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Company Law - awesome

Environmental Law (Karnataka State Law University)

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AL-AMEEN COLLEGE OF LAW

MODEL ANSWER PAPER MAY-2015

SUBJECT: COMPANY LAW
II semester of 3 year ll.b. & vi
semester of 5 year b.a.ll.b.

Prepared by:
Ms. sahana florence
Lecturer in law
Al – Ameen College of Law

AL-AMEEN COLLEGE OF LAW

BANGALORE
VI SEM 5YRS B.A. LL.B. & II SEM 3YRS. LL.B.

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MODEL ANSWER PAPER MAY-2015

SUBJECT- COMPANY LAW
Duration: 3. Hours Max Marks: 100

Instruction to Candidates:

1. Answer Q.No.9 and any five of the remaining questions.

2. Q. No.9 carries 20 marks and the remaining question carry 16 marks each
3. Answers should be written either in English or Kannada completely.

Q. No.1.What is meant by ‘lifting up the corporate veil’ discuss when the court lifts the veil.

SYNOPSIS
 Introduction
 Meaning of lifting up of the corporate veil
 Exception to the rule of corporate personality/ instances of lifting the corporate veil.

 Introduction
Human beings are the real beneficiaries of the corporate advantage. Company shall have
a residence, it has a purpose and business aim, and civil and criminal liabilities are imposed upon
the company. Company is a juristic person it has a separate legal entity. The company is an
association of persons formed for the purpose of some business carried in the name of company,
but at the same time it has its own independent corporate existence which is called as corporate
personality of a company.

 Meaning of lifting up of the corporate veil

Company is a legal person quite distinct from its members. This principle is regarded as a
curtain or veil or shield between the company and its members. This principle may be referred
to as the veil of incorporation through which the identity of the members can be revealed. The
veil of incorporation is not a wall between the company and its members but sometimes persons
creates the company for their selfishness with fraud intention under such circumstances the court
will lift the veil and withdraw the corporate personality from such company stating that the
company and its members are one and the same, and this principle is known as ‘lifting of
corporate veil’.

 Exception to the rule of corporate personality/ Instances of lifting the corporate veil:
Under the following circumstances or instances the Court can lift the
Corporate veil may be lifted

1. To prevent fraud or improper conduct:

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Some persons create a company with an intention to cheat the

opposite parties and to avoid legal obligation. When the fraud is appeared on
the face of the company, the court will interfere and decide the company as
improper and it will apply the principle of lifting of corporate veil. In Jones v/
s Lipmann,[ All ER 442 1962]: L agreed to sell certain land to J. he
subsequently changed his mind and to avoid the specific performance of the
contract, he sold it to a company, which was formed especially for the
purpose. The company had L and a clerk of his solicitors as the only members.
J brought an action for the specific performance against L and the company.
The court looked to the reality of the situation, ignored the transfer and
ordered that the company should convey the land to J.
2. Enemy Character:
Sometimes it becomes necessary to determine the character of a company.
To see whether the company is real and companies affairs are properly controlled
or not it is essential to determine the nature of a company. The function of
company should be in accordance with nation’s interest. If any signs of enemy
character are shown in the company then the court can interfere and can lift the
corporate veil and can say company and its members are one and the same.
In Dailmer Co. Ltd v/s Continental Tyre & Rubber Co. Ltd (1916): A
company was incorporated in England for the purpose of selling in England tyres
made by Germany, by a German company. All the Directors of this company
were German resident in Germany. During the First World War, the English
Company commenced an action for the recovery of a debt. The Court held that
the company was an alien company and the payment of debt to it would amount
to trading with the enemy and therefore the company was not allowed to proceed
with the action.
3. To prevent Tax Evasion:
In fact registration of company is intended for the tax benefits, every
country gives certain tax benefits to the companies. However some persons in a
company try to evade from paying taxes therefore to prevent tax evasion the
corporate veil may be lifted by the court.
In Sir Dishaw Maneckjee (AIR 1927. Bom, 371): D an assessee, who
was receiving huge dividend and interest income, transferred his investments to 4
Pvt Companies formed for the purpose of reducing his tax liability. These
companies transferred the income to “D” as a pretended loan.
The Court held that the companies were nothing more than the assessee
himself. They did no business but were created simply as legal entity to receive
dividends and interest and hand them over to “D” as pretended loan.
4. When the Company is a mere sham or fake( unlawful act):
The corporate veil may be lifted by the courts, where corporate personality
is being used as a fake or sham for doing an unlawful act.
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5. Protection of Public Policy:

