Unit 2 company law

Prepared and Presented by,
N. Ganesha Pandian
Assistant Professor
Madurai School of management
Madurai

 Major principles
 Nature and types of companies
 Formation of companies
 Memorandum and Articles of Association,
Prospectus
 Power, duties and liabilities of Directors
 winding up of companies
 Corporate Governance

Sec 3(1)(i) of the Act merely states that a
company means a company formed and
registered under this act or an exiting
company as defined.
Sec 3(1)(ii) provides that, ‘an existing
company means ‘company formed and
registered under previous company law.

 A joint stock company may be defined to mean a voluntary
association of persons formed for some common purpose with
capital divisible into transferable shares, limited liability with a
distinctive name, having a corporate body, a legal personality on its
own.
 It is creation of law. It has no physical existence like a natural person
 Justice James “ A company is an association of persons united for a
common object”
 Haney “ A company is an artificial person created by law, having
separate entity, with a perpetual succession and a common seal”

1, Separate legal entity
2, Separate property
3, Common seal
4, Capacity to sue and to be sued
5, Limited liability
6, Perpetual succession
7, Transferability of shares

 Term ‘corporate’ or ‘body corporate’ refers to company
 Corporation is wider than the company
 It includes
a, Companies incorporated in India and foreign
companies
b, Nationalized banks
c, Public financial institutions sec 4(A)
d, Corporations formed under Acts of parliament

 But excludes,
a, a cooperative society registered under any law
relating to cooperative societies
b, any other body corporate – central government
may by notification in the official gazette
c, a society registered under societies registration
act 1860

 Real person behind the company are disregarded once they have formed a
company and given to their association the status of a legal entity. The
principle is known as ‘the veil of incorporation’
 ‘Corporate veil’ refers to the ‘partition’ or ‘curtain’ between the company and
its members. The court in general consider bound by this principle in
deciding the matter and therefore they refuse to go behind the persons
responsible for acts of commission and omissions
 The corporate entity is disregarded and the corporate veil is lifted or pierced
in exceptional cases which is classified into
1, Exceptions under judicial interpretations
2, Exceptions under statutory provisions

1, Protection of revenue
2, Avoidance of welfare legislation
3, Prevention of fraud or improper conduct
4, Where the company is a sham
5, Company acting as agent or trustee of the
shareholders
6, Determination of character of the company
7,Where the doctrine conflicts public policy

1, Reduction in no. of members below legal
minimum (sec45)
2, Mis description of name (sec147)
3, Failure to refund application money sec69(5)
4, Investigation of the affairs and ownership of a
company (sec239)
5, Misrepresentation in prospectus
6, Non – Payment of tax

 According to sec 11, no company, association or
partnership consisting of more than 20 persons (10
in case of banking business) can be formed to
carry on any business for gain unless it is
registered under the companies act or any other
Indian Law
 Otherwise such an association will be deemed to
be illegal association having no legal existence

 Sec 25 provides that the central government may be
license direct that the association be regarded as a
company with limited liability without using the words
‘Limited’ or ‘Private Limited’
 These companies are also called licensed companies
u/s 256 of the central government is empowered to
grant exemption to such companies from any of the
provisions of the company act

1, Permitted to register with limited liability – no need to use these
words ‘Limited’ or ‘Private Limited’
2, Exempted from paying stamp duty on MoA and at time of registration
3, Need not send the list of its members to the registrar
4, May be permitted to have even firm as a member
5, Secretary need not possess the qualification prescribed under sec
2(45)
6, Board meetings once in six months
7, Exempted from maintaining at its registered office a register of
directors and managers etc.,

 According to sec12 of the companies act 1956,
seven or more persons or where the company to
be formed will be private company and two or
more persons may form an incorporate company
with or with out limited liability
 In words of Leonard W. Hein “the right of limited
liability is desirable, but not a necessary adjunct to
incorporation”

Classification of companies
Incorporat
ion
Member
ship
ControlLiability
No. of
members
Chartered
companies
Statutory
companies
Registered
companies
Licensed
company
Foreign
company
Limited
liability
Limited by
shares
Limited by
guarantee
Unlimited
liability
Private
Public Subsidiary
Holding
Governem
ent
Non
Governme
nt

1. Chartered companies – companies established as a result of royal charter
granted by a king or queen of a country (eg) East India company and Bank of
England
2. Statutory companies – Companies that are formed by special acts of parliament
or state legislations are called statutory companies (eg) RBI ,LIC and etc.
3. Registered companies – Companies registered under the Indian companies act
1956 or under any of the previous companies acts are called registered
companies
4. Licensed companies – companies established for promotion of arts, science,
religion, charity or any other objects can obtain license (sec25)
5. Foreign companies – A company incorporated outside India under the law of
the country of incorporation but having established its business in India

