Unit – 4

Company Law

Q1) Give an overview of the Companies Act.

A1) The Companies Act 2013 is an Act of the Parliament of India on Indian company law which regulates incorporation of a company, responsibilities of a company, directors, dissolution of a company. The 2013 Act is divided into 29 chapters containing 470 sections as against 658 Sections in the Companies Act, 1956 and has 7 schedules. However, currently there are only 438 (470-39+7) sections remains in this Act.[1] The Act has replaced The Companies Act, 1956 (in a partial manner) after receiving the assent of the President of India on 29 August 2013.The section 1 of the companies Act 2013 came into force on 30th August 2013. 98 different sections of the companies Act came into force on 12th September 2013 with few changes like earlier private companies’ maximum number of members were 50 and now it will be 200. A new term of "one-person company" is included in this act that will be a private company and with only 98 sections of the Act notified.[2][3] A total of another 183 sections came into force from 1 April 2014.

The Ministry of Corporate Affairs thereafter published a notification for exempting private companies from the ambit of various sections under the Companies Act.

The 2013 legislation has stipulations for increased responsibilities of corporate executives in the IT sector, increasing India's safeguards against organized cybercrime by allowing CEO's and CTO's to be prosecuted in cases of IT failure.

Minister of Corporate Affairs, Nirmala Sitharaman introduced The Companies (Amendment) Bill, 2020. It was passed by the parliament in 2020.

Q2) Explain the characteristics of a company.

A2) Some of the most important characteristics of a company are as follows:

1. Voluntary Association:

A company is a voluntary association of two or more persons. A single person cannot constitute a company. At least two persons must join hands to form a private company. While a minimum of seven persons are required to form a public company. The maximum membership of a private company is restricted to fifty, whereas, no upper limit has been laid down for public companies.

2. Incorporation:

A company comes into existence the day it is incorporated/registered. In other words, a company cannot come into being unless it is incorporated and recognized by law. This feature distinguishes a company from partnership which is also a voluntary association of persons but in whose case registration is optional.

3. Artificial Person:

In the eyes of law there are two types of persons viz:

 (a) Natural persons i.e., human beings and

(b) Artificial persons such as companies, firms, institutions etc.

Legally, a company has got a personality of its own. Like human beings it can buy, own or sell its property. It can sue others for the enforcement of its rights and likewise be sued by others.

4. Separate Entity:

The law recognizes the independent status of the company. A company has got an identity of its own which is quite different from its members. This implies that a company cannot be held liable for the actions of its members and vice versa. The distinct entity of a company from its members was upheld in the famous Salomon Vs. Salomon & Co case.

5. Perpetual Existence:

A company enjoys a continuous existence. Retirement, death, insolvency and insanity of its members do not affect the continuity of the company. The shares of the company may change millions of hands, but the life of the company remains unaffected. In an accident all the members of a company died but the company continued its operations.

6. Common Seal:

A company being an artificial person cannot sign for itself. A seal with the name of the company embossed on it acts as a substitute for the company’s signatures. The company gives its assent to any contract or document by the common seal. A document which does not bear the common seal of the company is not binding on it.

7. Transferability of Shares:

The capital of the company is contributed by its members. It is divided into shares of predetermined value. The members of a public company are free to transfer their shares to anyone else without any restriction. The private companies, however, do impose some restrictions on the transfer of shares by their members.

8. Limited Liability:

The liability of the members of a company is invariably limited to the extent of the face value of shares held by them. This means that if the assets of a company fall short of its liabilities, the members cannot be asked to contribute anything more than the unpaid amount on the shares held by them. Unlike the partnership firms, the private property of the members cannot be utilized to satisfy the claims of company’s creditors.

9. Diffused Ownership:

The ownership of a company is scattered over a large number of persons. According to the provisions of the Companies Act, a private company can have a maximum of fifty members. While, no upper limit is put on the maximum number of members in public companies.

10. Separation of Ownership from Management:

Though shareholders of a company are its owners, yet every shareholder, unlike a partner, does not have a right to take an active part in the day-to-day management of the company. A company is managed by the elected representatives of its members. The elected representatives are individually known as directors and collectively as ‘Board of Directors’.

Q3) Classify companies.

A3) A. Types of Company on the basis of Incorporation

1. Statutory Companies:

These companies are constituted by a special Act of Parliament or State Legislature. These companies are formed mainly with an intention to provide the public services.

Though primarily they are governed under that Special Act, still the CA, 2013 will be applicable to them except where the said provisions are inconsistent with the provisions of the Act creating them (as Special Act prevails over General Act).

Examples of these types of companies are Reserve Bank of India, Life Insurance Corporation of India, etc.

2. Registered Companies:

Companies registered under the CA, 2013 or under any previous Company Law are called registered companies.

Such companies come into existence when they are registered under the Companies Act and a certificate of incorporation is granted to it by the Registrar.

B. Types of Company on the basis of Liability

1. Companies limited by shares:

A company that has the liability of its members limited by the memorandum to the amount, if any, unpaid on the shares respectively held by them is termed as a company limited by shares.

The liability can be enforced during existence of the company as well as during the winding up. Where the shares are fully paid up, no further liability rests on them.

For example, a shareholder who has paid 75 on a share of face value 100 can be called upon to pay the balance of 25 only. Companies limited by shares are by far the most common and may be either public or private.

2. Companies limited by guarantee:

Company limited by guarantee is a company that has the liability of its members limited to such amount as the members may respectively undertake, by the memorandum, to contribute to the assets of the company in the event of its being wound-up. In case of such companies the liability of its members is limited to the amount of guarantee undertaken by them.

The members of such company are placed in the position of guarantors of the company’s debts up to the agreed amount.

Clubs, trade associations, research associations and societies for promoting various objects are various examples of guarantee companies.

3. Unlimited Liability Companies

A company not having a limit on the liability of its members is termed as unlimited company. Here the members are liable for the company’s debts in proportion to their respective interests in the company and their liability is unlimited.

Such companies may or may not have share capital. They may be either a public company or a private company.

C. Types of Company on the basis of number of members

1. Public Company:

Defined u/s 2(71) of the CA, 2013 – A public company means a company which is not a private company.

Section 3(1) of the CA, 2013– Public company may be formed for any lawful purpose by 7 or more persons.

Section 149(1) of the CA, 2013 – Every public company shall have minimum 3 director in its Board.

Section 4(1)(a) of the CA, 2013 – A public company is required to add the words “Limited” at the end of its name.

It is the essence of a public company that its shares and debentures can be transferable freely to the public unlike private company. Only the shares of a public company are capable of being dealt in on a stock exchange.

A private company that is a subsidiary of a public company, will be considered a public company.

