Professional Documents
Culture Documents
K. B. Rohatgi*
Revised by Lisa P. Lukose**
* Formerly Professor of Law and Director, South Delhi Campus, University of Delhi.
** Asst. Research Professor, Indian Law Institute, New Delhi.
1. The Companies Act, 1956, the Preamble,
2. Previous legislations relating to incorporation of companies in India: The Joint Stock
Companies Acts of 1850, 1857 and 1860, all repealed by the Indian Companies Act
of 1866, repealed by the Indian Companies Act of 1882, repealed by the Indian
Companies Act of 1913, and finally repealed by Companies Act, 1956.
3. Inserted by the Companies (Amendment Act), 2000.
COMPANY LAW 559
Incorporation
Under the law a company incorporated under the Act is a distinct entity
having independent corporate existence. Although all the shares may be
practically controlled by one person, in law a company is a distinct entity
and it is not permissible or relevant to enquire whether the directors
belonged to the same family or whether it is described as a "one-man
company". 9 Any seven or more persons, or where the company to be
formed is a private company, any two or more persons, may associate for
any lawful purpose by subscribing their names to a memorandum of
association, and thereby form an incorporated company, with or without
limited liability, provided they comply with the requirements of the Act in
respect of registration. 10 Thus, a company acquires its own separate legal
entity distinct from that of its members.
The company, being a separate person, is the owner of its capital, assets
and bound by its liabilities. An incorporated company never dies. It is an
entity with perpetual succession. Being a legal person it is capable of
owning, enjoying and disposing of property in its own name. The company
is the o w n e r of its capital and assets and no changes of individual
membership affect the title of the company. Although a legal entity, a
company is not a citizen either under the Constitution of India or under the
Citizenship Act. 1 1 But the company can enjoy fundamental rights; if a
fundamental right of a company is infringed the company can challenge the
4. S.3(l)(iv).
5. S. 4 (4).
6. Free Wheel (India) Ltd v. Dr. VedMitra AIR 1969 Delhi 258.
7. S. 581A.
8. S. 581A (k). Primary producers are those persons who are engaged in an activity
connected with, or related to, primary produce.
9. Salomon v. Salomon and Co.(1897) A.C. 22.
10. S. 12 (1).
11. State Trading Officer v. Commercial T.O. AIR 1963 SC 1811.
560 INDIAN LEGAL SYSTEM
12. Chiranjüal Chaudañ v. Union ofIndia (1951) 21 Comp. Cas. 33 (SC) and Bennet Coleman
Co.v. «7. O. 7(1972) SCC 788.
13. Gasquev. Commissioner of Inland Revenues (1940) 2 KB 80.
14. Dialmerand Co. v. Continental Tyre and Rubber Co. (1916) 2 A.C. 307.
15. In re Sir Dinshaw Maneekjee Petit AIR 1927 Bom. 37and Commissioner ofIncome Taxv.
Sri Meenakshi Mills Ltd. AIR 1967 SC 819.
16. Gilford Motor Co. v. Home (1933) 1 Ch 935.
17. Santanu Ray v. U. O. I (1989) 65 Comp. Cas. 196 (Delhi).
18. JyotiLtd. v. Kanwaljit KaurBhasin (1987) 62 Comp. Cas. 626 Pelhi).
19. In Delhi Development Authority v. Skipper Constructions Company (P.) Ltd. (1996) 4
SCALE 202 (SC) the court lifted the corporate veil when the company was created as
a mere sham for committing illegalities. In New Horizons Ltd v. U. O. I (1995) 1
Comp. LJ. 100 (SC) the court removed the facade of corporate personality to
determine the technical competence of the company.
20. S. 33 (1).
COMPANY LAW 561
Memorandum of association
21. S, 33(2).
22. S. 146 (2).
23. Stamp duty payable on various documents has been reduced to 50% w. e. f. 01-03-
04.