A, Private company :
In terms of sec3(1)(iii) of the act, a private company means a
company which has a minimum paid up capital of rs.1 lac or such
higher paid up capital as may be prescribed and which by its articles:
1. Restricts the rights to transfer its shares if any,
2. Limits the no. of its member to fifty not including, employee of the
company
3. Prohibits any invitation to the public to subscribe for any share or
debenture
4. Prohibits any invitation or acceptance of deposits from persons other
than its members, directors or their relatives

B, Public company:
As per sec3(1)(V) of the act, a public company is a
company which
1. Is not a private company
2. Has a minimum paid up capital of rs. 25 lacs or
such higher paid up capital as may be prescribed
3. Is a private which is a subsidiary of a company
which is not private

1. Limited liability: Liability of the shareholders
remains limited to the nominal value of the
shares held by him
2. Limited by guarantee: In a guarantee company,
the liability of a shareholder is limited to the
amount has voluntarily undertaken to contribute
towards the assets of the company to meet out
any deficiency at the time of its winding up

1. Government company – section 617 of
companies act 1956, defines a government
company as any company in which not less than
51% of the paid up capital is held by the any
government or subsidiary of a government
company.
2. Non-Government company – It is controlled and
operated by private capital

1. Investment companies – The principal business of which consists
in acquiring, holding and dealing in shares and securities
2. Finance companies – According to rule 2(CC) of the companies
(acceptance of deposit) rules,1975, a “Finance company” means
a non banking company which is a financial institution within the
meaning of clause (C) of sec45-1 of RBI act, 1934
3. Producer companies – Formation of “producer company” dealing
with primary produce, on co-operative principles. The scope of the
proposed company is restricted to dealing with primary produce

A company may be formed either to take over an
existing business or to carry on new business
The procedure for the formation of a company may
be divided into 3 principal stages
1. Promotion
2. Incorporation
3. Commencement of business

 The word promotion has not been defined in
the companies act.
 According to Bowen “the term promoter is a
term not of law but of business, usually
summing up in a single word a no. of
business operations familiar to the
commercial world by which a company is
generally brought into existence”.

1. Promoter chooses the company’s name and
ascertains that it will be accepted by the registrar of
companies
2. Prepares details of company’s MOA and AOA ,
nomination of directors, solicitors, bankers, auditors
and secretary and registered office of company
3. Promoter responsible for registration of company,
issue of prospectus(public), in fact bringing the
company into existence

 Companies act 1956 imposed fiduciary duties on the
promoters.
 He shouldn’t make any secret profits at the expense of
company
Preliminary or pre-incorporation contracts:
1. As promoters are not agents of the company in such cases,
companies are not liable for the acts of promoters entered
into before incorporation
2. However the above term “Provisional” contracts which are
entered into by a public company

1. While selecting name, the promoters will keep in mind the provisions of sec
20 and guidelines names of companies issued by government
2. Decision on objects, the place where business is to be carried out, the
extent of the responsibility of each member for losses and etc., embody in
the document called “Memorandum of Association”
3. Frame of rules and regulations for the company’s internal management
which will be incorporated in “Articles of Association”
4. These two documents to be signed by at least 7 person (public company) 2
persons (private company) with requisite stamp duty and delivered with
necessary stamp duty and delivered with necessary registration and filing
ties

1. Memorandum of Association
2. Articles of Association
3. Name of availability letter received from registration of
companies
4. The MOA of a company is required to contain the
name of the state in which the registered office will be
situated
5. Where a company by its AOA appoints any person a
director, manager or secretary

 According to sec 266 of the companies act, a person can’t be appointed
as director by the articles of a public company having share capital,
unless the person before the articles are registered has signed and filed
with the registrar either himself or through his agent his consent to act
as director
 Power of attorney on a non judicial stamp of a value prescribed in the
stamp laws of the state concerned, empowering the attorney of the
promoters
 A declaration under sec 33(2) in form no:1 by an advocate of the
supreme court, or a high court, an attorney or pleader entitled to appear
before high court or a chartered accountant practicing in India, who is
engaged in formation of a company, or by a persons name in article

 After filing the requisite document to the registrar, he
retains and registers the memorandum, the articles
and other documents filled with him and issue a
“certificate of incorporation” (ie) of the formation of
company sec 33(3)
 If there is any minor defect in any document, the
registrar may ask for its rectification. But if there is a
material and substantial defect, he may refuse
registration

