Accounting
Standards established under sub-section (1) of section 210A. Further the standards of
accounting specified by the Institute of Chartered Accountants of India shall be deemed to
be the Accounting Standards until the accounting standards are prescribed by the Central
Government under this sub-section.

1.8 DEVIATION FROM ACCOUNTING STANDARDS


Where the profit and loss account and the balance sheet of the company do not comply
with the accounting standards, such companies shall disclose in its profit and loss account
and balance sheet, the following, namely: —
(a) the deviation from the accounting standards;
(b) the reasons for such deviation; and
(c) the financial effect, if any, arising due to such deviation.
If any such person as is referred to in sub-section (6) of section 209 fails to take all
reasonable steps to secure compliance by the company, as respects any accounts laid
before the company in general meeting, with the provisions of this section and with the
other requirements of this Act as to the matters to be stated in the accounts, he shall, in
respect of each offence, be punishable with imprisonment for a term which may extend to
six months, or with fine which may extend to ten thousand rupees, or with both . Further
that in any proceedings against a person in respect of an offence under this section, it
shall be a defence to prove that a competent and reliable person was charged with the
duty of seeing that the provisions of this section and the other requirements aforesaid
were complied with and was in a position to discharge that duty. No person shall be
sentenced to imprisonment for any such offence unless it was committed willfully.
Accounts & Audit 1.5

1.9 AUTHENTICATION OF ANNUAL ACCOUNTS


According to Section 215, every balance sheet and every profit and loss account of a
company shall be signed on behalf of the Board of directors by its manager or secretary, if
any, and by not less than two directors of the company one of whom shall be a managing
director where there is one. In the case of a banking company, by the persons specified in
clause (a) or clause (b), as the case may be, of sub-section (2) of section 29 of the
Banking Companies Act, 1949. In the case of a company not being a banking company,
when only one of its directors is for the time being in India, the balance sheet and the
profit and loss account shall be signed by such director; but in such a case there shall be
attached to the balance sheet and the profit and loss account a statement signed by him
explaining the reason for non-compliance with the provisions of Section 215 (1).
The balance sheet and the profit and loss account shall be approved by the Board of
directors before they are signed on behalf of the Board in accordance with the provisions
of this section and before they are submitted to the auditors for their report thereon.

1.10 BOARD’S REPORT


There shall be attached to every balance sheet laid before a company in general meeting,
a report by its Board of directors, with respect to—
(a) the state of the company’s affairs;
(b) the amounts, if any, which it proposes to carry to any reserves in such balance sheet;
(c) the amount, if any, which it recommends should be paid by way of dividend;
(d) material changes and commitments, if any, affecting the financial position of the
company which have occurred between the end of the financial year of the company to
which the balance sheet relates and the date of the report;
(e) the conservation of energy, technology absorption, foreign exchange earnings and
outgo, in such manner as may be prescribed. [Section 217(1)]
The Board’s report shall, so far as is material for the appreciation of the state of the
company’s affairs by its members and will not in the Board’s opinion be harmful to the
business of the company or of any of its subsidiaries, deal with any changes which have
occurred during the financial year—
(a) in the nature of the company’s business;
(b) in the company’s subsidiaries or in the nature of the business carried on by them; and
(c) generally in the classes of business in which the company as an interest.
Further, the Board’s report shall also include a statement showing the name of every
employee of the company who—
1.6 Corporate and Allied Laws

(i) if employed throughout the financial year, was in receipt of remuneration for that year
which, in the aggregate, was not less than such sum as may be prescribed; or
(ii) if employed for a part of the financial year, was in receipt of remuneration for any part
of that year, at a rate which, in the aggregate, was not less than such sum per month as
may be prescribed or
(iii) if employed throughout the financial year or part thereof, was in receipt of
remuneration in that year which, in the aggregate, or as the case may be, at a rate which,
in the aggregate, is in excess of that drawn by the managing director or whole-time
director or manager and holds by himself or along with his spouse and dependent
children, not less than two per cent, of the equity shares of the company.
The statement shall also indicate, —
(i) whether any such employee is a relative of any director or manager of the company
and if so, the name of such director, and
(ii) such other particulars as may be prescribed.
“Remuneration” for the purpose has the meaning assigned to it in the Explanation to
section 198.

1.11 DIRECTORS’ RESPONSIBILITY STATEMENT (SECTION 217 (2AA)


The Board’s report shall also include a Directors’ Responsibility Statement, indicating
therein, —
(i) that in the preparation of the annual accounts, the applicable accounting standards
had been followed along with proper explanation relating to material departures;
(ii) that the directors had selected such accounting policies and applied them consistently
and made judgments and estimates that are reasonable and prudent so as to give a true
and fair view of the state of affairs of the company at the end of the financial year and of
the profit or loss of the company for that period;
(iii) that the directors had taken proper and sufficient care for the maintenance of
adequate accounting records in accordance with the provisions of this Act for
safeguarding the assets of the company and for preventing and detecting fraud and other
irregularities;
(iv) that the directors had prepared the annual accounts on a going concern basis.
(Section 217AA)

1.12 DISCLOSURES IN BOARD’S REPORT


The Board’s report shall also specify the reasons for the failure, if any, to complete the
buy-back within the time specified in sub-section (4) of section 77A. The Board shall also
Accounts & Audit 1.7

be bound to give the fullest information and explanations in its report aforesaid, or, in
cases falling under the proviso to section 222, in an addendum to that report, on every
reservation, qualification or adverse remark contained in the auditors’ report. The Board’s
report and any addendum thereto shall be signed by its chairman if he is authorised in
that behalf by the Board; and where he is not so authorised, shall be signed by such
number of directors as are required to sign the balance sheet and the profit and loss
account of the company by virtue of sub-sections (1) and (2) of section 215. If any person,
being a director of a company, fails to take all reasonable steps to comply with the
provisions of sub-sections (1) to (3), or being the Chairman, signs the Board’s report
otherwise than in conformity with the provisions of sub-section (4), he shall, in respect of
each offence, be punishable with imprisonment for a term which may extend to six
months, or with fine which may extend to twenty thousand rupees, or with both:

1.13 RIGHT OF MEMBERS TO COPIES OF BALANCE SHEET AND AUDITORS’


REPORT
A copy of every balance sheet (including the profit and loss account, the auditors’ report
and every other document required by law to be annexed or attached, as the case may
be, to the balance sheet) which is to be laid before a company in general meeting shall,
not less than twenty-one days before the date of the meeting, be sent to every member of
the company, to every trustee for the holders of any debentures issued by the company,
whether such member or trustee is or is not entitled to have notices of general meetings
of the company sent to him, and to all persons other than such members or trustees,
being persons so entitled. [Section 219)(a)]. A copy of the documents need not be sent—
(i) to a member, or holder of debentures, of the company, who is not entitled to have
notices of general meetings of the company sent to him and of whose address the
company is unaware;
(ii) to more than one of the joint holders of any shares or debentures none of whom is
entitled to have such notices sent to him;
(iii) in the case of joint holders of any shares or debentures some of whom are and some
of whom are not entitled to have such notices sent to them, to those who are not so
entitled;
(iv) in the case of a company whose shares are listed on a recognized stock exchange, if
the copies of the documents aforesaid are made available for inspection at its registered
office during working hours for a period of twenty-one days before the date of the meeting
and a statement containing the salient features of such documents in the prescribed form
or copies of the documents aforesaid, as the company may deem fit, is sent to every
member of the company and to every trustee for the holders of any debentures issued by
the company not less than twenty-one days before the date of the meeting;
1.8 Corporate and Allied Laws

if the copies of the documents are sent less than twenty-one days before the date of the
meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so
agreed by all the members entitled to vote at the meeting.

1.14 FILING WITH THE REGISTRAR


After the balance sheet and the profit and loss account have been laid before a company
at an annual general meeting as aforesaid, there shall be filed with the Registrar within
thirty days from the date on which the balance sheet and the profit and loss account were
so laid, or where the annual general meeting of a company for any year has not been
held, there shall be filed with the Registrar within thirty days from the latest day on or
before which that meeting should have been held. Three copies of the balance sheet and
the profit and loss account, signed by the managing director, manager or secretary of the
company, or if there be none of these, by a director of the company, together with three
copies of all documents which are required by this Act to be annexed or attached to such
balance sheet or profit and loss account:
In the case of a private company, copies of the balance sheet and copies of the profit and
loss account shall be filed with the Registrar separately. If the annual general meeting of
a company before which a balance sheet is laid as aforesaid does not adopt the balance
sheet, or is adjourned without adopting the balance sheet, or, if the annual general
meeting of a company for any year has not been held, a statement of that fact and of the
reasons therefore shall be annexed to the balance sheet and to the copies thereof
required to be filed with the Registrar. If default is made in complying with the
requirements of sub-sections (1) and (2), the company, and every officer of the company
who is in default, shall be liable to the like punishment as is provided by section 162 for a
default in complying with the provisions of section 159, 160 or 161.

1.15 HOLDING & SUBSIDIARIES ACCOUNTS


Section 213(1) of the Companies Act, 1956 states as follows:
Where it appears to the Central Government desirable for a holding company or a holding
company’s subsidiary to extend its financial year so that the subsidiary’s financial year
may end with that of the holding company, and for that purpose to postpone the
submission of the relevant accounts to a general meeting, the Central Government may
on the application or with the consent of the board of directors of the company whose
financial year is to be extended, direct that in the case of that company, the submission of
accounts to a general meeting, the holding of an annual general meeting or the making of
an annual return, shall not be required to be submitted held or made earlier than the dates
specified in the direction notwithstanding anything to the contrary in the Companies Act,
1956 or in any other Act for the time being in force. The Central Government shall, on the
application of the Board of directors of a holding company or a holding company’s
subsidiary, exercise the powers conferred on that Government if it is necessary so to do,
Accounts & Audit 1.9

in order to secure that the end of the financial year of the subsidiary does not precede the
end of the holding company’s financial year by more than six months, where that is not
the case at the commencement of this Act, or at the date on which the relationship of
holding company and subsidiary comes into existence, where that date is later than the
commencement of the Companies Act. Consider the following practical problem and
advise.
S. Ltd. is a subsidiary company of H Ltd. The financial year of H Ltd. is from 1 st April to
31 st March, whereas the financial year of S ltd. is 1 st July to 30 th June every year. This is
now causing difficulties particularly in view of the requirement of reporting and circulating
the consolidated annual accounts as required by accounting year of S Ltd. for the year 1 st
July, 2005 to 30 th June, 2006 be extended from present 12 months to 21 months, i.e. 1st
July, 2005 to 31 st March, 2007, so that the financial years of the holding company and the
subsidiary company end on the same date.
The management can extend the financial year of S. Ltd. from 12 months to 21 months as
mentioned in the question.
Following steps are required to be taken for this purpose:
(i) To convene a Meeting of the Board of directors of S. Ltd. where at the resolution for
extending the financial year 1 st July, 2005 to 30 th June, 2006 (12 months) to 1 st July, 2005
to 31 st March,.2007 (21 months) is to be passed so that the year ending matches with the
year ending of H. Ltd.
(ii) To make an application under section 213(1) of the Companies Act, 1956 to the
Central Government giving full details and specific reasons for seeking the extension in
the year ending. The application may be made on a plain paper as there is no prescribed
form for this purpose.
(iii) To attach the following to the application:
(a) A certified true copy of the last Balance Sheet and Profit and Loss Account of H Ltd.
and S. Ltd.
(b) A certified true copy of the Memorandum of Association and Articles of Association of
both the Companies.
(c) A certified true copy of the resolution of the Board of Directors proposing the
extension of the financial year ending from 12 months to 21 months.
(d) Requisite fee payable to the Central Government as per the Companies (Fees on
Application) Rules, 1999.
1.10 Corporate and Allied Laws

AUDIT
1.16 QUALIFICATIONS OF AN AUDITOR (SECTION 226)
A person shall not be qualified for appointment as auditor of a company unless he is a
chartered accountant within the meaning of the Chartered Accountants Act, 1949. Further
in the case of a firm whereof all the partners practising in India are qualified for
appointment as aforesaid may be appointed by its firm name to be auditor of a company,
in which case any partner so practising may act in the name of the firm.

1.17 DISQUALIFICATIONS OF AUDITORS


The following persons shall be not qualified for appointment as auditor of a company—
(a) a body corporate;
(b) an officer or employee of the company;
(c) a person who is a partner, or who is in the employment, of an officer or employee of
the company;
(d) a person who is indebted to the company for an amount exceeding one thousand
rupees, or who has given any guarantee or provided any security in connection with the
indebtedness of any third person to the company for an amount exceeding one thousand
rupees;
(e) a person holding any security of that company after a period of one year from the date
of commencement of the Companies (Amendment) Act, 2000. “Security” for the purpose
means an instrument which carries voting rights.
An officer or employee shall not be construed as an auditor. Further a person shall also
not be qualified for appointment as auditor of a company if he is disqualified for
appointment as auditor of any other body corporate which is that company’s subsidiary or
holding company or a subsidiary of that company’s holding company, or would be so
disqualified if the body corporate were a company. If an auditor becomes subject, after
his appointment, to any of the disqualifications specified in sub-sections (3) and (4) of
section 226, he shall be deemed to have vacated his office as such.

1.18 FIRST AUDITORS


The first auditor or auditors of a company shall be appointed by the Board of directors
within one month of the date of registration of the company; and the auditor or auditors so
appointed shall hold office until the conclusion of the first annual general meeting.
However the company may, at a general meeting, remove any such auditor or all or any of
such auditors and appoint in his or their places any other person or persons who have
been nominated for appointment by any member of the company and of whose nomination
notice has been given to the members of the company not less than fourteen days before
Accounts & Audit 1.11

the date of the meeting and if the Board fails to exercise its powers, the company in
general meeting may appoint the first auditor or auditors.

1.19 SUBSEQUENT AUDITORS [SECTION 224 (1)]


At each annual general meeting, subsequent auditor or auditors are appointed by way of
an ordinary resolution. The auditor or auditors so appointed appoint shall hold office from
the conclusion of that meeting until the conclusion of the next annual general meeting and
shall within seven days of the appointment, give intimation thereof to every auditor so
appointed: Before any appointment or re-appointment of auditor or auditors is made by
any company at any annual general meeting, a written certificate shall be obtained by the
company from the auditor or auditors proposed to be so appointed to the effect that the
appointment or reappointment, if made, will be in accordance with the limits specified.
Every auditor appointed shall within thirty days of the receipt from the company of the
intimation of his appointment, inform the Registrar in writing that he has accepted, or
refused to accept, the appointment.

1.20 AUDITORS’ APPOINTMENT BY SPECIAL RESOLUTION [SECTION 224A (1)]


The appointment or re-appointment at each annual general meeting of an auditor or
auditors shall be made by a special resolution in the case of a company in which not less
than twenty-five per cent of the subscribed share capital is held, whether singly or in any
combination, by—
(a) a public financial institution or a Government company or Central Government or any
State Government, or
(b) any financial or other institution established by any Provincial or State Act in which a
State Government holds not less than fifty-one per cent of the subscribed share capital, or
(c) a nationalised bank or an insurance company carrying on general insurance business,
If any company omits or fails to pass at its annual general meeting any special resolution
appointing an auditor or auditors, it shall be deemed that no auditor or auditors had been
appointed by the company at its annual general meeting, and thereupon the provisions of
sub-section (3) of section 224 shall become applicable in relation to such company.

1.21 RE-APPOINTMENT OF RETIRING AUDITOR


At any annual general meeting, a retiring auditor shall be deemed to be re-appointed,
unless—
(a) he is not qualified for re-appointment;
(b) he has given the company notice in writing of his unwillingness to be re-appointed;
(c) a resolution has been passed at that meeting appointing somebody instead of him or
1.12 Corporate and Allied Laws

providing expressly that he shall not be re-appointed; or


(d) where notice has been given of an intended resolution to appoint some person or
persons in the place of a retiring auditor, and by reason of the death, incapacity or
disqualification of that person or of all those persons, as the case may be, the resolution
cannot be proceeded with.
Where at an annual general meeting no auditors are appointed or re-appointed, the
Central Government may appoint a person to fill the vacancy.

1.22 CEILING ON NUMBER OF AUDITS


Any person who is full-time employment elsewhere cannot be appointed as an auditor.
Further no company or its Board of directors shall appoint a firm as its auditor if such
person or firm is, at the date of such appointment or re-appointment, holding appointment
as auditor of the specified number of companies or more than the specified number of
companies. In the case of a firm of auditors, “specified number of companies” shall be
construed as the number of companies specified for every partner of the firm who is not in
full-time employment elsewhere. Where any partner of the firm is also a partner of any
other firm or firms of auditors, the number of companies which may be taken into account,
by all the firms together, in relation to such partner shall not exceed the specified number
in the aggregate. Further where any partner of a firm of auditors is also holding office, in
his individual capacity, as the auditor of one or more companies, the number of
companies which may be taken into account in his case shall not exceed the specified
number, in the aggregate. The ceiling on number of company audits does not include a
private company.
A person or firm holding, appointment as the auditor of a number of companies exceeding
the specified number, shall, within sixty days from such commencement, intimate his or its
unwillingness to be re-appointed as the auditor from the financial year next following such
commencement, to the company or companies of which he or it is not willing to be re-
appointed as the auditor; and shall simultaneously intimate to the Registrar the names of
the companies of which he or it is willing to be re-appointed as the auditor and forward a
copy of the intimation to each of the companies referred to therein.
“specified number” means, —
(a) in the case of a person or firm holding appointment as auditor of a number of
companies each of which has a paid-up share capital of less than rupees twenty-five
lakhs, twenty such companies;
(b) in any other case, twenty companies, out of which not more than ten shall be
companies each of which has a paid-up share capital of rupees twenty-five lakhs or more.
[Explanation I to sub-Sections (IB) & (IC) of Section 224]
In computing the specified number, the number of companies in respect of which or any
Accounts & Audit 1.13

part of which any person or firm has been appointed as an auditor, whether singly or in
combination with any other person or firm, shall be taken into account.

1.23 FILLING UP CASUAL VACANCY


The Board may fill any casual vacancy in the office of an auditor; but while any such
vacancy continues, the remaining auditor or auditors, if any, may act:
Where such vacancy is caused by the resignation of an auditor, the vacancy shall only be
filled by the company in general meeting. Any auditor appointed in a casual vacancy shall
hold office until the conclusion of the next annual general meeting.
Any auditor appointed under this section may be removed from office before the expiry of
his term only by the company in general meeting, after obtaining the previous approval of
the Central Government in that behalf.

1.24 REMUNERATION OF AUDITORS


The remuneration of the auditors of a company may be fixed by the Board or the Central
Government, in case the auditor is appointed by the Board or the Central Government as
the case may be. In the case of an auditor appointed under section 619 by the
Comptroller and Auditor-General of India, remuneration shall be fixed by the company in
general meeting or in such manner as the company in general meeting may determine.
The expression “remuneration” includes any sums paid by the company in respect of the
auditors’ expenses shall be deemed to be included in

1.25 REMOVAL OF AUDITORS


Removal of auditor only requires an ordinary resolution. However Section 225 prescribes
certain procedure for the removal of an auditor.
(1) Special notice shall be required for a resolution at an annual general meeting
appointing as auditor a person other than a retiring auditor, or providing expressly that a
retiring auditor shall not be re-appointed.
(2) On receipt of notice of such a resolution, the company shall forthwith send a copy
thereof to the retiring auditor.
(3) Where notice is given of such a resolution and the retiring auditor makes with respect
thereto representations in writing to the company (not exceeding a reasonable length) and
requests their notification to members of the company, the company shall, unless the
representations are received by it too late for it to do so,—
(a) in any notice of the resolution given to members of the company, state the fact of the
representations having been made; and
1.14 Corporate and Allied Laws

(b) send a copy of the representations to every member of the company to whom notice
of the meeting is sent, whether before or after the receipt of the representations by
the company;
If a copy of the representations is not sent as aforesaid because they were received too
late or because of the company’s default the auditor may (without prejudice to his right to
be heard orally) require that the representations shall be read out at the meeting :
The copies of the representations need not be sent out and the representations need not
be read out at the meeting if, on the application either of the company or of any other
person who claims to be aggrieved, if the Central Government is satisfied that the rights
conferred are being abused to secure needless publicity for defamatory matter; and the
Central Government may order the company’s costs on such an application to be paid in
whole or in part by the auditor, notwithstanding that he is not a party to the application.

1.26 POWERS OF AUDITORS


1. Every auditor of a company shall have a right of access at all times to the books and
accounts and vouchers of the company, whether kept at the head office of the company or
elsewhere.
2. He shall be entitled to require from the officers of the company such information and
explanations as the auditor may think necessary for the performance of his duties as
auditor.
3. Section 228(2) provides that where the accounts of any branch office are audited by a
person other than the company’s auditor, the company’s auditor (a) shall be entitled to visit
the branch office, if he deems it necessary to do so for the performance of his duties as
auditor, and (b) shall have a right of access at all times to the books and accounts and
vouchers of the company maintained at the branch office.
4. He has the right to attend any general meeting of the company and be heard on matters
that concerns him as an auditor.

1.27 DUTIES OF AUDITORS


1. The auditor shall make a report to the members of the company on the accounts
examined by him, and on every balance sheet and profit and loss account and on every
other document declared by this Act to be part of or annexed to the balance sheet or profit
and loss account, which are laid before the company in general meeting during his tenure
of office, and the report shall state whether, in his opinion and to the best of his
information and according to the explanations given to him, the said accounts give the
information required by this Act in the manner so required and give a true and fair view
[Section 227(2)]
2. It is the duty of the auditor who shall inquire—
Accounts & Audit 1.15

(a) whether loans and advances made by the company on the basis of security have been
properly secured and whether the terms on which they have been made are not prejudicial
to the interests of the company or its members;
(b) whether transactions of the company which are represented merely by book entries
are not prejudicial to the interests of the company;
(c) where the company is not an investment company within the meaning of section 372
or a banking company, whether so much of the assets of the company as consist of
shares, debentures and other securities have been sold at a price less than that at which
they were purchased by the company;
(d) whether loans and advances made by the company have been shown as deposits;
(e) whether personal expenses have been charged to revenue account;
(f) where it is stated in the books and papers of the company that any shares have been
allotted for cash, whether cash has actually been received in respect of such allotment,
and if no cash has actually been so received, whether the position as stated in the
account books and the balance sheet is correct, regular and not misleading.
(3) The auditors’ report shall also state—
(a) whether he has obtained all the information and explanations which to the best of his
knowledge and belief were necessary for the purposes of his audit;
(b) whether, in his opinion, proper books of account as required by law have been kept by
the company so far as appears from his examination of those books, and proper returns
adequate for the purposes of his audit have been received from branches not visited by
him;
(bb) whether the report on the accounts of any branch office audited under section 228
by a person other than the company’s auditor has been forwarded to him as required by
clause (c) of sub-section (3) of that section and how he has dealt with the same in
preparing the auditor’s report;
(c) whether the company’s balance sheet and profit and loss account dealt with by the
report are in agreement with the books of account and returns;
(d) whether, in his opinion, the profit and loss account and balance sheet comply with the
accounting standards referred to in sub-section (3C) of section 211;
(e) in thick type or in italics the observations or comments of the auditors which have any
adverse effect on the functioning of the company;
(f) whether any director is disqualified from being appointed as director under clause (g)
of sub-section (1) of section 274;
(g) whether the cess payable under section 441A has been paid and if not, the details of
1.16 Corporate and Allied Laws

amount of cess not so paid.


(4).Where any of the matters referred to in clauses (i) and (ii) of sub-section (2) or in
clauses (a), (b) (bb)],(c) and (d) of sub-section (3) is answered in the negative or with a
qualification, the auditor’s report shall state the reason for the answer.

1.28 AUDIT OF ACCOUNTS OF BRANCH OFFICE OF COMPANY


1. Section 228 requires that where a company has a branch office, the accounts of that
office shall be audited by the company’s auditor appointed under section 224 or] by a
person qualified for appointment as auditor of the company under section 226, or where
the branch office is situate in a country outside India, either by the company’s auditor or a
person qualified as aforesaid or by an accountant duly qualified to act as an auditor of the
accounts of the branch office in accordance with the laws of that country.
2. Further in the case of a banking company having a branch office outside India, it shall
be sufficient if the auditor is allowed access to such copies of, and extracts from, the
books and accounts of the branch as have been transmitted to the principal office of the
company in India.
3. Where a company in general meeting decides to have the accounts of a branch office
audited otherwise than by the company’s auditor, the company in that meeting shall for
the audit of those accounts appoint a person qualified for appointment as auditor of the
company under section 226, or where the branch office is situate in a country outside
India, a person who is either qualified as aforesaid or an accountant duly qualified to act
as an auditor of the accounts of the branch office in accordance with the laws of that
country, or authorise the Board of directors to appoint such a person in consultation with
the company’s auditor.
4. The person so appointed as the branch auditor shall have the same powers and duties
in respect of audit of the accounts of the branch office as the company’s auditor has in
respect of the same.
5. The branch auditor shall prepare a report on the accounts of the branch office
examined by him and forward the same to the company’s auditor who shall in preparing
the auditor’s report, deal with the same in such manner as he considers necessary.
6. The branch auditor shall receive such remuneration and shall hold his appointment
subject to such terms and conditions as may be fixed either by the company in general
meeting or by the Board of directors if so authorised by the company in general meeting.
7. The Central Government may make rules providing for the exemption of any branch
office from the provisions of this section to the extent specified in the rules and in making
such rules the Central Government shall have regard to all or any of the following matters,
namely :—
Accounts & Audit 1.17

(a) the arrangement made by the company for the audit of accounts of the branch office
by a person otherwise qualified for appointment as branch auditor even though such
person may be an officer or employee of the company;
(b) the nature and quantum of activity carried on at the branch office during a period of
three years immediately preceding the date on which the branch office is exempted from
the provisions of this section;
(c) the availability at a reasonable cost of a branch auditor for the audit of accounts of the
branch office;
(d) any other matter which in the opinion of the Central Government justifies the grant of
exemption to the branch office from the provisions of this section.

1.29 SIGNATURE OF AUDIT REPORT, ETC. (SECTION 229)


Only the person appointed as auditor of the company, or where a firm is so appointed in
pursuance of the proviso to sub-section (1) of section 226, only a partner in the firm
practising in India, may sign the auditor’s report, or sign or authenticate any other
document of the company required by law to be signed or authenticated by the auditor.

1.30 SPECIAL AUDIT (SECTION 233A)


Where the Central Government is of the opinion—
(a) that the affairs of any company are not being managed in accordance with sound
business principles or prudent commercial practices; or
(b) that any company is being managed in a manner likely to cause serious injury or
damage to the interests of the trade, industry or business to which it pertains; or
(c) that the financial position of any company is such as to endanger its solvency;
the Central Government may at any time by order direct that a special audit of the
company’s accounts for such period or periods as may be specified in the order, shall be
conducted and may by the same or a different order appoint either a chartered accountant
whether or not such chartered accountant is a chartered accountant in practice or the
company’s auditor himself to conduct such special audit and such auditor shall be known
as Special auditor. The report of the special auditor shall, as far as may be, include all the
matters required to be included in an auditor’s report under section 227 and, if the Central
Government so directs, shall also include a statement on any other matter which may be
referred to him by that Government.

1.31 AUDIT OF COST ACCOUNTS (SECTION 233B)


Where the Central Government is of the opinion that it is necessary so to do in relation to
any company required under clause (d) of sub-section (1) of section 209 to include in its
1.18 Corporate and Allied Laws

books of account the particulars referred to therein, the Central Government may, by
order, direct that an audit of cost accounts of the company shall be conducted in such
manner as may be specified in the order by an auditor who shall be a cost accountant
within the meaning of the Cost and Works Accountants Act, 1959. If the Central
Government is of opinion that sufficient number of cost accountants are not available for
conducting the audit of the cost accounts of companies generally, that Government may,
by notification in the Official Gazette, direct that, for such period as may be specified in
the said notification, that such chartered accountant possessing the prescribed
qualifications may be appointed to audit the cost accounts of the company. The cost
auditor shall be appointed by the Board of directors of the company [in accordance with
the provisions of sub-section (1B) of section 224 and with the previous approval of the
Central Government. Before the appointment of any auditor is made by the Board, a
written certificate shall be obtained by the Board from the auditor proposed to be so
appointed to the effect that the appointment, if made, will be in accordance with the
provisions of sub-section (1B) of section 224. An audit conducted by an auditor under this
section shall be in addition to an audit conducted by an auditor appointed under section
224. Cost auditor shall have the same powers and duties in relation to an audit conducted
by him under this section as an auditor of a company has under sub-section (1) of section
227 and such auditor shall make his report to the Central Government] in such form and
within such time as may be prescribed and shall also at the same time forward a copy of
the report to the company.
Note: For detailed material on Accounts & Audit, students are advised to refer to Study
Material on Accounting and Audit respectively.
2
(B) DIVIDEND

2.0 MANNER AND TIME OF PAYMENT


(a) Dividend to be paid only out of profits: According to Section 205 dividend shall be
declared or paid by a company for any financial year
(a) out of the current year profits of the company for that year arrived at after providing for
depreciation or
(b) out of the profits of the company for any previous financial year or years arrived at after
providing for depreciation and remaining undistributed or out of both or
(c) out of moneys provided by the Central Government or a State Government for the
payment of dividend in pursuance of a guarantee given by that Government :
(b) Provisions for depreciation
(a) The company should provide for depreciation for any previous financial year or years
before declaring or paying dividend for any financial year provide and such depreciation
be provided out of the profits of that financial year or out of the profits of any other
previous financial year or years
(b) If the company has incurred any loss in any previous financial year or years then, the
amount of the loss or an amount which is equal to the amount provided for depreciation
for that year or those years whichever is less
(c) Such loss shall be set off against the profits of the company for the year for which
dividend is proposed to be declared or paid or against the profits of the company for any
previous financial year or years, arrived at in both cases after providing for depreciation
(d) The Central Government may, if it thinks necessary so to do in the public interest, allow
any company to declare or pay dividend for any financial year out of the profits of the
company for that year or any previous financial year or years without providing for
depreciation
(e) It shall not be necessary for a company to provide for depreciation where dividend for any
financial year is declared or paid out of the profits of any previous financial year or years
2.2 Corporate and Allied Laws

(c) Method of depreciation


Depreciation shall be provided either—
(a) to the extent specified in section 350; or
(b) in respect of each item of depreciable asset, for such an amount as is arrived at by
dividing ninety-five per cent of the original cost thereof to the company by the specified
period in respect of such asset; or
(c) on any other basis approved by the Central Government which has the effect of writing off
by way of depreciation ninety-five per cent of the original cost to the company of each
such depreciable asset on the expiry of the specified period; or
(d) as regards any other depreciable asset for which no rate of depreciation has been laid
down by this Act or any] rules made there under, on such basis as may be approved by
the Central Government by any general order published in the Official Gazette or by any
special order in any particular case :
(e) In the event of the depreciable asset being sold, discarded, demolished or destroyed the
written down value thereof at the end of the financial year in which the asset is sold,
discarded, demolished or destroyed, shall be written off in accordance with the proviso to
section 350.

2.1 COMPULSORY TRANSFER TO RESERVES:


Dividend shall be declared or paid by a company for any financial year out of the profits of the
company for that year arrived at after providing for depreciation only after the transfer to the
reserves of the company of such percentage of its profits for that year, not exceeding ten per
cent, as may be prescribed According to The Companies (Transfer of Profits to Reserves)
Rules, 1975,
(a) Where the dividend proposed exceeds 10 per cent but not 12.5 per cent of the paid
up capital, the amount to be transferred to the reserves shall not be less than 2.5 per cent of
the current profits;
(b) Where the dividend proposed exceeds 12.5 per cent but des not exceed 15 per cent
of the paid up capital, the amount to be transferred to the reserves shall not be less than 5 per
cent of the current profits;
(c) Where the dividend proposed exceeds 15 per cent but does not exceed 20 per cent of
the paid up capital, the amount to be transferred to the reserves shall not be less than 7.5 per
cent of the current profits;
(d) Where the dividend proposed exceeds 20 per cent of the paid up capital, the amount
to be transferred to the reserves shall not be less than 10 per cent of the current profits
No transfer to reserves is required if the rate of dividend proposed is 10 per cent or less.

2.2 TRANSFER OF HIGHER PERCENTAGE OF PROFITS TO RESERVES


A company can make a transfer of more than 10 per cent to reserves voluntarily provided it
Dividend 2.3

ensures the minimum distribution specified in Rule 3 of the Companies (Transfer of Profits to
Reserves) Rules, 1975. The minimum distribution is the rate of dividend equal to the average
of the rates of dividend for the last 3 financial years. Where bonus shares have been issued
during the financial year, minimum distribution would be constructed as the average of the
amount of dividend for the last three financial years. Where, however, the net profits after tax
for the financial year are lower by 20 per cent or more than the average net profits after tax of
the last two financial years, it will not be necessary to ensure the minimum distribution for
making a higher transfer to reserve. Where no dividend is declared, the transfer to reserves
should be lower than the average amount of dividends declared during the last three financial
years.

2.3 DECLARATION OF DIVIDEND OUT OF PAST RESERVES


Dividend can be declared by the company out of accumulated profits subject to the following
conditions;
1. The rate of the dividend declared does not exceed the average of the rates at which
dividend was declared by it in the 5 years immediately preceding that year or 10 per cent of its
paid up capital, whichever is less.
2. The total amount to be drawn from the accumulated profits earned in previous years
and transferred to the reserves does not exceed an amount equal to 1/10th of the sum of its
paid up capital and free reserves and the amount to drawn must first be utilized to set off the
losses incurred in the financial year before any dividend in respect of preference or equity
shares is declared.
3. The balance of reserves after such drawl does not fall below 15 per cent of its paid up
share capital.

2.4 DECLARATION OF INTERIM DIVIDEND


According to Section 2 (14A) dividend includes any interim dividend. Therefore, the
procedures which are applicable to final dividend (i.e. Sections 205, 205A, 205C, 206, 206A &
207) also applies to any interim dividend. Accordingly, like final dividend, interim dividend
shall be considered as debt once declared and, therefore, cannot be revoked. The Board of
directors may declare interim dividend and the amount of dividend including interim dividend
shall be deposited in a separate bank account within five days from the date of declaration of
such dividend.

2.5 TIME LIMIT


According to Section 207, a company which has declared dividend to the shareholders should
make the payment within 30 days from the date of its declaration. The term payment implies
the posting of dividend warrant irrespective of the fact whether the shareholder has received it
or not. Failure to post dividend warrant within 30 days, constitutes an offence under the Act.
The penalty for the default is punishable with simple imprisonment for a term which may
extend to three years and shall also be liable to a fine of one thousand rupees for every day
during which such default continues and the company shall be liable to pay simple interest at
2.4 Corporate and Allied Laws

the rate of eighteen per cent per annum during the period for which such default continues:
However, it shall not be an offence be deemed to have been committed in the following cases:
(a) where the dividend could not be paid by reason of the operation of any law;
(b) where a shareholder has given directions to the company regarding the payment of
the dividend and those directions cannot be complied with;
(c) where there is a dispute regarding the right to receive the dividend;
(d) where the dividend has been lawfully adjusted by the company against any sum due
to it from the shareholder; or
(e) where, for any other reason, the failure to pay the dividend or to post the warrant
within the period aforesaid was not due to any default on the part of the company.

2.6 UNPAID OR UNCLAIMED DIVIDEND (SECTION 205A)


A dividend which 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 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 within the said period of thirty days, to a special account to be
opened by the company in that behalf in any scheduled bank, to be called “Unpaid Dividend
Account of. Company Limited/Company (Private) Limited”.
2.7 PAYMENT OF UNPAID OR UNCLAIMED DIVIDEND (SECTION 205B)
Any money transferred to the unpaid dividend account of a company in pursuance of this
section which remains unpaid or unclaimed for a period of seven years from the date of such
transfer shall be transferred by the company to the Investor Education and Protection Fund
established under sub-section (1) of section 205C.]
Any person claiming to be entitled to any money transferred under sub-section (5) of section
205A to the fund of the Central Government, may apply to the Central Government for an
order for payment of the money claimed; and the Central Government may, if satisfied,
whether on a certificate by the company or otherwise, that such person is entitled to the whole
or any part of the money claimed, make an order for the payment to that person of the sum
due to him after taking such security from him as it may think fit :

2.8 WHEN DIVIDEND TO BE KEPT IN ABEYANCE? (SECTION 206A)


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, the company shall —
(a) transfer the dividend in relation to such shares to the special account referred to in
section 205A unless the company is authorised by the registered holder of such share 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 under clause
(a) of sub-section (1) of section 81 and any issue of fully paid-up bonus shares in pursuance
of sub-section (3) of section 205.
Dividend 2.5

2.9 INVESTOR EDUCATION & PROTECTION FUND (SECTION 205C)


The following amounts shall be credited to the Fund:
(a) amounts in the unpaid dividend accounts of companies;
(b) the application moneys received by companies for allotment of any securities and due
for refund;
(c) matured deposits with companies;
(d) matured debentures with companies;
(e) the interest accrued on the amounts referred to in (a) to (d) as above;
(f) grants and donations given to the Fund by the Central Government, State
Governments, companies or any other institutions for the purposes of the Fund; and
(g) the interest or other income received out of the investments made from the Fund:
No such amounts referred to in clauses (a) to (d) shall form part of the Fund unless such
amounts have remained unclaimed and unpaid for a period of seven years from the date they
became due for payment.

2.10 PAYMENT OF INTEREST OUT OF CAPITAL (SECTION 208)


(a) For the purpose of raising money to defray the expenses of the construction of any
work or building, or the provision of any plant, which cannot be made profitable for a lengthy
period, the company may—
(i) pay interest on so much of that share capital as is for the time being paid up, for the
period and subject to certain conditions and restrictions
(ii) charge the sum so paid by way of interest, to capital as part of the cost of
construction of the work or building, or the provision of the plant.
(b) No such payment shall be made unless it is authorised by the articles or by a special
resolution.
(c) No such payment, whether authorised by the articles or by special resolution, shall be
made without the previous sanction of the Central Government.
(d) Before sanctioning any such payment, the Central Government may, at the expense of the
company, appoint a person to inquire into, and report to the Central Government on, the
circumstances of the case; and may, before making the appointment, require the company to
give security for the payment of the costs of the inquiry.
(e) The payment of interest shall be made only for such period as may be determined by the
Central Government; and that period shall in no case extend beyond the close of the half-year
next after the half-year during which the work or building has been actually completed or the
plant provided.
(f) The rate of interest shall, in no case, exceed four per cent per annum or such other rate as
the Central Government may, by notification in the Official Gazette, direct.
2.6 Corporate and Allied Laws

(g) The payment of the interest shall not operate as a reduction of the amount paid up on the
shares in respect of which it is paid.
3
(C) DIRECTORS, POWERS, MANAGERIAL REMUNERATION

3.0 INTRODUCTION
When a company is incorporated under the Companies Act, 1956, it becomes a legal
entity (i.e., a legal person) capable of exercising all its functions. This impersonal creation
of law can only act through some agency, and it must be a human agency. It being
impracticable for all the members of a company (Whose number may be very large in a
big public company) to conduct its affairs they elect their representatives for this purpose.
These elected representatives are usually known as directors. Under Section 2, a director
“includes any person occupying the position of director by whatever name called”
Directors of a company collectively are referred to as “the Board of Directors” or the
“Board”. Any person, in accordance with whose directions or instructions the Board of
Directors of a company is accustomed to act, is also deemed to be a director of the
company (Sections 303 and 397).

3.1 LEGAL POSITION OF DIRECTORS


(i) As trustees: Although a director is described as a trustee, yet he is not a trustee in
the true sense of the term; he is so only in a limited sense, viz., he stands in a
fiduciary relationship with his company. It has been said that directors are trustees. If
this means no more than those directors in the performance of their duties stand in a
fiduciary relationship to the company, the statement is true enough. But if this
statement is meant to be an indication by way of analogy of what those duties are, it
appears to me to be wholly misleading. I can see but little resemblance between the
duties of a director and the duties of a trustee of a will or of a marriage settlement
“(As per Romer J. in re City Equitable Insurance Co., (1925) I ch. 407). Since he is in
a fiduciary relationship with the company, he is, to that extent, also a trustee of the
company’s assets which are under the director’s control or which have come into their
hands (Iyyappan vs. The Dharmodyam Company, 1963 I.S.C.R.85). He is a trustee in
the sense that he must act in the interest of the company and not in his own interest.
(Regal vs. Gulliver (1942), I All E R. 378) Because of his fiduciary relationship he
3.2 Corporate and Allied Laws

must exercise the powers according to the best of his judgement for good of the
company and its shareholders. It is his duty to abide by the provisions of the articles
and to exercise his power after due deliberation and careful consideration of what he
is intending to do. His transactions must be fair and proper [Narayandas Sowani vs.
Sangli Bank Ltd. (1965) 35 Comp. Cas 596 SC] Though the directors are trustees,
even in the limited sense, for the company and the shareholders, they are not trustees
for the creditors or for individual shareholders or for outsiders.
(ii) As agents: Although directors are not agents in the legal sense, the law of agency
governs the relationship between the company and its directors. Whenever an agent
acting on behalf of his principal will be liable, the directors would also be liable in the
like circumstances; where the liability would attach to the principal and the principal
only. The liability is the liability of the company. Thus when directors act properly on
behalf of the company, they do not incur personal liability; if they exceed their powers
but the acts are intra vires the company, it can ratify the acts. They are not in the
position of agents to shareholders. In certain respects, their powers are more
extensive than those of agents because the shareholders who appoint them do not
have much opportunity to control their acts.
(iii) As managing partners: The directors who look after a company does so for
themselves as well as for the shareholders. Their position is similar to that of
managing partners, for they are appointed to their offices by an arrangement between
them and other members. But they do not have all the powers or liabilities of
managing partners. Even amongst the directors themselves there is no mutual agency
as in the case of partners.
“Directors” are described as trustees, agents of managing partners, not as exhausting
their powers or responsibilities but as indicating useful points of view. It does not matter
much what you call them, so long as you understand what their true position is, “they are
commercial men managing a trading concern for the benefit of themselves and all other
shareholders in it” (as per Lessel M.R. in re Forest of Dena Mining Co 10 Ch D-450). The
best way to describe their position is to say that they stand in a fiduciary position towards
the company in regard to powers conferred on them by the articles (Re City Equitable Fire
Insurance Co).
♦ Number of Directors: The articles generally specify the maximum number of
directors that a company may have. Every public company (other than a public
company which has become such by virtue of Section 43-A) must have at least three
directors. Every other company must have at least two directors (Section 252).

3.2 APPOINTMENT OF DIRECTORS


You will appreciate that the competence and integrity of directors of a company go a long
Directors – Powers, Managerial Remuneration 3.3

way in bringing about its success. The company, therefore, must be pretty choosy in
selecting the proper persons to vest them with its management. Accordingly, only an
individual can be a director of a company. Consequently a body corporate, firm or other
association of persons cannot be appointed as director (Section 253). Usually the articles
of a company name the first directors but their appointment will be valid only if the
conditions prescribed by Section 266(1) of the Act have been complied with namely
(i) that the director has given his consent in writing and the same has been filed with the
Registrar; and
(ii) that he has subscribed to the memorandum undertaking to purchase the qualification
shares or has acquired the number of shares prescribed as the qualification for a
director or has an affidavit with the Registrar to the effect that he shall take or pay for
his qualification shares or that shares of the value not less than qualification shares,
are registered in his name.
(iii) Section 257 provides that a person who is not a retiring director and is other wise not
disqualified must either himself or some other member intending to propose him must
give a written notice of at least 14 days before the meeting along with a deposit of
Rs.500 which shall be refunded to such person or, as the case may be, to such
member, if the person succeeds in getting elected as a director. The Amendment Act
has added this requirement of deposit of Rs.500, 1998 to discourage frivolous notice
to contest for election as director of a company. These restrictions, however, do not
apply to the case of a private company.
Section 254 provides that “in default of and subject to any provisions in the articles”
subscribers to the memorandum who are individuals shall be deemed to be the directors
of the company till the company under Section 255 appoints directors.
Generally, however, the articles name the first directors. Sometimes (as Regulation 64 of
table A lays down) articles may also provide that both the number and the names of the
first directors have to be determined in writing by subscribers to the memorandum or a
majority of them. In such a case it has been held that a majority or subscribers should be
present (and not the quorum as required by the articles) before the first directors could be
validly appointed [Re London Southern and Company (1885) 31 Ch. D. 223].
According to Section 255, unless the articles provide for the retirement of all directors in
every general meeting, at least 2/3rds of the total number of directors of the public limited
company in question must, in the first place, be appointed, save as otherwise expressly
provided in the Act by the company in general meeting; secondly, they must be persons
whose period of office is liable to be determined by rotation. The remaining directors of
such company must also be appointed in the same way unless some other provision for
such appointments is made in the articles of the company concerned as where, for
instance, the articles authorise a financial institution, which may have advanced large
3.4 Corporate and Allied Laws

loans to the company to induct a director on the Board of the Company.


Now, the general meeting italicised above may be either an annual general meeting or an
extraordinary general meeting. But in practice, appointments of directors pursuant to
Section 255 are made, at the first annual general meeting after the in corporation of the
company. Persons who are named, as directors in the articles of the public company have
to retire from office at such meeting unless any of them (not exceeding 1/3rds of the total
number of directors constituting the Board for the time being) had been appointed under
an authority conferred upon some person by the articles as aforesaid.
The provisions as regards the retirement of directors by rotation are designed, in the
words of Justice Sarkar “to eradicate the mischief caused by self-perpetuating
managements” Oriental Metal pressing works vs. Bhaskar A.I.R 1961 S.C. 578 at p.575.
According to Section 256, out of the 2/3rds rotational directors only 1/3rds must retire by
rotation at one general meeting. If the number is not three or multiple of three, then the
number nearest to 1/3 must retire from office. First those directors who are the longest in
office must retire. If two directors have been appointed on the same day, their retirement
will be determined either mutually or by lot. The vacancies caused by such retirement may
be filled in the same annual general meeting by appointing either the retiring directors or
some other person. But the meeting may also decide that the vacancies shall not be filled.
Where, however, the meeting has not done either of two, and then the meeting is deemed
to have been adjourned for a week. If at the adjourned meeting held after the said week,
fresh appointment is not made and if no resolution against appointment is passed, then
the retiring directors shall be deemed to have been appointed except in the following
cases: (a) Where at the meeting or at the previous meeting the resolution for the
reappointment of a particular director was put to vote but lost; (b) where the retiring
director has expressed his unwillingness to be reappointed by a written notice addressed
to the company or its Board of Directors; (c) Where he is unqualified or has been
disqualified for appointment; and (d) where any special or ordinary resolution is required
for his appointment or reappointment.
You should also remember that a director who is to retire by rotation at an annual general
meeting cannot continue in office after the last day on which the meeting ought to have
been called as required by Section 166 [R.H.C. Insurance Society Ltd. (1960) 65 C.W.N.
26; Krishna Prasad Pilani vs. Colaba Land Mills (1960) Bom. 321]. It should further be
noted that a company, which does not carry on business for profit, or a company, which
by its articles prohibits the payment of dividend to its members, would not be affected by
the provisions of Sections 177, 255, 256 and 263. Section 177 provides that at any
general meeting a resolution put to vote at the meeting shall unless a poll is demanded be
decided on a show of hands. Section 255 provides that at least 2/3rds of the directors
shall retire by rotation Section 256 provides that 1/3rds of the retiring directors shall retire
every year. Section 263 provides each director should be elected separately. Such a
Directors – Powers, Managerial Remuneration 3.5

company, which does not carry on business for profit or prohibits the payment of dividend
to its members may provide by its articles for election of directors by ballot. The
Companies that will come under this section would be mostly the Chambers of Committee,
Clubs and other associations licensed under Section 25 of the Act where, in most cases,
there exists a practice of electing office bearers by ballot. In some companies where the
articles provide election of directors by ballot, if the context permits the word ‘ballot’ would
probably mean ‘poll’.
♦ Right of person other than retiring Director to stand for Directorship: In terms of
Section 257 as amended by the Amendment Act of 1988, a person other than a
retiring director proposing himself as a director, or any member proposing him for
directorship has to not less than fourteen days before the meeting give notice
signifying his candidature along with depositing with the company concerned a sum of
Rs.500 which shall be refunded to such person or member in the event the person
concerned succeeds in getting elected as a director of the company. Conversely as
clarified by circular nos. of 1989 dt. 15.9.89, in case such a person is not elected as
director, he or the member, as the case may be, will not be entitled to the refund of
Rs.500 and the amount deposited shall stand forfeited by the company.
This provision, it may be noted, does not apply to the appointment of directors otherwise
than by the company in the general meeting. Nor does it apply to a private company,
which is not subsidiary of a public company.
The company shall inform its members of the candidature of a person for the office of
director or the intention of a member to propose such person as a candidate for that
office, by serving individual notices on the members not less than seven days before the
meeting. But the company may avoid serving individual notices as aforesaid if the
company advertise such candidature or the place where the registered office of the
company is located, of which one is published in English and the other in the regional
language of that place. (sub-section 1A of Section 257). Sub-section (1A) will have to be
complied with by all companies, public and private.
♦ Appointment by proportional representation: But the articles of a public company
or a private company which is subsidiary of a public company may adopt the principal
of proportional representation for appointing not less than 2/3 rd if the total number of
the directors, whether by a single transferable vote or by a system of cumulative
voting or otherwise. In such a case, appointments will be so made once in every three
years and interim casual vacancies will be filled in conformity with the provisions of
Sections 262 and 265. Cumulative voting denotes that if there are five candidates or
distributes his five votes. He can cast all the five votes in favour of one candidate or
distribute his five votes among different candidates. This system of voting ensures
that the Board will have fair representation of the minority interest.
♦ Increase in the number of Directors: A public company may by an ordinary
3.6 Corporate and Allied Laws

resolution, increase or reduce the number of its directors within the limits fixed by the
articles buy any increase in the number of its directors beyond the maximum
permissible under the articles must be by a special resolution and have the approval
of the Central Government (Sections 258 and 259). Where, however, such permissible
maximum is 12 or less, no approval of the Central Government shall be required if the
increase does not make the total number of directors more than 12 (Proviso to
Section 259). In other words, the approval of the Government would not be required
for increase in the number of director’s upto 12 irrespective of the provision in the
articles of association.
If the articles fix no maximum or minimum, the provision as to minimum required by
Section 252 will govern. Any resolution in any manner increasing the number above
twelve as fixed by the proviso will have to require Central Government approval.
♦ Appointment of Small Shareholders as Director:
The Companies (Amendment) Act, 2000 has provided that a Public Company (a) with
a Paid-up Capital of Rs. 5 crores or more and (b) 1000 or more small shareholders
may have a director elected by such small shareholders as may be prescribed.
In exercise of the powers conferred by Section 642 read with Section 252 of the
Companies Act, 1956 (1 of 1956), the Central Government has framed the following
rules, called the Companies (Appointment of the Small Shareholders’ Director) Rules,
2001.
They shall come into force on the date of their publication in the Official Gazette
Notification No. GSR 168(E), dated 9.3.2001.
In this rules, unless the context otherwise requires “small Shareholder” means
shareholder holding shares of nominal value of twenty thousand rupees or less in public
company to which Section 252 of the Act applies.
These rules shall apply to public companies having-
(a) Paid-up capital of five crores rupees or more;
(b) One thousand or more small shareholders.
Manner of election of small shareholders’ director: (1) A company may act suo moto to
elect a small shareholders’ director from amongst small shareholders or upon the notice
of small (2001) 22 TCR…..(St.) Appt. of Small Shareholders’.Rules shareholders, who are
not less than 1/10 th of total small shareholders and have proposed name of person who
shall also be a small shareholder of the company.
(2) Small shareholders intending to propose a person shall leave a notice of their intention
with the company at least 14 days before the meeting under the signature of at least 100
small shareholders specifying name, address, shares held and folio number and
Directors – Powers, Managerial Remuneration 3.7

particulars of share with differential rights as to divided and voting, if any, of the person
whose name is being proposed for the post of director and of other small shareholders
proposing such person as a candidate for the post of director or small shareholders.
(3) A person whose name has been proposed for the post of small shareholders’ director
shall sign, and file with the company, his consent in writing to act as a director.
(4) The listed public company shall elect small shareholders nominee subject to sub-rules
(1), (2) and (3) above through the postal ballot.
(5) The unlisted company may appoint such small shareholders’ nominee subject to above
conditions if majority of small shareholders recommend his candidates for the post of
director in their meeting.
(6) Tenure of such small shareholders’ director shall be for a maximum period of 3 years
subject to meeting the requirement of provisions of Companies Act except that he need
not have to retire by rotation.
(7) On expiry of his tenure, the same person if so desired by small shareholders, may be
elected for another period of 3 years.
(8) Such director shall be treated as director for all other purposes except for appointment
as whole time director or managing director.
Disqualification: A person shall not be capable of being appointed as small
shareholders’ director of a company, if –
(i) he has been found to be of unsound mind by a court of competence jurisdiction and
the finding is in force;
(ii) he is an un-discharged insolvent;
(iii) he has applied to be adjudicated as an insolvent and his application is pending;
(iv) he has been convicted by a court of any offence involving moral turpitude and from
the date of expiry of the sentence;
(v) he has not paid any call in respect of shares of the company held by him, whether
along or jointly with others, and six months from the last day fixed for the payment of
call; or
(vi) an order disqualifying him for appointment as director has been passed by a Court
in pursuance of Section 203 and is in force, unless the leave of the court has been
obtained for his appointment in pursuance of that section.
Vacation of office: A person appointed as small shareholders’ director shall have to
vacate the office if, —
(i) such person so elected, as director of small shareholders ceases to be a small
3.8 Corporate and Allied Laws

shareholders’ director on and from such date on which he ceased to be a small


shareholder;
(ii) he has been rendered disqualified by virtue of sub-rule (1) of rule 5;
(iii) he fails to pay any call in respect of shares of the company held by him, whether
alone or jointly with others, within six months from the last date fixed for the
payment of the call;
(iv) he absents himself from three consecutive meetings of the Board of directors, or
from all meetings of the Board for a continuous period of three months, which ever
is longer, without obtaining leave of absence from the Board;
(v) he is a partner of any private company of which he is a director, accepts, a loan, or
any guarantee or security for a loan, from the company in contravention of Section
295;
(vi) he acts in contravention of Section 299;
(vii) he becomes disqualified by an order of court under Section 203;
(viii) he is removed in pursuance of Section 284.
Restriction on number of directorship: No person shall hold office at the same time as
small shareholders director in more than two companies.
♦ Additional Directors: When empowered by the articles, the Board of Director can
appoint additional directors. But such additional directors shall hold office only up to
the date of the next annual general meeting. Also the total number of additional
directors and other directors together must not exceed the maximum strength fixed for
the Board by the articles (Section 260). This Section applies to all companies, public
and private,
Additional Directors must acquire the qualification shares within two months. The
power under Section 260 can be exercised by a board even enough the strength of
the board has fallen below the minimum. However, such appointment of additional
Directors must be in the interest of the general body of shareholders [Anantha
Lakshmi vs. Indian Traders Ltd. A 1953 Mad. 467].
♦ Can an additional Director Continue to be in office where the annual general
meeting is not held as per Section 166? In Krishna Prasad Pilani vs. Colaba Land
Mills Co. 29 Comp. Crs 273, it was observed that an additional Director shall vacate
his office latest on the date on which the annual general meeting could have been
held under Section 166. He cannot continue in office on the ground that the meeting
was not held or could not be called within the time prescribed.
♦ Can an additional Director be appointed in general meeting? Where the articles
have conferred the power of appointing additional directors on the Board of Directors
Directors – Powers, Managerial Remuneration 3.9

the company in a general meeting is precluded from appointing additional directors


[Blair Open Hearth Furnance Co. vs. Reigart, (1913) 108 L.T. 665]. However, though
in ordinary circumstances the company in general meeting is precluded from
appointing such directors yet if owing to a deadlock or otherwise there is no board
capable of making the necessary appointment the company in a general meeting may
do so [Barrow vs. Potter, (914) 1 Ch. 895].
♦ Casual Vacancy: Where the office of a director appointed by the public company in
general meeting is vacated before his term of office expires in the normal course,
resulting in a casual vacancy may, in default of and subject to any regulations in the
articles, be filled by the Board of Directors at a meeting of the Board. (Section 262)
Since Section 262 requires the filling of casual vacancy at a Board meeting,
appointment can be made only by a validly convened and constituted Board meeting.
This cannot be done by a resolution by circulation.
Regarding the tenure of a director appointed against casual vacancy, sub-section (2)
of Section 262 provides that the person appointed in the casual vacancy shall hold
office only upto the date to which the director in whose place he is appointed would
have held office.
♦ Appointment of directors by Central Government: Section 408 (as amended from
February, 1975) empowers the Central Government to appoint such number of
persons as the Central Government may, by order in writing, specify as being
necessary to effectively safeguard the interest of the company or its shareholders or
the public interest for a maximum period of 3 years at a stretch, with a view to
preventing the oppression of the members or mismanagement of the affairs of the
company provided the conditions prescribed by the section are fulfilled.
Note: For a detailed discussion on Section 408 refer to Chapter 3 of this book.
♦ Appointment of alternate directors: The Board of Directors of a Company may, if
authorised by its articles or by a resolution passed by the company in general
meeting, appoint an alternate director to act for a director during his absence (for a
period of not less than 3 months from the State in which meetings of the Board are
ordinarily held). Such a director only officiates for the permanent incumbent and
cannot hold office for a period longer than that permissible for the original director
and as such vacates the office on the return of the original director. Also, if the term
of office of the original director is determined before he returns, any provision for the
automatic reappointment of retiring director in default of another appointment shall
apply to the original director and not to the alternate director (Section 313).
♦ Assignment of office by director: Any assignment of office made after the
commencement of the Act by any director is void [Section 312].
It was held in Oriental Metal Pressing Works Private Ltd. vs. B.K. Thakoor (A.I.R.)
3.10 Corporate and Allied Laws

1960 Bom. 167 that the appointment of one as managing director by the will of one D
was void in view of the provisions contained in Section 312, since, according to the
High Court, the words ‘any assignment’ were comprehensive enough to include every
assignment to transfer of a director or of the appointment by a director of a person to
the office of a director in his place, whether by a deed inter vivos or by will. But this
ruling has been reversed by the Supreme Court (vide A.I.R. 1961 S.C. 573). The
Court considers that the word ‘assignment’ in Section 312 does not mean or include
appointment. From its every nature transfer inevitably imports the passing of a thing
from one person to another. A transfer without the passage of the thing, even when
that is an office is inconceivable. On the other hand, an ‘appointment’ has nothing to
do with passing from one person to another; it connotes the putting in of someone in a
vacancy. So transfer and appointment are dissimilar. It would be an unusual statute,
which by using a single word intended to prohibit at the same time, two wholly
different acts. A construction leading to such a result cannot be permitted.
♦ Who cannot be appointed as directors? The Companies Act prohibits undischarged
insolvents and fraudulent persons from discharging any of the functions of a director.
Under Section 202 if an undischarged insolvent discharges any of the functions of a
director he is punishable with imprisonment (extending to 2,years) or fine (extending
to Rs. 5000) or with both. ‘Company in this context includes an unregistered company
as well as a foreign company having an established place of business in India).
Similarly, Section 203 provides that: (a) where a person is convicted of an offence in
connection with the promotion, formation or management of a company; or (b) where
in the course of winding up of a company, it appears that (i) a person has been guilty
of an offence under Section 542 (whether convicted or not), or (ii) has been otherwise
guilty while an “officer” of the company of any fraud, misfeasance or breach of duty in
relation to the company, the Court may order that such person shall not, without the
leave of the Court, be a director of a company for a period not exceeding 5 years.
(The court as regards (a) includes the convicting court and as regards (b) the court
having jurisdiction to wind up the company).
Furthermore, under Section 274 a person cannot be appointed as director of a
company in any of the following cases, namely:
(i) where he has been found to be of unsound mind by a court of competent
jurisdiction and the finding is in force;
(ii) where he is an undischarged insolvent;
(iii) where he has applied to be adjudged as an insolvent and his application is
pending;
(iv) where he has been convicted by a court of an offence involving moral turpitude
and sentenced to an imprisonment for not less than six months and a period of
Directors – Powers, Managerial Remuneration 3.11

five years has not elapsed from the date of expiry of the sentence;
(v) where he has failed to pay any call in respect of shares held by him, whether
singly or jointly with others and six moths have elapsed since the last day fixed
for the payment of the call;
(vi) where he has been convicted of an offence in relation to promotion, formation or
management of the company, or where has been found, during the course of
winding up to be guilty of fraudulent conduct of business or misfeasance in
relation to the company and as a consequence the Court has disqualified him
from being appointed as director for a period not exceeding 5years. [It may be
noted that the Court may remove this disqualification; the disqualifications
mentioned in (iv) may be removed by the Central Government by notification in
the Official Gazette].
A private company, which is not, a subsidiary of a public company can provide for
additional grounds for disqualification. But a public company or its private subsidiary
cannot provide for additional grounds for disqualification.
CLARIFICATIONS FROM THE DEPARTMENT OF COMPANY AFFAIRS ON
DISQUALIFICATION OF DIRECTORS UNDER SECTION 274(1) (G) OF THE
COMPANIES ACT, 1956
I. General Circular No. 8/2002 dated 22-03.2001
1. Issued by the Ministry of Law, Justice & Company Affairs, Department of Company
Affairs vide No. 2/5/2- 1-CL.V;
As you are aware, the provisions of Section 274 of the Companies Act, 1956 were
amended through Companies (Amendment) Act, 2000 (w.e.f. 13-12-2000) and a new
clause (g) was inserted to sub-section (1) of this Section. Through this clause a director of
a public company, which has made defaults in filing of annual accounts and annual
returns and in repaying deposits/interests thereon on due date or redeeming its
debentures on due date or in paying dividend for period specified in that section, is
disqualified to be appointed as director of other public companies for a period of five
years from the date on which such public company (ies) so defaulted.
3. A high proportion of the companies had been defaulting in filing the annual accounts
and annual returns and a large number of companies were defaulting in repayment of
deposits/ interest thereon and in redemption of debentures which put investor to lots of
hardships and the remedial action including a deterrent punishment to the errant directors
was essential. But ironically, the errant directors were not only continuing in the defaulting
companies but becoming directors in other companies too. It was in this context that in the
Companies Act, 1956 the new sub-section 274(1)(g) was inserted and the RBI also took
some remedial measures.
3.12 Corporate and Allied Laws

3. The intention and propose of the above amendment was to disqualify the errant
directors, protect the investors from mismanagement, ensure compliance in filing of
annual accounts and annual returns which are means of a disclosure to all the
stakeholders, increase the compliance rate of filing of the statutory documents and infuse
good corporate governance in the regulation of corporate affairs in the country.
4. The Department, however, has received representations from public financial
institutions, Government owned financial companies and other financial Institutions and
Companies in respect of these provisions. The Banking Division in the Finance Ministry
has also supported the apprehension of the Financial Institution. The representation have
been considered carefully keeping in view on the one hand, the need for strict compliance
with the provisions of the clause (g) of sub-section (1) of Section 274 of the Companies
Act, 1956 and on the other hand the non-obstante clause in statutes of some of the public
Financial Institutions and the special situation of the nominee directors of public Financial
Institutions/banks and the nominees of Central and State Government companies.
5. The Government has decided to – (i) clarify the legal position in respect of the Public
Financial Institutions/banks having non-obstante clause in their statute; (ii) to give some
relief to the nominees of the Public Financial Institutions/Banks/Central and State
Government; and (iii) to exempt Government Companies from the applicability of the
provisions of Section 274(I)(g) of the Companies Act, 1956.
6. While considering the applicability of the provisions of Section 274(1)(g) of the
Companies Act, 1956, the Government has taken into account the following points:
(i) In addition to protecting the interest of the Public Financial Institutions/banks, which
they represent, the Nominee Directors are also expected to serve the best interest of
sound public policy and bring about higher levels of corporate governance.
(ii) In view of implicit disqualification in Section 274(1)(g), qualified and experienced
professionals, both official and non-officials, suitable for being appointed on the
Boards of assisted concerns may not agree/available, thus adversely affecting the
interests of the Banks/ Financial Institutions.
(iii) Presence of the Nominee Directors on the Boards of assisted concerns and close
monitoring through them of all the affairs of the assisted concerns is for more
desirable when the company is in default to the Banks/Financial Institutions.
7. However, the Government hereby further clarifies that the Nominee Directors of Public
Financial Institutions/Banks/Government should in order to avail the relief granted are
expected to comply with the following:
(i) The Nominee Directors are expected to work assiduously towards observance of
good corporate governance practices in the company with due regard to the
legitimate interest of the various shareholders. The various provisions relating to
Directors – Powers, Managerial Remuneration 3.13

good corporate governance has been introduced in the Companies Act


Rules/Regulations and clause 49 of the Listing Agreement introduced by the SEBI.
The Nominee Directors are expected to study these provisions of corporate
governance and have them implemented.
(ii) Ensure that the operations of the company are conducted in consonance with public
policy.
(iii) Ensure strict compliance in letter and spirit of all the statutory provisions in
particular the provisions of the Companies Act and the regulations, clarifications etc.
issued thereunder. It is the duty of the nominee directors to fully acquaint
themselves in the relevant provisions of the Company Law and ensure that
measures are instituted to monitor and certify that these statutory provisions are
being observed.
(iv) The Nominee Directors should see that important committees of the Board of
Directors are constituted and are functioning effectively such as Audit Committee,
Nominations Committee, Remuneration Committee etc. The Nominee Directors are
expected to seek membership of these important committees and through their
active participation in such committees ensure that the objectives of setting up these
committees are being achieved.
(v) The Nominee Directors are expected to regularly attended and actively participate in
the proceedings of the Boards and in committee on which they are included. Their
frequent absence for sufficient reasons from the meetings of the Board of
Directors/Committees would negate the purpose for which the Institutions have
nominated the Nominee Directors and they would not be able to perform the various
responsibilities listed out in this paragraph.
(vi) Duly safeguard the interest of the Government/Banks/Financial Institutions, which
they represent. Ensure proper utilisation of financial assistance by the assisted
company and prevent any misuse/diversion of funds by the promoters/management
of the companies.
(vii) Provide adequate feedback to the nominating Institutions/banks/Companies on the
affairs and operations of the assisted concerns.
(viii) The Financial Institutions are expected to closely monitor the participation by the
Nominee Directors in the Boards/Committees as above and to ensure that they are
discharging their responsibilities as listed out above. In case any Nominee Director
is failing to discharge his/her responsibilities the Institutions are expected to take
steps to replace him/her. The Institutions are also expected to send a six monthly
report to the Department of Company Affairs (DOCA) bringing out the steps taken by
them to ensure that their Nominee Directors are discharging their responsibilities.
The Financial Institutions should also in a separate section of their annual Report
3.14 Corporate and Allied Laws

clearly bring out the measures instituted by them to ensure that the system of
Nominee Directors is functioning effectively.
8. Accordingly, it is clarified that:
(i) Nominee Directors appointed by the Public Financial Institutions and Companies
established under the Acts of Parliament having non-obstante provisions over the
Companies Act, 1956, like IDBI, LIC, UTI, IIBI etc, in their respective statutes shall
not be liable to be disqualified for appointment as directors by virtue of Section
274(1)(g) of the Companies Act, 1956.
(ii) Nominee Directors appointed on the Boards of assisted concerns or other public
companies by – (a) public financial institutions within the meaning of Section 4A of the
Companies Act, 1956; (b) Central or State Government; and (c) banking companies
are also exempt from the provisions of Section 274(1)(g) of the Companies Act, 1956.
II. (F.No. 2/5/2001-Cl.V dt. 14 th January, 2003)
Further in continuation of the above Department’s Circular No. 8/2002 dated 22 nd March,
2002, it has been further clarified that default of privately placed bonds/ debentures/debt
instruments by public financial institutions will not be considered as default to disqualify
directors u/s 274(1)(g) of the Companies Act of 1956. (F.No. 2/5/2001-Cl.V dt. 14 th
January, 2003)
III. (F.No. 2/5/2001-Cl.V dt. 14 th January, 2003)
G.S.R. 830 (E). - In exercise of the powers conferred by clause (b) of sub-section (1) of
section 642 of the Companies Act, 1956 (1 of 1956), the Central Government hereby
makes the following rules to carry out the purpose of clause (g) of sub-section (1) of
section 274 of the said Act, namely: -
1. Short title, commencement and extent. -
(1) These rules may be called the Companies (Disqualification of Directors under section
274(1)(g) of the Companies Act, 1956) Rules, 2003.
(2) These rules shall come into force from the date of their notification in the Official
Gazette.
(3) These rules shall apply to all public limited companies registered under the
Companies Act, 1956.
3. Definitions –
In these rules, unless the context otherwise requires, -
(a) “disqualifying company” is the company in which the default has occurred on account
of which a director stands disqualified;
Directors – Powers, Managerial Remuneration 3.15

(b) “appointing company” is the company in which an individual is seeking appointment as


a director, including re-appointment as director.
3. Disqualifications under clause (g) of sub-section (1) of section 274 of the
Companies Act, 1956.-
(a) Whenever a company fails to file the annual accounts and annual returns, as
described in sub-clause (A) of clause (g) of sub-section (1) of section 274, persons who
are directors on the last due date for filing the annual accounts and the annual returns for
any continuous three financial years commencing on and after the first day of April, 1999,
shall be disqualified.
(b) If a company has failed to repay any deposit, irrespective of the enactment, rules or
regulations under which the deposits have been accepted by the companies, or interest
thereon, or redeem its debentures, or pay any dividend declared on the respective due
dates, and if such failure continues for one year, as described in sub-clause (B) of clause
(g) of sub-section (1) of section 274, then the directors of that company shall stand
disqualified immediately on expiry of that one year from the respective due dates:
Provided that all the directors who have been directors in the relevant year, from the due
date to the expiry of one year after the due date, will be disqualified:
Provided further that disqualification on account of the reasons cited under this Rule shall
also apply to the reappointment as a director.
Explanation.- For the purpose of this rule, it is clarified that non-payment of dividend
referred to in sub-clause (B) of clause (g) of sub-section (1) of section 274 due to the
reason of dividend not being claimed or kept in separate bank account as required under
section 205A of Companies Act, 1956 or paid into Investors Education & Protection Fund
as required under section 205C of that Act shall not be deemed to be a failure to make
payment of dividend.
4. Duty of Statutory Auditor to report on disqualification.-
(a) It shall be the duty of statutory auditor of the appointing company as well as
disqualifying company, as required under section 227(3)(f) to report to the members of the
company whether any director is disqualified from being appointed as director under
clause (g) of sub-section (1) of section 274 and to furnish a certificate each year as to
whether on the basis of his examination of the books and records of the company, any
director of the company is disqualified for appointment as a director or not.
(b) It shall be the duty of the statutory auditors of the “disqualifying company” as required
in section 227(3)(f) to report to the members of the company whether any director in the
company has been disqualified during the year from being re-appointed as director, or
3.16 Corporate and Allied Laws

being appointed as director in another company under clause (g), of sub-section (1) of
section 274.
5. Duty of company to intimate disqualification.-
Whenever a company fails to file the annual accounts and returns, or fails to repay any
deposit, interest, dividend, or fails to redeem its debentures, as described in clauses (A)
and (B) of clause (g) of sub-section (1) of section 274, the company shall immediately file
a return in duplicate in Form ‘DD-B’, prescribed under these rules for this purpose, to the
Registrar of Companies, furnishing therein the names and addresses of all the Directors
of the company during the relevant financial years:
Provided that names of such directors who have been exempted from application of
Section 274(1)(g) by the Central Government, from time to time, shall be excluded.
Provided further that no unusual abbreviations or short forms shall be used in filling up the
Form ‘DD-B’, which shall give such details as may be necessary to distinguish and identify
each director without any ambiguity.
6. Failure to intimate disqualification shall render director as officer in default.-
When a company fails to file the Form ‘DD-B’ as above within 30 days of the failure that
would attract disqualification under Section 274(1)(g), officers of the company
listed in section 5 of the Companies Act, 1956 shall be officers in default.
7. (a) Upon receipt of the Form ‘DD-B’ in duplicate under Rule 5, the Registrar of
Companies shall immediately register the document and place one copy of it in the
document file for public inspection.
(b) The Registrar of Companies shall forward the other copy to the Central Government.
8. Names of the disqualified directors on the web-site etc.-
(a) The Central Government shall place on the web site of the Department of Company
Affairs the names and addresses and such other details including names and details of
the companies concerned, as may be necessary, in respect of all the disqualified
directors.
(b) The Central Government may also publicize the names of disqualified directors in such
manner, as it may consider appropriate.
(c) The Central Government shall take such steps as may be required to update its web-
site to ensure that name of the person, in whose respect disqualification period has
expired after 5 years, is deleted from the web-site.
9. Duty of every director.-
Directors – Powers, Managerial Remuneration 3.17

Every director in a public company registered under the Companies Act, 1956 shall file
Form ‘DD-A’, prescribed under these Rules, before he is appointed or re-appointed.
10. If any question arises as to whether these rules are or are not applicable to a
particular company, such question shall be decided by the Central Government.
11. Punishment for contravention of the rules.-
If a company or any other person contravenes any provision of these rules for which no
punishment is provided in the Companies Act, 1956, the company and every officer of the
company who is in default or such other person shall be punishable with fine which may
extend to five thousand rupees and where the contravention is a continuing one, with a
further fine which may extend to five hundred rupees for every day after the first, during
which the contravention continues.
13. On the commencement of these rules, all rules, orders or directions in force in relation
to any matter for which provision is made in these Rules shall stand repealed, except as
respects things done or omitted to be done before such repeal.
[F. No.1/8/2002-CL.V]
IV. F.No.2/5/2001-CL.V - G.S.R. 829 (E).- 21 st October, 2003
In exercise of the powers conferred by clause (a) of sub-section (1) of section 620 of the
Companies Act, 1956 (1 of 1956), the Central Government hereby directs that clause (g)
of sub-section (1) of section 274 of the said Act shall not apply to a Government company,
a copy of this notification having been laid in draft before both Houses of Parliament as
required by sub-section (2) of section 620 of the said Act.
♦ Can a Minor be appointed as a Director? In case of a minor there is no provision in
the Act expressly disqualifying him. However, since a minor is not competent to
contract. He cannot file with the Company or with the Registrar any valid consent to
act as Director, as required under Section 264. But, as Section 264 applies only to
public companies and private companies, which are their subsidiaries, there is nothing
to prevent a minor becoming a Director of independent private companies. [Ramaiya,
1988 E., p.829]
♦ Restrictions on number of directorships: A person cannot hold office at the same
time as director in more than fifteen companies [substituted in place of twenty by the
Companies (Amendment) Act, 2000] excluding a private company which is not
subsidiary or holding company of a public company, and unlimited company, an
association not for profit and a company in which such person is only an alternate
director (Sections 275 and 278).
In this context let us now consider an illustration. A is director in 14 public limited
companies. He is offered the directorship of (i) BC Private Limited; (ii) XYZ Ltd.; (iii)
3.18 Corporate and Allied Laws

Indian Automobile Association, a company registered under Section 25 of the


Companies Act. Can A accept these directorships? In the first case, A can accept
the directorship of BC private Ltd. In view of the provisions of Section 278(I)(a),
because private company, which is neither a subsidiary nor a holding company of a
public company, is not to be counted in calculating the number of directorships as
prescribed by Section 275. In the second case too; A can accept the directorship of
XYZ Ltd. Because with this he becomes a director of 15 companies which is the
prescribed maximum limit. In the third case as well, A can accept the directorship of
the Indian Automobile Association because the directorship is also to be excluded
from the computations of 15 directorships under Section 278(I)(c).
♦ Choice by person becoming director of more than 15 companies: Section 277
provides that where a person already holding the office of director in 15 companies is
appointed as a director of any other company, the appointment:
(a) shall not take effect unless such person has within 15 days thereof, effectively
vacated his office as director in any of the companies in which he was already a
director; and
(b) shall become void immediately on the expiry of the 15 days if he has not before
such expiry, effectively vacated his office as director in any of the other
companies aforesaid.
Where a person already holding office of director in 14 companies or less is appointed
as a director of other companies, making the total number of his directorships more
than 15, he shall choose the directorships which he wishes to continue to hold or to
accept, so however that the total number or the directorships, old and new, held by
him shall not exceed fifteen.
Please note that none of the new appointments of Directors shall take effect until the
aforesaid choice is made; and all the new appointments shall become void if the
choice is not made within 15 days from the day on which the last of them was made.
According to Section 279 any person who holds office or act as a director of more
than 15 companies in contravention of the aforesaid provisions shall be punishable
with fine, which may extend to Rs.50,000 in respect of each of those companies
exceeding fifteen.
♦ Consent of candidate for directorships: A person who is proposed as a candidate
for the office of director, is required to sign and file with the company his consent to
act as director (if appointed). However, a director retiring by rotation or otherwise or a
person who has left at the office of the company a notice under Section 257 signifying
his candidature for the office of a director, is not required to do so [Section 264(1)].
A person shall not act as a director unless he has signed and filed with the Registrar
Directors – Powers, Managerial Remuneration 3.19

his consent in writing to act as director within 30 days of his appointment [Section
264(2)].
The aforesaid provision does not apply to: (a) director reappointed after retirement by
rotation or immediately on the expiry of term of his office; or (b) an additional or
alternate director, or a person filling a casual vacancy under Section 262 appointed as
director or reappointed as an additional or alternate director immediately on the expiry
of his term office, or (c) a person named as director under the articles as first
registered.
♦ Appointed of directors must be voted individually: Each director shall be
appointed by a separate resolution in the case of a public company unless the
meeting first agreed by resolution that the appointment shall be made by single
resolution and no vote has been cast against it. A resolution moved in contravention
of this provision shall be void, whether or not objection thereto was raised at the time
it was so moved. Thus, two or more directors of a company cannot be elected as
directors by a single resolution unless it is done in conformity with the provisions of
Section 263. When such a resolution is passed, provision for automatic re-
appointment of directors retiring by rotation shall not apply. Section 263 does not
apply to a company whose articles provide for election of directors by ballot and which
does not carry on business or prohibits the payment of a dividend to the members
(Section 263A).
♦ Principle of proportional representation for appointment of directors: Under
Section 265, a company can adopt the principle of proportional representation for the
appointment of its directors, buy only if its articles so provide. In such a case, not less
than 2/3rds of the total number of directors shall be appointed according to the
aforesaid principle, whether by the single transferable vote by a system of cumulative
voting or otherwise. Such appointments are to be made once in every three years and
interim casual vacancies can be filled in accordance with the provision, mutatis
mutandis, of Section 263.