24. S. 35; Moosa Goolam Ariff v. Ebrabim GooLm Anff I.L.R. 40 Cal. 1 (1913) P.C.
25. Ashbury Railway Carriage & Iron Co. Ltd. v. Ricbe (1875) L.R. 7 H.L. 635.
562 INDIAN LEGAL SYSTEM
creditors and those who deal with the company to k n o w what is its
permitted range of enterprise. Under section 16 of the Act a company
cannot alter the conditions mentioned in its memorandum except in the
cases and in the manner and to the extent provided in the Act. 26
The memorandum of every company must state:27
(1) the name of the company with 'Limited; as the last word, and
'Private Limited' if the company be a private limited company;
(2) the state in which its registered office is to be situated;
(3) in the case of a company in existence before the commencement of
the Companies (Amendment) Act, 1965 the objects of the
company, and in the case of company after such commencement,
the main objects of the company to be pursued on its incorporation
and objects ancillary or incidental to attainment of such objects, and
other objects, if any;
(4) the states to whose territories the objects extend where the objects
of the company (other than a trading corporation) are not confined
to one state;
(5) the fact that the liability of its members is limited, if it is a limited
liability company;
(6) the amount of capital and the division thereof into shares of a fixed
amount, unless the company is an unlimited one 28 and
(7) the association clause and subscription. 29
A company being a legal person must have a name to establish its
identity. No company can be registered with a name, which, in the opinion
of the Central Government, is undesirable. 30 The name of the company
should not be identical with or should not too nearly resemble the name of
another registered company in existence or a registered trademark or a
trademark, which is a subject of an application for registration, of any other
person under the Trade Marks Act, 1999.31 If the liability of the members is
limited, the last word of the company's name must be 'Limited', and in the
case of a private limited company the word 'Private' should precede
'Limited'. 32 This is to ensure that all persons dealing with the company shall
have a clear notice that the liability of the members is limited. Any default in
this respect might involve the officers of the company in most serious
33. S. 25.
34. S. 21.
35. S. 146.
36. S. 17 (3).
37. Orient Paper Mills Ltd. v. State AIR 1957 Ori. 232.
38. Minerva Mills Ltd. v. Govt. ofMaharashtra (1975) 45 Comp. Cas. l(Bom.) Also see
Rank Film Distributors ofIndia Ltd. v. The Registrar of Companies AIR (1969) Cal. 32.
39. S. 13 (c).
40. S. 13 (d).
564 INDIAN LEGAL SYSTEM
funds cannot be spent on any project not directly within the terms of the
company's objects gives the creditors a feeling of security.41 Thus, the funds
of a company under the Act can only be applied in carrying out its
authorized objects. If a director of a company makes an ultra vires payment
he can be compelled to refund the money. The directors being agents of the
company can do nothing which the company itself cannot do under its
memorandum of association and, therefore, any contract made by them
which is ultra vires the company will be void and of no effect whatsoever. If
on the other hand, they make a contract within the powers of the company
but ultra vires the powers which the company by its articles has conferred
upon them, the company may ratify the contract in general meeting and
thereby be bound by it. In the absence of such ratification, the company will
not be bound by the contract and the directors may be personally liable to
the other party to the contract for the breach of an implied warranty of their
authority. Though a contract may be ultra vires the company and, therefore,
void, it may have certain indirect effects. First, if money or property
obtained under an ultra vires contract has been used to pay debts of the
company, then by the principle of subrogation the creditor can, to that
extent, stand in the shoes of those creditors of the company who have paid
off. Secondly, if the property handed over to the company by virtue of an
ultra vires contract exists in specie or if it can be traced the person handling it
over can get it back.
Section 17 allows alteration of objects within certain defined limits. The
limits imposed upon the power of alteration are of two kinds, namely
substantive and procedural. Section 17 provides that a company may alter
Memorandum so as to change the place of its registered office from one
state to another or with respect to its objects only in so far as the alteration
is necessary for any of the following purposes:
1. To enable the company to carry out its business more economically
or more efficiently;
2. T o enable the company to attain its main purpose by new or
improved means;
3. To enlarge or change the local areas of the company's operations;
4. To carry on some business which under existing circumstances may
conveniently or advantageously be combined with the business of
the company;
5. T o restrict or abandon any of the objects specified in the
memorandum;
41. Waman Lai v. Sandia Steam Navigation Co. AIR 1944 Bombay 131. The doctrine of
ultra vires has been upheld by the Supreme Court in A. Lakshamanaswamy Mudaliar v.
Life Insurance Corporation ofIndia AIR (1963) SC 1185.