 2. Private company:

Defined u/s 2(68) of the CA, 2013 –

A private company means a company which by its articles—

a. Restricts the right to transfer its shares;

b. Limits the number of its members to 200 hundred (except in case of OPC)

Note:

Persons who are in the employment of the company; and persons who, having been formerly in the employment of the company, were members of the company while in that employment and have continued to be members after the employment ceased, shall be excluded.

Where 2 or more persons hold 1 or more shares in a company jointly, they shall be treated as a single member.

Prohibits any invitation to the public to subscribe for any securities of the company;

Section 3(1) of the CA, 2013 – Private Company may be formed for any lawful purpose by 2 or more persons.

Section 149(1) of the CA, 2013 – Every Private company shall have minimum 2 director in its Board.

Section 4(1)(a) of the CA, 2013 – A private company is required to add the words “Private Ltd” at the end of its name.

Special privileges – Private Companies enjoys several privileges and exemptions under the Companies Act.

3. One Person Company (OPC):

With the enactment of the Companies Act, 2013 several new concepts were introduced that was not in existence in Companies Act, 1956 which completely revolutionized corporate laws in India. One of such was the introduction of OPC concept.

This led to the avenue for starting businesses giving flexibility which a company form of entity can offer, while also offering limited liability that sole proprietorship or partnerships does not offer.

Defined u/s 2(62) of the CA, 2013 – One Person Company means a company which has only one person as a member.

Section 3(1) of the CA, 2013 – OPC (as private company) may be formed for any lawful purpose by 1 person.

Section 149(1) of the CA, 2013 – OPC shall have minimum 1 director in its Board, its sole member can also be director of such OPC.

Some Feature explained

Single-member: OPCs can have only 1 member or shareholder, unlike other private companies.

Nominee: A unique feature of OPCs that separates it from other kinds of companies is that the sole member of the company has to mention a nominee while registering the company. Since there is only one member in an OPC, his death will result in the nominee choosing or rejecting to become its sole member. This does not happen in other companies as they follow the concept of perpetual succession.

Special privileges: OPCs enjoys several privileges and exemptions under the Companies Act.

D. Types of Company on the basis of Domicile

1. Foreign company:

Defined u/s 2(42) of the CA, 2013 – “foreign company” means any company or body corporate incorporated outside India which-

Section 379 to Section 393 of the CA, 2013 prescribes the provisions which are applicable on such companies.

2. Indian Company:

A company formed and registered in India is known as an Indian Company.

E. Other Types of Company:

1. Government Company:

Defined u/s 2(45) of the CA, 2013 – “Government company” means any company in which not less than 51 % of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company. Explanation – “paid-up share capital” shall be construed as “total voting power”, where shares with differential voting rights have been issued.

Special privileges: Government Company enjoys several privileges and exemptions under the Companies Act.

2. Subsidiary Company:

Defined u/s 2(87) of the CA, 2013 – “subsidiary company” or “subsidiary”, in relation to any other company (that is to say the holding company), means a company in which the holding company—

Provided that such class or classes of holding companies as may be prescribed shall not have layers of subsidiaries beyond such numbers as may be prescribed.

Explanation: For the purposes of this clause-

3. Holding Company:

Defined u/s 2(46) of the CA, 2013 – “holding company”, in relation to one or more other companies, means a company of which such companies are subsidiary companies;

Explanation: For the purposes of this clause, the expression “company” includes anybody corporate.

Q4) What do you mean by Lifting of Corporate veil?

A4) Lifting the corporate refers to the possibility of looking behind the company’s framework (or behind the company’s separate personality) to make the members liable, as an exception to the rule that they are normally shielded by the corporate shell (i.e. they are normally not liable to outsiders at all either as principles or as agents or in any other guise, and are already normally liable to pay the company what they agreed to pay by way of share purchase price or guarantee, nothing more). [v]

When the true legal position of a company and the circumstances under which its entity as a corporate body will be ignored and the corporate veil is lifted, the individual shareholder may be treated as liable for its acts.

The corporate veil may be lifted where the statute itself contemplates lifting the veil or fraud or improper conduct is intended to be prevented.

“It is neither necessary nor desirable to enumerate the classes of cases where lifting the veil is permissible, since that must necessarily depend on the relevant statutory or other provisions, the object sought to be achieved, the impugned conduct, the involvement of the element of public interest, the effect on parties who may be affected, etc.”. This was iterated by the Supreme Court in Life Insurance Corporation of India v. Escorts Ltd. [vi]

Q5) What are the circumstances under which corporate veil may be lifted?

A5) The circumstances under which corporate veil may be lifted can be categorized broadly into two following heads:

STATUTORY PROVISIONS

Section 5 of the Companies Act defines the individual person committing a wrong or an illegal act to be held liable in respect of offenses as ‘officer who is in default’. This section gives a list of officers who shall be liable to punishment or penalty under the expression ‘officer who is in default’ which includes a managing director or a whole-time director.

Section 45– Reduction of membership below statutory minimum: This section provides that if the members of a company is reduced below seven in the case of a public company and below two in the case of a private company (given in Section 12) and the company continues to carry on the business for more than six months, while the number is so reduced, every person who knows this fact and is a member of the company is severally liable for the debts of the company contracted during that time.

In the case of Madan lal v. Himatlal & Co.[vii] the respondent filed suit against a private limited company and its directors for recovery of dues. The directors resisted the suit on the ground that at no point of time the company did carry on business with members below the legal minimum and therefore, the directors could not be made severally liable for the debt in question. It was held that it was for the respondent being dominus litus, to choose persons of his choice to be sued.

Section 147- Misdescription of name: Under sub-section (4) of this section, an officer of a company who signs any bill of exchange, hundi, promissory note, cheque wherein the name of the company is not mentioned is the prescribed manner, such officer can be held personally liable to the holder of the bill of exchange, hundi etc. unless it is duly paid by the company. Such instance was observed in the case of Hendon v. Adelman.

Section 239– Power of inspector to investigate affairs of another company in same group or management: It provides that if it is necessary for the satisfactory completion of the task of an inspector appointed to investigate the affairs of the company for the alleged mismanagement, or oppressive policy towards its members, he may investigate into the affairs of another related company in the same management or group.

Section 275- Subject to the provisions of Section 278, this section provides that no person can be a director of more than 15 companies at a time. Section 279 provides for a punishment with fine which may extend to Rs. 50,000 in respect of each of those companies after the first twenty.

Section 299- This Section gives effect to the following recommendation of the Company Law Committee: “It is necessary to provide that the general notice which a director is entitled to give to the company of his interest in a particular company or firm under the proviso to sub-section (1) of section 91-A should be given at a meeting of the directors or take reasonable steps to secure that it is brought up and read at the next meeting of the Board after it is given.[ix] The section applies to all public as well as private companies. Failure to comply with the requirements of this Section will cause vacation of the office of the Director and will also subject him to penalty under sub-section (4).