3.3 SHARE QUALIFICATION FOR DIRECTORS


It is that number of shares which a shareholder must hold in order to be eligible for
election as a director. The Companies Act, 1956 does not prescribe for any share
qualification for a director. However, Regulation 66 of Table A provides that the
qualification for being a director of a company is the holding of at least one share in the
company. The articles of a company usually prescribe for such qualifications so that a
director has a personal interest in the company. In the event of such a provision by the
articles, it becomes incumbent on the part of every director to hold qualification shares
and if does not hold them at the time of his appointment as director, he must acquire them
within two months after his appointment as director. Any provision, made in the articles of
3.20 Corporate and Allied Laws

the company requiring a person proposed for directorship to hold qualification shares
either before appointment or within a third shorter than two months after his appointment
will be void. The nominal value of qualification shares must not exceed Rs. 5,000 and if
the nominal value of each share is Rs. 5,000 or more than the number of shares
prescribed, as qualification will be only one. It is, of course, not necessary for any
company to insist upon the holding of shares for the purpose of qualification for directors.
For the purpose of share qualification, the bearer of a share warrant is not deemed to be
the holder of the shares mentioned in the warrant (Section 270). A Director acting without
qualification shares is punishable with fine, which may extend to Rs. 500/- for every day
during which he continues as director (Section 272). The provisions relating to the share
qualification of a director do not apply to a private company, unless it is subsidiary of a
public company (Section 273): nor do they apply to directors appointed by the Central
Government under Section 408.
♦ Vacation of office by director: The office of a director shall become vacant if (1) he
fails to obtain with in the prescribed time (two months) or ceases to hold thereafter
the qualification shares when he is so required by the articles; (ii) he is found to be of
unsound mind by the Court; (iii) he applies to be adjudged an insolvent; (iv) he is
adjudged as an insolvent; (v) he is convicted by a court of an offence involving moral
turpitude and is sentenced to imprisonment for not less than six months; (vi) he does
not pay the call in respect of shares held by him within six months from the last date
fixed for the payment. The Central Government can, by notification in Official Gazette,
remove this disqualification; (vii) without obtaining leave of absence from the Board,
he absents himself from three consecutive meetings of the Board or from all meetings
thereof for a continuous period of 3 months, whichever is longer; (viii) he, whether by
himself or by any person for his benefit or on his account or any firm in which he is a
partner or any private company of which he is a director, accepts a loan or any
guarantee or security for a loan from the company without previous approval of the
Government as required by Section 295; (ix) having been appointed a director by
virtue of his holding any office or other employment in the company, he ceases to hold
such office or other employment in the company (x) he fails to disclose his interest in
contract or a proposed contract by the company as required by Section 299 (xi) he is
disqualified by an order of Court under Section 203 from acting as director of the
company (xii) he is removed by the company in annual general meeting in pursuance
of Section 284; and (xiii) he holds any office or place of profit in the company or its
subsidiary without the consent of the company accorded by a special resolution.
Note: (i) An alternate director vacates office when the original director returns
[Section 313(2)]. (ii) A person vacates the office of director automatically in such other
company after the expiry of 15 days if he, while holding directorship in 20 companies,
is appointed director in other companies unless he gives notice of choice [Section
277(I)(b)].
Directors – Powers, Managerial Remuneration 3.21

♦ Resignation of director: A director can resign from his office. For this purpose, he
must service a notice of his resignation upon the company (Municipal Freehold Co.
vs. Poling ton (1890) 63L. T. 238]. Palmer, however is of the view that if the articles
permit a director to resign at any time, the resignation will be effective from the time
of the service of the notice. There is no need for its acceptance by the Board or the
company in general meeting. If, however, the articles contain no such provision then
the resignation of the director will be effective only when he serves notice on the
company or the Board and resignation is accepted by them.
A verbal resignation is enough, though articles usually provide for a written notice
[Latchford Premier Cinema Ltd. vs. Ennion (1931) 2 Ch.439, Sawer vs. Mann (1938)
184Lt.42]. But a managing or governing or whole-term director cannot resign merely
by giving a notice. In his case, a formal acceptance of resignation by the company is
essential so as to make it complete and effective. This is because he occupies two
positions or possesses two capacities, viz., (i) one that of a director, and (ii) the other
that of manager or officer of the company in the sense of a whole-time employee. An
employee cannot give up office at his pleasure, simply by giving notice. The notice or
the letter of resignation is required to be approved or accepted by the company and
officer concerned has to be relieved of his duties and responsibilities attaching to the
office which he has resigned from [Achutha Pal vs. Registrar of Companies (1956) 36
Comp. Cas 598]. However, in the case of an ordinary director, formal acceptance of
resignation is not needed [Abdul Hug vs. Katpadi Industries Ltd. A.I.R. 1960 Mad.
483.]. A director cannot withdraw his resignation, without the consent of the company,
even if such withdrawal is sought before the Board considered the resignation
(Glossop vs. Glossop (1970) 2 Ch. 370: Lakshmana Mudaliar vs. Emperor (1932) 2
Comp. Cas.370]. Where the articles of a company provide that a person shall be a
director for life or until he resigns, a director so appointed will not be entitled to
damages against the company for wrongful termination of contract on the company
going into liquidation; the reason is that the articles operate so long as company
exists and it must be deemed to have been contemplated by articles that office shall
come to an end on the company going into liquidation [Re-Farrer (1987) 2 All
E.R.505].

3.4 REMOVAL OF DIRECTORS [SECTION 284]


A director (other than a director appointed by the Central Government under Section 408)
may be removed from the office by an ordinary resolution before the period of office
expires. But he cannot be removed in this way if he is the director of a company holding
office for life on 1-4-1953. It is further provided that the directors appointed on the
principle of proportional representation under Section 265 cannot be removed by an
ordinary resolution as aforesaid. Special notice shall be required for a resolution to
remove a director under Section 284. On receiving the notice of this resolution the
3.22 Corporate and Allied Laws

company must forthwith send a copy thereof to the director concerned, and the director
shall be entitled to be heard on the resolution at the meeting. The director can make a
representation in writing, a copy of which shall have to be sent to every member to whom
the notice of the meeting is sent. If the copy of the representation is not sent either due to
its having been received too late or due to the company’s default, the director may get the
representation read out at the meeting. However, the copy of the representation need not
be sent out at the meeting if on the application of either the company or any person
claiming to be aggrieved, the Court is satisfied that these rights are being abused to
secure needless publicity for defamatory matter.
The right under the section is a statutory right given to the company to remove by an
ordinary resolution, any director in whatsoever manner or on whatsoever terms appointed.
Where the directors attempt to avoid their removal by omitting to call a meeting or by not
attending with a view to creating a situation of no quorum, the Court/the Central
Government will convene the necessary meeting under Section 186. [Re El Sanbrero Ltd.,
(1958) 3 AIIER of (ch.II)]. Thus, where one of the only two director shareholders who was
holding 51% shares wanted to remove his fellow director who did not attend the meeting
to frustrate him because the articles required quorum of two, the Court (here it would have
to be CLB) ordered a meeting to be called with the presence of one as sufficient quorum
[Opera Photographic Ltd., Re. 1989 B CLC 763 Ch I]. What is important in this decision is
the judicial recognition of the importance of a statutory right. The right of the majority
shareholder to remove a director whom he fell out cannot be permitted to be vetoed by the
quorum requirements.
The vacancy resulting from the aforesaid removal may be filled in by the appointment of
another director at the same meeting at which the director is removed, provided special
notice of the proposed appointment has been given. A director so replaced holds office for
the remaining period for which the director who has been removed would have held office
had he not been removed. If the members of the company do not fill the vacancy, the
Board of Directors may fill it as casual vacancy. But the director who was so removed
from office shall not be reappointed to the Board when the casual vacancy is filled.
The above-mentioned provisions do not deprive any director, so removed of his rights to
compensation or damages payable to him in respect of the premature termination of the
directorship, or of any appointment terminating with that as a director (Section 284).

3.5 REMOVAL OF MANAGERIAL PERSONNEL


In the principal Act, in part VI, a Chapter i.e., (VIA) and Sections 388B, 388C, 388D and
388E dealing with the powers of the Central Government to remove managerial personnel
from office on recommendation of the Company Law Board have been added by the
Companies (Amendment) Act, 1963 the object of introduction of these Sections, as
explained by the Finance Minister, being that the existing provisions in Sections 397 and
Directors – Powers, Managerial Remuneration 3.23

398 of the Companies Act and other that follow provide for the removal from office in a
company of persons found to have been guilty of mismanagement in regard to the affairs
of that company only. Section 274 disqualifies a person from being appointed as a
director of a company if he is convicted by a court for any offence involving moral
turpitude and sentenced to imprisonment for a period of not less than 6 months. But under
these Sections, a conviction by a court is a prerequisite. This process, being very difficult
and lengthy process, the Central Government has tried to find an alternative procedure for
effecting removal of such persons from position of authority when the Central Government
comes into possession of certain facts which indicate that any person concerned with the
management of the affairs of a company has been guilty of negligence or default etc. in
carrying out of his obligations and functions and in other circumstances given in the
Sections mentioned above.
These Sections apply to companies both public and private, but do not apply to such body
corporate as foreign companies, which are incorporated outside India, as they are not
companies within the definition given in Section 3 of the Companies Act, 1956. Further,
these Sections deal only with the person who is or has been in management and not with
one whose concern with the management has ceased. These Sections will apply to a
whole body of individuals constituting the Board of Directors. Though the explanation
“managerial personnel” as enumerated in Section 197A does not include the Board of
Directors or individual director, they will also come within the scope of Section 388B
because they supervise, control and direct the manager. It may be construed from the
construction of these Sections that directors come within the scope of the provisions of
these Sections. A summarised view of these Sections is given below:
(A) Reference to Company Law Board of cases against managerial personnel: There
can be circumstances relating to the affairs of a company, which might suggest:
(a) that any person, concerned in the conduct and management of the affairs of a
company is or has been guilty of fraud, misfeasance persistent negligence or
default in carrying out his obligation and functions under the law or breach of
trust in connection therewith;
(b) that the business of a company is not or has not been conducted and managed
by such; person in accordance with sound business principles or prudent
commercial practices;
(c) that the company is or has been conducted and managed by such person in a
manner which is likely to cause or has in fact caused serious injury or damage
to the interest of the trade, industry or business to which such company
pertains;
(d) that the business is or has been conducted and managed by such person with
an intent to defraud its creditors, members or any other persons or otherwise for
3.24 Corporate and Allied Laws

a fraudulent or unlawful purpose or in a manner prejudicial to public interest.


If the Central Government is convinced that any one of the aforementioned
circumstances exist, it may state a case against the person aforesaid and refer it to
the Company Law Board with a request that the Board may enquire into the case and
record its findings as to whether or not such a person is fit and proper to hold the
office of director or any other office concerned with the conduct and management of
any company.
The statement of the case should be in the form of an application presented to the
Company Law Board or such officer thereof as it may appoint in this behalf, and the
person against whom such a case is stated and referred, should be joined as a
respondent to the application. The application should contain concise statement of
such circumstances and materials, as the Central Government may consider
necessary for purpose of enquiry to be made by the Company Law Board. The
application must be signed and verified in the manner laid down in the Code of the
Civil Procedure, 1908 for the signature and verification of a plaint in a suit by the
Central Government.
At any stage of the proceedings, the Company Law Board may allow the Central
Government to alter or amend the application in such manner and on such terms as
may be just and all such alterations or amendments shall be made may be necessary
for the purpose of determining the real questions in the enquiry (Section 388B)
(B) Interim order by Company Law Board: During the pendency of case before the
Company Law board, certain situations might come to the knowledge of the Board
which might necessitate the passing of an interim order restraining, in the interest of
the members or creditors of the company, the delinquent person against whom the
case is pending. In such situations, the Board may either on the application of the
Central Government or on its own motion, by order, direct that the respondent
(delinquent person) shall not discharge any of the duties of his office until further
order and appoint in his stead another suitable person to discharge the duties
connected with the office of the respondent subject to such terms and conditions as
the Board may specify in the order. There person, who is temporarily called upon to
discharge the duties in lieu of the respondent, will be regarded as a public servant
within the meaning of Section 21 of the Indian Penal Code [Section 388C].
(C) Findings of the Company Law Board: At the end of hearing of the case, the
Company Law Board shall record its findings. In the findings it must specifically state
as to whether or not the respondent is a fit and proper person to hold the office of
director, or any office and to be concerned with the conduct and management of the
company [Section 388D].
(D) Power of the Central Government to remove managerial personnel: Either on the
Directors – Powers, Managerial Remuneration 3.25

basis of the aforesaid finding of the Company Law Board or upon a decision of the
Board, the Central Government may, notwithstanding any other provisions contained
in this Act, by order remove the delinquent respondent from his office. An order of
removal having been passed under Section 388E the person concerned will be
debarred from holding the office for a period of five years from the date of the order of
removal. This time-limit may, however, be relaxed by the Central Government with the
previous concurrence of the Company Law Board, and the Central Government may
accordingly permit such person to hold the office of a director or any other office
connected with the conduct and management of the affairs of the company, even
before the expiry of the period of five years. But, for the loss or termination of his
office, he will not be entitled to or be paid any compensation in any event, even if
there is anything contained in any other provisions of the Act, or any other law or
contract, memorandum or articles. On the removal of the person the company may,
with the previous approval of the Central Government, appoint another person to that
office in accordance with the provisions of this Act. [Sections 388E(3), (4) and (5)].

3.6 DIRECTORS TO ACT AS A BOARD


Directors must act together as a body and generally, at meeting properly convened,
unless special powers are delegated to an individual director. Every company must hold a
meeting of the Board of Directors. Once in every three months and at least four such
meetings shall be held in every year. (The Central Government can by notification direct
that the provision of Section 285 shall not apply to any class of companies or shall apply
in a modified form.) These provisions shall not be deemed to have been contravened
merely by reason of the fact that the meeting of the Board, which had been properly
called, could not be held for want of a quorum [Section 288(2)]. Notice of the Board’s
meeting must be given in writing to every director for the time being in India, and at his
usual address in India (Section 286).
The quorum for a meeting of the Board of Directors must be one-third of its total strength
(any fraction contained in that one-third being rounded off as one), or two directors
whichever is higher. However, where at any time, the number of interested directors
exceeds or is equal to two thirds of the total strength the number of directors who are not
interested and who are present at the meeting not being less than two shall be the
quorum. There must be at least 2 non-interested directors (Section 287). If the meeting
could not be held for want of quorum, then unless the articles otherwise provide, the
meeting shall automatically stand adjourned till the same day in the next week at the
same time and place, or if that day is a public holiday, till the next succeeding day which
is not a public holiday at the same time and place (Section 288(I)].
Section 289 contains conditions, which must be complied with for the passing of a
resolution by circulation. The resolution must be circulated in draft along with necessary
3.26 Corporate and Allied Laws

papers to all the directors, or to all the members of the Committee not being less than the
quorum fixed for the Board meeting then in India and to other directors and members at
their usual addresses in India. Also the resolution must have been approved by such of
the directors as are there in India, or by a majority of such of them as are entitled to vote
on the resolution.
♦ Passing of resolution by circulation: Powers of the directors which are not
expressly required to be exercised at the Board’s meeting can also be exercised by
means of resolutions passed by circulation. Moreover, Regulation 81 of Table A of
Schedule 1 to the Act provides that save as otherwise expressly provided in this Act,
a resolution in writing, signed by all the members of the Board or of a committee
thereof, for the time being entitled to receive notice of a meeting of Board or
Committee, shall be as valid and effectual as if it had been passed at a meeting of the
Board or Committee, duly convened and held.
Section 289 lays down the procedure for the passing of resolution by circulation. A
resolution is deemed to have been duly passed by the Board or by Committee thereof
by circulation only if:
(i) the resolution has been circulated in draft along with the necessary papers to all
the directors or to all the members of the committee then in India (not being less
in number than the quorum fixed for a meeting of the Board or Committee) and
to all other directors or members at their usual address in India; and
(ii) the resolution has been approved by such of the directors as are then in India,
or by a majority or them as are entitled to vote on the resolution.

3.7 POWERS OF DIRECTORS AND RESTRICTIONS THEREON


The board of directors in entitled to exercise all such powers of the company and to do all
such acts and things as the company is authorised to exercise and do. But the Board shall
not exercise any power or do any act or thing which is, by the Act or any other statute or
by the memorandum or articles of the company or otherwise required to be exercised by
the company in general meeting. In exercising such powers the Board shall be subject to
regulation made by the company in that general meeting (Section 291). But this ‘subject to
regulation’ does not mean that the company in general meeting can override the Board’s
powers of carrying on the business, by prescribing a regulation, or passing a resolution,
taking away the powers which have been conferred upon the Board by the articles
[Automatic Self Cleaning, etc. Co. vs. Cunningham (1906) 2 Ch.34].
In generality the statement in the question is quite correct. The powers cover all the day-
to-day activities for the company and the actions of the Board of Directors cannot be
called into question. However in no case, can the directors usurp the powers vested by
the articles in the body of shareholders, nor can the shareholders usurp the power vested
Directors – Powers, Managerial Remuneration 3.27

likewise in the Board of Directors (Muraka Paint & Varnish Co. Ltd. vs. Mohanlal A.I.R.
1961 Cal. 251 A.P. Pothon vs. Hindustan Trading Corporation, A.I.R. 1966 Ker. 149).
The directors, being agents, are naturally subject to the will of their principal, viz., the
shareholders. Also because of the need to protect the interest of the shareholders, of the
company and in the public interest the law has imposed certain restrictions on the powers
of the Directors the most important of these are contained in Section 293 of the
Companies Act. The general powers of the Directors are subject to the following
limitations:
(i) The Board of Directors must necessarily act according to the Memorandum and the
Articles of Association. The implication of this is that the Board or the shareholders
cannot exercise certain powers, which are ultra vires the company. The acts which
are intra vires the company i.e., those powers which the company is entitled to
exercise and the activities that the company engage itself in, fall within the purview of
the Board of Directors generally, unless the Articles specifically reserve them for
shareholders. For example, it is common that declaration of the dividend is reserved
for the shareholders, to be decided upon at the Annual General Meeting (Regulation
85 of the table A of Schedule I to the Companies Act).
In case, power is reserved for the shareholders by the articles and the Directors
happen to exercise that power, it is possible for the shareholders to ratify the action of
the Board: in the final analysis, the power is exercised by the shareholders and not by
the Directors.
(ii) Certain power can be exercised only by the shareholders under law. In these, the
Directors clearly have no authority. Some of the prominent examples are given below:
(a) Issue of shares at a discount [Section 79(2)(i)]
(b) undertaking lines of business other than those mentioned in Memorandum as
the main objects including auxiliary to those [Section 149(2A)].
(c) selling or otherwise disposing of company’s undertaking or substantial part of
the undertaking (Section 293)].
(d) investing, otherwise than in trust securities, the amount of compensation
received by the company in respect of compulsory acquisition of the company’s
undertaking or of any premises or property used for in such undertaking
(Section 293).
(e) borrowing in excess of the aggregate of paid up capital plus free reserves
(Section 293).
(f) contributing in any financial year, to charitable and other funds not relating to
the company’s business, amounts exceeding Rs.50,000 or 5% of its average net
3.28 Corporate and Allied Laws

profits during the three preceding financial years whichever is greater (Section
293 as amended by the Companies) (Amendment) Act, 1977).
(g) issuing bonus shares or debentures.
(h) reorganisation of capital and amendment of Articles or Memorandum of
Association (Sections 94, 31 and 16 respectively).
(i) winding up unless ordered by the Court (Section 484).
(j) appointment of sole selling agents except that the Board can make the
appointment subject to approval of the company in a general meeting within 6
months of the appointment (Section 294).
It follows that except in certain special matters, the Board of Directors can exercise all the
powers and carry on all the activities that are necessary to achieve the object of the
company. A distinction, however, is necessary between the following three categories of
powers and activities:
(1) Those powers and activities in respect of which the Directors have complete
discretion.
(2) Those activities where approval of the shareholders is required but the third parties
would be protected if the Board acts without the consent of the company.
(3) Power, which only the shareholders can exercise, sometimes, subject to the approval
of the Central Government.
♦ Certain powers exercisable with the consent of the general body meeting: Under
Section 293 the Board of Directors of a public company cannot, except with the
consent of the company in general meeting:
(i) sell, lease or otherwise dispose of the whole, or substantially the whole, of the
company’s undertaking or where the company owns more than one undertaking,
of the whole or substantially the whole of any such undertaking.
Any resolution permitting the aforementioned transaction may attach such
conditions to the permission as may be specified in the resolution. Such
conditions may include those regarding the use, disposal or investment of the
sale proceeds, which may result from the transaction;
(ii) remit, or give time for the repayment of, any debt due by a director;
(iii) invest otherwise than in trust securities, the amount of compensation received
by the company in respect of the compulsory acquisition of any such
undertaking as is referred to in clause (i) or of any premises or properties used
for any such undertaking and without which it cannot be carried on or can be
carried on only after a considerable time;
Directors – Powers, Managerial Remuneration 3.29

(iv) borrow moneys where the moneys to be borrowed together with moneys already
borrowed by the company will exceed the aggregate of the paid up capital of the
company and its free reserves, (i.e., reserves not set apart for any specific
purpose). Temporary loans (i.e., loans repayable on demand or within 6 months
from the date of the loans, such as, short-term cash credit arrangements, the
discounting of bills and the issue of other short-terms loans of a seasonal
character but does not include loans raised for the purpose of financing
expenditure of a capital nature) obtained from the company’s bankers in the
ordinary course of business are not covered by this provision.
However, if a bank, in the ordinary course of its business, accepts deposits of
money from the public repayable on demand or otherwise, and withdrawable by
cheque, draft, order or otherwise, such acceptance must not be deemed to be a
borrowing by the bank within the meaning of clause (iv) above. A debt incurred
by the company in excess of the ceiling placed by clause (iv) above, shall not be
valid or effectual, unless the lender proves that he advanced the loan in good
faith and without knowledge that the aforesaid limit had been exceeded; and
(v) contribute to charitable and other funds not directly related to the business of
the company or the welfare of its employees, any amounts the aggregate of
which will in any financial year, exceed Rs.50,000 or 5% of its average net
profits during the immediately preceding three financial years, whichever is
greater.
As regards the exercise of the power mentioned either in para (iv) or (v) above,
the resolution in the general meeting must specify the total amount upto which
moneys may be borrowed or total amount which may be contributed to
charitable and other funds in any financial year.
(vi) appoint a sole selling agent for any area; the appointment may be made in the
first instance without the approval of the general meeting but it will be subject to
the subsequent approval by the company in the first general meeting held after
the date on which the appointment is made [Section 294 (2)].
(vii) appoint a director to hold any office or place of profit (excepting that of
managing director, manager, legal or technical advisers, banker or trustees for
the holders of debentures of the company) special resolution being needed
therefore; the consent of the company or its subsidiary in general meeting is
necessary (Section 314).
(viii) make loan to or give guarantee, or provide security in connection with a loan
made by any person to or to any person by, another company except where the
aggregate of loans made to companies not under the same management as the
lending company does not exceed the prescribed percentage of the aggregate
3.30 Corporate and Allied Laws

of the subscribed capital and free reserve of the lending company (not
applicable to banking, insurance and purely privates companies and companies
established for financing industrial enterprises) [Section 370]
(ix) to commence any new business; there is the necessity of a special resolution
being passed by the company in its general meeting [Section 149(2A)].
Tutorial Note: The list of the above-mentioned powers is not exhaustive but illustrative.
It should be borne in mind that there are instance of other powers needing general body
meeting’s consent.
♦ Powers to be exercised by Board only at its meeting: According to Section 292,
the following powers can be exercised by the Board only by means of resolution
passed at its meetings:
(a) to make calls; (aa) to authorise the buy back of shares
(b) to issue debentures;
(c) to borrow money otherwise than on debentures;
(d) to invest the funds of the company;
(e) to make loans.
The Board may, however, by resolution passed at meeting, delegate the last three
powers mentioned above to the extent specified hereunder. Such a delegation can be
made to any committee of directors, the managing director, the manager or any other
principal officer of the company or in the case of a branch office of the company, a
principal officer thereof. Every resolution delegating the power referred to in (c), (d)
and (e) above shall specify: (i) the total amount outstanding at any time up to which
money may be borrowed by the delegate; (ii) the total amount up to which the funds
may be invested as well as the nature of investment; and (iii) the total amount of
loans and the purpose thereof up to which and for which loans may be raised
respectively. It is to these extents that the delegate may exercise the aforesaid three
powers. The company in general meeting may impose restrictions and conditions on
the exercise by the Board of any of the five powers mentioned above.
In connection with the power mentioned in (c) above a question may arise whether
borrowing on a promissory note is within the powers of the directors.
It has been held in [P. Rangaswami Reddiar and Another vs. R. Krishnaswami
Reddiar and another (1971) 43 Comp. Case 232] that where such a borrowing
permissible under the company’s articles and moneys were borrowed on promissory
notes, such transaction would come within the powers of the director, It has also been
held in the same case that where a person was appointed as the managing director of
the company by the Board’s resolution vested with full powers of the management of
Directors – Powers, Managerial Remuneration 3.31

the affairs of the company and authorised to sign all the papers of the company, he
would have full powers to borrow money on a promissory note even without a
resolution of the Board as contemplated by Section 292(c) of the Act.
In addition to Section 292, some other Sections also require the Board to exercise its
powers in its meeting which are:
(f) receive notice of disclosure of shareholdings of directors under Sections 307
[Section 308(2)].
(g) Fill in casual vacancies in the Board (Section 262);
(h) sanction or give consent to contracts of or with any directors [Section 294(4);
and
(i) receive notice of disclosure of interest (Section 299)
The following powers may be exercised by a resolution passed at the meeting only with
the consent of all the directors present at the meeting.
(1) To appoint a managing director or manager a person who is already a managing
director or manager of another company [Sections 316(2) & 386(2)]
(2) To the sanction investment in companies in the same group [Section 372(5)].
♦ Validity of acts of directors: All the acts of a director or a committee of the Board
shall be valid not withstanding that his appointment was afterwards discovered to be
invalid by reason of any defect or disqualification or by reason of the appointment
being terminated by virtue of any provision contained in the Act or in the articles of
the company. But this provision of law shall not have the effect of validating the acts
of a director after his appointment has been shown to the company to be invalid or to
have been terminated (Section 290). But where there was no appointment at all, the
acts of such de facto directors are not protected. This protection applies only to
defects in appointment discovered after the appointment. Thus, if a director, whose
term of office has expired, acts as director, such acts cannot be regarded as valid;
that is not a defect afterwards discovered (Kamal Distillery vs. Ladhi Parshad, A.I.R.
1960 Punj. 655).
It has been held in Morris vs. Kaneseen 1945 I All E.R. 586 that this rule is intended
to be machinery to avoid calling into question the validity of transactions when there
has been a slip or irregularity in the appointment of directors and to override
substantive provisions of law relating to such appointments. The presumption as to
the validity of acts of directors would not cover the case where there has not been any
appointment at all.
♦ Consideration of a few complicated problems based on power of directors:
Having read the directorial powers in detail it would be worthwhile to consider a few
3.32 Corporate and Allied Laws

problems on these powers.


The Directors of X & Co. Ltd. desire to authorise the Managing Director to enter into
the following transactions namely- (a) invest from time to time surplus funds in the
purchase of shares of other companies: (b) borrow from banks money required for the
purpose: (c) give loans to persons, including firms in which directors or their relatives
are partners; (d) give donations to charitable trusts in which any of the directors may
be interested as trustees.
Let us now examine the measures to be taken for the proper implementation of the
above proposals.
(a) Although Section 292 empowers the Board of Directors of a company to
delegate to the Managing Directors the power to invest, in general terms, the
funds of the company nevertheless because of the overriding provisions of
Section 372(5) (which Section we shall discuss in detail in Study paper 3), the
transaction in the instant case would be invalid. Section 372(5) provides that no
investment in shares of a company can be made by the Board of Directors of an
investing company in pursuance of sub-section (2), unless it is sanctioned by a
resolution passed at a meeting of the Board with the consent of all the directors
present at the meeting except those not entitled to vote thereat, and unless
further notice of the resolution to be moved at the meeting has been given to
every director in the manner specified in Section 286. Since Section 372 does
not provide for delegation of the power, the proposed delegation to the
Managing Director in question, notwithstanding the general provision of Section
292, cannot be made.
(b) In terms of Section 292 the Board of Directors may also delegate to the
Managing Director the power to borrow money otherwise than debentures, which
it can exercise only by means of resolutions passed at Board meetings. As per
Explanation to Section 292(1), it is the arrangement for an overdraft or cash
credit that constitutes the exercise of the borrowing power and not the actual
utilisation of the arrangement. In other words, an arrangement for an overdraft
or cash credit to the tune of say Rs.5 lakhs constitutes the exercise of the
borrowing power and not the actual drawing of this amount on the basis of the
overdraft or cash credit. Consequently, the transaction in the instant case shall
be valid. But before implementation of the proposal, the Board must pass a
resolution at its meeting authorising the Managing Directors to borrow from
banks money required for the purpose of the company’s business. Also the
resolution delegating this power shall specify the total amount outstanding at
any one time up to which the delegate may borrow money.
If however, the moneys to be borrowed together with the money already
borrowed by the company (apart from temporary loans obtained from the
Directors – Powers, Managerial Remuneration 3.33

Company’s bankers in the ordinary course of business) will exceed the


aggregate of the paid up capital of the company and its free reserves, [that is to
say, reserves not set apart for any specific purpose] the Board of Directors of
the company in question must obtain the consent of the company in its general
meeting. Consequently, care should be taken to ensure that while delegating the
power to the managing director the aforesaid provision has not been violated;
also it should be ensured that the memorandum of association permits
borrowing.
(c) Since according to Section 295(1), (which we shall discuss later) without
obtaining prior approval of the Central Government in that behalf, a company
can not directly or indirectly lend money to persons including firms, in which
directors or their relatives are partners, the company in question must in the first
instance seek the Central Government’s approval. Secondly since the power to
make loans may be delegated under Section 292(1)(e), the Board of Directors of
the company in question must pass a resolution therefore and every resolution
delegating this power to the Managing Director shall specify the total amount up
to which loans may be made by the delegate, the purpose for which loans may
be made and the maximum amount of loans which may be made for each such
purpose in individual cases. Thirdly, by virtue of Section 291(1), the Board must
see with reference to the memorandum and articles whether the company is
authorised to exercise the power.
(d) Under Section 293(1) (e), the Board of Directors of a public company can
contribute or donate to charitable and other funds not directly related to the
business of the company or the welfare of its employees any amount the
aggregate of which will not, in any financial year exceed Rs.50,000 or 5% of its
average net profits during the three financial years preceding whichever is
greater. If this power of the company is not ultra vires the memorandum of the
company, then only the Board can act in pursuance of the above-mentioned
resolution of the company and in so acting, it can authorise the Managing
Director to exercise the power on behalf of the Board.
It may be noted that the power of the Board to donate to general charities is not
conditional to the existence of any profits. In such case, they may contribute up to the
limit given in Section 293(1)(e), even though the company may be working at a loss.

3.8 DUTIES OF DIRECTORS


The duties of directors may now be summarised as follows:
(i) Since the directors are in fiduciary position, their duties are onerous. As you know,
they are trustees of the money of the company in the bank as well as of the property
3.34 Corporate and Allied Laws

of the company. They are also agents in the transactions entered into by them on
behalf of the company. Therefore they must act in utmost good faith and take as
much care as a man of ordinary prudence would take in respect of his own affairs. In
other words, they will have to exercise all the powers they are vested with only in
this fiduciary capacity. You must remember that a director is a trustee only of the
company and not of the shareholder thereof. Therefore, though he may possess
inside information which may augment the value of shares, yet he is not obliged to
disclose the information to a shareholder who offers to sell his shares to the director
[Percival vs. Wright (1902) 2 Ch. 421]. However, in exceptional circumstances, the
director may owe a fiduciary duty to shareholders as well e.g. where directors are
negotiating terms of sale of issued shares of the company. That is where the
directors approach the shareholders and not vice versa for sale of shares.
(ii) He is required to evince as much skill as is expected from a person of his knowledge
and experience-thus far and no further.
(iii) Every director must act honestly. A director shall be liable to the company for any of
his underhand dealings irrespective of whether or not the company suffers on
account of such underhand dealings. Causing shares to be allotted to a minor, sale
by director to company without the disclosure of his interest, fraudulent
misrepresentation to co-directors enticing them into advancing money to him on
insufficient security, taking of bribes, etc… are some of the instances of dishonest
acts. Where a director derives any secret benefits or accept any bribes or any other
illegal gratifications, he must account for them and make them over to the company
Eden vs. Ridsdale Co. 23 A.B.D. 336. A company may repudiate a contract if it has
been induced by bribes [Shipway vs. Broadwood (1899) I.Q.B. 369; Grant vs. Gold
Explanation Syndicate (1990) 1 A.B. 233].
(iv) It is normally not the duty of the director to detect the frauds of the manager and the
chairman of the company. He can therefore, rely on co-directors and officers. If the
duty of detection of fraud is cast on a director, anything like an intelligent devolution
of labour will be impossible. But if there is anything that gives rise to the slightest
suspicion, then he will be put on an enquiry. If he fails to make the requisite enquiry
to allay his suspicion then he will be guilty of dereliction of duty and be liable for
damage emerging from such dereliction.
(v) It is the duty of a director to see that company’s moneys are kept properly invested,
unless the articles warrant the delegation of this duty to others.
(vi) It is incumbent upon directors to insist on some independent valuation of investment
and fixed assets at appropriate intervals. Revaluation of immovable property may
not be necessary for a considerable time, but revaluation of shares must be made
once a year. In this regard, a director should not put any reliance on the assurances
of the chairman or on the expression of the auditor’s belief. Likewise auditor too
Directors – Powers, Managerial Remuneration 3.35

must not rely on the directors’ assurance.


(vii) Directors are required to ensure the accurate compilation of the stock sheets and
the physical checking of certain of these items being done by the auditors.
(viii) According to Palmer a list of cheques that the Board authorises is to be placed
before each meeting of the Board.
(ix) It is the duty of the directors not to act in a manner prejudicial to public interest or
oppressive to any members. If they so act, proceedings will be against them under
Section 397.
(x) Duties of directors regarding take-over under Section 395.

3.9 DIRECTORS NOT TO HOLD OFFICE OR PLACE OF PROFIT


Any office or place shall be deemed to mean office or place of profit under the company
[within the meaning of the Section 314(3)]:
(a) in case the office or place is held by a director, if the director holding it obtains from
the company anything by way of remuneration over and above the remuneration to
which he is entitled as such director, whether as salary, fees, commission,
perquisites, the right to occupy free of rent any premises as a place of residence or
otherwise.
(b) in case the office or place is held by an individual other than a director or by any firm,
private company or other body corporate, if the individual, firm, private company of
body corporate holding it obtains from the company anything by way of remuneration
whether as salary, fees commission, perquisites, the right to occupy free of rent any
premises as a place of residence, or otherwise.
Except with consent of the company accorded by a special resolution, (a) no director of a
company shall hold any office or place of profit, and (b) no partner or relative of his, no
firm in which he or his relative is a partner, no private company of which he is a director or
member and no director or manager of such a private company shall hold any office or
place of profit carrying a total monthly remuneration of such sum as may be prescribed.
[The government by its notification of February, 1994 has fixed this amount at Rs.10,000
or more]. However, any of the aforesaid persons may be appointed as a managing
director or manager, banker or trustee for the debentureholders under any subsidiary of
the company, unless the remuneration received from such subsidiary in respect of such
office or place of profit is paid over the company or its holding company.
The special resolution may be passed before or at the general meeting of the company
held for the first time after the holding of such an office or place of profit. Further, where a
relative of a director, or a firm in which such a relative is a partner is appointed to an
office or place of profit in the company or a subsidiary thereof without the knowledge of
3.36 Corporate and Allied Laws

the director, the consent of the company may be obtained either in the general meeting
held for the first time after the holding of such an office within 3 months from the date of
the appointment whichever is later [Section 314(I) and the provision thereof].
But the abovementioned provisions of sub-section (1) shall not be applicable in a case
where the relative of a director or firm in which such relative is a partner holds any office
or place of profit under the company or its subsidiary, if the said relative’s or firm’s
appointment had taken place before the director in question became the director of the
company [Section 314(1A)].
A partner or a relative of a director or manager, a firm in which such director or manager
or relative of either is a partner, or a private company of which such a director or manager
or relative of either is director or member cannot hold any office or place of profit which
carries a total monthly remuneration of such sum as may be prescribed [The Govt. vide its
notification of 5 th February, 2003 has fixed this amount as Rs.50,000 or more], except with
the prior consent of the company by special resolution and the approval of the Central
Government.
When an office is held in contravention of the provision in sub-section (I), the director,
partner, relative, firm etc., concerned shall be deemed to have vacated office from the
date next following the date of the general meeting of the company referred to above or at
the expiry of the period of the three months, as the case may be, and shall be liable to
refund the company any remuneration received or the monetary equivalent of any
perquisite or advantage enjoyed by him for the period immediately preceding the date
aforesaid in respect of such an office or place of profit [Section 314(2)(a)].
The company shall not waive recovery of any sum refundable to it under Section
314(2)(a), unless permitted to do so by Central Government [Section 314(2)(b)].
Every individual, firm, private company or other body corporate proposed to be appointed
to any office or place of profit shall, before shall, before or at the time of such
appointment declare in writing whether he or it is not connected with a director of the
company in any of the ways referred to in sub-section (I) [Section 314(2A].
If may happen that after the commencement of 1947 Amendment Act, an office or place of
profit is held without the prior consent of the company by a special resolution and the
approval of the Central Government. In such a case, the partner, relative, firm or private
company appointed to it shall be liable to refund to the company any remuneration
received or the monetary equivalent of any perquisite or advantage enjoyed by him on and
from the date on which the office was so held by him [Section 314(2B)].
The company shall not waive the recovery of any sum refundable to it under sub-section
(2B) or (2c) as the case may be, unless permitted to do so by the Central Government
[Section 314(2D)].
Directors – Powers, Managerial Remuneration 3.37

It may be noted that nothing in Section 314 shall apply to a person who, being the holder
of any office or place of profit in the company, is appointed by the Central Government
under Section 408 as director of the company [Section 314(4)].
The aforementioned provisions are calculated to prevent directors from obtaining unfair
advantage from the company by providing sinecures to their business associates and
relations without the knowledge of the shareholders.
Let us examine the following problems:
1. Mr. Smart is a director of ABC Ltd., accepts the offer of employment as “Chief
Executive-Technical Operations” of the same company on a monthly remuneration of
Rs.15,000. Can he be an employee at the same time being the director of the
company? In case his son is appointed to the same post, does it attract any
provisions of the Companies Act?
Answer: Ordinarily, the shareholders in general meeting elect a director, and once so
elected, he enjoys well-defined rights and powers under the Act. An employee is
appointed by the company under a contract of service is a servant of the company
and the company can always direct his actions and interfere with his work. In Lee
Behrens & Co. (Re [1932] 2 com cas. 588 it was observed that directors are elected
representatives of the shareholders engaged in directing the affairs of the company
on its behalf. However, there is nothing in law to prevent a director from accepting
employment under the company under a special contract, which he may enter into
with the company. (R.R. Kothandaraman vs. Commr. of I.Tax (1957). Section 314
provide for a director holding an office or place of profit under a company.
Except with the consent of the company accorded by a special resolution no director
shall hold any office or place of profit and no partner or relative of his, no firm in
which he or his relative is a partner, no private company of which he is a director or
member and no director or manager of such a private company shall hold any office
or place of profit carrying a monthly remuneration of Rs. 10,000 or more. The special
resolution may be passed before or a general meeting of the company held for the
first time after the holding of such an office or profit. If it is done without the
knowledge of the director, the consent of the company may be obtained either in the
general meeting held for the first time after the holding of such an office or within 3
months from the date of appointment whichever is later.
If a partner or a relative of a director or manager, a firm in which such director or
manager or relative of either is a partner or a private company of which such a
director or manager or relative of either is director or member can not hold any office
or place of profit which carries a total monthly remuneration of Rs.20,000 or more
except with the prior consent of the company by special resolution and the approval of
the Central Government.
3.38 Corporate and Allied Laws

Thus, in the instance case, Mr. Smart can accept the offer of employment as Chief
Executive-Technical Operations. If his son is appointed to the said post, it requires
the consent of the company.
3. Mr. True is a director of a company and also a chartered accountant by profession
and one of the partners in M/s True & Fair Co. The company appointed the said firm
as chartered accountant of the company on a regular basis. Does Mr. True holds any
office or place of profit in the company. Would your answer be different if his
appointment is on a case-to-case basis?
Answer: Chartered Accountants appointed by a company on a regular basis are hit by
a restrictive provisions of sub-sections I and I(b) of Section 314 if he is a director
receiving remuneration over and above to which he is entitled. In case the office or
place of profit is held by an individual other than a director or by any firm, private
company or other body corporate, if it obtains from the company anything by way of
remuneration whether as salary, fees, commission perquisite or otherwise, approval of
the company is not required where the monthly remuneration is less than Rs. 10,000/-
. Accordingly, if a director is holding the place of chartered accountants for the
company he would be covered by Section 314(3) irrespective of the fact that office or
place of profit carries a total monthly remuneration less than Rs.10,000/-.

3.10 LIABILITIES OF DIRECTORS


The liability of a director should be considered from the following stand points (i) Directors
may become liable to shareholders in multifarious ways. (ii) They may also become liable
to third parties in certain cases: the liability may be civil and/or criminal.
(1) Liability to Shareholders
(a) Negligence: A director may become liable to shareholders for negligence. Where the
directors acting within their powers, fail to exercise as much reasonable skill and
diligence as may be expected from persons with their knowledge and experience in
the management of the affairs of the company, they can be held liable for negligence
(Re: City Equitable Fire Insurance Co. 1925 Ch.407). They are, however, not liable for
errors of judgement as a result of which a loss might have been caused to the
company provided they acted bonafide for the benefit of the company and with such a
care as may be reasonably expected of them. The burden of proving bad faith in such
a case lies on the person who challenges the act of the directors.
(b) Misfeasance and breach of trust: “Misfeasance” and “breach of trust” are allied heads
of liability. The former is defined as any breach of duty in the conduct of the
company’s affairs, which causes loss to the company: the latter is confined to any
misapplication of the funds of the company (Palmer-P.190). Thus, the payment of
dividend out of capital (Filicroft’s case). is a breach of trust. On the other hand,
Directors – Powers, Managerial Remuneration 3.39

allotment of shares to an infant or giving a fraudulent preference to a creditor, or to


commit any breach of articles would be misfeasance.
(c) Ultra vires acts: Where directors do any act which is in excess of their powers, e.g.
borrow money or create a mortgage which is beyond their authority as defined by the
articles such an act is called ultra vires the directors. If, however, it is not beyond the
powers of the company as laid down by the memorandum, the shareholders may, by
subsequent ratification, make the act, which is ultra vires the directors but intra vires
the company, valid and binding on the company.
(d) Act of co-directors: A director is not responsible for the acts and defaults of co-
director, unless he has expressly or impliedly authorised the same [Cargil vs. Bower
10 Ch.D.502]. The directors are jointly and severally liable for a breach of trust.
(2) Liability to third parties
(a) Insofar as contracts entered into by directors on the company’s behalf are concerned,
the directors cannot be generally held personally liable for the some, for they act as
agents of the company. But they may be personally liable if they act, without the
authority of the company, on the ground of a breach of warranty of authority. This
personal liability may attach to them when they have expressly or impliedly
undertaken to be personally responsible for their act.
(b) If the directors commit or authorise a tortious act, they are personally liable therefore
even if they have been acting as agents of the company. Likewise they would be
personally liable for commitment or authorisation of fraud, e.g., issue of a fraudulent
prospectus. But a director would not be liable for the fraud of his co-director, unless it
has been authorised by him, or he has participated therein.
(c) Certain liabilities have also been imposed by the Act as regards director qua third
parties, e.g., for misstatement in prospectus under Section 62 to prospective
subscribers; for irregular allotment under Section 71: for failure to return application
moneys where minimum subscription has not been raised within the prescribed
period, under Section 69; for similar failure mentioned under Section 73 etc.
♦ Directors’ rights and liabilities for their ultra vires acts: The acts of directors
which may be regarded as ultra vires are two-fold in nature, namely, (a) the acts
which are beyond their authority but within the company’s powers (i.e. intra vires the
company) and (b) the acts which are beyond the director’s authority as well as the
company’s. The rights and duties which emanate from ultra vires acts, we shall
discuss here under:
(i) Under the Act, the funds of a company can be applied in carrying out its
permitted objects. Therefore, if the directors of the company make an ultra vires
payment, e.g., payment of the interest out of capital they may be compelled to
3.40 Corporate and Allied Laws

repay the money to the company even after it goes into liquidation [In re-Sharpe
(1982 1 Ch. 154)]. But the directors so compelled to refund the money to the
company could claim to be indemnified by the payees who received the money
from the directors with the knowledge that the payment to them was ultra vires.
The reason for this rule of indemnification is that in such a case, the payees
would be constructive trustees of that money (Russel vs. Wakefield Water
Works Co. I R. 20 Eq 474).
(ii) The directors are the agents of the company. That’s why they cannot do
anything, which the company itself cannot do under its memorandum. But if they
make a contract within the powers of the company (i.e. intra vires the
memorandum) but ultra vires the powers which the company by its articles has
conferred upon them, then the company may ratify the contract in general
meeting and be bound by it (Grant vs. United Kingdom Switchback Railway
(1888) 40 Ch. D. 135). If, however the company does not ratify such contract
then the company will not be bound by the contract. Consequently, the directors
will remain liable to the other party to the contract for the breach of an implied
warranty of their authority (Weeks vs. Propert (1873) L.R. 8 C P. 427; Starkey
vs. Bank of England 1903.A.C.114).
♦ Directors with unlimited liability: In a company with limited liability, the liability of
the directors, like that of any other members, is limited to the amount remaining
unpaid on their shares. However, a limited company may, if the memorandum permits,
have directors with an unlimited liability. If a limited company has the powers under its
articles it may also alter its memorandum by a special resolution so as to make the
liability of its directors unlimited (Sections 322 and 323).
♦ Director’s reports: According to Section 217, the directors are under an obligation
to make out and attach to every balance sheet laid before a company; in general
meeting a report with regard to the state of affairs of the company-, the amount (if
any) which they recommend as dividends, the amount if any, which they propose to
carry any reserves in such balance sheet and the material changes and commitments
(if any) affecting the financial position of the company which have occurred between
the end of financial year to which the balance sheet relates and the date of the report.
The report shall deal with any changes, which have occurred during the financial year (i)
to the nature of the company’s business, (ii) in the company’s subsidiaries or in the nature
of the business carried on by them and (iii) generally in the class of business in which the
company has an interest. However, such matters are to be disclosed so far as these are
material for the application of the state of the company’s affairs by its members and will
not, in the board’s opinion be harmful to the business of the company or any of its
subsidiaries. The Board must also give the fullest information and explanation in its report
or in case falling under the proviso to Section 222, in an addendum to the report, on every
Directors – Powers, Managerial Remuneration 3.41

reservation, qualification or adverse remark contained in the auditor’s report. The report
and any addendum thereto must be signed by the chairman of the Board if he is
authorised by the Board; otherwise, it is to be signed by such number of directors as are
required to sign the balance sheet and profit and loss account of the company by virtue of
Section 215. In default of compliance with these provisions, each of the directors and
chairman signing the report without the Board’s authority shall be punishable with
imprisonment for a term extending up to six months or with fine up to Rs.20,000 or with
both. But no person is to be sentenced to imprisonment for such offence unless it was
committed willfully.
DIRECTOR’S RESPONSIBILITY STATEMENT [SECTION 217]
This section deals with the Report of Board of Directors to be placed before the general
meeting. A new sub-section (2AA) has now been inserted [by the Companies
(Amendment) Act, 200] to provide that the Report of Board of Directors shall also include
a Directors’ Responsibility Statement as under:
(i) That the applicable accounting standards have been followed in preparing the annual
accounts. If there is material departure, explanation for the same should be given.
(ii) That the directors have selected such accounting policies and applied them
consistently and made judgements and estimates that are reasonable and prudent so
as to give a true and fair view of the state of affairs of the company while preparing
the annual accounts.
(iii) That the Directors have taken proper and sufficient care (a) for maintenance of
adequate accounting records as required by the Act, (b) for safeguarding the assets
of the company and (c) for preventing and detecting fraud and other irregularities.
(iv) That the Directors have prepared the annual accounts on a going concern basis.

3.11 LOANS TO DIRECTORS [SECTION 295]


We will presently see from our discussion hereunder that a company’s power of lending
money to its directors is strictly regulated by the Act. A company without obtaining prior
approval of the Central Government in that behalf, cannot directly or indirectly lend
moneys or guarantee or secure the loans advanced by the other person to: (a) a director
of the lending company or that of its holding company or partner or relative of any such
director (b) any firm in which any such director or relative is a partner; (c) any private
company of which any director is a director or member; (d) any body corporate 25% or
more of whose total voting power may be exercised or controlled by any such or by two or
more such directors together (e) any body corporate the Board of Directors, managing
director or manager whereof is accustomed to act in accordance with the directions or
instructions of the board or of any director or directors of the lending company [Section
3.42 Corporate and Allied Laws

295(1)].
The impact of the aforesaid provision is that it prohibits the company not only from directly
lending money to its directors but also from giving any guarantee for a loan taken by a
director from any other person and providing any security for such loan. The Section too
prohibits the providing of any guarantee or security for a loan advanced by a director to
any person.
The above provisions do not apply to loans, etc. advanced by a private company (unless it
is a subsidiary of a public company) or by a holding company to its subsidiary. Similarly,
any guarantee or security provided by the holding company in respect of any loans made
to its subsidiary does not attract the provisions referred to above.
It is thus clear from the foregoing discussion that under Section 295, a company cannot
give loan or advance to its directors without obtaining the prior sanctions of the Central
Government in that behalf.
Now suppose that the directors of a public company have to travel often for company’s
business. The company makes some advances to them for this purpose, which sometimes
exceeds the actual requirements. In such a case can the company be deemed to have,
contravened the provision of Section 295? It seems that advances pertaining to travelling
expenses are outside the ambit of Section 295, because such advances are not in the
nature of loans, and are meant to meet expenses on behalf of the company. Therefore,
the provisions of Section 295(I) are not contravened, but the directors are bound to keep
the advances in excess in trust for the company.
In case a director of a public company has take a loan from the company without the
approval of the Central Government, (i) is it possible to avoid prosecution by applying to
the central Government for approval or by refunding the loan? And (ii) whether the offence
is compoundable before or after institution of prosecution and the authority can compound
the offence?
(i) According to Section 295 of the Companies Act, no public company shall make any
loan to any of its directors either directly or indirectly without obtaining the previous
approval of the Central Government. As the Act envisages prior approval, Central
Government will not entertain any application from the company seeking approval for
a loan already given to its director.
The company has, therefore, contravened the provisions of Section 295(1) and for
this offence every person who is knowingly a party to this contravention including the
person to whom the loan is made shall be punishable either with fine which may
extend to Rs. 50,000 or with simple imprisonment for a term which may extend to six
months [Section 255(4)]. Where any such loan has been repaid in full, no punishment
by way of imprisonment shall be imposed and where the loan has been repaid in part,
the maximum punishment, which may be imposed by way of imprisonment, shall be
Directors – Powers, Managerial Remuneration 3.43

proportionately reduced. So, by refunding the loan in full, it is possible to avoid


punishment in the form of imprisonment, but it is not possible to a avoid prosecution
and punishment in the form of fine.
(ii) All offences other than an offence which is punishable under the Companies Act with
imprisonment only or with imprisonment and also with fine are compoundable under
Section 621A. As the offence under Section 295 is punishable with fine or
imprisonment, it is compoundable but with the permission of the Court [Section
621A(2)]. The offence may be compounded either before or after the institution of
prosecution. If the offence is compounded before the institution of any prosecution, no
prosecution shall be instituted in relation to such offence, either by the Registrar or by
any shareholder or by any person authorised by the Central Government. Where the
composition of any offence is made after the institution of any prosecution, such
composition shall be brought to the notice of the court by the Registrar in writing and
on such notice of the composition of the offence being given, the company or its
officer in relation to whom the offence is so compounded shall be discharged [Section
621A(4)].
The offence may be compounded by the Regional Director where the maximum amount of
fine, which may impose for such offence, does not exceed Rs. 50,000 and in other cases
by the company Law Board. In this case, Regional Director may compound the offence, as
the maximum fine is only Rs. 50,000. On receipt of applications from the persons liable for
penalty under Section 295(4) along with the comments of the Registrar, the Regional
Director may specify the amount no exceeding the maximum fine which shall be paid to
the Central Government for compounding of the offence.

3.12 DIRECTORIAL REGISTERS


♦ Register of contracts, companies and firms in which directors are interested:
Every company shall keep one or more registers in which particulars of all contracts,
or arrangements to which Section 297 or Section 299 applies shall be entered. These
particulars should include the following to the extent they are applicable in each case:
(a) date of the contract or arrangement; (b) names of the parties thereto; (c) the
principal terms and conditions thereof; (d) in the case of contract to which Section 297
applies or in the case of a contract or arrangement to which Section 299(2) applies,
the date on which it was placed before the Board; (e) the names of the directors
voting for or against the contract or arrangement and the name of those remaining
neutral.
The particulars of every such contract or arrangement to which either of the above
mentioned Sections applies must be entered in the register within 7 days of the receipt at
the registered office of the particulars of contract other than the one requiring the Board’s
approval or within 30 days of date of that contract whichever is later; in the case of
3.44 Corporate and Allied Laws

contract requiring the Board approval within 7 days (exclusive of public holidays) of the
meeting of the Board at which the contract is approved. On these entries being made, the
register is required to be placed before the next meeting of the Board, whereupon it shall
be signed by all the directors present at the meeting. The register must also specify, in
relation to each director of the company, the names of the firms or bodies corporate of
which he has given notice under Section 299(3). However, the particular as regards
contracts the value of which does not exceed Rs.1,000 in the aggregate in any year or as
regards contracts entered into by a banking company for collection of bills or as regards
any transactions referred to in Section 297(2)(c) are not required to be entered in the
register. Violation of the aforementioned provision would render the company and every
officer thereof (in respect of each default) punishable with fine up to Rs.5000 (Section
301).
♦ Register of directors, managing director, manager and secretary (Section 303):
Every company must keep at its registered office a register of directors, managing
director, manager and secretary, and send to the Registrar in the prescribed form
within 30 days of the appointment of the first directors, a return in duplicate containing
particulars specified in the register and must notify the Registrar of any subsequent
changes within 30 days of the happening thereof. This notification also must be
submitted in duplicate in the prescribed form.
The above-mentioned register must contain the following particulars:
(i) In the case of an individual, his present (and former) name and surname in full; his
father’s name and surname in full or where the individual is a married woman the
husband’s name and surname in full; his usual residential address, nationality,
business, occupation, if any particulars of office (if any e.g., that of director, managing
director, manager or secretary in any other body corporate), the date of birth;
(ii) In the case of a body, corporate its corporate name and registered or principal office,
etc.
(iii) In the case of a firm, the name of the firm etc.;
(iv) If any director or directors have been nominated by a body corporate, its corporate
name and all the particulars mentioned (i) and (ii);
(v) If any directors have been nominated by a firm, the firm name and all the particulars
mentioned in (i) and (ii) above.
For the purpose of the aforesaid provision any person in accordance with whose
directions, or instructions the Board of Directors of a company is accustomed to act shall
be deemed to be a director of the company. [Explanation to Section 303].
♦ Inspection of the Register (Section 304): The register mentioned in Section 303
must be open to inspection by any member of the company free of charge. But a
Directors – Powers, Managerial Remuneration 3.45

person other than the member can inspect it on payment of one rupee for each
inspection. If the inspection is refused, the company and every officer thereof who are
in default are punishable with fine extending upto Rs.50. Also the Company Law
Board may, by order, compel an immediate inspection of the register.
♦ Register to be kept by Registrar (Section 306): The Registrar shall maintain a
separate register wherein he shall enter the particulars received by him under Section
303(2) in respect of companies, so however that all entries in respect of each such
company shall be together. This register shall be open to inspection by any member
of the public at any time during office hours, on payment of the prescribed fee. The
register should be in Form No. 34 of the Companies (Central Government’s) General
Rules and Forms 1956. According to a decision of the Punjab High Court (Jullundur
Dist. Registered Factory owners’ Association vs. Registrar of Companies 1961, Comp.
Cas, 673), where returns under Section 303(2) have been made by rival claimants,
the registrar should wait for the decision of the Court on the conflicting claims before
making entries in his separate register of the particulars furnished by either party.
♦ Register or directors’ shareholding etc. (Section 307): A company must maintain a
register showing, as regards each director, the number, description and the amount of
shares in or debentures of the company or any other body corporate, being the
company’s subsidiary or holding company, or a subsidiary of the company’s holding
company, which are held by him, or in trust for him, or of which he has any right to
become the holder whether on payment or not. Apart from these entries, there must
be an indication in the register of the nature and extent of any interest or right in or
any shares or debentures recorded in relation to a director. The register must also
show the date of each transfer of shares or debentures and the price or other
consideration therefore if the transaction has been entered into after the
commencement of the Act (i.e., April 1, 1956). The register shall be kept at the
registered office of the company. During the period beginning 14 days before the date
of company’s annual meeting, and ending 3 days after the date of its conclusion, any
member or holder of the debentures may inspect it; but during this period or any other
period, any person acting on behalf of the Central Government or the Registrar may
inspect it. Further the Central Government or the Registrar may at any time, require a
copy of the register or any part thereof. Furthermore, it must be produced at the
commencement of every annual general meeting and kept open and accessible during
the continuance of the meeting the any person having the right to attend the meeting.
Any default in the matter or the entries referred to in Sections 307(1) and (2) is
punishable with the extending to Rs. 50,000 and also with a further fine extending to
Rs.200 for every day during which default continues. Similar punishment is leviable in
case a copy required under this Section is not sent within a reasonable time. In the
case of refusal, the Company Law Board may compel an immediate inspection of the
3.46 Corporate and Allied Laws

register. The provisions of Sections 307 and 308 shall apply to managers as they
apply to directors.

3.13 POLITICAL CONTRIBUTIONS


Prior to the amendment of Section 293A, by the Companies (Amendment) Act, 1985, there
was a blanket ban on political contributions by companies. The amended Section seeks to
continue the existing blanket ban against political contributions in the case of government
companies and companies which have been in existence for less than three financial
years. The new Section seeks to permit any other company to make political contributions
not exceeding five per cent of the average net profits if a resolution authorising such
contributions is passed at a meeting of the Board of Directors. The New Section also
seeks to impose an obligation on every company to disclose in its profit and loss account
any amount or amounts contributed by it to any political party or for any political purpose.
Under the new Section, if a company makes any political contribution in contravention of
the provisions thereof, the company would be liable to fine which may extend to three
times the amount so contributed. Further every officer of the company in default, would be
liable to imprisonment for a term, which may extend to three years and also to fine.
The detailed provision of Section 293A, as amended, are reproduced below:
(1) Notwithstanding anything contained in any other provision of this act:
(a) no Government company; and
(b) no other company which has been in existence for less than three financial
years, shall contribute any amount or amounts directly or indirectly:
(i) to any political party; or
(ii) for any political purpose to any person.
(2) A company, not being a company referred to in clause (a) or clause (b) of sub-section
(1), may contribute any amount or amounts, directly or indirectly:
(a) to any political party, or
(b) for any political purpose to any person.
Provided that the amount or, as the case may be, the aggregate of the amount which
may be so contributed by a company in any financial year shall not exceed five per
cent of its average net profits determined in accordance with the provisions of
Sections 349 and 350 during the three immediately preceding financial years.
Explanation: Where a portion of a financial year of the company falls before the
commencement, of the Companies Act (Amendment) Act, 1985 and a portion falls
after the amendment, the latter portion shall be deemed to be a financial year within
Directors – Powers, Managerial Remuneration 3.47

the meaning, and for the purposes, of this sub-section.


Provided further that no such contribution shall be made by a company unless a
resolution authorising the making of such contribution is passed at a meeting of the
Board of Directors and such resolution shall, subject to the other provision of this
Section, be deemed to be justification in law for the making and the acceptance of the
contribution authorised by it.
(3) Without prejudice to the generality of the provisions of sub-sections (1) and (2):
(a) a donation or subscription or payment caused to be given by a company on its
behalf or on its account to a person who, to its knowledge, is carrying on any
activity which, at the time at which such donation or subscription or payment
was given or made, can reasonably be regarded as likely to affect public
support for a political party shall also be deemed to be contribution of the
amount of such donation, subscription or payment to such person for a political
purpose:
(b) the amount of expenditure incurred, directly or indirectly, by a company on
advertisement in any publication being a publication in the nature of a souvenir,
brochure, tract, pamphlet or the like, by or on behalf of a political party or for its
advantage shall be deemed:
(i) where such publication is by or on behalf of a political party, to a
contribution of such amount to such political party, and
(ii) where such publication is not by or on behalf of but for the advantage of a
political party to be a contribution for a political purpose to the person
publishing it.
(4) Every company shall disclose in its profit and loss account any amount or amounts
contributed by it to any political party or for any political purpose to any person during
the financial year to which that account relates, giving particulars of the total amount
contributed and the name of the party or person to which or to whom such amount has
been contributed.
(5) If a company makes any contribution in contravention of the provisions of this Section:
(a) the company shall be punishable with fine which may extend to three time the
amount so contributed, and
(b) every officer of the company who is in default shall be punishable with
imprisonment for a term, which may extend to three year and shall also be liable
to fine.

3.14 MANAGERIAL REMUNERATION


3.48 Corporate and Allied Laws

A director is not a servant of the company but he is the incharge of its management and
controls its affairs. He has no implied rights to remuneration for his services as a director.
However, there may be a specific provision for providing remuneration to him in the
articles or the shareholders may resolve for the same in the General Meeting. The
articles, however, generally provide for director’s remuneration, which is in the nature of
honorarium. Sections 198, 309, 310, 311, 387, 200 and Schedule XIII of the Companies
Act, 1956 provide the relevant provision relating to managerial remuneration, which may
be summarised as under:
(1) For the purpose of the above-mentioned Sections, the term ‘remuneration’ includes:
(i) Any expenditure incurred by the company in providing any rent free
accommodation or any other benefit or amenity in respect of accommodation
free of charge;
(ii) Any expenditure incurred by the company in providing any other benefit or
amenity free of charge or at a concessional rate;
(iii) Any expenditure incurred by the company in respect of any such obligation or
service which but for such expenditure by the company would have been paid by
the person himself; and
(iv) Any expenditure incurred by the company to effect any insurance of the life of,
or to provide any pension, annuity or gratuity for the person or his spouse or
child. (Section 198)
The term ‘remuneration’ however, does not include:
(i) any sitting or attendance fees payable to directors for attending each meeting of
the Board or a Committee there of [Section 198(2)]. However, in case of a
managing director and whole time director, the payment of sitting fee forms a
part of managerial remuneration and if the amounts is payable in accordance
with Schedule XIII, no such sitting fee is payable to them.
(ii) remuneration payable for acting as technical expert. [Section 309(1)]
(iii) if the articles do not provide for the payment of travelling expenses to the
directors, travelling expenses incurred in attending meeting of the Board or
Committee thereof or General Meeting.
(2) The remuneration of the directors must be fixed:
(i) by the articles or
(ii) by a resolution or if the articles so require by a special resolution of the
company [Section 309(1)]
(3) The director may be paid remuneration in one of the following modes:
Directors – Powers, Managerial Remuneration 3.49

(i) A director may receive remuneration by way of fee for each meeting of the
Board or a Committee thereof attended by him.
(ii) A director who is either in the whole time employment of the company or a
managing director may be paid remuneration either by way of a monthly
payment or as a specific percentage of the net profits of the company or partly
by one way and partly by the other.
(iii) A director who is neither in the whole time employment of the company nor a
managing director may be paid remuneration either by way of a monthly,
quarterly or annual payment with the approval of the Central Government or by
way of commission if the company by a special resolution authorised such
payment.
(4) According to Section 198, total managerial remuneration payable to directors,
managing director(s) or manager or whole time director(s) in respect of any financial
year should not exceed 11% of the net profits of that company for that financial year.
The approval of the Central Government is required to pay the remuneration to a
whole time director/managing director of a company if such remuneration exceeds
5% of the net profits for one such director, and 10% of net profits for all of them
together. (Section 309)
In case of a director who is neither in the whole time employment of the company nor
a managing director, the approval of the Central Government for their remuneration
is required if it exceeds 1% of the net profits of the company, if a company has a
managing or a whole time director or a manager, and 3% of the net profits of the
company in any other case. (Section 309) In case of a manager the need for
approval of the Central Government arises when the remuneration exceeds 5% of the
net profits (Section 387)
(5) Under sub-section (4) of Section 198 in case of loss or inadequacy of profits, the
approval of the Central Government is required for payment of minimum
remuneration to managerial personnel. Section 269 has dispensed with the
requirement of prior approval of Central Government for appointment of managerial
personnel so long as the appointment and remuneration are in accordance with
Schedule XIII. Section II Part II of the Schedule specifies minimum remuneration
(varying from Rs. 75,000 per month to Rs.2,00,000 per month and Rs. 1,50,000 to
Rs. 4,00,000 as the case may be depending on the effective capital of the company).
It may be inferred that no separate approval of the Central Government would be
required under Sections 198(4) and 309(3) provided the remuneration paid to a
managerial person in the event of absence or inadequacy of net profits in any
financial year is in accordance with the provisions of Section II of Part II of Schedule
XIII.
3.50 Corporate and Allied Laws

Note: Earlier provision for 10 per cent reduction in salary of a managerial person has
been deleted from the revised Schedule XIII effective from 14 th July, 1993. In fact the
remuneration specified in Part II of the Schedule as amended on 1 st February, 1994
is itself the ‘minimum remuneration’. Hence, where a managerial person had been
appointed (with or without Central Government approval) on a specified salary with a
provision for 10% reduction in salary in the event of loss or inadequacy of net profits
in any financial year, the company may, if it so wishes, delete the said condition,
without obtaining central Government’s approval in accordance with the provisions of
Section 310.
(6) Remuneration payable by a company having adequate net profits to its managerial;
personnel is governed by Section 1 of Part II of Schedule XIII, according to which,
there would be no restriction on the nature or quantum of remuneration paid by a
company to its managerial personnel as long as the remuneration paid during any
financial year is within 5 per cent or 10 per cent of the net profits, as the case may
be, of that financial year.
It may be further noted that where a profit making company fixes remuneration for all
its managerial personnel in accordance with the provisions of Section 1 of Part II of
the Schedule but in incurred losses or earns inadequate profits in any subsequent
financial year, it would be required to confirm to the provisions of Section II of Part II
of the Schedule during such subsequent financial year unless it obtains the approval
of the Central Government for payment of remuneration to its managerial personnel
in excess of the limits specified in Section II of Part II of the Schedule.
(7) Section 310 prohibits any increase in the remuneration of any director, except with
the approval of the Central Government. However, increase in remuneration effected
by an increase in the sitting fee for each meeting of the Board or Committee thereof
it such fee after the increase, does not exceed the limits prescribed by the Central
Government [presently the amount of remuneration by way of fee for each meeting of
the Board of Directors or a committee thereof is [(a) For companies with a paid up
share capital and free reserves of Rs 10 crore and above or turnover of Rs.50 crore
and above not to exceed Rs.20,000/- and (b) For other companies not to exceed
Rs.10,000/-] do not require the Central Government’s approval. The Amendment Act,
1998, provided that so long the increase in remuneration is in accordance with
Schedule XIII, approval of the Central Government will not be required.
(8) In the case of an appointment or reappointment of a managing or whole-time
director at a remuneration higher than the remuneration which that office previously
carried with it, the approval of Central Government is required except the cases
where such increase is in accordance with the conditions specified in the Schedule
XIII (Section 311).
Schedule XIII provides that in regard to such managerial personnel who are already
Directors – Powers, Managerial Remuneration 3.51

in position on the date of the amendment in the Schedule, companies may


themselves raise their remuneration, from a date not earlier than 1 st February 1994,
i.e., the date of the notification of the revised Schedule, without the approval of the
Central Government. This may be done even where the earlier
appointment/remuneration had been approved by the Central Government in
accordance with the provisions of Schedule XIII save and except in those cases
where the Central Government had given conditional approval to the
appointment/remuneration. For example, in some cases the Central Government
approves appointment of a person subject to the condition that the company would
not increase or vary his remuneration without obtaining approval of the Central
Government or that the remuneration of a managerial person shall not exceed a
specified ceiling if he has been permitted to work as managerial person in more than
one company and draw remuneration from both the companies. Where such specific
or special conditions have been imposed by the Central Government while approving
appointment/remuneration, these conditions would still have to be complied with
unless varied by the Central Government.
Any increase in the remuneration of managerial personnel in accordance with the
revised Schedule shall be subject to the approval of the shareholders in a general
meeting, when held, in specific terms so as to comply with Part III of the Schedule.
(10) Under Section 200, a company cannot pay its officer or employee any tax-free
remuneration. Since, under Section 2(30), the term ‘officer’ includes a director, the
payment of tax-free remuneration to a director is also forbidden.
It may, however be noted that despite Section 200 of the Companies Act, Section
10(6)(vii)(a)(ii) of the Income-Tax Act, 1961, provides that in the case of a foreign
technician of the class specified therein and employed by a company, the tax on his
income chargeable under the head ‘salaries’ may be paid by the company for a
period of twenty-four months following the expiry of a tax-free period of thirty-six
months from the date of his arrival in India.
(11) The Companies (Amendment) Act, 1974 introduced a new Section 637-AA
empowering the Central Government while according approval to the appointment or
remuneration of a managing or whole-time director or manager to fix the
remuneration, within the statutory ceilings, at such amount or percentage of profits of
the company, as it may deem fit and while fixing the remuneration, the Central
Government shall have regard to:
(a) the financial of the position of the company;
(b) the remuneration or commission drawn by the individual concerned in any other
capacity, including his capacity as a sole selling agent;
(c) the remuneration or commission drawn by him from any other company;
3.52 Corporate and Allied Laws

(d) professional qualifications and experience of the individual concerned;


(e) public policy relating to the removal of disparities in income.
♦ Compensation for loss of office: Sections 318 to 321 lay-down elaborate provisions
for regulating payment of compensation to directors for loss of office or in
consideration of retirement from office or in connection with such losses or retirement.
These provisions apply to all companies, i.e. public companies, private subsidiary of
public companies and to private companies.
Under Section 318 such compensation can be paid only to managing director, director
holding the office of the manager and to a whole time employee director and to no
others. The compensation payable shall be on the basis of average remuneration
actually earned by such persons for three years (or such shorter period as may be the
case) immediately proceeding the ceasing of holding of such office, and shall be for
the unexpired portion of his term or for three years (whichever is shorter). No such
payment however can be made at all if winding up of the company is commenced
before or commences within 12 months after he ceases to hold office if the assets or
winding up (after deducting expenses on winding up) are not sufficient to repay the
shareholders the capital contributed by them (inclusive of premium, if any).
No payment of such compensation can also be made in the following cases:
(a) Where the director resigns office due to reconstruction or amalgamation of the
company with another body or body corporate and such director is appointed manager
or managing director or other office in the resulting new body.
(b) Where a director resigns otherwise that as on reconstruction or amalgamation as
stated above.
(c) Where the director vacates office under Section 203 (acting-fraudently as director or
manager) or Section 283(1) Clauses (a) to (1) (vacation-of office by director).
(d) Where winding up (compulsory, voluntary or under supervision) has been due to the
negligence or default of the director in question.
Where the winding up is not due to negligency or default of the director, he can be
paid compensation for loss of office, even in the winding up. Termination of his
services will not be wrongful if the winding up was due to his default. [Rajagopal vs.
Salem Provident Society (1963)]
(e) Where the director has been guilty of any fraud or breach of trust in relation to or
gross negligency or gross mismanagement of the affairs of the company or any
subsidiary or holding company thereof. This also includes a breach of fiduciary
obligations because that constitutes a breach of trust.
In Bell vs. Lever Brothers, (1932), Lever Brothers removed their managing director of a
Directors – Powers, Managerial Remuneration 3.53

subsidiary by paying him compensation. It was afterwards discovered that during his
tenure of office he had been guilty of so many breaches of duty and corrupt practices that
he could have been removed without compensation. An action was then commenced to
recover back the compensation money. It was held that Bell was not bound to refund the
compensation money and to disclose any breach of his fiduciary obligation so as to give
the company an opportunity to dismiss him.