COMPANYLAW 565
42. S. 17(2).
43. S. 17 (3).
44. S. 18 (1) (b).
45. S. 19.
46. S. 17A.
47. S. 13 (2).
48. S. 12 (2).
49. S. 13 (4) (a).
566 INDIAN LEGAL SYSTEM
The clause lays down the limit beyond which the company cannot issue
shares without altering the memorandum. 50
The memorandum concludes with the subscription clause. In this clause
the subscribers declare:
We, the several persons whose names and addresses are
subscribed are desirous of being formed into a company, in
pursuance of the m e m o r a n d u m of association, and we
respectively agree to take the number of shares in the capital of
the company set opposite our respective names.
Each subscriber must sign the document and must write opposite his
name the number of shares he takes.51 But no subscriber shall take less than
one share. 52 After incorporation no subscriber can withdraw his name on
any ground whatsoever.
Articles of association
50. S. 94.
51. S. 13 (4) (c).
52. S. 13 (4) (b).
53. S. 26.
54. S. 28.
55. S. 30 (c).
COMPANY LAW 567
The memorandum and articles, when registered, bind the company and
its members to the same extent as if they respectively had been signed by
the company and by each member. 64 Hence, the company is bound to the
members and the members are bound to the company. Member inter se are
also bound by both these documents.65 But in relation to articles neither the
company nor its members are bound to outsiders.
Both memorandum and articles are registered with the Registrar before
the company is incorporated. Then it becomes public documents. These
documents are available for inspection by the public 66 and every person
dealing with the company is deemed to have constructive knowledge of the
contents of these documents even if they do not have actual notice of the
same. This is known as 'doctrine of constructive notice'. Persons dealing
with incorporated company must take notice of disabilities imposed on the
companies and its officials. If any one deals with the company in matters
inconsistent with the powers so given, he must bear the consequences of his
own negligence.67
Although outsiders are affected with notice of all that is contained in
these two documents, they are not concerned whether all matters of internal
management have been complied with. Outsiders need not inquire into the
regularity of the internal proceedings. This is known as the doctrine of
indoor management. 68 The doctrine is based upon the principles of justice
and public convenience. The reason is that while the memorandum and the
articles of association are public documents open to public inspection, the
details of internal procedures are not thus open to public scrutiny. 69
The doctrine is of great practical utility. It has been applied in a great
variety of cases to secure justice. It has been used to cover acts done on
behalf of a company by defacto directors who have never been appointed, 70
or whose a p p o i n t m e n t is defective, 7 1 or who having been regularly
appointed, have exercised an authority which could have been delegated to
them under the company's articles, but never has been so delegated, 72 or
who have exercised an authority without proper quorum. Thus where the
directors of a company having the power to allot shares only with the
64. S. 36 (1).
65. Ramkrisbna Industries (P.) Ltd. v. P. R. Ramaknshnan (1988) 64 Comp. Cas. 425, also
see Shiv OmkarMaheswari v. Bansidharjagannath (1957) 27 Comp. Cas. Bom. 255.
66. S. 610.
67. KotL· Venkataswamy v. Chima Ramamurthy AIR 1934 Mad. 579.
68. This doctrine has its genesis in Royal British Bank v. Turquand (1856) 119 ER 886.
69. Official Liquidator v. Commissioner ofPolice (1969) 1 Comp. L J. at page 27.
70. Imperial Oil and General Mills v. WazirSingh AIR 1915 Lah. 478.
71. Pudamjee and Co. v. N.H. Moos AIR 1926 Bom. 28.
72. Kishan Rathi v. Mondal Bros. (1966) 1 Comp. LJ. 10.
COMPANY LAW 569
consent of the general meeting allotted them without any such consent;73 or
where the managing director of a company granted a lease of the company's
properties, something which he could do only with the approval of the
board, 74 the company was held liable.
The doctrine of indoor management is not applicable in all cases. The
scope of its applicability has been restricted in certain respects. In the first
place, a person who has actual knowledge of the internal irregularity cannot
obviously claim the protection of the doctrine. Thus where a transfer of
shares was approved by two directors, one of whom within the knowledge
of the transfer or was disqualified for reasons of being the transferee himself
and the other was never validly appointed, the transfer was held to be
ineffective.75 Also, a person cannot claim the benefit of the rule if he would
have discovered the irregularity, had he made proper inquiries.
The doctrine of indoor management does not apply if a document is
forged so as to purport to be the company's document. 76 The doctrine does
not protect those who behave negligently and transact contract in suspicious
circumstances that requires enquiry. 77
Articles of association generally contain what is called the power of
delegation, namely, that a person who contracts with an individual director
of a company knowing that the board has power to delegate its authority to
such an individual, may assume that the power of delegation has been
exercised. But if the act of the officer of the company is one which would
ordinarily be beyond the powers of such an officer, the plaintiff cannot
claim the protection of the doctrine of indoor management simply because
under the articles power to do the act could have been delegated to him.