1. A private company may commence its
business immediately on incorporation
2. A public company can’t commence
immediately, unless they obtain certificate of
commencement from registrar
3. A company is bound to commence business
within a year of its incorporation

 MoA is most important document of a company and
it lays down the powers and objects of a company
and the scope of operation of the company beyond
with its action can’t go
 Sec 2(28) of companies act defines memorandum
as follows “ The Memorandum of association of a
company as originally framed or as altered from
time to time in pursuance of any previous company
law or of this act”
 Set out the constitution of the company

 According to Lord Mac Millian “the purpose of
memorandum is to enable the shareholders, creditors
as well as those who are deal with the company, to
know the company’s permitted range of enterprise”
 It enables the prospective shareholders the purpose
for which their money is going to be utilized by the
company and the risks the shareholder are expected
to such investment

 The memorandum of association of every
company shall contain the following clauses:
1. Name clause
2. The registered office clause
3. Objects clause
4. Liability clause
5. Capital clause
6. Subscription clause

1. Name clause {sec13(1)(a)} – this clause contains the name of
company
2. The registered office clause {13(1)(b)} – notice of situation of
registered office
3. Objects clause {13(1)(c)&(d)} – the clause must contains the object of
clause
4. Liability clause {13(2)} – this clause has to state the nature of liability
that members incur
5. Capital clause {13(4)(a)} – must state, the different types of shares
(capital)
6. Association or subscription clause {sec13(4)(c)} –this clause
provides that those who have agreed to subscribe to the
memorandum must signify their willingness to associate and to form a
company

1. “Ultra” means beyond, “vires” means powers. An action outside the
memorandum is ultra vires the company. The doctrine of ultra vires refers to
unauthorized acts.
2. An act may be ultra vires the companies act, the memorandum of association;
Article of association, the directors.
3. Act which ultra vires the companies act shall not only be invalid and void but
also illegal
4. Acts ultra vires the memorandum, shall be void
5. Acts ultra vires the articles can be adopted or ratified by altering the articles
with retrospective effect.
6. Acts Ultra vires the directors can be made valid and binding upon the
company by the acquiescence of all the members of a company.

 According to sec2(2), “Article” means the
articles of association of a company as
originally framed or altered from time to time
in pursuance of any previous companies act
or this act
 The articles of association are the rules and
regulations and bye-laws for the internal
management of the affairs of a company

The articles contain rules and regulations regarding
1. Share capital and variation of rights
2. Lien on shares
3. Calls on shares
4. Transfer, transmission, forfeiture and surrender of share
5. Issue of share warrants
6. Alteration and reduction of capital
7. Voting powers of members
8. Borrowing powers
9. Audit committee
10. Dematerialization
11. Buyback of shares
12. Proceedings at the board and at the general body meetings
13. Appointment, powers, duties, qualifications, remunerations and
etc of directors
14. Appointment of manager, managing director and secretary
15. Dividends and reserves
16. Maintenance of books of accounts and their audit
17. The company’s seal
18. Winding up

Table A of schedule I of the act deals with regulations for management of
a company limited by shares
However, the following companies shall have their own article of
association
1. Unlimited companies
2. Companies limited by guarantee
3. Private companies limited by shares
Form and signature of articles:
The articles shall be
a, Printed
b, divided into paragraphs
c, Signed by each subscriber of memorandum

 The articles of association of a company can at any
time be altered by special resolution. It is statutory
power and any provision in the articles making the
articles unalterable would be invalid as it is contrary to
the provisions of the companies act
 The company must file with the registrar a copy of the
special resolution within a month from the date of its
passing. The altered articles will bind the members in
the same way as did the original articles (sec31)

 MoA and AoA are available for public inspection in
the Registrar’s office on payment of rs.50/- for each
inspection (sec 610)
 The person contracting with the company know the
contents of these two documents is known as
“Doctrine constructive notice” or “Constructive notice
of memorandum of articles”

 Outsiders are bound to read the registered
documents and to see that the proposal dealing is
not inconsistent therewith, but they are not bound
to do more; they need not inquire into the regularity
of internal proceedings as required by the MoA.
 This limitation of the doctrine of constructive notice
is called “Doctrine of indoor management”

Issuing a “prospectus” by which the public is invited
to subscribe to the capital of the company through
equity shares, debentures and/or deposits
Objectives of prospectus:
1. To inform the public about the forming of a new
company;
2. To induce the investors to invest in its shares,
debentures and deposits