The court may interfere with the fake companies whose objects and
functions are against the public interest then the court may lift the corporate veil
of such companies.
6. Company avoiding legal obligation:
Where the use of an incorporated company is being made to avoid legal
obligation, the court may disregard the legal personality of the company and
proceed on the assumption as if no company existed.
7. Company acting as agent or trustee of the shareholders:
Where company is acting as agent for its shareholders, the shareholders
will be liable for the acts of the company.
8. Amalgamation:
Compromise or arrangement between the companies and its creditors or
any members of them leads to amalgamation of one company with another
company. In that circumstance the amalgamated company loses its separate legal
entity.

Q.No.2.What is misstatements in prospectus. Explain the extent of civil and criminal

liability of such misstatements.

SYNOPSIS
 Introduction
 Meaning of prospectus
 Meaning of misstatement of prospectus
 Liabilities for misstatement of prospectus
a. Civil liability
b. Criminal liability.

 Introduction
One of the main advantage of incorporation of company is it invites the public to
invest their money in it by way of shares and debentures or deposits. For this purpose the
company has to be inform about the various details of the company such as its object and
its nature of business to enable the public to decide whether to contribute or not to
contribute. For the assurance of the public the company will issue a document called
Prospectus by which a company exhibits its repaying capacity, its resources, reasons for
the development, profits etc. Further it is to be noted that every company need not go for
borrowing if its promoters are stronger enough and successful with their own financial
arrangements. The prospectus is needed only when the company wants to procure money
from the public in return of shares and debentures. People want to invest their money in
sound and profitable company. Prospectus gives the information about the profitability,

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soundness and prosperity of the company. The basic object and fundamental function of
the prospectus is to attract the public. Prospectus is an invitation to offer it is not a direct
offer.
 MEANING AND DEFINITION OF PROSPECTUS:
In order to finance its activities, a company needs capital which is raised by a
company by the issue of a prospectus inviting deposits or offers for shares and debentures
from the public. The central theme of a prospectus, from the money point of view, is that
it sets out the prospectus of the company and the purpose for which the capital is
required. The prospectus is the basis on which the prospective investors from their
opinion and take decisions as to the worth and prospects of the company.
According to section 2 (70) “prospectus means any document described or issued as
a prospectus and includes any notice, circular, advertisement or other document inviting
offers from the public for the subscription or purchase of any securities of a body
corporate”.
In other words, any document inviting deposits from the public or inviting offers
from the public for the subscription of shares or debentures of a company is a
prospectus.
 Meaning of misstatement of prospectus
Prospectus constitutes the contract between the company and the person who
purchases the shares or debentures. The persons who are behind the company have all the
knowledge as to the present and future of the company but, the investing public do not
know anything about the company. Therefore the prospectus must describe all the matters
very clearly it must not misrepresent or conceal any facts of the company. The prospectus
containing false, misleading, ambiguous, fraudulent statements of the facts of the
company are called as misleading or misstatement of prospectus. The people who want to
purchase shares in a company are entitled to true and correct facts of the company. The
prospectus must therefore tell the truth and nothing but the truth this is known as ‘golden
rule as to the framing of prospectus’.

 Liabilities for Mis statement of Prospectus:

If the investor is cheated by the company or by directors, promoters and all experts
of the company, they have both criminal and civil remedies by imposing civil and
criminal remedies.

1. Civil Liability [section- 35]:

A company or any officer of the company induces the investors the civil liabilities
will be imposed on such wrong doers. A person who has subscribed for shares on the
faith of misleading prospectus he has certain remedies.
 Remedies against the company: The person who has been induced to
subscribe for shares may
a) Rescind the Contract:

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Where the prospectus contains misstatement the contract to purchase

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

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

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not be less than the amount involved in the fraud, but which may extend to three
times the amount involved in the fraud.