 Sections 307 and 308- Section 307 applies to every director and every deemed director. Not only the name, description and amount of shareholding of each of the persons mentioned but also the nature and extent of interest or right in or over any shares or debentures of such person must be shown in the register of shareholders.

Section 314- The object of this section is to prohibit a director and anyone connected with him, holding any employment carrying remuneration of as such sum as prescribed or more under the company unless the company approves of it by a special resolution.

 Section 542- Fraudulent conduct: If in the course of the winding up of the company, it appears that any business of the company has been carried on with intent to defraud the creditors of the company or any other person or for any fraudulent purpose, the persons who were knowingly parties to the carrying on of the business, in the manner aforesaid, shall be personally responsible, without any limitation of liability for all or any of the debts or other liabilities of the company, as the court may direct. In Popular Bank Ltd., In re[x] it was held that section 542 appears to make the directors liable in disregard of principles of limited liability. It leaves the Court with discretion to make a declaration of liability, in relation to ‘all or any of the debts or other liabilities of the company’. This section postulates a nexus between fraudulent reading or purpose and liability of persons concerned.

JUDICIAL INTERPRETATIONS

By contrast with the limited and careful statutory directions to ‘lift the veil’ judicial inroads into the principle of separate personality are more numerous. Besides statutory provisions for lifting the corporate veil, courts also do lift the corporate veil to see the real state of affairs. Some cases where the courts did lift the veil are as follows:

United States v. Milwaukee Refrigerator Transit Company– In this case, the U.S. Supreme Court held that “where the notion of legal entity is used to defeat public convenience, justify wrong, protect fraud or defend crime, the law will disregard the corporate entity and treat it as an association of persons.”

Some of the earliest instances where the English and Indian Courts disregarded the principle established in Salomon’s case are:

Daimler Co. Ltd. v. Continental Tyre and Rubber Co. (Great Britain) Ltd– This is an instance of determination of the enemy character of a company. In this case, there was a German company. It set up a subsidiary company in Britain and entered into a contract with Continental Tyre and Rubber Co. (Great Britain) Ltd. for the supply of tyres. During the time of war, the British company refused to pay as trading with an alien company is prohibited during that time. To find out whether the company was a German or a British company, the Court lifted the veil and found out that since the decision-making bodies, the board of directors and the general body of share holders were controlled by Germans, the company was a German company and not a British company and hence it was an enemy company.

Gilford Motor Co. v. Horne– This is an instance for prevention of façade or sham. In this case, an employee entered into an agreement that after his employment is terminated, he shall not enter into a competing business or he should not solicit their customers by setting up his own business. After the defendant’s service was terminated, he set up a company of the same business.

His wife and another employee were the main share holders and the directors of the company. Although it was in their name, he was the main controller of the business and the business solicited customers of the previous company. The Court held that the formation of the new company was a mere cloak or sham to enable him to breach the agreement with the plaintiff.

Re, FG (Films) Ltd– In this case the court refused to compel the board of film censors to register a film as an English film, which was in fact produced by a powerful American film company in the name of a company registered in England in order to avoid certain technical difficulties. The English company was created with a nominal capital of 100 pounds only, consisting of 100 shares of which 90 were held by the American president of the company. The Court held that the real producer was the American company and that it would be a sham to hold that the American company and American president were merely agents of the English company for producing the film.

Jones v. Lipman– In this case, the seller of a piece of land sought to evade the specific performance of a contract for the sale of the land by conveying the land to a company which he formed for the purpose and thus he attempted to avoid completing the sale of his house to the plaintiff. Russel J. describing the company as a “devise and a sham, a mask which he holds before his face and attempt to avoid recognition by the eye of equity” and ordered both the defendant and his company specifically to perform the contract with the plaintiff.

Tata Engineering and Locomotive Co. Ltd. State of Bihar– In this case, it was stated that a company is also not allowed to lay claim on fundamental rights on the basis of its being an aggregation of citizens. Once a company is formed, its business is the business of an incorporated body thus formed and not of the citizens and the rights of such body must be judged on that footing and cannot be judged on the assumption that they are the rights attributable to the business of the individual citizens.

N.B. Finance Ltd. v. Shital Prasad Jain– In this case the Delhi High Court granted to the plaintiff company an order of interim injunction restraining defendant companies from alienating the properties of their ownership on the ground that the defendant companies were merely nominees of the defendant who had fraudulently used the money borrowed from the plaintiff company and bought properties in the name of defendant companies. The court did not in this case grant protection under the doctrine of the corporate veil.

Shri Ambica Mills Ltd. v. State of Gujarat– It was held that the petitioners were as good as parties to the proceedings, though their names were not expressly mentioned as persons filing the petitions on behalf of the company. The managing directors in their individual capacities may not be parties to such proceedings but in the official capacity as managing directors and as officers of the company, they could certainly be said to represent the company in such proceedings. Also, as they were required to so act as seen from the various provisions of the Act and the Rules they could not be said to be total strangers to the company petition.

Q6) Explain the procedure of incorporation of a company.

A6) Incorporation of a company starts with selection of the name and the type of company you wish to establish. The name should not be contradictory to provisions laid down in Companies Act, 2013 (hereinafter referred to as “Act”). There are various types of companies in India; the type of company completely depends upon the nature of the business, the objective of business, future expectations from the business and capital and the number of members one wishes to include in the business. Secondly, the applicant needs to file Memorandum of Association (hereinafter referred to as “MoA”) and Article of Association (hereinafter referred to as “AoA”) with Registrar of Companies (hereinafter referred to as “RoC”). The Government of India (hereinafter referred to as “GoI”) has made the incorporation of a company easy vide various amendments in Companies (Incorporation) Rules, 2014 (hereinafter referred to as “Rules, 2014”). The major steps in the process of incorporation of a company are.

Selection of Name

Clause 2 and 3 of Section 4 of the Act provide for the restrictions in the selection of the name. They provide that the name should not be identical or resembling the name of an already registered company under the Act, or any previous company law. Further, a company shall not be registered with the name giving the impression that the company in any way is connected with, or having patronage to the GoI, any State Government or any corporation set up by GoI or State Government thereof, unless a prior approval of the Central Government has been obtained for the use of any such word or expression.

Selection of Type of Company

The Act gives legal status to various kinds of companies. It is up to the applicant to decide which type of company one wishes to establish. There are various factors to decide, such as, number of members, the amount of capital that will be invested and future expectations from the company. A company formed may be either— (a) a company limited by shares; or (b) a company limited by guarantee; or (c) an unlimited company.