 A prospectus is defined under sec2(36) of the companies act as
“any document described or issued as a prospectus and include
any notice, circular, advertisement or other document inviting
offers of deposits from the public for subscription or purchase of
any shares in or debentures of a body corporate”
 Thus a prospectus means
1. A document
2. An invitation to public to invest in shares, deposits and
debentures
3. It is widely advertised

sec 56 of the matters and reports stated in schedule II to the
companies act must be included in a prospectus
1. General information:
I, Name and address of registered office
II, Name(s) of stock exchanges
III, Declaration about refund of the issue if minimum subscription of
90% is not received within 120 days from the opening of the issue
IV, Declaration about the issue of allotment letters/refunds within a
period of 10 weeks and interest in case of any refund at the
prescribed rate under sec 73

V, Date of opening of the issue
VI, Date of closing of the issue
VII, Name and address of auditors and lead managers
VIII, Whether rating form CRISIL or any rating agency
has been obtained for the proposed debentures/
shares issue. if no rating has been obtained, this
should be answered as “No”

2.Capital structure of the company
i. Authorized, issued, subscribed and paid up capital
ii. Size of the issue, giving separately reservation for
preferential allotment to promoters and others
3. Terms of the present issue
i. Terms of payment
ii. How to apply
iii. Any special tax benefits

4. Particulars of the issue
i. Objects
ii. Projects cost
iii. Means of financing (Including contribution of promoters)
5. Company management and project
i. History and main objects and present business of the company
ii. Promoters and their background
iii. Location of the project
iv, Collaborations, if any
v, Nature of the product(s), export possibilities
vi, Future prospect
vii, Stock market date

6. Particulars in regard to the company and
other listed companies under same
management
7. Outstanding litigations relating to financial
matters or any criminal proceeding
8. Management perception of risk factors

1. Minimum subscription
2. Expenses of the issues
3. Underwriting commission and brokerage
4. Previous public or rights issue giving particulars about date of
allotment, refunds, premium, discount and etc.,
5. Issue of shares otherwise than for cash
6. Particulars about purchase of property, if any
7. Revaluation of assets, if any
8. Material contracts and time and place where such document
may be inspected

1. An index to the contents of the prospectus
2. Details of:
a, Actual expenditure incurred on the project
b, means and source of financing such expenditure
c, year wise break up of the expenditure proposed
to be incurred on the said project
3. Details of ‘bridge loan’ or other financial arrangement

4. The turnover disclosed in the profit or loss statement shall be
bifurcated into:
a. turnover of products manufactured by company
b. turnover of products traded by company
c. details of products and not normally dealt in by the company
5. The statement of assets and liability prepared after deducting the
amount of revaluation reserve from both fixed assets and reserves
and the net worth arrived at after such deduction
6. The following details in case of companies undertaking major
expansion or new projects; a, technology b, market c, Competitions
d, managerial competence e, capacity build up

7. No projections of future profits shall be made
8. A statement by the directors
9. The details of:
a, the aggregate shareholding of the promoter group
b, The aggregate no. of securities purchased or sold by
the promoter group
c, The maximum and minimum price at which purchases
and sales referred to.

 Sec 56(3) of the companies act, 1956 requires that
no one shall issue form of application for shares in
or debentures of a company unless the same is
accompanied by a memorandum containing salient
features of prospectus(more commonly known as
‘abridged form of prospectus’), as may prescribed

 As per sec 601 of the companies act, 1956 a copy of
the prospectus must be filed with the registrar of
companies on or before the date of publication of the
prospectus, further
1. The copy sent for registration must be signed
2. Prospectus issued in more than one language, a
copy should be sent
3. A copy should be delivered for registration
4. The prospectus must be issued by newspaper ad

The following documents are to be filed along with the prospectus
1. Consent letter from an expert, if any, as required under sec 58 of the act
2. Copy of any contract appointing and fixing remuneration of M.D or manager
3. Copy of other contracts not being a contract entered into in the ordinary
course of business carried on or intended to be carried on or a contract
entered into more than 2 years before the date of prospectus
4. A statement certified by the auditor stating any adjustment in respect of loses
or assets and liabilities and reasons for such adjustment
5. Copies of underwriting agreements
6. Consent letter of auditors, legal auditors, solicitors, bankers or brokers to act
as such
7. Certified copies of power of attorneys given by directors to their agents to sign
the prospectus on their behalf

As per sec 60(3) of the act, the registrar shall not register a prospectus
unless-
1. It is dated as provided under sec 55 of the act
2. It contains matters as provided under sec56 of the act
3. It contain statements or reports of experts engaged or inserted in
formation, promotion or management of the company as provided
under sec 57 of the Act
4. It includes a statement purporting to be made by an expert without a
statement that he has given and not withdrawn his consent
5. It doesn’t contain the consent letters in writing of directors
6. It is not accompanied by consent letters in writing of directors, legal
advisers and etc as provided under sec60(3) of the act