Q.No.3.Discuss the provisions of the Companies Act, 2013 for the prevention of Oppression
and Mismanagement.
SYNOPSIS
 Introduction
 Meaning of oppression
 Meaning of mismanagement
 Leading case law
 Prevention of mismanagement and oppression

 Introduction
The management of a company is based on the majority rule. Like the will of the any
democratic set-up, the majority has its way in a company though due provision must also
be made for the protection of minority interest. This principle states that the will of
the majority should prevail and bind the minority is known as the principle of majority
rule. It was established in the case of FOSS v. HARBOTTLE.
 Meaning of Oppression:
The Oppression of small/minority shareholders takes place by majority
shareholders who controls the company. It is understood as an act or omission on the part
of management which implies majority, who holds or controls the management. The law,
however, has not defined what oppression is but certain prominent case laws have
defined the term “Oppression.”mThe essence of the matter seems to be that the conduct
complained of should at the lowest involve a visible departure from the standards of fair
dealing, and a violation of the conditions of fair play on which every shareholder who
entrusts his money to the company is entitled to rely------- Lord Cooper.
 Meaning of Mismanagement:

Similarly, mismanagement is not uncommon in companies. It means

mismanagement of resources by following means:
1. Absence of basic records of the company.
2. Drawing considerable expenses for personal purposes by
directors/management of the company.
3. Not filing documents with The Registrar of Companies relating to
compliances under The Companies Act 2013.
4. Misuse of companies finances/funds Sale of assets at very low prices.
5. Violation of provisions of law and memorandum or article of association
of the company.
6. Making Secret Profits.
7. Diverting company funds for personal use of directors

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8. Continuation in office by director beyond the specified term and not

holding any qualification shares.
9. The acts of mismanagement may not necessarily be of majority but can be
by any person in the day to day management of the company.

The management of a company is based on the majority rule. Like the will of
the any democratic set-up, the majority has its way in a company though due
provision must also be made for the protection of minority interest. This principle
states that the will of the majority should prevail and bind the minority is known as
the principle of majority rule. It was established in the case of FOSS v. HARBOTTLE.

 Leading Case Law:

Foss v/s Harbottle, [(1843)2 Hare 461]: Two minority shareholders in a
company alleged that its directors were guilty of buying their own land for the company’s
use and paying themselves a price greater than its value. This act of the directors resulted
in a loss to the company. The minority shareholders, therefore, decided to take an action
for damages against the directors. The shareholders in general meeting by majority
resolved not to take any action against the directors alleging that they were not
responsible for the loss which had been incurred. The court dismissed the suit on the
ground that the acts of directors were capable of confirmation by the majority of
members and held that the proper plaintiff for wrongs done to the company is the
company itself and not the minority shareholders. It further held that the company can act
only through its majority shareholders.
PREVENTION OF OPPRESSION AND MISMANAGEMENT:

1. APPLICATION TO TRIBUNAL FOR RELIEF IN CASES OF OPPRESSION-

(section241):

Any member, who has right to apply, may apply to the Tribunal under this
section-241. An application may be filed for a complaint that:

1. The affairs of the company have been or are being conducted;

a) In a manner prejudicial to the public interest, or
b) In an manner prejudicial or oppressive to him or any other member or
members, or
c) In a manner prejudicial to the interests of the company; or
2. The material change has taken place in the management or control of the company,
whether by;
a) An alteration in the BOD, or
b) Manager, or
c) In the ownership of the company’s share, or
d) If it has no share capital, in its membership, or
e) In any other manner whatsoever, and
That by reason of such change, it is likely that the affairs of the company
will be conducted in a manner prejudicial to its interests or its members or any class of

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members. These changes should not be a change brought about by, or in the interests of,
any creditors, including debenture holders or any class of shareholders of the company.
The Central Government, if it is of the opinion that the affairs of the
company are being conducted in a manner prejudicial to public interest, it may itself
apply to the Tribunal for an order.