3.15 MANAGING DIRECTOR


A managing director is a person entrusted with any powers of management, which would
not otherwise be exercisable, by him (Section 226). He exercises some or all of the
director’s powers and functions of managing which are delegated to him upon some terms
and conditions and subject to such restrictions as are set-out in the agreement, resolution
or other document appointing him. He may be appointed by:
(i) An agreement with the company, or
(ii) The resolution of the Board of Directors, or
(iii) A resolution passed by the company in Annual General Meeting, or
(iv) By the memorandum, or
(v) By the articles.
Normally, the articles empowers the Board of Directors to appoint one of their body to the
office of the managing director, by a resolution passed at the Board Meeting in separate
service contract stating his powers and his duties and terms of employment. As such a
managing director is a service director and he is to act under the control and supervision
of the Board. As a managing director must necessarily be a director, his appointment is
automatically terminated if he ceases to act as a director either because of any
disqualification, e.g., not purchasing qualification shares within two months of his
appointment as director or because of his retirement by rotation.
Before the Amendment Act of 1988, it was not obligatory for a public company (including a
deemed public company) or a private company, which is subsidiary of a public company to
appoint managerial personnel, that is, a managing or whole time director or a manager.
As per the amended section, it is obligatory for every public company or a subsidiary of a
public limited company having a paid-up share-capital of such sum as may be prescribed
(Rs. 5 crores or more w.e.f. August 18, 1990) to appoint either a managing or whole time
director or a manager.
There can be more than one managing director in a company on functional basis. But
usually there is only one managing director in a company of moderate size in which he is
the chief executive official of the company.
3.54 Corporate and Allied Laws

♦ Appointment of managing or whole time director or manager to require


Government approval in certain cases only: In the case of a public company
(including a deemed public company), or a private company which is subsidiary of a
public company, the Companies Act imposes certain restrictions on managing or
whole time director’s appointment, removal etc. which are discussed below:
If the condition specified in Schedule XIII are fulfilled, a managing or whole time director
or manager in public company (including a deemed public company) or a private company
which has a subsidiary thereof can be appointed, reappointed without the approval of the
Central Government. A return in the prescribed form no. 25-C is, however, required to be
filed within 90 days of appointment [Section 269(2)].
If the conditions specified Schedule XIII is not complied with, an application seeking
approval of the appointment must be made to the Central Government within 90 days from
the date of such appointment/re-appointment [Sections 269(2) and (3)].
The Central Government shall not accord its approval unless it is satisfied that:
(a) The proposed managing or whole time director of the company is a fit and proper
person and the appointment of the such an individual as managing or whole time
director is not against public interest;
(b) The terms and conditions of the appointment of the proposed managing or whole time
director of the company are fair and reasonable [Section 269(4)].
The Central Government is also empowered to accord approval to the appointment for a
period less than the period for which the person is proposed to be appointed by the
company [Section 269(5)].
If the appointment re-appointment is not approved by the Central Government the
appointee shall vacate office immediately on communication of the decision by the Central
Government, otherwise he shall be punishable with fine up to Rs. 5,000/- for every day
during which he fails to vacate such office [Section 269(6)].
When the Central Government is, prima-facie, of the opinion that any appointment made
without its approval has been made in contravention of the requirement of Schedule XIII,
the Central Government may render the letter to the Company Law Board for decision.
The Company Law Board after giving reasonable opportunity of hearing to the company
and the appointee may make an order declaring whether contravention of the
requirements of Schedule XIII has or has not taken place. If the Company Law Board
comes to he conclusion that such contravention has occurred, the appointment shall be
deemed to have come to an end on the date of such declaration and the person so
appointed shall, in addition to being liable to pay a fine of Rs. 1,00,000 refund to the
company the entire amount of salaries and perquisites etc., received by him. However, all
the acts of the managerial personnel, whose appointment is invalidated, will be deemed to
Directors – Powers, Managerial Remuneration 3.55

be valid [Sections 269(7), (8), (9), (10), (12)].


♦ Restrictions on Appointment: An individual cannot be managing director or
manager of more than two companies, public or private, where out of two companies
at least one is a public company or private company, which is a subsidiary of a public
company. An individual may hold the office of managing director or manager in any
number of private companies, which are not subsidiaries of public company. But if the
office is hold in a public company or a private company which is subsidiary of a public
company, the same individual can not, in addition thereto, hold the office of managing
director in more than one another company whether such every company is a public
company or private company which is subsidiary of public company or any private
company. (Section 316)
♦ Terms of Office: The term of office of a managing director must not exceed 5 years
at a time. The term, however, may be extended for further period not exceeding 5
years at a time. (Section 317)
It is important to note that the person ceases to be managing director with a ceasure
of directorship on account of his retirement by rotation at the Annual General Meeting.
But if such a person is re-elected as director at the AGM and thereby he continues as
the director of the company, he shall continue as a managing director also for the
period for which he is so elected by the AGM and for the unexpired period of present
term of appointment as managing director.
♦ Disqualifications for appointment: A managing director has necessary to be a
director and therefore, all the disqualifications rendering impossibilities for the
appointment of a person as director (Section 274) will apply in the case of
appointment of a managing director. Section 267 specifically provide that company
must appoint or continue the appointment of a person as managing or whole time
director who is:
(a) An undischarged insolvent or has at any time been adjudged insolvent;
(b) Suspends or has at any time suspended payment to his creditor or has made a
composition with them or
(c) Has at any time been convicted of an offence involving moral turpitude.
The term moral turpitude needs a little elaboration. According to American encyclopedia
of Law, it comprises anything contrary to justice, honesty, and principle of good morals,
an act of baseness, vileness or depravity in the private and social duties, which a man
owes to his fellowmen or society in general. The term also comprises anything contrary to
the accepted and customary rule of right and duty between man and man.

3.16 INTER-CORPORATE LOANS AND INVESTMENTS (SECTION 372A)


3.56 Corporate and Allied Laws

(a) Overall ceiling limits: No company shall directly or indirectly make


(i) make any loan to any other body corporate;
(ii) give any guarantee or provide security in connection with a loan made by any
other person to, or to any other person by, any body corporate; and
(iii) acquire by way of subscription, purchase or otherwise the securities of any
other body corporate, exceeding 60% of its paid-up share capital and free
reserves or 100% of its free-reserves whichever is more. [sub-section (1)]
Explanation:
1. “Loan” includes debentures, or any deposit of money made by one company
with another company, not being a banking company.
3. “Free Reserves” means those reserves which, as per latest audited balance
sheet of the company, are free for distribution as dividend and shall include
balance to the credit of the securities premium account but shall not include
share application money.
(b) Loans, Investments and guarantees in excess of prescribed limits: Where the
aggregate of the loans and investments so far made, the amounts for which guarantee
or security so far provided to or in all other bodies corporate, along with the
investment, loan, guarantee or security proposed to be made or given by the Board,
exceeds the aforesaid limits, no investment or loan shall be made or guarantee shall
be given or security shall be provided unless previously authorised by a special
resolution passed in a general meeting.
However, the Board may give guarantee, without being previously authorised by a
special resolution if:
1. a resolution is passed in the meeting of the board authorising to give guarantee
in accordance with the provisions of this section;
3. there exists exceptional circumstances which prevent the company from
obtaining previous authorisation by a special resolution passed in a general
meeting for giving a guarantee;
3. the resolution of the Board under (1) as above is confirmed within twelve
months, in a general meeting of the company or the annual general meeting
held immediately after passing of the Board resolution, whichever is earlier.
(c) Matter to be specified in special resolution: The notice of special resolution shall
indicate clearly the specific limits, the particulars of the body corporate in which the
investment is proposed to be made or loan or security or guarantee to be given, the
purpose of the investment, loan or security or guarantee, specific sources of funding
and such other details.
Directors – Powers, Managerial Remuneration 3.57

(d) Other Steps: No loan or investment shall be made or guarantee or security given by
the company in pursuance of sub-section (1) of Section 372A unless the resolution
sanctioning it is passed at a meeting of the Board with the consent of all the directors
present at the meeting and the prior approval of the public financial institution referred
to in Section 4A where any term loan is subsisting, is obtained.
The prior approval of a public financial institution shall not be required where the
aggregate of the loans and investments so far made, the amounts for which guarantee
or security so far provided to or in all other bodies corporate, along with the
investments, loans guarantee or security proposed to be made or given does not
exceed the limit of sixty per cent specified in sub-section (1) as referred above, if
there is no default in repayment of loan instalment or payment of interest thereon as
per the terms and conditions of such loan to the public financial institution. [sub-
section (2)].
(e) Rate of interest: No loan to any body corporate shall be made at a rate of interest
lower than the prevailing bank rate, being the standard rate made public under
Section 49 of the Reserve Bank of India Act, 1934. [sub-section (3)].
(f) Default under Section 58A: No company which has defaulted in complying with the
provision of Section 58A, shall directly or indirectly make any loan to any body
corporate; give any guarantee, or provide security, in connection with a loan made by
any other person to, or to any other person by, any body corporate and acquire, by
subscription, purchase or otherwise the securities of any other body corporate till
such default is subsisting. [sub-section (4)]
(g) Register of Investments and Loans: (i) Every company shall keep a register
showing the following particulars in respect of every investment or loan made,
guarantee given or security provided by it in relation to any body corporate under sub-
section (1), namely:
— the name of the body corporate;
— the amount, terms and purpose of the investment or loan or security or
guarantee;
— the date on which the investment or loan has been made; and
— the date on which the guarantee has been given or security has been provided
in connection with a loan.
(ii) The particulars of investment, loan, guarantee referred to in sub-section (1) shall
be entered chronologically in the register aforesaid within seven days of the making of
such investment or loan, or the giving of such guarantee or the provision of such
security. [sub-section (5)]
3.58 Corporate and Allied Laws

(iii) The register referred to in sub-section (5) shall be kept at the registered office of
the company concerned and shall be open to inspection at such office and the
extracts may be taken therefrom and copies thereof may be required, by any member
of the company to the same extent, in the same manner, and on payment of the same
fees as in the case of the register of members of the company; and the provisions of
Section 163 shall apply accordingly. [sub-section (6)]
(h) Guidelines: The Central Government may prescribe guidelines for the purposes of
Section 372A. [sub-section (7)]
(i) Exemptions: Nothing contained in Section 372A shall apply,
(a) to any loan made, guarantee given or any security provided or any investment
made by (1) a banking company or an insurance company, or a housing finance
company in the ordinary course of its business, or a company established with
the object of financing industrial enterprise or of providing infrastructural
facilities; (2) a company whose principal business is the acquisition of shares,
stock, debentures or other securities; (3) a private company, unless it is a
subsidiary of a public company;
(b) to investment made in shares allotted in pursuance of clause (a) of sub-section
(1) of Section 81;
(c) to any loan made by a holding company to its wholly owned subsidiary;
(d) to any guarantee given or any security provided by a holding company in
respect of loan made to its wholly owned subsidiary;
(e) to acquisition by a holding company by way of subscription, purchases or
otherwise, the securities of its wholly owned subsidiary [sub-section (8)]
(j) Penalty for default: If default is made in complying with the provisions of this
section, other than sub-section (5), the company and every officer of the company
who is in default shall be punishable with imprisonment which may extend to two
years or with fine which may extend to fifty thousand rupees.
However where any such loan or any loan in connection with which any such
guarantee or security has been given, or provided by the company, has been repaid in
full, no punishment by way of imprisonment shall be imposed under this sub-section
and where such loan has been repaid in part, the maximum punishment which may be
imposed under this sub-section by way of imprisonment shall appropriately be
reduced.
Further that all persons who are knowingly parties to any such contravention shall be
liable, jointly and severally, to the company for the repayment of the loan or for
making good the same which the company may have been called upon to pay by
Directors – Powers, Managerial Remuneration 3.59

virtue of the guarantee given or the securities provided by such company. [sub-
section (9)].
If default is made in complying with the provisions of sub-section (5), the company
and every officer of the company who is in default shall be punishable with fine which
may extend to five thousand rupees and also with a further fine which may extend to
five hundred rupees for every day after the first day during which the default
continues. [sub-section (10)].

3.17 SELF-EXAMINATION QUESTIONS


1. It is admitted that a body corporate is a juridical person. But how can an abstract body
function or carry on business?
2. What are the functionaries called both individually and collectively in the field of
Company Law?
3. Are these functionaries nominated or elected and by whom?
4. Of the propositions comprised in the following statements, state which is correct?
(a) Directors (i) are not trustees as conceived by the Indian Trusts Act (ii) are
trustees of the company’s assets, which are or come under the director’s control
and they must act in the interests of the company only.
(b) Directors are trustees (i) for the company (ii) for the shareholders (iii) for the
creditors (iv) for the individual shareholder (v) for outsiders.
(c) The law of agency (i) governs (ii) does not govern the relationship between the
company and it directors.
(d) Directors are (i) agents of the company (ii) agents of the shareholders.
(e) Where the directors exceed their powers, the company can ratify their acts (i) if
the acts are ultra vires the company, (ii) if the acts are intra vires the company.
(f) Directors (i) do stand (ii) do not stand, in a fiduciary position towards the
company in regard to powers conferred on them by the articles.
5. What is the maximum number or directors, prescribed by the Act that a company
might have?
6. What is the minimum number of directors that a company must have?
(a) When it is a public company;
(b) When it is a private company; and
(c) When it is a “deemed public” company?
7. State whether the following statements are true or false:
(a) A body corporate or a firm or an association of persons can be a director of
another company.
3.60 Corporate and Allied Laws

(b) Generally articles cannot name the first directors.


(c) Articles may provide that both the number and the names of the first directors
must be determined in writing by the subscribers to memorandum.
(d) The tenure of office of the first directors ends on the last date of the first annual
general meeting of a company.
(e) In the case of a public company subsequent directors can be appointed in an
extraordinary general meeting.
(f) Out of the total number of directors of a public company or its private subsidiary,
only 2/3 rd of them can be given permanent appointments.
(g) The rest of the directors i.e., 1/3rd of them, are liable to retire by rotation.
(h) The object of the provisions as regards rotation of directors is to do way with the
mischief done by self-perpetuating managements.
(i) Of the 2/3 rd rotational directors, only 1/3 rd shall go out at one general meeting.
(j) Those who are longest in office will retire last because their long experience is
beneficial to the company.
(k) When two directors are appointed on the same day, their retirement will be
determined by a lottery.
(l) The vacancies caused by such retirement must be filled in the same meeting in
which the directors retire.
8. Where the vacancies caused by rotational retirement have not been filled in or any
decision not to fill them up has not been taken either, then what will be the effect of
this issue?
9. In the context of your answer to Q.8, if no fresh appointment is made or if no decision
against appointment is taken, can the retiring directors be deemed to have been
reappointed?
10. The articles of a company fix the maximum number of directors at 12 whereas the
company actually has 6 directors: What type of resolution will be necessary if the
number is proposed to be increased to (a) 12, (b) 15, (c) is the approval of the Central
Government necessary in both the cases?
11. Can the Board of Directors appoint additional directors?
13. Can the Board fill a casual vacancy by a resolution passed by circulation?
13. A director of a company has gone out of the State for 2 months, and the Board
desires to appoint an alternate director in his stead, can it do so?
14. Can a minor become a director?
15. Is it necessary that a person must be a graduate of a University if he wants to become
a director of a company?
16. What are the disqualifications for directorship?
Directors – Powers, Managerial Remuneration 3.61

17. In how many companies can a person hold directorship at a time?


18. A public company appoints three directors by a single resolution.
(a) Will the appointment be valid?
(b) Would there be any difference in your answer if the meeting had first
unanimously agreed that the appointment would be made by a single resolution?
19. (a) Does the Act prescribe any share qualification for a director?
(b) Can the articles provide for it?
20. Can you be compelled to take the said qualification shares:
(a) Before your appointment as director;
(b) Any time after your appointment which is shorter than 2 months?
21. The nominal value of the qualification shares must not exceed Rs. 5,000. But if it does
exceed this amount what would then constitute the share qualification for
directorship?
23. Does the Act provide for situations for automatic vacation of the office of director?
23. An ordinary director can resign verbally, or in writing informing the company of his
resignation and leave the office forthwith; but a managing or whole-time director
cannot vacate his office in this manner and his resignation has to be formally
accepted. Can you account for this distinction?
24. The articles of a company provide that a person shall be a director for life or until he
resigns. In terms of the articles the director was so appointed. When the company
went into liquidation his service were terminated. Could he claim compensation
against the company for his termination?
25. K and C were directors. At a board meeting of directors S was appointed as a director
and C and S purported to remove K from the Board. Later, C and S acting as directors
allotted shares to M. Before the allotment M had notice that K was contesting the
validity of the appointment of S. Would the allotment be valid?
26. A director whose term of office has expired continues to act as a director. Can his act
regarded as valid in the circumstances?
27. Can a director act individually?
28. The law requires that the Board must meet at least once in every three months. The
last meeting of the Board was held on January 5. The next meeting cannot be held on
April 4 as most of the directors would remain out of India till 29 th April. Would it be
proper if the meeting were held on 30 th April?
29. Has the Act prescribed the maximum number of meetings per year for Board of
Directors?
30. What is the quorum necessary for a Board meeting in the following circumstances?
(a) Where the total number of directors is 9.
3.62 Corporate and Allied Laws

(b) Where it is 11.


(c) Where it is 3.
(d) Where the total number is 12, all are present but 10 are “interested directors”
within the meaning of the Act.
31. When a meeting cannot be held for want of quorum, does it stand dissolved?
33. Can the Board pass a resolution by circulation?
33. Can a company in general meeting override the Board’s power of carrying on
business by prescribing a regulation or passing a resolution, taking away the powers,
which have been conferred upon the Board by the articles of the company?
34. What are the acts that can be performed by the Board of public company only with the
consent of the company in general meeting?
35. The power (i) to make calls; (ii) to issue debenture; (iii) to borrow moneys otherwise
than on debentures; (iv) to invest the funds of the company; and (v) to make loans
can be exercised by the Board only by means of resolution passed at the general
meeting of the company. Is it a correct statement?
36. The Board has the requisite sanctions through resolution to borrow otherwise than on
debentures, to invest the funds of the company and to make loan. Can the Board
delegate any of these powers on the basis of the said sanction?
37. A public company wants to make loans to its directors. Can it do so?
38. Can a private company make loans to any firm in which one of the relatives of its
director is partner, without the previous approval of the Central Government?
39. According to law, a director who is director or indirectly interested in any contract or
arrangement – whether actual or proposed – made by or on behalf of a company must
disclose his interest.
(a) Where should it be disclosed if it is an “actual” contract?
(b) Where should it be disclosed it is a “proposed” contract?
40. (a) Can an interested director vote on, participate in the discussion of, any contract
into?
(b) Will he be counted for purpose of quorum?
41. The sanction of the Board of Directors is a ‘must’ for certain contracts in which
particular directors are interested.
(a) What are those contracts?
(b) Can this consent be obtained by a resolution by circulation?
43. What will be the effect of the contract referred to in Q.41, if the sanction of the Board
has not been obtained within 3 months after entering into the contract?
43. Will the said transaction be in order, if the Board accords its sanction to the said
Directors – Powers, Managerial Remuneration 3.63

contract says 4 months after it is entered into?


44. Is the maintenance of the following compulsory?
(a) Register of contracts, companies and firms in which directors are interested.
(b) Register of directors, managing director, manager and secretary.
(c) Register of director’s shareholdings?
45. If a director assigns his office, what will be the consequence of such an assignment?
46. The managing director of a company, while exercising his power under the articles
appointed by his will one as the managing director to hold the office after his death.
(a) Was the exercise of the power legal?
(b) Didn’t it offend the provision of the Act that any assignment of office by a
director would be void?
47. Is compensation payable for the loss of his office to the following personnel?
(a) To a director;
(b) To a director who has resigned;
(c) To a director whose directorship has been vacated in terms of the specific
provisions of the Act;
(d) To a director where the company was being wound up for reasons for which
such director was not at all responsible in any way.
(e) To a managing or whole-time director or to a manager.
48. The directors of an insurance company left the management of the company’s affairs
almost entirely to B, the g director. On account of B’s fraud, a large quantity of the
assets of the company disappears and in the balance sheet, items appeared under
captions ‘loans at call or short notice’, and “cash at bank or hand”. But the directors
never enquired how these items were made up. Had they done so, they would have
discovered that the loans were chiefly made to B and to the company’s general
manager and that the “cash at bank or in hand” included pounds 93,000/- in the hands
of the company’s stock brokers, in which B was the partner. Could the directors be
held culpably negligent in the circumstances? [iii re-City Equitable Fire Insurance Co.
(1925) Ch. 4071].
49. The Directors left all the management of a bank’s affairs in the hands of a manager
and never cared to enquire whether the loans were made by the manager on
securities or whether the securities were good or worthless. The manager advanced
large amounts to his relatives and friends without security or on securities, which
were obviously, fakes. Decide [Re-Union Bank of Allahabad Ltd.].
50. The entire management of a cotton mill was vested in the manager. The balance
sheet of the mail showed stocks of yarn. As a matter of fume, mill did not possess the
stocks shown and the directors had never made any physical checking of yarn. The
3.64 Corporate and Allied Laws

shareholders brought an @ contended that they could not be, of yarn; the
responsibility in this man. Would this contention of the
51. “Where an agent is liable, the directors would be liable; where the liability would
attach to the principal only; the liability is a liability of the company’s [Ferguson vs.
Wilson (1866) per Lord cairns] APPLY THIS test to the following cases and state if the
directors are liable:
(a) Where the directors make themselves personally liable to a third party.
(b) Where the contract and the surrounding circumstances indicate that they are
personally liable.
(c) Where the directors contract without purporting to bind the company.
(d) Where the directors say, “We the directors of X Co. Ltd. hereby agree”.
53. How shall the remuneration payable to directors be determined?
53. Can the remuneration payable to directors be determined at a meeting of the directors
themselves? [Raditey Siiyatyi vs. The Official Liquidation A.LR. 1968 Raj. 226].
54. The remuneration payable to directors:
(a) shall be.
(b) shall not be, subject to the provisions of Sections 198 and 309.
55. The Explanation to Section 198 includes certain items within the purview of the word
“remuneration”. Can you account for this inclusion?
56. What is the overall maximum limit of managerial remuneration?
57. Does the said overall maximum limit include any fee payable to directors for attending
the Board or its Committee?
58. What is the basis on which a managing or whole-time director may be paid his
remuneration?
59. Can the remuneration of directors of public company or its subsidiary be increased?
60. (a) If any director gets any amount in excess of its statutory limit, can be forced to turn
the excess amount to the company.
(b) Can the company waive the recovery of any such sum?

3.18 ANSWERS TO THE SELF-EXAMINATION QUESTIONS


1. Through human agency;
3. Directors and Board of Directors respectively;
3. Elected by shareholders;
4. (a) Both; (b) (i)&(ii); (c) (iii); (d) (i); (e) (ii); (f);
5. The act prescribed none-article, prescription prevails;
Directors – Powers, Managerial Remuneration 3.65

6. (a) 3; (b) 2; (c);


7. (a) False; (c) True; (d) True; (e) False; (f) False;
8. Meeting to stand adjourned for a week;
9. Yes subject to the exceptions in Section 256(4)(b);
10. (a) Ordinary resolution; (b) Special resolution; (c) No-necessary only in case of (b);
11. Yes, if the articles permit;
13. No;
13. No;
14. No;
15. No;
16. Those mentioned in Section 274;
17. 20 companies only;
18. (a) No; (b) Yes;
19. (a) No; (b) Yes;
20. No;
21. Value of one share;
23. Yes, in Section 233;
23. Because the latter, being an employee cannot give up office at his pleasure-his
resignation must be approved or accepted;
24. No, because articles operates as long as the company is a going concern;
25. No;
26. No;
27. No, unless so delegated;
28. Yes;
29. No;
30. (a) 3; (b) 4; (c) 2; (d) 2 non-interested directors;
31. No;
33. Yes;
33. No;
34. Those prescribed by Section 293, Sections 294(3), 314, 370, 149(2A) etc.;
35. No;
36. No, further resolution to be passed for delegation;
3.66 Corporate and Allied Laws

37. Yes, only with the previous approval of the Central Government;
38. Yes, if the private company is not a subsidiary of public company;
39. (a) At the first meeting of the Board held after the director becomes interested;
(b) At the Board’s meeting at which the question of entering into it is first considered of
interest has arisen by that time or at the first board meeting after the arising of the
interest;
40. (a) No; (b) No;
41. (a) For the sale, purchase or supply of goods or services for underwriting shares or
debentures; (b) No;
43. Voidable at Board’s option;
43. Yes, provided the Board has not repudiated the contract after the expiry of 3 months;
44. Yes;
45. Void;
46. (a) Yes; (b) No;
47. (a) No; (c) No; (d) Yes;
48. Yes;
49. Directors liable for misfeasance could not be said to have acted personally and hence
non-exonerable from their liability;
50. Yes;
51. Yes;
53. Either by the articles or a share holder resolution a general meeting;
53. Yes; If there is a clear provision to that effect in the articles;
54. (a);
55. To prevent directors from drawing more money than that they are statutory entitled to,
in the guise of collateral benefits;
56. 11%;
57. No;
58. Monthly basis or fixed percentage of net profits basis or in combination of both the
basis;
59. Yes;
60. (a) Yes; (b) No.
4
(D) MEETINGS, POWERS OF THE BOARD AND RELATED
PARTY TRANSACTIONS

4.0 INTRODUCTION
A company is a corporate body or corporation, which is an artificial person, recognised as
such by Law and capable of doing many of things a natural person can do. For example, a
company can own property, enter into contracts, and even be guilty of certain offences. It
does all these things on its own accounts, quite apart from the persons who compose it.
Unlike a natural person, a company cannot however think and express its will or make a
decision except through resolutions passed at properly convened and constituted
meetings of its members. They must act collectively, not individually and an act or
decision of individual members while not duly assembled as body is not a valid act of the
company. A company, i.e. its members collectively may delegate most (but not all) of their
functions to directors, who must ordinarily meet together to perform them. Two main
organs members or shareholders in general meetings and directors acting as a Board
conduct the affairs of a company.
♦ CLASSIFICATION OF MEETINGS
Meetings held the Companies Act might be classified as follows:
4. Meetings of shareholders or members:
(a) Statutory meeting.
(b) Annual general meeting.
(c) Extraordinary general meeting.
(d) Class meetings.
2. Meeting of debenture holders.
3. Meetings of creditors and contributories in winding up.
4. Meeting of creditors otherwise than in winding up.
4.2 Corporate and Allied Laws

5. Meeting of directors:
(a) Board meeting
(b) Committee meeting.

4.1 MEETINGS OF DIRECTORS


Two main organs, the shareholders in general meeting and the directors acting as a Board
conduct the affairs of a company. The modern practice is to confer on the directors the
right to exercise all company’s powers except for those matters, which are by law required
to be exercised by the company in general meeting. This practice has also been given
statutory acknowledgment in Section 291, which read as follows:
(1) Subject to the provisions of this Act, the Board of Directors of a company shall be
entitled to exercise all such powers, and to do all such acts and things, as the
company is authorised to exercise and do:
Provided that the Board shall not exercise any power or do any act or thing which is
directed or required, whether by this or any other Act or by the memorandum or
articles of the company or otherwise, to be exercised done by the company in general
meeting: Provided further that in exercising any such power or doing any such act or
thing, the Board shall be subject to the provision contained in that behalf in this or any
other Act, or in the memorandum or articles of the company, or in any regulations not
inconsistent therewith and duly made there under, including regulations made by the
company in general meeting.
(2) 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.
The powers of the directors are, therefore, restricted in two ways: First being agents
of the company, the directors can do nothing which the company itself, their principal,
cannot do under its memorandum of association and any purported act by them,
which is ultra virus the company, will be void and of no effect. Secondly when acting
within the power of the company, the directors cannot exercise any power of the
company which is required by the Companies Act or any other Act or by the
memorandum or articles of the company or otherwise, to be exercised by which the
company in general meeting.
How directors exercise their powers? : Subject to any special provisions in the
articles, powers delegated by a company to its directors must be exercised at properly
convened meeting generally referred to as Board meetings. Only acts done at duly
constituted meetings are therefore valid, unless the articles provide otherwise, and an
individual director has no power to bind the company unless duly authorised so to act
at a Board meeting although subsequent acquiescence by a properly convened Board
Meetings, Powers of the Board and Related Party Transaction 4.3

meeting of invalid act of some directors may have the effect of ratifying the act
[Southern Countries Deposit Bank Ltd. vs. Rider and Kirkwood (1895) 73 LT 374, CA].
4.1.1 Board Meeting: Frequency of Board Meetings: Section 285 required the Board to
meet at least once in every three months irrespective of whether it is the Board of a public
company or a private company. And at least four such meetings must be held in every
year. However, the Central Government may by notification in the official Gazette, direct
that these provisions will not apply in relation to any class of companies or will apply in
relation thereto subject to such exceptions, modifications or conditions as may be
specified in the notification.
It will be worthwhile to consider the question here. Is a director bound to attend the
meeting of the Board? No, he is not so bound. But nonetheless he will be guilty of
breach of duty if he fails to attend the Board meetings with reasonable regularity without
sufficient cause being shown for non-attendance. Willful non-attendance on his part may
give rise to his liability of ground of negligence if it is patently prejudicial either to the
company or to the general body of shareholders. Fairly frequent absence from the Board
meting may however, be excused if the entire control is exercised by a single director or if
the Board is pretty large in number [Re. Denham & Co. D 25 Ch. D. 752; Marquis of
Bute’s case (1892) 2 Ch. 100]. The fewer the directors, the more onerous is the duty to
attend.
Although a director need not attend each Board meeting unless the articles provide
otherwise, yet his continuous non-attendance say two attendances followed by two non-
attendances, again followed by one attendance and so forth just by way of a guard
against infringement of provision of Section 283(1)(g) may render him guilty of breach of
trust which may be committed by other directors [Charitable Corporation vs. Sultan 2 Atk.
400]. For example, the other director or directors take the advantage of the aforesaid non-
attendance by the director and dissipate the company’s assets through wasteful and other
improper expenses. The absenting director would be responsible for the loss caused to
the company, if his presence could otherwise stop their wrongful acts resulting in the said
dissipation of assets.
It is true that Section 285 does not prescribe any penalty for non-compliance with the
requirements of the Section. Nevertheless, Section 622A may be invoked to deal with
such a situation.
If a director is improperly excluded from meeting by the Board, he has an equitable
remedy by way of injunction through a suit [Hayes vs. Bristol Plant hire Ltd., (1957)
I.A.E.R 685; Pulbrook vs. Richmond Mining Co. (1878) 9 Ch. D. 610]. But he will be
deprived of this remedy by Court’s injunction if has been excluded by the general meeting
itself [Read vs. Astoria Garage Streatham Ltd. (1952) Ch. 637 (CA)-(1952) 3 All. E.R.
252]. But even if he remains aggrieved by the said general meting resolution, shall he be
left out without any remedy whatsoever? It seems more appropriate that he should not be
4.4 Corporate and Allied Laws

debarred from seeking other remedies like damages.


Suppose, A claims to be director of X & Co. (P) Ltd. but the company’s records prima
facie reveal that A was not appointed as such. In such a case according to a Supreme
Court decision in [Jalan Ram Autar vs. Coal Producers (P) Ltd. (1970) 40 Comp. Cas. 715
(S.C.)] the onus lies on A to prove his claim of directorship before any interim relief can
be granted to him by way of injunction.
According to decision in Burden vs. Sinclair 105 S.J. 586, where there is a suit for a
declaration that a director has been validly removed from his office, an interim injunction
will not be granted.
In the context of Section 285, let us consider another intricate issue. Suppose a
meeting of the Board has been convened within the prescribed period in strict conformity
with the said Section but for want of quorum, the said meeting could not take place. In
such a situation, the meeting automatically stands adjourned by virtue of Section 288(1)
till the same day in the next week, at the same time and place. And if that “same day” is a
public holiday, then the meeting stands adjourned till the next succeeding day, which is
not a public holiday, at the same time and place. And because of this adjournment the
meeting is obviously held after the period specified in Section 285. In terms of Section
288(2), which in not clearly couched, a company shall not be deemed to have contravened
the provisions of Section 285 where the meeting does not take place for want of quorum.
In view of these legal provisions, a pertinent question for our consideration comes up. For
holding the next Board meeting, which date should we take into account for the purpose of
calculating the statutory period of once in every three months. Whether the date of the
original meeting, which was adjourned, for want of quorum or the adjourned date on which
the meeting was actually held?
A practical difficulty arises in this regard owing to the silence of the Act on this point. Our
confusion gets worse confounded when we come across Section 191 which states that
where a resolution is passed at an adjourned meeting inter alia, of the Board of Directors
of a company, it must “for all purposes” be deemed to have been passed at the date of the
adjourned meeting and not on an earlier (i.e., the original) meeting. For resolving our
question indicated in italics above, should we take the indirect provisions of Section 191
and conclude, by correlating the phrase ‘for all purposes’ with the expression ‘be treated
as having been passed on the date on which it was in fact passed, and shall not be
deemed to have been passed on any earlier date’ appearing in Section 191, that for
holding the next meeting for the Board, the statutory period should be calculated from the
date at which the adjourned meeting was held? There is no judicial decision to warrant
this conclusion.
However, according to Buckely’s Companies Act, (p.339, 12 th Edition), except as regards
the meetings of the three classes referred to in Section 144 of the English Companies Act
(corresponding to our Section 191 which is a verbatim copy of the English Section), the
Meetings, Powers of the Board and Related Party Transaction 4.5

legal fiction of continuity of the original meeting and all adjournments or any legal
consequence emanating therefrom remains unaffected by Section 144 of the English Act.
This is so notwithstanding the phrase “for all purposes”, appearing in Section 144, in as
much as our Section 191 is the verbatim copy of Section 144, we can rely on this treatise.
And relying thereon, we may conclude that the continuity of the original meeting will
remain unhampered and therefore for the purpose of holding the next Board meeting the
statutory period of “every three months” should be computed from the date when the
original meeting was adjourned for want of quorum.
♦ Notice of meeting: Notice of every Board meeting has to be served in writing on
each director for the time being in India, and at his usual address in India to every
other director. Every officer of the company whose duty is to serve the notice as
aforesaid and who fails to do so shall be punishable with fine extending to Rs. 100
(Section 286). It is usually the secretary of the company on whom it casts the duty to
serve the notice as aforesaid. It should be noted that the company is not liable for the
default in the service of the said notice; it is only the officer in default who is subject
to the said penalty.
Where a director goes abroad for a period of more than 3 months and an alternate
director has been appointed in his stead under Section 313(1), to whom should the notice
of Board meeting be given-to the “original director” or to the “alternate director”? Although
there is no legal precedence in this regard, it would be a prudent practice on strictly
construing Section 286 that the notice should be served to the alternate director as well
as on the original director who is outside India for the time being.
In the post-Independence period, there is an upsurge of foreign consortia. Articles of
foreign collaborations frequently provide that notice of Board meetings should be sent by
Air Mail to foreign directors so that they may be able to attend the statutorily prescribed
minimum number of meetings (i.e. 3 consecutive meeting without obtaining the leave of
absence from the Board) so as to prevent the vacation of their office due to continuous
non-attendance under Section 283(1) (g) of the Act. Now a vital question crops up as to
whether such a provision in the articles of foreign collaborations is valid, because of the
provisions of Section 286(1) which, as we have already stated earlier, requires the service
of the said notice on a director out of India at his usual address in India. Such a question
in not free from doubt. In England, such a notice is required to be given to a director
abroad, only when he is within easy reach, else not. But a moot point arises whether a
foreign director falls within the purview of the expression “a director other than a director
for the time being in India.” On a scrutiny of the act we find that whereas Section 53
provides for service of documents like notices, etc. on members by a company there in no
such or similar Section providing for services of notice on directors.
No particular form has been prescribed for the above-mentioned notice of Board
meetings. It has been held in Arunachalam Chettiar vs. Kaleshwarar Mills Ltd. (1957)
4.6 Corporate and Allied Laws

I.M.L.J.254-A.I.R. 1957 Mad. 309 that where articles of the company provide that there
will be a meeting on the first Saturday of every month, there will not be no necessity of the
service of the notice under Section 286(1) in as much as a provision in the articles is
sufficient compliance of Section 286(1).
Suppose, the above-mentioned notice, as required by Section 286(1) has not been
served. In such a situation the proceedings at the meeting shall not become invalid
provided (i) all the directors attend the meeting and do not raise any objection to the non-
service of notice; or (ii) where the absent directors make no complaint about the want of
notice, particularly when the proceedings are ratified at a subsequent meeting whereat the
absentee directors are present [Re State of Wyoming Syndicate (1901) 2 Ch. 431].
Let us consider another situation. Suppose, a director states that he will not be able to
attend the next Board meeting. In the circumstances is there any necessity to give the
notice under Section 286(1)? As per the decision in Re. Portuguese Consolidated Coffee
Mines Steel’s Case 42 Ch. D. 160, the answer is ‘yes’.
If the articles are silent, the notice of Board meeting is not required to specify the nature
of business to be transacted thereat [Compagnia de Mayville vs. Whitley, (1861) 1 Ch.
788]. If, however, the articles provided otherwise, then the notice must specify the nature
of the business to be transacted. All said and done, a better course seems to be that the
notice should specify the purpose of the meeting, it is an extraordinary or special meeting.
♦ Time and Place of Board Meeting: Whether or not the Board meeting can be held on
a public holiday and out of business hours is a question open to conflict. As already
state earlier, under Section 288, the adjourned Board meeting is to be held on a day
which is not a holiday but no such restriction has been levied on the matter of holding
the original Board meeting. On the basis of the provision of Section 288, one set of
arguments may be that like the adjourned meeting, the holding of the original Board
meeting is equally a normal and usual work of a company and that is why it should be
held during usual business hours and on a day, which is not a public holiday. On this
analogy, a similar inference may be drawn form the provision of Section 166(2) as
well, because it prescribes only for each annual general meeting that it held on a day
which is not a public holiday and during the business hours and also because annual
general meeting is normal work of the company. Another set of arguments is that a
meeting of the board can take place even on a public holiday and out of business
hours because there is not such restriction as contemplated either by Section 166(2)
or by Section 288. We are rather inclined to subscribe to latter set of arguments. This
is because if the Legislature could think of imposing similar restrictions twice-once at
the time of drafting Section 166(2) in respect of only annual general meeting and the
other at the time of drafting Section 288 in respect of adjourned Board meetings-it
could rationally think of similar restrictions for the third time in respect of original
Board meetings. If the human element of forgetfulness on the part of the draftsmen is
Meetings, Powers of the Board and Related Party Transaction 4.7

to be given any consideration, even then it can be upheld on the first occasion when
Section 166(2) was drafted. But definitely such forgetfulness is not tenable on second
occasion when Section 288 was enacted especially in respect of adjourned Board
meeting. Had it been the intention of the legislature, it could easily enact a provision
and add it as a sub-section to Section 288. It, therefore, seems that the legislature did
not deliberately think it necessary to provide for original board meeting to be held on
a day other than a public holiday and during usual business hours. The law will take
its course, however the course may sound irrational. Therefore, in the absence of any
specific provisions in Act it seems that the original Board meeting can be held even
on a holiday and out of the business hours.
♦ Quorum: A quorum is the prescribed minimum number of qualified persons
authorised to transact the business at a meeting. In relation to a Board meeting
quorum implies fully qualified and disinterested directors who must be present at the
meeting so as to enable the Board of which they are the constituents to legally
transact the business thereat. Can the articles of a company fix such a quorum? No,
in view of Section 287 which has fixed the quorum of the Board meeting. Accordingly
such a quorum is one third of the total strength of Board (any fraction contained in the
said one third being rounded of as one) or two directors whichever is higher. The total
strength is to be derived after deducting the number of directors whose offices are
vacant. Therefore, the Quorum = 1/3 (of the total strength vacancies). Where total
number of directors are 9 and 2 offices of the directors have fallen vacant, we find:
1/3 of (9-2) = 1/3 of 7 = 21/3 directors. If the fraction of 3 rd were to be rounded off as
one then 3, i.e. 2+1 directors would constitute the quorum for the Board meetings. If
at any time the number of the remaining directors exceeds or is equal to two thirds of
the total strength, the number of the remaining directors who are non-interested but
present at the meeting, not being less than two shall constitute the quorum. For
example, there are in all 15 directors and the Board meeting commences with all the
15 directors. During the currency of the meeting, an item comes up for discussion in
respect of which 13 happen to be “interested” directors. In this case, in spite of the
excess of the interested directors being more than two-thirds, the prescribed minimum
number of non-interested directors constituting the quorum, namely, 2 present at the
meeting are to transact the particular item of business.
Now suppose all the 15 directors cited in the above illustration are equally interested in
that particular item of business and the time is so vital that but for a decision thereon, the
business of the company will be greatly hampered. How to resolve this impasse?
The act has not made any direct provision to take with such a situation, but the Article 48
of Table A of Schedule 1 of the Act, provides a remedy. According to the said article, the
Board may, whenever it thinks fit, call an extraordinary general meeting. By invoking this
Article, the Board should get the aforesaid impasse resolved by the shareholders at the
4.8 Corporate and Allied Laws

general meeting. Since according to Section 173(1) (b), all business in the case of any
other meeting than the annual general meeting is to be deemed special, by virtue of sub-
section (2) the notice of the extraordinary meeting must annex to it a statement setting out
all the material facts concerning the item of business, including, in particular, the nature of
the concern or interest there in of every director.
We have seen that interested directors are excluded from the computation of the quorum
under Section 300(1). However, in the terms of Section 300(2), the interested directors
can be counted for the purpose of quorum in the following cases, namely – (a) where the
company is a private company which is neither a subsidiary nor a holding company of a
public company; (b) where the company is a private company which is a subsidiary of a
public company, in respect of any contract or arrangement thereof; (c) where there is any
contract of indemnity against any loss which the directors or any one or more of them may
suffer by reason of becoming or being sureties or surety for the company; (d) in respect of
any contract or arrangement entered or to be entered into with a public company, or a
private company, which is a subsidiary of a public company in which the director’s interest
consist solely (i) in his being a director holding shares of such number or value as to be
just enough and not more than enough to qualify him for appointment as director, or (ii) in
his being a member holding not more than 20% of the paid-up share capital of the
company; (e) where it is a public company in respect of which the Central government
has, through a notification in the official Gazette, waived the necessity to comply with the
requirements of Section 300(1) on considerations of establishing or promoting any
industry, business or trade in the public interest.
Inability to hold a Board meeting for want of quorum results, as has already been stated in
the automatic adjournment thereof under Section 288. It has also been stated earlier that
according to Section 191, a resolution passed at an adjourned meeting is deemed as
having been passed thereat itself; it does not date back to an earlier date, i.e., the date of
the original meeting. It would be worthwhile to recapitulate here the provisions of Sections
174(2) to (5), which deal with adjournment of the general meeting for want of quorum so
as to compare them with the provisions relating to adjournment of board meetings. Unless
the article of a company whether public or private – provide otherwise, if the quorum is not
present within half an hour from the time fixed for the general meeting, it shall stand
dissolved in case the meeting has been convened, under Section 169, on the requisition
of members; in regard to any other class of meeting, it shall stand adjourned to the same
day in the next week at the same time and place of to such other day and at such other
time and place as the board may determine. If again at the adjourned meeting the quorum
is not present within half an hour of the scheduled time then the members present shall
constitute the quorum. According to Article 53 of Table A of Schedule I to the Act, where a
meeting is adjourned for 30 days or more, a fresh notice of the adjourned meeting has to
be served. Thus, Section 288 does not throw any light on what happens if the quorum is
not there at the adjourned meeting as well whether the Board meeting is to be adjourned
Meetings, Powers of the Board and Related Party Transaction 4.9

over and over again till the quorum is procured. Secondly, for want of quorum, the Board
meeting automatically stands adjourned to the same day in the next week and at the same
time and place. But the Board has no power to fix any other day or place or time for such
adjourned meeting: where as in the case of general meeting, the Board can adjourn it to
any other day or other time and place. Thirdly Section 288 implies that a Board meeting
can be called on a public holiday, though not the adjourned meeting. Under Section
166(2) annual general meeting cannot be held on a public holiday. But in the absence of
any specific prohibitions by the Act, a statutory and an extraordinary meeting can be held
on a public holiday.
The term “public holiday” in this context should be understood. According to the proviso to
Section 2 (38) no day declared by the Central Government to be a public holiday shall be
deemed to be a public holiday unless the declaration was notified before the issue of the
notice of the meeting. Suppose, the notice of a meeting was issued on April 1 st where by it
was to be held on May 3. If on April 2, the Central Government declares the 3 rd day of
May as a public holiday, there is on bar to the holding of the meeting on May 3 in spite of
its being declared as a public holiday. If, however, the declaration is notified before the
issue of the notice convening the meeting, say on 31 st March, the meeting cannot be held
on May 3.
♦ Resolutions: The resolutions of the Board fall into the following three categories:
(a) Those passed at board meeting: Some specific resolutions are covered by
Section 292 which we have already discussed in the Study Paper relating to the
directors. Besides those, there are other resolutions, which must be passed only
at a Board meeting. These are; (i) Resolution for filling casual vacancies under
Section 262; (ii) Resolution for giving consent to contracts with directors as
required by Section 297; (iii) Resolution for appointing managing director or
manager of a company of a person who is already holding such a post in
another company [unanimous consent being necessary under the proviso to
Section 316 (2)]; (iv) Resolution for making investments in companies under the
same management/group (unanimous sanction being necessary under Section
372).
As regards the form of aforesaid resolutions, it would be sufficient if the
substance thereof were entered in the minutes. A formal resolution is not
necessary. Board resolutions may be implied from conduct as well [Freeman vs.
Buckhurst (1964) 2 Comp. L.J. 36 (49)].
(b) Those passed by circulation: According to Section 289 of the Act, a resolution
shall not be deemed to have been passed by the board of directors or by a
committee thereof by circulation, unless (i) the resolution has been circulated in
draft, together with the necessary papers (if any) to all the directors or to all the
members of the committee then in India (not being less in number than the
4.10 Corporate and Allied Laws

quorum fixed for a meeting of the Board or committee, as the case may be; (ii)
the resolution has been approved by such of the directors as they are then in
India, or by a majority of such of them as they are entitled to vote on the
resolution.
A resolution, passed by circulation as aforesaid, should be recorded in the
minutes of the next Board meeting in order to ensure its authority.
(c) Those signed by all the members of the Board entitled to receive notice of
Board meeting under Article 81 of Table A Scheduled I to the Act: Accordingly a
resolution in writing signed by all the members of the Board entitled to receive
notice of a Board meeting shall be as valid and effectual as if it had been
passed at a meeting of the Board. However, the matter mentioned in Section
292 cannot be dealt with by a resolution under the said Article 81, because of
mandatory character of the Section 292.
♦ Chairman of the Board: According the Article 76 of Table A, the board may elect a
chairman of its meeting and determine the period for which he is to hold office. If no
such chairman is elected, or if at any meeting the chairman is not present within five
minutes from the schedule time for the meeting then the directors present may choose
one from amongst them to be chairman of the meeting.
♦ Directors, attendance book: It is important that a careful record of the attendance of
directors at Board meetings be kept. The Articles may or may not contain a provision
on the subject, but reg. 71 of Table A states that “every director present at any
meeting of the Board or of a committee shall sign his name in a book to be kept for
that purpose”.
Each director should sign the book before or soon after the signing of the minutes, as
a director may leave before the conclusion of the business; and unless he has
previously signed the attendance book, the secretary has no formal evidence of this
presence.
♦ Voting at Board meetings: Questions at Board meetings are almost invariably
decided by a simple majority of votes, each director having one vote and the
chairman, if the articles so provide but not otherwise, having a casting vote. Reg. 74
of Table A provides that:
(1) Save as otherwise expressly provided in the Act, questions arising at any
meeting of the Board shall be decided by a majority of votes.
(2) In case of an equality of votes, the chairman of the Board shall have a second
or casting vote.
Meetings, Powers of the Board and Related Party Transaction 4.11

The Articles of most companies usually contain the above provisions.


The Act expressly provides that certain Board decisions must be made by resolutions
passed at board meetings with the consent of all the directors present at such meetings,
e.g. under Section 316(2), for appointing a person as managing director of a public
company or a private company which is a subsidiary of a public company, if he is either
the managing director or the manager of any other company; under Section 386(2), for
appointing a person as manager, if he is either the manager or the managing director of
any other company, or under Section 372, for investing in any shares of any other body
corporate.
Articles may also require more than a bare majority in case of certain resolutions. If there
is such a requirement, it is usually restricted by the articles to resolutions of a particular
kind, e.g. resolutions to borrow money. In some “one-man” companies (invariably very
small private companies), the articles name the chairman and provide that no resolution is
to be passed by the Board without his concurrence.
♦ Minutes of Board Meeting: The procedures for writing out the minutes of the Board
meetings are the same as those applicable to general meetings of the company.
These are Govern by Sections 193-196, which we have already discussed earlier. It
may, however, be noted that the decision of the Board need not in all cases be
formally recorded in writing and their intention may be implied from conduct [H.L.
Bolton (Engineering) Co. Ltd. vs. T.J. Graham & Sons (1956) 3, All E.R. 624].
4.1.2 Committees of Directors and their meetings: Subject to the provisions of the Act,
the Board may delegate any of its power to the committees consisting of such members of
its body as its things fit. A committee so formed shall, in exercise of the powers so
delegated, conform to any regulations that may be imposed on it by the Board (Article 77
of Table A).
A committee may elect a chairman of its meeting. If no chairman is elected, or if at any
meeting the chairman does not turn up within five minutes from the time scheduled for the
meeting, the members present may choose one from amongst themselves to be the
chairman of the meeting (Article 78).
A committee may meet and adjourned and it thinks proper, Questions arising at any
meeting of a committee shall be determined by a majority of votes of the members
present. And in case of equality of votes, the chairman shall have a second or casting
vote (Article 79).
All Acts done by the Board meeting by its committee meeting or by any person acting as a
director shall be as valid as if every such director or such person had been duly appointed
and was qualified to be a director. The validity of all such acts done is not affected even if
it discovered later on that there was some defect in the appointment of any one or more of
such directors or of any person acting as a director. The said acts will also remain
4.12 Corporate and Allied Laws

unaffected even the directors are later on discovered to be disqualified (Article 80). This
provision has been intended to prevent the validity of transactions from being questioned
where there has been a slip in the appointment of a director. But the provision cannot be
utilized to ignore or override the substantive provisions pertaining to such appointment. It
is applicable only to acts of directors whose appointment or qualification is later on
discovered to be faulty. Where, however, their appointments have not taken place at all
but they merely choose to act on the company’s behalf, the protection prescribed by either
Article 80 or Section 290 cannot be invoked [Morris vs. Danssen (1964) I, A.E.R. 586 (H,
L.)] This is because the said subsequent discovery must be a discovery of the defect; it
must not be discovery of facts which go to constitute the defect [British Asbestos Co. vs.
Body (1903) 2 Ch. 439].
Suppose a regulation like Articles 80 is included in the Article of association of a
company. What would be the possible impact of this? The impact has been summed up in
Halsbury’s Laws of England (vide p. 277, 3 rd Edition, Vol. VI) thus: “An Article validating
the acts of persons acting as directors, though it is a afterwards discovered that there was
a defect in their appointment or qualification, operates not only between the company and
outsiders but also as between the company and its members; as where defecto directors
make a call, summon meetings of the company, elect other directors or allot shares, A
defecto director may be ordered to furnish a statement of affairs in winding up. Directors
can not take advantage of any infirmity in their proceedings in which they have
themselves participated; they are stopped as between themselves and the company; they
are also stopped from saying they have been improperly appointed if, they have acted
after appointment, persons dealing with them who know of the invalidity are likewise
stopped.”
It should also be noted that Section 290 applies to act of an individual director, whereas
Article 80 covers Act of the Board and of its committee.

4.2 PROTECTION AGAINST ABUSE OF FIDUCIARY CAPACITY OF DIRECTORS


By now, you know that the position of a director vis-a-vis the company is that of an agent
who may not himself contract with his principal; also that it is similar to that of a trustee
who, however fair a proposal may be, is debarred from letting a position arise where his
interest and that of the trust may conflict. To ensure that the authority vested in the
directors is not abused, a number of provisions have been included in the Companies Act.
For instance, in the absence of provisions in the articles, a director is precluded from
entering into a contract with the company. If in such a case he does enter into a contract
then the company is entitled to have the contract set aside or to sue, at its option, the
director for breach of duty. That is why the articles of almost all companies contain a
provision authorising the directors to enter into a contract with the company. In order to
restrain the directors from entering into contracts, which are prejudicial to the companies,
Meetings, Powers of the Board and Related Party Transaction 4.13

the Act has enacted a number of provisions. These provisions have the effect either of
invalidating contracts entered into by directors unless they have been sanctioned by the
Board of Directors, or of disqualifying the director who is interested in a contract from
continuing as a director unless he has made a disclosure of his interest therein. These
provisions are contained in Sections 297, 299, 300, 301 and 303.

4.3 DISCLOSURE OF INTEREST IN CONTRACTS


A director who is directly or indirectly interested in any contract or arrangement – whether
actual or proposed – made by or on behalf of a company must disclose his interest at a
meeting of the Board of Directors.
Regarding a proposed contract or arrangement, a disclosure must be made at the Board’s
meeting at which the question of entering into it is first taken into consideration. If at the
date of that meeting, the director was not concerned or interested therein then the
disclosure is to be made at the first board’s meeting held after he becomes so concerned
or interested. As regards any other contract or must arrangement, the disclosure must be
made at the first Board’s meeting held after the director becomes concerned or interested.
Every director who fails to comply with the aforementioned provisions shall be punishable
with the fine extending up to Rs.5,000. For example, P is one of the 5 directors of X & Co.
Ltd. At a meeting of the Board of directors, a resolution with all the 5 votes in favour is
passed approving a proposal to enter into a binding contract with Y and Co. Ltd. in which
P has the majority shareholding. In the circumstances, P should have made the disclosure
of the nature of his concern or interest at the stated meeting of the Board of Directors
whereas the resolution was passed unanimously; otherwise P would be punishable with
fine as aforesaid.
For the purpose of the above mentioned disclosure, a director may give a general notice
to the Board that he is a director or a member of a specified body corporate or is a
member of a specified firm and therefore is to be regarded as concerned or interested in
any contract which may, after the date of the service of the notice, be entered into with
that body corporate or firm. Such a notice shall be deemed to be a sufficient disclosure of
interest or concern in relation to any contract or arrangement so made. Such a general
notice shall automatically expire at the end of the financial year in which it is given, but it
may be renewed for further period of one financial year at a time by a fresh notice given in
the last month of the financial year in which it would otherwise have expired. Such a
general notice or renewal thereof is to be given at the [Board’s] meeting or the director
concerned must take reasonable steps to ensure that it is brought up and read at the first
meeting of the directors held after the said notice is given. But as regards any contract or
arrangement entered into or to be entered into between two companies where any of the
directors of one company (or two or more of them together) holds or (hold) not more than
2% of the paid-up share capital in the other company, no disclosure is needed (Section
4.14 Corporate and Allied Laws

299). Therefore, if P in our illustration cited earlier does not hold more than 2% of the paid
up share capital of Y & Co. Ltd. he need not make any disclosure. The resolution passed
at the Board meeting of X & Co. Ltd. in respect of the contract with Y & Co. Ltd. would be
valid even if P did not disclose his interest.
Under Section 300(I), a director is forbidden from taking part in the discussion of or voting
on any contract or arrangement (or any proposed contract or arrangement) entered into by
or on behalf of the company, when he is directly or indirectly interested in it. Although he
may be present at the meeting, his presence will not count for the purpose of quorum at
the time of any such discussion or vote. If the interested director votes, his vote shall be
void. In this connection it may be noted that the voting on the contract or arrangement by
the interested director, of itself does not invalidate the contract or arrangement; only the
vote of interested director is to be excluded. If, as a result of such exclusion there is no
quorum, the resolution sanctioning the contract would be void, i.e., a nullity and as such
the contract would be incapable of subsequent ratification. [Firestone Tyre & Rubber Co.
vs. Synthetics and Chemicals (1972) 2 Com. L.J. 200]
Consider the following situation:
(a) A Limited had four directors. At one of its convened Board meeting only two of them
attended and they appointed two additional directors who were their relatives. Is the
appointment of those additional directors valid?
Section 300 provides that a director shall not take part in the discussion of or vote on any
contract or arrangement entered into or to be entered into by or on behalf of the company
if he is in anyway whether directly or in directly concerned or interested in the contract or
arrangement. The Department of Company Affairs has clarified that the word interested as
used in the section should be given a restrictive interpretation and thus excludes a
director who has no pecuniary interest. Accordingly, the relationship of the director with
the contracting party will not per se make the director concerned or interested in the
contract or arrangement.
The scope of the expression ‘contract’ or ‘arrangement’ was examined by the Madras High
Court in Madras Tube Co. Ltd. vs. Hari Krishan Somani, (1985) I Comp LJ 195 (Mad). The
question before the court was whether the appointment of an additional director would
come within the scope of the word ‘contract’ or ‘arrangement’. The company had four
directors. Only two of them attended the meeting. They appointed two additional directors
who were related to them as brother and wife, respectively. The court came to the
conclusion that although appointment as director does not come within the scope of the
expression ‘contract’ because the position of a director may be conferred on a person by
any method other than contract, became interested directors. Without them there was no
independent quorum. Consequently the appointments were a nullity.
The Bombay High Court re-examined the matter in Shailesh Harilal Shah vs. Matushree
Meetings, Powers of the Board and Related Party Transaction 4.15

Textiles Ltd., (1994) and after giving due consideration to the authorities which influenced
the Madras decision nevertheless came to the conclusion that the appointment as an
additional director of a person who is related to a director does not violate the requirement
of Section 300(1) because the position of a director may be conferred on a person by any
method other than contract buy that it would amount to an arrangement. The attending
directors, therefore, became interested directors. Without them there was no independent
quorum. Consequently the appointments were nullity.
The provisions mentioned above shall not apply to:
(i) a private company, which is neither a subsidiary nor a holding company of a public
company
(ii) a private company, which is a subsidiary of a public company in respect of a contract
or an arrangement, entered into by the private company with the holding company:
(iii) any contract of indemnity against any loss, which the director may suffer by reason of
becoming surety for the company;
(iv) any contract or arrangement entered into (or proposed contract or arrangement) with
a public company or a private company which is subsidiary of a public company in
which the interest of the director consists a) in his being a director of such company
and the holder of not more than the requisite qualification shares and he having been
nominated as such director, or (b) in his being member holding of more than 2% of its
paid up-share capital
(v) a public company or a private company which is subsidiary of a public company in
respect of which the Central Government in the public interest issues a notification
thereof having regard to the desirability of establishing or promoting any industry,
business or trade. However, the Central Government may direct that the provision of
Section 300(1) shall apply to these companies subject to such exceptions,
modifications and conditions as it may specify in the notification in the foregoing
circumstances. [Sections 300(2) and (3)].
According to Section 297, a director of the company or his relative, a firm in which such a
director or relative is a partner, any other partner in such a firm or a private company of
which the director is a member or director, must not enter into contracts with company for
the sale, purchase, or supply of goods, materials or services or for underwriting shares or
debentures except with the consent of the Board of Directors [sub-section (1)]. According
to the provision to sub-section (1) in the case of a company having a paid-up capital of
Rs.1 crore or more no such contract shall be entered into except with previous approval of
the Central Government The consent of the Board is deemed to have been given only if it
is accorded by a resolution of the Board and not otherwise, either before or within three
months of the date of entering into the contract [sub-section (4)].
4.16 Corporate and Allied Laws

If the consent is not accorded to any contract under Section 297, anything done in
pursuance of the contract shall be voidable at the option of the Board. [sub-section (5)].
Before we proceed on to discuss the other provisions contained in Sections 297(2) and (3)
let us examine a situation.
(b) X Ltd., recently went in for public issue of shares and for this purpose it paid
brokerage to a share broking firm in which one of the Directors of the company is a
partner in that firm. State in this connection:
(i) Whether the concerned interested director should disclose his interest in the
firm to the company. If so, When?
(ii) Should he still disclose, if the company already knew of this fact.
(iii) What would be your answer, if the concerned director merely acted as a broker
between the firm and the company?
(i) According to Section 297, a director of the company or his relative, a firm in which
such a director or relative is a partner, any other partner in such a firm or a private
company of which the director is a member or director, must not enter into contracts
with company for the sale, purchase, or supply of goods, materials or services or for
underwriting shares or debentures except with the consent of the Board of Directors.
If the company is having a paid-up capital of Rs.1 crore or more no such contract
shall be entered into except with the previous approval of the Central Government.
The consent of the Board is deemed to have been given only if it is accorded by a
resolution of the Board and not otherwise, either before or within three months of the
date of entering into the contract. [sub-section (4)].
In view of the legal position as states above, the appropriate brokerage can be paid to
the broking firm if the contract had been entered into with the consent of the Board of
Directors of X & Co. Ltd. the director in question is to disclose his concern or interest
at the first meeting of the Board meeting held after the director becomes concerned or
interested in the contract. A general notice given in this regard to the Board is
deemed to be sufficient disclosure of his concern or interest, if either it is given at the
meeting of the Board of Directors concerned or he takes reasonable steps to ensure
that it is brought up and read at the first meeting of the board after it is given.
The condition under which the sanction of the Board of Directors in respect of
contracts by directors or persons connected therewith would not be required [as
contained in sub-section (2) of Section 297] have been liberalised. The restrictions do
not apply to:
(a) the purchase of goods and materials from, or sales thereof to, the company for
cash at prevailing market prices;
(b) any contract or contracts between the company and directors or persons
Meetings, Powers of the Board and Related Party Transaction 4.17

connected therewith in respect of sale, purchase or supply of goods in which the


parties to the contract regularly trade or do business in; provided they are in
respect of goods and materials or services the value whereof or the cost of
service would not exceed Rs.5,000 in aggregate in any year comprised in the
period of the contract;
(c) the transactions by banking or insurance company entered into with any
director, relative, firm, partner, etc. in the ordinary course of his business.
Section 297(3) provides that a director or persons connected with him may enter into
a contract in the circumstances of urgent necessity without obtaining consent of the
Board, even if the value of such a contract exceeds Rs. 5,000 in the aggregate, but in
such a case the consent of the Board must be obtained at meeting within three
months of the date of entering into the contract.
(ii) The term ‘disclosure’ means to make others aware of something, which they are not
aware. The disclosure of interest by a director has been provided in Section 299 only
with a view to know that the director occupies fiduciary position in the company
should disclose his interest in any arrangement or contract either directly or indirectly
so that the company is in a position to know whether he is acting in any way
prejudicial to the interest of the company or for his own benefit. When board is aware
of the fact of the interest of a director in a particular transaction, it would not be
necessary for such a director to formerly disclose his interest. (Ramakrishna Rao vs.
Bangalore Race Club, 40 Comp. Case 674 (Mysore). A. Sivasailam vs. Registrar of
Companies {C.A. No. 11/621A/SRB/94 decided on 31.5.94 (CLB)}).
(iii) A contract to act as broker where the duty of the broker is merely to bring together the
two contracting parties, namely, the company, on the one hand, and the purchaser of
shares or debentures, on the other, does not seem to be covered either by clause (b)
or by clause (a) of sub-section (1) of Section 297. It is not covered by clause (b) for
two reasons: First, clause (b) specifically refers to underwriting and importing into that
clause the act of broking is not permissible. Secondly, there is a good deal of
difference between underwriting and broking. In the case of the former, the obligation
extends far beyond the mere bringing together the two contracting parties together,
while in the case of latter, the broker earns his commission only when he succeeds in
bringing the two parties together and not otherwise. To act as a broker is also not
covered by clause (a) because commission earned as a broker is not earned by
supplying services. The Madras High Court has rightly held that “rendering of services
should consist of the doing of an act for the benefit of another which is more than the
mere making of a contract and which goes beyond the performance of an obligation
undertaken in the course of an ordinary commercial contract”. (Radhakrishna Rao vs.
Province of Madras AIR 1952 Mad. 718)
4.18 Corporate and Allied Laws

Having read the provisions of Sections 297 and 299, let us now test for ourselves how
far we have been able to grasp them with particular reference to the following problem:
A & Co. Ltd. wants to sell its products to its following customers: (a) A partnership firm in
which two of the directors of the company are partners; (b) A private company in which
one of the directors of the company is a member; (c) A public company in which one of
the directors of the company is a director. In these three cases what steps are required to
be taken by A & Co. Ltd.?
(a) & (b) According to Section 297, except with the consent of the Board of Directors of a
company, firm in which the director or directors of the company is/are partners or a private
company of which such director or directors is or are a member or members shall not
enter into any contract with the company for the sale, purchase or supply of any goods,
materials or services. Therefore, the public company in the instant two cases should
obtain the consent of its Board of Directors. This consent shall have to be taken by a
resolution passed at the Board meeting and not otherwise. The resolution according the
consent must be passed before the contract to sell the product is entered into or within 5
months of the date on which it was entered into; otherwise consent shall not be deemed to
have been given. If the consent is not accorded, anything done in pursuance of the
contract shall be voidable at the option of the Board. Care should be taken to ensure that
the interested directors do not vote on the motions and their presence is not counted for
the purpose of quorum for the meeting. Also it is to be seen that such directors have
disclosed their interests in the contract pursuant to Section 299 of the Companies Act
unless any of them is enjoying the exemption under sub-section (6) of the above section.
The consent contemplated above is not a general consent but consent referable to each
particular or specific contract or contracts. Consent requires knowledge of the necessary
facts and material, which lead to the consent and cannot be given in general or abstract
manner (Watchand Nagar Industries Ltd. vs. Ratanchand, A.I.R. Bom. 256). Therefore,
the Board of the public company should take appropriate steps in this regard.
(c) The point of the case in question relates to disclosure of interest by directors.
According to Section 299(6), nothing in Section 299 shall apply to any contracts
entered into or to be entered between two companies where one of the directors of
the one company or two or more of them together holds or hold not more than 2% of
the paid up share capital in the other company. This point is not clear from the facts in
the problem. This is a contract to be entered into between two companies. And if the
director of the first company holds 2% or less of the paid-up share capital in the
second public company, the provisions of Section 299 will not apply to this case.
If, however, the said director holds more than the aforesaid 2% then the Board of
Directors should see that the director, pursuant to Section 299, discloses his interest or
concern at the meeting of the Board. This disclosure has to be made at the Board meeting
at which the contract is considered. If the interest is acquired subsequent to the meeting
Meetings, Powers of the Board and Related Party Transaction 4.19

then it is to be disclosed at the immediately next meeting.


The Board of the first-mentioned public company should ascertain whether the interest of
director aforesaid consists solely (i) in his being a director of such company and the
holder of not more shares of such number and value therein as is requisite to qualify him
for appointment as a director thereof, he having been nominated as such director by the
company or (ii) in his being a member holding not more than 2% of its paid-up share
capital. Also, there is no restriction on voting, etc. by an interested director if a notification
had been issued by the Central Government under Section 300(3) exempting the company
from the purview of Section 300. If, on such assertion, the interest is not found to be so
consisting as aforesaid, the Board of the company should see that interested director
does not participate in the discussion or vote on the contract and that his presence is
excluded from the computation of quorum.