Promoters
Before a company is formed, some persons must take the initiative in taking
necessary steps to form it. Promoters are the persons who form or float a
company. A promoter may be an individual, association, partner, syndicate
or company. A promoter has been described as one who undertakes to form
a company with reference to a given object and to set it going and who takes
the necessary steps to accomplish that purpose. A promoter stands in
fiduciary position towards the company he promotes. 78 When a promoter
desires to sell his own property to the company he must disclose his interest
in the property to an independent board of directors and make a full
Prospectus
79. Ibid.
80. Gluckstein v. Barnes (1900) AC 240.
81. S. 3(iii)(c).
82. S. 70.
83. S. 2(36).
84. S. 64.
COMPANY LAW 571
intended company must be dated and that date will, unless the contrary is
proved, be taken as the date of publication of the prospectus. 8 5 A
prospectus must not be issued by or on behalf of the company, unless on or
before the date of its publication, a copy of it has been delivered to the
Registrar signed by every director or proposed director or his duly
authorized agent. Where a prospectus is generally issued, that is, to the
members of the company and outsiders, it must be accompanied by a copy
of every contract relating to the appointment or remuneration of a managing
director, or managers and of every other material contract. Where auditors
or accountants have made their reports in connection with part II of
schedule II and have made some adjustments in figures, a signed written
statement by them setting out the adjustments and reasons thereof must be
annexed to every copy of the prospectus generally issued.
The Registrar must not register a prospectus if the requirements of the
Act have not been complied with and the prospectus is not accompanied by
the consent in writing of the persons named therein as the auditor, legal
adviser, attorney, solicitor, banker or broker of the company or intended
company to act in that capacity.86
A prospectus must not be issued more than ninety days after the date
on which a copy thereof is delivered for registration and if a prospectus is so
issued, it will be deemed to be a prospectus a copy of which has not been
delivered to the Registrar. 87
If a prospectus is issued without a copy thereof being delivered to the
Registrar or without the required documents or consent attached thereof,
the company and every person who is knowingly a party to the issue of the
prospectus will be punishable with fine which may extend to Rs. 5,000/-.
It is necessary for every public company, before offering shares or
debentures for public subscription by issue of a prospectus, to make an
application for listing the security in one or more recognised stock
exchanges. 88 This is known as listing of the shares.
A prospectus must contain the necessary information to enable the
public to decide whether or not to subscribe for its shares and debentures.
Every prospectus must state the matters specified in part I of schedule II
and set out the reports specified in part II of schedule II and part I and part
II will have the effect subject to the provisions contained in part III of that
schedule.89 As per the SEBI90 (Disclosure and Investor Protection) Guidelines,
85. S. 55.
86. S. 60 (3).
87. S. 60 (4).
88. S. 73 (1), as amended by the Companies (Amendment) Act, 1988.
89. S. 56 (1).
90. Securities and Exchange Board of India. The Government of India established SEBI
in 1988. In 1992 it became an autonomous statutory board with the passing of the
572 INDIAN LEGAL SYSTEM
2000 every prospectus or offer document must also contain information about
the promoters' contribution and details of their 'buy- back' and 'stand by'
arrangements for purchase of securities.
The Companies (Amendment) Act, 2000 has introduced section 60A
and section 60B relating to shelf prospectus and information memorandum
respectively. Shelf prospectus means a prospectus issued by any financial
institutions or bank for one or more issues of the securities or class of
securities specified in that prospectus. A public company making an issue of
securities may circulate information memorandum to the public prior to
filing a prospectus to elicit the demand for securities proposed to be issued.
The company is required to file a prospectus prior to the opening of the
subscription list and to offer as a red-herring prospectus at least 3 days
before opening of offer.91
Provisions relating to prospectus are most stringent and the duty of
preparing and filing it in accordance with the law is mandatory. A company
should not, at any time, vary the terms of a contract referred to in the
prospectus or statement in lieu of prospectus except subject to the approval
of or except on authority given by the company in general meeting. 92
Section 65 of the Act provides that a statement included in a prospectus
will be deemed to be untrue if the statement is misleading in the form and
context in which it is included or if there is omission of any matters from
the prospectus which is calculated to mislead. If the prospectus contains an
untrue statement, an applicant for shares is entitled to rely on it and is not
bound to verify it. A person who has been induced to buy shares or
debentures in a company on the basis of false or misleading statement in the
prospectus has a cause of action either against the company or against the
directors or both. The aggrieved person has t w o remedies, namely,
rescission of contract and damages for fraud. The remedy against the
company is for rescission of contract with or without damages for fraud.