2. POWERS OF TRIBUNAL(Sec-242, sub- section 1,3):

On any application made under Section 241, the Tribunal shall frame its
opinion on two points:
1. that the company’s affairs have been or are being conducted in a manner
prejudicial or oppressive to any member or members or prejudicial to public
interest or in a manner prejudicial to the interests of the company; and
2. that to wind up the company would unfairly prejudice such member or
members, but that otherwise the facts would justify the making of a winding-
up order on the ground that it was just and equitable that the company should
be wound up, the Tribunal may with a view to bringing to an end the matters
complained of, make such orders as it thinks fit.
3. A certified copy of the order of the Tribunal under sub-section (1) shall be
filed by the company with the Registrar within 30 days of the order of the
Tribunal.

 Details in Order Passed by Tribunal (Section 242, Sub-Section 2):

The order shall provide for:
1. The regulation of conduct of affairs of the company in future;
2. The purchase of shares or interests of any member of the company by
other members thereof or by the company;
3. In the case of a purchase of its shares by the company as aforesaid, the
consequent reduction of its share capital;
4. Restriction on the transfer or allotment of the shares of the company;
5. The termination, setting aside or modification, of any agreement,
however arrived at, between the company and the managing director,
any other director or manager, upon such terms and conditions as may,
in the opinion of the Tribunal, be just and equitable in the
circumstances of the case;
6. The termination, setting aside or modification, of any agreement,
between the company and any person other than those referred but no
such agreement shall be terminated, set aside or modified except after
due notice and after obtaining the consent of the party concerned;
7. The setting aside of any transfer, delivery of goods, payment,
execution or other act relating to property made or done by or against
the company within three months before the date of the application ,
which could, if made or done by or against an individual, be deemed in
his insolvency to be a fraudulent preference;
8. Removal of the managing director, manager or any of the directors of
the company;

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9. Recovery of undue gains made by any managing director, manager or

director during the period of his appointment as such and the manner
of utilisation of the recovery including transfer to Investor Education
and Protection Fund or repayment to identifiable victims;
10. The manner in which the managing director or manager of the
company may be appointed subsequent to an order removing the
existing managing director or manager of the company;
11. Appointment of such number of persons as directors, who may be
required by the Tribunal to report to the Tribunal on such matters as
the Tribunal may direct;
12. Imposition of costs as may be deemed fit by the Tribunal;
13. Any other matter for which, in the opinion of the Tribunal, it is just
and equitable that provision should be made.
 Interim Order (Section 242, Sub-Section 4):
The tribunal may, on the application of any party to the proceeding, make
any 9interim order which it thinks fit for regulating the conduct of the
company’s affairs upon such terms and conditions as appear to it to be just
and equitable.
 Alteration in Memorandum or Articles (Section-242, Sub-Section5, 6,7):
Where an order of the Tribunal makes any alteration in the Memorandum or
Articles of a company, then, the company shall not have power, except to the extent, if
any, permitted in the order, to make, without the leave of the Tribunal, any alteration
whatsoever which is inconsistent with the order, either in the memorandum or in the
articles.
The alterations made by the order in the memorandum or articles of a company
shall, in all respects, have the same effect as if they had been duly made by the company
in accordance with the provisions of this Act and the said provisions shall apply
accordingly to the memorandum or articles so altered.
A certified copy of every order altering, or giving leave to alter, a company’s
memorandum or articles, shall within thirty days after the making thereof, be filed by the
company with the Registrar who shall register the same.
3. RIGHT TO APPLY UNDER SECTION 241 (SECTION-244):
The following members of a company shall have the right to apply namely:—
 in the case of a company having a share capital, not less than one hundred
members of the company or not less than one-tenth of the total number of
its members, whichever is less, or
 any member or members holding not less than one tenth of the issued
share capital of the company, subject to the condition that the applicant or
applicants has or have paid all calls and other sums due on his or their
shares;
 in the case of a company not having a share capital, not less than one-fifth
of the total number of its members
 any one or more of them having obtained the consent in writing of the rest,
may make the application on behalf and for the benefit of all of them.
4. CONSEQUENCES OF TERMINATION OR MODIFICATION OF
AGREEMENTS(Section 243):