 “Shelf prospectus” means a prospectus issued by any
financial institution or bank for one or more issues of
the securities or class of securities specified in that
prospectus
 Who shall file a shelf prospectus?
Any public financial institution, public sector bank or
scheduled bank whose main object is financing, shall
file a shelf prospectus

 “Information memorandum” means a process undertaken
prior to the filing of a prospectus by which a demand for
the securities proposed to be issued by a company is
elicited and the price and the terms of issue for such
securities is assessed by means of a notice, circular,
advertisement or document
 {sec 2(19B)} the concept of information memorandum
has been introduced with a view to ascertain the
quantum and acceptable price of securities to be offered
by a company

 A “Red-herring prospectus” means a prospectus
which doesn’t have complete particulars on the
price of the securities offered and the quantum of
securities offered. Every variation as made and
highlighted shall be individually intimated to the
person invited to subscribe to the issue of
securities

1. A prospectus constitutes the basis of the contract b/w the
company and the shareholders and therefore it must disclose
all material facts very accurately
2. It must not misrepresent or conceal material facts and thereby
improperly influence and mislead the prospective investor into
becoming an allottee of shares and in consequence suffer loss
3. A Prospectus containing false, misleading, ambiguous or
fraudulent statement of material facts, is termed as
“Misleading prospectus”

1. Company 2. Promoters 3. Directors 4.
Experts
Two types 1. Civil liability 2. Criminal liability
Civil Liability divided into
1. Remedies against company
2. Remedies against directors, experts and
promoters

 Section 2(46) of the companies act defines “share”
as ‘share in the share capital of company and
includes stock except where distinction between
share and stock is expressed or implied.
 Kinds of shares
 Preference share
 Equity share
 Deferred share

 With voting rights
 With differential rights as to divided, voting or
otherwise in accordance with such rules and
subject to such conditions as may be prescribed
 Shares which do not have any preferential right in
respect of dividend as well as repayment of capital
are known as with “equity shares”

 Share certificate is a certificate issued by the company to the member of the
company under the common seal specifying the number of shares held by
him and the amount paid on each share. A member of a company has a right
to receive a share certificate.
 It is a prima facie evidence of his title to the shares.
 Rule 6 of the companies (issue of share certificates) rules, 1960 provides
that every share certificate shall be issued under the common seal of the
company and shall be signed by two directors or persons authorized by the
two directors and the secretary or some other person appointed by the
board for the purpose.

 A share certificate usually contains the following particulars
 Name of the company
 Address of the registered office of company
 Date of issue
 Name of the allottee|transferee
 Certificate number
 No of shares held
 Distinctive numbers
 Folio no
 Amount paid on the shares.

1. Payment of dividend 2. Payment of capital
Classification of
Preference shares
Non
Participating
Participating
Irredeemableredeemable
Non -
CumulativeCumulative

As per sec 85(1) of the act, preference share capital means that
part of the share capital which fulfils both the follow requirements.
1. In respect of dividend, it carriers a preferential right to be paid at a
fixed amount at an amount calculated at fixed rate which may be
free subject to income tax.
2. An respect of capital, it carries on winding up or on re payment of
capital preferential right to be repaid the amount of capital paid up.

Only private company can issue deferred
shares such shares are normally issued to
the promoters and directors of the
company. It is also known as founders
shares. A public company cannot issue
deferred shares.

 As per explanation given to sec 79(a) of the Act,
sweat equity share means equity shares issued by
a company to its employees or directors at a
discount or for consideration other than cash for
providing know-how or making available rights in
the nature of intellectual property rights or value
additions by whatever name called

 Share capital means the capital raised by the issue of shares.
The amount invested by the shareholders towards the face
value of shares are collectively known as share capital which is
quite distinct from the capital put in by individual shareholders.
The share capital is divided as shown below:
1. Authorized capital
2. Issue capital
3. Subscribed capital
4. Share warrant
5. Stock invest

1. Authorized capital:
Authorized capital refers to that amount which is stated in the
‘capital clause’ of the memorandum of associations as the
share capital of the company. This is the maximum limit of the
company which it is authorized to raise and beyond which the
company can’t raise unless the capital clause in the
memorandum is altered in accordance with the provisions of
sec 94 of the companies Act,1956
2. Issue capital:
Issued capital refers to the nominal value of that part of
authorized capital, which has been subscribed for the
signatories to MOA ii) allotted for cash or for consideration
other than cash and iii) allotted as share bonus