Public Company: A public company is a company whose shares are freely transferable. This kind of company may or may not be a listed company; a minimum of seven numbers of people are required to form a public company. A public company is ideal for large businesses as after some years of establishment when the market is capitalized, a public company can be listed on a recognized stock exchange.

Private Company: A private company is a company whose shares are not freely transferable and the number of subscribers is limited. A minimum of two persons are required to form this kind of a company. A private company is ideal for new startups, as investors can easily invest in a private company and no SEBI regulations apply on private companies. This kind of company is most common in India.

One Person Company: A one-person company (hereinafter referred to as “OPC”) is a private company having only one member and only that member’s name is indicated in the MoA, along with the successor to the member, in case of death or incapacity to enter into contracts.

Producer Company: “Producer Company” means a company having special objects and activities listed in Section 581B of the Act, such company needs to be registered as producer company according to the provisions of the Act.

Documents Required and Filings

INC form 32: The Applicant needs to file form INC 32 with the RoC. The process for this filing has become entirely electronic, as the GoI had introduced Simplified Proforma for Incorporating a Company Electronically (SPICe) vide amendment in Rules, 2014 for ease of doing business. Earlier, forms INC 1, INC 7, INC 8 and INC 10 were required to be filed with RoC, however, after the amendment only form INC 32, INC 33 and INC 34 are required. The change was widely accepted by the applicants as the process is now speedy and tranquil.

Memorandum of Association: The MoA contains the following information regarding the company: (1) Name Clause; (2) Registered Office Clause; (3) Object Clause; (4) Liability Clause; (5) Capital Clause; and (6) Association Clause. MoA is filed with RoC in form INC 33 duly signed by directors of the company.

Articles of Association: AoA of a company lay down the working of a company and the rights and liabilities of shareholders and directors. AoA is filed with RoC in Form INC 34.

Certificate of Incorporation

On the basis of the documents and information filed with it, the RoC shall register all the documents and information referred to in the register and issue a certificate of incorporation in the prescribed form, to the effect that the proposed company is incorporated under the Act, from the date mentioned in the certificate of incorporation issued. Further, the RoC shall allot to the company a Corporate Identity Number, which shall be the distinct identity for the company and which shall also be included in the certificate.

Registered Office

 According to the Act, a company must have a registered office capable of receiving and acknowledging all communications and notices on and continuously from the 15th (fifteenth) day of its incorporation. Once the registered office has been established, the company shall furnish proof to Registrar for verification of the address within 30 (thirty) days of incorporation. Form INC-22 is to be filed with the Registrar for this purpose.

These are the basic steps involved in the incorporation of a Company.

Q7) What is Certificate of Commencement of Business?

A7) Commencement of Business Certificate is the declaration that the Director of the Company needs to file with Registrar of Companies. Moreover, this declaration is filed in Form INC-20A within 180 days of the incorporation of the Company.

Basically, this is a declaration filed before commencing the business and exercising borrowing powers by the Company. Company has to comply with Section 10A(1)(a) of Companies Act 2013 and Companies (Incorporation) Rules, 2014 while filing the Certificate of Commencement of Business.

Provisions related to Commencement of Business Certificate

Section 10A of Companies Act provides that all the Companies incorporated after Companies (Amendment) Ordinance 2018 and having Share capital shall not commence business or not exercise borrowing powers unless it complies with some conditions. Those conditions are:

The director of the Company has filed the declaration with Registrar that every subscriber to MoA has paid the amount for the shares held by them. He shall file such declaration within 180 days of Incorporation of Company.

Secondly, Company has filed with Registrar the verification of Registered Office of the Company in Form INC-22 as provided in Section 12(2) of Companies Act 2013

Q8) Write a note on Memorandum of association.

A8) Memorandum of Association is the most important document of a company. It states the objects for which the company is formed. It contains the rights, privileges and powers of the company. Hence it is called a charter of the company. It is treated as the constitution of the company. It determines the relationship between the company and the outsiders.

The whole business of the company is built up according to Memorandum of Association. A company cannot undertake any business or activity not stated in the Memorandum. It can exercise only those powers which are clearly stated in the Memorandum.

Definition of Memorandum of Association

Lord Cairns:

“The memorandum of association of a company is the charter and defines the limitation of the power of the company established under the Act”.

Thus, a Memorandum of Association is a document which sets out the constitution of the company. It clearly displays the company’s relationship with outside world. It also defines the scope of its activities. MoA enables the shareholders, creditors and people who has dealing with the company in one form or another to know the range of activities.

Q9) What are the Contents of Memorandum of Association?

A9) According to the Companies Act, the Memorandum of Association of a company must contain the following clauses:

1. Name Clause of Memorandum of Association

The name of the company should be stated in this clause. A company is free to select any name it likes. But the name should not be identical or similar to that of a company already registered. It should not also use words like King, Queen, Emperor, Government Bodies and names of World Bodies like U.N.O., W.H.O., World Bank etc. If it is a Public Limited Company, the name of the company should end with the word ‘Limited’ and if it is a Private Limited Company, the name should end with the words ‘Private Limited’.

2. Situation Clause of Memorandum of Association

In this clause, the name of the State where the Company’s registered office is located should be mentioned. Registered office means a place where the common seal, statutory books etc., of the company are kept. The company should intimate the location of registered office to the registrar within thirty days from the date of incorporation or commencement of business.

The registered office of a company can be shifted from one place to another within the town with a simple intimation to the Registrar. But in some situation, the company may want to shift its registered office to another town within the state. Under such circumstance, a special resolution should be passed. Whereas, to shift the registered office to other state, Memorandum should be altered accordingly.

3. Objects Clause of Memorandum of Association

This clause specifies the objects for which the company is formed. It is difficult to alter the objects clause later on. Hence, it is necessary that the promoters should draft this clause carefully. This clause mentions all possible types of business in which a company may engage in future.

The objects clause must contain the important objectives of the company and the other objectives not included above.

4. Liability Clause of Memorandum of Association

This clause states the liability of the members of the company. The liability may be limited by shares or by guarantee. This clause may be omitted in case of unlimited liability.

5. Capital Clause of Memorandum of Association

This clause mentions the maximum amount of capital that can be raised by the company. The division of capital into shares is also mentioned in this clause. The company cannot secure more capital than mentioned in this clause. If some special rights and privileges are conferred on any type of shareholders mention may also be made in this clause.

6. Subscription Clause of Memorandum of Association

It contains the names and addresses of the first subscribers. The subscribers to the Memorandum must take at least one share. The minimum number of members is two in case of a private company and seven in case of a public company.

Thus, the Memorandum of Association of the company is the most important document. It is the foundation of the company.