4.4 SOLE SELLING AGENTS


A company cannot appoint a sole selling agent of any area for a term exceeding 5 years
at a time. But it can re-appoint, or extend the term of office by further period not
exceeding 5 years on each occasion. The Board “shall not appoint a sole selling agent for
any area except subject to the condition that the appointment shall cease to be valid if it is
not approved by the company in the first general meeting held after the date on which the
appointment is made” [Section 294(2)]. It has been held that the appointment of a sole
selling agent must be made by the company in its general meeting; and such clause must
be inserted as a mandatory condition in all appointments of sole selling agent: an
appointment without a such a clause being inserted is void ab initio (Arante Manufacturing
Corp. vs. Bright Bolts Private Ltd. 1967 Comp. Cas. 759; Shelagram Jhaijharia vs.
National Co. Ltd. 1965 Comp. Cas. 706). If the company in the general meeting
disapproves the appointment it shall become invalid from the date of the general meeting
[Section 294(2A)].
Where a company has a sole selling agent, the Central Government may require the
company to furnish to it such information regarding the terms and conditions of the
appointment as it considers necessary for determining whether or not such terms and
conditions are prejudicial to the interest of the company. If the company refuses or
neglects to furnish any such information, the Central Government may appoint a suitable
person to investigate and report on the terms and conditions contained in the appointment
of the sole selling agent. After perusal of the information furnished either by the company
or by investigator (as the case may be); if the Central Government is of the opinion that
the terms and conditions of the appointment are prejudicial to the interest of the company,
it may make the necessary modifications so that they are not longer prejudicial to the
interests of the company. The appointment of sole selling agent shall be regulated by the
terms and conditions as varied by the Central Government from the date as may be
4.20 Corporate and Allied Laws

specified by the Central Government [Section 294(5)]. It has been provided that where the
company has more selling agents than one, the Central Government may exercise similar
powers referred to above – only for the purpose of determining whether any of those
selling agents should be declared to be the sole selling agent, and if so, for which area or
areas.
A company may have more selling agents than one in any area or areas. The Central
Government may, if it reasonably feels so, ask the company for such information
regarding the terms and conditions of appointment of all the selling agents as it considers
necessary. The purpose of calling for such information is to determine whether any of
those selling agents should be declared to be the sole selling agent for such area or any
of such areas of the company refuses or neglects to furnish any such information, then
the Central Government may appoint a suitable person to investigate and report on the
terms and conditions of appointment of all the selling agents. On the basis of the
information thus obtained directly or through the investigator, the Central Government
may reasonably form an opinion that any of the selling agents shall to all intents and
purposes be the sole selling agents for such area. If it so forms an opinion, it may by
order declare that selling agent to be the sole selling agent for that area with effect from
such date as may be specified in the order. From the date so specified in the order, his
appointment as the sole selling agent shall be regulated by the terms and conditions as
varied by the Central Government [sub-section (6)].
It shall be the duty of the company (a) to produce to the person under clause (b) of sub-
section (5) or clause (b) of sub-section (6) all books and papers of, or relating to, the
company which are in its custody or power, and (b) otherwise to give to that person all
assistance in connection with the investigation which the company is reasonably able to
give [sub-section (7)]. If the company refuses or neglects to perform these two duties,
then the company and every officer thereof who is in default shall be punished with fine
extending to Rs. 5,000 and with a further fine of not less than Rs. 50 for every day after
the first during which such refusal or neglect continues [sub-section (8)].
Prohibition of payment of compensation to sole selling agents for the loss of office:
Section 294A prohibits payment of compensation to the sole selling agent for the loss of
his office in the following cases:
(i) where the appointment of the sole selling agent ceases to be valid by virtue of Section
294(2A);
(ii) where he resigns his office as a result of reconstruction or amalgamation of the
company, and is appointed as the sole selling agent of the reconstructed company or
the body corporate resulting from the amalgamation;
(iii) where he resigns his office otherwise than in the circumstances envisaged in the
foregoing clause (ii);
Meetings, Powers of the Board and Related Party Transaction 4.21

(iv) where he has been guilty of fraud or breach of trust in relation to, or of gross
negligence in the conduct of his duty as the sole selling agent; and
(v) where he has instigated or taken part directly or indirectly in bringing about the
termination of the sole selling agency.
The amount of compensation payable for the loss of office must in no case exceed the
remuneration which he would have earned, had he been in office for the unexpired
residue of his term, or for 3 years, whichever is shorter. The amount thereof is to be
calculated on the basis of the average remuneration actually earned by him during a
period of 3 years immediately preceding the date on which he had ceased to be in office
or his appointment was terminated. In case he had held his office for a period lesser than
3 years, the basis would be the average remuneration that he had earned during such
shorter period.
♦ Power of the Central Government to prohibit the appointment of sole selling
agents in certain cases: Section 294AA inserted by the 1974 Amendment Act has
vested the Central Government with this power. It may be of the opinion that the
demand of goods of any category to be specified by that Government – substantially
exceeds the production or supply of such goods and that the services of sole selling
agents will not be necessary to create a market for such goods. If it actually forms this
opinion, then it may, by notification in the Official Gazette, declare that the sole
selling agents shall not be appointed by a company for the sale of such goods for
such period as may be specified in the declaration [sub-section (1)].
A Company cannot appoint any individual, firm or body corporate who or which has a
substantial interest in the company, as sole selling agent of that company, unless such
appointment, has been previously approved by the Central Government [sub-section (2)].
If a company has a paid up share capital of Rs. 50 lakhs or more, then it cannot appoint
sole selling agents without the consent of the company given by a special resolution and
the approval of the Central Government [sub-section (1)]. In Ramesh B. Desai vs. Union
of India (1990), it was held that the Central Government may refuse to grant approval
inspite of the fact that the company has accorded its sanction by passing a special
resolution, when the appointment of a sole selling agent is found to be prejudicial to the
interests of the company.
Read the provisions of Sections 294(5), (6) & (7) above and note that these provisions
shall so far as may be applicable to the sole selling or the sole purchasing or buying
agents of a company [sub-section (4)].
A company seeking approval under Section 294AA is required to furnish such particulars
as may be prescribed [sub-section (5)].
4.22 Corporate and Allied Laws

It may so happen that an appointment has been made of sole selling agent by a company
before the commencement of 1974 Amendment Act; also that the appointment is such that
it could not have been made except on the authority of a special resolution passed by the
company on the approval of the Central Government if sub-sections (2), (3) & (8), were in
force at the time of such appointment. In such circumstances, the company shall obtain
the aforesaid authority and approval within 5 months from such commencement. If it does
not do so, then the appointment shall stand terminated on the expiry of 6 months from
such commencement [sub-section (6)]. If the company in general meeting disapproves the
appointment in sub-section (3), then such appointment shall cease to be effective
notwithstanding anything contained in sub-section (6) [sub-section (7)].
All the provisions of Section 294AA but those of sub-section (1) shall apply so far as may
be, to the appointment by a company of a sole selling agent for the buying or purchasing
of goods on behalf of the company [sub-section (8)].
The Central Government has extended the ban on appointing sole selling agents for a
further period of three more years from the date of publication of this notification in the
Official Gazette in respect of every category of public drugs, drugs and formulations as
defined in the Drugs (Price Control) Order, 1987, excluding bona fide preparation
including in Ayurvedic, Siddha or Homeopathic systems of medicine. (vide F.N. 3/7/87
CL.Vs 18.4.94).
The Explanation to Section 294AA explains the expression “appointment” and “substantial
interest” and provides that Appointment include re-appointment and “Substantial interest”
means:
In relation to an individual, the beneficial interest held by such individual or any of his
relatives singly or together, in the shares of the company, the aggregate amount paid up
on which exceeds Rs. 5 lakhs or 5% of the paid-up share capital of the company,
whichever is lesser.
In relation to a firm, or a body corporate, “substantial interest” means the beneficial
interest held by such individual or any of his relative singly or together one or more
partners of the firm or any relative of such partner singly or together such body corporate
or one or more of its directors or any relative of such director singly or together, in the
shares of the company the aggregate amount paid up on which exceeds Rs. 5 lakhs or 5%
of the paid-up share capital of the company, whichever is lesser.
5
(E) INSPECTION AND INVESTIGATION

5.0 INSPECTION
According to Section 209A, the books of account and other books and papers of every
company shall be open to inspection during business hours by the Registrar or by such officer
of the Government as may be authorised by the Central Government in this behalf and by
such officers of the Securities and Exchange Board of India as may be authorised by it: Such
inspection may be made without giving any previous notice to the company or any officer
thereof. The inspection by the Securities and Exchange Board of India shall be made in
respect of matters covered under sections referred to in section 55A.
It shall be the duty of every director, other officer or employee of the company to produce to
the person making inspection,, all such books of account and other books and papers of the
company in his custody or control and to furnish him with any statement, information or
explanation relating to the affairs of the company . Further, it shall be the duty of every
director, other officer or employee of the company to give to the person making inspection all
assistance in connection with the inspection and shall have the same powers as are vested in
a civil court under the Code of Civil Procedure, 1908. Besides any officer authorised to make
an inspection shall have all the powers that a Registrar of Companies (ROC) in relation to the
making of inquiries.

5.1 INVESTIGATION
5.1.1 Who can apply for investigation?
(a) Report of the Registrar: Where a report has been made by the Registrar under sub-
section (6) or sub-section (7) of section 234, the Central government may appoint one
or more competent persons as inspectors to investigate the affairs of a company and
to report thereon in such manner as it may direct.
(b) On application by the members: In the case of a company having a share capital,
an application by not less than two hundred members or from members holding not
less than one-tenth of the total voting power therein and in the case of a company
having no share capital, an application by not less than one-fifth of the persons on the
company’s register of members has been received the Tribunal may, after giving the
parties an opportunity of being heard, by order, declare that the affairs of the
5.2 Corporate and Allied Laws

company ought to be investigated by an inspector or inspectors, and on such a


declaration being made, the Central Government shall appoint one or more
competent persons as inspectors to investigate the affairs of the company and to
report thereon in such manner as it may direct.. The application by members of a
company under section 235 (2) shall be supported by such evidence as the Tribunal
may require for the purpose of showing that the applicants have good reason for
requiring the investigation. The Central Government may, before appointing an
inspector, require the applicants to give security, for such amount not exceeding one
thousand rupees as it may think fit, for payment of the costs of the investigation.
(c) By the company on passing the special resolution or by the Order of the Court, the
Central Government shall appoint one or more competent persons as inspectors to
investigate the affairs of a company
(d) By the Central Government, if there are circumstances suggesting
(i) that the business of the company is being conducted with intend to defraud its
creditors, members or any other persons, or otherwise for a fraudulent or
unlawful purpose, or in a manner oppressive of any of its members, or that the
company was formed for any fraudulent or unlawful purpose;
(ii) that persons concerned in the formation of the company or the management of
its affairs have in connection therewith been guilty of fraud, misfeasance or
other misconduct towards the company or towards any of its members; or
(iii) that the members of the company have not been given all the information with
respect to its affairs which they might reasonably expect, including information
relating to the calculation of the commission payable to a managing or other
director, or the manager, of the company.
5.1.2 Firm, body corporate or association not to be appointed as inspector: As per
section 238 no firm, body corporate or other association shall be appointed as an inspector
under section 235 or 237.

5.2 POWER OF INSPECTORS


(a) To carry investigation into affairs of related companies (Section 239)
For the purposes of his investigation, the inspector shall investigate the affairs of—
(a) any other body corporate which is, or has at any relevant time been the company’s
subsidiary or holding company, or a subsidiary of its holding company, or a holding
company of its subsidiary; or
(b) any other body corporate which is, or has at any relevant time been managed by any
person as managing director or as manager, who is, or was, at the relevant time, the
managing director or the manager of the company; or
(c) any other body corporate which is, or has at any relevant time been, managed by the
company or whose Board of directors comprises of nominees of the company or is
accustomed to act in accordance with the directions or instructions of—
Inspection and Investigation 5.3

(i) the company, or


(ii) any of the directors of the company, or
(iii) any company, any of whose directorships is held by the employees or nominees of
those having the control and management of the first-mentioned company; or
(d) any person who is or has at any relevant time been the company’s managing
director or manager,
(b) Production of documents and evidence
The inspector may, with the previous approval of the Central Government, require any body
corporate other than a body corporate to furnish such information to, or produce such books
and papers before, him or any person authorised by him.
(c) The inspector may keep in his custody any books and papers for six months and
thereafter shall return the same to the company, body corporate, firm or individual by whom or
on whose behalf the books and papers are produced.
(d) An inspector may examine on oath—
(a) any of the persons referred to as above
(b) with the previous approval of the Central Government, any other person in relation to the
affairs of the company,
(e) He may administer an oath accordingly and for that purpose may require any of those
persons to appear before him personally.
(c) any reference to officers and other employees, agents or partners shall be construed as
a reference to past as well as present officers and other employees, agents or partners,
as the case may be.

5.3 INVESTIGATION OF OWNERSHIP OF COMPANY (SECTION 247)


(1) If it appears to the Central Government that there is good reason so to do, it may appoint
one or more inspectors to investigate and report on the membership of any company and
other matters relating to the company, for the purpose of determining the true persons—
(a) who are or have been financially interested in the success or failure, whether real or
apparent, of the company; or
(b) who are or have been able to control or materially to influence the policy of the company.
(2) The Central Government shall appoint one or more inspectors under sub-section (1), if the
Tribunal, in the course of any proceedings before it, declares by an order that the affairs of the
company ought to be investigated as regards the membership of the company and other
matters relating to the company, for the purpose of determining the true persons—
(a) who are or have been financially interested in the success or failure, whether real or
apparent, of the company; or
(b) who are or have been able to control or materially to influence the policy of the company.
5.4 Corporate and Allied Laws

(11) A prosecution shall not be instituted under this section except by, or with the consent of,
the Central Government.
(12) This section shall apply in relation to debentures as it applies in relation to shares.

5.4 VOLUNTARY WINDING UP OF COMPANY, ETC., NOT TO STOP INVESTIGATION


PROCEEDINGS (SECTION 250A)
An investigation may be initiated under section 235, 237, 239 or 247 notwithstanding that—
(a) an application has been made for an order under section 397 or section 398; or
(b) the company has passed a special resolution for voluntary winding up,
and no investigation so initiated shall be stopped or suspended by reason only of the fact that
an application referred to in clause (a) has been made or a special resolution referred to in
clause (b) has been passed.
6
COMPROMISE, ARRANGEMENTS AND RECONSTRUCTIONS

6.0 COMPROMISE AND ARRANGEMENT


Though Companies Act defines “arrangement”, it does not define “compromise”. These
terms have no definite legal connotation. ‘Compromise’ means an amicable agreement
between parties to a controversy to settle their differences by making mutual concessions,
as distinguished from adjudication on the basis of an exact ascertainment of the opposing
rights. In a compromise, “the parties agree to try to settle it between themselves by a
give-and-take arrangement”. For the purpose of a compromise, it has been held that it is
but essential that each party thereto should be empowered to make the necessary
concessions. [Dani Chand & Co. vs. Narain Das & Co. (1947) 7 Comp. Case 195 F.B.].
Thus, compromise envisages the existence of a dispute, e.g. one relating to rights. But
the word “arrangement” is of wide import and its meaning should not be limited to
something analogous to a compromise.
Section 390(b) provides that the expression ‘arrangement’ includes a reorganisation of the
share capital of the company by the consolidation of shares of different classes or by the
division of shares into shares of different classes or by division of shares into shares of
different classes or by both these methods. An arrangement also may involve debenture
holders being given an extension of time for payment, releasing their security in whole or
in part or exchanging their debentures for the claims and the balance in shares or
debentures of the company; preference shareholders giving up their rights to arrears of
dividends, further agreeing to accept a reduced rate of dividend in the future, etc.

6.1 RECONSTRUCTION
Reorganisation or arrangement is said to have taken place only when one company is
involved, Amalgamation, on the other hand, is of two or more companies. The term
“reconstruction” includes reorganisation, arrangement, amalgamation, etc., and thus is a
term of wide import.
A reconstruction is commonly said to have taken place when a company resolves to wind
up its business and it is proposed to form a new company, with only the old shareholders
as its members to take over its undertaking, the rights of shareholders in the old company
6.2 Corporate and Allied Laws

being satisfied by their being allotted shares in the new company. In that case, the old
company ceases to exist in point of law, and its assets are transferred to the new
company. It would be, nonetheless, a reconstruction even if all the assets might not pass
to the company, or all the shareholders of the transferor company might not be
shareholders in the transferee company, or all the liabilities of the transferor company
might not be taken over by the transferee company. A reconstruction, in such a case,
would imply that substantially the same persons would carry on the same business
substantially. [Re South African Supply and Cold Storage Co. (1904) 2 Ch. 286].
6.1.1 Why Reconstruction? A reconstruction may be necessary for the following
purposes:
(1) To extend the operations of the company: If the shares are fully paid up and further
capital is desired to be raised, the shareholders in the old company may be issued
only partly paid shares in the new company so that by calling up the uncalled amount
the company would have the funds it would require for carrying on its business.
(2) As a method for altering the Memorandum of Association: When such an alteration
cannot be undertaken under Section 17 i.e., in a case where the new company
desires to have “objects”, in its memorandum, over and above those in the old
company.
Although the companies Act permits companies to alter their objects by a special
resolution, with the confirmation of the Company Law Board, it is not possible to
radically alter the ‘objects clause’ of the Memorandum of Association, e.g., a company
incorporated to manufacture rayon yarn cannot switch over to the business of
manufacturing jams. It may, therefore, be necessary for a company to go into
voluntary liquidation to carry on an activity totally unrelated to those for which it was
originally formed.
(3) For purpose of Reorganisation: The term “reorganisation” is usually applied to an
arrangement to alter or modify the rights of shareholders or creditors, or both.
(4) In order to amalgamate with one or more companies: Amalgamation is the blending of
two or more companies into a single undertaking, the shareholders of each such
company becoming substantially the shareholders in the new company which is to
carry on the blended undertaking. To achieve this objective, either a new company
may be formed to take over the business of the existing companies or the business of
one or more existing companies be taken over by one of the existing companies.
(5) Reconstruction or Arrangement undertaken for bringing the capital structure of
companies into line with the requirements of the Act: The Act requires that the capital
of a company must consist only of equity and preference shares. Companies having
deferred or other forms of capital, therefore, are obliged to conform to the legal
requirement as to their capital structure by a scheme of reconstruction.
Compromise, Arrangements and Reconstruction 6.3

6.1.2 How Reconstruction is effected? Reconstruction may be carried out:


(a) by sale of the company under the powers contained in its Memorandum of
Association;
(b) by a scheme of arrangement under Section 391;
(c) by acquiring all or a majority of the shares in another company under Section 395;
(d) by a compulsory amalgamation of companies in the public interest by an order of the
Central Government under Section 396;
(e) by a sale under Section 494 (members voluntarily winding up); or under Section 507
(creditor’s voluntarily winding up); in the former case a special resolution and in the
latter case the sanction either of the Court or of the Committee of Inspection is
necessary.
(f) by a scheme of arrangement with creditors only; under Section 517 (voluntary winding
up both by members and creditors, a special resolution and consent of three-fourths
in value of creditors are necessary.
(a) Sale powers in the Memorandum: Where a company has power in the objects
clause of memorandum, it may dispose of the whole of its undertaking to
another company. After the sale, the company will be wound up and the shares
in the new company will be distributed among the members in proportion to their
holdings in the old company. When a company is not in a position to raise
further capital and it cannot otherwise carry on its business or when the carrying
on of the company is considered not necessary, the company may resort to such
a course.
“Sale of the whole undertaking and division of the proceeds cannot be a
corporate object. Under its Memorandum of Association, a single steamship
company may no doubt sell its only steamship with whole of its equipment to
another. But under a clause in its Memorandum of Association it cannot, in my
opinion, sell its only steamship and all its undertaking and divide the proceeds.
Distribution of capital (except in reduction of capital) can only be made in a
winding up” [Buckley L.J., in Bisgood vs. Henderson’s Transval Estate, (1908) I
Ch. 743]. That is to say, it can only be effected in liquidation of the company
under the power conferred by Section 287 of the English Companies Act, which
corresponds to Section 494 of Indian Companies Act.
(b) Reconstruction under Section 391: In order to facilitate a reconstruction or
amalgamation, it is frequently desirable or necessary for the company first to
effect a compromise or arrangement with its creditors or any class of them
or/and members or any class of them. Section 391 lays down the procedure by
which the court’s assistance may be invoked in this respect. It must be noted
6.4 Corporate and Allied Laws

that the meeting should be conducted in such a manner as the court directs and
that Section 170(2) dealing with class meetings will not apply to meetings held
under where a company is not being wound up, provisions of the Act apply to
such meeting unless the Court orders otherwise [Madras Companies: Rules,
(RR 41, 55)]. Under the Calcutta High Court Rules, (RR.41, 55) notice of petition
under Section 391 has to be given to members and creditors. They should send
notice to the petition to the effect that they intend to appear on the hearing of
the petition.
When a compromise or arrangement between parties aforesaid is proposed the following
persons may apply to the Court:
(i) the company;
(ii) any creditor;
(iii) any member; or
(iv) in the case of company which is being wound up, the liquidator.
On such an application, the Court may order a meeting of the creditors or class of
creditors or the members or class of members, as the case may be, to be called, held and
conducted in such manner as the Court directs. If at the meeting, a majority in number
representing three-fourths in the value of the creditors or members (or any class of them),
as the case may be, present and voting either in person or by proxy, where proxies are
allowed under the Rules made under Section 643, agree to any compromise or
arrangement, it is, if sanctioned by the Court, binding on all the creditors or class of
creditors or on the members or class of members, as the case may be. The compromise
or arrangement is also binding on the company or, if the company is being wound up, on
the liquidator and on the contributories [sub-section (2)].
But, before according the aforesaid sanction, the Court must satisfy itself that the
company or any other person which or who has made the application, has disclosed to the
Court by an affidavit or otherwise all the material facts relating to the company, e.g., latest
financial position of the company, the latest auditor’s report on the accounts of the
company, the pendency of any investigation proceedings in relation to the company under
Sections 235 to 251, etc. [Proviso to Section 391(2)].
You have observed above that if the requisite three-fourths majority is obtained in favour
of a scheme of reconstruction, the same shall bind the creditors, members, liquidators and
contributories “if sanctioned by the Court”. This implies that the Court may not sanction,
i.e. its power is discretionary and not obligatory. Moreover, under proviso to Section
391(2), the Court is under an obligation not to sanction any compromise or arrangement
until a full disclosure of all material facts relating to the company have been made. This
proviso is designed as a safeguard against any compromise placed by consideration of
Compromise, Arrangements and Reconstruction 6.5

the shareholders or creditors. Therefore, the claim of minority, on proof that directors had
failed to disclose materials facts regarding a company’s financial position, would succeed
and the Court would not accept the contention if there be any, that the scheme has been
duly approved by the majority if it is satisfied that full disclosure of all material facts had
not been made at the meeting convened by the Court under sub-section (1) of Section
391.
An order of the Court, made as aforesaid shall not be effective until a certified copy of the
same has been filed with the Registrar. A copy of the order is also required to be annexed
to every copy of the memorandum or instrument which defines the constitution of the
company issued after the certified copy of the order has been filed with Registrar; in
default thereof the company and any of its officers at fault shall be punished with fine. An
appeal lies against the order under the Section to the Court, empowered to hear appeals
from the decisions of the original court, or if more than one court is empowered, to the
Court of inferior jurisdiction. [Sections 391(3), (4), (5) & (7)].
Before giving its sanction, the Court must be satisfied that the statutory provisions have
been complied with that the class of creditors or members have been fairly represented by
those who attended, and that the statutory majority in approving the scheme is acting
bonafide in the interest of the class if professes to represent. The arrangement must also
be such as a man of business would reasonably approve, as fair and reasonable as
regards the different classes, if any [Re. Alabama, New Orleans, Texas and Pacific in
Junction Rail Co. 1819 I. Ch. 213 CA; Re. Hindustan General Electric Corporation Ltd.
AIR 1959 Cal 679; Nand Prasad vs. Arjun Prasad (1959) Pat (293)]. The Court cannot
sanction any scheme, which involves the doing of an act, which is ultra vires the company
[Re. Oceanic Steam Navigation Co. Ltd. (1939), Ch. 4]. But the memorandum can be
changed if members consent. It should be noted that a scheme, not certified by the
Reserve Bank, cannot be sanctioned by the Court in respect of banking companies (See
Section 45 of the Banking Regulation Act, 1949).
Powers of Courts: Apart from the power of sanctioning a compromise or arrangement the
Court has inter alia the following powers:
(i) to stay, while application under Section 391 is pending the commencement or
continuation or any suit or proceeding against the company [Section 391(6)];
(ii) to supervise the carrying out of the compromise or arrangement [Section 392(1)(a)].
Only the High Court has this power when it makes an order under Section 391; a
District Court has no such power. It may be noted that under Section 10(2)(b) the
Central Government can confer jurisdiction under Section 391 on District Courts in
respect of companies with a paid up capital of less than Rs. 1 lakh;
(iii) to modify the compromise or arrangement for the proper working thereof [Section
392(1)]; and
6.6 Corporate and Allied Laws

(iv) to order winding up of the company, if it is satisfied that the compromise or


arrangement is unworkable [Section 392(2)].
It may be noted that only High Courts have powers (iii) and (iv).
(a) Circulation of information to creditors or members: Section 393 provides for the
circulation of a statement, which must explain the objects of the proposed
compromise or arrangement scheme. The statement should accompany the notice of
the meeting to be called to consider the scheme. The statement should accompany
the notice of the compromise or arrangement and explain its effect. In particular, the
statement must state any material interest of the directors, managing director or
manager of the company whether in their capacity as such or as members or creditors
and the effect on those interests of the compromise or arrangement if and in so far as
the effect is different from the effect thereof on the like interests of other persons. If
the notice calling the meeting is given by an advertisement, a statement, it must be
furnished to such creditor or member free of charge on an application being made in
the manner indicated in the notice. In the event of a default, the company and the
officers responsible thereof would be liable to be penalised. It is the duty of every
director, managing director, manager and trustee for debentureholders to serve notice
on the company of such matters relating to himself as may be necessary for the
purpose of the Section; a default is punishable with a fine.
(b) Facilitating reconstruction and amalgamation: In order to facilitate schemes of
reconstruction and amalgamation when application is made to the Court under
Section 391 for sanction of an arrangement which involves the transfer of the whole or
part of the property of one company (called “transferor company”) to another company
(called “the transferee company”), the Court may make an order under Section 394
dealing with the following matters:
(i) the transfer to the transferee company of the whole or part of the undertaking,
property or liabilities of any transferor company;
(ii) the allotment or appropriation by the transferee company of any shares or
debentures, policies, etc. to or for any person;
(iii) the continuation by or against the transferee company of any legal proceedings
pending by or against the transferor company;
(iv) the dissolution, without winding up, of any transferor company;
(v) the provision to be made for persons who dissent from the scheme, and
(vi) any other incidental matter.
The first proviso, to Section 394(1) restraints the Court from accepting a compromise or
arrangement in connection with the scheme of amalgamation, before receiving a report
Compromise, Arrangements and Reconstruction 6.7

from the Company Law Board or the Registrar that the affairs of the transferor company
have not been conducted in a manner prejudicial to the interest of its members or to
public interest.
Further, under the second proviso, the order for the dissolution of the transferor company
cannot be made until the official liquidator, on the scrutiny of the books and papers, has
reported to the Court that the affairs of the company had not been conducted prejudicially
to the interest of the members or to public interest.
Note: A transferor company includes any body corporate whether or not a company under
the Companies Act, while a ‘transferee company’ comprises only a company within the
meaning of this Act. This distinction is presumably designed to facilitate transfer of foreign
companies to Indian companies by schemes of reconstruction or amalgamation.
Where, an order is made under Section 394, every company in relation to which the order
is made must file a certified copy thereof with the Register for registration with 20 days
after the order is made.
In the event of the whole or any part of the undertaking of the company being transferred,
the directors cannot receive from the transferor company any compensation for loss of the
office or by way of consideration for retirement. They may, however, receive such
compensation from the transferee company or from any other person provided the
particulars with respect to the payment proposed, have been disclosed to the members of
the company and have been approved by them in general meeting. (Section 319)
An order under Section 394 does not transfer automatically a contract of personal
services, which are in their nature incapable of being transferred (previously existing
between an individual and the transferor company) to the transferee company. [Noxes vs.
Daneaster Amalgamated Collieries Ltd., (1940) 3 All. ER. 549 (HL)].
Section 394A makes it obligatory on the part of the Court to serve notice of every
application made to it under Section 391 upon the Central Government and to take into
consideration the representations, if any, made to it by the Government before passing
any order under any of these Sections. The objective is to “enable the Government to
study the proposal and to raise such objections thereto as it thinks fit in the light of the
facts and information available with it and also to place the Court in possession of certain
facts which might not have been disclosed by those who appear before it so that the
interests of the investing public at large may be fully taken into account by the Court
before passing its order.”
It may be noted that Section 394A, which provides for notice to the Central Government
does not apply to proceedings under Section 392 [Mehtab Chand Golcha vs. Official
Liquidator, Golcha Properties (P) Ltd. (1981) Comp. Cas. 103 at p. 104].
(c) Acquisition or Amalgamation by Shares Purchase: Of the various methods of
6.8 Corporate and Allied Laws

amalgamation, this is the simplest method. A company may acquire business and
control of another company not by amalgamation but by acquisition of a majority of
shares in that company. The consideration for acquisition may be paid either in cash
or shares or both. Section 395 provides a means for the compulsory acquisition of the
shares of a dissenting minority to prevent such a minority from extracting
unreasonably high price for its shares.
Under the aforesaid Section, a scheme of contract involving the transfer of shares or any
class of shares in a company has first to be offered for approval of the holders of such
shares by the company seeking to acquire the shares. The scheme or contract must then
be approved by the holders of not less than 90% in value of the shares concerned within
four months from the date of the offer (by the transferee company). Where, however, such
shares which are to be transferred are already held by the offeror (i.e. transferee
company) or its nominee or its subsidiary to value greater than 10% of the aggregate of
values of all the shares of the transferor company, the terms of the offer must be the
same for the holders of all other shares and the scheme or contract must not only be
approved by 9/10th in value of such holders but they must also be not less than 3/4ths in
number.
When these conditions have been satisfied, the transferee company may give notice in
the prescribed manner to any dissenting shareholder, expressing its desire to acquire his
shares. This notice, if decided to be given, must be served within 2 months after the
expiry of the period of 4 months. If such notice is given, the transferee company is entitled
and bound to acquire these shares on the terms approved by the majority, unless the
dissenting shareholder applies to the Court within one month from the date of the notice,
and the Court orders otherwise.
But, if the transferee company has served the aforesaid notice upon the dissenting
shareholders and they made no application to the Court or, if the application has been
made, but the Court has not ordered to the contrary, the transferee company must within
the prescribed period, send a copy of the notice to the transferor together with an
instrument of transfer executed by the transferee company and on behalf of the
shareholders, by a person appointed by the transferee company. The transferee company
must pay or transfer to the transferor company and on behalf of the shareholders, by a
person appointed by the transferee company. The transferee company must pay or
transfer to the transferor company the amount or other consideration representing the
price payable for the shares, which the transferee company is entitled to acquire. The
transferor company must thereupon register the transferee company as the holder of
those shares, and within one month of the date of such registration and of the receipt of
the money or other consideration representing the price payable to them by the transferee
company [Section 395(3)].
All sums of money and any other consideration received by the transferor company from
Compromise, Arrangements and Reconstruction 6.9

the transferee company are to be held in trust for the several persons entitled to the
shares in respect of which they have been received and until disbursed, these are to be
kept in a separate bank account. These are to be paid to the shareholders against the
deposit of relevant share certificates. [Section 395(4)]
In relation every offer of a scheme or contract involving the transfer of shares or any class
of shares in the transferor company to the transferee company, the following provisions
are applicable:
(1) Every such offer of every circular containing such offer or every recommendation to
the member of the transferor company by its directors to accept offer must be
accompanied by such information as may be prescribed.
(2) Every offer must contain a statement by or on behalf of the transferee company,
disclosing the steps it has taken to ensure that the necessary cash will be available.
(3) Every circular containing or recommending acceptance of such an offer should be first
presented to the Registrar for registration and it should not be circularised until it has
been registered.
(4) The Registrar may refuse to Register any such circular which does not contain the
information required to be given under paragraph (1) above or which sets out such
information in a manner likely to give a false impression.
(5) Against as order of the registrar refusing to register any such circular, an appeal lies
to the Court.
(6) Whosoever issues a circular mentioned in paragraph (3) above, which has not been
registered, shall be punishable with fine extending to Rs. 500 [Section 395(4A)].
Further, to safeguard the interest of dissenting shareholders, sub-section (3) of Section
395 imposes an obligation on the transferor company to advise the shareholders, whose
shares have been taken over, as to the price payable to them within one month of the
date of registration of the shares in favour of the transferee company and of the receipt of
the amount or other consideration representing the price.
When all the shares of the company have been agreed to be transferred, the directors,
qualification shares will not be transferred till new directors, properly qualified to act as
directors, have been appointed [Briess vs. Wolley (1954) 2 W.L.K. 832; (1954) I. A.I.R.
909]. The directors of the transferor company cannot receive compensation for the loss of
office or as consideration for retirement from office or in connection with retirement from
the transferor company. But they may receive it from the transferee company or any other
person if the particulars of the payments, proposed to be made, are stated in the notice of
the offer sent to the shareholders of the transferor company and the proposal is approved
by the company in general meeting. (Section 320)
6.10 Corporate and Allied Laws

It may be noted that payments received by directors in contravention of Sections 319 and
320 are to be held in trust for the company.
(d) Power of the Central Government to provide for amalgamation of companies in the
public interest: Section 396(1) provides that where in the “Public” interest it appears
to the Central Government that amalgamation of two companies is essential, it may,
through notification in the Official Gazette, provide for the amalgamation of the two
companies into a single company with such constitution, property, powers, rights,
interests, authorities and privileges and with such liabilities, duties and obligations as
may be specified in the notification. Under Section 396(2) [as amended by the
Companies (Amendment) Act, 1985] the order aforesaid may provide for the
continuation by or against the transferee company of any legal proceedings pending
by or against any transferor company; also incidental, consequential and
supplemental provisions necessary to give affect to the amalgamation may be
included therein.
Every member or creditor (including a debentureholder) of each of the companies before
the amalgamation shall have, as nearly as may be, the same interests in and rights
against the amalgamated company as he has in the company of which he was originally a
member or creditor. If his interests in or rights against the amalgamated company are less
than his original interests etc., in the original company, he shall be entitled or receive
compensation from the amalgamated company to the extent these have been reduced.
[Section 396(2)]
The prescribed authority would assess the amount of compensation receivable.
Any person aggrieved by any assessment of compensation made by the prescribed
authority under sub-section (3) may, within thirty days from the date of publication of such
assessment in the Official Gazette, prefer an appeal to the Company Law Board and
thereupon the assessment of the compensation shall be made by the Company Law
Board. [Section 396(3A), added in 1985].
But the Central Government would not make such an order for amalgamation unless:
(a) the draft copy of the proposed order has been sent to each of the companies
concerned.
(b) the time for preferring an appeal under sub-section (3A) has expired, or where any
such appeal has been preferred, the appeal has been finally disposed of (Added by
the Amendment Act of 1985); and
(c) the Central Government has considered the suggestion, objection or modification to
the same made by the said companies or any class of shareholders thereof or any
creditor or class of creditors thereof, within a period fixed by the Central Government.
The expression “public interest” has not been defined either by this Act, or by the General
Compromise, Arrangements and Reconstruction 6.11

Clauses Act. It is a very wide expression and comprehends inter alia, (i) economic welfare
of the community [Shri Kishan vs. State of Rajasthan 1955 2 SCR 53]; (ii) welfare of
labour [Basti Sagar Mills vs. Ram Ujagar AIR (1964) S.C. 355]. The concept of public
interest has been discussed in detail at the end of this Study paper.
(e) Reconstruction under Section 494: The Section gives complete power of a special
type for sale of business in winding up. A company which is proposed to be, or in the
course of being wound up, voluntarily, may sell its business to another company and
the compensation received, whether in the form of shares, policies or other like
interest in the transferee company, may be distributed among the shareholders of the
company that is being wound up, or the members of the transferor company may
receive any other benefit from transferee company. To give effect to it the following
condition must exist:
(i) the transferor company should be in process of being wound up as a members’
voluntary winding up.
(ii) there should be a proposal to transfer or sell the whole or part of its business or
property to another company (i.e. the transferee company); and
(iii) the transferor company should approve, by a special resolution, the proposal to
confer authority, whether general or particular on the liquidator to put the above
scheme or arrangement into effect.
The liquidator usually gives notice to the shareholders of the transferor company as
regards the number of shares to which they are entitled, the amount payable by them
thereon and the time within which they must apply for the shares. The sale or
arrangement under this provision is binding on all the members whether they agree to it or
not. If any member does not vote in favour of the special resolution, he may address to
the liquidator his dissent in writing even 7 days subsequent to the passing of the special
resolution and require him:
(a) to abstain from carrying the resolution into effect; or
(b) to purchase his interest at a price to be determined by agreement or arbitration in the
manner provided by Section 494.
The liquidator has the right to exercise either of the above options. Should he elect to
purchase, he must raise the money in such a manner as determined by the company. It
must be paid prior to the company being dissolved.
It is common practice to make a provision in the scheme, enabling the liquidator to sell the
shares of those who neither agree nor apply within the prescribed time and to distribute
the sale proceeds among them.
The transferor company may pass such a special resolution either before or concurrently
6.12 Corporate and Allied Laws

with the resolution for voluntary winding up or for the appointment of a liquidator. After an
order for winding up of the company by or subject to the supervision of the court has been
passed within a year, the special resolution would not be valid unless sanctioned by the
Court.
The Arbitration Act, 1940, will govern arbitration, under this Section for determining the
purchase price of shares of the dissentient member.
Section 494 makes no provision as regards the rights of creditors who felt that they have
been affected by the scheme of transfer. As such the only remedy available to them is to
present a petition either for compulsory winding up or for winding up under the supervision
of the Court within a year of the making of the order.
The impact of Section 494 on the sale of the whole or part of the business or property is
that a sale under such scheme can be made even to a foreign company.
Under Section 507, it is provided that the procedure under Section 494 would apply to a
creditors, voluntary winding up as well as to a members’ voluntary winding up. The
liquidator in the former case will have to exercise the power only with the sanction of the
Court or that of the Committee of inspection.
At times an existing company may require further capital to make up the deficiency
caused by losses or otherwise but the usual methods of raising capital may not be
available to it. In such a case, it may resort to reconstruction under Section 494 by
constituting a new company to take over the undertaking. The members of the existing
company will be allotted partly paid shares in the new company in lieu of assets
transferred. Fresh capital after wards will be raised by calling the unpaid amount of the
shares. The shareholders of the existing company however will not be bound to take the
partly paid shares and they may not assent to the scheme; they may call for the purchase
of their interest or for giving up the scheme. The shareholders concurring in the scheme,
however, shall have to pay whenever the call is made for raising further capital.
(f) Reconstruction under Section 517: It is another form of reconstruction pursuant to an
arrangement with the creditors when the company is being voluntarily wound up.
Under this Section, any arrangement entered into between a company about to be
wound up or in the course of winding-up and its creditors is binding on the company
and its creditors provided it has been:
(a) approved by a special resolution of the company; and
(b) agreed to by three fourths in number and value of the creditors.
Any creditor or contributory may, however, within three weeks from the completion of
arrangement, appeal to the Court and the court may amend, vary, confirm or set aside the
arrangement.
Compromise, Arrangements and Reconstruction 6.13

Note: Students may note that reconstruction under Section 517 is not commonly resorted
to in as much as it might be difficult to secure the 3/4 the majority referred to in paragraph
(b) above.
♦ Compensation for loss of office on amalgamation or reconstruction: Section
318(3) of the Act prohibits the payment of compensation to a managing director, or
other director for the loss of office when he resign his office in consequence of the
reconstruction of the company or its amalgamation and he is appointed as a
managing director, manager or other officer of the reconstructed or amalgamated
company.
♦ Conditions prohibiting reconstruction or amalgamation of company: Where any
provision in the memorandum or articles of a company, or in any resolution passed in
general meeting by, or by the Board of Directors of, the company, or in an agreement
between the company and any other person, whether made before or after the
commencement of this Act, prohibits the reconstruction of the company or its
amalgamation with any body corporate or bodies corporate, either absolutely or
except on the condition that the managing director or manager of the company is
appointed or reappointed as managing director or manager of the reconstructed
company or of the body resulting from amalgamation, as the case may be shall
become void with effect from the commencement of this Act, or be void, as the case
may be. (Section 376)
Preservation of books and papers of amalgamated company (Section 396A): The
books and papers of a company which has been amalgamated with or whose shares
have been acquired by another company under Chapter V of Part VI cannot be
disposed of without the prior permission of the Central Government which may
appoint a person the examine the books and papers in order to ascertain whether
they contain any evidence of commission of an offence in connection with promotion
or formation or the management of the affairs of the first-mentioned company or its
amalgamation or the acquisition of its shares.
It is a measure introduced to prevent accounts and records of a company being disposed
of following amalgamation with a view to destroying incriminating evidence.

6.2 AMALGAMATION OF TWO COMPANIES-STEPS TO BE TAKEN BY BOTH


Procedures for amalgamation of the Companies: Proceedings for an amalgamation by the
transferor and transferee companies should be carried out simultaneously. These are as
follows:
In The Transferee Company In The Transferor Company
1. To check up whether the memorandum contains 1. The same as in the case of
the power of amalgamation; if not, then to carry transferee Company.
6.14 Corporate and Allied Laws

out the proceedings for its alteration and to obtain


Company Law Board’s Confirmation.
2. To Prepare the draft scheme including exchange 2. –do–
ratio and get it approved by the Board’s meeting.
6. To apply to the Court for directions to convene the 6. –do–
general meeting by way of Judge’s Summons
[Rule 67 of the Companies (Court) Rules, 1959];
such directions would be in respect of matters set
out in Rule 69.
4. To send notice for general meeting to every 4. –do–
member along with a statement setting forth the
terms of the compromise or arrangement and
explaining its effect and particularly stating any
material interests of the directors, managing
director or manager, whether in their capacity as
such or as members or creditor, or otherwise and
the effect on those interests on the amalgamation
and insofar as it is different from the effect on the
like interests, of other persons [Section 393(1)(a)].
In case of the said notice being given through
advertisement, to either include the aforesaid
statement or to notify the place for obtaining the
copies of such statement [Section (1)(b)]; these
can be obtained free of charge on making an
application therefore in the manner indicated in
the notice [Section 393(3)].
In case of debenture holders’ rights being affected
by amalgamation, the said statement to give like
information and explanation regarding the trustees
under the deed [Section 393(2)].
[Rules 69 to 76 of the Companies (Court) Rules to
be noted in this connection.]
5. To hold the general meeting and pass the 5. The same as in the case of
resolution approving the draft scheme of transferee company.
amalgamation subject to the confirmation of the
high Court, resolution to be passed by a majority
in number representing 3/4ths in value of the
members as required by Section 391.
Compromise, Arrangements and Reconstruction 6.15

6. To move the High Court for approval of the 6. To move the High Court jointly
scheme, and for the purpose to supply it with with the transferee company,
material facts as required by the proviso to and also to supply the court
Section 391(2). with all material facts.
Further the court would need a
satisfactory report from the
Company Law Board or the
Registrar that the affairs of the
Company have not been
conducted in a manner
prejudicial to the interests of
its members or to public
interest, because it is a
scheme for the amalgamation
of it, with the transferee
company which is being wound
up. [Proviso to Section 394(1)].
7. On receipt of the Court’s order, to file the certified 7. The same as in the case of
copy thereof with the registrar within 30 days after transferee company.
the making of the order [Section 394(3)]; otherwise
it would not be effective.
8. A copy of the Court’s order also to be annexed to 8. The same as in the case of
every copy of the memorandum or instrument, transferee company.
which defines the constitution of the company,
issued after the certified copy of the order has
been filed with the Registrar under a pain of
penalty [Section 39(4)].
9. To proceed to effect the scheme of amalgamation 9. To do the same in the case of
as per the scheme approved and the directions the transferee company,
given by the High Court by issuing suitable notices except of allotment of shares
to shareholders and persons concerned and to and taking over business,
allot shares and take over the business as per the because no question of these
scheme. arises in this case.

6.3 SELF-EXAMINATION QUESTIONS


1. (a) Can a compromise or arrangement be proposed between a company and a class of
its creditors or members?
(b) Can a shipping company with only one steamship, under a clause in its
6.16 Corporate and Allied Laws

memorandum, sell it with the whole of its equipment and with the proceeds buy
another ship?
(c) Can the said company, under a clause in its memorandum, sell the ship and its
entire undertaking divide the proceeds amongst its shareholders?
2. (a) Is it necessary to apply to the Court for the above-mentioned proposed
compromise or arrangement?
(b) Who can apply therefor when the company is a going concern?
(c) Can the liquidator do so, when the company goes into liquidation?
3. Suppose, in the said creditors’ meeting convened by the Court a numerical majority
agrees to the arrangement, which is also sanctioned by the Court. Will it be binding
on all the creditors?
4. Before sanctioning the agreement, the Court (a) may (b) may not (must, satisfy itself
that the application has disclosed to the Court all the material facts relating to the
company. Which is correct?
5. An appeal (a) does lie, (b) does not lie against the order of the Court under Section
391. Which is correct?
6. In the matter of sanctioning the scheme of arrangement, say whether the following
statements are correct:
(a) The Court must be satisfied that the statutory provision has been complied with.
(b) It is not necessary for it to see that the members or creditors (as the case may
be) have been fairly represented by those who attended the meeting.
(c) The Court is bound to see that the statutory majority approves the scheme, but
it is not bound to see that the statutory majority was acting bonafide in the
interest of the members or the creditors (as the case may be).
(d) The Court can sanction a scheme even if it involves the doing of an act, which is
ultra vires the company.
(e) While the application for compromise or arrangement is pending with the Court,
it can stay the commencement or continuation of any suit against the company.
(f) A District Court can supervise the carrying out of the compromise or
arrangement.
7. Suppose the compromise or the arrangement is found to be unworkable. What should
the Court do in the circumstances?
8. Suppose, that, application has been made to the court under Section 391 for the
sanction of an arrangement and that the arrangement involves the reconstruction and
Compromise, Arrangements and Reconstruction 6.17

amalgamation and the transfer of the whole or the part of the property or liabilities of
one company to another company: (a) Can the Court accord the sanction? (b) When?
9. In the circumstances, mentioned in Q.3, the Act empowers the Court to make
provision for the dissolution of the transferor company. Is this power of the Court
absolute or contingent?
10. Can the aforesaid directors in the like circumstances claim compensation from the
transferee company?
11. Of the propositions comprised in the following statements, state which is correct:
(a) A company (i) can, (ii) cannot, acquire the business and control of another
company by the acquisition of shares in that other company.
(b) The scheme of the acquisition offered by the transferee company to the
transferor company requires approval (i) by the holders of at least 75% in value
of shares concerned (ii) by the holders of not less than 90% in value of the
shares concerned.
(c) The above-mentioned approval of the shareholders may be accorded within (i)
30 days, (ii) 60 days, (iii) one month, (iv) 2 months, (v) 120 days, (vi) 4 months,
from the date of offer for acquisition.
12. It is said that in the matter of acquisition of shares aforementioned 9/10ths in value of
the shareholders of the transferor company must approve the transferee company’s
proposed acquisition. Now suppose, the transferee company already holds shares in
the transferor company to a value greater then 1/10ths of aggregate values of all the
shares concerned:
(a) How would you compute the aforesaid 9/10ths for the purpose of approval?
(b) In such a situation, will the approval by the shareholders holding 9/10ths in
value of the shares be sufficient?
(c) Will your answer be different, if more than its nominee or its subsidiary holds not
by the transferee company but 1/10 of the aggregate value of all the shares in
the transferee company?
13. There are two public limited companies. It is felt that these should be amalgamated
into a single company in the interest of the public. Who is to decide the question of
public interest and order for their amalgamation?
14. Can the Central Government straightaway order, without parliamentary approval, the
amalgamation of two or more companies on ground of public interest?
15. You have noticed that arrangement, reconstruction or amalgamation is possible in the
case of a going company. Is reconstruction also possible of a company, which is in
6.18 Corporate and Allied Laws

the process of being wound up voluntarily?


16. A company is proposed to be completely wound up as a member’s voluntary winding-
up. There is a proposal to transfer or sell part of its business or property to another
company.
The transferor company approves by an ordinary resolution of the proposal to confer
authority on the liquidator to put the scheme into effect. Can the liquidator do so in
the circumstances?
17. In the case of members’ voluntary winding-up, how is the authority to sell the
business or property to another company given to the liquidator?
18. Do you find any distinction between reconstruction and amalgamation under Sections
391 to 395 and reconstruction or amalgamation under Sections 494 or 517?

6.4 ANSWERS TO THE SELF-EXAMINATION QUESTIONS


1. Yes;
2. (a) Yes; (b) Company or creditor members; (c) Yes;
3. No, unless the majority represents 3/4ths in value of the creditors;
4. (c);
5. (a);
6. (a) Yes; (b) No; (c) Yes; only regarding the first part of the statement: (d) No; (e) Yes; (f)
No;
7. Order the winding up of the company;
8. (a) Yes; (b) On the receipt of a report from the Company Law Board or Registrar that
transferor company’s affairs have not been conducted prejudicially to its members’
interest or public interest.
9. Contingent;
10. Yes; provided the conditions prescribed by Section 319 are fulfilled;
11. (a) (i); (b) (ii); (c) (vi);
12. (a) Transferee company’s shareholding in the transferor company be included for the
purpose; (b) Yes, only if they constitute at least 3/4ths in number; (c) No;
13. Central Government;
14. Yes;
15. Yes, it is a member’s voluntary winding-up;
16. No;
17. By a special resolution;
18. The former is in respect of a company, which is going concern, and the latter is in respect of
company in liquidator.
7
(G) PREVENTION OF OPPRESSION AND MISMANAGEMENT

7.0 “MAJORITY RULE” AS APPLIED IN THE MANAGEMENT OF A COMPANY


The Companies Act, 1956, together with the protection granted to minority under the
Common Law, attempts to maintain a balance between the rights of majority and the
minority shareholders by admitting in the rule of the majority but limiting it at the same
time by a number of well-defined minority rights, and thus protecting the minority
shareholders.
Minority shareholders are protected by:
1. the Common Law; and
2. the provisions of the Companies Act, 1956.
7.1 Protection at Common Law: It is a well-known principle, enunciated in Foss vs.
Harbottle, which the rule of majority shall prevail. But there are certain exceptions to this
rule where the majority rule does not prevail. These are as under:
(a) Where the act complained of is illegal or ultra vires the company;
(b) Where the act done by the majority constitutes fraud on the minority;
(c) Where a resolution is passed by a simple majority for any act, which requires special
resolution for it to be effective;
(d) Where the act infringes the personal rights of an individual member;
(e) Where any act amounts to oppression of minority or mismanagement of the affairs of
the company.
In all these cases a minority shareholder is entitled to bring an action for a declaration
that the resolution complained of is void, or for an injunction to restrain the company from
passing it. All these principles have been followed in a few leading cases in India as well.
7.2 Protection under the Companies Act, 1956: Various rights are given to minority
7.2 Corporate and Allied Laws

shareholders by the Companies Act, 1956. These relate to:


(a) The variation of class rights (Section 107)
(b) Schemes of reconstruction and amalgamation (Section 391)
(c) Prevention of oppression of minority and of mismanagement under Sections 397 and
398.
(d) The rights to apply to the Central Government to have the affairs of the company
investigated. (Section 235)
There are some other Sections of the Companies Act, which protect the minority
shareholders’ rights. These are:
1. S-17: Consent of the Company Law Board is necessary before certain acts can be
validly done by a company, e.g., an alteration of the objects of a company.
2. S-101: Consent of the Court is necessary in case of reduction of share capital.
7. S-111: Rights to appeal to the Central Government against the arbitrary action of the
Board of Directors in refusing to register a transfer of shares.
4. S-408: Right of the Central Government to appoint on an order from the Company
Law Board (C.L.B.) such number of persons as directors as considered
necessary to effectively safeguard the interests of the company or its
shareholders or the public interests. Such an order may be made by C.L.B. on
a reference made to it by the Central Govt. or on an application of not less
than 100 members of company or by such members holding not less than
1/10th of the total voting power.
5. S-439: A contributory is entitled to present a petition to the Court for the winding up of
the company on just and equitable grounds.
6. S-517: An arrangement between a company and its creditors may be amended,
varied, confirmed or set aside by the Court on the application of any creditor
or contributory.

7.3 OPPRESSION AND MISMANAGEMENT


The management of companies is based on the principle of majority rule ordinarily;
decision of the majority is the rule for the minority. This sound principle has, occasionally,
been abused and the whip of the majority has often produced sullen effects, prejudicial to
the best interests of the shareholders. Until the commencement of the Companies Act,
1956 the only remedy available (under the Indian Companies Act, 1913) to an oppressed
minority was to petition to the Court to wind up the company on the ground that it was
Prevention of Oppression and Mismanagement 7.3

“just and equitable” so to do. The winding up remedy is, however, not always
advantageous to the petitioning shareholder, or shareholders because the very persons
whose conduct is complained of, may be the only persons capable of buying up the
shares of the dissentients. Nevertheless, the oppression or mis-management calls for
some remedial action. Sections 397 to 409 of the Companies Act, 1956 empower (i) the
Company Law Board and (ii) the Central Government to deal with such situations.
Section 397 provides that the members of a company who complain that the affairs of the
company are being conducted in a manner oppressive to any member or members may
apply to the Company Law Board for appropriate relief subject to Section 399. Under
Section 398 too, members of a company may apply to the Company are being conducted
in a manner prejudicial to the interest of the company as a whole, subject to Section 399.
Section 399 provides, however, that a single member is not entitled to make an
application under either of the Section, viz., Sections 397 and 398.
7.4 Who may apply to the Company Law Board when oppression or mis-management
is complained of? The application can be made only by:
(a) In the case of a company having a share capital:
(i) not less than one hundred members or not less than one tenth of the total
number of members whichever is less; or
(ii) a member or members holding not less than one-tenth of the issued share
capital of company provided that the applicants have paid all calls and other
sums due on their respective share [Section 399(1)(a)]. It may be noted that
joint members are counted as one member.
(b) In the case of a company not having a share capital: not less than one-fifth of the total
number of members [Section 399(1)(b)].
(c) The Central Government: The Central Government can also apply or authorise a
member or members to make an application under Section 397 or 398, though the
requisite conditions under [a] and [b] are not satisfied [Section 399(4)].
An application under Section 399(4) must contain the names and addresses of the
applicants, the total numbers of applicants, etc., it must be verified by an affidavit. The
Central Government may require the applicant to produce documentary evidence in
support of the complaint [Section 399(4); Rule 13 of the Companies (Central Govt.’s)
General Rules and Forms, 1956]. It may also require the members to give security for
costs [Section 399(5)].
7.5 Difference between Sections 397 and 398: Under Section 397, the existence of
7.4 Corporate and Allied Laws

conditions justifying the making of winding up order on the ground that it is just and
equitable that the company should be wound up, is a condition precedent to the
interference by the Company Law Board. On the other hand, under Section 398, the
C.L.B. would interfere on its being satisfied that by reason of any material changes in the
management or control of the company, it is likely that the affairs of the company will be
conducted in a manner prejudicial to the interest of the company. The two positions are
distinct. Whereas in the first case, the C.L.B. acts to prevent injustice being done to a
member or members in his or their individual capacity, in the second case the C.L.B. acts
in order to prevent injury being inflicted to the interest of the company as a whole.
The material change in the management or control contemplated in the preceding
paragraph will be deemed to have taken place in any of the following circumstances, viz.:
(i) when there has been alteration in the Board of Directors;
(ii) when a replacement of its manager has taken place;
(iii) when a change has occurred in the ownership of the shares of the company;
(iv) when there has been a change in the membership of a company having no share
capital;
(v) when a change has taken place in any other manner whatsoever;
(vi) by reason of any of the aforesaid changes, the affairs of the company are likely to be
conducted in manner prejudicial to public interest or to the interest of the company
[Section 398(1)(b)].
Thus on an application made in the foregoing circumstances, the Company Law Board will
interfere only if it is of the opinion:
(1) When it is made under Section 397: (a) that the company’s affairs are being conducted
in a manner oppressive to any member or members [Section 397(2)] or in a manner
prejudicial to public interest; and (b) that to wind up the company would unfairly
prejudice such member or members but that otherwise the facts would justify the
making of a winding up order on “just and equitable” ground.
(2) when it is made under Section 398:
(a) that affairs of the company are being conducted in a manner prejudicial to the
interests of the company [Section 398(1)(a)]; or
(b) that a material change has taken place in the management or control of the
company and as a consequence the affairs of the company may be conducted in
a manner prejudicial to the public interest or in a manner prejudicial to the
Prevention of Oppression and Mismanagement 7.5

interests of the company [Section 398(1)(b)].


The Company Law Board may make such order it thinks fit with a view to bringing to
an end, or preventing the matters complained or apprehended, as the case may be.
(3) Under Section 397, the Company Law Board can end the oppression complained of
whereas, under Section 398, it can prevent the matters complained of or
apprehended. In other words, only Section 398 is preventive; Section 397 is not.
A complaint under Section 398 can be made only by a member or members and not by
officers or directors who might be oppressed in these capacities [Elder vs. Elder & Weston
Ltd. (1952) 102 Law J. 91; (1952) S.C. 49].
In the aforementioned case, the interpretation of Section 210 of the English Companies
Act, 1948, corresponding to Section 397 of our Act, was considered. There it was alleged
that the majority of the shareholders of a private company had removed two minority
shareholders from their directorship and employment but there was no suggestion of
mismanagement to the detriment of the share holders. The Court held that these
allegations could not support an application under the Section, which required oppressive
conduct to members in their character as members. Such conduct towards a member in
any other capacity, e.g., as a director or creditor could not per se justify an application.
The “conduct complained of should at the lowest involve a visible departure from the
standards of fair dealing and a violation of the conditions of fair play on which every
shareholder who entrusts his money to a company, is entitled to rely” (ibid) (per Lord
Cooper).
7.6 Powers of the Company Law Board on application under Sections 397 or 398:
Without prejudice to the generality of the powers of making any order as it thinks fit under
Section 397 or 398 the C.L.B. has, in particular under Section 402, the following powers:
(a) to regulate by order the conduct of the company’s affairs in the future;
(b) to order the purchase of shares or interest of any member or members of the
company by the other members thereof or by the company;
(c) in the case of a purchase of shares by the company as aforesaid, to order the
consequent reduction of its share capital;
(d) to terminate, set aside for modify any agreement, howsoever, arrived at, between the
company on the one hand and any of the following persons on the other, namely: (i)
the managing director; (ii) any other director; (iii) the manager upon such terms and
conditions as may, in the opinion of the Company Law Board be just and equitable in
all the circumstances of the case;
7.6 Corporate and Allied Laws

(e) to terminate, set aside or modify any arrangement between the company and any
person not referred to above, after giving due notice to, and obtaining the consent of
the party concerned;
(f) to set aside any transfer, delivery of goods, payment, execution of other act, relating
to property made or done by or against the company within 3 months before the date
of the application under Section 397 or 398 which would in the case of an individual
be deemed in his insolvency to be fraudulent preference; and
(g) to deal with any other matter for which, in the opinion of the C.L.B., it is just and
equitable that provision should be made.
The C.L.B. may make an interim order for regulating the conduct of the company’s affairs,
pending the passing by it of a final order under Section 397 or 398 (Section 403).
Where an order made under Section 397 or 398 involves an alteration of the
memorandum or articles of association of the company, the company shall not have the
right to make any alteration therein, subsequently, in a manner which is inconsistent with
the order passed by the C.L.B. without its leave (Section 404). Certified copies of the
alteration must be filed with the Registrar. Where, an order of the Court under the
foregoing Section involves the termination of any of the agreement mentioned herein
before, such termination shall not give rise to any claim for damages against the company
for loss of office or in any other respect either under the agreement or otherwise. Further,
no managing or other directors or manager whose agreement has been terminated or set
aside shall, without leave of the C.L.B. be appointed in any of the above capacity in
respect of the company for a period of five years from the date of the order. Any
contravention of this provision is punishable with imprisonment for a term, which may
extend to one year, or with a fine up to Rs. 50,000 or with both. Before leave is granted,
the Central Government must be notified and heard (Section 407).
7.7 Powers of the Central Government: Section 408 has vested some powers in the
Central Government to prevent oppression or mismanagement. It can exercise these
powers on an order of the Company Law Board which is turn will so order on the
application of at least 100 members of the company or of members holding at least one
tenth of the total voting power therein. But before exercising such powers, it must make
such enquiry as it deems fit and be satisfied that it is necessary to exercise its powers in
order to prevent the affairs of the company being conducted either in a manner oppressive
to any members of the company or in a manner prejudicial to the interests of the company
or to public interest. Being thus satisfied, it may appoint such number of persons as the
Company Law Board may, by order in writing, specify as being necessary to effectively
safeguard the interest of the company, or its shareholders or the public interest, as
Prevention of Oppression and Mismanagement 7.7

directors thereof for such period not exceeding three years at one time as it may think fit
[Section 408(1)]. In the alternative, the company may be asked to elect its directors by the
system of proportional representation by means of a single transferable vote so that the
minority may also have representation in the Board of Directors of the company [Proviso
to Section 408].
If the Company Law Board has passed an order the proviso to Section 408(1), it may,
should it deem fit, direct that until new directors are appointed pursuant to the aforesaid
order, such number of persons as the Company Law Board may, by order in writing,
specify as being necessary to effectively safeguard the interest of the company, or its
shareholders or the public interest will hold office as additional directors. The Central
Government shall appoint such Additional Directors.
The director or directors appointed under sub-section (1) or (2) or Section 408 are not
liable to retire by rotation as contemplated by Section 255 [Section 408(3)]. These
directors are not required to hold any qualification shares; nor are their tenure of office
liable to termination by retirement of directors by rotation. These directors may, however,
be replaced by some others by the Central Government [Section 408(4)]. No change in
the Board of Directors, after a person has been appointed or directed to hold office of a
director or additional director under Section 408 shall so long as such director or
additional director holds office, be effective unless confirmed by the Company Law Board
[Section 408(5)].
On appointing directors or additional directors referred to in the first two sub-sections
above, the Central Government may issue such directions to the company as it may
consider necessary or appropriate in regard to its affairs. Such directions can be issued
notwithstanding anything contained in this Act or in any other law for the time being in
force [Section 408(6)]. The Central Government may require these directors or additional
directors to report to it from time to time with regard to the affairs of the company [Section
408(5)].
On a complaint being lodged by the managing or any other director or the manager, the
Company Law Board is empowered under Section 409 to prevent any change in the Board
of Directors, which is likely to affect the company prejudicially. The power conferred by
this Section, however, cannot be exercised in relation to a private company, unless it is a
subsidiary of a public company.
7.8 General observations on remedy for oppression under Sections 397 and 398: The
remedy available under Section 397 of the Companies Act, 1956, can be invoked only
when the affairs of the company are being conducted in a manner oppressive to a
shareholder or shareholders. Likewise, the remedy available under Section 398 can be
7.8 Corporate and Allied Laws

invoked only when the affairs of the company are being conducted in a manner prejudicial
to the interest of the company. These two Sections clearly postulate that at the time
application is made, there must be a continuing course or conduct of the affairs the
company, which is oppressive to any shareholder or shareholders or prejudicial to the
interest of the company. It is this course of oppressive or prejudicial conduct, which can
be made the subject matter of a complaint in the application. The forgoing provisions of
law do not confer any power on the Company Law Board to set aside or interfere with past
and concluded transactions between the company and the shareholders or third parties
which are no longer continuing wrongs or to award a compensation to the company for the
aggrieved shareholders in respect of such transactions [Seth Mohanlal Ganpatram vs.
Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. (1964) 34 Comp. Cas 777].
There are only two cases in which, on the application under Section 397 or 398 of the
Companies Act, 1956 the Company Law Board is empowered to give relief in respect of
past and concluded transactions which are no longer continuing wrongs; they are really in
the nature of exceptions to the general principles as stated above. Firstly, Section 402(f)
enables the Company Law Board to set at naught transactions amounting to fraudulent
preference, effected within three months before the date of the application under Section
397 or 398 even though they are no longer continuing wrongs. Secondly, Section 406 of
the Companies Act, 1956, read with Section 543 of that Act set forth in Schedule XI
enables Company Law Board on an application under Section 397 or 398 to bring to book
delinquent directors, managers and other office-bearers of the company and to enforce
the company’s claim against them if they have misapplied or retained company’s money
or have committed any misfeasance or breach of trust in relation to the company [Seth
Mohanlal Ganpatram vs. Shri Satyaji Jubilee Cotton and Jute Mills Co. Ltd. and others,
ibid].
Persons who hold majority of beneficial interest but minority of voting power, can complain
of oppression which term includes not merely obtaining unfair pecuniary advantage but
also an over whelming desire for power (re Hammer Ltd. 109 L.J. 24 C.A.). The remedy
available is analogous to that of winding up and, consequently, Section 406 provides that
Sections 439 to 544 shall only apply to companies in respect of which application has
been made under Section 397 or 398 in form set forth in Schedule XI. Before seeking a
winding up, a member must exhaust his remedy under Section 397 [See Section 433(f)].
7.9 Distinction between various remedies for oppressions: The remedies available
are: (i) suit for injunction and declaration by the minority shareholders who have been
oppressed by an infringement of class rights, etc. This is an exception to the rule in Foss
vs. Harbottle, 2 Hare 461 that in respect of wrong done to the company, only company
can sue; (ii) winding-up petition; (iii) relief under Section 397 or 398. Remedy (i) applies
Prevention of Oppression and Mismanagement 7.9

where wrong consists of single act or acts and it has not been the course of a conduct.
Remedies (ii) and (iii) apply where wrong is the outcome of a course of conduct and not
due to an individual act. The oppressed shareholder must act reasonably exhausting the
remedy (iii) before remedy (ii) can be availed of.

7.10 POWERS OF CENTRAL GOVERNMENT TO REMOVE MANAGERIAL


PERSONNEL ON THE RECOMMENDATION OF CLB
The powers of the Company Law Board to remove a director of a company are contained
in Sections 388B to 388E of Companies Act. The Central Government may state a case
against any of the managerial personnel of a company and refer the case to the Company
Law Board with a request that the Company Law Board may inquire into the case and
record a finding whether or not he is fit and proper person to hold the office of director or
any other office connected with the conduct and management of the company. The
Central Government may exercise this power where in its opinion there are circumstances
suggesting:
(i) that any person concerned in the conduct and management of the affairs of a
company is or has been in connection there with guilty of fraud, misfeasance,
persistent negligence or default in carrying out his obligations and functions under the
law, or
(ii) that the business of a company is not or has not been conducted and managed by
such person in accordance with sound business principles or prudent commercial
practices; or
(iii) that a company is or has been conducted and managed by such person in a manner
which is likely to cause, or has caused, serious injury or damage to the interest of the
trade, industry or business to which such company pertains; or
(iv) that the business of a company is or has been conducted and managed by such
person with intent to defraud its creditors, members or any other person or otherwise
for a fraudulent or unlawful purpose or in a manner prejudicial to public interest
[Section 388B(1)].
Every case under sub-section (1) shall be stated in the form of an application which shall
be presented to the Company Law Board or such officer thereof as it may appoint in this
behalf [Section 338B(2)].
The person against whom a case is referred to the Company Law Board under this section
shall be joined as a respondent to the application [Section 388B(3)]. The application made
to the C.L.B. must contain a concise statement of the circumstances and material as the
Central Government may consider necessary for the purpose of the enquiry, and be
7.10 Corporate and Allied Laws

signed and verified in the manner laid down in the Civil Procedure Code, for the signature
and verification of a plaint in a suit by the Central Government [Section 388B(4)].
The Company Law Board may, on the application of the Central Government, or on its
own motion, by an interim order direct that the respondent shall not discharge any of the
duties of his office until further orders of the Company Law Board; and appoint a suitable
person in place of the respondent [Section 388C(1)]. Such appointee shall be deemed to
be a public servant within the meaning of Section 21 of the Indian Penal Code [Section
388C(2)].
At the conclusion of the hearing of the case the Company Law Board must record its
findings (Section 388D). If the finding of the Company Law Board is against the
respondent the Central Government, by order, shall remove him from office [Section
388(1)]. The person against whom order of removal from office is made must not hold the
office of a director or any other office connected with the conduct and management of
affairs of the company for a period of 5 years from the date of the order of removal. The
Central Government may, with the previous concurrence of the Company Law Board,
remit or relax this period of 5 years [Section 388E(3)]. On the removal of a person from
office in the above manner, no compensation in any circumstance whatever is payable to
him for the loss or termination of office [Section 388E(4)]. The company may, with the
previous approval of the Government, appoint another person to the office in place of the
person removed [Section 388E(5)].

7.11 CONCEPT OF PUBLIC INTEREST AND ITS IMPINGEMENT ON COMPANY LAW


The expression “public interest” is an elusive abstraction; it means general welfare of the
society or “regard for social good” and predicates interest of the general public in matters
where regard for the social good is of the first moment.
A thing is said to be in public interest where it is or can made to appear to be contributive
to the general welfare rather than to the special privileges of a class, group or individual.
In common parlance, it is assumed to denote the interest to the community or nation as a
whole as well as the State Government, which represents it. “The expression is not
capable of precise definition and has not a rigid meaning, and is elastic and takes its
colours from the statute in which it occurs, the concept varying with the time and state of
society and its needs. Thus, what is ‘public interest’ today may not be so considered a
decade later. In any case, the expression cannot be considered in vacuum but must be
decided on the facts and circumstance”. [Per Chief Justice Mahajan in State of Bihar vs.
Kameshwar, A.I.R. 1952 SC 252].
Since the concept of public interest is bound to undergo frequent changes with a change
Prevention of Oppression and Mismanagement 7.11

in our social, political and economic values, no hard and fast definition can be and
actually has been, laid down by the Act. Whatever furthers the general interests of the
community as opposed to the particular interest of the individual (a company formed and
registered under the Act is a legal person) is to be considered as “public interest”, i.e., an
interest in which the community is directly and vitally concerned. A survey of the
provisions of the Act would reveal the truth of the statement that the concept of public
interest has been making rapid in-roads into the Indian Company Law, e.g., Sections 396,
397, 398, 408, 637A etc.; Schedule VI also being intended to safeguard public interest.
A survey of the provisions of the Act would reveal the truth of the statement that concept
of “public interest” has been making rapid in roads into the Indian Company Law:
(i) Section 396, as you have seen earlier, empowers the Central Government to
provide for compulsory amalgamation of companies (notwithstanding anything
contained in Sections 394 and 395) into a single company in the public interest. It
may be noted that the expression “national interest” was used in 1956. The
Amendment Act of 1960 brought the substitution of ‘public interests’ for ‘national
interest’ into effect. The Indian Companies Act, 1913 contained no provisions akin to
those of Section 396. Therefore, the Companies Act, 1956, made such provision in
the Company Law for the first time.
(ii) You have read in your Study Paper on Auditing that Section 211(3) empowers the
Central Government to exempt any class of companies from compliance with any of
the requirements in Schedule VI pertaining to form and contents of balance sheet
and profit and loss account if, in its opinion, it is necessary to grant the exemption in
the “public interest”. [The Amendment Act, 1960 has substituted the expression
“public interest” for “national interest”].
(iii) The annual statements of account (in the form set out in Schedule VI) of a public
company and its subsidiary companies are public documents (In the case of a
private company, the profit and loss account is not a public document). The
Companies Act, 1956 has laid down minimum information, which is to be disclosed
in these statements along with general principle that it must exhibit a true and fair
picture. The information now required to be given is much more than under the
Indian Companies Act, 1917. The purpose behind this is, undoubtedly, the
safeguarding of the public interest.
(iv) There may be a case where a transfer of shares in a company has taken place or is
likely to take place and, as a result thereof a change in the composition of the Board
of directors is likely to take place; and further such a situation (in the Govt’s opinion)
may be prejudicial to the public interest. In such a case, the Central Government is
7.12 Corporate and Allied Laws

empowered, under Sections 250(3) and (4) to impose restrictions on such transfers
e.g. the voting rights in respect of such shares shall not be exercisable for the
period specified not exceeding three years the resolution approving the transfer of
such shares should first be sanctioned by the Government in order to be effective.
Thus, the Amendment Act of 1960 has extended the provisions of Section 250 in
public interest also.
Mention of ‘public interest’ in the context of restriction on transfer of shares is also
made in Sections 108B, 108C and 108D.
(v) Under Section 397, the member of a company has given the right to file an
application to the Company Law Board for appropriate relief where the affairs of the
company are being conducted, inter alia, in a manner prejudicial to public interest
provided the requirements of Section 399 are fulfilled.
(vi) Under Section 398, the shareholder company can file an application to the Company
Law Board for relief in cases (a) where the affairs of the company are being
conducted in a manner prejudicial to interest.
(vii) Under Section 408, the Central Government is empowered to appoint such number
of persons as the Company Law Board may, by order in writing specify being
necessary to hold office as directors in the company to effectively safeguard public
interest (besides the interest of the company or its shareholders). Such an order
may be made on a reference made to it by the Central Government or on an
application of not less than 100 members of the company or of the members holding
1/10th of the total voting power therein.
(viii) Under Section 394(1) of the Companies Act, 1956, the Court has been empowered:
(a) to refuse its sanction to any compromise or arrangement in connection with a
scheme for the amalgamation of a company which is being wound up, with another
company where it receives a report from the Company Law Board or the Registrar
that the affairs of the company have been conducted inter alia in a manner
prejudicial to public interest; and (b) to refuse the dissolution of any transferor
company under clause (iv) of Section 394(1) where it receives a report from the
Official Liquidator (on security of the books and papers of the company) that the
affairs of the company have been conducted, inter alia in a manner prejudicial to
public interest.
(ix) The office of public trustee has been set up so as to enable him to take over the
voting rights of shares and debentures held in trust from their trustees to be
exercised in such manner as he may determine (Sections 153A and 158B). The
object of this was to ensure that voting powers attaching to funds held in trust for
Prevention of Oppression and Mismanagement 7.13

the company or the public were exercised to promote the public interest and not to
further those of private individuals who had formed tax-free trusts ostensibly for
‘public motives’.
(x) The object of Sections 13(c) and (d) (as amended in 1965 on the recommendation of
the Vivian Bose Enquiry Commission and endorsement of the recommendation by
the Daftary Shastri Committee is to enable shareholders and others interested to
form a clear idea of the main object and other objects. This amendment, in
combination with Section 149(2A) which requires that whenever a company embarks
on any kind of business activity regarding “other objects” the sanction of the
company by special resolution must be obtained, will give the shareholders an
opportunity to know for themselves the actual business which the company is
carrying on or proposes to carry on. This is likely to put a positive check on the
public money being jeopardised.
(xi) The evasion of income-tax or super tax is a matter of public interest, benami
shareholding and shareholding in the names of fictitious or non-existing persons
were once very common because in such cases tax might be evaded and the
revenue could be defrauded in cases where the super-tax limit was reached. To
check such practice, Section 68A has been incorporated in the Act, rendering it a
punishable offence for a person to apply for or get an allotment of share or get a
transfer of shares registered in the names of fictitious or non-existing persons of
benamidars. Further, to check such practice, both the benamidars and the holder of
beneficial interest in a share have to make declarations under Section 187C
(introduced by the Amendment Act, 1974).
The Central Government is empowered to state a case against managerial personnel to
the Company Law Board under Section 388B where the circumstances suggest the
company is or has been conducted and managed by such person in a manner which is
likely to cause or has caused serious injury or damage to the interests of trade, industry
or business to which such company pertains {vide} Amendment Act of 1988.