The remedy against directors is for fraud or compensation under the Act. 93
An allottee must move for the recession of the contract as soon as he
comes to know of the misrepresentation but in any case before the company
goes into liquidation. On winding up the right of the company's creditors
intervenes and the right of rescission is lost. On winding up he is deemed to
be a contributory unless he has commenced an action for rescission before
Securities and Exchange Board of India Act, 1992. The basic objectives of the Board
are to (a) protect the interests of investors in securities; (b) promote the development
of Securities Market and (c) regulate the securities market.
91. A red- herring prospectus is a prospectus, which does not have complete particulars
on the price of securities offered and the quantum of securities offered.
92. Pramatha N. Sanyalv. KaliDutt AIR 1925 Cal. 714.
93. S. 62.
COMPANY LAW 573
Members
94. Shrimani Sugar Mills v. Debi Prasad AIR 1950 All. 508.
95. S. 63.
96. S. 68.
97. S. 2(7) of the Sale of Goods Act, 1930.
98. U. P. Oil Mills v. Jamma Pd. (1933) 3 Comp. Cas. 256 (All).
99. S. 41 (2).
574 INDIAN LEGAL SYSTEM
100. S. 372.
101. S. 42(1).
102. Ruhyashringa Jewellery Ltd v. Stock Exchange 1995 SCL (SC) 227 and Rich Paints Ltd.
v. Vadodara Stock Exchange Ltd. (1998) 15 SCL 128.
103. Changa Mal v. Provincial Bank (1914) 36ILR 412 (All).
104. Ramanbhai v. GhasiRam (1918) Bom. LR 595.
105. S. 113.
COMPANY LAW 575
106 Ibid.
107 S. 68B.
108 S. 84.
109 Dixon v. Kennaway (1900) 1 Ch. 833
110 Bloonmentbal v. Ford (1897) AC 156.
111 S. 75.
112 S. 78.
576 INDIAN LEGAL SYSTEM
113. S. 68A.
114. S. 114.
115. S. 115 (2).
116. S. 150(1).
117. S.163.
118. AmarNath v. Kama! Electric Supply Co. AIR 1952 Punj. 411.
119. Ss. 159-161.
120. S. 161 (2) (6). See also S. 162 which contains provision about penalty etc.
COMPANY LAW 577
Capital
The word 'capital' is used in a company in various senses. It may mean the
nominal, issued, paid-up or reserve capital of the company. Nominal capital
is the amount of capital with which the company is registered. It must be
stated in the memorandum and may be increased in the manner provided in
the Act. Issued capital is that part of the nominal capital of the company
which is offered to the public for subscription. Subscribed capital is that
part of the issued capital of the company which has been subscribed or
taken up by the public. Paid-up capital is that portion of the issued capital of
the company which has been paid up by the shareholders. A shareholder is
liable to pay in full the nominal value of the shares taken by him as and
when calls are made by the company. Paid up capital is that part of the
called-up capital of the c o m p a n y which has been paid-up by the
shareholders. Reserve capital is that part of the uncalled capital of the
company which, the company may by a special resolution determine, will
not be called up. The reserve capital cannot be called up except in the event
and for the purposes of the company being wound up. 121
The Companies (Amendment) Act, 2000, has substituted section 86
with new provisions which state that the share capital of a company limited
by shares shall be only of two kinds, viz., (a) equity share capital (i) with
voting rights; or (it) with deferential rights as to dividend, voting or
otherwise in accordance with such rules and subject to such conditions as
may be prescribed and (b) preference share capital. Preference share capital
is that part of the share capital of the company which fulfils the following
requirements: as respects dividends, it carries a preferential right to be paid
a fixed amount; and as respects capital it carries, on a winding up, a
preferential right to be repaid the amount of capital paid up. Equity share
capital means all share capital which is not preference share capital. 122
The Companies (Amendment) Act, 2000 has introduced some other
categories of shares such as derivative and hybrids. 123
A limited company with a share capital can alter the capital clause of its
m e m o r a n d u m of association in any of the following ways, provided
authority to alter is given by the articles:124
1. it may increase its capital by issuing new shares
121. S. 85.
122. Ibid.
123. Derivative has the same meaning as in section 2 of the Securities Contracts
(Regulation) Act, 1956. Section 2 (19-A) of the Companies Act defines hybrid as
any security which has the characteristics of more than one type of security,
including their derivatives.