Q10) Write a note on Articles of Association.

A10) Articles of Association is an important document of a Joint Stock Company. It contains the rules and regulations or bye-laws of the company. They are related to the internal working or management of the company. It plays a very important role in the affairs of a company. It deals with the rights of the members of the company between themselves.

The contents of articles of association should not contradict with the Companies Act and the MoA. If the document contains anything contrary to the Companies Act or the Memorandum of Association, it will be inoperative. The private concerns that are limited by shares and those limited by guarantee and unlimited companies must have their articles of association. Public companies may not have their articles but may adopt Model articles given in Table A of Schedule I of Companies Act, 1956. If a public company has only some articles of its own, for the rest, articles of Table A will be applicable.

Articles that are profound to be registered should be printed, segmented well and sequenced consecutively. Each subscriber to Memorandum of Association must sign the articles in the presence of at least one witness.

Q11) What are the Contents of Articles of Association?

A11) The articles generally deal with the following

1. Classes of shares, their values and the rights attached to each of them.

2. Calls on shares, transfer of shares, forfeiture, conversion of shares and alteration of capital.

3. Directors, their appointment, powers, duties etc.

4. Meetings and minutes, notices etc.

5. Accounts and Audit

6. Appointment of and remuneration to Auditors.

7. Voting, poll, proxy etc.

8. Dividends and Reserves

9. Procedure for winding up.

10. Borrowing powers of Board of Directors and managers etc.

11. Minimum subscription.

12. Rules regarding use and custody of common seal.

13. Rules and regulations regarding conversion of fully paid shares into stock.

14. Lien on shares.

Q12) How to alter Articles of Association?

A12) Alteration of Articles of Association

The alteration of the Articles should not sanction anything illegal. They should be for the benefit of the company. They should not lead to breach of contract with the third parties. The following are the regulations regarding alteration of articles:

A company may alter its articles with a special resolution. Due importance and care should be given to ensure that the alteration of AoA does not conflict with the provisions of the Memorandum of Association or the Companies Act. A copy of every special resolution altering the Articles must be filed with the Registrar within 30 days of its passing.

1. The proposed alteration should not contravene the provisions of the Companies Act.

2. The proposed alteration should not contravene the provisions of the Memorandum of Association.

3. The alteration should not propose anything that is illegal.

4. The alteration should be bonafide for the benefit of the company.

5. The proposed alteration should in no way increase the liability of existing members.

6. Alteration can be made only by a special resolution.

7. Alteration can be done with retrospective effect.

8. The Court does not have any power to order alteration of the Articles of Association.

Q13) Explain the doctrine of Ultra vires.

A13) Doctrine of Ultra vires

The Doctrine of ultra vires is related to actions taken by a private in relevancy corporation or company. Each company has what's known as a Memorandum of Association of Company (Memorandum), that is the company’s constitution. The memorandum defines the company’s objectives, powers, and areas of operation, each internal and external. The memorandum are an overview and a guide that the executives of the corporate will follow to make sure of the scope of their own powers, and what lines they can't and may not cross.

This commitment to uphold the company’s memorandum is cited as doctrine of ultra vires. If the corporate performs an act that's on the far side the scope of the powers afforded to that by its memorandum, then that act is ultra vires, or on the far side its powers. The Doctrine of ultra vires could be a reasonably policy that reassures a company’s shareholders and creditors that the corporate won't use their assets or funds for any functions aside from people who afforded to that, and such that among the ultra vires school of thought.

The Doctrine of ultra vires could be a basic rule of Company Law. It states that the objects of a corporation, as laid out in its memorandum of Association, may be departed from solely to the extent allowable by the Act. Hence, if the corporate will act, or enters into a contract on the far side the powers of the administrators or the corporate itself, then the aforesaid act/contract is void and not wrongfully binding on the corporate.

The term ultra vires means that ‘Beyond Powers’. In legal terms, it's applicable solely to the acts performed in way over the legal powers of the someone. This works on assumption that the powers restricted in nature. Since the Doctrine of ultra vires limits the corporate to the objects laid out in the memorandum, the corporate will be:

The company cannot sue on ultra vires dealings. Further, it cannot be sued too. If a corporation provides product or offers service or lends cash on Associate in Nursing ultra vires contract, then it cannot get payment or recover the loan. However, if an investor loans cash to a corporation that has not been extended nevertheless, then he will stop the corporate from parting with it via Associate in Nursing injunction.

The investor has this right as a result of the corporate doesn't become the owner of the money because it is ultra vires to the corporate and also the investor remains the owner. Further, if the corporate borrows cash in ultra vires dealings to repay a legal loan, then the investor is entitled to recover his loan from the corporate.

Sometimes act that is ultra vires may be regularized by the shareholders of the corporate. for instance:

Remember, you cannot bind a corporation through ultra vires contract. Estoppel, acquiescence, lapse of your time, delay, or approval cannot build it ‘Intra vires’

Effects of an Ultra Vires Act

The effects of an ultra vires act may be summed up as follows:

Types of Ultra vires Acts

There are 3 sorts of ultra vires acts, that mentioned below:

Will Ultra Vires Act be Ratified?

An ultra vires act cannot be sanctioned even by the full body of the shareholders and create it binding on the corporate. In alternative words, even the shareholders cannot do Associate in Nursing ultra vires act. this is often the peculiar feature of this philosophical system.

The principles of law on this subject were 1st pronounced by Lord Cairons, L.J., in Ashbury Railway Carriage & Iron Co. Ltd. V. Riche. therein case, an organization was shaped with the subsequent objects:

The directors contractile to finance the development of a railway line in Belgium with Mls Riche. The Court control that the contract was ultra vires the corporate and void, in order that even the following assent of the full body of the shareholders couldn't formalize it.

However, later on, the House of Lords control in alternative cases that the philosophical system of ultra vires ought to be applied fairly and unless it's expressly prohibited, an organization could do Associate in Nursing act, that is very important for, or attendant attainment of its objectives.

Exception to the Doctrine of Ultra vires

There are, however, sure exceptions to the current philosophical system, that are as follows:

Q14) Explain the Doctrine of Indoor Management.

A14) The role of the doctrine of indoor management is opposed to that of the rule of constructive notice. The latter seeks to protect the company against the outsider; the former operates to protect outsiders against the company. The rule of constructive notice is confined to the external position of the company and, therefore, it follows that there is no notice as to how the company’s internal machinery is handled by its officers. If the contract is consistent with the public documents, the person contracting will not be prejudiced by irregularities that may beset the indoor working of the company.