Subscribed capital:
Subscribed capital refers to the paid up value of the issued capital.
Other items used under the companies Act, 1956 are:
Unissued capital: Unissued capital refers to that portion of the
authorized capital which has not yet been issued
Uncalled capital: Uncalled capital refers to that portion of the issued
capital which has not yet been called up by the company
Reserve capital: It refers to that portion of uncalled share capital
which shall not be except in the event and for the purposes of the
company being wound up(sec 99). A limited company may, be a
special resolution, determine a portion of this uncalled capital as
reserve capital

Share warrant: A public company limited by shares, if authorized by its
article may issue share warrant with the prior approval of the central
government only fully paid shares can be converted into share warrant
with the prior approval of central government
Stock invest: stock invest is an instrument issued by banks to solve the
problem of delay in refund of excess application money on account of
over subscription and to solve the liquidity problem of excess
application money. The stock invest is valid for three months
It is an additional facility given to the investors for applying public issues
apart from the other instruments such as cash, cheques and drafts

 Alteration of share capital means alteration of capital clause of the MOA of the
company by any of the following means:
1. Increase of share capital by issuing new shares
2. Consolidation or division of all or any of its share capital into shares of larger
amount than existing shares
3. Conversion of all or any of its fully paid up shares into fully paid up shares of
denomination
4. Sub-division of its shares or any of them into shares of smaller amount that is
fixed by the memorandum
5. Cancellation of shares which have not been taken or agreed to be taken and
diminution of the amount of its share capital by the amount of the shares so
cancelled

 Sec 100 of the companies Act 1956 provides that a company limited by shares
or a company limited by guarantee and having a share capital may, if authorized
by its articles, by special resolution and on its confirmation by the court on
petition, reduce its share capital in any way in particular;
1. By reducing or extinguishing the liability of members in respect of uncalled or
unpaid capital
2. By paying off or returning paid up capital not wanted for the purpose of the
company
3. By paying off the paid up capital on the footing that it may be called up again
so that the liability is not extinguished
4. By writing off or cancelling the capital which has been lost or is unrepresented
by the available assets
5. By following a combination of any of the preceding methods

A debenture capital is a certificate of loan
issued by a company
The term ‘debenture’ is expressed to include
debenture stock, bonds and assets of the
company or not; but there is no statutory or
judicial definition of the term debenture

In the word of BK Sengupta, ‘Debenture’ is the
description of an instrument whereas ‘debenture
stock is the description of a debt or sum secured by
an instrument
1. Debenture stock is the ‘loan capital’ in consolidated
form
2. Always accompanied by a trust deed
3. Stamp duty is paid in lump-sum at the time of
executing the trust deed

Main features of debenture:
1. It is a document given by a company as evidence of
a debt to its holders usually arising out of a loan
2. It is a form of certificate issued by a company under
its common seal
3. It is generally contains a charge on the assets of the
undertaking or some class of assets or even part of
its profits or even may not create any charge
4. It is generally provides for payment of interest until
the amount is repaid back to the holder

1. Registered debentures: The registered debentures are those
which are payable to registered holders
2. Bearer debentures: These are negotiable instrument and are
transferable by mere delivery to the transferee
3. Secured or mortgaged debentures: These are debentures
which are secured by a charge on the assets of the company.
The charge may be fixed or floating
4. Naked or unsecured debentures: debentures which do not
have any charge on the assets of the company known as
unsecured or naked debentures

5, convertible debentures: sec 81(3) permits the issue
of convertible debentures. It enables the issue of
shares to debenture holders and creditors in
exchange for the amount due to them
i, Fully convertible debenture
ii, Non convertible debenture
iii, Partially convertible debenture
6, Redeemable debenture
7, Irredeemable debenture

 Sec 253 of the companies act provides that no body corporate
or association or firm can be a appointed as director of a
company
 Sec 2(13) of the companies Act defines a director as including
any person occupying the position of a director by whatever
name called. It means that it is the position what is important
and not the individual concerned
 Sec 2(30) of companies Act defines officer includes a director
as well as any person under whose direction or instruction the
board or any one or more of the directors are accustomed to the
Act

 The companies Act has not prescribed any academic qualifications for he
directors of any company
Disqualification of directors:
Section 274 of companies act 1956, provides that the following persons shall not
be capable of being appointed as directors of any company
a, A person found by a competent court to be unsound mind
b, an un discharged insolvent
c, a person who has applied to be adjudged an insolvent
d, a person who has been convicted by a court
e, a person who has not paid any call in respect of shares of the company held
by him whether alone or jointly
f, a person has been disqualified by a court or tribunal
g, a person who is already a director of a public company