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Where an order made under section 242 terminates, sets aside or modifies an
agreement
(a) such order shall not give rise to any claims whatever against the company by any
person for damages or for compensation for loss of office or in any other respect either in
pursuance of the agreement or otherwise;
(b) no managing director or other director or manager whose agreement is so terminated
or set aside shall, for a period of five years from the date of the order terminating or
setting aside the agreement, without the leave of the Tribunal, be appointed, or act, as the
managing director or other director or manager of the company. Tribunal shall not grant
leave under this clause unless notice of the intention to apply for leave has been served on
the Central Government and that Government has been given a reasonable opportunity of
being heard in the matter.
Any person who knowingly acts as a managing director or other director or
manager of a company in contravention of this section and every other director of the company
who is knowingly a party to such contravention, shall be punishable with imprisonment for a
term which may extend to six months or with fine which may extend to five lakh rupees, or with
both.

Q.No.4.What is Allotment of Shares? Explain statutory restrictions and general principles

of Allotment of Shares.
SYNOPSIS
 Introduction
 Meaning of Allotment of Shares
 General Provisions relating to Allotment of Shares
 Statutory Restrictions on Allotment of Shares

Introduction:
Whenever the company requires huge amount it issues an advertisement along
with Prospectus and applications. The interested public fill up the application and send to
them to the company along of the company with certain fixed amount. It is upto the
BOD’s of the company to accept the offer or reject it. If the offer is accepted by the
company by making allotment of shares it results in a valid contract between the
company and the applicant.
The company may not allot the shares to all applications, for example; if a
company requires 1 Crore whereas the applications received by it may express their
willingness upto 3 Crores then it is the duty of the company to select the applications
worth of 1 Crore and return the balance to the applicants. The applicants who are selected
shall be issued letters of allotment and also requiring them to pay the share amount in
instalments or at a time. Now a day the companies are imposing the conditions to pay
money in advance along with the application. If the application is allotted then the
company will issue share certificate to the shareholders.
Allotment of shares is the act of allotting or distributing the shares of a company
to specific person in response to their application for shares.

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RESTRICTIONS ON ALLOTMENT OF SHARES

 General Restrictions on Allotment Of Shares:

For a valid allotment of shares there are certain general restrictions

imposed on the companies:

1. There must be proper Offer and Acceptance:

As a contract requires an offer by one party to do something in the
same way a valid allotment of shares there must be an offer by one
party and acceptance by the other. The acceptance of the offer by the
company means the allotment of shares to the applicant by the
company.
2. Allotment must be made by Proper Authority:
The allotment must be made by proper authority according to the
provisions of the AOA. Proper authority means the BOD’s. Usually an
allotment is made by a resolution of the BOD but in certain
circumstances the articles and memorandum may authorise any other
person to allot the shares.
3. Allotment Must be Made Within Reasonable Time:
The allotment must be made within the time specified in the
application not exceeding 120 days of issuing the prospectus. If no
time is specified then a reasonable time may be considered. The
Supreme Court said that the interval of 5-6 months between
application and allotment is unreasonable. Therefore the allotment
must be made within the reasonable time.
4. Allotment Must be Communicated:
Allotment must be communicated to the applicant in order to
constitute contract. If the application stipulates a particular way of
communication then the company should communicate in a stipulated
way of communication. Otherwise the ordinary mode of
communication I.e. post should be followed.
5. Allotment Must be Unconditional:
Allotment should be made on the conditions stated in the
application for shares if there is a variation there is no contract
between the company and the applicant. Illegal conditions should not
be imposed on the applicant.
 Statutory Restrictions On Allotment Of Shares:
There are some statutory restrictions on allotment of shares:
1. Minimum Subscription:
Section-39 of the Companies Act 2013, deals with the provisions
relating to minimum subscription. When a company invites the public

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to subscribe for shares it cannot allot those shares until the minimum
subscription stated in the prospectus is received. The companies Act
has taken precautionary steps for the protection of investors. The
restriction on minimum subscription is a watch dog upon the directors.
The minimum amount which in the opinion of the directors may
raised by the issue of shares to meet the expenditure on each of the
following:
a) To pay the purchase price of any property.
b) To pay the preliminary expenses.
c) To pay commissions.
d) To pay for money borrowed by the company.
e) To make provisions for the working capital.