7.12 SELF-EXAMINATION QUESTIONS


1. (a) When oppression or mismanagement is complained of, can the Central
Government apply to the Company Law Board for redress?
(b) Can it also authorise a person or a member to make an application?
2. Answer the following questions:
(a) In the case of application for oppression, can the Company Law Board interfere,
if the conditions, warranting a winding up order on just and equitable ground, do
7.14 Corporate and Allied Laws

not exist?
(b) If the conditions referred to in (a) exist and the winding up of the company would
not unfairly prejudice the member or members, can the Company Law Board
interfere?
(c) Can the Company Law Board make an interim order for regulating the conduct
of the company’s affairs, pending the final order under Section 397 or 398?
(d) Can the Company Law Board, in the case of oppression and mismanagement,
set aside or interfere with past and conclude transactions between the company
and the shareholders or third parties which are no longer continuing wrong?
(e) Are there any exceptions to rule underlying (b) above?

7.13 ANSWERS TO SELF-EXAMINATION QUESTIONS


1. (a) Yes; (b) Yes;
2. (a) No; (b) No; (c) Yes; (d) No; (e) Yes; 406 Section 402(f) read with Section 543 in
the modified form set forth in Schedule XI.
8
(H) REVIVAL AND REHABILITATION OF SICK INDUSTRIAL
COMPANIES

8.0 DEFINITIONS
Sick Industrial Company
Sick Industrial Company means an industrial undertaking which has
(i) the accumulated losses in any financial year equal to fifty per cent or more of its average
net worth during four years immediately preceding such financial year; or
(ii) failed to repay its debts within any three consecutive quarters on demand made in writing
for its repayment by a creditor or creditors of such company.
Industrial undertaking
“industrial undertaking” means any undertaking, pertaining to any industry carried on in one or
more factories or units by any company, as defined in clause (aa) of section 3 of the Industries
(Development and Regulation) Act, 1951 (65 of 1951) but does not include a small-scale
industrial undertaking as defined in clause (j) of that section [Section 2 (19AB)]
Net Worth
“Net worth” means the sum total of the paid-up capital and free reserves after deducting the
provisions or expenses as may be prescribed.
Explanation.—For the purposes of this clause, “free reserves” means all reserves created out
of the profits and share premium account but does not include reserves created out of
revaluation of assets, write back of depreciation provisions and amalgamation [Section 2
(29A)].
Operating Agency
“operating agency” means any group of experts consisting of persons having special
knowledge of business or industry in which the sick industrial company is engaged and
8.2 Corporate and Allied Laws

includes public financial institution, State level institution, scheduled bank or any other person
as may be specified as the operating agency by the Tribunal [Section 2 (31AA)]
Industrial Company
“industrial company” means a company which owns one or more industrial undertakings
[Section 2 (19AA)]
8.1 PROCEDURE FOR REVIVAL AND REHABILITATION
8.1.1 Reference to Tribunal
(a) The Board of directors of a sick industrial company shall make a reference to the
Tribunal and prepare a scheme of its revival and rehabilitation.
(b) Such a reference shall be made to the Tribunal along with an application containing
such particulars as may be prescribed, for determination of the measures which may be
adopted with respect to such company:
(c) The application shall be accompanied by a certificate from an auditor or from a panel
of auditors prepared by the Tribunal indicating—
(a) the reasons of the net worth of such company being fifty per cent or less than fifty per
cent; or
(b) the default in repayment of its debt making such company a sick industrial company, as
the case may be.
(d) The provisions of Section 424A (i) shall not apply to a Government company:
(e) However a Government company may, with the prior approval of the Central
Government or a State Government, as the case may be, make a reference to the Tribunal in
accordance with the provisions of this sub-section and thereafter all the provisions of this Act
shall apply to such Government company:
(f) In case any reference had been made before the Tribunal and a scheme for revival
and rehabilitation submitted before the commencement of the Enforcement of Security Interest
and Recovery of Debts Laws (Amendment) Act, 2004, such reference shall abate if the
secured creditors representing three-fourth in value of the amount outstanding against
financial assistance disbursed to the borrower have taken measures to recover their secured
debt under sub-section (4) of section 13 of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (54 of 2002) :
(g) No reference shall be made to the Tribunal under Section 424A (i) if the secured
creditors representing three-fourth in value of the amount outstanding against financial
assistance disbursed to the borrower have taken measures to recover their secured debt
Revival and Rehabilitation of Sick Industrial Companies 8.3

under sub-section (4) of section 13 of the Securitisation and Reconstruction of Financial


Assets and Enforcement of Security Interest Act, 2002 (54 of 2002).
(h) The Central Government or the Reserve Bank or a State Government or a public
financial institution or a State level institution or a scheduled bank without prejudice to the
provisions contained in Section 424A (1), may if it has sufficient reasons to believe that any
industrial company has become, for the purposes of this Act, a sick industrial company, make
a reference in respect of such company to the Tribunal for determination of the measures
which may be adopted with respect to such company:
(i) A reference shall not be made under Section 424A (1) in respect of any industrial
company by—
(a) the Government of any State unless all or any of the industrial undertakings belonging to
such company are situated in such State;
(b) a public financial institution or a State level institution or a scheduled bank unless it has,
by reason of any financial assistance or obligation rendered by it, or undertaken by it,
with respect to such company, an interest in such company.
(j) A reference under Section 424A (1) or (3) shall be made to the Tribunal within a
period of one hundred and eighty days from the date on which the Board of directors of the
company or the Central Government or the Reserve Bank of India or a State Government or a
public financial institution or a State level institution or a scheduled bank, as the case may be,
come to know, of the relevant facts giving rise to causes of such reference or within sixty days
of final adoption of accounts, whichever is earlier.
(k) The Tribunal may, on receipt of a reference, pass an order as to whether a company
in respect of which a reference has been made has become a sick industrial company and
such order shall be final.

8.2 INQUIRY INTO WORKING OF SICK INDUSTRIAL COMPANIES (SECTION 424B)


(a) The Tribunal may make such inquiry as it may deem fit for determining whether any
industrial company has become a sick industrial company—
(a)upon receipt of a reference with respect to such company under section 424A; or
(b)upon information received with respect to such company or upon its own knowledge as to
the financial condition of the company.
(b) The Tribunal may, if it deems necessary or expedient so to do for the expeditious
disposal of an inquiry, require by order any operating agency to enquire into the scheme for
revival and make a report with respect to such matters as may be specified in the order.
8.4 Corporate and Allied Laws

(c) The operating agency shall complete its inquiry as expeditiously as possible and
submit its report to the Tribunal within twenty-one days (extendable to forty days with reasons
with reasons to be recorded in writing) from the date of such order:
(d) The Tribunal shall conclude its enquiry as expeditiously as possible and pass final
orders in the proceedings within sixty days extendable to ninety days with reasons with
reasons to be recorded in writing) from the commencement of the inquiry. An inquiry shall be
deemed to have commenced upon the receipt by the Tribunal of any reference or information
or upon its own knowledge reduced to writing by the Tribunal.
(e) Where the Tribunal deems it fit to make an enquiry or to cause an inquiry to be made
into any industrial company, as the case may be, it may appoint one or more persons who
possess knowledge, experience and expertise in management and control of the affairs of any
other company to be a special director or special directors on the board of such industrial
company on such terms and conditions as may be prescribed for safeguarding its financial
and other interests or in the public interest.
(f) The special director or special directors appointed for the purpose shall submit a report to
the Tribunal within sixty days from the date of appointment of such director or directors about
the state of affairs of the company in respect of which reference has been made and such
special director or directors shall have all the powers of a director of a company under this
Act, necessary for discharge of his or their duties.
(g) The Tribunal may issue such directions to a special director appointed as it may deem
necessary or expedient for proper discharge of his duties.
(h) The appointment of a special director shall be valid and effective notwithstanding
anything to the contrary contained in any other provision of this Act or in any other law for the
time being in force or in the memorandum and articles of association or any other instrument
relating to the industrial company, and any provision regarding share qualification, age limit,
number of directorships, removal from office of directors and such like conditions contained in
any such law or instrument aforesaid, shall not apply to any special director or directors
appointed by the Tribunal.
(i) Any special director appointed, shall—
(a)hold office during the pleasure of the Tribunal and may be removed or substituted by any
person by order of the Tribunal;
(b)not incur any obligation or liability by reason only of his being a director or for anything
done or omitted to be done in good faith in the discharge of his duties as a director or anything
in relation thereto;
Revival and Rehabilitation of Sick Industrial Companies 8.5

(c)not be liable to retirement by rotation and shall not be taken into account for computing the
number of directors liable to such retirement;
(d)not be liable to be prosecuted under any law for anything done or omitted to be done in
good faith in the discharge of his duties in relation to the sick industrial company.

8.3 POWERS OF TRIBUNAL TO MAKE SUITABLE ORDER ON COMPLETION OF


INQUIRY (SECTION 424C)
(a) If after making an inquiry under section 424B, the Tribunal is satisfied that a
company has become a sick industrial company, the Tribunal shall, after considering all the
relevant facts and circumstances of the case, decide, as soon as may be, by an order in
writing, whether it is practicable for the company to make its net worth exceed the
accumulated losses or make the repayment of its debts referred to in clause (b) of sub-section
(2) of section 424A within a reasonable time.
(b) If the Tribunal decides that it is practicable for a sick industrial company to make its net
worth exceed the accumulated losses or pay its debt referred to in that sub-section within a
reasonable time, the Tribunal shall, by order in writing and subject to such restrictions or
conditions as may be specified in the order, give such time to the company as it may deem fit
to make its net worth exceed the accumulated losses or make repayment of the debts.
(c) If the Tribunal decides that it is not practicable for a sick industrial company to make its net
worth exceed the accumulated losses or make the repayment of its debts within a reasonable
time and that it is necessary or expedient in the public interest to adopt all or any of the
measures specified in section 424D in relation to the said company it may, as soon as may be,
by order in writing, direct any operating agency specified in the order to prepare, having
regard to such guidelines as may be specified in the order, a scheme providing for such
measures in relation to such company.
(d) The Tribunal may, if any of the restrictions or conditions specified in an order made
under sub-section (2) are not complied with by the company concerned, or if the company fails
to revive in pursuance of the said order, review such order on a reference in that behalf from
any agency referred to in sub-section (3) of section 424A or on its own motion and pass a
fresh order in respect of such company under sub-section (3) and if the operating agency
specified in an order made under sub-section (3) makes a submission in that behalf, review
such order and modify the order in such manner as it may deem appropriate.

8.4 PREPARATION AND SANCTION OF SCHEMES (SECTION 424D)


(a) Where an order is made under sub-section (3) of section 424C in relation to any sick
industrial company, the operating agency specified in the order shall prepare as expeditiously
8.6 Corporate and Allied Laws

as possible and ordinarily within a period of sixty days (extendable to ninety days with reasons
with reasons to be recorded in writing) from the date of such order, having regard to the
guidelines framed by the Reserve Bank of India in this behalf, a scheme with respect to such
company providing for any one or more of the following measures, namely:—
(a) the financial reconstruction of such industrial company;
(b) the proper management of such industrial company by change in, or take over of, the
management of such industrial company;
(c) the amalgamation of—
(i) such industrial company with any other company; or
(ii) any other company with such industrial company (hereafter in this section, in the
case of sub-clause (i), the other company, and in the case of sub-clause (ii), such
industrial company, referred to as “transferee company”);
(d) the sale or lease of a part or whole of any industrial undertaking of such industrial
company;
(e) the rationalisation of managerial personnel, supervisory staff and workmen in accordance
with law;
(f) such other preventive, ameliorative and remedial measures as may be appropriate;
(g) repayment of debt;
(h) such incidental, consequential or supplemental measures as may be necessary or
expedient in connection with or for the purposes of the measures specified in clauses (a)
to (g):
(b) The scheme may provide for any one or more of the following, namely:—
(a) the constitution, name and registered office, the capital, assets, powers, rights, interests,
authorities and privileges, duties and obligations of the sick industrial company or, as the
case may be, of the transferee company;
(b) the transfer to the transferee company of the business, properties, assets and liabilities
of the sick industrial company on such terms and conditions as may be specified in the
scheme;
(c) any change in the Board of directors, or the appointment of a new Board of directors, of
the sick industrial company and the authority by whom, the manner in which and the
other terms and conditions on which, such change or appointment shall be made and in
the case of appointment of a new Board of directors or of any director, the period for
which such appointment shall be made;
Revival and Rehabilitation of Sick Industrial Companies 8.7

(d) the alteration of the memorandum or articles of association of the sick industrial company
or, as the case may be, of the transferee company for the purpose of altering the capital
structure thereof, or for such other purposes as may be necessary to give effect to the
reconstruction or amalgamation;
(e) the continuation by or against the sick industrial company or, as the case may be, the
transferee company of any action or other legal proceeding pending against the sick
industrial company immediately before the date of the order made under sub-section (3)
of section 424C;
(f) the reduction of the interest or rights which the shareholders have in the sick industrial
company to such extent as the Tribunal considers necessary in the interests of the
reconstruction, revival or rehabilitation or repayment of debts of such sick industrial
company or for the maintenance of the business of such industrial company;
(g) the allotment to the shareholders of the sick industrial company, of shares in such
company or, as the case may be, in the transferee company and where any shareholder
claims payment in cash and not allotment of shares or where it is not possible to allot
shares to any shareholder, the payment of cash to those shareholders in full satisfaction
of their claims—
(i) in respect of their interest in shares in the sick industrial company before its
reconstruction or amalgamation; or
(ii) where such interest has been reduced under clause (f) in respect of their interest in
shares as so reduced;
(h) any other terms and conditions for the reconstruction or amalgamation of the sick
industrial company;
(i) sale of the industrial undertaking of the sick industrial company free from all
encumbrances and all liabilities of the company or other such encumbrances and
liabilities as may be specified, to any person, including a co-operative society formed by
the employees of such undertaking and fixing of reserve price for such sale;
(j) lease of the industrial undertaking of the sick industrial company to any person, including
a co-operative society formed by the employees of such undertaking;
(k) method of sale of assets of the industrial undertaking of the sick industrial company such
as by public auction or by inviting tenders or in any other manner as may be specified
and for the manner of publicity therefor;
(l) issue of the shares in the sick industrial company at the face value or at the intrinsic
value which may be at discount value or such other value as may be specified to any
8.8 Corporate and Allied Laws

industrial company or any person including the executives and employees of such sick
industrial company;
(m) such incidental, consequential and supplemental matters as may be necessary to secure
that the reconstruction or amalgamation or other measures mentioned in the scheme are
fully and effectively carried out.
(c) Scrutiny of the Scheme
(i) The scheme prepared by the operating agency shall be examined by the Tribunal and a
copy of the scheme with modification, if any, made by the Tribunal shall be sent, in draft,
to the sick industrial company and the operating agency and in the case of
amalgamation, also to any other company concerned, and the Tribunal may publish or
cause to be published the draft scheme in brief in such daily newspapers as the Tribunal
may consider necessary, for suggestions and objections, if any, within such period as the
Tribunal may specify.
(ii) The complete draft scheme shall be kept at the place where registered office of the
company is situated or at such places as mentioned in the advertisement.
(iii) The Tribunal may make such modifications, if any, in the draft scheme as it may consider
necessary in the light of the suggestions and objections received from the sick industrial
company and the operating agency and also from the transferee company and any other
company concerned in the amalgamation and from any shareholder or any creditors or
employees of such companies: Where the scheme relates to amalgamation, the said
scheme shall be laid before the company other than the sick industrial company in the
general meeting for the approval of the scheme by its shareholders and no such scheme
shall be proceeded with unless it has been approved, with or without modification, by a
special resolution passed by the shareholders of the transferee company.
(iv) The sanctioned scheme may thereafter be sanctioned, within sixty days (extendable to
ninety days with reasons with reasons to be recorded in writing) by the Tribunal and shall
come into force on such date as the Tribunal may specify in this behalf: Different dates
may be specified for different provisions of the scheme.
(v) The Tribunal may, on the recommendations of the operating agency or otherwise, review
any sanctioned scheme and make such modifications as it may deem fit or may by order
in writing direct any operating agency specified in the order, having regard to such
guidelines including the guidelines framed by the Reserve Bank of India in this behalf in
order to prepare a fresh scheme providing for such measures as the operating agency
may consider necessary.
Revival and Rehabilitation of Sick Industrial Companies 8.9

(vi) When a fresh scheme is prepared, the provisions of sub-sections (3) and (4) of Section
424D shall apply in relation thereto as they apply to in relation to a scheme prepared
under section 424D(1).
(vii) Where a sanctioned scheme provides for the transfer of any property or liability of the
sick industrial company in favour of any other company or person or where such scheme
provides for the transfer of any property or liability of any other company or person in
favour of the sick industrial company, then, by virtue of, and to the extent provided in, the
scheme, on and from the date of coming into operation of the sanctioned scheme or any
provision thereof, the property shall be transferred to, and vest in, and the liability shall
become the liability of, such other company or person or, as the case may be, the sick
industrial company.
(viii) The sanction accorded by the Tribunal shall be conclusive evidence that all the
requirements of this scheme relating to the reconstruction or amalgamation, or any other
measure specified therein have been complied with and a copy of the sanctioned scheme
certified in writing by an officer of the Tribunal to be a true copy thereof, shall, in all legal
proceedings (whether in appeal or otherwise), be admitted as evidence.
(ix) A copy of the sanctioned scheme shall be filed with the Registrar within the prescribed
time by the company in respect of which such scheme relates.
(x) On and from the date of the coming into operation of the sanctioned scheme or any
provision thereof, the scheme or such provision shall be binding on the sick industrial
company and the transferee company or, as the case may be, the other company and
also on the shareholders, creditors and guarantors and employees of the said
companies.
(xi) The creditors of a sick industrial company may also prepare a scheme for revival or
rehabilitation of such sick industrial company and submit the same to the Tribunal for its
sanction: No scheme shall be submitted by the creditors to the Tribunal unless such
scheme has been approved by at least three-fourth in value of creditors of the sick
industrial company.
(xii) All the provisions relating to the preparation of scheme by the operating agency and
sanction of such scheme by the Tribunal shall, as far as may be, apply to the scheme
referred to in sub-section (11) of Section 424D.
(xiii) The scheme referred to in sub-section (11) if sanctioned by the Tribunal shall be binding
on all the creditors and on other concerned.
(xiv) If any difficulty arises in giving effect to the provisions of the sanctioned scheme, the
Tribunal may, on the recommendation of the operating agency or otherwise, by order, do
8.10 Corporate and Allied Laws

anything, not inconsistent with such provisions, which appears to it to be necessary or


expedient for the purpose of removing the difficulty.
(xv) The Tribunal may, if it deems necessary or expedient so to do, by order in writing, direct
any operating agency specified in the order to implement a sanctioned scheme with such
terms and conditions and in relation to the sick industrial company as may be specified in
the order.
(xvi) Where the whole of the undertaking of the sick industrial company is sold under a
sanctioned scheme, the Tribunal may distribute the sale proceeds to the parties entitled
thereto in accordance with the provisions of section 529A and other provisions of this
Act.
(xvii) The Tribunal may monitor periodically the implementation of the sanctioned scheme.

8.5 REHABILITATION BY GIVING FINANCIAL ASSISTANCE (SECTION 424E)


(1) Where the scheme relates to preventive, ameliorative, remedial and other measures with
respect to the sick industrial company, the scheme may provide for financial assistance
by way of loans, advances or guarantees or reliefs or concessions or sacrifices from the
Central Government, a State Government, any scheduled bank or other bank, a public
financial institution or State level institution or any institution or other authority (any
Government, bank, institution or other authority required by a scheme to provide for such
financial assistance being hereafter in this section referred to as the person required by
the scheme to provide financial assistance) to the sick industrial company.
(2) Every scheme shall be circulated to every person required by the scheme to provide
financial assistance for his consent within a period of sixty days from the date of such
circulation or within such further period, not exceeding sixty days, as may be allowed by
the Tribunal and if no consent is received within such period or further period, it shall be
deemed that consent has been given.
(3) Where in respect of any scheme the consent is given by every person required by the
scheme to provide financial assistance, the Tribunal may, as soon as may be, sanction
the scheme and on and from the date of such sanction the scheme shall be binding on all
concerned.
(4) On the sanction of the scheme, the financial institutions and the banks required to provide
financial assistance, shall designate by mutual agreement a financial institution and a
bank from amongst themselves which shall be responsible to disburse financial
assistance by way of loans or advances or guarantees or reliefs or concessions or
sacrifices agreed to be provided or granted under the scheme on behalf of all financial
institutions and banks concerned.
Revival and Rehabilitation of Sick Industrial Companies 8.11

(5) The financial institution and the bank designated shall forthwith proceed to release the
financial assistance to the sick industrial company in fulfilment of the requirement in this
regard.
(6) Where in respect of any scheme consent is not given by any person required by the
scheme to provide financial assistance, the Tribunal may adopt such other measures,
including the winding up of the sick industrial company, as it may deem fit.

8.6 ARRANGEMENT FOR CONTINUING OPERATIONS, ETC., DURING INQUIRY


(SECTION 424F)
(1) At any time before completion of the inquiry under section 424B, the sick industrial
company or the Central Government or the Reserve Bank of India or a State Government
or a public financial institution or a State level institution or a scheduled bank or any
other institution, bank or authority providing or intending to provide any financial
assistance by way of loans or advances or guarantees or reliefs, or concessions to such
industrial company may make an application to the Tribunal—
(a) agreeing to an arrangement for continuing the operations of the sick industrial
company; or
(b) suggesting a scheme for the financial reconstruction of the sick industrial company.
(2) The Tribunal may, within sixty days of the receipt of the application, pass such orders
thereon as it may deem fit.

8.7 WINDING UP OF SICK INDUSTRIAL COMPANY (SECTION 424G)


(1) Where the Tribunal after making inquiry under section 424B and after consideration of all
the relevant facts and circumstances and after giving an opportunity of being heard to all
concerned parties, is of the opinion that the sick industrial company is not likely to make
its net worth exceed the accumulated losses within a reasonable time while meeting all
its financial obligations and that the company as a result thereof is not likely to become
viable in future and that it is just and equitable that the company should be wound up, it
may record its findings and order winding up of the company.
(2) For the purpose of winding up of the sick industrial company, the Tribunal may appoint
any officer of the operating agency, if the operating agency gives its consent, as the
liquidator of such industrial company and the officer so appointed shall for the purpose of
the winding up of such sick industrial company, be deemed to be, and have all the
powers of, the official liquidator under this Act.
8.12 Corporate and Allied Laws

(3) The Tribunal may cause to be sold the assets of the sick industrial company in such
manner as it may deem fit and pass orders for distribution in accordance with the
provisions of section 529A, and other provisions of this Act.
(4) Without prejudice to the other provisions contained in the Companies Act, 1956 the
winding up of a company shall, as far as may be, concluded within one year from the
date of the order.
8.8 OPERATING AGENCY TO PREPARE COMPLETE INVENTORY, ETC. (SECTION
424H)
(1) For the proper discharge of the functions of the Tribunal under this Part, the
circumstances so require, the Tribunal may, through any operating agency, cause to be
prepared—
(a) with respect to a company a complete inventory of—
(i) all assets and liabilities of whatever nature;
(ii) all books of account, registers, maps, plans, records, documents of title or
ownership of property and all other documents of whatever nature relating thereto;
(b) a list of shareholders and a list of creditors showing separately in the list of creditors, the
secured creditors and unsecured creditors;
(c) a valuation report in respect of the shares and assets in order to arrive at the reserve
price for the sale of a part or whole of the industrial undertaking of the company or for
fixation of the lease rent or share exchange ratio;
(d) an estimate of reserve price, lease rent or share exchange ratio;
(e) proforma accounts, where no up-to-date audited accounts are available.

8.9 DIRECTION NOT TO DISPOSE OF ASSETS (SECTION 424I)


The Tribunal may, if it is of opinion, that any direction is necessary in the interest of the sick
industrial company or creditors or shareholders or in the public interest, by order, direct such
company not to dispose of, except with the prior approval of the Tribunal any of its assets
during the period of inquiry under section 424B or during the period of preparation or
consideration of the scheme under section 424C.
8.10 POWER OF TRIBUNAL TO CALL FOR PERIODIC INFORMATION (SECTION 424J)
On receipt of reference under section 424A, the Tribunal may call for any periodic information
from the company as to the steps taken by the company to make its net worth exceed the
accumulated losses or to make repayment of its debts referred to in that section, as the case
may be, and the company shall furnish such information.
Revival and Rehabilitation of Sick Industrial Companies 8.13

8.11 MISFEASANCE PROCEEDINGS SECTION (424K)


(1) If, in the course of scrutiny or implementation of any scheme or proposal, it appears
to the Tribunal that any person who has taken part in the promotion, formation or management
of the sick industrial company or its undertaking, including any past or present director,
manager or officer or employee of the sick industrial company—
(a) has misapplied or retained, or become liable or accountable for, any money or
property of the sick industrial company; or
(b) has been guilty of any misfeasance, malfeasance or non-feasance or breach of trust
in relation to the sick industrial company,
the Tribunal may, by order, direct him to repay or restore the money or property or any part
thereof, with or without interest, as it thinks just, or to contribute such sum to the assets of the
sick industrial company or the other person, entitled thereto by way of compensation in
respect of the misapplication, retainer, misfeasance or breach of trust as the Tribunal thinks
just, and also report the matter to the Central Government for any other action which that
Government may deem fit.
(2) If the Tribunal is satisfied on the basis of the information and evidence in its
possession with respect to any person who is or was a director or an officer or other employee
of the sick industrial company, that such person by himself or along with others had diverted
the funds or other property of such company for any purpose other than a bona fide purpose
of the company or had managed the affairs of the company in a manner highly detrimental to
the interests of the company, the Tribunal shall by order, direct the public financial institutions,
scheduled banks and State level institutions not to provide, during a period of ten years from
the date of the order, any financial assistance to such person or any firm of which such person
is a partner or any company or other body corporate of which such person is a director (by
whatever name called).
(3) No order shall be made by the Tribunal against any person unless such person has
been given an opportunity for making his submissions.
(4) The provisions of Section 424K shall apply notwithstanding that the matter is one for
which the person may be criminally liable.

8.12 PENALTY FOR CERTAIN OFFENCES (SECTION 424L)


(1) Whoever violates provisions of this Part or any scheme, or any order, of the Tribunal
or the Appellate Tribunal or makes a false statement or gives false evidence to the Tribunal or
the Appellate Tribunal and attempts to tamper the records of reference or appeal filed under
this Act, shall be punishable with simple imprisonment for a term which may extend to three
8.14 Corporate and Allied Laws

years or shall be liable to fine not exceeding ten lakh rupees.


(2) No court shall take cognizance of any offence except on a complaint in writing of an
officer of the Tribunal or the Appellate Tribunal or any officer of the Central Government
authorised by it or any officer of an operating agency as may be authorised in this behalf by
the Tribunal or the Appellate Tribunal as the case may be.
9
(I) CORPORATE WINDING UP AND DISSOLUTION

9.0 INTRODUCTION
Clarification on Companies (Second Amendment) Act, 2002
[Notification issued by Ministry of Finance and Company Affairs (Department of Company
Affairs) vide F. No. 1/1/2003-CL.V dated 9.9.2003].
The Companies (Second Amendment) Act, 2002 (11 of 2003) received the assent of the
President of India on 13.1.2003. Government has decided to bring into force the
provisions of section 2 and 6 of the Companies (Second Amendment) Act, 2002 (11 of
2003) with effect from 1.9.2003. Notification has been published in the Official Gazette
dated 31 st March, 2003 as S.O.344 (E). This has been notified to enable the Government
to initiate necessary steps to establish National Company Law Tribunal and make it
operational.
For the sake of clarity it is stated that this Notification bringing into effect section 6 of the
Companies (Second Amendment) Act, 2002 (11 of 2003) will only set in motion all
preliminary steps required for establishment of National Company Law Tribunal. Upon
establishment of the same a separate Notification regarding constitution of NCLT will be
issued. Till such time, jurisdiction of Company Law Board will continue to remain
unchanged.”
We bring to the attention of students that though the Companies (Second Amendment)
Act, 2002 has been passed by the Parliament, only a few provisions (Section 2 and 6)
have been notified so far. In other words, despite, the Sick Industrial (Special Provisions)
Act, 1985 [SICA] has been repealed, all the provisions of the said Amendment Act, 2002
have not come into force. The reason being though the Government has constituted the
National Company Law Tribunal (NCLT) which shall deal with winding-up and
rehabilitation of sick companies it has not yet become operational.
In view of the above situation, the provisions relating to winding-up of companies as
contained in the legislation prior to the amendment are still having relevance and in view
of the fact that entire provisions of the Companies (Second Amendment) Act, 2002 have
9.2 Corporate and Allied Laws

not come into force. Yet the new law has been incorporated in this study material to the
extent possible.

9.1 DISSOLUTION OF COMPANY


9.1.1 How dissolution is brought about: A company, being a body corporate, continues in
existence until it is dissolved according to law. Dissolution can be brought about in the
following ways.
a. By removal of the company’s name from the register by the Registrar (without
winding-up order) (Section 560): A defunct company is a company which has not been
legally dissolved, and the name of which continues on the Register of Companies
maintained in the Registrar’s office.
Where the Registrar has a reasonable ground to believe that a company is not carrying
on business or is not in operation he must send to the company a letter through post
enquiring if it is carrying on business or is in operation. If no reply is received by him
within one month, the Registrar, within 14 days after the expiry of the period of one
month, must send to the company a registered letter referring to the first letter and state
that no answer thereto has been received and further stating that if no answer is received
to the second letter within one month of the date thereof, a notice will be published in the
Official Gazette with a view to striking the companies name off the register. If the
Registrar either gets a reply to the effect that it is not carrying on business or is not in
operation, or does not within one month, after the second letter, receive any reply, he
may publish in the Official Gazette and send to the company by registered post a notice
that at the expiry of a period of three months from the date of the notice, the name of the
company will, unless cause is shown to the contrary, be struck off the Register and the
company will be dissolved.
If the Registrar has reason to believe either that no liquidator is acting or that the affairs
of the company have been completely wound up, and any returns required to be made by
the liquidator have not been made for consecutive six months, the Registrar must publish
in the Official Gazette and send to the company a similar notice. When the time stipulated
in such notice expires, the Registrar may, unless cause to the contrary is previously
shown, strike its name off the Register and publish notice thereof in the Official Gazette,
whereupon the company shall stand dissolved.
But the liability (if any) of every director, manager or other officer who was exercising and
power of management and of every member of the company, shall continue, This liability
may be enforced as if the company had not been dissolved. Also, the aforesaid
provisions will not affect the power of the Tribunal to wind up a company the name of
which has been struck off the register.
b. By order of the Tribunal or the order of the Central Government under Section 396:
A company whose undertaking is being transferred to another company under a scheme
in accordance with Section 394 may be dissolved by an order of the Tribunal [Section 394
(1) (iv)].
Corporate Winding-up and Dissolution 9.3

The dissolution of existing two or more companies may take place when the Central
Government, by virtue of Section 396, orders the amalgamation of the said existing
companies in to a new single company in the public interest.
c. By winding- up : This method is by far the most common one and is followed when for
any reason other than those mentioned above, the company’s existence is not desired or
cought to be terminated e.g., because the object for which the company had been formed
has been accomplished, or because the company is insolvent.
d. Effect of dissolution: “The dissolution puts an end to the existence of the company.
Unless and until it has been set aside, it prevents any proceeding being taken against
promoters, directors, or officers of the company to recover money or property due or
belonging to the company, or to prove a debt due from the company. Where, the
company is dissolved, the statutory duty of the liquidator towards the creditors and
contributories is gone; but if he has committed a breach of his duty to any creditor by
distributing the assets without complying with the requirements of the Act, he is liable to
damages to the creditor”. (Halsbery’s Laws of England, 3rd Edn. Vol. VI, Page, 370);
Kanhaiya Lal Bhargava vs. Official Liquidator (1965) 35 Comp. Cas. 340)
e. Revival of company after dissolution: Where a company has been struck off the
register, the company, or any member or creditor who feels aggrieved, may, within 20
years from the gazetting of the notice, apply to the Tribunal to have the company restored
to the register. If the Tribunal is satisfied that the company was carrying on business or
was in operation when struck off or that it is otherwise just that it be restored to the
register, it may make an order accordingly. When a certified company of this order is
delivered to the Registrar for registration, the company would be deemed to have
continued in existence as if its name had not been struck off.
A letter or notice referred to above may be addressed to the company at its registered
office. If there is no such office, it may be addressed to the company to the care of some
director or other officer of the company. If there is no such director or officer whose name
and address is known to the Registrar, it may be sent to each of the persons who
subscribed to the memorandum at the address mentioned in the memorandum [Section
560].
f. Revival of defunct company under Section 560 and dissolved company under
Section 559 :
Section 559 Section 560
(i) Application for revival must be
presented by the liquidator or other
person who appears to the Tribunal
to be interested.
(ii) Limitation period for application is 2
years of the date of the dissolution.
9.4 Corporate and Allied Laws

(iii) Acts done after dissolution and


before revival are not validated by
order of revival.
9.1.2 Distinction between winding-up and dissolution: These two situations differ from
each other in following respects:
(i) Winding- up precedes dissolution. In the former case, the company still remains in
existence, while the latter implies that the company is not extant any more (Employer’s
Liabilities Assurance Corporation vs. Sedwitck........ Co., 1927 A.G.95).
(ii) Winding-up denotes and involves the liquidator’s acts of realising and collecting the
assets of the company, satisfying its debts and obligations, distributing its capital and
surplus assets among the members of the company. But dissolution comes after the
liquidator has done all this in the winding-up; ordinarily it implies that the company’s
affairs have been completely wound-up and that the company is no longer in existence
[Kanhaiya Lal Bhargava’s, Case / (1965) /35 Comp. Cas. 340].
(iii) The Liquidator, in the case of a winding- up, is the representative of the company on
behalf of which he in appointed, but on dissolution he cannot nay more represent a
person not in existence. In the first case any creditor can prove a debt due to him from
the company, while it is not possible to do so after dissolution (Kanhaiya Lal’s Case
Supra).
9.1.3 Implications of Winding-up: Winding- up more popularly known as liquidation of a
company, relate to the proceedings by which (a) all its affairs are wound up, (b) its rights and
liabilities are discerned, and (c) the claims of its creditors are settled either fully or to such an
extent as may be warranted by the assets of the company. Having met all the obligations of
the company out of the assets realised, the surplus assets of the company, if there be any, are
distributed among its members in proportion to their rights laid down by the articles of
association. On this being done and on compliance with certain other statutory requirements,
the company is said to have been dissolved.
The term ‘winding-up’ should not be construed as synonymous with ‘bankruptcy’. In the matter
of winding-up, the general rule is that a company may be wound if its members so desire or if
it cannot pay its debts or if its extinction is considered desirable on any account. It thus follows
that a company may be wound up even if it is otherwise solvent, for instance, winding- up for
purposes of reconstruction.
Where a solvent company is being wound up, all debts payable on a contingency and claims
against the company, present or future, certain or contingent, ascertained or sounding only in,
damages, are admissible to proof against the company, a just estimate being made, as far as
possible, of the value of such debts or claims as may be subject to any contingency, or may
sound only in damages, or for some other reason may not bear a certain value [Section
)(528)]. As regards the right of the creditors of the company which is being wound up for its
inability to pay its debts, the same rules prevail as in the case of insolvency law in respect of
debts provable, the valuation of annuities and future and contingent liabilities and the
respective rights of secured and unsecured creditors (Section 529).
Corporate Winding-up and Dissolution 9.5

Secured creditors may rely on the security and ignore the liquidation altogether, or value their
security and prove for the balance of their debt, or give up their security and prove for the
whole amount, Unsecured creditors are paid in the order prescribed by Section 530.
Preferential creditors are paid first; liability for dividends is satisfied only if the claims of
outsiders are fully met.
So far as the employees are concerned, a winding- up order by a Tribunal operates as a
notice of discharge to the employees and officers of the company except when the business of
the company is continued [Section 445 (3)]. A voluntary winding- up which involves a
discontinuation of the business also operates as a notice of discharge, and may also raise a
claim for damage where there is an agreement for employment for a fixed time (Reigate vs.
Union Manufacturing Co. (1918) 1KB).
9.1.4 Modes of winding-up : Part VII of the Act deals with the winding-up of a company.
Under Section 425, a company may be winding-up either: (i) by a Tribunal (compulsory
winding- up) or (ii) voluntarily. Whichever method is adopted, a liquidator or liquidators must
be appointed to administer the property of the company, and they first apply the assets of the
company towards the payment of debts which have statutory priority in a winding up, next to
the payment of creditors in their order of precedence and then distribute the surplus, if any,
among the shareholders according to their rights inter se.
In respect of companies with a paid- up capital of less than Rs. I lakh, winding-up jurisdiction
can be conferred on the Tribunals, In other cases, only the Tribunal has jurisdiction in winding-
up matters (Section 10)
9.1.5 Contributories: In a winding up, the term ‘’contributory” means a past or present
member. Strictly, it means every person liable to contribute to the assets of a company in the
event of its being wound up, and includes holders of shares which are fully paid; for the
purposes of all proceedings for determining, and all proceedings prior to the final
determination of the persons who are to be deemed contributories; the term ‘contributory’
includes any person alleged to be contributory (Section 428).
If a member is once placed on the list of contributories, he is liable to the extent of original
shares that remain unpaid, unless he proves that he should not have been placed on the list.
For instance, some applicants consented to become shareholders of a company on the
condition that their suggestions should be included in the memorandum and articles of
association. Their suggestions, however, were not carried out by the promoters but the
applicants signed usual applications for shares which were allotted to them and thereby
became shareholders of the company. It was held that it was not open to them to object
subsequently to their being shareholders of the company on the ground that the condition had
not been fulfilled (East Bengal Sugar Mills Ltd., In re. (1941) 11 Comp. Cas 169).
Liability of contributories as present and past members (Section 426): When a company
goes into liquidation, every member, whether past or present, has to contribute to the assets
of the company. However, a past member will not be required to contribute in the following
circumstances:
9.6 Corporate and Allied Laws

(a) If he had ceased to be a member for a period of one year or upwards before the
commencement of winding up;
(b) If the debt or liability of the company was contracted or incurred after he ceased to be a
member;
(c) If the present members are able to satisfy the contributions required to be made by them
under the Act.
There is, however, a limitation on the amount the members may be required to contribute. In
the case of a company limited by shares, any past or present member is not required to
contribute in excess of the amount, if any, unpaid on the shares in respect of which he is liable
as such member.
In the case of a company limited by guarantee, a past or present member is not required to
contribute an amount which is in excess of the amount undertaken to be contributed by him to
the assets of the company in the event of its being wound up. In the case of a company limited
by guarantee but having a share capital, every member (present or past) of the company is
liable, in addition to the guaranteed amount, to contribute to the extent of any sum unpaid on
any shares held by him as if the company were a company limited by shares.
When any provisions are contained in a policy of insurance or other contract whereby the
liability of individual members on the policy or contract is restricted whereby the funds of the
company and alone made payable, the liability of the contributory will be subject to such a
provision. Dividends, profits or other sums due to a past or present member, must not be
treated as debts due from the company payable to that member for setting off the rights of
members as against creditors claiming otherwise than in the character of past or present
members. But such sums shall be taken in to account for finally adjusting the rights of the
contributories per se [Section 426(f) and (g)]. According to Section 426 (g), any debt due to a
past member in respect of unclaimed dividends cannot be admitted to rank in competition with
the debts due to ordinary creditors [Re. Consolidated Goldfields of New Zealand Ltd. (1953)
Ch. 689.]
The liability of a member to be included in the list of contributories is not ex contraactu but ex
lege. This is borne out by Section 426. It provides that the liability of a contributory shall create
a debt accruing due from him at the time when his liability commenced, but payable at the time
specified in the calls made on him by liquidator. In other words, the liability of a contributory
though commencing at the date when he entered into the contract with the company under
which he became a member, is only contingent upon the company being wound up, in as
much as it is, until a call is made, nothing more than a mere liability to contribute, if necessary,
to the assets of the company for payment of the debts due to its creditors and expenses of the
winding up. Thus, the liability of a contributory arises ex lege and not ex contractu. The effect
of this provision is to give to the liquidator a new cause of action which a company itself might
not have. For instance, if the claim of a company for the realisation of any call from a member
is barred by limitation, such member becomes liable to pay all that has remained unpaid on his
shares including the unpaid calls when the company goes into liquidation [In re East Bengal
Sugar Mills Ltd. Supra]. This statutory liability of the contributory is a new liability which arises
Corporate Winding-up and Dissolution 9.7

after the winding-up of a company has started. Therefore it is no answer to a liquidator’s claim
against any person whose name appears on the register of members that there was an
agreement with the directors to exclude this statutory liability [Hansraj Gupta vs. Asthana
(1932) P.C. 240].
A director or manager-whether past or present- whose liability under the provisions of the Act
is unlimited shall, apart from his liability to contribute as an ordinary member, be liable to
make a further contribution as if he were a member of an unlimited company. No further
contribution is required of him.
(a) if he has ceased to hold office for a year or more before the commencement of the
winding-up;
(b) if the debt was one which the company had contracted after he had ceased to hold office;
(c) subject to the articles, the director or manager shall not be liable to contribute so as to
satisfy his debt or liability of the company and the costs, charges and expenses of the
winding- up unless the Tribunal deems it necessary (Section 427).
Contributories in case of death or insolvency of member or winding- up of a body corporate
which is a member : In the case of death of a member, his legal representative will be liable as
contributories whether the death took place before or after his name had been placed on the
list of contributories. The assignees of insolvent members are liable as contributories subject,
however, to their power of disclaimer. When a body corporate which is a contributory is in the
process of a winding-up, it will be represented by its liquidator in regard to its own liability, and
the liquidator shall be a contributory subject, however, to his power of disclaimer (Sections
430, 431 and 432).
9.1.6 Official Liquidator
a. Appointment of Official Liquidator: In order that the debts and obligations of a
company in liquidation may be satisfied, and the surplus assets distributed amongst the
members according to their right to share in such surplus assets, there must be some
person to discharge these duties. The person who does all these is called the liquidator.
For the purpose of the Companies Act and in so far as it relates to the winding- up of a
company by the Tribunal, there must be attached to each Tribunal an Official Liquidator.
He is appointed by the Central Government and is a whole time officer, unless the Central
Government thinks that there will not be sufficient word to justify a full-time appointment
in which case a part- time officer may be appointed. The Official Receiver attached to a
District Tribunal for insolvency purposes, or if there is no such Official Receiver then such
person as the Central Government may, by notification in the Official Gazette, appoint for
the purpose shall be the Official Liquidator attached to the District Tribunal [Section 448
(1). Also one or more Deputy or Assistant Official Liquidators may be appointed by the
Central Government so as to assist the Official Liquidator in discharging his function
[Section 448 (1-A)]. On a winding- up order being made in respect of a company, the
Official Liquidator ex-officio shall become the liquidator of the company [Section 449].
9.8 Corporate and Allied Laws

The legal position of an Official Liquidator is that he is pubic servant and an officer of the
Tribunal. Such a position requires him to be honest and impartial and to act in the
interests of all concerned [Ripon Press vs. Cheti 55 Mad 180]. He has such powers as
are prescribed by Section 457. Section 462 requires him to render account to the
Tribunal. In the case of government company the liquidator shall forward a copy to the
Central Government if that Government is a member or to the Central Government and
State Government if both are members, of the Government company. He is not ‘trustee’,
in the sense of the term; although he is sometimes described as such [ex-parte Watkin
1857. I Dh. E. 130]. He stands in fiduciary relationship with the company he is appointed
for [Black and Co., 1872, 8 Ch. 254]. He is debarred from making any secret profit. If he
abuses his power and betrays his position, he shall be liable to make good any secret
profits that he may have made as well as be liable to be removed by the Tribunal. Thus,
he is a trustee in the sense that he must act in the interest of the company, the creditors
and the contributories. He should not act in his own interest [Silk Stone & Haigh Moor Co.
1900, 1 Ch. 167].
b. Appointment of Provisional Liquidator : After a winding-up petition has been
presented, but before a winding-up order has been issued, the Tribunal may appoint the
Official Liquidator as the provisional liquidator. But prior to such an appointment being
made, the Tribunal is bound to give notice to the company and also a reasonable
opportunity to make its representation. The Tribunal may, however, raise this notice for
special reasons which must be recorded in writing. The provisional liquidator will be
vested with powers of liquidator, unless they are limited or restricted to any extent by the
appointing Tribunal. On winding-up order having been made, the Official Liquidator
ceases to be provisional liquidator and becomes the liquidator [Section 450].
Generally, a provisional liquidator will not be appointed unless a strong case is made out
by showing the necessity for such an appointment and unless it is proved that the
property of the company needs be taken possession of immediately [In re-Dry Docks
Corporation of London, 1888 39 Ch. D. 309; East Punjab Pictures vs. Jhabar Mal 1940
East Punjab 139]. His appointment is temporary and continues till the appointment of the
Official Liquidator. The reason for his temporary appointment is that there must be some
persons to take proper custody of the company’s property so that it debts and obligations
are met with equitably and in accordance with the provisions of the Act and fraudulent
preference is prevented (In re-Dry Docks Corporation, supra]. As against an order of the
Tribunal by which a provisional liquidator is either appointed or not, an application for
permission to move the Supreme Tribunal cannot lie, as this order, being only an
interlocutory order, is not a final order [Jhabar Mal, vs. The Punjab Pictures Ltd., 1949, 99
Comp. Cas. 172].
A liquidator may be removed and replaced by another, if the Tribunal is satisfied that it is
for the general advantage of those interested in the assets of the company [Re Adom
Eyton Ltd. (1887) 36 Ch. D. 209].
c. Powers of Liquidator : A liquidator has the following powers which he must exercise
with the sanction of the Tribunal;
Corporate Winding-up and Dissolution 9.9

(i) to institute or defend any suit, prosecution or legal proceeding, civil or criminal, in the
name and on behalf of the company
(ii) to carry on the business of the company, so far as may be necessary for its beneficial
winding-up,
(iii) to sell movable and immovable property and actionable claims of the company by public
auction or private contract in whole or in parcels,
(iii) (a) to sell whole of the undertaking of the company as a going concern
(iv) to raise any money required, on the security of the assets of the company
(v) to do such other things as may be necessary for the winding -up of a company and the
distribution of its assets [Section 457 (1)].
The Tribunal may order that the liquidator can exercise the above powers without the sanction
or intervention of the Tribunal. However, in such cases, the liquidator, in exercising the
aforementioned powers, will be subject to the control of the Tribunal (Section 458).
The following is a list of powers which he can exercise without the consent of the Tribunal
(i) do all acts and to execute deeds, receipt and other documents for and on behalf of the
company and use for this purpose the company’s seal;
(ii) to inspect the records and returns of the company on the files of the Registrar without
payment of any fee;
(iii) to prove rank and claim of the insolvency of any contributory for any balance against his
estate and to receive dividends in his insolvency, in respect of that balance, as a
separate debt from the insolvent, and rateably with the other separate creditors;
(iv) to draw, accept, make and endorse bills of exchange, hundi or promissory note in the
name and on behalf of the company as if these have been drawn, accepted, made or
endorsed by or on behalf of the company in the course of its business;
(v) to take out in his official name, letters of administration to any deceased contributory and
do any other acts needed for obtaining payment of money due from the contributory or his
estate and
(vi) to appoint an agent to do any business which he himself is unable to do [Section 457 (2)].
All the above-mentioned powers, exercisable by the liquidator are subject to the control of the
Tribunal. Any contributory or creditor may apply to the Tribunal in regard to the exercise of the
powers conferred on the liquidator [Section 457 (2)].
A liquidator in a voluntary winding-up, with the sanction of a special resolution in case of
member’s winding-up, and, or Tribunal or Committee of Inspection or (if there is no such
committee) of a meeting of the creditors in creditor’s voluntary winding-up, can exercise
powers specified under clauses (a) to (d) of Section 457 (1) [i.e., powers (i) to (iv)
aforementioned which are exercisable with the sanction of the Tribunal [Section 512 (1) (a)].
The exercise of these powers, however, will be subject to the control of the Tribunal [Section
512 (2)]. The liquidator may
9.10 Corporate and Allied Laws

(i) without the sanction referred to in Section 512 (1) (a) exercise any of the other powers
given by the Act to the liquidator in a winding-up by the Tribunal;
(ii) exercise the power of the Tribunal, under the Act, of settling a list of contributories which
shall be prima facie evidence of the liability of the person named therein to be
contributories
(iii) exercise the powers of the Tribunal of making calls:
(iv) call general meetings of the company to obtain the sanction of the company by ordinary
or special resolution as the case may require, or for any other purpose he may think fit
[Section 512 (1) (b) to (c)].
A liquidator may (a) with the sanction of the Tribunal when the Company is being wound up by
or subject to the supervision of the Tribunal and (b) with the sanction of a special resolution of
the company in the case of the voluntary winding-up;
(i) pay any class of creditors in full;
(ii) make any compromise or arrangement with creditors or persons claiming to be creditors
or having or alleging themselves to have any claim, present or future, certain or
contingent; ascertained or sounding only in damages against the company or whereby
the company may be rendered liable or
(iii) compromise any call or liability to call, debt and liability capable of resulting in a debt, and
all claims, present or future, certain or contingent, subsisting or alleged to subsist
between the company and a contributory or alleged contributory or other debtor or person
apprehending liability to the company, and all questions in any way concerning or
affecting the assets or liabilities or the winding-up on such terms and conditions as may
be agreed, and take any security for the discharge of any such call, debts, liability or
claim and give a complete discharge in respect thereof.
In the case of voluntary winding-up, the powers aforementioned exercisable by the liquidator
are subject to the control of the Tribunal. Any creditor or contributory may apply to the Tribunal
with respect to the exercise or proposed exercise of any such power [Section 546 (2) and (3)].
The Supreme Tribunal may make rules under Section 643 as regards the manner in which the
liquidator should exercise power under clauses (ii) and (iii) of Section 546 (1) without the
sanction of the Tribunal.
d. Duties of Liquidators: The following are the main duties of a liquidator or provisional
liquidator, as the case may be, as contemplated by the Act.
(1) To take into custody or under his control, all the property, effects and actionable claims to
which the company is or appears to be entitled (Section 456). For this purpose, the
liquidator, or provisional liquidator as the case may be, may in writing request the Chief
Presidency Magistrate or the District Magistrate within whose jurisdiction such property,
effect or actionable claims or any books of account or other documents of the company
may be found to take possession thereof. Thereupon, the Chief Presidency Magistrate or
the District Magistrate may after having given to any party such notice as he may think fit,
take possession of them and deliver the same to the liquidator or the provisional
liquidator [Section 456 (1A)].
Corporate Winding-up and Dissolution 9.11

For securing compliance with the provisions of Section 456 (1A), the Magistrate
aforementioned may take or cause to be taken such steps and use or cause to be used
such force as he considers necessary [Section 456 (1B). All the property and the effects
of the company shall be deemed to be in the custody of the Tribunal as from the date of
the winding-up [Section 456 (2)].
(2) To submit a preliminary report to the Tribunal giving the particulars mentioned in Section
455.
(3) To keep, in the manner prescribed, proper books in which he shall cause entries or
minutes to be made of proceedings at meeting and of such matters as may be prescribed
(Section 461). Rule 286 of the Companies (Tribunal) Rules 1956 prescribes that the
liquidator should maintain different books for various purposes. The forms of the books
have also been prescribed. In addition the rule requires that registers should be
maintained to keep a record of several routine matters, e.g., receipt and despatch of
letters, remittances received, etc. Where the liquidator finds that the books of account as
have been maintained by the company are incomplete, it is obligatory for him to have the
same completed and brought up-to-date.
(4) To summon meeting of the creditors and contributories in the manner hereinafter stated
under the head “Committee of Inspection” [Section 464].
(5) To pay the moneys, received by him as liquidator, or any company into the Public
Account of India in the Reserve Bank of India (Section 552) and not into his private bank
account (Section 554). But the voluntary liquidator is to pay the moneys into a scheduled
bank to the credit of “Liquidation Account of X & Co. Ltd./X & Co. Private Ltd/X & Co.”
(Section 553).
(6) To pay forthwith dividends payable to creditors, which had remained unpaid for 6 months
after the date on which they were declared and assets refundable to any contributory,
which have remained undistributed for six months after the date on which they become
refundable into the Public Account of India Companies Liquidation Account in the
Reserve Bank of India in a separate account called “Company’s Liquidation Account”
[Section 555 (1)].
(7) To summon meetings at such times as the contributories, by resolution, direct, or
whenever requested to do so by not less than one-tenth in value of creditors or
contributories, as the case may be [Section 460 (3) (b)].
(8) To obey directions given by resolutions of creditors or contributories or by the Committee
of Inspection in the administration of the assets of the company and the distribution
thereof among its creditors [Section 460 (1)]. Note that any directions given by the
creditors or contributories at any general meeting shall in case of conflict, be deemed to
override any direction given by the committee of inspection [Section 460 (2)].
(9) To submit the accounts for inspection to Committee of Inspection [Section 465 (2)].
(10) To account for secret profit made by him.
(11) To be impartial between creditors, members, etc.
9.12 Corporate and Allied Laws

(12) To obey the directions of the Tribunal with regard to disposal of books of the company
(Section 550).
(13) To file periodical report with the Tribunal (Section 551).
(14) To notify on invoices that the company is in liquidation (Section 547)
(15) To duly observe all the requirements of the Act [Section 463 (1)].
(16) To participate in public examination of directors, etc. (Section 481).
(17) To forward dissolution order to Registrar within 30 days from the date thereof [Section
481 (2)].
e. Information as to pending liquidations: Section 551 (1) prescribes that when the
winding-up of a company is not concluded within one year after its commencement the
liquidator shall, unless exempted from so doing by the Central Government, within two
months of the expiry of such year and thereafter, until the winding-up is concluded, at
intervals of not more than one year or at such shorter interval, if any, as may be
prescribed, file a statement in Form No. 148 (Rule 311 of Companies (Tribunal) Rules).
The statement shall contain necessary particulars and be audited by a Chartered
Accountant. These particulars must be with respect to the proceedings in and position of
the liquidation. In the case of a winding-up being carried on by or under the supervision of
the Tribunal, the aforesaid statement is to be filed in the Tribunal but in the case of a
voluntary winding-up, it is to be filed with the Registrar. But an audit is not necessary in
case of winding-up by the Tribunal, where provisions of Section 462 apply.
Simultaneously with the filing of a copy of the statements of account in the Tribunal, a
copy shall be filed with a Registrar [Section 551 (2)]. In the case of a government
company, the copy of the Statement of account shall be filed with the Central
Government if that Government is a member, or to the State Government if both are
members of the Government Company. [551 (2A)]. Any person stating himself in writing
to be a creditor or contributory is entitled all reasonable times on payment of the
prescribed fee to inspect the foregoing statements of account and to receive a copy
thereof or an extract therefrom [Section 551 (3)].
f. Audit of Liquidator’s Accounts: As has been stated earlier, Section 462 (1) prescribes
that the liquidator shall, during his tenure of office, present to the Tribunal an account of
his receipts and payments, Rule 98 of the Companies (Tribunal) Rules requires the
Official Liquidator to file his accounts with the Tribunal twice a year, one made up to 31st
March and the second up to 30th September, within 3 months of the closing of the
accounts. The accounts should be drawn up in Form 144 of the Companies Tribunal
Rules.
Section 462 (3) prescribes that the Tribunal shall cause the accounts to be audited as it
thinks fit. In consonance there with, Rule 302 of the Companies Rules provides that the
accounts shall be audited by one or more Chartered Accountants appointed by the
Tribunal or, if the Tribunal so directs, by the Examiner of the Local Fund Accounts of the
State concerned. The audit shall be complete check of the accounts of the Official
Liquidator and of each of the companies in liquidation in his charge. Though the
Corporate Winding-up and Dissolution 9.13

certificate to be appended to this account has not been prescribed it has been mentioned
that the auditor shall check them with reference to books of account and give his
observations and comments on the accounts. He also must forward a certificate of audit
as well as a copy thereof to the Registrar and another copy to Official Liquidator (Rule
303). A copy of the accounts must be filed and kept by the Tribunal and the same be
open to inspection by any creditor, contributory or any person interested [Section 462
(4)]. In the case of a government company, the liquidator shall forward a copy to the
Central Government if that Government is a member of the Government company or to
any State Government if that Government is a member or to the Central Government and
State Government if both are members of the Government company. [462 (4A)] Section
462 (5) provides that the liquidator shall cause the account when audited, or summary
thereof to be printed and shall send a printed copy of the accounts or summary by post to
every creditor or to every contributory. But the Tribunal is empowered to dispense with
the compliance of this provision.
g. Control exercisable by Central Government over Liquidator: The Central
Government, according to the provisions contained in Section 463, is empowered to take
cognisance of the conduct of the liquidator of companies which are being wound-up by
the Tribunal. If, on the application of any creditor or contributory, it is found that a
liquidator is not faithfully performing the duties and fully observing the requirements
imposed on him by the Act, rules or otherwise the Central Government must enquire into
the matter and take such action as it may think expedient. Also, the Central Government
may at any time (a) require any liquidator to answer any enquiry in relation to any
winding-up in which he is engaged; or (b) direct a local investigation to be made into the
books and vouchers of the liquidator; or (c) apply to the Tribunal to have him examined
on oath concerning the winding-up.

9.2 WINDING-UP BY TRIBUNAL


9.2.1 Circumstances : Section 433 deals with the circumstances in which a company may be
wound up by the Tribunal. These are as follows:
(a) If the company has by a special resolution resolved that it shall be wound up by the
Tribunal;
(b) if the company defaults in delivering the statutory report to the Registrar or in holding the
statutory meeting. But instead of ordering such a company to be wound up, the Tribunal
may direct the report to be filed or the meeting to be held;
(c) if the company does not commence its business within a year from its incorporation or
suspends its business for a whole year. It should be noted that the power of the Tribunal
to wind up, when the company has not carried on business for a year, is discretionary and
it will not be exercised unless there are indications that the company has no intention to
start or to continue its business. However, the Tribunal would not grant an order against
the wishes of a majority of the contributories if the delay in commencing, or the
interruption of, the business is explained and if it is satisfied that business would be
9.14 Corporate and Allied Laws

commenced or resumed. [Murlidhar vs. Bengal Steam Co. Ltd., (1921) I.L.R. 47 Cal.
654];
(d) if the number of members is reduced below seven in the case of a public company or
below two in the case of a private company, the Tribunal would, however, permit the
company to wind up itself voluntarily. In this connection, it is necessary to recall that
according to the provisions contained in Section 45 of the Act a member is personally
liable for the debts of the company if the membership falls below the statutory minimum
and the business is carried on for more than six months after the number has been so
reduced and such a fact is within the knowledge of the shareholders;
(e) if the company is unable to pay its debts. Under Section 434, a company is deemed
unable to pay its debts in any of the following circumstances :
(i) If a creditor of the company, to whom the company by assignment or otherwise owes a
sum exceeding Rs.500, has demanded the same in writing, and the company has for 3
weeks thereafter neglected to pay the amount or to secure or compound for it to the
reasonable satisfaction of the creditor.
The above-mentioned letter of demand may be delivered by registered post or otherwise
at the registered office of the company. The meaning of the word “delivered in respect of
a registered letter cannot be limited to cases when the registered letter is accepted by the
addressee. A tender of such a letter, even if it is refused by the assessee, is a good
delivery. The refusal to take the delivery of the letter precludes the addressee from
pleading ignorance of its contents.
Prior to an order for winding-up of a company being made, it is required to be shown that
the debt due from the company is presently payable and that the title of the petitioner is
complete. A petition cannot be supported on the allegation that some debt is due, unless
it was debt for which a statutory demand was made. [In Re. Jambad Coal Syndicate Ltd.
I.L.R. 62 Col 294].
The demand under clause (i) above is called statutory notice and ly form. Notice served
at some place other than the registered office of the company will be invalid [Ankhtiarpur
Bihar Light Railway Co. Ltd. vs. Union of India [1954] 93 Cal. L.J. 271]. But if the
company has no registered office, then the notice of demand for the payment of the debt
may be given at the place where the company carries on business [British & Foreign
Apparatus Co., 1865), 12L.T. 368]. Where the debt is bona fide disputed, clause (i) does
not apply:
(ii) If execution or other process issued on a decree or order of a Tribunal in favour of the
creditor of the company is returned unsatisfied in whole or in part; or
(iii) If it is proved to the satisfaction of the Tribunal that the company is unable to pay its
debts.
A company may be wound up even when its assets are valuable, if they are locked up in
investments and the company is carried on at a loss. In considering whether a company is
able to pay its debts, the company’s contingent and prospective liabilities have to be taken
into account, and, therefore it may be unable to pay its debts, although it has paid its debts as
Corporate Winding-up and Dissolution 9.15

they become due, if its existing and probable assets will be insufficient to meet its prospective
liabilities.
To justify the application of clause (i) above, the company may be, in the words of Sir William
James, V.C. “commercially insolvent”. Insolvency may be proved easily by notice under clause
(i); under clause (ii), it is more difficult to prove to the satisfaction to the Tribunal. For instance
the fact that the liabilities of a company far exceed its assets does not ipso facto mean that the
company is unable to pay its debts and does not give rise to a ground for compulsory winding
up under Section 433. It is rather the “commercial insolvency” (i.e., the circumstances in which
the existing assets and liabilities” are such as to make the Tribunal feel satisfied that the
existing and probable assets would be insufficient to meet the existing liability”) which affords
an occasion for compulsory winding-up on the ground of inability to pay off its debts. A
particular company may have the capacity to meet the demands of its creditors; in that case, a
winding up order would be unjustified [Krishnaswamy vs. Stressed Concrete Construction
(Pvt) Ltd. AIR. 1964 Mad. 191].
In the Registrar of Companies, Punjab vs. Ajanta Lucky Scheme and Investment Co. Private
Ltd. and Others (1973), 43 Comp Cas. 314, the Registrar of Companies filed petition for the
winding-up of the respondent company under Section 433 (e) read with Section 439 (5) of the
Act on the ground that the company was unable to pay debts and that its liabilities exceeded
its assets. The two issues that emerged therefrom were as follows, viz. (a) whether the
company was unable to pay its debts and meet its liability; and (b) whether it was a proper
case for winding-up. Held: (a) That for determining the company’s ability or otherwise to pay
its debts, it was to be considered whether the company was able to meet its liability as and
when they accrued due. Section 434 of the Act prescribes the circumstances in which a
company was to be treated as unable to pay its debts. Admittedly, none of these
circumstances was present in the case in question and no complaint had even been received
by the company from its creditors as regards non-fulfilment of any of their claims against the
company. In a case where no debt had been due, a demand therefore could not be made. The
mere fact that certain liabilities might accrue due in future, which could exceed the existing
assets of the company, would not necessarily lead to the conclusion that the company would
be unable to meet its liabilities when they accrued due. The mere fact of the company’s
liabilities being in excess of its assets could not ipso facto be a ground for putting the
company into liquidation. The test would be that the company should be commercially solvent,
i.e., the company ought to be on a position to meet its liabilities as and when they arose: (b)
that there was no ground for winding-up, because it was shown that (i) the paid-up capital had
augmented, every year the business flourished, there were additions to list profit and the
subscribers’ claims on maturity had been met; and (ii) any creditor or contributory or even the
Reserve Bank had never lodged any complaint against the financial stability of the company.
(f) “just and equitable” rule: Where there is a petition of the Tribunal to wind up a company
on the ground that it is “just and equitable”, the Tribunal has power to make a winding-up
order in any case where the special circumstances are such that it appears just to make
such an order. Such orders have been made by the Tribunals in the following
circumstances.
9.16 Corporate and Allied Laws

(i) Where the substratum of the company has disappeared, e.g., where the main object of
the company was to acquire and work a mine or patent or concession which could not be
obtained or where the mine was worthless or the patent was invalid or the concession has
lapsed [Re, German Date Coffee Co. (1882) 20 Ch. D. 169].
A company will not be wound up because it has ceased to carry on one of several businesses
authorised by its memorandum unless, upon a fair construction of the memorandum, that
business is regarded as the main object of the company [Re. Amalgamated Syndicate (1897)
2 Ch. 600]. Similarly, a company which has amalgamated with another company cannot be
wound up on the ground that it has ceased to carry on business as a separate company.
Thus the substratum of a company is deemed to have disappeared or gone, if the main object
for which the company was formed has become impracticable, i.e., permanently impracticable.
“Usual tests for determining whether the substratum of the company has disappeared are
whether: (a) the subject-matter of the company is gone, or (b) the object for which it was
incorporated has substantially failed, or (c) it is impossible to carry on the business of the
company except at a loss, which means that there is no reasonable hope that the object of
trading at a profit can be attained or (d) the existing and probable assets are insufficient to
meet the existing liabilities” [In re Kaithal and General mills Co. Ltd., 1951,31, Comp. Cas.
461].
Where the substratum has gone, the Tribunal can wind-up the company, even though the
majority of shareholders oppose the winding-up order. But before the Tribunal can wind-up on
this account, it must be proved that the whole of the business of the company has become
impossible of being carried on. The question whether the substratum has gone or not would
depend not on the intention of the Board of Directors or of the shareholders, but would depend
upon, and should be decided by the Tribunal, on a true and accurate construction of the
memorandum of association and the actual facts of the case [Mohan Lal Mehta vs. Chunilal
Mehta (1962) 32 Comp. Cas. 970]. If there are two or more main objects and some are
frustrated and some are pursued, the company cannot be wound up. All the main objects must
be destroyed in order to justify winding-up [Kitson & Co. (1946) I.A.E.R. 435 (C.A.)]. It should
be noted that even if the substratum is gone, if the members do not ask for winding-up,
carrying on of the other objects of the memorandum will not be ultra vires.
(ii) Where there is a deadlock or a crisis in the management of a company, e.g., where the
two sole shareholders, who were also directors, were not on speaking term owing to
disagreement [Re, Yenidje Tobacco Co. 1916, 2 Ch. 426]; Where there is a deteriorating
state of management and control of business owing to sharp differences between the
members as reflected in their resolutions at their meetings [Vijayalakshmi Talkies vs.
Rao. A.I.R. 966 Andh.Pr.285]; where the mismanagement is such that there is no
practicability of remedying it [Rajamundry Electric Corporation vs. Rao, A.I.R. 1955 S.C.
213]. However, factions, quarrels; etc., among shareholders are not sufficient grounds
[S.S. Raj Kumar vs. Project Castings Private Ltd. (1968) I Comp. L.J. 41].
(iii) Where the company has been formed to carry on a fraudulent or an illegal business.
(iv) If the company is a “bubble”, i.e., if it never had any business to carry on [Re London &
Country Coal Co. 1867, 3 Eq. 355].
Corporate Winding-up and Dissolution 9.17