1. Executive directors
2. Non executive directors
3. Representative directors
4. Nominee directors
5. Independent directors

The appointment of a director may be
grouped as:
1. Appointment of first directors
2. Appointment at general meeting
3. Appointment by Board of directors
4. Appointment by third parties
5. Appointment by central government

1. Appointment of first directors (sec 254)
a. The first directors are usually appointed by name
in the articles or in the manner provided therein.
b. Where the articles do not provide for the
appointment of first directors, those of the
subscription to memorandum are deemed to be
first directors of company
c. The first directors can hold office until the
directors are duly appointed in accordance with the
provisions of sec 255

 According to sec 255 the directors must be appointed
by the company in general meeting
 Sec 256 states that of the directors subject to
retirement by rotation only one-third or a number
nearest to one-third shall retire at an annual general
meeting
 In the first place, those directors shall retire who have
been longest in office since their last appointment

Appointment of directors other than those retiring (sec 257)
recognizes the right of any person, whether a member of a
company or not, to contest election as a director at any general
meeting of a company
Consent to act as director: sec 264 requires that every person
proposed as candidate for the office of a director shall sign, and
file with the company, his consent in writing to act as a director, if
appointed
Appointment of directors by the board
The board of director may appoint a director
a, as an additional director (or) (sec260)
b, to fill a casual vacancy (or) (sec262)
c, as an alternate director (sec313)

The articles may empower a third party to
appoint directors. Similarly, banking
company or a financial institution which
has advanced loans to the company may
appoint their nominees on the board

 The central government has been empowered to appoint
directors on an order passed by the company law board
 A person appointed by the central government in
pursuance of the above provisions shall not be:
1. Considered for the purpose of reckoning two-third or
any other proportion of the total no. of directors of the
company
2. Required to hold qualification shares
3. Required to retire by rotation

 The board of directors of a company shall be entitled to exercise all
such powers and perform all such acts and things as the company is
authorized to exercise and do in general meetings
 General powers of the board (sec292)
1. The power to make calls on shareholders in respect of money unpaid
on their shares
2. The power to authorize the buyback of shares
3. The power to issue debentures
4. The power to borrow money otherwise than on debentures
5. The power to invest funds of the company and
6. The power to make loans

The board however by a resolution passed at a meeting delegate
to any committee of directors, the managing director, the
manager or any other principal officer of the company, the
power specified in clauses (4),(5)and (6) on such conditions as
the board may prescribe
Besides the power specified in sec 292, there are certain other
powers also which can be experienced only at the meeting of
the board
1. The power of filling casual vacancies in the board
2. Sanctioning of a contract in which a director is inserted
3. The power to recommend the rate of dividend, to be declared
by the company at the AGM subject to the approval by the
shareholders

 In the following cases, not only that the powers be
exercised at the board’s meeting but also that every
director present and entitled to note must consent
thereto:
a, the power to appoint a person as M.D or manager,
who is already M.D or manager of another company
b, The power to invest in any shares and debentures of
any other body corporate

1. Sale, lease or otherwise dispose of the whole, or the whole of the
undertaking of their company
2. Remit or give time for the repayment of any debt by a director
3. Invest otherwise than in trust securities, the amount of
compensation received by the company in respect of compulsory
acquisition of any fixed assets by the company
4. Borrow money exceeding the aggregate of the paid up capital of the
company and its free reserves
5. Contribute in any year to charitable and other net profits for the
funds not directly relating to the business of the company or the
welfare of its employee any FY whichever is greater

Duties of directors may be divided under
two heads:
1. Statutory duties
2. General duties

1. To file returns of allotments in case of issue of securities
2. To disclose the extent of interest in contracts entered into by the company
3. Not to issue irredeemable preference shares or share redeemable after 10 yrs
4. To disclose receipt from transfer of property
5. To disclose receipt of compensation from transferee of shares
6. Duty to attend board meetings
7. Duty to convene general meetings
8. To prepare and place at the AGM along with the balance sheet and P&L a/c a
report on the company’s affairs
9. Duty to make declaration of solvency in the case of members’ voluntary winding
up