124. S. 94(1).
578 INDIAN LEGAL SYSTEM
2. consolidate the whole or any part of its share capital into shares of
larger amount
3. convert shares into stock or vice versa
4. sub-divide the whole or any part of its share capital into share of
smaller amount
5. cancel those shares which have not been taken up and reduce its
capital accordingly.
Any of these acts can be done by the company by passing a resolution
at a general meeting, but does not require to be confirmed by the court
except in the case of reduction of capital.
An equity shareholder has a right to vote in respect of equity capital, on
every resolution placed before the company and his voting right on a poll
will be in proportion to his share of the paid-up equity capital of the
company. A holder of preference shares will have a right to vote only on
resolutions which directly affect the rights attached to his preference shares.
He will also be entitled to vote on every resolution if the dividend due has
remained unpaid for a specified period.
Company, like individual businessman, requires money from time to
t i m e . Part of this requirement is met by share capital raised from
shareholders and for the rest a c o m p a n y has t o depend o n public
borrowings. Every trading company has implied power to borrow unless
expressly prohibited by the memorandum or the articles. Sometimes
memorandum or articles may impose restrictions on the borrowing powers
of the company, although that is very rare. There is nothing in the Act
which restricts the borrowing powers of a company. Where a company has
borrowing power, it includes as incidental to it, the power to give security
for the loan by creating a mortgage or charge on all or any of its property.
Debenture means a document evidencing the debt which the company
has taken from the public. A debenture need not be under seal although
usually it is. Debenture is the description of an instrument while debenture
stock is the description of a debt or sum secured by an instrument.
Debentures may be registered, bearer, secured, unsecured, redeemable or
irredeemable. A debenture generally contains a charge on the undertaking of
the company, or on some class or part of its assets. But a debenture, which
creates no such charge, is perfectly valid. The charge, which a company may
create on its assets, may be of two kinds, namely: fixed charge; and floating
charge. The remedies of debenture holders depend upon the terms of their
agreement with the company. But one of the remedies which is always open
to them as mortgagees under the Transfer of Property Act is to bring the
property charged to sale.125 Also, they may appoint a receiver to take charge
125. Naram Singh and Co. v. U. P. Oil Industries Ltd. (1954) 1 Comp. L.J. 225 (All.).
COMPANY LAW 579
of the assets subject to the charge. Section 125 provides that prescribed
particulars of every charge126 together with the instrument, if any, by which
the charge is created or evidenced or a copy thereof must be filed with the
Registrar for registration within 21 days after the date of its creation. O n
registration of a charge, the Registrar must give a certificate of
registration. 127 If any charge required to be registered is not registered, it
will be void against the liquidator and any creditor of the company so far as
any security on the company's property or undertaking is conferred thereby.
But non-registration will not prejudice any contract or obligation for the
repayment of the money secured by the charge.
Meetings
Dividends
133. 167,
134. Ss. 171 and 172.
135. S. 176.
136. S.189.
137. S. 205.
COMPANY LAW 581
for which dividends are to be paid; (2) undistributed profits of the previous
financial years; and (3) moneys provided by the Central Government or a
state government for the payment of dividends in pursuance of a guarantee
by the government concerned. Once a dividend is declared it becomes a
statutory debt from the company to its shareholders. 138 Section 205 (2-A)
requires creation of Compulsory Reserve in which certain amount shall be
transferred before any dividend is declared or paid.139 If there is inadequacy
of profits in a particular year the company has to pay dividend out of
previous years' reserves. Section 205C brought into existence a new fund
known as the Investor Education And Protection Fund to credit inter alia
the amounts in unpaid dividend accounts of companies.140 If the articles so
authorize, a company has the "power to conven its accumulated profits into
bonus shares". 141
Section 209 requires that every company is to keep at its registered office
proper books of account. The auditors of a company are appointed at its
annual general meeting. An auditor appointed at one general meeting holds
office from the conclusion of that meeting until the conclusion of the next
annual general meeting. An auditor may be re-appointed; and may be
removed before the expiry of his term. 142
The Central Government has the power in the following cases to direct
the special audit of a company's accounts: 143
1. w h e n the affairs of any company are not being managed in
accordance with sound business principles or prudent commercial
practice or
2. when any company is being managed in a manner likely to cause
serious injury or damage to the interest of the trade, industry or
business to which it pertains or
3. when the financial position of any company is such as to endanger
its solvency.