(v) Where the company is insolvent and is being carried on for the benefit of the debenture
holders [Re. Clandown Colliery Co. (1915), I Ch.369].
(vi) Where the petitioner was excluded from all participation in the business.
(vii) Where preponderance of voting power was permanently vested in a Board in which
minority shareholders had justifiable no confidence [Loch vs. John Blackwood Ltd. (1924)
A.C. 783].
Clause (f) of Section 433 should not be construed as ejusdem generis [i.e. of the same kind or
natural with the other clauses [a] to [c] of that Section. The ground need not at all be similar to
any of the other grounds mentioned in Sectioned in Section 433.
9.2.2 Alternative remedy to winding-up in cases of Oppression: Cases have arisen from
time to time where minority shareholders have found it difficult to resist oppression by the
majority. Section 397 provided that where the affairs of a company are being conducted in a
manner oppressive to some members the Company Law Board may, with a view to bringing to
an end the matters complained of make such order as it think fit to remedy the position, when
the winding-up of the company would unfairly prejudice the complaining members. A similar
relief can be applied for in the case of mismanagement, where the affairs of the company are
being conducted in a manner prejudicial to the interests of the company, or when a material
change in the management or control of the company or in its constitution is likely to prejudice
the interest of members of the company [Section 398].
9.2.3 Who may petition for winding-up? [Section 439]: The various persons who can make
an application for the winding-up a company through Tribunal are :
(1) the company;
(2) any creditor or creditors, including any contingent or prospective creditor or creditors;
(3) any contributory or contributories;
(4) all or any of the above parties, together or separately;
(5) the registrar; and
(6) any person authorised by the Central Government in a case falling under Section 234 of
the Act (i.e., when the Central government is satisfied that it is just and equitable that the
company should be wound up on the ground that the business of the company is being
conducted in a fraudulent or unlawful or oppressive manner or that the company was
formed for any fraudulent or unlawful purpose, etc.
A creditor has a right ex debito justitiae [i.e., a remedy which the applicant gets as a right] to a
winding- up order if he can prove that he claimed an undisputed debt and that the company
has failed to discharge it. Under Section 439 (8), a contingent or prospective creditor,
however, must obtain leave of the Tribunal, give security for costs and the Tribunal must be
satisfied that there is a prima facie case for winding- up of the company. The Central
Government or any State Government or Municipal or other local authority to whom any tax or
other public charge is due is also an entity comprised in the term creditor. It has been held in
[Hari Nagar Sugar Mills Co. Ltd. vs. M.W. Pradhan (1962), 2 Com. LJ. 17 S.C] that a receiver
of creditors, properties is also a creditor and as such he has a right to present a petition. He
9.18 Corporate and Allied Laws

is creditor by statutory assignment. A secured creditor, the holder of any debentures [including
debentured stock] whether or not trustees have been appointed in respect of such and other
like debentures and also the trustee for the debenture-holders are creditors and hence entitled
to present a petition for winding- up [Section 439 (2)].
A contributory can present a petition only when: (i) the number of members falls below 7 or
below 2 in the case of a public or private company respectively or (ii) he holds shares which
were originally allotted to him or has held shares for six out of the eighteen months prior to the
commencement of winding- up or the shares have devolved on him through the death of a
former holder [Section 439 (4)]. A holder of fully paid- up shares is also entitled to present a
petition. This right of his as a contributory cannot be excluded on the ground that the company
has no assets at all or that it may not have any surplus assets left for distribution among the
shareholders after the satisfaction of its liabilities [Section 439 (3)].
The Registrar may present a petition for winding -up only on the ground that default has been
made in delivering that statutory report to him or in holding the statutory meeting, or that the
company has not commenced its business within a year from its incorporation, or that from the
financial condition of the company as disclosed in its balance sheet or from an inspectors, S
report under Section 235 or 237, or the report of a special auditor appointed under Section
233 A it appears that the company is unable to pay its debts. But such a partition can be made
only with the previous approval of the Central Government [Section 439 (5)].
The Official Liquidator may also present a petition for winding- up by the Tribunal, where the
company is being wound up either voluntarily or subject to the supervision of the Tribunal. And
the Tribunal, before making a winding- up order on such petition, must be satisfied that in the
circumstances such a winding- up cannot be continued, due regard being had to the interest of
the creditors or contributories or both (Section 440).
9.2.4 Powers of Tribunal on hearing petition (Section 443): The winding- up petition and its
hearing are governed by Rules 95-123 of the Companies (Tribunal) Rules, 1959. Such a
petition is required to be made in Form No. 45, (General form of petition 46 (viz., petition by
creditors), or 47 (viz., petition by company), as the case may be, with such variations as the
circumstances may require, and shall be presented in duplicate. The Registrar shall note on
the petition the date of its presentation.
After the Tribunal hears the petition, it may (i) dismiss it with or without costs, (ii) adjourn the
hearing conditionally, or (iii) make an interim order, or (iv) make an order for winding- up of the
company. It must not refuse to make a winding -up order on the ground only that the
company’s assets have been mortgaged to an amount equal to or in excess of those assets,
or that the company has no assets.
If a petition for winding-up is presented on ‘’just and equitable” ground 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 winding-up instead of pursuing
that other remedy.
Where the petition is presented on the ground of default in delivering the statutory report or in
holding the statutory meeting, the Tribunal may direct that the report be delivered or the
Corporate Winding-up and Dissolution 9.19

meeting be held instead of making the winding-up order. The person considered responsible
for the default may be charged with the costs involved.
9.2.5 Date of commencement of winding-up by Tribunal (Section 441): Where, before the
presentation of a petition for the winding-up of a company by the Tribunal, a resolution has
been passed by the company for voluntary winding-up, the winding- up of the company shall
be deemed to have commenced at the time the resolution was passed. Unless the Tribunal,
on proof of fraud or mistake, thinks fit to direct otherwise, all proceedings taken in the
voluntary winding- up shall be deemed to have been validly taken. In any other case, the
winding- up of the company by the Tribunal is deemed to commence at the time of the
presentation of the petition for the winding-up.
This date is important for several reasons. Some of the immediate effects are that the Official
Liquidator becomes the liquidator of the company (Section 449). A statement as to the affairs
of the company has to be submitted to him and he has to report thereon to the Tribunal
(Section 454 and 455). The winding-up order constitutes a notice of discharge to the officers
and employees of the company except when the business of the company is continued
[Section 445 (3). The Tribunal has to communicate winding- up order forthwith to the Official
Liquidator and the Registrar (Section 444).
Within 30 days from the date of the making of a winding- up order, a certified copy of the order
must be filed with the Registrar by the petitioner and the company [Section 445 (1)]. In
computing this period of 30 days, the time required for obtaining a certified copy of the order is
to be excluded. Then the Registrar shall make a minute thereof of in his book relating to the
company and shall notify in the Official Gazette that a winding- up order has been made.
When the winding-up order has been made or the Official Liquidator has been appointed as
provisional liquidator no suit or other legal proceeding can be commenced or if pending at the
date of the order, shall be proceeded with against the company except by leave of the Tribunal
and subject to terms imposed by it [Section 445 (1)]. The expression : ‘’or other legal
proceeding”, in Section 446 does not mean a legal proceeding analogous to a suit (Shaikh
Mansoor vs. Government A.I.R. 1952 T.C. 14). An award under the Industrial Disputes Act is
not a legal proceeding (Price vs. Chandrashekharan A.I.R. 1951 Mad 987). Leave of Tribunal
will be granted where a shareholder applies for rescission or the suit is for specific
performance.
A regards the ‘Leave of the Tribunal’ appearing in Section 446 (1) the Supreme Tribunal
decision is that the Tribunal has the jurisdiction to grant leave to proceed with a suit or other
proceedings against a company in liquidation, even if such leave was not obtained for the
commencement of the suit or proceeding. ‘’ The proceedings may at best be regarded as
instituted on the date on which the leave was obtained from the Tribunal” [Hansidhar
Shankarlal vs. Mohammed Ibrahim (1971) Comp. Cas. 21]. But the Tribunal does not grant
this leave as a matter of course. The facts and circumstances of each case have to be probed
into by the Tribunal. The discretion of the Tribunal must be exercised judicially but not
capriciously or arbitrarily. Usually, leave is granted where outsiders get linked up with some
dispute with the company and the Tribunal thinks it fit that the dispute should be settled in an
action by the ordinary Civil Tribunal. It has been held that against an order refusing leave to
9.20 Corporate and Allied Laws

institute a suit, an appeal lies under Section 483 (Balakrishan vs. Indian Association Chemical
Industries Ltd. A.I.R. (1959) Bom. 41
Suppose, RC, a labourer of GD & Co. Ltd. which is in liquidation, prays for permission of the
Tribunal to implead the Official Liquidators as the party respondent in a claim petition made
before the Labour Tribunal subsequent to the winding- up order. Should the leave be granted
in this case? It has been held [R. Chidambaranathan vs. Gannon Dunkerly& Co. (Madras) Ltd.
(1973) 43, Comp. Cas. 500] that the prayer for leave under Section 446 (1) was misconceived.
In the event of such leave being granted, a flood gate of litigation would be opened before the
Laboru Tribunal and every labourer would be filing petitions and drawing the Official Liquidator
to the Labour Tribunals for defending the case of the company. The purpose and the intention
of the Act was that all such claims against the company which has been wound up would have
to be filed before the Official Liquidator who was empowered to decide such claims. The
petition was,. therefore, dismissed. It has, however, been held that RC could withdraw the
proceedings before the labour Tribunal and file the same before the Official Liquidator for
appropriate reliefs.
It has been held that the following proceedings are not affected by [Section 446]: (a) a private
sale autside the Tribunal by public auction by a mortgagees [Ranganathan vs. Govt. or
Madras 1955, S.C. 604 ;]. (b) a defendants plea of set- off or counted claim in defence
[Andhra paper Mills Co. Ltd. vs. Anand Bros. (1951) I.M.L.T. 340]: (c) proceeding by persons
out of jurisdiction on a foreign country [Re. Voclain (Foreign) Ltd. (1932) 2, Ch. 196]; (d) a
claim petition by a third party where a company in winding-up has attached the property of a
judgement debtor [Seiva Lyer vs. Mathura Mercantile bank (1962) 32, Comp Cas. 47]
It may be noted that the proceedings for assessing a company to income tax under the Income
tax Act are not legal proceedings and hence are not affected by Section 446. Until the I.T.O.
makes an assessment order, he is not a creditor, and as such can not prove his claim in the
winding-up [Tilk Ram and Sons (Private) Ltd. vs. Commissioner of Income- tax (1964) 4
Comp. Cas. 151]. However, it has been held in [Rele vs. Deshpande, (1967) Comp, L.J. 210]
that the re-assessment proceedings by the Income-tax authorities cannot be commenced or
continued without the leave of the Tribunal.
It may further be noted that if a secured creditor realises his security without intervention of
the Tribunal, he will be outside the jurisdiction of the Tribunal in the winding up. But where the
secured creditor invokes the aid of the Tribunal and takes any legal proceeding against the
company within the meaning of Section 446, it will be necessary for him to seek leave of the
Tribunal [Ranganathan vs. Government of Madras, Supra].
In the winding-up, the Tribunal shall have the jurisdiction to entertain or dispose of; (i) any suit
or proceeding by or against the company; (ii) any claim made by or against the company
including claims by or against any of its branches in India; (iii) any application made under
Sections 391 by or in respect of the company; (iv) any question of priorities or any other
question of law or fact which may relate to or arise in the course of the winding-up of the
company [Section 446 (2)]. Any such suit or proceeding pending in any other Tribunal may be
transferred to or disposed of by the Tribunal in which the winding-up proceedings are taken
[Section 446 (3)]. The provisions contained in sub-section (1) or (3) as aforementioned, shall
Corporate Winding-up and Dissolution 9.21

not be applicable to any proceeding in appeal either before the Supreme Tribunal or the
Tribunal [Section 446 (4)].
Section 446 is designed to safeguard the assets of the company in winding-up against
wasteful or expensive litigation in regard to matters capable of being determined expeditiously
and cheaply by the winding-up Tribunal itself ‘’An even- handed justice requires that the
Tribunal should have power to intervene at an early stage for the protection of the assets, and
this power is given by Section 446.”
The winding- up order operates in favour of all the creditors and contributories of the company
as if it had been made on the joint petition of a creditor and of a contributory [Section 477].
9.2.6 Statement of Affairs: Where winding- up order has been made or the Official Liquidator
has been appointed as provisional liquidator by the Tribunal, a statement as regards the
affairs of the company in the prescribed form [57, Companies (Tribunal) Rules, 1959] shall be
delivered to the Official Liquidator. Such a statement shall have to be verified by an affidavit
and shall contain particulars of (i) the assets of the company stating separately the cash
balance in hand and at the bank, negotiable securities; (ii) its debts and liabilities; (iii) the
names, residence and occupations of the creditors (secured debts being segregated from
those considered unsecured) and in the case of secured debts the particulars of the securities
given whether by the company or an officer there of, their value and the dates on which they
were given; (iv) the debts due to the company and the names, and residences, and
occupations of the persons from whom they are due (also estimated amount to be realised);
and (v) such further or other information as may be prescribed or as the Official Liquidator
may required [Section 454 (1)].
The aforementioned statement is required to be made and verified by one of more of the
directors and by a person who, at the date of winding-up order or the appointment of the
provisional liquidator, as the case may be, the manager, secretary or other chief officer of the
company. Also, it may be made by the following persons if the Official Liquidator so requires,
subject to the directions of the Tribunal; (i) who are have been officers of the company; (ii)
who have participated in the formation of the company at any time within one year before the
relevant date; (iii) who are in the employment of the company or have been so within the said
year and are in the opinion of the Official Liquidator, capable of giving the information
required; (iv) so are or have been within the said year, officers of, or in the employment of a
company which is, or within the said year was, an officer of the company to which the
statement related [Section 454(2)].
The above mentioned statement is required to be submitted within 21 days of the winding- up
order of the appointment of the provisional liquidator, as the case may be, or within such
extended time, not exceeding three months, as may be fixed by the Official Liquidator or the
Tribunal for special reasons. The persons, preparing the statement and affidavit shall be
allowed such costs and expenses incurred in connection therewith as the Official Liquidator
may deem reasonable, subject to an appeal to the Tribunal [Section 454] (3) and (4).
Non-compliance with any of the requirements of Section 454, without a reasonable excuse,
shall render the defaulter liable to be punished with imprisonment to the extent of two years or
9.22 Corporate and Allied Laws

with a fine extending upto Rs. 100 per day during which the default continues or with both
[Section 454 (5)].
The Tribunal concerned may take cognizance of an offence, mentioned above, upon receiving
a complaint of facts constituting such an offence and try the offence i itself in accordance with
the procedure laid down in the Criminal Procedure Code 1898 for the trial of summons cases
by Magistrates) 454 (5A0].
The Statement of affairs must be open to inspection by any one stating himself in writing to be
a creditor or contributory. Also he is entitled to a copy thereof or as extract there from. For
both inspection and copy or extract, the prescribed fee is to be paid [Section 454 (6)].
(Note: The expression ‘the relevant date’ in a case where a provisional liquidator is appointed,
is the date of his appointment and in a case where no such appointment is made, the date of
the winding-up)
Section 511A extends the provisions of Section 454 to every voluntary winding-up in the same
way as they are applicable to a winding-up by the Tribunal. For construing these provisions,
references in the Section to (a) the Tribunal shall be omitted; (b) the Official Liquidator or the
provisional liquidator shall be construed as references to the liquidator; (c) the ‘relevant date’
shall be construed as references to the date of commencement of the winding-up.
The afore-mentioned provisions of Section 454 are intended to enable the liquidator to have
information as regards the affairs of a company, so that the liquidator may know something
about the property and the assets of the company, the names, addresses and occupations of
the creditors, the debts due to the company and the persons from whom they ard due. The
statement of affairs of the company is intended to afford facility to the liquidator in his
management of the company’s affairs in discharging the company’s obligations, realising its
assets, and distributing surplus assets (if any) among its members.
9.2.7 Official Liquidators report (Section 445): The Official Liquidator must, as soon as
practicable after the receipt of the statement of affairs under Section 454 but, not later than six
months from the date of the winding- up order or such extended period as may be allowed by
the Tribunal, or where the Tribunal orders that no statement of affairs need be submitted as
soon as practicable, after the date of the order, submit a preliminary report to the Tribunal :
(a) as to the amount of capital issued, subscribed, and paid-up and the estimated amount of
assets and liabilities, giving separately under the heading of assets: particulars of, (i)
cash and negotiable securities; (ii) debts due from contributories (iii) debts due to the
company and securities (if any) available in respect thereof; (iv) movable and immovable
properties belonging to the company; and (v) unpaid calls;
(b) if the company has failed, as to the causes of the failure; and
(c) whether a further inquiry is desirable as to the company’s failure, promotions or formation
or the conduct of the business thereof.
If the Official Liquidator thinks fit, he may make a further report or report, stating the manner in
which the company was promoted or formed and whether in his opinion any fraud has been
committed by any person in its formation or promotion or by any officer of the company in
Corporate Winding-up and Dissolution 9.23

relation to the company since the formation and any other matters which, in his opinion, it is
desirable to bring to the notice of the Tribunal. Such further report may lead to the public
examination of a person or officer in accordance with Section 478 (Section 455).
A person ordered by the Tribunal to be examined will be entitled to obtain a copy of the report
of the Official Liquidator at his cost and to employ an advocate to enable him to explain or
qualify any answer given by him. The person so charged may apply to the Tribunal to be
exculpated from any charges made or suggested against him and, if he does so, it shall be the
duty of the Official Liquidator to appear on the hearing of the application and call the attention
of the Tribunal to any matters which appears to the Official Liquidator to be relevant [Section
478 (6) & (7) ].
The Preliminary Report mentioned above shall be in Form No. 60 with such variations as may
be necessary [Rule 135, the Companies (Tribunal) Rules].
9.2.8 Final Winding- up: Under Rules 281 of the Companies (Tribunal) Rules, 1959, as soon
as the affairs of the company have been fully wound-up, the Official Liquidator in a winding- up
by the Tribunal shall file his final account (in Form No. 146) in to the Tribunal and apply for
order as to dissolution of the company subject to his final account being passed. The
application must be set down for hearing until the auditor completes the audit of the final
account and files his certificate in relation thereto. Rules 282 provides that upon the hearing of
the application, the Tribunal may, after hearing the Official Liquidator and any other person on
whom notice may have been served by the Tribunal, and upon pursuing the account, as
audited, make such orders as it may think fit as to the dissolution of the company, the
application (subject to the provision of the Act) of the balance in the hands of the Official
Liquidator or the payment thereof into Companies Liquidator Account in the public account of
the Reserve bank and the disposal of books and papers of the company and of the Liquidator.
After the liquidator has filed the statement as aforementioned, showing the affairs of the
company to have been completely wound up or when the Tribunal is of the opinion that the
liquidator cannot proceed with the winding-up of the company for funds and assets or for any
other reason whatsoever and it is just and reasonable in the circumstances of the case that an
order of dissolution should be made, then the Tribunal shall make an order that the company
be dissolved from the date of the order [Section 481 (1)]. A copy of the order must be
forwarded within 30 days from the date of the order by the liquidator to the Registrar who shall
enter in his books a minute of the dissolution of the company and the company shall be
dissolved accordingly [Section 481 (2)].
9.2.9 Committee of Inspection: Either at the time of making an order of the winding- up of a
company or at any time thereafter, the Tribunal may direct that a Committee of Inspection
shall be appointed in order to act with the liquidator. In the event of such a direction being
given, the liquidator is bound to convene a meeting within 2 months from the date of such
direction, of the creditor (ascertained form the company’s books and documents) with a view
to determine who are to be members of the committee (Section 464 (1). Within 14 days from
the date of the creditor’s meeting or such further time as extended by the Tribunal, the
liquidator shall convene a meeting of the contributories so as to consider the decision taken at
9.24 Corporate and Allied Laws

the creditor’s meeting in regard to the membership of the committee. This decision may either
be altogether rejected with or without any modifications [Sub- Section (2) If the decision taken
at the first meeting is either rejected or accepted with modification, the liquidator shall be duly
bound to seek the Tribunal’s, direction as regards the composition [sub-section (3)]
A committee of inspection shall consist of not more than 12 members, being the creditors and
contributories or their attorneys. The proportions of the members of the committee; if not
decided upon by the creditors and contributories themselves, shall be determined by the
Tribunal. Its function is to assist the liquidator and to inspect his accounts. The committee
must meet at such times as and may from time to time appoint; the liquidator or any member
may also summon a meeting as an when he thinks necessary. The quorum is 1/3rd of total
numbers of member or two, whichever is er. The committee acts only if there is a quorum and
by a majority of members present. A member of the committee ceases to act; (i) when he
resigns by notice in writing signed by him and delivered to the liquidator; (ii) when he is
adjudged an insolvent or compounds or arranges with his creditors; (iii) when he is absent
from five consecutive meetings of the committee without leave of those members who together
with himself, represent the creditors or contributories; (iv) when he is removed by ordinary
resolution of which 7 day’s notice has been given by the creditors, if he represents the
creditors, or by the contributories, if he represents the contributories.
If any vacancy occurs in the committee, the liquidator must immediately summon a meeting of
the creditors or contributories, as the case may be, to fill the vacancy unless he thinks it
unnecessary to fill in the vacancy and obtains the leave of the Tribunal in regard thereto
(Section 465). A member of the committee of inspecting is in fiduciary position and cannot buy
any of the company’s property from the liquidator (In re Blumer (1937) Ch. 489). Similarly,
where a member of the committee purchases the property of a company, such as purchase
was held to be bad, inasmuch as he occupied a fiduciary position in relation to the company
(Durga Prasad vs. Official Liquidator, Benaras Bank Ltd. A.I.R. 1959 All. 196).

9.3 VOLUNTARY WINDING UP


9.3.0 Introduction : The object of a voluntary winding-up is to enable the members and
creditors to settle their affairs among themselves without seeking assistance of the Tribunal
but they may apply to the Tribunal for any directions or orders if and when necessary (Section
518). A voluntary winding-up does not necessarily, imply that the company’s business has
ceased since such a winding-up may also be necessary in the case of reconstruction or an
amalgamation of a company.
9.3.1 Procedure for voluntary winding-up : A company may be wound-up voluntarily
under Section 484, according to the following procedures:
(a) By passing an ordinary resolution at a general meeting in any of the following
circumstances: (i) When the period (if any) fixed for the duration of the company by its
Articles has expired. (ii) When the Articles provide for the dissolution of the company on
occurrence of an event and the event has occurred e.g. if a company is formed to
construct a particular bridge and tile same has been built.
Corporate Winding-up and Dissolution 9.25

(b) By a special resolution : When the company for any reason which need not be disclosed,
decides that it should be wound-up voluntarily. A company may be prosperous, yet it may
desire to wind-up its affairs as a matter of convenience. It can do so if it passes a special
resolution to that effect.
The members of a company can not be divested of their right to pass a resolution calling for a
voluntary winding-up by including in the Articles, a special provision in this regard because
such a provision would be repugnant to the express provisions of this Act. Notices of the
meeting where it is intended to propose an ordinary or a special resolution as the case may
be, must be given, and the meeting should be held in the manner laid down by the Act and the
articles of the company. Upon the passing of a resolution for voluntary winding-up, the
company must within 14 days thereof, give notice of the resolution by an advertisement in the
Official Gazette and also in some newspapers circulating in the district where the Registered
Office of the company is situated (Section 485). A printed or typewritten copy of every
winding-up resolution passed in pursuance of Section 484 (duly certified under the signature
of an officer of the company must within thirty days after the passing thereof be riled with the
Registrar who shall record the same (Section 192).
9.3.2 Commencement of voluntary winding-up: Voluntary winding-up is deemed to have
commenced at the time when the resolution for the voluntary winding-up is passed (Section
486). Even if the company is subsequently wound-up by the Tribunal, the commencement of
the winding-up would be taken to be as from the date of the passing of the resolution (Section
441).
9.3.3 Effects of voluntary winding-up: With the commencement of voluntary winding-up, the
following situations arise:
(1) The company ceases to carry on its business except for the purposes of beneficial
winding-up of such business (Section 487). It still maintains its corporate personality and
its corporate power, until it is dissolved (Section 487). This is so even if the Articles
provide to the contrary [Hari Prasad Jayantilal & Co. vs. I.T.O. Ahmedabad.9.LR. (1966)
S.C 148.11. The liquidator represent the company in liquidation and the functions as its
agent for purposes of winding-up [Official Liquidator vs. Commissioner of Income Tax
(1971) 41 Comp. Cas. 226]..
(2) Any transfer of shares made without the sanction of the liquidator is invalid and alteration
in the status of the members made after the commencement of the winding-up is void
(Section 536).
(3) On the appointment of a liquidator under Section 490 or 502, as the case may be, the
powers of the directors, or managing or whole time director, or manager cease except in
so far as the company in general meeting or liquidator, may sanction that the same be
continued or for the purpose of giving notice of liquidator’s appointment to the Registrar
under Section 493. In the event of a creditors’ winding-up, the powers of directors cease
except in so far as the Committee of Inspection, or if there is no such Committee, the
creditors in general meeting may sanction that the same may be continued (Sections 491
& 505).
9.26 Corporate and Allied Laws

(4) Every invoice, order for goods, or business letter issued by or on behalf of the company
or a liquidator or a receiver or manager, in which the company’s name appears must
contain a Statement that the company is being wound-up (Section 547).
(5) As to whether a voluntary winding-up discharges the servants of the company, it would
depend upon whether the business of the company has ceased or is being continued.
Thus, it would depend on the facts of each case. A voluntary winding-up coupled with
immediate cessation of the company’s business has been held to operate as a dismissal
of the company’s servants [Reigate vs. Union Mfg. Co. (1981) I.K.B., 592 (Ch.)].
(6) Suits and other legal proceedings against the company are not automatically stayed but
an application may be made by the liquidator or any creditor or contributory to the
Tribunal to determine any question arising in the winding-up, e.g. enforcing of calls,
staying of proceeding or any other matter. Generally, such an application can be made
for exercising all or any of the powers which the Tribunal might exercise, if the company
was being wound-up by the Tribunal (Section 518).
(7) A voluntary winding-up shall not be a bar, enter alia, to the right of any creditor or
contributory to have the company wound-up by the Tribunal; but in the case of such an
application the Tribunal shall have to be satisfied that the rights of the creditors or
contributories or both would be prejudiced by a voluntary winding-up (Section 440).
9.3.4 Position of various parties
9.3.4.1 Shareholders and contributories: A shareholder of a company is liable to pay the full
amount on the shares held by him but nothing more. This liability continues even after
winding-up, but for the purposes of winding-up, he is described by the Act as a contributory.
Prior of a shareholder to the assets of the company is measured by the from membership.
However, winding-up creates a new cause of action for the liquidator and the liquidator can
demand of him the payment of the unpaid calls even if they had become time-barred before
liquidation [Re. East Bengal Sugar Mills Ltd. (1982) 1 Cal. 1321. The liability arises from the
fact that his name appears on the register of members [K.L. Goenka vs. S.R. Majumdar (1958)
28 Comp.. Cas. 536]. According to Section 429, the liability of a contributory shall create a
debt accruing due from him at the time when his liability commenced, but payable at the time
specified in the calls made on him for enforcing that liability (by the liquidator). Thus, the
liability of a contributory, though commencing at the date of the winding-up, is only contingent
during the winding-up, since until a call is made, it is nothing more then a mere liability to
contribute, if necessary, to the company for payment of the debts due to its creditors and
expenses of the winding-up. Such liability, however, creates a debt under Section 429 and it
does not become payable until a call is made. It may be noted that the liability under this
Section stands in striking contrast with the liability of a shareholder under Section 36(2)
according to which all moneys payable by any member, to the company under the
Memorandum or Articles shall be a debt due from him to the company. The debt under
Section 36(2) arises ex-contractu, whereas the debt under Section 429 arises e-x-lege i.e. as
a result of the statute on the company going into liquidation. Thus Section 429 gives the
liquidator a new cause of action which a company itself might not have.
Corporate Winding-up and Dissolution 9.27

The estate of the deceased shareholder is liable to the same extent as, it would have been if
he had been alive (Section 430). Section 431 lays down that if a contributory becomes
insolvent after the commencement of the winding-up, he becomes a stranger to the company;
although his name remains on the list of contributories, his assignee in insolvency represents
him for all purposes and is to be deemed a contributory. Under Section 432, where a body
corporate which is a contributory in itself is ordered to be wound-up, either before or after it
has been placed on the list of contributories, the liquidator of body corporate shall represent it
for all the purposes of winding-up of the company and shall be deemed a contributory.
A shareholder on the A list of contributories is liable to the extent to which his shares are not
fully paid up. But the liability of a member on the B list arises only in certain specific
circumstances, mentioned in Section 426. The A list comprises the present members and the
B list the past members, who ceased to be members within one year prior to the winding-up.
A past member is liable to contribute only when the present members have been unable to
satisfy the contribution required from them in respect of their shares.
A person who is both a contributory and a creditor of the company (in respect of dividends,
profits or otherwise), cannot set off the debt due and owing from the company against his
liability for call even if there is an express agreement to do so. In other words, the
contributory has to make his contribution to the assets of the company without any right to
claim a set-off in regard to the amount due to him from the company [Pure Milk Supply Co.
Ltd. vs. Hari Singh A.I.R. (1963) Punj 22].
In addition to the aforesaid liabilities, Section 536 imposes a sort of restriction on the
members; namely that in the case of voluntary winding-up, no transfer of share except
transfers made to or with the sanction of the liquidator shall be made and that every alteration
in the status of the members after the commencement of such winding-up shall be void. In the
case of winding-up by or subject to the supervision of the Tribunal, every disposition of the
property including actionable claims of the company and every transfer of shares or alteration
in the status of its members made after the commencement of the winding-up shall be void
unless the Tribunal otherwise directs.
9.3.4.2 Creditors: A company can never be declared insolvent, although it may have become
insolvent in the sense that it is unable to pay its debts. Where it solvent company is being
wound-up all the debts payable on a contingency and claims against the company, present or
future, certain or contingent, ascertained or sounding only in damages, are admissible to proof
against the company. A just estimate should be made of the possible value of such debts or
claims as may be subject to any contingency or may sound only in damages or for some other
reason may not bear a certain value (Section 528). As regards the rights of the creditors,
company which is being wound-up for its inability to pay its debt, the same rules prevail as in
the case of insolvency law in respect of debts provable, the valuation of annuities and future
and contingent liabilities and the respective rights of secured and unsecured creditors (Section
529).
The secured creditor may rely on the security and ignore the liquidation altogether, or value
his security and prove for the balance of his debt, or give-up his security and prove the whole
9.28 Corporate and Allied Laws

amount. Unsecured creditors are paid in the order prescribed by Section 530. Preferential
creditors are paid first; liability for dividends is satisfied only if claims of outsiders are fully met.
9.3.4.3 Employees: A winding-up order by a Tribunal operates as a notice of discharge to
employees and officers of the company, except when the business of the company is
continued [Section 445(3)]. A voluntary winding-up which involves a discontinuation of the
business also operates as a discharge, and may also give rise to a claim for damage where
there is an agreement for employment for a fixed time [Reigate vs. Union of Manufacturing
Company (1918) I.K.B. 592].
9.3.5 Types of voluntary winding-up: There are two types of voluntary winding-up, viz.
Members’ voluntary winding-up and Creditors’ voluntary winding-up. Where the directors are
in a position to make the statutory declaration of solvency required under Section 488 of the
Act, the winding-up would be conducted as a Members’ voluntary winding-up and would be
controlled by the members themselves, the creditors would have no voice in the proceedings.
If the directors do not make such a declaration, the winding-up would be conducted as a
creditors voluntary winding-up and the creditors shall have a controlling voice in the
procedure. In both the cases, the process of liquidation would be normally conducted without
reference to the Tribunal; although the Tribunal shall have the power to determine any matter
the liquidator or any creditor or contributory might refer to it.
9.3.5.1 Members’ voluntary winding-up–declaration of solvency: In respect of a members’
voluntary winding-up, two directors, where there are only two directors, and a majority of
directors, where there are more than two, should make a declaration, called ‘declaration of
solvency’, in Form No. 149 pursuant to Rule 313 of the Companies (Tribunal) Rules, 1959
verified by an affidavit. In the declaration, the following matters are required to be stated,
namely, (i) that they have made a full enquiry into the affairs of the company, and (ii) that
having made such enquiry, they have formed the opinion that the company has no debts or
that it will be able to pay its debts in full within a period not exceeding three years from the
commencement of the winding-up. To be effective:
(a) it must have been made and filed with the Registrar within the five weeks immediately
preceding the date of passing of the winding-up resolution; and
(b) it must be accompanied by a copy of the auditor’s report on the profit and loss account of
the company for the period commencing from the date of the company for the last
account to the latest practicable date immediately before the making of the declaration
and the balance sheet of the company made out as on the last-mentioned date and, also,
embodies a statement of the company’s assets and liabilities as at that date. The report
of the auditor must be prepared, as far as circumstances permit, in the manner laid down
by the Act (Section 488). This accompaniment is intended to be an additional safeguard.
Unless the above mentioned conditions are complied with, the resolution passed for voluntary
winding-up would be invalid and the members’ voluntary winding-up cannot be effected [S.P.
Bhargava vs. Rameswar A.I.R. (1952) M.P. 3]
Corporate Winding-up and Dissolution 9.29

Where the declaration of solvency is made by the directors without any reasonable grounds
that the company will be able to pay its debts in full within the period specified in the
declaration, it would render them liable to imprisonment which may extend to 6 months and or
to pay a fine exceeding Rs. 50,000. If the company is wound-up in pursuance of such a
resolution within a period of 5 weeks after the declaration was made, but its debts are neither
paid off nor provided for in full within the period specified in the declaration, it would be
presumed, till the contrary is shown, that the directors did not have reasonable ground to form
the opinion as to company’s solvency [Section 488(3) & (4)].
9.3.5.2 Creditors’ voluntary winding-up: Where the declaration of solvency, referred to
under members’ voluntary winding-up has not been made by the directors and filed with the
Registrar, the winding-up is known as a Creditor’s voluntary winding-up [Section 488(5)].
9.3.6 Procedure of winding-up: The procedure applicable to the two types of voluntary
winding-up is somewhat different. The provisions under Sections 490 to 498 are applicable to
a members’ voluntary winding-up, whereas Sections 511 to 521 apply to both types of
voluntary winding-up.
9.3.6.1 Procedure of members’ voluntary winding-up: The procedure for a member’s
voluntary winding-up of a company is narrated below:
(i) At the Board’s meeting, the directors have to make a declaration of solvency under
Section 488 of the Companies Act in Form 149 of the Companies (Tribunal) Rules and
Forms. If there are more than 2 directors then the said declaration must be made by a
majority of them. This declaration has to be filed with the Registrar of Companies
together with the auditor’s report on the balance sheet and profit and loss account or
income and expenditure account of the company made upto the date of the Board’s
meeting, the time limit for such filing being 5 weeks before the passing of the resolution
for the winding-up.
(ii) Next, the company has to pass at its general meeting a special resolution called
“resolution for voluntary winding-up” (Section 454). At this very meeting or at any
meeting subsequent thereto, one or more liquidators are to be appointed by the company;
also his or their remuneration, if it is to be given, should be fixed at the said meeting
(Section 490).
(iii) Under Section 485, the aforesaid resolution to wind-up the company voluntarily has to be
published in Official Gazette as also in a newspaper circulating in the district where the
Registered Office of the company is situated. This is required to be made within 14 days
of the passage of the resolution.
(iv) Under Section 493, the company has to give notice of appointment of the liquidator to the
Registrar. The notice is to be given in form No. 36(b) of the Companies (Central
Government’s) General Rules and Forms. The liquidator has also to separately notify the
Registrar, under Section 516, about his appointment.
(v) The liquidator is then required to do the following things, namely, speedy realisation of
assets, preparation of list of creditors, admission of proof, settlement of lists of
9.30 Corporate and Allied Laws

contributories. making of such calls as are necessary, payment to secured creditors of


costs including the liquidator’s own remuneration, payment of preferential claims and
distribution of the surplus pro rata amongst the contributories after meeting all the claims
of creditors and after adjusting all rights and claims. For resolving any doubts and
difficulties, application may be made to the Tribunal.
(vi) Duty of liquidator to call general meeting : In the event of a voluntary winding-up being
continued for more than a 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 and at the end of
each succeeding year within three months from the end of each or such longer period as
the Central Government may allow. Also, he shall lay before the meeting an account of
his acts and dealings and of the conduct of the winding-up during the preceding year
together with a statement in Form No. 153 [pursuant to Rule 328 of the Companies
(Tribunal) Rules 1959] containing stipulated particulars in respect of winding-up
proceedings and the position of the liquidation. Any failure on the part of the liquidator in
complying with these provisions shall render him liable to a fine to the extent of Rs. 100 in
respect of each failure (Section 496). The liquidator has to keep all moneys in a
scheduled bank; he must strictly adhere to the provisions of Section 553 and Rules 324 to
326 of the Companies (Tribunal) Rules.
Where the winding-up of a company is not concluded within one year after its
commencement, Section 551 requires that a statement by the liquidator in Form 153 of
the Companies (Tribunal) Rules, should be filed with the Registrar within 2 months of the
close of such year (if he is not exempted from so doing by the Central Government) and
thereafter until the winding-up is concluded, at intervals of not more than one year or
such shorter interval as may be prescribed. The statement should be audited by a
chartered accountant.
(vii) Final meeting and dissolution : When the winding-up is complete, the liquidator shall,
subject to the provisions contained in Section 498, make-up an account of the winding-up
which must show as to how the winding-up has been conducted and the property of the
company has been disposed of, also he shall call a general meeting of the company to
place before it the account [Form No. 155, pursuant to Rule 329 of the Companies
(Tribunal) Rules]. Such a meeting is required to be called by advertisement which must
specify the time, place and subject and published, not less than one month before the
meeting, in the Official Gazette as well as some newspapers circulating in the district
where the registered office of the company is situated. Besides, he shall, within one
week of the meeting, send to the Registrar and the Official Liquidator a copy of the
account and also a return to each of them as regards the holding of the meeting and of
the date thereof [Section 497(2) & (3)]. Where the meeting is not held for want of
quorum, the liquidator shall, instead of the said return, make a return, to the effect that
the meeting was duly called but no quorum was present thereat [Section 497(4)]. Upon
receiving the account and either of the returns under Sub-section (3) or (4), the Registrar
must immediately register them, with a view to ensuring that the winding-up process of
Corporate Winding-up and Dissolution 9.31

the companies (which have been voluntarily wound-up should not be conducted in a
manner prejudicial to the interest of the shareholders or of the public.
On receipt of the final statement of accounts and the returns from the liquidator, the Official
Liquidator shall make a scrutiny of the books and papers of the company. For the purpose, he
shall be provided with all reasonable facilities by the liquidator and all officers (past and
present) of the company.
Where the Official Liquidator, after scrutiny of the returns and accounts, reports to the Tribunal
that the affairs of the company have not been conducted in a manner prejudicial to the
interests of its members to public interest, the company is deemed to have been dissolved
from the date of the submission of the report.
If the official Liquidator, on such a scrutiny, reports to the Tribunal that the affairs of the
company have been conducted in a manner prejudicial to the interest of its members or the
public, the Tribunal shall direct the Official Liquidator to make a further investigation into the
affairs of the company, and for that purpose, he shall be invested with all such powers as the
Tribunal may deem fit [Section 497(6A)I. On receipt of the report as regards further
investigation, the Tribunal may either make an order that the company shall stand dissolved
with effect from the date which it shall specify or shall make such other order as the
circumstances of the case might justify [Section 497(6B)].
9.3.6.2 Procedure of creditors’ voluntary winding-up: (1) The creditors of a company would
be mainly concerned if the company arrives at the decision that it should wind-up itself
because of its inability to meet its liabilities. The company in that case must call a meeting of
the creditors to be held on the day or the day next following the next date on which there is to
be held a general meeting of the company at which the resolution for voluntary winding-up is
to be proposed [Section 500 (l)].
(2) Notice of the meeting is to be sent to the creditors and it must also be advertised once at
least in the Official Gazette and in two newspapers circulating in the district where the
registered office of the company is situated [Section 500(2)].
At the meeting of the creditors, the Board of Directors must cause a full statement of the
company’s affairs, and a list of the company’s creditors and the estimated amount of their
claims, to be laid before the meeting of the creditors. The Board of directors also must
appoint one of their members to preside over the said meeting [Section 500(3)].
If the meeting of the company for passing the winding-up resolution, is adjourned and at
the adjourned meeting the resolution is passed, then any resolution passed at the
creditors meeting, though prior in date to that for winding-up would nevertheless be valid
and effective as if it had been passed after the passing of the winding-up resolution
[Section 500(5)1.
The resolution passed at the creditors’ meeting shall be notified by the company to the
Registrar within ten days of the passing thereof (Section 501).
In a creditors voluntary winding-up, the creditors and the members appoint a liquidator in
their respective meetings. If different persons are nominated, the creditors’ nominee shall
9.32 Corporate and Allied Laws

become the liquidator. However, any director, member or creditor may, within seven days
after the nomination has been made by the creditors, apply to the Tribunal for an order
that the company’s nominee shall be the liquidator instead of, or jointly with, the nominee
on
(3) If a vacancy occurs by death, resignation or otherwise in the office of a liquidator (other
than the one appointed by or by the direction of the Tribunal) the creditors in general
meeting may fill in the vacancy (Section 306).
(4) The creditors at the first meeting under Section 400, or at a subsequent meeting may
appoint a Committee of Inspection consisting of not more than five persons [Section
5031. The members of the Committee are to be nominated by the company at a general
meeting. If any of the nominees is not acceptable to the creditors, they may by resolution
choose any person in his place. However, the Tribunal is empowered to direct otherwise.
(5) The Committee of Inspection and, if there is no such Committee the creditors, may fix the
remuneration of the liquidator. If they do not fix the remuneration, the Tribunal would do
so (Section 504). Section 465(2) to (10) applicable to Committee of Inspection appointed
in a compulsory winding-up will also apply to the Committee under Section 503, subject to
such rules as may be made by the Central Government [Section 503(5)].
(6) Where the voluntary winding-up continues for more than a year, the liquidator must call a
general meeting of the company, as in the case of members’ winding-up as well as
meeting of the creditors at the end of the first year of the commencement of winding-up
within three months from the end of each year or such longer period as the Central
Government may allow, Such a meeting also must be called at the end of each
succeeding year in the same manner. The liquidator must lay before the meeting an
account of his acts and dealings and of the conduct of the winding-up during the
preceding year and also a statement in Form No. 153 pursuant of Rule 327 of Companies
(Tribunal) Rules (Section 508).
(7) As soon as the affairs of the company have been wound-up, the liquidator shall: (a)
make-up an account of the winding-up showing how the winding-up has been conducted
and the property of the company has been disposed of, in Form No. 155 [pursuant to
Rule 329 of the Companies (Tribunal) Rules] and (b) 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 any explanation thereof.
Note: To provide for the scrutiny of the records of a company which is being wound-up
voluntarily by the creditors, provisions have been made in Sub-sections (5), (6), (6A) and (6B)
of Section 509 which are identical with those contained in the corresponding Sub-sections of
Section 497 which have been discussed earlier in the Study Paper.
9.3.7 Duties and responsibilities of liquidator in creditors’ voluntary winding-up : The
liquidator in a creditors’ voluntary winding-up administers the company is very much the same
way in which the directors administer it before the commencement of winding-up. To that
extent a liquidator can rightly be described as the agent of the company.
Corporate Winding-up and Dissolution 9.33

The liquidator owes certain duties towards the creditors and contributories under the statute,
including that of administration of the assets of the company. These he holds in trust for
them. To this extent he is trustee and he must discharge his fiduciary duties honestly. If he
neglects these duties, he may be held personally liable by the party prejudiced or for
misfeasance proceedings, under Section 543. Thus the liquidator in a creditor’s voluntary
winding-up has a dual status both as agent and trustee..
Like any other liquidator, it is also his duty to take into his custody or under his control all the
property, effects and actionable claims to which the company is or appears to be entitled. To
discharge this responsibility, it is his duty to take the aid, if need be, if the Chief Presidency
Magistrate or the District Magistrate within whose jurisdiction the aforesaid property, etc. are
found (Section 456).
As regards the distribution, on realisation, of the assets of the company, the liquidator is under
an obligation to apply such assets subject to the provisions of the Act as to preferential
payment, in satisfaction of its liabilities pan passu. He must thereafter distribute the residue
among the members according to their rights and interest in the company (Section 511). For
the purpose, the liquidator has to ascertain the assets and liabilities of the company and draw-
up a scheme of distribution.
It is the liquidator’s duty to compel the directors or the officers of the company in liquidation to
supply him with a statement as to the affairs of the company verified by an affidavit containing
the particulars relating, inter alia, to:
(i) the assets of the company, stating separately the cash balance in hand and at banks and
the negotiable securities held by the company;
(ii) its debts and liabilities;
(iii) names, residence and occupations of all creditors and amounts standing to their credit
together with dates and amounts of securities given therefor; and
(iv) debts due to the company and the amount likely to be realised on their account (Section
511A read with Section 454).
Within 30 days of his appointment, the liquidator is duty-bound to publish his appointment in
the Official Gazette and notify the same in the prescribed form to the Registrar (Section 516).
On the detection of a fraud having been committed by promoters, directors, etc., it is the
liquidator’s responsibility to invoke the aid of Section 519 and apply to the Tribunal for the
public examination of them.
For the determination of any question arising in the winding-up or for getting the rights and
powers of the Tribunal regarding enforcement of calls, staying of proceedings or other matters
exercised by it, it is the responsibility of the liquidator to apply to the Tribunal (Section 518).
Where the voluntary winding-up continues for more than a year, the liquidator must call a
general meeting of the company and a meeting of the creditors at the end of the first year of
the commencement of winding-up and at the end of each succeeding year, or as soon
thereafter as may be convenient within 3 months from end of year or such longer period as the
Central Government may allow. The liquidator must lay before the meetings an account of his
9.34 Corporate and Allied Laws

acts and dealings and of the conduct of the winding-up during the preceding year and also a
statement in Form No. 153 pursuant to Rule 327 of Companies (Tribunal) Rules (Section
508).]
As soon as the affairs of the company have been wound-up, the liquidator shall:
(a) make-up an account of the winding-up showing how the winding-up was been conducted
and the property of the company has been disposed of, in Form No. 155 [pursuant to
Rule 329 of Companies Tribunal (Rules)]; and
(b) 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 any explanation thereof. Besides, the
liquidator, within one week from the date the meeting is held, must send to the Registrar
and the Official Liquidator a copy of each of the account and also a return to each of them
regarding the holding of the meeting and of the date thereof. Where the meeting is not
held for want of quorum, the liquidator shall, instead of the said return, make a return to
the effect that the meeting was duly called but no quorum was present thereat.
Under Section 512(3), it is the liquidator’s duty to pay the debts of the company and to
adjust the rights of the contributories themselves.
9.3.8 Position of a ‘voluntary’ liquidator: It has been held that a voluntary liquidator is not
an officer of the Tribunal, [Re. Hills Waterfall etc. Co. (196) Ch. 946, 954].- also that he can
more rightly be described as the agent of the company [Knowles Scott (181), I Ch. 717].
The status of a liquidator as an agent of the company can be appreciated if one considers that
in a voluntary winding-up the liquidator is appointed by the shareholders, at a general meeting,
both in the case of members’ and the creditors’ winding-up, the only difference between the
two is that where the person nominated by the creditors at their separate meeting is different
from the one proposed by the members, the nominee of the creditors takes the office of the
liquidator. Further, under Section 512 of the Companies Act, a liquidator can exercise certain
powers, with the sanction of a special resolution of the company, in the case of a members
winding-up and in the case of creditors’ winding-up with the sanction of the Tribunal or the
Committee of Inspection or (if there is no such committee) of the meeting of the creditors’ be
also has the right to exercise a number of powers on his own as the agent of the company’ A
company in voluntary winding-up thus is administered by the liquidator in very-much the same
way as it is done by the directors, before the commencement of winding-up.
It must, how ever, be remembered that the liquidator owes certain duties towards the creditors
and contributories under the statute including that of administration of the assets of the
company. These he holds in trust for them. In so far as this, he is a trustee. If he neglects
these duties, he may be held personally liable by the party prejudiced, or misfeasance
proceedings under Section 543 can be taken against him. Thus the liquidator has a dual
status both of agent and trustee.
9.3.9 Steps to be taken in a case where the company is solvent but the business for
which it was formed has been completed:
Corporate Winding-up and Dissolution 9.35

(a) Prepare a statement of its assets and-liabilities [Section 488(2)].


(b) Prepare and file with the Registrar of Companies a statutory declaration by directors that
the company will be able to pay its debts in full within such period not exceeding three
years from the commencement of the winding-up as may be specified in the declaration.
This must be done within five weeks before that date of the passing of the winding-up
resolution, and must be delivered to the Registrar before that date. It may be
accompanied by a copy of the report of the auditors of the company on the profit and loss
account of the company (for the period commencing from the date up to which last such
account was prepared and ending with the latest practicable date immediately before the
making of the declaration) and the balance sheet of the company (made out as on the
last-mentioned date). It must also embody a statement of the company’s assets and
liabilities, as at that date [Section 488(3)].
(c) Call a general meeting of the company to pass a resolution for the winding-up of the
company (Section 484). As to resolution, it should be in accordance with the provisions of
Section 189(1).
(d) Hold meeting of shareholders in accordance with notice so as to pass the resolution
referred to in (c) above.
(e) Appoint liquidator for the purpose of winding-up the affairs and distributing the assets of
the company (Section 490).
(f) The company must give notice of appointment of liquidator to the Registrar of Companies
(Section 493).
9.3.10 Provisions applicable to every voluntary winding-up: These provisions are
contained in Sections 510 to 521. These are summarised below:
(a) As regards the distribution, on realisation of the assets of the company in liquidation,
such assets should be applied subject to the provisions of the Act, as to preferential
payment in satisfaction of its liabilities pari passu and the residue will be distributed
among the members according to their rights and interests in the company (Section 511).
For the purpose the liquidator has to ascertain the assets and liabilities of the company
and draw-up a scheme of distribution.
(b) The liquidator in all cases is entitled to be supplied with a statement as to the affairs of
the company verified by a affidavit containing the particulars relating, inter alia, to:
(i) the assets of the company stating separately the balance in hand and at banks, and
the negotiable securities held by the company.
(ii) its debts and liabilities;
(iii) names, residence and occupations of all creditors and amounts standing to their
credit together with dates and amounts of securities given therefor; and
(iv) debts due to the company and the amount likely to be realized on their accounts.
The liquidator can compel one or more directors or other officer of the company to submit
such a statement within 21 days from the date of the commencement of the winding-up.
9.36 Corporate and Allied Laws

He may also extend the time up to a maximum period of 3 months from that date (Section
511A read with Section 454).
(c) A body corporate cannot be appointed as a liquidator (Section 513).
(d) If for any reason whatever there is no liquidator to act, the Tribunal may appoint the
Official Liquidator or any other person as a liquidator and appoint in his stead the official
Liquidator. The Registrar is also empowered to apply to the Tribunal tot; such
appointment or removal so that the liquidation proceedings be accelerated and the proper
conduct of the liquidation by a competent liquidator be ensured (Section 515).
(e) Within 30 days of his appointment, the liquidator is required to publish his appointment, in
the Official Gazette and notify the same in the prescribed form to the Registrar (Secton-
516).
(f) Section 518 empowers the liquidator or any contributory or creditor to apply to the
Tribunal to have questions determined or to exercise the powers as specified in the
Section.
(g) Section 519 empowers the liquidator to apply to the Tribunal for public examination of
promoters, directors, etc. on the detection of a fraud having been committed by them.
(h) All costs charges and expenses properly incurred in the winding-up are required to be
paid, subject to the rights of secured creditors, out of the assets of company in priority to
all other claims (Section 520).
9.3.11 Summary procedures for winding-up
9.3.11.1 Members’ voluntary winding-up:
(i) Directors (both where 2 directors majority where more than 2 directors) have to make a
declaration of solvency under Section 488 at the Board Meeting. This declaration
together with the auditors report on the balance sheet and profit and loss account (or
income and expenditure account) of the company made-up to the date of the Board
Meeting shall be filed with the Registrar, the time-limit for such filing being 5 weeks
before the passing of the resolution for winding-up;
(ii) Company has to pass at its meeting a special resolution (Section 484) and appoint one or
more Liquidators, at this or at subsequent meeting and fix remuneration if to be paid
(Section 490);
(iii) Company has to publish the said resolution in the Official Gazette as also in newspaper
circulating in the district where its Registered Office is situated, within 14 days of the
passage of the resolution (Section 485);
(iv) Company is required to give notice of the appointment of Liquidator to the Registrar
(Section 493) and the Liquidator to separately communicate his appointment to the
Registrar under Section 516;
(v) Then the Liquidator has to do the following things e.g., speedy realisation of assets,
preparation of list of creditors, admission of proof, settlement of List of contributories,
Corporate Winding-up and Dissolution 9.37

making of necessary calls, payment to secured creditors, payment of costs, payment of


preferential claim, etc.;
(vi) Liquidator has to call general meeting at the end of each year under Section 496;
(vii) Liquidator has to file with the Registrar a Statement as required by Section 551, where
the winding-up is not concluded within ODC year after its commencement;
(viii) Liquidator has to call final meeting for the purpose of dissolution of the company, and for
that matter to proceed according to the provisions contained in Sections 497 and 498.
9.3.11.2 Creditors’ voluntary winding-up: The creditors would be mainly concerned if the
company arrives at the decision that it should wind-up itself because of the inability to meet its
liabilities. Therefore:
(i) the company has to call creditors’ meeting to be held on the day or the day next following
the date on which there is to be held a general meeting of the company at which the
resolution for voluntary winding-up is to be proposed [Section 500(1)];
(ii) the company has to send notice of the meeting to creditors and also advertise the notice
in two newspapers circulating in the district of its registered office [Section 500(2)];
(iii) the Board of Directors, in the creditors’ meeting, has to cause a full statement of the
position of the company’s affairs and a list of company’s creditors and the estimated
amount of their claims to the laid [Section 500(3)];
(iv) the company has to notify the resolution passed thereat to Registrar within 10 days of the
passing thereof [Section 501(1)1;
(v) creditors’ nominee as Liquidator to call meeting of the company and of creditors at the
end of each year in compliance with the requirements of Section 508;
(vi) the liquidator has to call the final, meeting in compliance with the provisions of Section
509.

9.4 GENERAL PROVISIONS ON WINDING-UP


Sections 528 to 560 contain provisions applicable to every mode of winding-up. Some of
the important provisions are stated below:
(1) Section 551 prescribes that information as to the pending liquidation, unless
exempted by the Central Government, shall be given by the liquidator within 2 months
of the expiry of the first year and thereafter at intervals of not more than one year, by
filing a statement in the prescribed form [Form No. 153 Companies (Tribunal) Rules];
also that the statement shall be audited by a chartered accountant. The statement
shall have to be riled (a) in the case of a winding-up by or subject to the supervision
of the Tribunal, in the Tribunal; and (b) in case of a voluntary winding-up, with the
Registrar.
9.38 Corporate and Allied Laws

N.B. Students should not that this requirement is over and above the requirements
under Sections 497 (in the case of members voluntary winding-up) or 508 and 509 (in
the case of creditors voluntary winding-up).
(2) Debts that are provable: Debts of all descriptions in a winding-up are payable only
when these have been proved. All debts payable on a contingency and claims against
the company, whether present or future, certain or contingent, ascertained or
unascertained, can be proved against a company; when the amount of a debt cannot
be ascertained, a fair estimate thereof may be made for purposes of proof (Section
528). This Section applies to proof of debts when the company is in a solvent state
i.e. when its assets are sufficient to pay all its debts and liabilities and the costs of the
winding-up. Where the company is insolvent, Section 528 would be applicable. In the
winding-up of an insolvent company, the same rules are applicable as regards: (i)
debts provable; (ii) the valuation of annuities and future and contingent liabilities and
(iii) the respective rights of secured and unsecured creditors, as those in the case of
an estate of person adjudged insolvent under the Insolvent Law. [Section 529(1)].
However, the security of every secured creditor shall be deemed to be subject to a
pari passu change in favour of the workmen to the extent of the workmen’s portion
therein, and, where a secured creditor instead of relinquishing his security and
proving his debt, opts to realise his security, then (a) the liquidator shall be entitled to
represent the workmen and enforce such charge; (b) any amount realised by the
liquidator by way of enforcement of such charge shall be applied rateably for the
discharge of workmen’s dues, and (c) so much of the debt due to such secured
creditor as could not be realised by him by virtue of the foregoing provisions of this
proviso or the amount of the workmen’s portion in his security, whichever is less shall
rank pari passu with the workmen’s dues for the purposes of Section 529A [Proviso
added to Sub-section (1) of Section 529 by the Companies (Amendment) Act, 1985].
All persons who in any such case would be entitled to prove for and receive dividends
out of the assets of the company may come in under the winding-up, and make such
claims against the company as they respectively are entitled to make by virtue of this
Section [Sub-section (2)]. If, however, a secured creditor, instead of relinquishing his
security and proving for his debts, proceeds to realise his security, then he shall be
liable to pay his portion of the expenses incurred by the liquidator (including a
provisional liquidator) for the preservation of the of a security before it is realised by
the secured creditor for the purpose of sub-section (2), the portion of expenses which
the secured creditor shall be liable to pay shall be the expenses less an amount which
bears to such expenses the same proportion as the workmen’s portion in relation to
the security bears to the value of the security.
For the purposes of Section 529, Section 529A and Section 530:
(a) [“workmen” in relation to a company, means the employees of the company being
Corporate Winding-up and Dissolution 9.39

workmen within the meaning of the Industrial Disputes Act, 1947: i.e., any person
(including an apprentice) employed in any industry to do any skilled, manual,
supervisory, technical or clerical work for hire or reward, whether the terms of
employment be express or implied, but does not include any such person:
(i) who is subject to the Army Act, 1950, or the Air Force Act, 1950, or the Navy
(Discipline) Act, 1934; or
(ii) who is employed in the police service or as an officer or other employee of a
prison; or
(iii) who is employed mainly in a management or administrative capacity, or
(iv) who, being employed in a supervisory capacity, draws wages exceeding one
thousand rupees per-mensum or exercise, either by the nature of the duties attached
to the office or by reason of the powers vested in him, functions mainly of a
managerial nature.];
(b) “workmen’s dues” means the aggregate of the following sums due from the company
to its workmen, namely:
(i) all wages, salaries including wages payable for time or piece work and salary
earned wholly or in part by way of commission of any workmen, in respect of services
rendered to the company and any compensation payable to any workman under any
of the provisions of the Industrial Disputes Act, 1947;
(ii) all accrued holiday remuneration becoming payable to any workman, or in the case
of his death to any other person in his right, o the termination of, the winding-up other
or resolutions;
(iii) unless the company is being wound-up voluntarily merely for the purposes of
reconstruction or of amalgamation with another company or unless the company has,
at the commencement of the winding-up, under such a contract with insurers as
mentioned in Section14 of the Workmen’s Compensation Act, 1923, rights capable of
being transferred to and vested in the workman, all amounts due in respect of any
compensation or liability for compensation under the said Act in respect of the death
or disablement of any workman of the company. In other words, in the absence of
alternative circumstances mentioned in the beginning of this clause the provision of
this clause will fall within the provision of the phrase “workmen’s dues”;
(iv) all sums due to any workman from a provident fund, a gratuity fund or any other
fund for the welfare of the workman maintained by the company.
(c) “workmen’s portion”, in relation to the security of any secured creditor of a company,
means the company which bears to the value of the security the same proportion as
the amount of the workmen’s dues bears to the aggregate of (i) the amount of
9.40 Corporate and Allied Laws

workmen’s dues, and (ii) the amounts of the debts due to the secured creditors. It has
been exemplified by the following statutory illustration.

Illustration
The value of the security of a secured creditor of a company is Rs. 1,00,000. The total
amount of the workmen’s dues is Rs. 1,00,000. The amount of the debts due from the
company to its secured creditors is Rs. 3,00,000. The aggregate of the amount of
workmen’s dues and of the amounts of debts due to secured creditors is Rs. 4,00,000.
The workmen’s portion of the security is therefore 1/4th of the value of the security, i.e.
25,000, [Sub-section (3) added to Section 529 by the Companies (Amendment) Act,
1985].
Now let us illustrate the significance of the Explanation aforementioned by reference to
the statutory illustration stated above.
The facts given in the above illustration remain the same. The liquidators incur Rs. 10,000
for the preservation of the security before it is realised by the secured creditor. Now what
is the portion of Rs. 10,000 that should be borne by the secured creditors? It is equal to
the following equation:
Workmen ' s portion
Whole of expenses – Whole of expenses ×
Value of the security

10,000 × 25,000
= Rs. 10,000 ×
1,00,000

= Rs. 10,000 – 2,500


= Rs. 7,500. This is the amount to be borne by the secured creditors.
♦ Overriding preferential payment: Under Section 529A (incorporated by the 1985
Amendment Act), notwithstanding anything contained in other provisions of this Act or
any other law for the time being in force in the winding-up of a company – (i)
workmen’s dues and (ii) debts due to secured creditors to the extent such debts rank,
under clause (c) of the proviso to Sub-section (1) of Section 529, pari passu with such
dues, shall be paid in priority to all other debts. These debts payable under (i) and (ii)
above shall be paid in full, unless the assets are insufficient to meet them, in which
the case they shall be paid in equal proportions.
Note: The aforesaid rules of insolvency as contained in Section 529 will be applicable
only in respect of the three matters specified under paragraph (i), (ii) and (iii) but no
further; and they apply except in so far as special provisions are contained in the
Companies Act Italia vs. Free Press Journal (1956) M.L.J. 463. Further Section 529
shall cease to be applicable as soon as it is found that the company in the course of
Corporate Winding-up and Dissolution 9.41

winding-up is not insolvent [Re. Fine Industrial Commodities Ltd. (1953) 3 A.E.R.
707].
(3) Preferential payments: Subject to the provisions of Section 529A (discussed earlier),
the following debts must, according to provisions contained in Section 530, as
amended by the 1996 Amendment Act, be paid in priority to the claims of unsecured
creditors:
(a) All revenues, taxes, cesses and rates due to the Central or State Government or a
local authority, having become due and payable within the twelve months before the
relevant date;
(b) All wages and salaries of an employee for service rendered for a period not exceeding
four months within the preceding 12 months next before the relevant date, but not
exceeding Rs. 20,000 in any one case;
(c) All accrued holiday remuneration;
In case of (b) and (c) where amount is paid out of money advanced by another person
for that purpose, that person, is subrogated to rights of employee who has been paid
[Section 530(4)];
(d) Unless the winding-up is merely for purposes of amalgamation or of reconstruction
employer’s contribution to the State Insurance Scheme under the Employees’ State
Insurance Act, 1948 payable during 12 months before the relevant date and all
amounts due in respect of any compensation or liability for compensation in respect of
death or disablement compensation under the Workmen’s Compensation Act, 1923;
(e) All sums due to any employee from any fund including a provident, pension or a
gratuity for the welfare of the employees, maintained by the company; and
Expenses payable by any company in respect of an investigation held under Section
235 or 237 of the Act.
For the purposes of Section 530: (i) Any remuneration in respect of a period of holiday
or of absence from work through sickness or other good causes shall be deemed to
be wages in respect of services rendered to the company during that period;
(ii) The expression “accrued holiday remuneration” includes, in relation to any person,
all sums which, by virtue either of his contract of employment or of any enactment
(including any order made or direction given under any enactment), are payable on
account of the remuneration which would, in the ordinary course, have become
payable to him in respect of a period of holiday, had his employment with the
company continued until he became entitled to be allowed the holiday;
(iii) The expression “employee” does not include a workman (added by the Companies
(Amendment) Act, 1985 (w.e.f. 29.5.85); and
9.42 Corporate and Allied Laws

(iv) The ‘relevant date’ means in the case of winding-up by the Tribunal:
(a) the date of the appointment of first appointment of a provisional liquidator; or
(b) if no such appointment was made, the date of the winding-up order, Unless, in
either case the company had commenced to be wound-up voluntarily before that date.
In all other cases, it means the date of voluntary winding-up resolution.
If the assets are insufficient to pay the foregoing preferential debts in full they abate in
equal proportions. If necessary, these debts may be paid out of the proceeds of any
assets subject to a floating charge.
The order of priority in paying off debts in a winding-up may be roughly worked out as
follows: (i) Secured creditors (mortgagees); (ii) costs and charges of winding-up [In a
voluntary winding-up automatically this has priority. In a compulsory winding-up. Tribunal
has to give it priority by order (See Section 576 and 520); (iii) preferential debts (Section
530); (iv) floating charges [See Section 530(5)(b)]; and (v) unsecured creditors.
The above does not affect debts that are secured by a fixed charge which have to be paid
up to the value of the property concerned.
If there is any surplus, capital is returned to preference shareholders first and then to
equity shareholders. If there is still any surplus left, it depends on the articles whether
preference shareholders are entitled to share that surplus.
Section 530(1) requires that the revenues, taxes, etc. should have become due and
payable within the period of 12 months immediately preceding the relevant date. The
arrears of sales tax not to be paid preferentially under Section 530 although the same
become ‘recoverable’ as arrears of land revenue under the Sales-tax Act. The words
‘recoverable’ arid ‘payable’ have got completely different connotations. The word
‘revenues’ used in Section 530(1)(a) of the Companies Act means revenues which have
become due and payable as revenues within the next 12 months before the relevant date,
and not revenues which are recoverable as arrears of land revenue. Sales tax, assessed
after winding-up, is not revenue, which has become due and payable within 12 months
next before the relevant date. Therefore, it cannot be paid preferentially under Section
530. [Sales-tax Officer, Kanpur vs. Official Liquidator (1968) 38 Comp. Case 430].
Advance income tax demanded and due under the Income-tax Act is to be paid
preferentially under Section 530(1)(a) of the Companies Act provided it becomes due and
payable within the twelve months next before the relevant date. [Joint Official Liquidator
vs. Comm. Of Income-tax (1954) I.M.L.J. 282 – AIR 1954 Mad. 858]. But the Calcutta
Tribunal has held a contrary view. [Suburban Bank Ltd. AIR (1953) Cal. 487].
Ex-gratia payments to employees of the company are not within the ambit of Section
530(1)(b) [Vijay Card Board Co. Ltd. vs. Collector, District Hyderabad AI (1957) Andhra
Corporate Winding-up and Dissolution 9.43

Pradesh 725].
Under Section 530(4), the bank which provided an overdraft for making money available
for payment of wages, is entitled to preferential payment for the money so advanced and
paid [Re. Rampgill Mill Ltd. (1967) Comp. L.J. 262].
‘Bonus’ payable to staff appears to be covered by the expression ‘all wages’ occurring in
Section 530(1)(b) and therefore, is to be paid preferentially to tile extent laid down in
Section 530(1)(b) especially if it is due under the Payment of Bonus Act. The company’s
contribution payable to the Employees State Insurance Corporation is, for the purposes of
Section 530, a preferential payment [Re. Bihar Bolts Engineering Works Ltd. Air 1959 Pat.
417].
In the winding-up of a company, an advocate is entitled to preferential payment of his fees
and expenses out of the fruits of a litigation which he had successfully conducted for the
company which are in the hands of the liquidator [Kutti Krishna Menon vs. Cochin
Mercantile Ltd. (1969) 32 Comp. Case 578].
(4) Effect of winding-up on antecedent and other transactions: With a view to
affording better protection to the creditors of a company, the principle of fraudulent
preference as existent in the insolvency laws, has been extended to companies so as
to render void certain categories of transactions entered into within a limited period
before the commencement of winding-up. The detailed provisions in this regard are
contained in Sections 531 to 537 of the Act, which are summarised below:
(i) Fraudulent Preference: All transfers of property, movable or immovable, made by
delivery of goods or payment of money etc., if made by an insolvent person within 3
months before the presentation of insolvency petition, would be held to be a
fraudulent preference of its creditors and would be invalid. Similarly, in the case of a
company all such transfers, if made within 6 months before the commencement of its
winding-up, would be deemed to be a fraudulent preference of its creditors, and would
be invalid (Section 531). For the purpose of proving a fraudulent preference, two
things need be shown, viz.:
(a) that in the case of a winding-up by or subject to the supervision of the Tribunal the
transaction took place within 6 months before the presentation of the petition and in
the case of voluntary winding-up, the transaction took place within 6 months of
passing of resolution for winding-up [Section 531(2)]; and
(b) that the main motive in the mind of the company, acting through its directors, was
to prefer one creditor to the other [In Re. Jackson & Bassford (1906) 2 Ch. 467].
On the basis of the above-mentioned provisions of Section 531, let us examine the
following situation: A company has been running into losses. To one of its creditors it
gives a mortgage on its immovable property on 1st May, 1985. On October 15, 1985,
9.44 Corporate and Allied Laws

a winding-up petition is presented to the Tribunal, which passes an order of winding-


up on 30th November, 1985. It is clear from this situation that the transaction of
mortgage on the company’s immovable property took place within 6 months before the
presentation of the petition for winding-up. Now, if it can further be proved that the
dominant motive of the company was to prefer one creditor to other creditors, then the
transaction would be deemed to be fraudulent preference and hence invalid. The real
test is whether the debtor (the company in the said illustration) in making the transfer
is doing what he himself felt bound or compelled to do. If so, the case does not fall
within the purview of fraudulent preference [Nobin Kishori vs. Jugneshwar AIR (1983)
Cal. 809; In re. MIC Trust Ltd. (1933) Ch. 542].
(ii) Avoidance of voluntary transfer: Any transfer of movable or immovable property or
any delivery of goods by a company, save and except a transfer or delivery in the
course of the company’s business in favour of a purchaser or encumbrancer in goods
faith and for valuable consideration, shall be void against the liquidator, if such
transfer or delivery is made within one year before the presentation of the winding-up
petition by or subject to the supervision of the Tribunal or the passing of a resolution
for the voluntary winding-up (Section 531A).
(iii) Void transfer: Any transfer or assignments by a company of all the property to
trustees for the benefit of its creditors are void (Section 532).
(iv) Liabilities of fraudulently preferred persons: If an act done by a company is invalid
under Section 531 as a fraudulent preference of a person interested in property
mortgaged or charged in his favour to secure the company’s debt, the person so
preferred would be liable, as a surety for the debt to the extent of the mortgage (or
the charge) on the property or the value of his interest, whichever is less. The value
of the said person’s interest shall be determined at the date of the transaction
constituting the fraudulent preference and shall be determined as if the interest were
free of all encumbrances other than those to which the mortgage or charge the
company’s debt was then subject (Section 533).
(v) Limitation on rights under a floating charge: There are two major statutory limitations
to rights arising out of a floating charge. First, a floating charge created within 12
months of the commencement of winding-up unless it is proved that the company
immediately after the creation of the charge was solvent, is invalid except up to the
amount of any cash paid to the company at the time or subsequent to the creation of,
and in consideration for, the charge together with interest on the amount at 5% per
annum or other prescribed rate (Section 534). Secondly, preferential debts have also
priority over debts secured by a floating charge (Section 123 and 530) and they must
be paid out of the assets covered by a floating charge to the extent that they cannot
be met out of assets available for payments of unsecured creditors.
(vi) Disclaimer of onerous property: The liquidator may, with the leave of the Tribunal,
Corporate Winding-up and Dissolution 9.45

disclaim any onerous property within twelve months of the commencement of the
winding-up. If the existence of any disclaimable property does not come to the
knowledge of the liquidator within one month after the commencement of the winding-
up, he can disclaim at any time within 12 months after he has become are fit. The
Tribunal may, however, extend the time.
An onerous property may consist of: (a) land of any tenure, burdened with onerous
covenants (b) shares or stocks in companies; (c) any other property which is
unsaleable or is not readily saleable, being onerous, binding the possessor thereof
either to perform any onerous act or to pay any sum of money; or (d) unprofitable
contracts.
His right to disclaim is lost if, within twenty eight days or such extended period as may
be, allowed by the Tribunal of receiving a demand from any interested person to make
his decision, (he does not give notice that he intends to apply for leave to disclaim).
Any person injured by disclaimer is treated as a creditor of the company to the
amount of compensation or damages payable in respect of the injury, and may prove
in the winding-up to the extent of the injury (Section 535).
(vii) Avoidance of transfers etc.: In the case of a voluntary winding-up, any transfer of
shares in the company which has not been sanctioned by the liquidator, and any
alteration in the status of the members of the company made after the commencement
of the winding-up, is void.
In the case of a winding-up by or subject to the supervision of the Tribunal, all
disposition of properties (including actionable claims) belonging to the company as
well as transfer of shares in the company or alteration in the status of its members
which are made after the commencement of the winding-up are void unless otherwise
ordered by the Tribunal (Section 536).
(viii)Avoidance of certain attachment, etc.: In the case of any company which is being
wound by or subject to the supervision of the Tribunal, (a) any attachment, distress or
execution put in force, without leave of the Tribunal, against the estate or effects of
the company, after the commencement of the winding-up or (b) any sale held, without
leave of the Tribunal, of any of the properties or effects of the company after such
commencement is void. These provisions, however, will not apply to any proceeding
for the recovery of any tax or impost or any dues payable to the Government (Section
537).
In Rajratna Narabhai Mills Co. Ltd. (In liquidation) by its Official Liquidator vs. New
Quality Bobbin Works (1973) 43 Comp. Case 131. Three issues emerged for decision.
These are as follows:
First, where an attachment of the company’s property under Tribunal’s order takes place
9.46 Corporate and Allied Laws

prior to the filing of the winding-up petition and the sale of the attachment property takes
place before the issue of the winding-up order, can the liquidator claim the sale proceeds?
It was held that on account of the sale of the property having taken place after the
commencement of the winding-up proceedings, Section 537 of the Act would operate and
the sale of the shares would be void. Where the respondent had derived benefit under a
void contract, he would be under an obligation to return it to the Official Liquidator of the
company in liquidation who would be the only claimant of the benefit. Secondly, if the sale
proceeds were claimable, would be liquidator being required to file a separate suit? It has
been held that the summons for getting the relief under Section 537 by the official
liquidator was maintainable and there was necessity for the liquidator to file a separate
suit. When the official liquidator, if empowered by Section 457(1) of the Act to institute or
defend legal proceedings and in performance of his duty, finds a transaction to be void
against him the transaction becoming void because of the winding-up proceedings – it
would be a question of fact arising in the course of winding-up and the Tribunal would
have the jurisdiction to decide the question. This is the scope and ambit of jurisdiction
conferred upon the Tribunal under Section 446(2) of the Act. Therefore, the liquidator
would not have to file the suit in the Tribunal. Thirdly, whether the application by the
liquidator to the Tribunal for the recovery of the sale proceeds was barred by limitation?
Article 137 of the Limitation Act, 1963 would apply only to application not made under the
Code of Procedure. The liquidator made this application not under the Code of
Procedure but under the Companies Act to the Tribunal on whom jurisdiction is conferred
by Section 10 of the Companies Act. It was, therefore, held that the application was not
barred by limitation.
(5) Offences by officers of companies in liquidation: The Act provides certain
punishments to be inflicted on past or present officers of a company which is in the
course of winding-up (i) who do not disclose to the liquidator all the property of the
company and consideration for which the same has been disposed of, (ii) who conceal
or fraudulently remove any part of the property of the company of value of Rs. 100 or
more within twelve months next before the commencement of the winding-up, (iii) who
make any material omission in their statements about the affairs o the company, (iv)
who are guilty of any false representation or fraud obtaining consent of the creditor to
the agreement relating to the affairs of the company or to a winding-up.
Note: The above is illustrative of offences for which an officer may be punished. For a
complete list of such offences read Section 538(1)(a) to (p).
The officers may be punished on any one of the aforementioned grounds with
imprisonment or with fine or with both.
Offences against the Act: No Tribunal shall take cognizance of any offence against the
Act, except on the complaint in writing made by the Registrar, or a shareholder or a
person authorised by the Central Government in this regard [Section 621(1)]. In spite of
Corporate Winding-up and Dissolution 9.47

anything contained in the Code of Criminal Procedure if the complainant is either the
Registrar or the Central Government’s deputationist, his personal attendance before the
Tribunal trying the offence shall not be necessary, unless the Tribunal for reasons to be
recorded in writing requires his personal attendance at the trial [Section 621(IA)].
Notwithstanding anything contained in the Code of Criminal Procedure 1973 any offence
punishable under this Act (whether committed by a company or any officer thereof, not
being an offence punishable with imprisonment only or with imprisonment and also with
fine, may, either before or after the institution of any prosecution be compounded by (a)
the Company Law/Board, or (b) where the maximum amount of fine which may be
imposed for such offence does not exceed fifty thousand rupees by the Regional Director
on payment or credit by the company or the officer, as the case may be, to the Central
Government of such sum as that Board or the regional director as the case may be, may
specify but in no case the sum so specified shall exceed the maximum amount of fine
imposed for the offences so compounded. This provision is not applicable in case of an
offence committed by a company or its officer within a period of three years from the date
on which a similar offence committed by it or him was compounded. [Section 621A, as
added by the Companies (Amendment) Act, 1988]. The amount of fine, imposed under the
Act by the Tribunal may be applied, under the direction of the Tribunal in or towards the
payment of the costs of proceedings, or rewarding the person on whose information the
fine is recovered (Section 626). For false statements made in, as well as omissions
intentionally made of, any material fact knowing it to be material, any return, report,
certificate, balance sheet, prospectus, statement or other document, Section 628 renders
the offence punishable with imprisonment extending-up to 2 years as well as with me.
Similarly, under Section 629 an offender is punishable for intentionally giving false
evidence in any examination on oath.
Falsification of books: If with intent to defraud or deceive, any person, any officer or
contributory of a company destroys, mutilates, alters, falsifies, secrets, etc. any books,
papers or securities, or is a party to any of these acts, he will be punishable with
imprisonment for a period extending up to 7 years and fine. He will also be equally
punishable, if he makes or is privy to the making of, any false or fraudulent entry in any
register, books of account, etc. belonging to the company (Section 539).
An auditor, being an officer of the company, if culpable in the circumstance would be
liable to be punished as prescribed. The provisions of this Section can be invoked only
when the company is being wound-up.
Liabilities where proper accounts not kept: If in a winding-up it is found that proper books
of account have not been kept throughout the period of two years preceding the
commencement of winding-up (or the period between the incorporation of the company
and the commencement of the winding-up whichever is shorter) the officers of the
company would be liable to imprisonment for a term extending to one year. They may
9.48 Corporate and Allied Laws

however, escape liability, if they can show that they had acted honestly, and that in view
of the circumstances in which the business was carried on, the default was excusable.
Proper books of account will be deemed to have been kept if there have been kept (a),
such books or accounts as are necessary to exhibit and explain the transactions and
financial position of the business of the company, including books containing entries made
from day-to-day in sufficient detail of all cash received and all cash paid, and (b)
statement of annual stock taking with all necessary particulars, where the business of the
company has involved dealings in goods (Section 541).
Liabilities for fraudulent trading: If, in the course of a winding-up, it transpires that the
business has been carried on with the intent to defraud creditors or others, the Tribunal
may, on the application of the Official Liquidator, or the liquidator or any creditor or
contributory, declare that any person who was knowingly a party to such a carrying on of
the business shall be personally liable to on unlimited extent for all or any of the
company’s debts or liabilities, lie may also be called upon to pay fine up to Rs. 50,000 or
sentenced to imprisonment up to two years or with both (Section 542).
Misfeasance: If, in the course of winding-up of a company, it appears that any person who
had taken part in the formation or promotion of the company, or any past or present
director, manager, liquidator or other officer of the company has misapplied or retained or
become liable or accountable for any money or property of the company, or has been
guilty of any misfeasance or breach of trust in relation to the company, the Tribunal may,
on the application of the Official Liquidator, or any creditor or contributory, examine into
the conduct of such person, and compel him to repay or restore the money or property or
make compensation to the company for misfeasance or breach of trust/misapplication etc.
(Section 543).
Now suppose, the Official Liquidator of a company in liquidation institutes misfeasance
proceedings against the director thereof and during the pendency of the proceeding itself
the director passes away. Can the legal representatives of the decreased director be
impleaded and the proceedings continued against them? This question came up for
judicial decision in Official liquidator vs. Pasthasarathi Sinha (1983) 53 Comp. Cases 163
(SC).
Held: The misfeasance proceedings initiated under Section 543 against a director of a
company in winding-up can be continued on his death against his heirs and legal
representatives for the purpose of determining and declaring the loss or damage caused
to the company though no compulsive order may be made in those proceedings under
Section 543 against the heirs and legal representatives. On conclusion of the proceedings
under Section 543 a declaration of liability may be made. Such declaration partakes the
character of a decree in a suit and can be enforced under Section 634 and 635. The
provisions of Section 50 of CPC have to be applied when the person who is made liable
dies and the liability of the legal representatives should be determined accordingly.
Corporate Winding-up and Dissolution 9.49

Misfeasance is an act or omission, in relation to the company, which causes loss or injury
to the company. Although loss to the company has not been expressly stated in Section
543, nevertheless such ‘loss’ has to be implied in case of misapplication or retainer. Only
such an act of misfeasance as results in the loss to the company will fall within the ambit
of Section 543. It is essential for the liquidator to establish that the respondents are
accountable for some goods or money belonging to the company or that they are guilty of
misapplication, retainer or breach of trust (In re. Vijay Laxmi Sugar Mills Ltd. AIR 1963 All
55). For the creation of liability under Section 543, it must be shown that there has been
dishonesty or fraud or at least gross and culpable negligence Piliai Central Bank vs.
Augusti AIR 196, Ker. 121). An honest mistake, not amounting to culpable negligence or
breach of duty, would not be misfeasance (Ayyangar vs. Official Assignee of Madras, 55
Mad. 153).
Where the person guilty of the offence is a firm or body corporate, the Tribunal may make
the aforesaid order against the individual who was at the relevant time a partner of the
firm or a director of the body corporate (Section 544).
Notes: (i) For the purpose of Section 543 an auditor is an officer [Section 2(30)];
(ii) Section 543 provides for a summary remedy for bringing erring officers of the
company to book and the long-winded remedy by way of suit is always available in
addition;
(iii) Illustrations of misfeasance are: improper payment of dividends; ultra vires
investment; selling his own property to company without disclosure; allotting shares in
contravention of Section 69, etc.; and
(iv) Misfeasance summons would also lie against directors when they have paid dividend
out of capital knowingly allotted shares to infants, etc. Misfeasance lies against the
liquidator when he has negligently admitted a claim.
Misfeasance proceedings can be taken against the auditors under Section 543 of the
Companies Act. If they are found to have been guilty of any misfeasance or breach of
trust in relation to the company. Such a liability may arise due to non-performance or
unsatisfactory performance of duties by an auditor in relation to the account of the
company, as a result of which the company has suffered losses. The liability is a
liability and the Tribunal may call upon the auditor to make good the damages
suffered by the company. But the action against the auditor under the aforementioned
provision of law can be taken only if the business of the company is in the course of
being wound up. The directors of a company while it is functioning can also take an
action against the auditor for negligence in the circumstances similar to those
aforementioned.
The application must be made within 5 years from the date of the order of winding-up
or the first appointment of liquidator or of the misapplication, retainer, misfeasance or
9.50 Corporate and Allied Laws

breach of trust as the case may be, whichever is longer.