1. Duty of good faith
2. Duty of care and affection
3. Duty not delegate

a, Preparation of strategic plans operating plans and budget
b, monitoring major capital expenses
c, Defining and reviewing the board functions periodically
d, Setting the values, mission and vision of the company and
chalking out procedures to realize them
e, Provision of adequate resources to achieve the set
objectives
f, Mentoring, monitoring and evaluating the agreed
objectives

g, Ensuring compliances and disclosures
h, monitoring and managing potential conflicts of
interests of management, board members and
shareholders including misuse of corporate assets
and abuse in related party transactions
i, Ensuring the integrity of company’s accounting and
financial reporting system
j, Monitoring the effectiveness of corporate governance
practice

The company directors may be removed as
stated below:
1. Removal by shareholders
2. Removal by central government
3. Removal by company law board

 Definition: A meeting may be defined as any gathering,
assembly or coming together of two or more persons for the
transactions of some lawful business of common concern
 Elements of valid meeting:
1. Properly convened
2. Proper authority
3. Proper notice
4. Proper quorum
5. Resolution
6. Minutes

 The annual general meeting is to be held each
year with a view to enable the shareholders to
review and evaluate the overall progress of the
company during the past year
 The first AGM must be held within 18 months of
the incorporation of the company
 Thereafter it must be held within 6 months of
the expiry of FY of company

1. Meeting of members
2. Meeting of directors and committee of
directors
3. Meeting of debenture holders
4. Meeting of creditors and contributors

 Resolutions: A valid resolution can be passed only at the meeting
which has been duly convened and duly constituted with the requisite
quorum
Kinds of resolution: 1, Ordinary resolution 2, special resolution
 Minutes: Minutes is an authentic record of the proceedings of the
meeting. Sec 193 of the companies Act 1956, requires every company
to maintain minutes of its general meetings, board meetings and
meetings of the committee of the board
 Reports: Reports are always in a narrative form giving a historical
account of all things discussed. An report gives statement of results,
events, progress etc., (i.e) full a/c of the proceedings of the meeting
Under companies Act, 2 types of reports are prepared 1, Statutory
reports 2, Non-statutory reports

 Winding up/ liquidation represents the last
stage in company’s life. It is a proceeding by
which a company is dissolved
 The company’s asset are disposed of, the
debts are paid off out of the realized assets,
and the surplus, if any is then distributed
among the members in proportion to their
holdings in the company.

There are two modes of winding up of a
company
1. Winding up by the tribunal
2. Voluntary winding up
a, member’s voluntary winding up
b, Creditors voluntary winding up

 Also known as compulsory winding up and a company
may be wound up in the following cases
1. Special resolution of the company
2. Default in delivering the statutory report to the registrar
3. Failure to commence or suspension of business
4. Reduction in membership
5. Inability to pay its debts
6. Just and equitable

An application to the tribunal for avoiding winding up of a
company is made by a petition. This may be presented in
following cases
1. Petition by the company
2. Petition by any creditor(s)
3. Petition by any contributor(ies)y
4. Petition by registrar
5. Petition by central government

1. Advertisement of petition
2. Powers tribunal
3. Consequences of winding up order
4. Procedure of winding up by the tribunal
5. Committee of inspection
6. Dissolution of company
7. Contributory

 Voluntary winding up means winding up by the
members or creditors of a company without
interference by the tribunal
 A company may wound up voluntarily:
1. By passing an ordinary resolution
2. By passing a special resolution

1. Consequence as to shareholders/ members
2. Consequence as to creditors
3. Preferential payments
4. Consequence as to servants and officers
5. Consequence as to proceedings against the
company
6. Consequence as to cost

 Corporate governance is defined by The institute of
company secretaries of India as follows: “The
application of best management practices, compliance
of law in letter and spirit and adherence to ethical
standards for effective management and distribution of
wealth and discharge of social responsibility for
sustainable development of all stakeholders”

 The principles evolved by the ICSI are as under:
1. Sustainable development of all stakeholders to
ensure growth of all individuals associated with.
2. Effective management and distribution of wealth
3. Discharge of social responsibility
4. Application of best management practices
5. Compliance of law in letter and spirit

 Corporate governance extends beyond corporate law. It is integral to the very
existence of a company
1. It tries to inspire and strengthen the investors 'confidence
2. To ensure commitment of the board in managing the company in transparent
manner so as to minimize the shareholders’ value
3. To see that the board is balanced as regards the representation of adequate
number of non executive director and independent directors
4. To review that the board adopts transparent procedures and practices in the
interest of both company and stakeholders
5. To check that the board provides adequate information pertaining to the
development
6. To ensure that the board leads the company forward so as to maximize long
term value and shareholders’ wealth

1. Impact of globalization
2. Economic changes
3. Change in the structure of shareholding
4. Financial reporting and transparency
5. Shareholders’ net worth and net wealth

Unit 2 company law

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Unit 2 company law