The Central Government may also appoint one or more persons as
inspectors to investigate the affairs of any company in the following
144
cases: 1 "
Directors
151. S. 252.
152. S. 254.
153. S. 255.
154. Ss. 260, 262 and 313.
155. S. 265.
156. S. 408.
157. Companies (Second Amendment) Act, 2002 dissolved Company Law Board and
constituted National Company Law Tribunal under section 10FB by inserting Part
IB. It consists of a President and judicial and technical members not exceeding
sixty-two. Appeals from the NCLT can be preferred to the National Company Law
Appellate Tribunal constituted under section 10FR.
158. S. 402.
159. S. 284.
160. Ss. 388B to 388E.
161. S. 402.
162. S. 318.
163. S. 285.
584 INDIAN LEGAL SYSTEM
164. S. 295.
165. Ss. 299 to 302.
166. S. 309 (4).
167. Ibid
168. S. 198 (2).
169. S. 309(3).
COMPANY LAW 585
of a financial year shall not exceed eleven per cent of the net profits of the
company. 170
Section 269 (2) states that no appointment of a managing or whole time
director for the first time in an existing company and no reappointment of a
person as such director for the first time after December 28, 1960 in the
existing c o m p a n y shall be effective unless approved by the Central
Government. In case of a public company incorporated after December 28,
1960, the appointment may be made without previous approval of the
Central Government, but such approval must be obtained before the expiry
of three months from the date of incorporation otherwise the appointment
will cease to have effect from the date. N o managing director can be
appointed for a time exceeding five years, but he can be reappointed on the
basis of five year's tenure on each occasion.
When a person is a managing director of one public company, he can be
managing director of one more company, whether public or private;
however, section 316 empowers the Central Government, in appropriate
cases, to permit, by order, the same person to be managing director of more
companies, if it is satisfied that it is necessary for their proper working that
the companies should function as a single unit and have a c o m m o n
managing director.
A managing director, as defined in section 2 (26) means a director who,
by virtue of an agreement with the company, or a resolution passed by the
company in general meeting or by board of directors or by virtue of its
m e m o r a n d u m or articles, is e n t r u s t e d w i t h substantial p o w e r s of
management which would not otherwise be exercisable by him, and includes
a director occupying the position of a managing director by whatever name
called.
Directors are not, as such, employees or servants of the company. It is
difficult to define their true position. For some purposes they are agents of
the company, while for the other they are trustees for it. In the eyes of law
directors are agents of the company for which they act and their relationship
with the company is governed by the law of agency. Also, directors are
called trustees. 171 They are no doubt trustees of assets which have come
into their hands or which are under their control. The directors enjoy such
powers as are given to them by the statute, memorandum or articles. Within
these limits they are competent to exercise all powers of the company
except those which are to be exercised by the company in general meeting.
When directors act within their power they cannot be overruled even by the
general meeting of the company.
170. S. 198.
171. Ramaswami Iyer v. Brahmayya & Co. (1966) 1 Comp. LJ 107.
386 INDIAN LEGAL SYSTEM
The board of directors is entitled to exercise all such powers, and do all
such acts and things, as the company is authorized to do and exercise. 172
The residuary powers of a company reside in the general meeting of
shareholders. Shareholders intervention is permissible only in exceptional
circumstances such as (i) mala fide behaviour of the directors (ii)
i n c o m p e t e n c y of the board of directors 1 7 3 (Hi) deadlock in the
management 174 etc. The board cannot exercise any power or do any act
which is to be exercised or done by the company in general meeting. 175
The directors may be liable to outsiders, to the company, or for breach
of statutory duties. Directors are not personally liable on contracts entered
into as agents on behalf of the company. They will be liable only where
ordinary agents will be liable under those circumstances.