(6) Power of Tribunal to grant relief to officers against the liability for misfeasance,
breach of duty, etc.: If in any proceedings for misfeasance against an officer of a
company it appears to the Tribunal hearing the case that he is or may be liable in
respect of the misfeasance, negligence, breach of duty, etc. but that he has acted
honestly and reasonably and that having regard to all the circumstances of the case
including those connected with his appointment, he ought fairly to be excused the
Tribunal may relief him either wholly or partly, from his liability on such terms as it
may think fit. But in a criminal proceeding under this Sub-section, the Tribunal is
bereft of any power to grant relief from any liability, which may attach to an officer in
respect of such misfeasance [Section 633(i)].
Where any such officer has reason to apprehend that any proceeding will or might be
brought against him in respect of any misfeasance, etc. he may apply to the Tribunal
for relief and the Tribunal on such application has the same power to relieve him as it
would have had if it had been a Tribunal before which proceedings against that officer
for misfeasance, etc. had been brought under Sub-section 633 [Section 633(2)].
But the relief under Sub-section (1) or Sub-section (2) can be granted to an officer,
only if the relevant Tribunal has, by notice served in the manner specified by it,
required the Registrar or any other person to show cause why such relief should not
be granted [Section 633(1)].
It should be noted that only an officer of the company and not company itself could
apply for relief. But it is for the Tribunal before which the proceeding is pending and
not for Tribunal to grant relief. The Tribunal can grant relief only under Sub-section
(2) against apprehended prosecution.
(7) Prosecution of delinquent officers and members of the company (Section 545): If
it appears to the Tribunal in a winding-up by or subject to the supervision of the
Tribunal that any past or present officer or any member of the company has been
guilty of any offence in relation to the company, the Tribunal may, either on the
application of any person interested in the winding-up or of its own motion direct the
liquidator either himself to prosecute that offender or to refer the matter to the
Registrar. In the latter case, if the Registrar considers it to be a fit case for
prosecution he shall report the matter to the Central Government, which may, after
taking such advice as it thinks fit, direct the Registrar to institute such proceedings for
the purpose. No report shall, however, be made by the Registrar unless an
opportunity is given to an accused person to make a statement to him in writing and of
being heard thereon.
Similarly, if in the course of the voluntary winding-up it appears to the liquidator that
any such person as stated above has been guilty of criminal offence in relation to the
Corporate Winding-up and Dissolution 9.51

company, then he shall forthwith report to the Registrar. The Registrar may, in this
case, do any of the three viz. (i) he may refer the matter to the Central Government
for further enquiry whereupon they shall investigate the matter and if thought
expedient, may apply to the Tribunal for an order conferring on any person designated
by them, all the case of compulsory winding-up or (ii) if he is of the opinion that the
case is not a fit one for the prosecution, he shall inform the liquidator according and
(iii) the liquidator in the last case if he holds a different opinion may himself take
proceedings against the offender after securing the sanction of the Tribunal. In case,
however, the liquidator does not make a report to the Registrar as he should, the
Tribunal may, on an application of any person interested in the winding-up or of its
own, motion, direct the liquidator to make such report which, on being made shall
dealt with by the Registrar in any one of the three ways mentioned above.
In connection with an every prosecution in pursuance of these provisions, it shall be
the duty of the liquidator and of every officer and an agent of the company, past and
present (other than the defendant in the proceeding) to give to the Registrar all
assistance he is reasonably able to give. ‘Agent’ here includes any banker, legal
advisor or an auditor of the company. In case of default, the Tribunal may, on the
application of the Registrar, direct performance of this duty. Where the liquidator is in
default, the Tribunal may order him to pay the cost of the application personally
unless it appears that the default was due to the liquidator not having in the hands the
sufficient assets of the company.
(8) Disposal of books and papers of the company: In a winding-up by the Tribunal or
subject to the supervision of the Tribunal, the Tribunal will direct how the books and
papers of the company and of the liquidator are to be disposed of.
In the case of members’ voluntary winding-up they are disposed of in such manner as
the company by a special resolution directs and in the case of creditors’ voluntary
winding-up in such a way as the Committee of Inspection and if there is no such
Committee as the creditors of the company may direct.
After the expiry of five years from the dissolution of the company, no responsibility will
rest on the company the liquidator or any person to whom the custody of the books
and papers has been committed, by reason of any books or papers not being
forthcoming for any person claiming to be interested therein (Section 55).
The Central Government may, by rules, prevent for such period (not exceeding 5
years from the dissolution of the company) as the Central Government thinks proper,
the destruction of the books and papers of a company, which has been wound-up, and
of its liquidator. Also it can similarly enable any creditor or contributory of the
company to make representation to the Central Government in respect of the matters
aforementioned and to appeal to the Tribunal from any direction, which may be given
by the Central Government in the matter [Section 540(3)]. If any person acts in
9.52 Corporate and Allied Laws

contravention of any such rules or of any direction of the Central Government


thereunder, he shall be punishable with an imprisonment for a term extending to 6
months or with fine extending to Rs. 50,000 or with both [Section 550(4)].
(9) Information as to pending liquidation (Section 551): You may come across a
situation where the winding-up of a company has commenced but it has not been
possible to conclude it within one year since its commencement. In such a case, the
liquidator is required to file in the Tribunal (in case of a winding-up/by or subject to
supervision of the Tribunal or with the Registrar in case of a voluntary winding-tip a
statement in the prescribed form. The statement is to contain the prescribed
particulars and is to be duly audited by a qualified auditor with respect to the
proceedings in and the position of the liquidation. This statement is to be filed within
two months of expiry of such a year. This statement is to be filed at intervals of not
more than one year or such shorter intervals as may be prescribed. The liquidator has
to comply with these requirements unless he is exempted from so doing wholly or
partly by the Central Government [Sub-section (1)].
A copy of the statement filed in the Tribunal as aforesaid has to be simultaneously
filed with the Registrar who shall keep it along with the other records of the company
[Sub-section (2)].
In the case of Government Company in liquidation, copy of the statement shall be
forwarded to the Central Government if it is a member of the Government Company or
to the state Government if that Government is a member or to the Central and the
State Government both, if both are the members of the Government Company [55(2A)
as added by the Companies (Amendment Act), 1988].
The said statement is open to an inspection by any person stating himself in writing to
be a creditor or contributory or his agent at all reasonable times on payment of the
prescribed fee. He may also have a copy of or an extract from, the statement if he so
wants [Sub-section (3)].
The Section provides for the following penalties namely:
(a) fine up to Rs. 5,000 for every day of the liquidator’s failure in complying with the
requirement of the Section.
(b) imprisonment up to six months or fine up to Rs. 10,000 or both for the liquidators
wilful default in causing the statement to be audited by a qualified auditor and
(c) sentence provided in Section 182 of the Indian Penal Code for the person untruthfully
stating himself to be a creditor or contributory of the company for inspecting the
aforementioned statement or receiving copy or an extract thereof [Sub-section (4) &
(5)].
(10) Liquidators’ duty as to the payment into a bank: In terms of Section 552, every
Corporate Winding-up and Dissolution 9.53

Official Liquidator is bound to pay all moneys which he receives as the liquidator of
the company into the public account of India in the Reserve Bank in such a manner
and as at such times as may be prescribed.
Under Section 553, every other liquidator than the Official Liquidator shall pay such
money into a scheduled bank to the credit of a special bank account. This account is
to be described as “the Liquidation Account of Company ‘Company Limited’/Company
Private Limited”. He has to make this payment into the bank unless the Tribunal for
reasons of an advantage to the creditors or contributories otherwise orders him.
However, he cannot retain with himself any sum in excess of Rs. 500 or such other
amount as the Tribunal may authorise for more than 10 days. If he fails to give any
satisfactory explanation he is obliged to pay interest at 12% per annum and such
other penalty as may be prescribed by the Registrar. He shall be further liable to
disallowance of all or such of his remuneration as the Tribunal may think fit. For the
said stipulated amount and period, he shall also be liable to be out as well as to pay
expenses occasioned by reason of his default.
According to Section 554, neither, the Official Liquidator nor any other liquidator can
pay any money received by him in his capacity as such into any private banking
account.
(11) Unpaid dividend, and undistributed assets to be paid into Company’s
Liquidation Account (Section 555): Where a company is being wound-up, the
liquidator shall forthwith may into the public account of India in the Reserve Bank in a
separate account described as the “Company’s Liquidation Account” all the money
which he has either in his hands or under his control and which represents (a)
dividends payable to any creditor which bad remained unpaid for 6 months after the
declaration thereof; or (b) assets refundable to any contributory, which have remained
undistribution thereof; or (b) assets refundable to any contributory, which have
remained undistributed for 6 months after the date on which they became refundable.
Similarly, on the dissolution of a company the liquidator must pay any unpaid
dividends or undistributed assets in his hands at the date of the dissolution, into the
account aforementioned [Sub-section (2) & (3)].
While making the aforesaid payment, the liquidator shall furnish to such officer as
appointed by the Central Government with a statement in the prescribed form. Such a
statement must set forth the nature of the sums, the names and the last known
addresses of thin persons entitled to participate therein, the amount to which each is
entitled thereto and nature of the claim thereto, and other prescribed particulars.
For the money paid into the Reserve Bank the liquidator is entitled to a receipt from
the former a receipt is an effectual discharge of the liquidator’s obligation in this
regard [Sub-section (4)].
9.54 Corporate and Allied Laws

Where the company is being wound-up by the Tribunal the liquidator shall make the
payment mentioned above by transfer from the account referred to in Section 552
[Sub-section (5)].
Visualise situation where the company is being wound-up voluntarily or subject to the
supervision of the Tribunal. In such a case, the liquidator shall, when filing a
statement pursuant to Section 51(1) indicate the sum of money which is payable to
the Reserve Bank under Section 551(1) & (2) as unclaimed dividends or undistributed
assets and which he has not in his hands for 6 months preceding the date to which
the statement is brought down, and pay that sum into the company’s Liquidation
Account within 14 days from the date of filing the statement [Sub-section (6)].
Any person entitled to moneys which had been paid into the company’s Liquidation
Account, may apply to the Tribunal for an order for payment thereof. The Tribunal
may order payments, if it is satisfied that the money is due to the applicant. Prior to
this order being made; the Tribunal shall, however, serve a notice on an officer who
might have been appointed by the Central Government in this connection, asking him
to show cause why the order should not be made [Sub-section (7)]. This provision
clearly shows that the person entitled to participate in the sums so paid up into the
Company’s Liquidation Account do not lose their right forever.
It should, however, be noted that the person may also apply to the Central
Government, instead of the Tribunal as referred to above, for an order for payment of
the money. If no application for such a payment has already been made to the
Tribunal, the Central Government may make the order for payment to that person or
the sum due after taking such security from him as it may think fit) provided it is
satisfied with a certificate to be given in this regard by the liquidator or the Official
Liquidator or otherwise [Sub-section (7)].
It is necessary that if the moneys paid into the company’s liquidation account have
remained unclaimed for fifteen years, those will have to be transferred to the general
revenue account of the Central Government. Even thereafter any person entitled
thereto may apply to the Central Government [Sub-section (8)].
Should the liquidator, instead of putting the money into the company’s Liquidation
Account, retain it, he must: (i) pay interest @ 12% per annum on the sum retained,
subject, however to the Central Government’s power to remit wholly or partly the
amount of interest; (ii) pay any expenses incurred as a result of his default; and (iii)
where the winding-up is by or under the ‘supervision of the Tribunal, be deprived of
his remuneration partly or wholly and be removed from his office [Sub-section (9)].
(12) Dissolution declared void: Within two years of the dissolution of a company, the
Tribunal may, on an application being made by the liquidator or any other person
interested, make an order declaring the dissolution to have been void. A certified copy
Corporate Winding-up and Dissolution 9.55

of the order must be filed with the Registrar by the person on whose application order
was made, within 30 days (Section 559).
(13) Winding-up unregistered companies: An “unregistered company” includes any
partnership, association or company consisting of more than seven members at the
time when the petition for winding-up the partnership, etc. is presented before the
Tribunal. It does not include, however, a railway company incorporated by an Act of
Parliament or other Indian Law or any Act of Parliament of the United Kingdom, or a
company registered under the Companies Act, 1956 or under any previous
Companies Law (Section 582).
An unregistered company may be wound-up under the Act and all the provisions of the Act
with respect to winding-up apply to an unregistered company with the following exceptions
and additions:
(a) To determine a Tribunal’s jurisdiction in the matter of its winding-up, the principal
place of business is, for all the purposes of the winding-up deemed to be the
Registered Office of the company.
[N.B. The Registered Office of a company is the determining factor for the Tribunal’s
jurisdiction in this regard].
(b) An unregistered company is not to be wound-up under Act voluntarily or subject to
supervision. It is to be wound-up by the Tribunal.
(c) The circumstances in which an unregistered company may be wound-up are as
follows:
(i) if the company has been dissolved, or has ceased to carry on business, or is
carrying on business for the purpose of winding-up its affairs;
(ii) if the company is unable to pay its debts; or
(iii) if the Tribunal is of the opinion that it is just and equitable that the company
should be wound-up.
An unregistered company is deemed to be unable to pay its debts in the following
circumstances:
(i) if a creditors (as assignee or otherwise), to whom a sum exceeding Rs. 500 is due,
has submitted a demand in writing to the company asking it to pay him the sum due
and the company has neglected to pay it or to secure or to compound for it for 3
weeks after the service of the demand;
(ii) if any suit or legal proceedings has been instituted against any member for any debt
or demand due from the company and a notice thereof has been communicated to the
company and the company has not, within 10 days of the service of the notice, paid,
secured or compounded for the debt;
9.56 Corporate and Allied Laws

(iii) if the execution or the process against the company has been returned unsatisfied in
whose or in part;
(iv) if it is otherwise proved to the satisfaction of the Tribunal that the company is unable
to pay its debts.
Every person, in the event of an unregistered company being wound-up, who is liable to
pay or to contribute to the payment of (a) any debt or liability of the company, (b) any sum
for the adjustment of the rights of the members among themselves or (c) the costs,
charges and expenses of the winding-up, shall be deemed to be a contributory. He will be
liable to contribute to the assets of the company all sums due from him in respect of any
liability to pay or contribute. If a contributory dies or becomes insolvent, the provision of
the Act as regards legal representatives or assignees shall be applicable (Section 585).
The provisions of the Act with regard to staying and restraining suits and legal proceeding
against a company at any time after the presentation of the petition for winding-up but
before a winding up order is made, in the case of an unregistered company where the
application to stay or restrain is made by a creditor, extent to suits and legal proceedings
against any contributory (Section 586). If, however, a winding-up order has been made,
no suit or legal proceedings can be commenced or proceeded with against a contributory
for the debt of the company with leave of the Tribunal (Section 587).
10
(J) PRODUCER COMPANIES

10.0 INTRODUCTION
(a) Background of the law relating to producer companies
The co-operative movement in India is considered as the backbone of the Indian economy.
The movement was able to make rapid strides in the rural economy, uplifting the standard of
living of the rural masses, which enabled them to sell their produce under an organised
structure and form of organisation. The co-operative businesses in India are a time tested and
successful form of organisation which enabled wider participation of the member constituting it
and today there are many co-operative businesses, which are, not only state oriented but have
become multi-state and national co-operatives. With the on set of reforms in the Indian
economy, a need was felt that such of those producer co-operatives should be able to
corporatise themselves into company form of organisation.
In the back drop of corporatisation of businesses, the Central Government had constituted on
1st November, 1999, a high powered committee under the Chairmanship of Dr. Y.K. Alagh to
examine and make recommendations with regard to the following agenda:
(a) Framing a legislation which would enable incorporation of co-operatives as companies
and conversion of co-operatives into companies;
(b) Ensuring that proposed legislation accommodates the unique principles of co-operative
business within a regulatory framework similar to that of companies.
The Committee submitted its report on 15th March, 2000. On the basis of recommendations of
the committee, the Government introduced in the Lok Sabha on 31st August, 2001, the
Companies (Second Amendment) Bill, 2001. Thereafter, the Bill was renamed as Companies
(Amendment) Bill, 2002 passed by the Lok Sabha on 10th December, 2002, and by the Rajya
Sabha on 17th December, 2002. The Bill was given assent by the President of India on 31st
December, 2002. The Bill finally became an Act, known as the Companies (Amendment) Act,
2002 [No. 1 of 2003]. The Act came into force w.e.f. 6th February, 2003 vide Notification No.
135(E) dated 5th February, 2003.
The main objective of the amendment is to facilitate the formation of co-operative businesses
10.2 Corporate and Allied Laws

as companies and to make it possible to convert existing co-operative business into


companies. The option of conversion is purely voluntarily. With the Act coming into force, a
new part Part-IXA has been included. With this, the Act (Companies Act, 1956) contains new
Sections 581A to 581ZT relating to formation of producer companies, their administration and
management, conversion of existing co-operative businesses into produce companies and
matters connected therewith.
(b) Structure of the Companies (Amendment) Act, 2002
Part-IXA introduced by the Amendment Act, 2002 contains the twelve chapters dealing with
the respective matters as shown below:
Chapter-I Definitions
Chapter-II Incorporations of producer companies and other matters.
Chapter-III Management of producer company.
Chapter-IV General Meetings.
Chapter-V Share Capital and Member Rights.
Chapter-VI Finance, Accounts and Audit.
Chapter-VII Loans to Member and Investments.
Chapter-VIII Penalties.
Chapter-IX Amalgamation, Merger or Division.
Chapter-X Resolution of Disputes.
Chapter-XI Miscellaneous Provisions.
Chapter-XII Re-Conversion of producer company into Inter-State
Co-operative Societies.
(c) Over-riding effect
The provisions of Part-IXA shall override other laws (Section 581ZQ). In other words, the
provisions of this part shall have effect notwithstanding anything inconsistent therewith
contained in this Act or any other law for the time being in force or any instrument having
effect by virtue of any such law; but the provisions of any such Act or law or instrument in so
far as the same are not varied by, or are inconsistent with, the provisions of this part shall
apply to the producer company.
(d) Application of provisions relating to private companies (Section 581ZR)
All the limitations, restrictions and provisions of this Act, other than those specified in this part,
applicable to a private company, shall, as far as may be, apply to a producer company, as if it
is a private limited company under this Act in so far as they are not in conflict with the
provisions of this Part. Although, the status of a producer company shall be that of a private
company, strictly speaking, it cannot be construed as a private company in terms of Section
3(1)(iii) of the Companies Act, 1956 which defines a private company. In terms its maximum
Producer Companies 10.3

member as in the case of private company, producer company need not limit the number of
members to 50. In terms of restriction on the transfer of shares, a producer company shall be
restricted as provided in Sections 581ZD(ii) and (iv). Besides, it need not have a minimum
paid up capital of Rs. 1 lakh. It shall also not possible for a producer company to make any
invitation to the public for subscription of any shares or debentures of the company or accept
any invitation of deposits.
(e) Major distinctions between Producer Company and the Private Company
All the provisions of Part-IXA (contained in Sections 581A to 581ZT) relating to producer
companies shall prevail over all the provision of other laws to the extent they are inconsistent
therewith. Similarly, all the limitations, restrictions and prohibitions under Section 3(iii) of the
Act applicable to a private company shall not be applicable to producer company as if it is a
private company to the extent they are not in conflict with the provisions of this part. Given this
contradiction in the formation of producer company, a producer company differ from a private
company as a distinct and different class of company. The distinction varies in the matters
relating to formation, management, administration, finance, accounts, audit and merger,
amalgamation or division of companies. The major distinction between these two classes of
companies are as follows:
Producer Company Private Company
1. Incorporation
The producer company can be formed by Private Company can be formed by two
any 10 or more individuals, each of them individuals or companies. The name of the
being individuals or institutions. Its name private company should bear the words
shall bear the words “Producer Company “private limited” and the liability may be
Ltd.” and the liability of the members shall limited (by shares or by guarantee) and
be limited by the memorandum. The unlimited by the memorandum. The articles
objects of a producer company should be should specifically contain the restrictions as
as specified in 581B, which contain 11 stated in Section 3(iii) and the minimum
items. There need not be any conditions capital should be Rs. 1 lakh. The objects can
attached to articles to state that it is a be main, incidental or ancillary and other
private company. objects.
2. Management
The minimum and maximum number of The minimum number of directors of a private
directors of a producer company is 5 and company is two and the maximum may be
50. Their tenure is for a minimum period of specified by the articles (any increase in the
1 year and the maximum period of 5 years. maximum beyond 12 directors requires
The Board can opt one or more directors or approval of the Central Government). A
additional directors which cannot exceed tenure of directors is not fixed by the law. The
1/5th of the total number of directors. The board can appoint additional, alternate
period of such directors may be for any director and director to fill up casual vacancy.
10.4 Corporate and Allied Laws

period. Vacation of the office of directors is An additional director shall hold the office
provided in Section 581Q and the powers upto the date of the next Annual General
have been mentioned in 581R. The matters Meeting. The powers and functions of
to be transacted by the board only at directors are specified in Section 292. There
general meeting are contained in Section is no additional liability for directors as
581S. The liability of directors for their acts provided for directors in a producer company.
then in contravention of the provisions of
the Act shall be joint concern. Further, this
liability shall be in addition to or not in
derogation of a liability imposed under any
other law.
3. General Meetings
The notice of the AGM shall comprise not The first AGM is required to be held within 18
only the agenda but also to include minutes months from the date of incorporation and
of the previous AGM and EGM. It shall also notice of the meeting should be given not
contain the names of candidates for less than 21 days Notice and the accounts
elections of office of the director including a can be sent separately.
statement of their qualifications. The notice
of meeting is required to be given not less
than14 days and the quorum shall be 1/4th
of the total members unless the articles
provide for a higher number. The first AGM
is required to be held within 90 days from
the date of incorporation of the company.
4. Share Capital and Members Rights
The share capital of a producer company Share capital may be equity or preference or
shall consist of equity shares only and a any other class. There is no provision for
member shall hold shares in proportion to holding of shares according to the patronage
the patronage of that company. Active and there is no distinction between members.
members shall have special rights and such Transfer of shares is restricted and
shares are transferable to any other active nomination is voluntarily. There is also no
member. The transferability is subject to provision for cession of membership and their
prior or approval of the board and at par rights. The voting rights shall be generally
value. Nomination facility by members is governed by the manner prescribed by the
mandatory. Circumstances for cession of articles of association.
membership is provided. Irrespective of the
shareholding one member shall have only
one vote.
Producer Companies 10.5

5. Loans and Investments


Loans to members can be granted only Excepting that of loan to directors a private
after approval by members in the general company cannot provide loan or advance to
meeting. The general reserves of a its members. The provisions of Section 372A
producer company shall be invested in relating to inter-corporate loans and
specified securities. The limit of investment investments are not applicable to a private
in other companies either by the producer company.
or together with its subsidiaries cannot
exceed 30% of the aggregate paid up
capital and free reserves.
10. Finance, Accounts and Audit
Producer companies shall keep proper Proper books of accounts shall be kept in
books of accounts and internal audit shall those companies engaged in industrial
be carried out by a chartered accountant. activity. Internal audit need not be carried out
Apart from the matters provided in Section and auditor’s report shall be subject to the
227, auditor shall report on certain provisions as specified in Section 227. A
additional matters like debts due with bad private company has no restriction for making
debts, verification of cash securities, donations or subscription and it can
donations etc. A producer company may contribute donation to political party or
donate or subscribe to any institution or purpose as specified in Section 293A.
individuals for social and economic welfare
or for promoting mutual assistance
principles. The aggregate amount shall not
exceed 3% of the net profit in the financial
year immediately proceeding the financial
year. It cannot donate directly or indirectly
to any political party or purposes.
7. Penalties
Penalties for contravention of provisions Penalties for contravention of the applicable
relating to producer company are specified provisions is specified in appropriate
generally in Section 581ZA. sections.
8. Amalgamation, Merger or Division
Registrar of Companies shall have a The National Company Law Tribunal shall
jurisdiction over the administration of have the jurisdiction over the matter.
scheme of amalgamation and an appeal
can be preferred to High Court.
9. Resolution of Disputes
Any dispute relating to formation, The resolution of disputes (oppression and
management or business of a producer mis-management are handled by the
10.6 Corporate and Allied Laws

company shall be settled by the Arbitration Company Law Board under Sections 397,
and Conciliation Act, 19910. 398 and 399 of the Companies Act, 19510.
10. Miscellaneous Provisions
Striking off the name of a producer Striking of name of company are generally
company shall be done by the Registrar of regulated by Section 560 or any other
Companies in accordance with Section 560 scheme as may be notified by the Central
of the Act. The provisions relating to Government. There is no provision which
producer companies shall have an specifies that the provisions relating to
overriding affect over any such Act or law private company shall have an overriding
for the time being inforce. effect over any other Act or law for the time
being inforce.
11. Reconversion of Companies
A producer company can be converted into Reconversion is possible by converting a
Inter-State Co-operative Society and vice- public company into a private company and
versa. vice-versa.

(f) Power to modify Act in its application to producer companies (Section 581ZT)
(1) The Central Government may, by notification in the Official Gazette, direct that any of the
provisions of this Act (other than those contained in this Part) specified in the said notification:
(a) shall not apply to the producer companies or any class or category thereof; or
(b) shall apply to the producer companies or any class or category thereof with such
exception or adaptation as may be specified in the notification.
(2) A copy of every notification proposed to be issued under sub-section (1), shall be laid in
draft before each House of Parliament, while it is in session, for a total part of thirty days
which may be comprised in one session or in two or more successive sessions, and if, before
the expiry of the session immediately following the session or the successive sessions
aforesaid, both Houses agree in disapproving the issue of the notification or both Houses
agree in making any modification in the notification, the notification shall not be issued or, as
the case may be, shall be issued only in such modified form as may be agreed upon by both
the Houses.

10.1 DEFINITIONS
Section 581A summarises the following definitions:
(a) “active member” means a member who fulfils the quantum and part of patronage of the
producer company as may be required by the articles;
Producer Companies 10.7

(b) “chief executive” means an individual appointed as such under sub-section (1) of Section
581W;
(c) “limited return” means the maximum dividend as may be specified by the articles;
(d) “member” means a person or producer institution (whether incorporated or not) admitted
as a member of a producer company and who retains the qualifications necessary for
continuance as such;
(e) “inter-State co-operative society” means a Multi-State co-operative society as defined in
clause (p) of Section 3 of the Multi-State Co-operative Societies Act, 2002 (39 of 2002)
and includes any co-operative society registered under any other law for the time being in
force, which has, subsequent to its formation, extended any of its objects to more than
one State by enlisting the participation of persons or by extending any of its activities
outside the State, whether directly or indirectly or through an institution of which it is a
constituent;

(f) “mutual assistance principles” means the principles set out in sub-section (2) of Section
581G;

(g) “officer” includes any director or Chief Executive or Secretary or any person in
accordance with whose directions or instructions part or whole of the business of the
producer company is carried on;

(h) “patronage” means the use of services offered by the producer company to its member
by participation in its business activities;

(i) “patronage bonus” means payments made by a producer company out of its surplus
income to the member in proportion to their respective patronage;

(j) “primary produce” means—

(i) produce of farmers, arising from agriculture (including animal husbandry, horticulture,
floriculture, pisciculture, viticulture, forestry, forest products, re-vegetation, bee raising
and farming plantation products), or from any other primary activity or service which
promotes the interest of the farmers or consumers; or
(ii) produce of persons engaged in handloom, handicraft and other cottage industries;
(iii) any product resulting from any of the above activities, including by-products of such
products;
(iv) any product resulting from an ancillary activity that would assist or promote any of the
aforesaid activities or anything ancillary thereto;
(v) any activity which is intended to increase the production of anything referred to in sub-
clauses (i) to (iv) or improve the quality thereof;
10.8 Corporate and Allied Laws

(k) “producer” means any person engaged in any activity connected with or relatable to any
primary produce;

(l) “producer company” means a body corporate having objects or activities specified in
Section 581B and registered as producer company under this Act;

(m) “producer institution” means a producer company or any other institution having only
producer or producers or producer company or producer companies as its member
whether incorporated or not having any of the objects referred to in Section 581B and
which agrees to make use of the services of the producer company or producer
companies as provided in its articles.

(n) “withheld price” means part of the price due and payable for goods supplied by any
member to the producer company; and as withheld by the producer company for payment
on a subsequent date.
10.2 OBJECTS AND FORMATION OF A PRODUCER COMPANY
Producer company means a body corporate having objects or activities specified in Section
581B and registered as a producer company under Companies Act, 19510.
Every producer company should deal basically with the produce of its active member for
carrying out any of its objects. The objects of the producer company, as per Section 581B,
may be relating to all or any of the following matters, namely:
(i) production, harvesting, procurement, grading, pooling, handling, marketing, selling, export
of primary produce of the member or import of goods or services for their benefit:
The producer company may at its option carry on any of the activities specified in this
clause either by itself or through other institution;
(ii) processing including preserving, drying, distilling, brewing, vinting, canning and packaging
of produce of its member;
(iii) manufacture, sale or supply of machinery, equipment or consumables mainly to its
member;
(iv) providing education on the mutual assistance principles to its members and others;
(v) rendering technical services, consultancy services, training, research and development
and all other activities for the promotion of the interests of its members;
(vi) generation, transmission and distribution of power, revitalisation of land and water
resources, their use, conservation and communication relatable to primary produce;
(vii) insurance of producers or their primary produce;
(viii) promoting techniques of mutuality and mutual assistance;
Producer Companies 10.9

(ix) welfare measures or facilities for the benefit of member as may be decided by the Board;
(x) any other activity, ancillary or incidental to any of the activities referred to in clauses (i) to
(ix) or other activities which may promote the principles of mutuality and mutual
assistance amongst the member in any other manner;
(xi) financing of procurement, processing, marketing or other activities specified in clauses (i)
to (x) which include extending of credit facilities or any other financial services to its
member.
(a) Formation and Registration
The formalities relating to registration of a producer company are similar as applicable for all
companies. However, for registration of a producer company, the requirements of Part-IXA
should also be complied with. [Section 581C(i)].
A producer company can be formed by any ten or more individuals, each of them being a
producer, or any two or more producer institutions, or a combination of ten or more individuals
and producer institutions, desirous of forming a producer company having its objects specified
in Section 581B and otherwise complying with the requirements and provisions of this Act in
respect of registration, may form Company under this Act.

If the Registrar of Companies is satisfied that all the requirements of this Act have been
complied with in respect of registration and matters precedent and incidental thereto, he shall,
within thirty days of the receipt of the documents required for registration, register the
memorandum, the articles and other documents, if any, and issue a certificate of incorporation
under this Act.

After incorporation producer company so formed shall have the liability of its members limited
by the memorandum to the amount, if any, unpaid on the shares respectively held by them
and be termed as company limited by shares. It also becomes a body corporate as if it is a
private limited company to which the provisions contained in this Part apply, without, however,
any limit to the number of members thereof, and the producer company shall not, under any
circumstance, whatsoever, become or be deemed to become a public limited company under
this Act.
The producer company may reimburse to its promoters all other direct costs associated with
the promotion and registration of the company including registration, legal fees, printing of a
memorandum and articles and the payment thereof shall be subject to the approval at its first
general meeting of the member.

The producer company should also be required to submit (a) memorandum and (b) its articles
duly signed by the subscribers to the memorandum, to the Registrar of the State to which the
registered office of the company is to situate [Section 581G(i)].
10.10 Corporate and Allied Laws

(b) Effect of incorporation of producer company (Section 581K)

Every shareholder of the inter-state co-operative society immediately before the date of
registration of producer company (hereafter referred to as the transformation date) shall be
deemed to be registered on and from that date as a shareholder of the producer company to
the extent of the face value of the shares held by such shareholder.
(c) Membership and voting rights of members (Section 581D)

A person, who has any business interest which is not conflict with business of the producer
company, shall become a member. On the other hand, a member, who acquires any business
interest which is in conflict with the business of the producer company, shall cease to be a
member and be removed as a member in accordance with articles of the producer company.

The articles of any producer company may provide for the conditions, subject to which a
member may continue to retain his member, and the manner in which voting rights shall be
exercised by the members.

These voting’s rights are:


(a) In a case where the member consists solely of individual member, the voting rights shall
be based on a single vote for every member, irrespective of his shareholding or patronage
of the producer company.
(b) In a case where the member consists of producer institutions only, the voting rights of
such Producer institutions shall be determined on the basis of their participation in the
business of the producer company in the previous year, as may be specified by articles.
Provided that during the first year of registration of a producer company, the voting rights
shall be determined on the basis of the shareholding by such Producer institutions.
(c) In a case where the member consists of individuals and producer institutions, the voting
rights shall be computed on the basis of a single vote for every member. However, a
producer company may, if so authorised by its articles, restrict the voting rights to active
member, in any special or general meeting.
(d) Benefits to member (Section 581E)
The member of the producer company may get benefited in the following ways:
(1) Every member of producer company, subject to provisions in the articles, shall initially
receive only such value for the produce or products pooled and supplied, as the Board of
producer company may determine, and the withheld price may be disbursed later in cash
or in kind or by allotment of equity shares, in proportion to the produce supplied to the
producer company during the financial year to such extent and in such manner and
subject to such conditions as may be decided by the Board.
Producer Companies 10.11

(2) Every member shall, on the share capital contributed, receive only a limited return.
However, every such member may be allotted bonus shares in accordance with the
provisions contained in Section 581ZJ.
(3) The surplus if any, remaining after making provision for payment of limited return and
reserves referred to in Section 581ZI, may also be disbursed as patronage bonus,
amongst the members, in proportion to their participation in the business of the producer
company, either in cash or by way of allotment of equity shares, or both, as may be
decided by the members at the general meeting.

10.3 MEMORANDUM OF PRODUCER COMPANY (SECTION 581F)


The memorandum of association of every producer company should contain the following:
(a) the name of the company with “producer company Limited” as the last words of the
name of such Company;
(b) the State in which the registered office of the producer company is to situate;
(c) the main objects of the producer company shall be one or more of the objects specified
in Section 581B;
(d) the names and addresses of the persons who have subscribed to the memorandum;
(e) the names, addresses and occupations of the subscribers being producers, who shall act
as the first directors in accordance with sub-section (2) of Section 58IJ.
(f) opposite to the subscriber’s name the number of shares each subscriber takes:
Provided that no subscriber shall take less than one share;
(g) the amount of share capital with which the producer company is to be registered and
division thereof into shares of a fixed amount;
(h) that the liability of its member is limited;
(i) in case the objects of the producer company are not confined to one State, the States to
whose territories the objects extend.

10.4 ARTICLES OF ASSOCIATION (SECTION 581G)


The articles should contain the following provisions, namely:
(a) the qualifications for member, the conditions for continuance or cancellation of member
and the terms, conditions and procedure for transfer of shares;
(b) the manner of ascertaining the patronage and voting right based on patronage;
(c) subject to the provisions contained in sub-section (1) of Section 581N, the manner of
10.12 Corporate and Allied Laws

constitution of the Board, its powers and duties, the minimum and maximum number of
directors, manner of election and appointment of directors and retirement by rotation,
qualifications for being elected or continuance as such and the terms of office of the said
directors, their powers and duties, conditions for election or co-option of directors, method
of removal of directors and the filling up of vacancies on the Board, and the manner and
the terms of appointment of the Chief Executive;
(d) the election of the Chairman, term of office of directors and the Chairman, manner of
voting at the general or special meetings of member, procedure for voting, by directors at
meetings of the Board, powers of the Chairman and the circumstances under which the
Chairman may exercise a casting vote.
(e) the circumstances under which, and the manner in which, the withheld price is to be
determined and distributed;
(f) the manner of disbursement of patronage bonus in cash or by issue of equity shares, or
both;
(g) the contribution to be shared and related matters referred to in sub-section (2) of Section
581ZI;
(h) the matters relating to issue of bonus shares out of general reserves as set out in Section
581ZJ;
(i) the basis and manner of allotment of equity shares of the producer company in lieu of the
whole or part of the sale proceeds of produce or products supplied by the member;
(j) the amount of reserves, sources from which funds may be raised, limitation on raising of
funds, restriction on the use of such funds and the extent of debt that may be contracted
and the conditions thereof;
(k) the credit, loans or advances which may be granted to a member and the conditions for
the grant of the same;
(l) the right of any member to obtain information relating to general business of the company;
(m) the basis and manner of distribution and disposal of funds available after meeting
liabilities in the event of dissolution or liquidation of the producer company;
(n) the authorisation for division, amalgamation, merger, creation of subsidiaries and the
entering into joint ventures and other matters connected therewith;
(o) laying of the memorandum and articles of the producer company before a special general
meeting to be held within ninety days of its registration;
(p) any other provision, which the member may, by special resolution recommend to be
included in articles.
Producer Companies 10.13

The articles should also contain the following mutual assistance principles, namely:
(a) the member shall be voluntary and available, to all eligible persons who, can participate or
avail of the facilities or services of the producer company, and are willing to accept the
duties of member;
(b) each member shall save as otherwise provided in this Part, have only a single vote
irrespective of the share holding;
(c) the producer company shall be administered by a Board consisting of persons elected or
appointed as directors in the manner consistent with the provisions of this Part and the
Board shall be accountable to the member;
(d) save as provided in this Part, there shall be limited return on share capital;
(e) the surplus arising out of the operations of the producer company shall be distributed in
an equitable manner by—
(i) providing for the development of the business of the producer company;
(ii) providing for common facilities; and
(iii) distributing amongst the member, as may be admissible in proportion to their
respective participation in the business;
(f) provision shall be made for the education of member, employees and others, on the
principles of mutuality and techniques of mutual assistance;
(g) the producer company shall actively co-operate with other producer companies (and other
organisations following similar principles) at local, national or international level so as to
best serve the interest of their members and the communities it purports to serve.
(a) Amendment of memorandum (Section 581H)
A producer company shall not alter the conditions contained in its memorandum except in the
cases, by the mode and to the extent for which express provision is made in this Act.
However, a producer company may, by special resolution, not inconsistent with Section 581B,
alter its objects specified in its memorandum.
A copy of the amended memorandum, together with a copy of the special resolution duly
certified by two directors, shall be filed with the Registrar within thirty days from the date of
adoption of resolution. Where as in case of transfer of the registered office of a producer
company from the jurisdiction of one Registrar to another, certified copies of the special
resolution certified by two directors shall be filed with both the Registrars within thirty days,
and each Registrar shall record the same, and thereupon the Registrar from whose jurisdiction
the office is transferred, shall forthwith forward to the other Registrar all documents relating to
the producer company.
10.14 Corporate and Allied Laws

The alteration of the provisions of memorandum relating to the change of the place of its
registered office from one State to another shall not take effect unless it is confirmed by the
Company Law Board (Tribunal) on petition.
(b) Amendment of articles (Section 581-I)
Any amendment to the articles should be proposed by not less than two-third of the elected
directors or by not less than one-third of the members of the producer company, and adopted
by the members by a special resolution.
A copy of the amended articles together with the copy of the special resolution, both duly
certified by two directors, should be filed with the Registrar within thirty days from the date of
its adoption.

10.5 INTER-STATE CO-OPERATIVE SOCIETIES


(a) Conversion of Inter-State Co-operative Societies to become producer companies
(Section 581J)
Any inter-State co-operative society having objects for multiplicity for states may make an
application to the Registrar for registration as producer company.
Such application should be accompanied by—
(a) a copy of the special resolution, of not less than two-third of total member of inter-State
co-operative society, for its incorporation as a producer company,
(b) a statement showing—
(i) names and addresses or the occupation of the directors and Chief Executive, if any, by
whatever name called, of such co-operative; and
(ii) list of member of such inter-State co-operative society;
(c) a statement indicating that the inter-State co-operative society is engaged in any one or
more of the objects specified in Section 581B;
(d) a declaration by two or more directors of the inter-State co-operative society certifying that
particulars given in clauses (a) to (c) are correct.
The word “Producer Company Limited” should form part of its name to show its identity.
On compliance with the requirements of the Act, the Registrar shall, within a part of thirty days
of the receipt of application, certify under his hand that the inter-State co-operative society
applying for registration is registered and thereby incorporated as a producer company.
A co-operative society formed by producers, by federation or union of co-operative societies of
producers or co-operatives of producers, registered under any law for the time being in force
which has extended its objects outside the State, either directly or through a union or
Producer Companies 10.15

federation of co-operatives of which it is a constituent, as the case may be, and any federation
or union of such co-operatives, which has so extended any of its objects or activities outside
the State, shall be eligible to make an application as above to obtain registration as a
producer company under this Part.
The Inter-State Co-operative Society upon its registration, under this section transformed into
a producer company, and thereafter shall be governed by the provisions of this Part to the
exclusion of the law by which it was earlier governed, save in so far as anything done or
omitted to be done before its registration as a producer company, and notwithstanding
anything contained in any other law for the time being in force, no person shall have any claim
against the co-operative institution or the company by reason of such conversion or
transformation.
Upon registration as a producer company, the Registrar of Companies who registers the
company required to intimate the Registrar with whom the erstwhile inter-State co-operative
society was earlier registered for appropriate deletion of the society from its register.
(b) Vesting of undertaking in producer company (Section 581L)
(1) All properties and assets, of, or belonging to, the inter-State co-operative society as on the
transformation date, shall vest in the producer company.
(2) All the rights, debts, liabilities, interests, privileges and obligations of the inter-State co-
operative society as on the transformation date shall stand transferred to, and be the rights,
debts, liabilities, interests, privileges and obligations of, the producer company.
(3) Without prejudice to the provisions contained in sub-section (2), all debts, liabilities and
obligations incurred, all contracts entered into and all matters and things engaged to be done
by, with or for, the society as on the transformation date for or in connection with their
purposes, shall be deemed to have been incurred, entered into, or engaged to be done by,
with or for, the producer company.
(4) All sums of money due to the inter-State co-operative society immediately before the
transformation date, shall be deemed to be due to the producer company.
(5) Every organisation, which was being managed immediately before the transformation date
by the inter-State co-operative society shall be managed by the producer company for such
part, to such extent and in such manner as the circumstances may require.
(6) Every organisation which was getting financial, managerial or technical assistance from the
inter-state co-operative society, immediately before the transformation date, may continue to
be given financial, managerial or technical assistance, as the case may be, by the producer
company, for such part, to such extent and in such manner as that company may deem fit.
(7) The amount representing the capital of the erstwhile inter-State co-operative society shall
form part of the capital of the producer company.
10.16 Corporate and Allied Laws

(8) Any reference to the inter-State co-operative society in any law other than this Act or in
any contract or other instrument, shall be deemed to be reference to the producer company.
(9) If, on the transformation date, there is pending any suit, arbitration, appeal or other legal
proceeding of whatever nature by or against the inter-State co-operative society, the same
shall not abate, be discontinued or be in any way prejudicially affected by reason of the
incorporation of the producer company under Section 581C or transformation of the inter-State
co-operative society as a producer company under Section 581J, as the case may be, but the
suit, arbitration, appeal or other proceeding, may be continued, prosecuted and enforced by or
against the producer company in the same manner and to the same extent as it would have,
or may have been continued, prosecuted and enforced by or against the inter-State co-
operative society as if the provisions contained in this Part had not come into force.
(c) Concession, etc. to be deemed to have been granted to producer company (Section
581M)
With effect from the transformation date, all fiscal and other concessions, licences, benefits,
privileges and exemptions granted to the inter-state co-operative society in connection with
the affairs and business of the inter-State co-operative society under any law for the time
being in force shall be deemed to have been granted to the producer company.
(d) Provisions in respect of officers and other employees of Inter-State Co-operative
Society (Section 581N)
(1) All the directors in the inter-State co-operative society before the incorporation of the
producer company shall continue in office for a part of one year from the transformation date
and in accordance with the provisions of this Act.
(2) Every officer or other employee of the inter-State co-operative society (except a director of
the Board, Chairman or Managing Director) serving in its employment immediately before the
transformation date shall, in so far as such officer or other employee is employed in
connection with the inter-State co-operative society which has vested in the producer
company by virtue of this Act, become, as from the transformation date, an officer or, as the
case may be, other employee of the producer company and shall hold his office or service
therein by the same tenure, at the same remuneration, upon the same terms and conditions,
with the same obligations and with the same rights and privileges as to leave, leave travel
concession, welfare scheme, medical benefit scheme, insurance, provident fund, other funds,
retirement, voluntary retirement, gratuity and other benefits as he would have held under the
erstwhile inter-State co-operative society if its undertaking had not vested in the producer
company and shall continue to do so as an officer or, as the case may be, other employee of
the producer company.
(3) Where an officer or other employee of the inter-State co-operative society opts not to be in
employment or service of the producer company, such officer or other employee shall be
deemed to have resigned.
Producer Companies 10.17

(4) Notwithstanding anything contained in the Industrial Disputes Act, 1947 (14 of 1947) or in
any other law for the time being in force, the transfer of the services of any officer or other
employee of the inter-State co-operative society to the producer company shall not entitle
such officer or other employee to any compensation under this Act or under any other law for
the time being in force and no such claim shall be entertained by any court, tribunal or other
authority.
(5) The officers and other employees who have retired before the transformation date from the
service of the inter-State co-operative society and are entitled to any benefits, rights or
privileges, shall be entitled to receive the same benefits, rights or privileges from the producer
company.
(6) The trusts of the provident fund or the gratuity fund of the inter-State co-operative society
and any other bodies created for the welfare of officers or employees shall continue to
discharge functions in the producer company as was being done hitherto in the inter-State co-
operative society and any tax exemption granted to the provident fund or the gratuity fund
would continue to be applied to the producer company.
(7) Notwithstanding anything contained in this Act or in any other law for the time being in
force or in the regulations of the inter-State co-operative society, no director of the Board,
Chairman, managing director or any other person entitled to manage the whole or substantial
part of the business and affairs of the inter-State co-operative society. The co-operative
society shall be entitled to any compensation against the inter-State co-operative society or
the producer company for the loss of office or for the premature termination of any contract of
management entered into by him with the inter-State co-operative society.
10.6 MANAGEMENT
(a) Number of directors
Every producer company shall have at least 5 directors and not more than 15 directors.
(Section 581O). The proviso to the Section states that in the case of the Inter-State Co-
operative Society incorporated as a producer company, such company may have more than
15 directors for a part of one year from the date of its incorporation as a producer company.
(b) Appointment of Directors (Section 581P)
The members who sign the memorandum and the articles are designated as first directors and
shall govern the affairs of the company until the directors are appointed at the Annual General
Meeting. The Election of Directors shall be conducted within 90 days from the date of
registration of the producer company. In the case of Inter-State Co-operative Society the
election shall be held within a period of 360 days. The period of office of a director shall be not
less than one year and not exceeding 5 years as may be specified in the articles. The
directors retiring by rotation in accordance with the articles shall be eligible for re-appointment
as a director. Normally, the Directors of the Board shall be elected are appointed by the
10.18 Corporate and Allied Laws

member in the Annual General Meeting. The Board may also co-opt one or more expert
directors or an additional director. Such directors cannot exceed 1/5th of the total number of
directors. The expert directors shall not have the right to vote in the election of chairman but
shall be eligible to be elected as chairman if it is provided by the articles. The maximum period
for which such directors shall hold, shall not exceed such period as may be prescribed in the
articles.
(c) Vacation of office by directors (Section 581Q)
The office of the director of a producer company shall become vacant if—
(a) he is convicted by a court of any offence involving moral turpitude and sentenced in
respect thereof to imprisonment for not less than six months;
(b) the Producer Company, in which he is a director, has made a default in repayment of any
advances or loans taken from any company or institution or any other person and such
default continues for ninety days;
(c) he has made a default in repayment of any advances or loans taken from the producer
company in which he is a director;
(d) the producer company, in which he is a director—
(i) has not filed the annual accounts and annual return for any continuous three financial
years commencing on or after the 1st day of April, 2002; or
(ii) has filed to, repay its deposit or withheld price or patronage bonus or interest thereon
on due date, or pay dividend and such failure continues for one year or more;
(e) default is made in holding election for the office of director, in the producer company in
which he is a director, in accordance with the provisions of this Act and articles;
(f) the annual general meeting or extraordinary general meeting of the producer company, in
which he is a director, is not called in accordance with the provisions of this Act except
due to natural calamity or such other reason.
The above provisions may also apply to the director of a Producer institution, which is a
member of a producer company.
(d) Powers and functions of Board (Section 581R)
The Board of directors of a producer company shall exercise, subject to articles, all such
powers and to do all such acts and things, as the company is authorised. These powers may
include all or any of the following matters, namely:
(a) determination of the dividend payable;
(b) determination of the quantum of withheld price and recommend patronage to be approved
at general meeting;
Producer Companies 10.19

(c) admission of new member;


(d) pursue and formulate the organisational policy, objectives, establish specific long-term
and annual objectives, and approve corporate strategies and financial plans;
(e) appointment of a Chief Executive and such other officers of the producer company, as
may be specified in the articles;
(f) exercise superintendence, direction and control over Chief Executive and other officers
appointed by it;
(g) cause proper books of account to be maintained; prepare annual accounts to be placed
before the annual general meeting with the auditor’s report and the replies on
qualifications, if any, made by the auditors;
(h) acquisition or disposal of property of the producer company in its ordinary course of
business;
(i) investment of the funds of the producer company in the ordinary course of its business;
(j) sanction any loan or advance, in connection with the business activities of the producer
company to any member, not being a director or his relative;
(k) take such other measures or do such other acts as may be required in the discharge of its
functions or exercise of its powers.
All the above powers may be exercised by the Board, through a resolution passed at its
meeting on behalf of the producer company. However, a director or a group of directors, who
do not constitute the Board, shall not exercise any of the powers exercisable by it.
(e) Liability of directors (Section 581T)
When the directors vote for a resolution, or approve by any other means, anything done in
contravention of the provisions of this Act or any other law for the time being in force or
articles, they shall be jointly and severally liable to make good any loss or damage suffered by
the producer company.
The producer company is having the right to recover from its director—
(a) where such director has made any profit as a result of the contravention of law or articles,
an amount equal to the profit so made;
(b) where the producer company incurred a loss or damage as a result of the contravention of
law or articles, an amount equal to that loss or damage.
Where as the liability imposed under this section shall be in addition to and not in derogation
of a liability imposed on a director under this Act or any other law for the time being in force.
10.20 Corporate and Allied Laws

(f) Committee of directors (Section 581U)


The Board may constitute such number of committees as it may deem fit for the purpose of
assisting the Board in the efficient discharge of its functions. However, the Board shall not
delegate any of its powers or assign the powers of the Chief Executive, to any committee. A
committee may, with the approval of the Board, co-opt such number of persons as it deems fit
as member of the committee. Whereas that the Chief Executive appointed under Section
581W or a director of the producer company shall be a member of such committee. Every
such committee shall function under the general superintendence, direction and control of the
Board, for such duration and in such manner as the Board may direct. The fee and allowances
to be paid to the member of the committee shall be such as may be determined by the Board.
The minutes of each meeting of the committee shall be placed before the Board at its next
meeting.
(g) Meetings of Board and quorum (Section 581V)
A meeting of the Board shall be held not less than once in every three months and at least
four such meetings shall be held in every year. Notice of every meeting of the Board of
directors shall be given in writing to every director for the time being in India, and at his usual
address in India to every other director. The Chief Executive shall give notice as aforesaid not
less than seven days prior to the date of the meeting of the Board and if he fails to do so, he
shall be punishable with fine which may extend to one thousand rupees. However, a meeting
of the Board may be called at shorter notice and the reasons thereof shall be recorded in
writing by the Board. The quorum for a meeting of the Board shall be one-third of the total
strength of directors, subject to a minimum of three. Subject to provisions in the articles,
directors including the co-opted director, may be paid such fees and allowances for
attendance at the meetings of the Board, as may be decided by the member in the general
meeting.
(h) Chief Executive and his functions (Section 581W)
(1) Every producer company shall have a full time Chief Executive, appointed by the Board
from amongst persons other than member.
(2) The Chief Executive shall be ex officio director of the Board and such director shall not
retire by rotation.
(3) Save as otherwise provided in articles, the qualifications, experience and the terms and
conditions of service of the Chief Executive shall be such as may be determined by the Board.
(4) The Chief Executive shall be entrusted with substantial powers of management as the
Board may determine.
The Chief Executive shall manage the affairs of the producer company under the general
superintendence, direction and control of the Board and be accountable for the performance of
the producer company. Without prejudice to the above the Chief Executive may exercise the
Producer Companies 10.21

powers and discharge the functions, namely:


(a) doing administrative acts of a routine nature including managing the day-to-day affairs of
the producer company;
(b) operating bank accounts or authorise any person, subject to the general or special
approval of the Board in this behalf, to operate the bank account.
(c) making arrangements for safe custody of cash and other assets of the Producer
Company;
(d) signing such documents as may be authorised by the Board, for and on behalf of the
company;
(e) maintaining paper books of account; prepare annual accounts and audit thereof; place the
audited accounts before the Board and in the annual general meeting of the member;
(f) furnishing member with periodic information to appraise them of the operation and
functions of the producer company;
(g) making appointments to posts in accordance with the powers delegated to him by the
Board;
(h) assisting the Board in the formulation of goals, objectives, strategies, plans and policies;
(i) advising the Board with respect to legal and regulatory matters concerning the proposed
and on going activities and take necessary action in respect thereof;
(j) exercising the powers as may be necessary in the ordinary course of business;
(k) discharging such other functions, and exercise such other powers, as may be delegated
by the Board.
(i) Secretary of a producer company (Section 581X)
Every producer company having an average annual turnover exceeding five crore rupees in
each of three consecutive financial years shall have a whole-time secretary, who possesses
membership of the Institute of Company Secretaries of India constituted under the Company
Secretaries Act, 1980 (56 of 1980). If a producer company fails to comply with this, the
company and every officer of the company who is in default, shall be punishable with fine
which may extend to five hundred rupees for every day during which the default continues:
Whereas in any proceedings against a person in respect of an offence, under this section shall
be a defence to prove that all reasonable efforts to comply with the provisions of section were
taken or that the financial position of the company was such that it was beyond its capacity to
engage a whole-time secretary.
10.22 Corporate and Allied Laws

10.7 GENERAL MEETINGS


(a) Matters to be transacted at general meeting (Section 581S)
The Board of directors of a producer company shall exercise the following powers on behalf of
the company, and it shall do so only by means of resolutions passed at the annual general
meeting of its member, namely:
(a) approval of budget and adoption of annual accounts of the producer company;
(b) approval of patronage bonus;
(c) issue of bonus shares;
(d) declaration of limited return and decision on the distribution of patronage;
(e) specify the conditions and limits of loans that may be given by the Board to any director;
and
(f) approval of any transaction of the nature as is to be reserved in the articles for approval
by the member.
(b) Quorum (Section 581Y)
Unless the articles require a large number, one-fourth of the total member shall constitute the
quorum at a general meeting.
(c) Voting Rights (Section 581Z)
Subject to Sections 581D, (1)&(3), every member shall have one vote and in the case of
equality of votes, the Chairman or the person presiding shall have a casting vote except in the
case of election of the Chairman.
(d) Annual general meetings (Section 581ZA)
(1) Every producer company shall hold, annual general meeting in a year the time gap
between one annual general meeting to another, should not be more than fifteen months.
(2) In this regard, the Registrar may, for any special reason, permit extension of the time for
holding any annual general meeting (not being the first annual general meeting) by a part not
exceeding three months.
(i) A producer company shall hold its first annual general meeting within a part of ninety days
from the date of its incorporation.
(3) The member shall adopt the articles of the producer company and appoint directors of its
Board in the annual general meeting.
(4) The notice calling the annual general meeting shall be accompanied by the following
documents, namely:
(a) the agenda of the annual general meeting;
Producer Companies 10.23

(b) the minutes of the previous annual general meeting or the extra-ordinary general meeting;
(c) the names of candidates for election, if any, to the office of director including a statement
of qualifications in respect of each candidate;
(d) the audited balance-sheet and profit and loss accounts of the producer company and its
subsidiary, if any, together with a report of the Board of Directors of such Company with
respect to—
(i) the state of affairs of the producer company;
(ii) the amount proposed to be carried to reserve;
(iii) the amount to be paid as limited return on share capital;
(iv) the amount proposed to be disbursed as patronage bonus;
(v) the material changes and commitments, if any, affecting the financial position of the
producer company and its subsidiary, which have occurred in between the date of the
annual accounts of the producer company to which the balance sheet relates and the date
of the report of the Board;
(vi) any other matter of importance relating to energy conservation, environmental
protection, expenditure or earnings in foreign exchanges;
(vii) any other matter which is required to be, or may be, specified by the Board;
(e) the text of the draft resolution for appointment of auditors;
(f) the text of any draft resolution proposing amendment to the memorandum or articles to be
considered at the general meeting, along with the recommendations of the Board.
(5) The Board of Directors shall, on the requisition made in writing, duly signed and setting out
the matters for the consideration, made by one-third of the member entitled to vote in any
general meeting, proceed to call an extraordinary general meeting in accordance with the
provisions contained in Sections 169 to 186 of this Act.
(6) Every annual general meeting should be held during business hours, on a day that is not a
public holiday and shall be held at the registered office or at some other place within the city,
town or village in which the registered office of the Company is situate.
(7) A general meeting of the producer company shall be called by giving not less than fourteen
days prior notice in writing.
(8) The notice of the general meeting indicating the date, time and place of the meeting shall
be sent to every member and auditor of the producer company.
(9) Unless the articles of the producer company provide for a larger number, one-fourth of the
total number of member of the producer company shall be the quorum for its annual general
meeting.
10.24 Corporate and Allied Laws

(10) The proceedings of every annual general meeting along with the Directors’ Report, the
audited balance-sheet and the profit and loss account shall be filed with the Registrar within
sixty days of the date on which the annual general meeting is held, with an annual return
along with the filing fees as applicable under the Act.
(11) In the case where a producer company is formed by Producer institutions, such
institutions shall be represented in the general body through the Chairman or the Chief
Executive thereof who shall be competent to act on its behalf:
Provided that a Producer institution shall not be represented if such institution makes a default
or failure referred to in clauses (d) to (f) of sub-section (1) of Section 581Q.

10.8 SHARE CAPITAL AND MEMBER RIGHTS


(a) Share capital (Section 581ZB)
The share capital of a producer company shall consist of equity shares only. The shares held
by a member in a producer company, shall as far as may be, be in proportion to the patronage
of that company.
(b) Special user rights (Section 581ZC)
The producers, who are active member may, if so provided in the articles, have special rights
and the producer company may issue appropriate instruments to them in respect of such
special rights.
The instruments shall be issued after obtaining approval of the Board in that behalf, be
transferable to any other active member of that producer company. Here special rights means
any right relating to supply of additional produce by the active member or any other right
relating to his produce which may be conferred upon him by the Board.
(c) Transferability of shares and attendant rights (Section 581ZD)
The provisions are as follows:
(1) Save as otherwise provided in sub-sections (2) to (4), the shares of a member of a
producer company shall not be transferable.
(2) A member of a producer company may, after obtaining the previous approval of the
Board, transfer the whole or part of his shares along with any special rights, to an active
member at par value.
(3) Every member within three months of his becoming a member, of Producer Company,
nominate, as specified in articles, a person to whom his shares in the producer company
shall vest in the event of his death.
(4) The nominee shall, on the death of the member, become entitled to all the rights in the
shares of the producer company and the Board of that Company shall transfer the shares
Producer Companies 10.25

of the deceased member to his nominee:


Provided that in a case where such nominee is not a producer, the Board shall direct the
surrender of shares together with special rights, if any, to the producer company at par
value or such other value as may be determined by the Board.
(5) Where the Board of a producer company is satisfied that—
(a) any member has ceased to be a primary producer; or
(b) any member has failed to retain his qualifications to be a member as specified in
articles, the Board shall direct the surrender of shares together with special rights, if any,
to the producer company at par value or such other value as may be determined by the
Board:
Provided that the Board shall not direct such surrender of shares unless the member has
been served with a written notice and given an opportunity of being heard.

10.9 FINANCE, ACCOUNTS AND AUDIT


(a) Books of accounts (Section 581ZE)
Every producer company has to maintain books of account registered office with respect to—
(a) all sums of money received and expended by the producer company and the matters in
respect of which the receipts and expenditure take place;
(b) all sales and purchase of goods by the producer company;
(c) the instruments of liability executed by or on behalf of the producer company;
(d) the assets and liabilities of the producer company;
(e) in case of a producer company engaged in production, processing and manufacturing, the
particulars relating to utilisation of materials or labour or other items of costs.
The balance sheet and profit and loss account of the producer company shall be prepared, as
far as may be, in accordance with the provisions contained in Section 211 of the Companies
Act, 19510.
(b) Internal audit (Section 581ZF)
Every producer company shall have internal audit of its accounts carried out, at such interval
and in such manner as may be specified in articles, by a chartered accountant as defined in
clause (b) of sub-section (1) of Section 2 of the Institute of Chartered Accountants Act, 1949
(38 of 1949).
(c) Duties of auditor under this Part (Section 581ZG)
Without prejudice to the provisions contained in Section 227, the auditor shall report on the
10.26 Corporate and Allied Laws

following additional matters relating to the producer company, namely:—


(a) the amount of debts due along with particulars of bad debts if any;
(b) the verification of cash balance and securities;
(c) the details of assets and liabilities;
(d) all transactions which appear to be contrary to the provisions of this Part;
(e) the loans given by the producer company to the directors;
(f) the donations or subscriptions given by the producer company;
(g) any other matter as may be considered necessary by the auditor.
(d) Donations or subscription by producer company (Section 581ZH)
A producer company may, by special resolution, make donation or subscription to any
institution or individual for the purposes of—
(a) promoting the social and economic welfare of producer member or producers or general
public; or
(b) promoting the mutual assistance principles:
Provided that the aggregate amount of all such donation and subscription in any financial year
shall not exceed three per cent of the net profit of the producer company not more than 3% of
the net profit in the financial year immediately preceding the financial year in which the
donation or subscription was made. Further, no producer company shall make directly or
indirectly to any political part or for any political purpose to any person any contribution or
subscription or make available any facilities including personnel or material.
(e) General and other reserves (Section 581ZI)
Every producer company shall maintain a general reserve in every financial year, in addition to
any reserve maintained by it as may be specified in articles.
In a case where the producer company does not have sufficient funds in any financial year for
transfer to maintain the reserves as may be specified in articles, the contribution to the
reserve shall be shared amongst the member in proportion to their patronage in the business
of that company in that year.
(f) Issue of bonus shares (Section 581ZJ)
Any producer company may, upon recommendation of the Board and passing of resolution in
the general meeting, issue bonus shares by capitalisation of amounts from general reserves
referred to in Section 581ZI in proportion to the shares held by the member on the date of the
issue of such shares.
Producer Companies 10.27

(g) Loan, etc., to member (Section 581ZK)


The Board may, subject to the provisions made in articles, provide financial assistance to the
member of the producer company by way of—
(a) credit facility, to any member, in connection with the business of the Producer Company,
for a part not exceeding six months;
(b) loans and advances, against security specified in articles to any member, repayable within
a part exceeding three months but not exceeding seven years from the date of
disbursement of such loan or advances. However, that any loan or advance to any
director or his relative shall be granted only after the approval by the member in general
meeting.
(h) Investment in other companies, formation of subsidiaries, etc. (Section 581ZL)
The producer company has to follow the following provisions under this Section.
(1) The general reserves of any producer company shall be invested to secure the highest
returns available from approved securities, fixed deposits, units, bonds issued by the
Government or co-operative or scheduled bank or in such other mode as may be
prescribed.
(2) Any producer company may, for promotion of its objectives acquire the shares of another
producer company.
(3) Any producer company may subscribe to the share capital of, or enter into any agreement
or other arrangement, whether by way of formation of its subsidiary company, joint
venture or in any other manner with any body corporate, for the purpose of promoting the
objects of the producer company by special resolution in this behalf.
(4) Any producer company, either by itself or together with its subsidiaries, may invest, by
way of subscription, purchase or otherwise, shares in any other company, other than a
producer company, specified under sub-section (2), or subscription of capital under sub-
section (3), for an amount not exceeding thirty per cent of the aggregate of its paid-up
capital and free reserves:
Provided that a producer company may, by special resolution passed in its general
meeting and with prior approval of the Central Government, invest in excess of the limits
specified in this section.
(5) All investments by a producer company may be made if such investment are consistent
with the objects of the producer company.
(6) The Board of a producer company may, with the previous approval of member by a
special resolution, dispose of any of its investments referred to in sub-sections (3) and (4).
(7) Every producer company shall maintain a register containing particulars of all the
10.28 Corporate and Allied Laws

investments, showing the names of the companies in which shares have been acquired,
number and value of shares; the date of acquisition; and the manner and price at which
any of the shares have been subsequently disposed of.
(8) The register referred to in sub-section (7) shall be kept at the registered office of the
producer company and the same shall be open to inspection by any member who may
take extracts there from.

10.10 PENALTIES
Penalty for contravention (Section 581ZM)
(1) If any person, other than a producer company registered under this part, carries on
business under any name which contains the words “producer company limited”, he shall be
punishable with fine which may extend to ten thousand rupees for every day during which
such name has been used by him.
(2) If a director or an officer of a producer company, who willfully fails to furnish any
information relating to the affairs of the producer company required by a member or a person
duly authorised in this behalf, he shall be liable to imprisonment for a term which may extend
to six months and with fine equivalent to five per cent of the turnover of that company during
preceding financial year.
(3) If a director or officer of a producer company—
(a) makes a default in handing over the custody of books of account and other documents or
property in his custody to the producer company of which he is a director or officer; or
(b) fails to convene annual general meeting or other general meetings, he shall be punishable
with fine which may extend to one lakh rupees, and in the case of a continuing default or
failure, with an additional fine which may extend to ten thousand rupees for every day
during which such default or failure continues.

10.11 AMALGAMATION, MERGER OR DIVISION


Amalgamation, merger or division, etc., to form new producer companies (Section
581ZN)
(1) A producer company may, by a resolution passed at its general meeting,—
(a) decide to transfer its assets and liabilities, in whole or in part, to any other producer
company, which agrees to such transfer by a resolution passed at its general meeting, for
any of the objects specified in Section 581B;
(b) divide itself into two or more new producer companies.
(2) Any two or more producer companies may, by a resolution passed at any general or
Producer Companies 10.29

special meetings of its members, decide to—


(a) amalgamate and form a new producer company; or
(b) merge one producer company (hereafter referred to as ‘merging company’) with another
producer company (hereafter referred to as ‘merged company’).
(3) Every resolution of a producer company under this section shall be passed at its general
meeting by a majority of total Members with right of vote or two-thirds of its Members present
and voting, whichever is less, and such resolution shall contain all particulars of the case may
be.
(4) Before passing a resolution under this section, the producer company shall give notice
thereof in writing together with a copy of the proposed resolution to all the Members and
creditors who may give their consent.
(5) Notwithstanding anything contained in articles or in any contract to the contrary, any
Member, or any creditor not consenting to the resolution shall, during the period of one month
of the date of service of the notice on him, have the option,
(a) in the case of any such Member, to transfer his shares with the approval of the Board to
any active Member thereby ceasing to continue as a Member of that company; or
(b) in the case of a creditor, to withdraw his deposit or loan or advance, as the case may be.
(6) Any Member or creditor, who does not exercise his option within the period specified in
sub-section (5), shall be deemed to have consented to the resolution.
(7) A resolution passed by a producer company under this section shall not take effect until
the expiry of one month or until the assent thereto of all the member and creditors has been
obtained, whichever is earlier.
(8) The resolution referred to in this section shall provide for—
(a) the regulation of conduct of the producer company’s affairs in the future;
(b) the purchase of shares or interest of any member of the producer company by other
member or by the producer company;
(c) in the case of purchase of shares of one producer company by another producer
company, the consequent reduction of its share capital;
(d) termination, setting aside or modification of any agreement, howsoever arrived between
the company on the one hand and the directors, secretaries and managers on the other
hand, apart from such terms and conditions as may, in the opinion of the majority of
shareholders, be just and equitable in the circumstances of the case;
(e) termination, setting aside or modification of any agreement between the producer
company and any person not referred to in clause (d):
10.30 Corporate and Allied Laws

Provided that no such agreement shall be terminated, set aside or modified except after
giving due notice to the part concerned and also no such agreement shall be modified
except after obtaining the consent of the part concerned;
(f) the setting aside of any transfer, delivery of goods, payment, execution or other act
relating to property, made or done by or against the producer company within three
months before the date of passing of the resolution, which would if made or done against
any individual, be deemed in his insolvency to be a fraudulent preference;
(g) the transfer to the merged company of the whole or any part of the undertaking property
or liability of the producer company;
(h) the allotment or appropriation by the merged company of any shares, debentures,
policies, or other like interests in the merged company;
(i) the continuation by or against the merged company of any legal proceedings pending by
or against any producer company;
(j) the dissolution, without winding-up, of any producer company;
(k) the provision to be made for the member or creditors who make dissent;
(l) the taxes if any, to be paid by the producer company;
(m) such incidental, consequential and supplemental matters as are necessary to secure that
the division, amalgamation or merger shall be fully and effectively carried out.
(9) When a resolution passed by a producer company under this section takes effect, the
resolution shall be a sufficient conveyance to vest the assets and liabilities in the transferee.
(10) The producer company shall make arrangements for meeting in full or otherwise
satisfying all claims of the member and the creditors who exercise the option, within the part
specified in sub-section (5), not to continue as the member or creditor, as the case may be.
(11) Where the whole of the assets and liabilities of a producer company are transferred to
another producer company in accordance with the provisions of sub-section (9), or where
there is merger under sub-section (2), the registration of the first mentioned Company or the
merging company, as the case may be, shall stand cancelled and that Company shall be
deemed to have been dissolved and shall cease to exist forthwith as a corporate body.
(12) Where two or more producer companies are amalgamated into a new producer company
in accordance with the provisions of sub-section (2) and the producer company so formed is
duly registered by the Registrar, the registration of each of the amalgamating companies shall
stand cancelled forthwith on such registration and each of the Companies shall thereupon
cease to exist as a corporate body.
(13) Where a producer company divides itself into two or more producer companies in
accordance with the provisions of clause (b) of sub-section (1) and the new producer
Producer Companies 10.31

companies are registered in accordance with the provisions of sub-section (8), the registration
of the erstwhile producer company shall stand cancelled forthwith and that Company shall be
deemed to have been dissolved and cease to exist as a corporate body.
(14) The amalgamation, merger or division of companies under the foregoing sub-sections
shall not in any manner whatsoever affect the pre-existing rights or obligations and any legal
proceedings that might have been continued or commenced by or against any erstwhile
company before the amalgamation, merger or division, may be continued or commenced by,
or against, the concerned resulting company, or merged company, as the case may be.
(15) The Registrar shall strike off the names of every producer company deemed to have been
dissolved under sub-sections (11 to 14).
(16) Any member or creditor or employee aggrieved by the transfer of assets, division,
amalgamation or merger may, within thirty days of the passing of the resolution, prefer an
appeal to the High Court.
(17) The High Court shall, after giving a reasonable opportunity to the person concerned, pass
such orders thereon as it may deem fit.
(18) Where an appeal has been filed under sub-section (16), the transfer of assets, division,
amalgamation or merger of the producer company shall be subject to the decision of the High
Court.