Royal British Bank v. Turquand-

Turquand, a company, had a clause in its constitution that allowed the company to borrow money once it had been approved and passed by resolution (decision) of the shareholders at a general meeting. Turquand entered into a loan with the Royal British Bank and two of the co-directors signed and attached the company seal to the loan agreement. Loan had not been approved by the shareholders.

Company defaulted on their payments and the bank sought restitution. Company refused to repay claiming that the directors had no right to enter into such an arrangement

It was held that “The Turquand was entitled to assume that the resolution was passed.

The Company was therefore bound by the rule.

Doctrine is also popularly known as the Turquand rule.

Exceptions to the Doctrine of Indoor Management-

1.Knowledge of irregularity-

The first and the most obvious restriction is that the rule has no application where the party affected by an irregularity had actual notice of it. Knowledge of irregularity may arise from the fact that the person contracting was himself a party to the inside procedure.

Howard v Patent Ivory-

The directors could not defend the issue of debentures to themselves because they should have known that the extent to which they were lending money to the company required the assent of the general meeting which they had not obtained.

The principle is clear that a person who is himself a part of the internal machinery cannot take advantage of irregularities.

2. Forgery-

Doctrine of indoor management does not apply to forgery because forgery is void ab- initio.

Ruben v. Great Fingall Consolidated-

The plaintiff was the transferee of a share certificate issued under the seal of the defendant company. The certificate was issued by the company’s secretary, who had affixed the seal of the company and forged the signatures of two directors.

The plaintiff contended that whether the signatures were genuine or forged was a part of internal management and, therefore, the company should be estopped from denying genuineness of document. But it was held that the rule has never been extended to cover such a complete forgery.

Lord Loreburn said: It is quite true that persons dealing with limited liability companies are not bound to inquire into their indoor management and will not be affected by irregularities of which they have no notice. But this doctrine, which is well established, applies to irregularities which otherwise might affect a genuine transaction. It cannot apply to a forgery.

3. Negligence on the part of the outsider-

Anand Bihari Lal vs. Dinshaw and Co.-

In this case the plaintiff accepted transfer of Company’s property from its accountant, the transfer was held void.

Q15) How to appoint directors of a company?

A15) APPOINTMENT OF DIRECTORS

(1) Where no provision is formed within the articles of a company for the appointment of the first director, the subscribers to the memorandum who are individuals shall be deemed to be the first directors of the company until the directors are duly appointed and just in case of a 1 Person Company a private being member shall be deemed to be its first director until the director or directors are duly appointed by the member in accordance with the provisions of this section.

(2) Save as otherwise expressly provided during this Act, every director shall be appointed by the company generally meeting.

(3) nobody shall be appointed as a director of a company unless he has been allotted the Director number under section 154.

(4) every one proposed to be appointed as a director by the company generally meeting or otherwise, shall furnish his Director number and a declaration that he's not disqualified to become a director under this Act.

(5) an individual appointed as a director shall not act as a director unless he gives his consent to carry the office as director and such consent has been filed with the Registrar within thirty days of his appointment in such manner as could also be prescribed:

Provided that within the case of appointment of an independent director within the general meeting, an explanatory statement for such appointment, annexed to the notice for the overall meeting, shall include a statement that within the opinion of the Board, he fulfils the conditions laid out in this Act for such an appointment.

(6) (a) Unless the articles provide for the retirement of all directors at every annual general meeting, not but two-thirds of the entire number of directors of a public company shall

(i) be persons whose period of office is liable to determination by retirement of directors by rotation; and

(ii) save as otherwise expressly provided during this Act, be appointed by the corporate generally meeting.

(b) The remaining directors within the case of any such company shall, in default of, and subject to any regulations within the articles of the company, even be appointed by the company generally meeting.

(c) At the first annual general meeting of a public company held next after the date of the overall meeting at which the primary directors are appointed in accordance with clauses (a) and (b) and at every subsequent annual general meeting, one-third of such of the directors for the nonce as are susceptible to retire by rotation, or if their number is neither three nor a multiple of three, then, the amount nearest to one-third, shall retire from office.

(d) the directors to retire by rotation at every annual general meeting shall be those that are longest in office since their last appointment, but as between persons who became directors on an equivalent day, those that are to retire shall, in default of and subject to any agreement among themselves, be determined by lot.

(e) At the annual general meeting at which a director retires as aforesaid, the company may refill the vacancy by appointing the retiring director or another person thereto.

Explanation- For the needs of this sub-section, ―total number of directors‖ shall not include independent directors, whether appointed under this Act or the other law for the nonce effective, on the Board of a company.

(7) (a) If the vacancy of the retiring director isn't so filled-up and therefore the meeting has not expressly resolved to not fill the vacancy, the meeting shall stand adjourned till an equivalent day within the next week, at the same time and place, or if that day is a national holiday, till subsequent succeeding day which isn't a holiday, at an equivalent time and place.

(b) If at the adjourned meeting also, the vacancy of the retiring director isn't filled up which meeting also has not expressly resolved to not fill the vacancy, the retiring director shall be deemed to have been re-appointed at the adjourned meeting, unless—

(i) at that meeting or at the previous meeting a resolution for the re-appointment of such director has been put to the meeting and lost;

(ii) the retiring director has, by a notice in writing addressed to the company or its Board of directors, expressed his unwillingness to be so re-appointed;

(iii) he is not qualified or is disqualified for appointment;

(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of any provisions of this Act; or

(v) section 162 is applicable to the case.

Explanation- For the needs of this section and section 160, the expression ―retiring director‖ means a director retiring by rotation.

Q16) What are the qualifications of directors?

A16) The Act doesn't lay down any academic or shareholding qualification for a director. there's a widespread misconception that a director must necessarily be a shareholder of the company. But if it's not so, unless the articles of the company provide otherwise, a director needn't be a shareholder of the company. But usually, the articles provide surely qualification shares for the directors.

1. Qualification Shares:

If the articles of the company so provide then as per Sec. 270, the directors must obtain their qualification shares as follows:

(i) the administrators must obtain qualification shares within two months after their appointment unless they already hold shares.

(ii) If any provision within the articles requiring a person to hold the qualification shares before his appointment as a director or to get them within a period shorter than two months shall be void.

(iii) The nominal value of 1 qualification share must not exceed Rs. 5,000.

(iv) Bearer share warrants won't be counted for the needs of qualification shares.

(v) If a director doesn't obtain qualification shares within two months of his appointment or thereafter doesn't possess such shares at any time, he ceases to be a director automatically.

(vi) The director shouldn't obtain shares by way of gift from a promoter. He should make the payment for his qualification shares.

(vii) A director is required to hold qualification shares in his title. it's also sufficient if he holds them as a trustee provided it doesn't appear on the register of members that he's a trustee.

(viii) Unless the articles provide otherwise, a joint holding are going to be sufficient for share qualification.