The prospectus must mention the amount of minimum

subscription. The amount payable on application on each share
shall not be less than 5 % of the nominal value of the shares. All
money should be deposited in a scheduled bank. As soon as the
company issues prospectus within 120 days it should receive the
minimum subscription amount. If the company does not receive
the minimum subscription then within 30 days the company must
refund the money to the subscribers. If the company keeps that
amount it has to pay interest at 6% on each share.

2. Opening of Subscription List:

The companies Act provides that shares shall not be allowed
immediately after the issue of prospectus. No allotment shall be
made on any shares in pursuance of prospectus issued until the
beginning of 5th day after on which the prospectus is issued.

3. Obtaining the Permission from Stock Exchange(section-40):

Every company making public offer shall make an application to at
least one stock exchange before making the public offer. This is duty
of company to obtain permission of stock exchange or stock exchanges
for the dealing of securities there. Prospectus for the public offer shall
also state the name or names of the stock exchange in which
application for dealing of the securities has been made. If a default is
made in complying with the provisions of this section, the company
shall be punishable with a fine which shall not be less than five lakh
rupees but which may extend to fifty lakh rupees and every officer of
the company who is in default shall be punishable with imprisonment
for a term which may extend to one year or with fine which shall not

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be less than fifty thousand rupees but which may extend to three lakh
rupees, or with both.
4. Over Subscription:
If the company receives more applications with money it shall
have to return such excess money within 8 days from the date of
completion of the allotment.
5. Return of Allotment:
The company shall have the report within 30days of allotment of
shares the entire matters regarding the allotment to the register of
companies. This report is called as return as to allotment. This
return as to allotment shall state the numbers, nominal value, the
name, the address and occupation of the shareholders and the
amount paid on each share. Every officer who is in default shall be
punishable with fine which may extent to 1000 rupees per day
during which the default continues.

Q.No.5. What is Winding up of a Company? Briefly explain the circumstances under which
a company may be wound up by the Court.
SYNOPSIS
 Introduction
 Meaning of Winding up
 Modes of winding up
 Circumstances under which a company may be wound up by the Court.

MEANING OF WINDING UP:

Winding up or liquidation of a company represents the last stage in its life. It means a
proceeding by which a company is dissolved. The assets of the company are disposed of, the
debts are paid off out of the released from the assets, and the surplus , if any, is then distributed
among the members in proportion to their holdings in the company.
According to Prof. Gower, winding up of a company is a process whereby its life is
ended and its property administered for the benefit of its creditors and members.
An administrator called liquidator , is appointed and he takes control of the company,
collects its assets, pays its debt and finally distributes any surplus among the members in
accordance with their rights.

MODES OF WINDING – UP (SECTION 270):

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

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I.WINDING UP BY THE TRIBUNAL

Winding up of a company under the order of a Tribunal is also called as

“Compulsory Winding Up”.

CIRCUMSTANCES FOR WINDING UP BY TRIBUNAL (SECTION 271):

A company may be wound up by the Tribunal on a petition filed under Section 272 of the
Act.
The company may be wound up by Tribunal-
1. If the Company is Unable to Pay its Debts (sub – section 2 of Section 271):
A company may be wound up by the Tribunal if it is unable to pay its debts. In this
stage company has reached a stage where it is commercially insolvent, which means that the
company is unable to pay its debts or liabilities as they arise in the ordinary course of
business.
A company shall be deemed to be unable to pay its debts, if the company has to pay
the sum within twenty – one days after the receipt of demand or to provide adequate security
or re – structure or compound the debt to the reasonable satisfaction of the creditor
2. Special Resolution of the Company:
Winding up under this is not common because normally the members of the
company prefer to wind up the company voluntarily for in such a case they shall have
voice in its winding up. If the company has resolved by special resolution that the
company be wound up by the Tribunal.
3. Against the Sovereignty of India:
If the company has acted against the interests of the sovereignty and integrity of
India, its security of the State, friendly relations with foreign States, public order,
decency or morality then the Tribunal may order for the winding up of a company.
4. If a Company is Sick:
If the Tribunal has ordered the winding up of the company in case of a sick
company.
5. If the Affairs of the Company is Fraudulent:
If, on application by the Registrar or the Government, the Tribunal is of the
opinion that the affairs of the company has been conducted in a fraudulent manner or the
company was formed for fraudulent and unlawful purpose or the persons concerned in
the formation or management of its affairs have been guilty of fraud, misfeasance or
misconduct in connection therewith and that it is proper that the company be wound up.
6. Default in Submitting the Financial Statements or Annual Returns with the
Registrar:
If the company has made a default in filing with the Registrar its financial
statements or annual returns for immediately preceding five consecutive financial years.
7. Just and Equitable Grounds:
If the Tribunal is of the opinion that it is just and equitable to wind up the
company then they can do so. The words ‘Just and Equitable’ are of the widest
significance and do not limit the jurisdiction of the Tribunal to any particular case. The
principle of Just and Equity must be rest with the judicial discretion of the Tribunal
depending upon the facts and circumstances of each case.