N o director can hold any office or place of profit except that of
managing director, manager, legal or technical adviser, banker or trustee for
the debenture holders of the company under the company or its subsidiary
unless the company consented thereto by a special resolution which may be
passed at the first general meeting of the company held for the first time
after the holding of such office or place of profit. 176
The Act also imposes penalty upon directors for omitting to comply
with or contravening certain provisions of the Act. 177
The fundamental principle relating to the administration of a company
is that its board of directors should direct and control its affairs. But the Act
allows a person to accept directorship in not more than fifteen178 companies
and does not prescribe the time and attention he should devote to a
particular company.
The Central Government can also make a reference to the Tribunal
against any managerial personnel if in the o p i n i o n of the C e n t r a l
Government, there are circumstances suggesting:
(a) that any person concerned in the conduct and management of the
affairs of a company is or has been guilty of fraud, misfeasance,
persistent negligence or default in carrying out his obligations and
functions under the law or breach of trust or
(b) that the business of a company is not or has not been conducted
and managed by such person in accordance with sound business
principles or prudent commercial practices or
Interests of shareholders
The affairs of a company are governed in accordance with the wishes of the
holders of the majority of shares. Like any democratic set up, the majority
has its way, though due provision must be made for the minority to have its
say. The Companies Act, therefore, contains a large number of provisions
for the protection of the interest of investors. The aim of these provisions is
to require those who control the affairs of a company to exercise their
power according to certain principles of natural justice and fair play.
The basic principle relating to the administration of the affairs of a
company is that
The court will not, in general, intervene at the instance of the
shareholders in matters of internal administration; and will not
interfere with the management of a company by its directors so
183. Rajahmundry Electric Supply Corporation v. A. Nageshwara Rao AIR 1956 SC 213. The
principle of 'majority supremacy' is originated from Foss v. Harbottle (1849) 67 ER
189.
184. /. P. Singh v. Chairman, Metropolitan Council AIR 1969 Del. 295.
185. Nagappa Chettiarv. Madras Race Club (1949) 1 M.L.J. 662. See also Ss. 397 to 409 of
the Act.
186. S. 397 (1).
187. S.398 (1).
188. S. 399(1).
COMPANY LAW 589
Winding up
192. S. 439.
193. S. 447.
COMPANY LAW 591
194. S. 484.
195. S. 486.
196. S. 488.
197. S. 491.
198. S. 505.
199. S. 511.
200. S. 528.
592 INDIAN LEGAL SYSTEM
insolvent company, the same rules will prevail with regard to debts provable,
the valuation of annuities and future and contingent liabilities and the
respective rights of secured and unsecured creditors. 201 All persons who are
entitled to prove for and receive dividends out of the assets of the company
may come in and make their claims.202
If, in the course of the winding up of a company, it appears that any
person who has taken part in the promotion or formation of the company
or any past or present director has misapplied or retained or become liable
or accountable for any money or property of the company or has been guilty
of any misfeasance or breach of trust in relation to the company, the
Tribunal may, on the application of the official liquidator, etc., examine the
conduct of the person concerned and compel him to repay or restore the
money or property or any part thereof, as the case may be. 203
Suggested Readings
1. Avtar Singh, Indian Company Law, 14th ed., Eastern Book Company,
Lucknow, 2004.
2. C. R. Datta, Datta on the Company Law, 3rd ed., Orient Law House,
Allahabad, 1982.
3. Gulshan S.S and Kapoor G. K, Business Law Including Company Law, 9til
ed., New Delhi, New Age International Publishers, 2001.
4. Indian Chamber of Commerce, Calcutta, A Handbook on the Companies
Act, 1965.
5. Indian Law Institute, Problems of Corporate Law, Management and Practice,
1964.
6. K. M. Ghosh, The Indian Company Law, 11 th ed., Eastern Law House,
Calcutta, 1963.
7. K. Venkoba Rao, Commentaries on the Companies Act, 1956.
8. L. V. Rangacharya, Modern Company Law, A n d h r a Law Times,
Hyderabad, 1965.
9. M.J. Sethna, Indian Company Law, 7 th ed., Lakhani, Bombay, 1967.
10. Majumdar, A. K. and Kapoor G.K., Company Law and Practice, Taxman,
8 th ed., 2002.
11. Ministry of Finance, Department of Company Law Administration, A
Layman's Guide to the Indian Company Law, 1956.
12. Ministry of Finance, Department of Company Law Administration,
Report ofthe Companies Act Amendment Committee, 1957.
201. S. 529(1).
202. S. 529 (2).
203. S. 543.
COMPANY LAW 593