(ix) a person who acts as a director of a company without holding qualification shares even after the expiry of the period of two months from the date of his appointment shall need to vacate his office as a director and be punishable with a fine extending to Rs. 50 for each day from the date of expiry of the period of two months till the date he continues to act as a director. [Sec. 272]

(x) The above provisions on qualification shares don't apply to a non- subsidiary private company, [Sec. 273]

2. Written Consent:

Every person proposed as a candidate for the office of a director has got to sign and file with the company his consent to act as a director, if appointed (Sec. 264). However, the following persons haven't to file such consent:

(i) a person who is retiring from directorship by rotation or otherwise.

(ii) a person who has given notice of his candidature for directorship at the registered office of the company under Sec. 257.

However, a newly appointed director shall not act as a director unless he has also within 30 days of his appointment signed and filed with the Registrar his consent to act as such director.

Filing of such a consent isn't necessary within the case of following person:

(i) A director reappointed after retirement by rotation or immediately on the expiry of his term of office.

(ii) Additional or alternate director, or a person filling an off-the-cuff vacancy within the office of a director under section 262 or appointed as a director or reappointed as a further or alternate director immediately on the expiry of his term of office.

(iii) a person named as a director under its articles of association as first registered.

It is to be noted that only persons newly seeking appointment as directors have to file their consent to act as such. an individual who is already a director and who is retiring at the annual general meeting but immediately seeking reappointment is exempted from filing the consent. The provisions of this section aren't applicable to an independent private company.

3. Only Individuals: can be Directors:

Nobody corporate, association or a firm can be appointed director of a company. Only individuals are often appointed as directors. [Sec. 253]

Q17) What is AGM? Explain the provisions relating to annual general meeting?

A17) An Annual General Meeting (AGM) is held to have an interaction between the management and the shareholders of the company.

Which Companies Are Required to Hold an AGM?

All companies except one person company (OPC) should hold an AGM after the end of each financial year. A company must hold its AGM within a period of six months from the end of the financial year. However, in the case of a first annual general meeting, the company can hold the AGM in less than nine months from the end of the first financial year. In such cases where the first AGM is already held, there is no need to hold any AGM in the year of incorporation. Do note that the time gap between two annual general meetings should not exceed 15 months. The Companies Act, 2013 makes it compulsory to hold an annual general meeting to discuss the yearly results, auditor’s appointment and so on. A company should follow the procedures under the Companies Act, 2013 to conduct the AGM.

What is the Procedure to Hold an AGM?

The company must give a clear 21 days’ notice to its members for calling the AGM. The notice should mention the place, the date and day of the meeting, the hour at which the meeting is scheduled. The notice should also mention the business to be conducted at the AGM.

A company should send the notice of the AGM to:

– All members of the company including their legal representative of a deceased member and assignee of an insolvent member.

– The statutory auditor(s) of the company.

– All director(s) of the company.

The notice may be given in writing through speed post or registered post or via electronic mode. The notice should be sent to the address of the member as per the records of the company. In the case of electronic communication, the notice should be sent to the e-mail address of the member as per the records of the company. The notice can be text typed in an email or an attachment to an email.

The notice of the AGM should be placed on the website of the company or any other website as may be mentioned by the government.

An AGM can be called at a notice period shorter than 21 days’ if at least 95% of the members entitled to vote in the meeting agree to the shorter notice. The consent may be given in writing or through electronic mode.

Matters Discussed in an AGM or Agenda for an AGM

The matters discussed or business transacted in an AGM consists of:

– Consideration and adoption of the audited financial statements

– Consideration of the Director’s report and auditor’s report

– Dividend declaration to shareholders

– Appointment of directors to replace the retiring directors

– Appointment of auditors and deciding the auditor’s remuneration

– Apart from the above ordinary business, any other business may be conducted as a special business of the company.

The ordinary business of the company will be passed by an ordinary resolution where the votes cast in favour are more than the votes cast against the resolution. However, in case of special business transactions, the resolution may be passed as an ordinary resolution or a special resolution, depending on the applicable legal provisions. A special resolution requires at least 75% votes in favour of the resolution.

An AGM should be conducted during the business hours between 9 a.m. and 6 p.m. only. The meeting can be conducted on any day, which is not a national holiday, including holidays declared by the Central Government. The meeting can be held at any place which is within the limits of the city or town or village in which the registered office is situated. A government company can also hold its AGM at any other place as the Central Government may approve. An unlisted company can hold an AGM at any place in India after obtaining consent from its members in writing or in electronic mode.

In the case of a Section 8 company, the Board decides the date, time and place of the AGM as per the directions given in a general meeting of the company.

What is the Quorum for an AGM?

In the case of a private company, two members present at the meeting shall be the quorum for the AGM.

In the case of a public company, the quorum is:

– Five members present at the meeting if the number of members is within one thousand.

– Fifteen members present at the meeting if the number of members is more than one thousand but within five thousand.

– Thirty members present at the meeting if the number of members is more than five thousand.

In case the quorum for the meeting is not present within half an hour from the scheduled time, the meeting will be adjourned to the same day in the following week for the same time and at the same place.

Members’ Rights in an AGM

The members (including shareholders) of the company are entitled to attend and vote at the AGM. Members can cast their votes by a physical ballot or postal ballot or through e-voting. Members can appoint proxies to attend an AGM and vote on their behalf. The proxy should be appointed in writing, and the proxy form should be signed by the member. In case the proxy is appointed by a corporate shareholder, the proxy form should be signed and sealed by an authorized signatory of the corporate.

The members can elect one among themselves as the chairman of the meeting. However, if the articles of association of the company provide for a chairman, such person shall chair the AGM of the company.

Reporting of the AGM in Form MGT-15

After the conduct of AGM, every listed company has to file a report on the AGM in form MGT-15 within a period of 30 days from the conclusion of the AGM.

Consequences and Penalty for Default in Holding an AGM

In case a company fails to hold an AGM within the stipulated time or extension obtained by it, the Tribunal may itself or on an application made by any director or member order an AGM to be conducted as per its directions.

If the company further defaults in holding a meeting in accordance with the directions of the Tribunal, the company and every officer of the company who commit the default shall be punishable with a fine of up to Rs 1 lakh. In case of continuing default, a fine of Rs 5,000 per day is levied for each day during which the default continues.

Q18) What is extra ordinary general meeting? Explain its provisions.

A18) Matters requiring immediate consideration by members, which cannot be deferred till next Annual General Meeting, to meet such emergencies, the companies can provide for holding of emergency meetings of the members which are known as Extra Ordinary General Meeting.

Regulation 42 of Table F provides that all general meetings, other than Annual General Meeting, shall be called as Extra Ordinary General Meetings.