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The Tribunal may order winding up under the ‘Just and Equitable’ clause in the
following circumstances:
1. When the Substratum of the Company is Gone: The main purpose or basis of a
company can be said to have disappeared only when the object for which it was
incorporated has substantially failed, or when it is impossible to carry on the
business of the company except at a loss, or the existing and possible assets are
insufficient to meet the existing liabilities.
2. When the Management is carried on in Such a Way that the Minority
disregarded or Oppressed: Oppression of minority shareholders will be a ‘just
and equitable’ ground where those who control the company abuse their power to
such an extent as to seriously prejudice the interest of minority shareholders.
3. Where there is Deadlock in the Management of the Company: When the
shareholding is more or less equal and there is a case of complete deadlock in the
company on account of lack of probity in the management of the company and
there is no hope or possibility of smooth and efficient continuance of the company
as a commercial concern, there may arise a case for winding up on the ‘just and
equitable’ ground.
4. Where the Public Interest is likely to be Prejudiced: Where the concept of
prejudice to public interest is introduced, it would appear that the Tribunal
winding up a company will have to take into consideration not only the interest of
shareholders and creditors but also public interest in the shape of need of the
community, interest of the employees, etc.

PETITION FOR WINDING UP (SECTION 272):

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

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A copy of the petition made under this section shall also be filed with the Registrar and
the Registrar shall, without prejudice to any other provisions, submit his views to the Tribunal
within sixty days of receipt of such petition.

POWERS OF TRIBUNAL (SECTION 273):

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

Q.No.6.What is Debenture? What are its Characteristics? Explain the various kinds of
debenture.
SYNOPSIS

 Introduction
 Meaning and Definition of Debentures
 Characteristics of Debentures
 Kinds of Debentures

Meaning and Definition of Debenture:

Debenture is most important instrument to raise capital for a company. It is a long term
security yielding a fixed rate of interest issued by a company and secured against assets of the
company. A company use debenture to raise debt capital. Popularly, debenture issued by public
sector companies with government approval is called bonds.

Section 2 (30) of the Companies Act, 2013 define inclusively debenture as “debenture”
includes debenture stock, bonds or any other instrument of a company evidencing a debt,
whether constituting a charge on the assets of the company or not.

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In Levy v/s Abercorris Slate & Slab Co., (1887), it has been held that “debenture means it
is a document which either creates a debt or acknowledges it”

This is clear from definition that debenture may be Secured Debenture or Unsecured
Debenture. According to Section 44, the shares or debentures or other interest of any member in
a company shall be movable property transferable in the manner provided by the articles of the
company. The certificate of debenture shall be issued within a period of six months from the date
of allotment in the case of any allotment of debenture.

Characteristics features of Debenture:

In the light of above definitions, the characteristics features of a debenture are as follows:

1. It is issued by a company and is usually in the form of a certificate which is an

acknowledgement of indebtedness.

2. It is issued under the company’s seal.

3. It is one of the series issued to a number of lenders. But a single debenture is also not
uncommon. Thus a mortgage of a company’s property to a single individual as security for a
loan is a debenture within the definition.

4. It usually specifies a particular period or date as the date of repayment. It also provides for the
payment of a specified principal and interest at the specified date.

5. It generally creates a charge on the undertaking of the company or some parts of its property;
but there may be debentures without any such charge.