10.12 RESOLUTION OF DISPUTES


(a) Disputes (Section 581ZO)
Where any dispute relating to the formation, management or business of a producer company
arises—
(a) amongst member, former member or persons claiming to be member or nominees of
deceased member; or
(b) between a member, former member or a person claiming to be a member, or nominee of
deceased member and the producer company, its Board of directors, office-bearers, or
liquidator, past or present; or
(c) between the producer company or its Board, and any director, office-bearer or any former
director, or the nominee, heir or legal representative of any deceased director of the
producer company, such dispute shall be settled by conciliation or by arbitration as
provided under the Arbitration and Conciliation Act, 1996 (26 of 1996) as if the parties to
the dispute have consented in writing for determination of such disputes by conciliation or
by arbitration and the provisions of the said Act shall apply accordingly.
Explanation—For the purposes of this section, a dispute shall include—
(a) a claim for any debt or other amount due;
10.32 Corporate and Allied Laws

(b) a claim by surety against the principal debtor, where the producer company has
recovered from the surety amount in respect of any debtor or other amount due to it
from the principal debtor as a result of the default of the principal debtor whether such
debt or amount due be admitted or not;

(c) a claim by producer company against a member for failure to supply produce as
required of him;

(d) a claim by a member against the producer company for not taking goods supplied by
him.

If any question arises whether the dispute relates to formation, management or business
of the producer company, the question shall be referred to the arbitrator, whose decision
thereon shall be final.

(b) Striking off name of producer company (Section 581ZP)

If a producer company fails to commence business within one year of its registration or
ceases to transact business with the member or if the Registrar is satisfied, after making
such inquiry as he thinks fit, that the producer company is not carrying any of its objects
specified in Section 581B, he shall make an order striking off the name of the producer
company, which shall thereupon cease to exist forthwith.

No such order cancelling the registration as aforesaid shall be passed until a notice to
show cause has been given by the Registrar to the producer company with a copy to all
its directors on the proposed action and reasonable opportunity to represent its case has
been given.

Where the Registrar has reasonable cause to believe that a producer company is not
maintaining any of the mutual assistance principles specified, he shall strike its name off
the register in accordance with the provisions contained in Section 560 of this Act.

Any member of a producer company, who is aggrieved by an order made under this
Section, may appeal to the Company Law Board (Tribunal) within sixty days of the order.
After disposing the appeal, if any, the order to striking off the name shall take effect.

(c) Re-conversion of producer company to inter-state co-operative society (Section


581ZS)

The method is as follows:

(1) Any producer company, being an erstwhile inter-State co-operative society, formed
and registered under this Part, may make an application—

(a) after passing a resolution in the general meeting by not less than two-third of its
member present and voting; or
Producer Companies 10.33

(b) on request by its creditors representing three-fourth value of its total creditors, to
the High Court for its re-conversion to the inter-State co-operative society.

(2) The High Court shall, on the application made under sub-section (1), direct holding
meeting of its member or such creditors, as the case may be, to be conducted in such
manner as it may direct.
(3) If a majority in number representing three-fourths in value of the creditors, or member,
as the case may be, present and voting in person at the meeting conducted in
pursuance of the directions of the High Court under sub-section (2), agree for re-
conversion, if sanctioned by the High Court, be binding on all the member and all the
creditors, as the case may be, and also on the company which is being converted:
Provided that no order sanctioning re-conversion shall be made by the Court unless
the Court is satisfied that the company or any other person by whom an application
has been made under sub-section (1) has disclosed to the Court, by affidavit or
otherwise, all material facts relating to the company, such as the latest financial
position of the company, the latest auditor’s report on the accounts of the company,
the pendency of any investigation proceedings in relation to the company under
Sections 235 to 251, and the like.

(4) An order made by the Court under sub-section (3) shall have no effect until a certified
copy of the order has been filed with the Registrar.

(5) A copy of every such order shall be annexed to every copy of the memorandum of the
company issued after the certified copy of the order has been filed as aforesaid, or in
the case of a company not having a memorandum, to every copy so issued of the
instrument constituting or defining the constitution of the company.

(6) If default is made in complying with sub-section (4), the company, and every officer of
the company who is in default, shall be punishable with fine which may extend to one
hundred rupees, for each copy in respect of which default is made.

(7) The Court may, at any time after an application has been made to it under this
section, stay the commencement or continuation of any suit or proceeding against the
company on such terms as the Court thinks fit, until the application is finally disposed
of.

(8) Every producer company which has been sanctioned re-conversion by the High Court,
shall make an application, under the Multi-State Co-operative Societies Act, 2002 (39
of 2002) or any other law for the time being in force for its registration as multi-State
co-operative society or co-operative society, as the case may be, within six months of
sanction by the High Court and file a report thereof to the High Court and the
Registrar of companies and to the Registrar of the co-operative societies under which
10.34 Corporate and Allied Laws

it has been registered as a multi-State co-operative society or co-operative society, as


the case may be.
11
(K) COMPANIES INCORPORATE OUTSIDE INDIA

11.0 FOREIGN COMPANIES

Companies which are incorporated in foreign countries but have offices and places of
business in India are described as foreign companies. They have to comply with certain
provisions of the Act.

11.1 APPLICATION OF SECTIONS 592 TO 602 TO FOREIGN COMPANIES


(SECTION 591)

All these sections will apply to all foreign companies, i.e. companies falling under the
following two classes, namely (a) companies incorporated outside India which after the
commencement of this Act, establish a place of business within India; and (b) companies
incorporated outside India which have, before the commencement of this Act, established
a place of business within India and continue to have an established place of business
within India at the commencement of the Act [sub-section (1)].

It may so happen, that not less than 50% of the paid-up share capital whether equity or
preference or partly equity and partly preference of a foreign company having an
established place of business in India is held by one or more citizens of India or one or
more bodies corporate incorporated in India, whether singly or in the aggregate. In such a
case, the said company shall comply with such of the provisions of the Act as may be
prescribed with regard to the business carried on by it in India, as if it were a company
incorporated in India [sub-section (2) as inserted by the 1974 Amendment Act].

11.2 DOCUMENTS, ETC., TO BE DELIVERED TO THE REGISTRAR BY FOREIGN


COMPANIES

Foreign companies which after April 1, 1956 established a place of business in India
must, within 30 days, from the date, file with the Registrar having jurisdiction over New
Delhi (Section 597) and also with the Registrar of the State in which the principal place of
business of the company is situated:
11.2 Corporate and Allied Laws

(a) a certified copy of the charter, statutes or memorandum and articles of the company or
other instruments constituting or defining the constitution of the company, and if the
instrument is not in English language certified translation thereof;

(b) the full address of the registered or principal office of the company;

(c) a list of the directors and secretary of the company, containing the particulars
mentioned in Section 592(2)

In respect of each director (when an individual), this list mush contain his present name
and surname in full, his former name or names or surname or surnames in full, his usual
residential address, his nationality and if that nationality is not the nationality of origin, his
nationality of origin and his business occupation (if any), or if he has no business
occupation but holds any other directorship or directorships, particulars thereof. If the
director is a body corporate, the list must contain its corporate name and registered or
principal office and the full name, address, nationality and the nationality of origin if
different from that nationality or each of its directors. In respect of the secretary or each of
the joint secretaries (if there be any) (when an individual), the list must contain his
present name and surname, and former name(s) or surname(s) and his usual residential
address if the secretary is a body corporate, its corporate name and registered or
principal office;

(d) the name and address or the names and addresses of some one or more persons
resident in India authorised to accept on behalf of the company service of process and
any notices or other documents required to be served on the company, and

(e) the full address of the office of the company in India, which is to be deemed its
principal place of business in India.

Under Rule 16 of the Companies (Central Government’s) General Rules and Forms, 1956,
a copy of any charter, statutes, memorandum and articles, or other instrument constituting
or defining the constitution of a company must be duly certified to be true copy. It must be
certified, in the case of a company incorporated outside the Commonwealth by (a) an
official of the Government to whose custody the original of the document is committed or
(b) a Notary of such country or (c) an officer of the company. The signature and seal of
the official mentioned in (a) or (b) is required to be authenticated by diplomatic and
Consular Officer empowered in this behalf under Section 3 of the Diplomatic and Consular
Officers (Oaths and Fees) Act, 1948, or, where there is no such officer by any one of the
officials mentioned in Section 6 of the Commissioner of Oaths Act, 1889 or in any Act
amending the same). The certificate of the officer of the company referred to above is
required to be signed before a person having authority to administer an oath as provided
Companies Incorporate Outside India 11.3

by Section 3 of the Diplomatic and Consular Officers (Oath and Fees) Act or as the case
may be by Section 3 of the Commissioner of Oaths Act, (the status of the person
administering the oath in the latter case being authenticated by any official specified in
Section 6 of the Commissioner of Oaths Act, or in any Act amending the same).

If the company is incorporated in any part of the Commonwealth, the copy of the above
mentioned document must be certified as true copy by: (a) an official of the Government
to whose custody the original of the document is committed, (b) a Notary in that part of
the Commonwealth, or (c) an officer of the company, on oath before a person having
authority to administer oath in that part of the Commonwealth.

Under Rule 17 (ibid), the English translation of the document to be filed with the Registrar
in pursuance of Sections 592, 593 or 605 must be certified to be correct. If the translation
is made outside India it shall be authenticated by the signature and seal (if any) of the
official having custody of the original or of a Notary of the country (or part of the country)
where the company is incorporated. If the translation is made within India, it shall be
authenticated by an advocate, attorney or pleader entitled to appear before High Court or
by an affidavit of the person having, in the opinion of the Registrar, an adequate
knowledge of the language of the original and of English. The documents pursuant to
Section 592 are to be delivered in Form No. 44.

11.3 RETURN TO BE DELIVERED TO REGISTRAR WHERE DOCUMENTS ARE


ALTERED:

Under Section 593 of the Act, if any alteration is made or occurs in: (a) the charter,
statute or memorandum and articles of a foreign company or other instruments
constituting or defining the constitution of a foreign company, or (b) the registered
principal office of a foreign company; or (c) the name or address of any person authorised
to accept service on behalf of a foreign company; or the directors or secretary of a foreign
company; or (d) the principal place of business of the company in India; then the company
shall within the prescribed time deliver to the Registrar for registration a return containing
the prescribed particulars of the alteration.

Rule 18 of the Companies (Central Government’s) General Rules and Forms, 1956
prescribe the time, within which the particulars of alteration are to be filed. The notice of
alteration in respect of items (a), (b) or (c) above, must be communicated to the Registrar
on or before 31 st January of the year following the year in which alteration was made or
occurred, that in respect of item (d) or (e) within one month from the date of alteration.

11.4 ACCOUNTS OF FOREIGN COMPANY


11.4 Corporate and Allied Laws

Under Section 594(I), every foreign company in every calendar year must:

(a) Make out a balance sheet, and profit and loss account relating to his India Business in
such form containing such particulars and including or having annexed thereto such
documents (including in particular, document relating to every subsidiary of the foreign
company) as under the provisions of the Act it would, it had been a company within the
meaning of the Act, have been required to make out and, lay before the company in
general meeting; and

(b) Deliver three copies of those documents to the Registrar.

In regard to foreign company having a branch in India, whose entire or almost the entire
business related to India, to avoid preparation of separate balance sheet and, Profit and
Loss Account in respect of the Indian Business, it has been agreed to by the Department
of Company Law Administration that if the World Balance Sheet, and Profit and Loss
Account prepared by it in the country of Incorporation was recast in the form prescribed in
Schedule VI to the Companies Act, then such statement of accounts would be
accountable in compliance with the provision of Section 594(1).

Under Section 594(3), every foreign company shall send to the Registrar along with the
documents required to be delivered to him under sub-section (1), three copies of a list in
prescribed form of all places of business established by the company in India as at the
date with reference to which the balance sheet referred to in sub-section (1) is made out.

11.5 OBLIGATION TO STATE NAME OF FOREIGN COMPANY

It is also obligatory for every foreign company to, (a) exhibit on the outside of its place of
business in India its name and the country in which it is incorporated and such an
exhibition must be in English as well as in the local language, (b) state, in every
prospectus inviting subscriptions in India, for its shares or debentures the country of
incorporation, (c) cause the name of the company and its country of incorporation to be
stated in legible English characters in all business letters, bill heads, letter papers,
notices, advertisements and other official publications thereof.

If the liability of the members of the company is limited, the notice of the fact also must be
stated in the prospectus, letter heads, letter papers, etc. and to be conspicuously
exhibited on outside of every place where it carries on business in India, in legible English
characters and also in legible characters of the language of the locality in which the office
or place is situated. (Section 595).

11.6 SERVICE ON FOREIGN COMPANY


Companies Incorporate Outside India 11.5

A necessity may arise for serving on a foreign company certain process, notice or other
document. These would be deemed to have been sufficiently served if these are
addressed to any person (whose name has been delivered to he Registrar under the
foregoing provisions relating to foreign companies) and left or sent by post to, the
address, which has been so delivered. But if such name and address of a person resident
in India has not been given to the Registrar or if at any time all the persons whose names
and addresses have been so delivered are dead or have ceased to reside or refuse to
accept services on behalf of the foreign company, then the document may be served on
the company itself by leaving it at or sending it by post to, any place of business
established by the company in India (Section 596).

11.7 PENALTIES

Section 598 prescribes a penalty for the company and every officer or agent of the
company for non-compliance with any of the requirements mentioned above, extending to
Rs. 10,000 and in the case of a continuing offence, with an additional fine extending to
Rs. 1,000 per day, during which the default continues.

11.8 EFFECT OF COMPANY’S FAILURE TO COMPLY WITH THE PROVISIONS OF


PART XI OF THE COMPANIES ACT RELATING TO COMPANIES INCORPORATED
OUTSIDE INDIA

Under Section 599 if a foreign company fails to comply with any of the foregoing
provisions of Part XI, such a failure will not affect the validity of any contract, dealing or
transaction entered into by the company, it will be liable to be sued in respect thereof. But
it cannot bring any suit, claim any set off, make any counter-claim or institute any legal
proceeding in respect of any such contract, dealing or transaction until it has complied
with the provisions of that Part.

11.9 REGISTRATION OF CHARGES, APPOINTMENT OF RECEIVER AND BOOKS


OF ACCOUNT (SECTION 600)

The provision of Part V of the Companies Act (Sections 124 to 145 shall apply mutatis
mutandis to: (a) charges on properties in India, which were created by foreign company
after 15.1.1937; and (b) charges on property in India which is acquired by any foreign
company after 15.1.1937. Moreover, where a section is created or the completion of the
acquisition of the property takes place outside India, even provisions of Section 125(5)
and the proviso to 127(1) shall have effects as if the property (wherever situated) were
situated outside India.

The provisions of Section 118 (pertaining to the right of debenture holders and members
11.6 Corporate and Allied Laws

to have copies of trust-deed) shall apply mutatis mutandis to a foreign company [sub-
section (2)].

The provisions of Section 209 (pertaining to books to be kept by a company) shall be


applicable to a foreign company to the extent of requiring it to keep at its principal place
of business in India, the books of account mentioned in Section 209 with regard to
moneys received and spent, sales and purchases made, and assets and liabilities in the
course of or in relation to its business in India [sub-section (3)(a)].

On and from the commencement of the Companies (Amendment) Act, 1974 (i.e. 1.2.75),
the provisions of Section 159 (relating to Annual Return to be made by company having a
share capital) shall, subject to such modifications or additions as may be made therein by
the rules made under this Act, apply to a foreign company which has an established place
of business in India, as they apply to a company incorporated in India [sub-section
(3)(b)(i) as inserted by the aforesaid Amendment Act]. Further, on and from 1.2.1975, the
provisions of Sections 209, 209A, 233A and 233B (relating to: books of account to be kept
by an indigenous company; inspection of books of account, etc., under Section 209A
inserted a new by the 1974 Amendment Act; special audit; audit of cost accounts in
certain cases) as well as Sections 234 to 246 (relating to: Registrar’s power to call for
information or explanation; seizure of document by Registrar, investigation of company’s
affairs on application by members or report by Registrar; application by members to be
supported by evidence any power to call for security; investigation of company’s affairs in
other cases; prohibition of a firm, body corporate or association from being appointed as
inspectors; power of inspectors to carry out investigation into the affairs of related
companies or associates, etc., production of documents and evidence; seizure of
documents by inspector; Inspector’s report; prosecution, application for winding-up of
company or an order under Section 397 or 398; proceedings for recovery of damages or
property; expenses of investigation and inspectors’ report to be evidence) shall so far as
may apply to the Indian business of a foreign company as they apply to company
incorporated in India [sub-section (3)(ii) as inserted anew by the 1974 Amendment Act].

In applying the aforementioned Sections (viz., 124 to 145, 118 & 209), the Registrar and
the registered office of the foreign company referred to in those Sections, shall be the
Registrar having jurisdiction over New Delhi and its principal place of business in India
respectively.

N.B. The prescribed form for the purpose of Section 600 is Form No. 55 of the
Companies (Central Government’s) Rules and Forms, 1956.

11.10 FEES FOR REGISTRATION OF DOCUMENTS


Companies Incorporate Outside India 11.7

Such fees as may be prescribed have to be paid to the Registrar for registering any
documents that are required to be filed with the Registrar (Section 601). Rule 20 of the
Companies (Central Government’s) Rules prescribes the fee for registration of any
document relating to a foreign company.

11.11 REGISTRATION OF PROSPECTUS

Section 605 declares that no person shall issue, circulate or distribute in India any
prospectus offering for subscription the shares in or debentures of, a foreign company
incorporated or to be incorporated outside India irrespective of whether or not it has
established or will establish place of business in India, unless:

(i) before its issue, circulating or distributing of the prospectus in India a copy thereof,
certified by the chairman and two other directors of the company as having been approved
by a resolution of the Registrar;

(ii) the prospectus states on the face of it that a copy thereof has been so delivered; and

(iii) there is endorsed on or attached to the copy: (a) the consent of an expert, if any, to
the issue of the prospectus as required by Section 604(b) a copy of any contract needed
by clause 16 of Schedule II to be stated in the prospectus or, in the case of a contract not
reduced into writing, a memorandum giving full particulars thereof; and a statement
setting out the adjustments referred to in clause 32 of the same Schedule. Likewise,
under sub-section (3) of Section 603, a person is prohibited from issuing to any one in
India a form of application for shares in, or debentures of such a company or intended
company, unless the form is issued along with the prospectus.

Students may note that: (i) a prospectus also comprises the document which according to
Section 64, is deemed to be a prospectus and (ii) under Section 608(3) the expression
‘prospectus’, ‘shares’ and debentures, in reference to foreign companies have the same
meaning as when used in relation to a company incorporated under the Act.

11.12 REQUIREMENTS AS REGARDS PROSPECTUS

In so far as foreign companies are concerned the provisions as regards prospectus


requirements have been brought almost in line with the provisions applicable to
companies incorporated in India, subject to minor modifications.

Under Section 603, the prospectus to be issued by an existing or intended foreign


company in India must be dated and contain the following particulars: (a) the instrument
constituting or defining the constitution of the company; (b) the enactments or provisions
under which the company was incorporated; (c) the address of the place in India where
11.8 Corporate and Allied Laws

the said instruments, enactments etc., translation thereof in English, if they are in some
other foreign language, can be inspected; (d) the date on which and the country in which
the company was incorporated; and (e) whether there is a place of business in India, and
if so, the address of its principal office. The provisions contained in (a), 9(b) and (c)
above, shall not be applicable, if the prospectus is issued more than 2 years after the
company had become entitled to commence business. As in the case of the prospectus of
a company incorporated in India, the prospectus of a foreign company too, must contain
the matters laid down in Part I of Schedule II and set out the report specified in Part II of
the Schedule subject always to the provisions of Part III of the Schedule.

Furthermore, the penalty prescribed for contravention of any of the provisions contained in
Sections 603, 604 and 605 is imprisonment for a term extending up to 6 months, or fine
up to Rs. 50,000 or both (Section 606). Section 62 relating to civil liability for mis-
statement in a prospectus is applicable also to a prospectus issued, circulated or
distributed in India by a foreign company, with the substitution for references in Sections
62 to Section 60 of this Act, of reference to Section 604 thereof (Section 607).
12
(I) OFFENCES AND PENALTIES

12.0 TYPES OF PENALTIES


There are five types of penalties that have been contemplated under the Companies Act, 1956.
They are
1. Fine only
2. Imprisonment or fine
3. Imprisonment or fine or with both
4. Imprisonment and fine and
5. Imprisonment only
Of the above, the offences referred to in 1 to 3 are compoundable and others are not
compoundable. The application for compounding has to be made in duplicate on plain paper and
there is no filing for it. The application should clearly state the details of offence committed and that
the applicant should admit the offence and plead guilty and seek specifically to compound the
offence.
12.1 OFFENCES – CONTINUING OR NOT
Whether an offence is a continuing offence or not is to be decided by the principles laid down in
Section 472 of the Cr. PC. The said section provides that “in case of continuing offence a fresh
period of limitation shall begin to run at every moment of time during which the offence continues.”
The general understanding of the principle of continuing offence is that if a section in the
Companies Act provides for a fine of say Rs. 50/- per day for the offence, then such an offence can
be treated as a continuing offence. It may be mentioned incidentally that the offence under Section
159 of the Act though provides for fine per day., the Calcutta High Court decided in National Cotton
Mills Case (1984) that the offence under Section 159 is not a continuing offence over-ruling its
own decision in Ajit Kumar Sarkar Vs. AROC (1979) that offence under Section 159 is a continuing
offence.
But what is a continuing offence was decided earlier by Supreme Court in State of Bihar Vs.
Deokaran Nenshi (1973).
In the case of continuing offence there is thus an ingredient of continuance of the offence which is
absent in the case of an offence which takes place when an act or omission is committee once and
for all.”
12.2 Corporate and Allied Laws

12.2 NON-COGNIZABLE OFFENCES


Notwithstanding anything in the Code of Criminal Procedure, 1898 (V of 1898), every offence
against this Act shall be deemed to be non-cognizable within the meaning of the said Code
(Section 624).
Offences punishable with compulsory imprisonment cannot be compounded.
Other offences can be compounded by the Regional Director or Company Law Board.
An offence is compoundable by the Regional Director where the maximum a mount of fine is up to
Rs,. 5,000/- or by the Company Law Board where the fine exceeds Rs. 5,000/-.
Application in Duplicate for compounding of offence should be made to the Registrar of companies
who shall forward the same to the Regional Director or to the Company Law Board as the case
may be.

12.3 OFFENCES COMPOUNDABLE – SECTION WISE LIST


The section-wise list of offences which can be compounded and offences which cannot be
compounded are given in Annexure I and II.
Part-A
[Vide sub-section (1) of section 621A]
Section Nature of offence Penalty
11(5) Being a member of a company, association or Fine upto Rs. 10,000
partnership consisting more than specified numbers
22(2) Failure to comply with any direction given by Central Fine upto Rs. 1,000 for
Government to change the name of an existing every day during which
company default continues
25(10) Failure to remove name of Chambers of Commerce Fine upto Rs. 5,000 for
consequent upon revocation of license every day during which
default continues
39(2) Failure to send copies of memorandum, articles or Fine upto Rs. 500 for
agreement to members on demand each offence
40(2) Failure to issue of altered copy of memorandum, Fine upto Rs. 100 for
articles, resolutions or agreements each copy
44(3) Failure to file the prospectus or statement in lieu of Fine upto Rs. 5,000 per
prospectus by a private company on ceasing to be day
private company
49(9) Failure to comply with the provisions of sub-sections (1) Fine upto Rs. 50,000
to (8) relating to investments by a company
56(3) Issue of application form without salient features of Fine upto Rs. 50,000
prospectus or non -supply of copy of prospectus on
demand
Offences and Penalties 12.3

59(1) Issue of prospectus in contravention of section 57 or 58 Fine upto Rs. 50,000


60(5) Issue of prospectus without the copy thereof being filed Fine upto Rs. 50,000
with the Registrar
69(4) Failure to keep application moneys in Scheduled Bank Fine upto Rs. 50,000
70(4) Failure to file statement in lieu of prospectus before Fine upto Rs. 10,000
allotment of shares
72(3) Prohibition for allotment of shares unless the conditions Fine upto Rs. 50,000
as specified in the section are fulfilled
73(2B) Default in repayment of application moneys and interest Fine upto Rs. 50,000
73(3) Failure to keep application moneys in Scheduled Bank Fine upto Rs. 50,000
75(4) Failure to comply with the provisions of section 75 Fine upto Rs. 5,000 per
relating to return of allotment day
75(4), Showing in return shares allotted for cash while in Fine upto Rs. 50,000
proviso actual no cash received for such allotment
76(5) Failure to comply with the provision relating to Fine upto Rs. 5,000
commission and discount
77(4) Contravening provisions on purchase by company or Fine upto Rs. 10,000
loans by company for purchase of its own or its holding
company’s shares
79(4) Omitting to include in prospectus certain particulars Fine upto Rs. 500
relating to the issue of shares at a discount
80(6) Non-compliance with the provisions of the section Fine upto Rs. 10,000
relating to issue of redeemable preference shares
89(3) Non-compliance with the provisions of the sub-section Fine upto Rs. 10,000
relating to termination of disproportionately excessive
voting rights in existing companies
95(3) Failure to give to the Registrar notice of consolidation, Fine upto Rs. 500 per
etc., of share capital in accordance with section 95(1) day
97(3) Failure to file with the Registrar notice of increase of Fine upto Rs. 500 per
capital or of members within thirty days of passing of day
resolution
107(5) Failing to forward to the Registrar a copy of order of the Fine upto Rs. 500
court in regard to variation of shareholders’ rights
111(9) Non-compliance with the order of CLB/Tribunal relating Fine upto Rs. 10,000 &
to registration of transfer/transmission of further fine of Rs. 1,000
share/debenture per day
12.4 Corporate and Allied Laws

111(12) 111 Default in complying with the provisions of section 111 Fine upto Rs. 500 per
read with Failure to give effect to orders of CLB/Tribunal day Fine upto Rs.
111(9) 10,000 & further fine of
Rs. 1,000 per day
111A read Failure in complying with any of the provisions of Fine upto Rs. 500 per
with 111(12) section 111A day
113(2) Failure to complete and having ready for delivery share Fine upto Rs. 5,000 per
or debenture certificate within two months of allotment, day
etc.
115(6) Non-compliance with the requirements of section 115 Fine upto Rs. 500 per
relating to entries in the register in respect of share day
warrants
117A(3) Copy of the trust deed not made available for inspection Fine upto Rs. 500 per
day
118(2) Failure to forward a copy of debenture trust deed to Fine upto Rs. 500 and
members or debenture- holders within seven days at further fine upto Rs.
their request 200 per day
127(2) Failure to deliver to the Registrar for registration Fine upto Rs. 5,000
particulars of charges on company acquiring property
subject to charge
133(2) Delivering debentures or certificate of debenture stock Fine upto Rs. 10,000
without endorsing on its certificates of registration
137(3) Default in complying with the provisions of section 137 Fine upto Rs. 500 per
regarding appointment of receiver or manager day
142(1) Failure to file with the Registrar for registration Fine upto Rs. 5,000 per
particulars of any charge, etc. day
142(2) Not complying with any of the requirements of the Act Fine upto Rs. 10,000
as to registration with the Registrar of any charge, etc.
143(2) Failure to make entry in register of charges Fine upto Rs. 5,000
144(3) Refusing to allow inspection of copies of instruments Fine upto Rs. 500 and
creating charges and company’s register of charges further fine upto Rs.
200 per day
146(4) Non-compliance with the requirements of section 146 in Fine upto Rs. 500 per
regard to registered office day
147(2) Non-compliance with the provisions of section 147(1)(a) Fine upto Rs. 500 per
or in regard to painting or affixing its name and address day
of registered office outside office or place of business
147(3) Non-compliance with the provisions of section 147(1)(b) Fine upto Rs. 5,000
or (c) in regard to engraving name on seal and
mentioning name and registered office in business
Offences and Penalties 12.5

letters, etc.
147(4) Misuse of seal, letterhead, etc. by an Officer Fine upto Rs.5,000
148(2) Non-compliance with the requirements of section 148(1) Fine upto Rs.10,000
regarding publication of authorized as well as
subscribed and paid-up capital
149(2A) Commencement of any new business in contravention of Fine upto Rs. 5,000 per
this sub-section day
149(6) Commencement of business or exercising borrowing Fine upto Rs.5,000 per
powers in contravention of section 149 day
150(2) Failure to maintain register of members Fine upto Rs. 500 per
day
151(4) Committing default in complying with the provisions of Fine upto Rs. 500
sub-sections (1) to (3) relating to index of members
152(3) Committing default in complying with the requirements of Fine upto Rs. 500
subsections (1) and (2) regarding register and index of
debenture-holders
153B(3)(a) Failure to make a declaration by the trustee Fine upto 5,000 and
further fine upto Rs. 100
per day
154(2) Closing register of members or debenture holders Fine upto Rs. 5,000 per
otherwise than in compliance with the provisions of day
section 154(1)
157(3) Failure to file with the Registrar notice of situation of Fine upto Rs. 500 per
office where foreign register is kept day
158(9) Not transmitting to registered office in India copies of Fine upto Rs. 500
entries in foreign register and not keeping at registered
office in India duplicate of foreign register
162(1) Non-compliance with the provisions of section 150, 160 Fine upto Rs. 500 per
or 161 regarding annual return day
163(5) Refusing inspection, making of any extract or sending Fine upto Rs. 500 per
any copy within specified time, of registers, returns, etc. day
165(9) Non-compliance with the provisions relating Fine upto Rs. 5,000
168 Failure to hold annual general meeting in accordance Fine upto Rs. 50,000 and
with section 166 or to comply with any directions of further fine upto Rs.
Central Government under section 167(1) 2,500 per day
176(2) Omitting to state in notice of meeting that a member is Fine upto Rs. 5,000
entitled to appoint proxy and that proxy need not be a
member
176(4) Invitation to appoint proxy specified in the invitation Fine upto Rs. 10,000
12.6 Corporate and Allied Laws

issued at Company's expense


187C(5)(a) Failure to file declaration not holding beneficial interest in Fine upto Rs 1,000 per
any share day
187C(5)(b) Failure to file return by the company Fine upto Rs 100 per day
188(8) Non-compliance with the provisions of section 188 Fine upto Rs. 50,000
regarding circulation of members' resolutions
192(5) Failure to file with the Registrar certain resolutions or Fine upto Rs. 200 per
agreements in accordance with section 192(1) day
192(6) Failure to annex copies of certain resolutions or Fine upto Rs. 100 for
agreements to articles or not forwarding to members on each copy in respect of
request copy of certain resolutions or agreements which default is made
192A(6) Failure to comply with section 192A(1)to(4) Fine upto Rs. 50,000
193(6) Non-compliance with the provisions of section 193 Fine upto Rs. 500
regarding minutes of proceedings of general meetings
and of board and other meetings
196(3) Refusing inspection of minutes book of general meetings Fine upto Rs. 5,000 for
or not furnishing to member on request a copy of minutes each default
within specified time
197(2) Circulating or advertising proceedings of general Fine upto Rs. 5,000
meetings without including certain particulars
205A(8) Failure to transfer the amount of accumulated profits to Fine upto Rs. 5,000 per
unpaid dividend account and other provisions of section day
205A
218 Improper issue, circulation or publication of balance sheet Fine upto Rs. 5,000
or profit and loss account
219(3) Failure to send to members, etc., copies of balance- Fine upto Rs. 5,000
sheet, auditors report, etc., twenty-one days before date
of Meeting
219(4) Default in complying with demands for copies of balance Fine upto Rs. 5,000
sheet, etc., within seven days of such demand
220(3) Failure to file with the Registrar copies of balance sheet, Fine upto Rs. 500 per
etc. day
223(4) Non-compliance by certain companies with the provisions Fine upto Rs. 500 per
of section 223 regarding publication of half-yearly day
statement in the specified form
224(4) Failure to give notice to the Central Government within Fine upto Rs. 5,000
seven days where no auditors are appointed at an annual
general meeting
232 Failure of company to comply with the provisions of Fine upto Rs. 5,000
Offences and Penalties 12.7

sections 225 to 231 with regard to auditors


233 Failure of auditor to comply with sections 227 and 229 Fine upto Rs. 10,000
233A(5) Failure to provide information to special auditor Fine upto Rs. 5,000
234(4) Failure to furnish information or explanation or production Fine upto Rs. 5,000 and
of books and papers further fine of Rs. 500
per day
250(10) Otherwise contravening the restrictions imposed by the Fine upto Rs. 50,000
Central Government/ during investigation of ownership of
shares and debentures
269(6) Failure to vacate office where not approved by Central Fine upto Rs. 5,000 per
Government day on officer in default
269(10) Order of Tribunal/CLB declaring that contravention of Fine upto Rs. 50,000
requirement of Schedule XIII has taken place against the company and
fine of Rs.1,00,000 on
the officers in default and
fine of Rs.1,00,000 on
the person appointed
272 Acting as director without holding qualification shares Fine upto Rs. 500 per
day
279 Acting as a director of more than 15 companies Fine upto Rs.50,000
283(2A) Functioning as a director after vacation of office on Fine upto Rs. 5,000 per
account of any disqualification day
286(2) Default in giving notice of Board meetings Fine upto Rs. 1,000
294(8) Neglecting or refusing to furnish information required by Fine upto Rs. 50,000 and
Central Government or to produce any books and papers, further fine not less than
etc. Rs. 500 per day
299(4) Failure to disclose interest in a contract by the Director Fine upto Rs. 50,000
300(4) Participation in Board meeting by interested director Fine upto Rs. 50,000
301(4) Non-compliance with the provisions of section 301(1), (2) Fine upto Rs. 5,000
and (3) in regard to register of contracts, companies and
firms in which directors are interested
301(5)/ 163(5) Failure to maintain register of contracts Fine upto Rs. 500 per
day
302(5) Failure to disclose the members director's interest in Fine upto Rs. 10,000
contract appointing manager/managing director
303(3) Failure to keep register of directors or to file with the Fine upto Rs. 500 per
Registrar return of directors, managing director, manager day
and secretary
12.8 Corporate and Allied Laws

304(2) Refusing inspection to any member of register kept under Fine upto Rs. 500
section 303
305(1) Failure by a director to inform change of his particulars Fine upto Rs. 5,000
307(7) Failure to produce at annual general meeting register of Fine upto Rs. 5,000
directors' shareholdings
307(8) Failure to comply with the provisions of section 307(1) Fine upto Rs. 50,000 and
and (2) in regard to register of directors' shareholdings further fine upto Rs. 200
per day
320(3) Failure to secure particulars regarding payment to Fine upto Rs. 2,500
directors stipulated in sub-section (1)
322(3) Default in giving notice under this section Fine upto Rs. 10,000 and
damages
372A(10) Failure to maintain the Register of inter-corporate loans, Fine upto Rs. 5000 and
investments and guarantees further fine upto Rs. 500
for every day during
which default continues
374 Contravening section 372 [excluding sub-sections (6) and Fine upto Rs. 50,000
(7)] or 373 in regard to investments made in shares and
debentures of companies in the same group
383A(1A) Failure to appoint whole-time secretary Fine upto Rs. 500 per
day
391(5) Failing to annex to the copy of memorandum certified Fine upto Rs. 100 for
copy of court's order sanctioning any compromise or each copy
arrangement with creditors and members
393(4) Failure to comply with the requirements of section 393 in Fine upto Rs. 50,000
regard to compromises or arrangements with creditors
and members
393(5) Failure to give information by directors relating to Fine upto Rs. 5,000
compromise or arrangement with creditors or members
394(3) Failure to file with the Registrar a certified copy of the Fine upto Rs. 500
order of the court on application for sanctioning of a
compromise or arrangement
395(4A)(6) Issue of circular containing or recommending acceptance Fine upto Rs. 5,000
of offer for transfer of shares which has not been
registered
404(4) Failure to file with the Registrar a certified copy of the Fine upto Rs. 50,000
altered memorandum of articles
416(3)(b) Non-compliance with the requirements of section 416 in Fine upto Rs. 2,000
regard to contract by agents of company in which
Offences and Penalties 12.9

company is undisclosed principal


423 Non-compliance with the requirements of sections 421 Fine upto Rs. 2,000
and 422 in regard to receivers
441F Non-payment of cess payable under section 441A Upto ten times the
amount in arrears
445(1) Default by petitioner and the company to file with the Fine upto Rs. 1,000 for
Registrar, a certified copy of the order on the making of a each day of default
winding up order
481(3) Default in forwarding to the Registrar a copy of the Fine upto Rs. 500 for
Court/Tribunal's order dissolving the company within each day of default
fourteen days of the order
485(2) Default in giving notice of the resolution for voluntary Fine upto Rs. 500 for
winding up in the Official Gazette, within 14 days and also each day of default
in some newspaper, circulating in the district where the
registered office of the company is situate
493(3) Default in giving notice to the Registrar, of the Fine upto Rs. 1,000 for
appointment of liquidator or liquidators under section 490, each day of default
of every vacancy occurring in the office of liquidator and
of the name of the liquidator or liquidators appointed to fill
every such vacancy under section 492 within 10 days of
the event to which it relates
495(2) Failure to summon a meeting of the creditors in case of Fine upto Rs. 5,000
insolvency and to lay before the meeting a statement of
the assets and liabilities of the company
496(2) Failure to call a general meeting of the company at the Fine upto Rs. 1,000 in
end of the first year from the commencement of the respect of each failure
winding up and at the end of each succeeding year or as
soon thereafter but within 3 months from the end of the
year or such longer period as the Central Government
may allow; and to lay before the meeting an account of
the liquidator's acts and dealings and of the conduct of
the winding up during the preceding year together with
the statement containing the requisite particulars relating
to the proceedings and the position of the liquidation
497(3) Default in sending to the Registrar a copy of the accounts Fine upto Rs. 500 for
and return within one week of the holding of the meeting each day of default
497(7) Failure to call a general meeting of the company as Fine upto Rs. 5,000
required by section 497
500(6) Default in complying with the provisions relating to the Fine upto Rs. 10,000
calling of meeting of creditors, etc., and advertising the
notice of the meeting of the creditors in the Official
12.10 Corporate and Allied Laws

Gazette and at least in two newspapers


501(2) Default by company in giving notice to the Registrar of Fine upto Rs. 500 for
any resolution passed at a creditors' meeting under each day of default
section 500
508(2) Default by liquidator in calling a general meeting of the Fine upto Rs. 1,000
company and a meeting at the end of the first year from
the commencement of winding up and at the end of each
succeeding year, and failure to lay before the meeting an
account of his acts and dealings with respect to the
proceedings and position of the winding up
509(3) Default by liquidator in sending to the Registrar a copy of Fine upto Rs. 500 for
the accounts and returns of the holding of the meetings each day of default
and of the date or dates on which they were held
509(7) Failure of the liquidator to call a final general meeting of Fine upto Rs. 5,000
the company or creditors
513(3) Appointment of a body corporate as liquidator Fine upto Rs. 10,000
514 Giving, agreeing, or offering to give, to any member or Fine upto Rs. 10,000
creditor of company any gratification with a view to
securing his own appointment or nomination as the
company's liquidator, or securing or preventing the
appointment or nomination of some person other than
himself
516(2) Failure by liquidator to publish in the Official Gazette and Fine upto Rs. 500 for
deliver to the Registrar for registration a notice of his each day of default
appointment in the prescribed Form
547(2) Default by a company which is being wound up, whether Fine upto Rs. 5,000
by the Court/Tribunal or voluntarily, to make a mention of
the fact that the company is being wound up in every
invoice, order for goods or business letter, issued by or
on behalf of the company or a liquidator of the company
or a receiver or manager of the property of the company
in which the name of the company appears
551(5) Default by liquidator to comply with any of the Rs. 5,000 for each day of
requirements of the section relating to information as to default
pending liquidations
559(2) Default by any person, on whose application the Fine upto Rs. 500 for
Court/Tribunal passes an order declaring the dissolution each day of default
to be void, to file within 21 days after making of the order
or such further time as the Court/Tribunal may allow a
certified copy of the order with the Registrar
581ZM(1) Any person, other than a Producer Company registered Fine upto Rs. 10,000 for
Offences and Penalties 12.11

under this Part, carries on business under any name every day during which
which contains the words "Producer Company Limited" such name has been
used by him
581ZM (3)(a) A director or officer of producer company defaults in Fine upto Rs. 1 lakh and
handing over the custody of books of account and other if the default continues
documents or property in his custody to the producer an additional fine of Rs.
company 10,000 for everyday
during which such
default continues
581ZM (3)(b) A director or officer of producer company fails in Fine upto Rs. 1 lakh and
convening AGM or other general meeting if the default continues
an additional fine of Rs.
10,000 for everyday
during which such
default continues
598 Failure by any foreign company to comply with sections Fine upto Rs. 10,000 and
591 to 597 further fine up to Rs.
1,000 for each day of
default
630(1) Wrongfully withholding or wrongfully taking possession of Fine upto Rs. 10,000
property of the company by an officer

APPENDIX-II
List of Offences punishable with imprisonment or with fine or both, compound-able with the
permission of the Court under section 621 A(6)(a) of the Act

Name of offence Penalty


Section
44(4) Filing with the Registrar prospectus or statement Imprisonment upto two years or
in lieu of prospectus containing any untrue fine upto Rs. 50,000 or both
statement
63(1) Issuing a prospectus which includes any untrue Imprisonment upto two years or
statement fine upto Rs. 50,000 or both
68 Fraudulently inducing persons to invest money Imprisonment upto five years or
fine upto Rs. 1,00,000 or both
70(5) Delivery to the Registrar statement in lieu of Imprisonment upto two years or
prospectus which includes any untrue statement fine upto Rs. 50,000 or both
77A(11) Default in complying with the buy-back provisions Imprisonment upto two years or
contained in section 77A fine upto Rs. 50,000 or both
84(3) Fraudulently renewing or issuing of duplicate Company liable to fine upto Rs.
12.12 Corporate and Allied Laws

share certificates 10,000 and officer in default


liable to imprisonment upto six
months or fine up to Rs.
1,00,000 or both
108-I(2) Failure to comply with section 108B Fine upto Rs. 50,000 in case of
body corporate and
imprisonment upto three years
or fine upto Rs. 50,000 or both
against officer in default
108-I(3) Failure to comply with section 108C Fine upto Rs. 50,000 in case of
body corporate and
imprisonment upto three years
or fine upto Rs. 50,000 or both
against officer in default
108-I(4)(b) Contravention of section 108B or 108D Fine upto Rs. 50,000 on
company and officer in default
punishable with imprisonment
for a term upto three years and
with fine upto Rs. 50,000 or both
192A(5) Defacing or destroying postal ballot or declaration Imprisonment upto 6 months or
of identity of shareholder fine or both
202(1) Discharging functions of a director by an Imprisonment upto two years or
undischarged insolvent with fine upto Rs. 50,000 or with
both
203(7) Acting as a director in contravention of an order of Imprisonment upto two years or
the Court or the Tribunal fine upto Rs. 50,000 or both
209(5)/(7) Failure to keep proper books of account, etc. Imprisonment upto six months
or fine upto Rs. 10,000 or both
210(5) Failure to lay balance sheet and profit and loss Imprisonment upto six months
account at the AGM or fine upto Rs. 10,000 or both
210(6) Person charged with to comply with section 210 Imprisonment upto 6 months or
fine upto Rs. 10,000 or both for
each offence
211(7)/(8) Failure to prepare balance sheet and profit and Imprisonment upto six months
loss account showing a true and fair view or fine upto Rs. 10,000 or both
212(9)/(10) Failure to attach the accounts of subsidiary Imprisonment upto six months
company, etc. or fine upto Rs. 10,000 or both
217(5)/(6) Failure to take reasonable step relating to Board's Imprisonment upto six months
report or fine upto Rs. 20,000 or both
221(4) Failure to disclose certain payments, to the Imprisonment upto six months
Offences and Penalties 12.13

company or fine upto Rs. 50,000 or both


233B(11) Failure to comply with the provisions of section Fine upto Rs. 5,000 on company
233B regarding audit of cost accounts and imprisonment upto three
years; or fine upto Rs. 50,000 or
both to officer in default
240(3) Disobedience to the order of court directing Imprisonment upto six months
production of books before inspector or fine up to Rs. 20,000 or both
and further fine upto Rs. 2,000
per day
250(9) Exercise of right in respect of shares and Imprisonment upto six months
debentures in violation of restrictions imposed by or fine upto Rs. 50,000 or both
CLB/Tribunal
292A(11) Failure to comply with section Imprisonment upto one year or
fine upto Rs. 50,000 or both
295(4) Loans to directors, etc. without approval of Fine upto Rs. 50,000 or
Central Government imprisonment upto six months
308(3) Failure to make disclosure of shareholdings by a Imprisonment upto two years or
director fine upto Rs. 50,000 or both
371(1) Contravention of the provisions of section 369, Fine upto Rs. 50,000 or
370 or 370A in regard to loans to companies imprisonment upto six months
372A(9) Default in complying with subsections (1) to (4) Imprisonment upto two years or
and (6) to (8) of section 372A fine upto Rs. 50,000
407(2) Acting as a director in contravention of section Imprisonment upto one year or
407(1) fine upto Rs. 50,000 or both
420 Failure to collect provident fund payment of Imprisonment upto six months
contribution to the trust and or fine upto Rs. 10,000
424L Violation of provisions of Part VI relating to revival Simple imprisonment upto three
and rehabilitation of sick industrial companies or years or fine upto Rs.10,00,000
any scheme or any order of the Tribunal/Appellate
Tribunal or making a false statement or giving
false evidence to the Tribunal/ Appellate Tribunal
and attempting to tamper the records of reference
or appeal filed under the Act.
454(5) Default in complying with the provisions of section Imprisonment upto two years or
454 fine upto Rs. 1,000 per day or
both
454(7) Untruthfully stating himself to be a member or a Penalty as provided under
creditor of a company section 182 of Indian Penal
Code (IPC). Section 182 of IPC
imposes imprisonment of either
12.14 Corporate and Allied Laws

description for a term which may


extend to 6 months or fine which
may extend to Rs. 1,000 or both
488(3) Making of a declaration of solvency under section Imprisonment upto six months
488 without having reasonable grounds for the or fine upto Rs. 50,000, or both
opinion that the company will be able to pay its
debts in full, within the period specified in the
declaration
538(1) Committing any offences mentioned sub-section Imprisonment upto two years or
(1) of section 538 except those stated in clauses in fine, or both
(m),(n),(o) thereof within 12 months before the
commencement of the winding up or at any time
thereafter
538(1)(m) Obtaining on credit, for and on behalf of the Imprisonment upto five years or
(n)and(o) company, by any false representation or other fine or both
fraud, any property which the company does not
subsequently pay for; or obtaining on credit, for or
on behalf of the company under the false
pretence that the company is carrying on its
business, any property which the company does
not subsequently pay for; or pawning, pledging or
disposing of any property of the company which
has been obtained on credit and has not been
paid for unless such pawning, pleading or
disposing is in the ordinary course of the business
of the company, within 12 months before the
commencement of the winding up or at any time
thereafter
538(2) Taking in pawn or pledge or otherwise receiving Imprisonment upto three years
the property, within 12 months before the or fine, or both
commencement of the winding up or at any time
thereafter, knowing it to be pawned, pledged or
disposed of in circumstances which amount to an
offence under clause (o) of sub-section (1)(c)
539 Destroying, mutilating, altering, falsifying or Imprisonment upto seven years
secreting any books, papers or securities or being and fine
a privy to the commission of such offences or
being a privy to the making of any false or
fraudulent entry in any register, books of account
or document belonging to the company with intent
to defraud any officer or contributory of a
company or other person when the company is
being wound up
Offences and Penalties 12.15

542(3) Knowingly being a party to the carrying on of any Imprisonment upto two years or
business of a company, when it is being wound fine upto Rs. 50,000, or both
up with intent to defraud creditors of the company
or any other persons or for any fraudulent
purpose
550(4) Acting in contravention of any rule of any direction Imprisonment upto six months
of the Central Government under sub-section (1) or or fine upto Rs. 50,000, or
concerning the disposal of books and papers of a both
company
551(4) Any person untruthfully stating himself to be a Penalty as provided under
creditor or a contributory for the purpose of the section 182 of Indian Penal
section Code (IPC). Section 182 of IPC
imposes imprisonment of either
description for a term which may
extend to 6 months or fine which
may extend to Rs.1,000orboth
551(5) Wilful default by liquidator in causing statement to Imprisonment upto six months
be audited or fine upto Rs. 10,000 or both
606 Contravention of the provisions of sections 603, Imprisonment upto six months
604 and 605 relating to prospectus of foreign or fine upto Rs. 50,000 or both
companies
614A(2) Failure to file document with the Registrar as Imprisonment upto six months
directed by the Court or fine or both
615(6) Failure to furnish information or statistics, etc., Imprisonment upto three months
required by the Central Government or fine upto Rs. 10,000 or both
621A(5) Failure to comply with order of Central Imprisonment upto six months
Government for filing any document, return, etc. or with fine upto Rs. 50,000 or
both
APPENDIX-III
List of Non-Compoundable Offences punishable with imprisonment only

Section Offence Prescribed penalty


68A(1) Personation for acquisition, etc., of shares Imprisonment upto 5 years
541(1) Failure to maintain proper books of account by a Imprisonment upto one
company throughout the period of two years year
immediately preceding the commencement of the
winding up, or the period between the incorporation of
the company and the commencement of the winding
up, whichever is shorter
625(4) Failure on the part of a shareholder to pay Imprisonment upto 2
12.16 Corporate and Allied Laws

compensation months
630(2) Default in delivering or refunding within a time fixed by Imprisonment upto 2 years
Court, any property wrongfully withheld or knowingly
misapplied by an officer or employee upon trial under
this section
APPENDIX-IV
List of Non-Compoundable Offences, i.e. offences punishable with imprisonment and fine under
section 621A(7)(b) of the Act
Section Offence Prescribed
penalty
58A(5) Omission to make repayment of deposit Company liable to fine not less
or acceptance of deposit in contravention than twice the amount of deposit
of rules not repaid and officer in default
liable for imprisonment upto 5
years and also fine
58A(6) (a)(i) Acceptance of deposit in excess of Company liable to fine not less
prescribed limits or in contravention of than the amount of deposit and
manner of condition prescribed under officer in default liable for
subsection (1) or in contravention of sub- imprisonment upto 5 years and
section (2) also fine
58A(6)(a)(ii) Invitation of deposits in excess of Company liable to fine upto Rs.
prescribed limits and contrary to rules 10,00,000 but not less than Rs.
50,000 and officer in default liable
for imprisonment up to 5 years
and also fine.
58A(10) Failure to comply with the order of Imprisonment upto 3 years and
CLB/Tribunal also fine not less than Rs. 500 per
day
58AA(9) Failure to comply with provisions of Imprisonment upto 3 years and
section 58AA fine not less than Rs. 500 per day
73(2B) Failure to make repayment of Fine upto Rs. 50,000 and also
application money within six months imprisonment upto one year
from the expiry of the eighth day
80A(3) (a) & (b) Failure to comply with section 80A Company shall be liable to fine
upto Rs.10,000 per day and officer
in default liable to imprisonment
upto 3 years and fine
108-1 (4)(a) Contravention of section 108B or 108D Imprisonment upto five years and
fine
Offences and Penalties 12.17

116 Personation of shareholder Imprisonment upto 3 years and


also fine
117C(5) Default in complying with order of Imprisonment upto three years
Tribunal/CLB and also fine not less than Rs. 500
per day
153B(3)(b) Declaration by a trustee as stated in Imprisonment upto 2 years and
section 153(3)(o) also fine
207 Not distributing dividend within thirty Imprisonment upto 3 years and
days also fine upto Rs. 1,000 per day
209A(8) Failure to comply with section 209A Fine not less than Rs. 50,000 and
also imprisonment upto one year

269(11) Contravention of section 269(10) Imprisonment upto 3 years and


also fine upto 500 rupees per day
293A(5) Political contribution made contrary Company liable to fine upto three
to section 293A times the amount contributed and
officer in default liable to
imprisonment upto 3 years and
also fine
446A Failure of directors and other officers to Imprisonment upto one year and
complete the books of account and get fine not exceeding one lakh
them audited up-to date of winding up rupees
order made by Court /Tribunal and
submitted to the Court/Tribunal
540 Being an officer of a company which is Imprisonment upto two years and
subsequently ordered to be wound up by also fine
the Court/ Tribunal or which later passes
a resolution for voluntary winding up by
false pretences or by means of any other
fraud, inducing any person to give credit
to the company, or with intent to defraud
creditors of the company, making or
causing to be made any gift or transfer of
or charges on or causing or conniving at
the levying of any execution against the
property of the company, or (c) with intent
to defraud creditors of the company,
concealing or removing any part of the
property of the company since the date of
any unsatisfied judgment or order for
payment of money obtained against the
company, within two months before that
12.18 Corporate and Allied Laws

date

541(1) Failure to maintain proper books of Imprisonment upto one year.


account by a company throughout the
period of two years immediately
preceding the commencement of the
winding up, or the period between the
incorporation of the company and the
commencement of the winding up,
whichever is shorter
581ZM(2) A director or an officer of producer pany Imprisonment upto six months
willfully failing to furnish any information com-and fine equivalent to 5 per
relating to the affairs of the Producer cent of the turnover of producer
Company required by Member or a company during preceding
person duly authorized in this behalf financial year

628 False statements as mentioned in section Save as otherwise provided in the


628 Act, imprisonment upto 2 years
and also fine
629 False evidence given as stated in Imprisonment upto 7 years and
section 629 also fine
13
(M) E-GOVERNANCE

13.0 MCA 21 PROJECT


This is an innovative project and initiative of the Ministry of Company Affairs carried out under
the national e-governance Programme of the Government with a comprehensive online portal
to enable e-filing. This project covers all the services provided by the Registrar of Companies
(ROC) starting from the incorporation of a new company. The project would provide e-
services including names such, registration of new companies, filing of various returns and
statutory documents under the Companies Act, 1956. The system would also enable on filing
and access for statutory documents like memorandum of association, articles of association,
certificate of incorporation etc.
The project serves the interest of all the key stake holders and the public at large. Also
professionals need no longer to visit the officers of ROC and would be able to interact with the
Ministry using MCA 21 portal from their offices or home or going to the facilitation centers
which have been set up. The services of the Ministry of Company Affairs with the introduction
of MCA 221 will be e-form driven. Form filing will be done using freely downloadable software
and it can be done offline. The prerequisite for using the MCA 21 portal will be P-4 computer
with printer, windows 2000 / XP, internet explorer 6.0 version, Adobe Acrobat Reader 7.05
version and digital signature certificate.
To know better about how MCA 21 will function, one need to know about the set up of the
Ministry of Company Affairs
13.1 SET UP OF MCA
MCA has a three tier organizational set-up:
♦ Headquarters at New Delhi
♦ Regional Directors (RD) at Mumbai, Kolkata, Chennai and Noida
♦ Registrar of Companies (RoC) in States and Union Territories
MCA Headquarters handles cases that require approval of the GoI for citizen related functions.
RD supervises the functioning of RoCs and handles the matters delegated by GoI while the
RoC offices handle the bulk of citizen facing functions.
The Official Liquidators (OL) attached to various High Courts functioning in the country are
also under the overall administrative control of the MCA. Its headquarters at Delhi also
includes two Directors of Inspection and Investigation and Director of Research and Statistics.
13.2 Corporate and Allied Laws

13.2 MCA 21 PROGRAM


Ministry of Company Affairs (MCA), Government of India (GoI) has initiated MCA 21 program,
for easy and secure access to MCA services in a manner that best suits the businesses and
citizens.
The program goals have been set as follows keeping in mind stakeholders' needs:
♦ Business enabled to register a company and file statutory documents quickly and easily
♦ Public to get easy access to relevant records and effective grievances redressal
♦ Professionals to be able to offer efficient services to their client companies
♦ Financial Institutions to easily find charges registration and verification
♦ Employees to ensure proactive and effective compliance of relevant laws and corporate
governance
MCA 21 is envisioned to provide anytime and anywhere services to businesses. It is a
pioneering program being the first mission mode e-governance project being undertaken in the
country. This program builds on the GoI vision to introduce a Service Oriented Approach in the
design and delivery of Government services, establish a healthy business ecosystem and
make the country globally competitive.
13.3 PROGRAM SCOPE
MCA 21 program will provide for anytime anywhere electronic services with speed and
certainty to all the stakeholders. It will include:
♦ Design and development of application system
♦ Setting up of IT infrastructure
♦ Setting up the Digital Signature/PKI delivery mechanisms and associated security
requirements
♦ Setting up of Physical Front Offices (PFOs)
♦ Setting up of temporary FOs for the peak periods to meet with the requirements and
subsequent shutdown of temporary FOs at the end of such peak periods
♦ Migrating legacy data and digitization of paper documents to the new system
♦ Providing MCA services to all MCA 21 stakeholders in accordance with the Service
Oriented Approach
♦ Providing user training at all levels and all offices (Front and Back Offices)
The MCA 21 is designed to automate processes related to the proactive enforcement and
compliance of the legal requirements under the Companies Act, 1956. However, it does not
include processes related to OL.
13.4 FRONT OFFICE
The implementation of Front Offices (FO) is done in two ways. These can be called as Virtual
Front Office (VFO) and Physical Front Office (PFO).
The VFO is what the citizen has in front while accessing the MCA 21 portal. The PFO will be a
replacement to the existing RoC counters. The PFO will also accept paper documents.
E-Governance 13.3

However, these will be converted into electronic documents by customer service agents
manning PFO. Also, the authorised person(s) will have to sign these documents digitally.
Consequently the authorised signatories for a given document will need to appear in person at
the PFO for the purpose of digitally signing the document.
The user can avail the following services on MCA 21 portal
♦ eFiling
♦ Viewing public document
♦ Requesting certified copies
♦ Registering investor complaint
♦ Tracking transaction status
13.5 BACK OFFICE
The back office is what MCA employee has in front which accessing back office portal. The
back office process relates to:
♦ Dynamic routing of documents that have been electronically filed to the concerned
official within MCA based on the type of service request.
♦ Electronic workflow systems to support speed and certainty in service delivery
♦ Supporting all routine tasks such as registrations and approvals
♦ Storing of all approved documents of companies as part of electronic records, including
provision of access to electronic records for the stakeholders
♦ Enhancing identification of defaulters
♦ Increasing efficiency of Technical Scrutiny
♦ Ensuring close follow-up on matters related to compliance management including
prosecutions
♦ Enabling quicker responses to investor grievances
♦ Providing alerts when the tasks are not carried out within stipulated period
13.6 KEY BENEFITS
MCA 21 seeks to fulfill the requirements of the various stakeholders. The key benefits of MCA
21 project are the back office process relates to:
♦ Expeditious incorporation of companies
♦ Simplified and ease of convenience in filing of Forms/ Returns
♦ Better compliance management
♦ Total transparency through e-Governance
♦ Customer centric approach
♦ Increased usage of professional certificate for ensuring authenticity and reliability of the
Forms / Returns
♦ Building up a centralised database repository of corporate operating
13.4 Corporate and Allied Laws

♦ Enhanced service level fulfillment


♦ Inspection of public documents of companies anytime from anywhere
♦ Registration as well as verification of charges anytime from anywhere
♦ Timely redressal of investor grievances
♦ Availability of more time for MCA employees for monitoring and supervision

13.7 SOME FAQ’S ON E-FILING


1. What are the steps for offline eFiling?
1. Select a category to download an eForm from the MyMCA portal (with or with out the
instruction kit.
2. At any time, you can read the related instruction kit to uthorized yourself with the
procedures (you can download the instruction kit with eform or view it under Help menu).
3. You have to fill the downloaded e-Form.
4. You have to attach the necessary documents as attachments.
5. You can use the Prefill button in eForm to populate the greyed out portion by connecting
to the Internet.
6. The applicant or a representative of the applicant needs to sign the document using a
digital signature.
7. You need to click the Check Form button available in the eForm. System will check the
mandatory fields, mandatory attachment(s) and digital signature(s).
8. You need to upload the eForm for pre-scrutiny. The pre-scrutiny service is available
under the Services tab or under the eForms tab by clicking the Upload eForm button.
The system will verify (pre-scrutinise) the documents. In case of any inadequacies, the
user will be asked to rectify the mistakes before getting the document ready for execution
(signature).
9. The system will calculate the fee, including late payment fees based on the due date of
filing, if applicable.
10. Payments will have to be made through appropriate mechanisms – electronic (credit
card, Internet banking) or traditional means (at the bank counter through challan).
(a) Electronic payments can be made at the Virtual Front Office (VFO)or at PFO
(b) If the user selects the traditional payment option, the system will generate 3 copies
of pre-filled challan in the prescribed format. Traditional payments through cash,
cheques can be done at the designated network of banks using the system
generated challan. There will be five banks with estimated 200 branches uthorized
for accepting challan payments.
E-Governance 13.5

11. The payment will be exclusively confirmed for all online (Internet) payment transactions
using payment gateways.
12. Acceptance or rejection of any transaction will be explicitly communicated to the
applicant (including facility to print a receipt for successful transactions).
13. MCA 21 will provide a unique transaction number, the Service Request Number (SRN)
which can be used by the applicant for enquiring the status pertaining to that transaction.
14. Filing will be complete only when the necessary payments are made.
15. In case of a rejection, helpful remedial tips will be provided to the applicant.
16. The applicants will be provided an acknowledgement through e-mail or alternatively they
can check the MCA portal.
2. What are the steps for online eFiling?
1. When the business or the registered users access the MyMCA portal, they enter their
username and authentication details – Password/ Digital Certificate.
2. The user will be shown a list of eForms category-wise under eForms tab .
3. At any time, the users can read the related instruction kit, available under Help menu, to
uthorized themselves with the procedures.
4. The users can then fill the appropriate eForm for the service required. There is an option
of pre-fill facility in the eForms, where the static details such as name and address of the
company will be pre-filled by the system automatically on entering the Corporate Identity
Number (CIN).
5. The users attach the necessary documents to the eForm.
6. The users may avail the pre-scrutiny service of the eForm. The documents will be verified
(pre-scrutinised) by the system. In case of any inadequacies, for example, if a mandatory
column in the eForm is not filled in, the user will be asked to rectify before the document
is ready for execution (signature).
7. The applicant or a representative of the applicant will then submit the duly signed
documents electronically.
8. The system will calculate the fee, including late payment fees, if applicable.
9. Payments will have to be made through appropriate mechanisms – electronic (credit
card, Internet banking) or traditional means (at the bank counter).
(a) Electronic payments can be made at the Virtual Front Office (VFO).
(b) If the user selects the traditional payment option, the system will generate a pre-filled
challan in the prescribed format. Traditional payments through cash, cheques can be
13.6 Corporate and Allied Laws

done at the designated network of banks using the system generated challan. There will
be five banks with estimated 200 branches uthorized for accepting challan payments.
10. The payment will be exclusively confirmed for all online (Internet) payment transactions
using payment gateways.
11. Acceptance or rejection of any transaction will be explicitly communicated to the
applicant (including facility to print a receipt for successful transactions).
12. MCA 21 will provide a unique transaction number, which can be used by the applicant for
enquiring status pertaining to that transaction.
13. Filing will be complete only when the necessary payments are made.
14. In case of a rejection, helpful remedial tips will be provided to the applicant.
15. The applicants will be provided an acknowledgement through e-mail or alternatively they
can check the MCA portal.
3. How can I apply for a Company Name?
File eForm1 A by logging in the portal along with a payment of fees of Rs. 500/- and attaching
the digital signature of the applicant proposing to incorporate the company. If proposed name
is not available apply for a fresh name on the same application.
4. Can I apply for a Company Name Online?
Yes, You can avail this service at MCA portal.
5. What is the validity period of the Name approved?
The approved name is valid for a period of 6 months from the date of approval. The Applicant
can renew the name within 6 months by submitting a fresh Name application (Form-1A) along
with the fees of Rs. 500/-, by mentioning that the application is for renewal of the name
already approved. Names inadvertently allowed or which are against the guidelines, which
have subsequently come to the notice, may be withdrawn by the RoC before or after
incorporation of the company.
6. What is the minimum number of directors required to form a company?
Minimum no. of directors for Private Limited Company: Two. For Public Limited Company:
Three.
7. What is the minimum number of subscribers required for registration of a company?
Minimum no. of subscribers for Private Limited Company: Two. For Public Limited Company:
Seven.
8. What is the minimum Paid-up Capital at the time of registration of a company?
The minimum paid up capital for Private Limited Company: Rs. 1,00,000/- For Public Limited
Company: Rs. 5,00,000/- This limit is not applicable to company having licence under section
25.
E-Governance 13.7

9. What are the documents to be filed with RoC every year?


Invariably, the Balance Sheet and Annual Return have to be filed every year. Other
documents such as, Return of Allotment (Form-2), Change of Registered office (Form-18),
Change among the Directors (Form-32), Charges (Form-8, 10, 17, 13)etc., have to be filed
within the due date from the events taking place in the company as per the Companies Act,
1956.
10. How do I find SRN for form 1A filed before MCA 21 project?
You may find SRN by entering NIC issued name approval reference number in the “Name
Approval Reference Number” service available after logging into MyMCA portal.

13.8 DETAILS OF NEW FORMS AND FEES


S. Old Form No. Corresponding Subject Category Modalities
No. revised e-Form No. for fee
computation
(incl.
additional
fees)
1 Form 1 Form 1 Application Company Existing
and Registration Practice of
declaration for levying fee.
incorporation
of a company
2 Form 1A Form 1A Application Company Rs. 500/-
form for Registration/
availability or Change
change of services
name
3 Form 1AA, 1AC Form 1AA Particulars of Informational Existing
person(s) or services Practice of
director(s) or levying fee.
charged or
specified for
the purpose of
clause (f) or
(g) of section
5
4 Form 1AD Form 1AD Application for Approval Rs. 500/-
confirmation services -
by Regional Regional
Director for Director
change of
registered
office of the
company
13.8 Corporate and Allied Laws

within the
state from the
jurisdiction of
one Registrar
to the
jurisdiction of
another
Registrar
5 Form 1B (For Form 1B Application for Approval As Per
Conversion of approval of services - Companies
public company the Central Registrar of (Fees On
to private Government companies/ Application)
company) for change of Change Rules, 1968
name or services
conversion of
a public
company into
a private
company
6 Form 2 Form 2 Return of Compliance Existing
allotment related filing Practice of
levying fee.
7 Form 3 Form 3 Particulars of Compliance Existing
contract related filing Practice of
relating to levying fee.
shares allotted
as fully or
partly paid-up
otherwise than
in cash
8 Form 4 Form 4 Statement of Compliance Existing
amount or rate related filing Practice of
percent of the levying fee.
commission
payable in
respect of
shares or
debentures
and the
number of
shares or
debentures for
which persons
have agreed
for a
commission to
subscribe for
absolutely or
E-Governance 13.9

conditionally
9 Form 4C Form 4C Return in Compliance Existing
respect of buy related filing Practice of
back of levying fee.
securities
10 Form 5 Form 5 Notice of Change Existing
consolidation, services Practice of
division, etc. levying fee.
or increase in
share capital
or increase in
number of
members
11 Form 8, 13, 55, Form 8 Particulars for Charge Existing
56, 59 creation or management Practice of
modification of levying fee in
charges (other respect of
than those Form 8
related to
debentures)
12 Form 10, 13, 57, Form 10 Particulars for Charge Existing
59 registration of management Practice of
charges for levying fee in
debentures respect of
Form 10.
13 Form 15, 16, 13 Form 15 Appointment Charge Existing
or cessation of management Practice of
receiver or levying fee in
manager respect of
Form 15.
14 Form 17, 13, 60 Form 17 Particulars for Charge Existing
satisfaction of management Practice of
charges levying fee in
respect of
Form 7/60..
15 Form 18 Form 18 Notice of Company Existing
situation or Registration/ Practice of
change of Change levying fee.
situation of services
registered
office
16 Form 19 Form 19 Declaration of Company Existing
compliance Registration Practice of
with the levying fee.
provisions of
section
149(1)(a), (b)
13.10 Corporate and Allied Laws

and (c) of the


Companies
Act, 1956
17 Form 20 Form 20 Declaration of Company One Fee For
compliance Registration Form 20 And
with the another on
provisions of SLP-
section Schedule. III-
149(2)(b) of as per
the existing
Companies practice.
Act,1956
18 Form 20A Form 20A Declaration of Company Existing
compliance Registration Practice of
with the levying fee.
provisions of
section
149(2A) or of
section
149(2B)
19 None Form 20B [Refer Form for filing Compliance As One
Section 159 of the annual return related filing Document
Companies Act, 1956] of a company Filing Fee
having a share
capital
20 Form 21 Form 21 Notice of the Informational Existing
court or the services Practice of
company law levying order
board fee.
21 Form 21A Form 21A Particulars of Compliance Existing
annual return related filing Practice of
for the levying fee.
company not
having share
capital
22 Form 22 Form 22 Statutory Compliance Existing
Report related filing Practice of
levying fee.
23 None Form 22B Form of return Informational Existing
to be filed with services Practice of
the Registrar Form 3 for
fee.
24 Form 23 Form 23 Registration of Informational Existing
resolution(s) services Practice of
and levying fee.
agreement(s)
E-Governance 13.11

25 Form 23AA Form 23AA Notice of Informational Existing


address at services Practice of
which books levying fee.
of account are
maintained
26 None Form 23AAA Application to Approval As per
Central services- Companies (
Government Head Fees on
for Quarters Application
modification in Rules 1999)
the matters to
be stated in
the company’s
balance sheet
or profit and
loss account
27 None Form 23AAB Application for Approval - DO-
exemption services -
from attaching Head
the annual Quarters
accounts of
the subsidiary
companies
28 None Form 23AAC Application to Approval -DO-
Central services-
Government Head
for not Quarters
providing
depreciation
29 None Form 23AC Form for filing Compliance As One
balance sheet, related filing Document
profit and loss Filing Fee
account and
other
documents
with the
Registrar
30 Form 23B Form 23B Information by Compliance Existing
auditor to related filing Practice- No
Registrar Fee
31 Form 23C Form 23C Form of Approval Existing
application to services - Practice of
the Central Head levying fee.
Government Quarters
for
appointment
of cost auditor
13.12 Corporate and Allied Laws

32 Form 24 Form 24 Form of Provisions Existing


application to relating to Practice of
the Central managerial levying fee.
Government personnel
for increase in
the number of
directors of
the company
33 Form 24A Form 24A Form for filing Approval Existing
application to services - Practice of
Central Regional levying fee.
Government Director
(Regional
Director)
34 None Form 24AB Form for filing Approval As per
application for services - Companies (
giving loan, Head Fees on
providing Quarters Application
security or Rules 1999)
guarantee in
connection
with a loan
35 Form 24B Form 24B Form of Approval As per
application to services - Existing
the Central Head practice
Government Quarters
for obtaining
prior consent
for holding of
any office or
place of profit
in the
company by
certain
persons
36 Form 25A, 26 Form 25A Form of Provisions As per
application to relating to Existing
the Central managerial practice of
Government personnel levying fee
for approval of on F-25 A
appointment
and
remuneration
or increase in
remuneration
or waive for
excess or over
payment to
E-Governance 13.13

managing or
whole - time
director(s) or
manager
37 Form 25B Form 25B Form of Provisions As per
application to relating to Existing
the Central managerial practice
Government personnel
for approval to
amendment of
provisions
relating to
managing,
whole - time or
non -
rotational
directors
38 Form 25C Form 25C Return of Compliance Existing
appointment related filing Practice of
of managing levying fee.
director or
whole - time
director or
manager
39 Form 32, 29 Form 32 Particulars of Company Existing
appointment Registration/ Practice of
of managing Change levying fee.
director, services
directors,
manager and
secretary and
the changes
among them
or consent of
candidate to
act as a
managing
director or
director or
manager r
secretary of a
company and/
or undertaking
to take and
pay for
qualification
shares
40 None Form 32 Addendum Particulars of Company No fee
13.14 Corporate and Allied Laws

appointment Registration/ applicable


of managing Change
director, services
directors,
manager and
secretary and
the changes
among them
or consent of
candidate to
act as a
managing
director or
director or
manager o
secretary of a
company and/
or undertaking
to take and
pay for
qualification
shares -
addendum to
Form 32.
41 Form 35A Form 35A Information to Informational Existing
be furnished in services Practice of
relation to any levying fee.
offer of a
scheme or
contract
involving the
transfer of
shares or any
class of sares
in the
transferor
company to
the transferee
42 Form 36 Form 36 Receiver_s or Charge Existing
manager_s Management Practice of
abstract of le