All business which are transacted at Extra Ordinary General Meeting shall be deemed special.

Extra Ordinary General Meeting shall be held at a place within India except of the wholly owned subsidiary of a company incorporated outside India.   

Calling of Extra Ordinary General Meeting

1. Section 100(1) of Companies Act 2013 and Regulation 43(i) of Table F

The Board of Directors may whenever it thinks fit call an Extra Ordinary general meeting. For this Board resolution is required. Thus, General meeting need to be called only on the authority of board resolution.

If a managing director, manager, secretary or other officer calls a general meeting without prior approval of the Board of Directors, it will have no effect unless the Board ratifies the convening of general meeting before it is held.

2. Regulation 43(ii) of Table F, Calling of Extra Ordinary General Meeting by any director or any two members

If at any time directors capable of acting sufficient in number to form a quorum, any one director or any two members of the company may call an Extra Ordinary General meeting in the same manner, as nearly as possible as that in which such a meeting may be called by the board.

3. Section 100 of Companies Act, 2013 Calling of Extra Ordinary General Meeting on requisition

The demand of members to convene a meeting is called requisition. It shall set out the matters for consideration of which the meeting is to be called.

The number of members entitled to requisition a meeting in regard to any matter shall be

1. In case Company having a share capital, members holding at least one tenth of such paid up capital of the capital which carries a right voting in regard to that matter.

2. In case Company not having share capital, members holding at least one tenth of total voting power of all the members who have a right to vote to that matter.

On receipt of requisition the Board of Directors shall proceed to call Extra Ordinary General Meeting within 21 days from the date of the deposit of requisition, on a date, which shall not be later than 45 days of the date of deposit of requisition.

The Board of Directors shall be said to have failed in calling the meeting if:

Where the Board fails to call a meeting, the meeting may be called by the requisitionists themselves within a period of 3 months from the date of the deposit of requisition.

Any reasonable expenses incurred by the requisitionists in calling a meeting shall be reimbursed to the requisitionists by the Company and the same so paid shall be deducted from any fee or other remuneration payable to such of the directors who were in default in calling the meeting.

Notice of the meeting

Notice shall be given in writing or through electronic mode at least before 21 clear days to the proposed date of extra ordinary general meeting.

The notice calling meeting shall specify the place, date, day and hour of the meeting and shall contain the business to be transacted at the meeting- Requistionists should convene meeting at Registered office or in the same city or town where Registered office is situated. Further such meeting should be convened on any day except national holiday.

No explanatory statement as required under section 102 need be annexed to the notice of an extraordinary general meeting convened by the requistionists and the requistionists may disclose the reasons for the resolutions which they propose to move at the meeting.

The notice of the meeting shall be given to those members whose names appear in the Register of members of the company within three days on which the requistionists deposit with the Company a valid requisition for calling an extraordinary general meeting.

The notice of the meeting shall be given by speed post or registered post or through electronic mode. Any accidental omission to give notice to, or the non-receipt of such notice by, any member shall not invalidate the proceedings of the meeting.

4. Section 98 of Companies Act, 2013 Calling of Extra Ordinary General Meeting by Tribunal

If for any reason company could not call, hold or conduct meeting. The National Company Law Tribunal may order a meeting of the company to be called, held or conducted in such manner as it thinks fit.

The directions given under this section include that one member of the company present in person or by proxy shall be deemed to constitute a meeting.

The tribunal may do so either on its own motion or on the application of any director of the company or on the application of any member of the company who would be entitled to vote at the meeting.

Q19) What is winding up of companies?

A19) Winding up of a company is defined as a process by which the life of a company is brought to an end and its property administered for the benefit of its members and creditors. In words of Professor Gower, “Winding up of a company is the process whereby its life is ended and its property is administered for the benefit of its members & creditors. An Administrator, called a liquidator is appointed and he takes control of the company, collects its assets, pays its debts and finally distributes any surplus among the members in accordance with their rights.”

According to Halsburry's Laws of England, “Winding up is a proceeding by means of which the dissolution of a company is brought about & in the course of which its assets are collected and realized; and applied in payment of its debts; and when these are satisfied, the remaining amount is applied for returning to its members the sums which they have contributed to the company in accordance with Articles of the Company.” Winding up is a legal process.

Q20) What are the modes of winding up of a company?

A20) The main modes of winding up may be discussed under the following three heads, namely:

1. Compulsory winding up by the court.

 2. Voluntary winding up without the intervention of the court.

 3. Voluntary winding up with the intervention of the court i.e., under the supervision of the court.

Mode # 1. Compulsory Winding Up by the Court:

Winding up of a Company by an order of the court is called the compulsory winding up. Section 433 of the Companies Act lays down the circumstances under which a Company may be compulsorily wound up. They are:

(a) If the Company has by special resolution, resolved that the Company may be wound up by the court.

(b) If default is made in delivering the statutory report to the Registrar or in holding the statutory meeting.

(c) If the Company does not commence its business within a year from its incorporation or suspends it for a whole year.

(d) If the number of members is reduced, in the case of a public Company below seven, and in the case of a private company below two.

(e) If the Company is unable to pay its debts.

(f) If the court is of the opinion that it is just and equitable that the company should be wound up.

Persons Entitled to Apply for Liquidation:

The Petition for winding up of a Company may be presented by any of the following persons (Sec. 439):

(1) The Company.

(2) The creditors which include contingent creditors, prospective creditors, secured creditors, debenture holders, or a trustee for debenture holders.

(3) The contributories – comprise present and past shareholders of a Company (Secs. 426 and 428).

(4) The Registrar.

(5) Any person authorized by the Central Government on the-basis of report of inspectors.

Mode # 2. Voluntary Winding Up:

A voluntary winding up occurs without the intervention of the court. Here the Company and its creditors mutually settle their affairs without going to the court.

This mode of winding up takes place on:

(a) The expiry of the prefixed duration of the Company, or the occurrence of event whereby the Company is to be dissolved, and adoption by the Company in general meeting of an ordinary resolution to wind up voluntarily; or

(b) The passing of a special resolution by the Company to wind up voluntarily.

Mode # 3. Winding Up Subject to Supervision of the Court:

Windings up with the intervention of the court are ordered where the voluntary winding up has already commenced. As a matter of fact, it is the voluntary winding up but under the supervision of the court. A court may approve a resolution passed by the Company for voluntary winding up but the winding up should continue under the supervision of the court.

The court will issue such an order only under the following circumstances:

(a) If the resolution for winding up was obtained by fraud by the company; or

(b) If the rules pertaining to winding up are not being properly adhered to; or

The Court may exercise the same powers as it has in the case of compulsory winding up under the order of the court.