6. A debenture-holder does not have any right to vote in the company meetings, but their claims
rank prior to preferential and equity shareholders and their exact rights depends upon the nature
of debenture they hold

Kinds of Debentures:

Debentures may be the following kinds:

1. Bearer Debenture: These debentures, also known as ‘unregistered debentures’ are

payable to its bearer. Bearer Debentures are transferable by mere delivery without any
notice to the company. Company keeps no record for such debenture holders. Debenture
Coupons are attached with the Debenture Certificate and interest can be claimed by the
Coupon holder. The holder of this debenture names will not appear in the Register of
Debenture Holders and also in the Debenture Certificate. These are regarded as
negotiable instruments and are transferable by delivery, and a bonafide transferee for
value is not affected by the defect in the title of the prior holder.

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In Bechuanaland Exploration Co. v/s London Trading bank Ltd.,(1898): ‘B’ company
held debentures of an English Company, payable to bearer. It kept them in a safe of
which the secretary had the key. The secretary pledged the debentures with a bank as
securities for a loan taken by him. The bank took the debentures bonafide. The Court held
that the bank was entitled to the debentures as against the company.
2. Registered Debentures: These are debentures which are payable to the registered
holders. A holder is one whose name appears both on the debenture certificate and in the
company’s register of debentures. The registered holder of the debentures can transfer
them like shares, but the transfer to be complete has to be registered with the company.
3. Secured Debentures: Debentures which create some charge on the property of the
company are known as secured debentures. The charge may be a fixed charge or a
floating charge.
4. Unsecured Debentures: Debentures which do not create any charge on the assets of the
company are known as unsecured debentures. The holders of these debentures like
ordinary unsecured creditors may sue the company for recovery of the debt.
5. Redeemable Debentures: Debentures are usually issued on the condition that they shall
be redeemed after a certain period. Such debentures are known as redeemable debentures.
6. Irredeemable or Perpetual Debentures: When debentures are irredeemable, they are
called perpetual debentures. A debenture will be treated as irredeemable where either
there is no period fixed for repayment of the principal amount or repayment of it is made
conditional on the happening of an event which may not happen for an identified period
or may happen only in certain specified and contingent events, e.g., the winding up of the
company. They are not invalid because of the condition that they are made irredeemable
or redeemable only on the happening of some contingency, or on the expiration of a
period, however long, it may be for 100 years after the issue of debentures.
7. Convertible Debentures: These debentures give an option to the holders to convert them
into preference or equity shares at stated rates of exchange, after a certain period. If the
holders exercise the right of conversion, they cease to be lenders to the company and
become members instead.
8. Non- Convertible Debentures: These debentures do not give any option to their holders
to convert them into preference or equity shares. They are to be duly paid as and when
they mature.

Section 71 extensively deals with debentures.

Where debentures are issued by a company, the company shall create a debenture
redemption reserve account out of the profits of the company available for payment of
dividend and the amount credited to such account shall not be utilised by the company
except for the redemption of debentures.

No company shall issue a prospectus or make an offer or invitation to the public

or to its members exceeding five hundred for the subscription of its debentures, unless the

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company has, before such issue or offer, appointed one or more debenture trustees and
the conditions governing the appointment of such trustees shall be such as may be
prescribed.

An issue of debenture for more than five hundred members or any number of
public (this is subject to clarification from government) without creating a debenture
trust is prohibited.

A debenture trustee shall take steps to protect the interests of the debenture
holders and redress their grievances.

Any provision of trust deed or contract secured by trust deed, exempting a trustee
or indemnifying him against any liability for breach of trust shall be void. However,
trustee may be indemnified where he show the degree of care and due diligence required
of him as trustee.

The liability of the debenture trustee shall be subject to such exemptions as may
be agreed upon by a majority of debenture-holders holding not less than three – fourths in
value of the total debentures at a meeting held for the purpose.

A company shall pay interest and redeem the debentures in accordance with the
terms and conditions of their issue.

Where at any time the debenture trustee comes to a conclusion that the assets of
the company are insufficient or are likely to become insufficient to discharge the
principal amount as and when it becomes due, the debenture trustee may file a petition
before the Tribunal. The Tribunal may, after hearing the company and any other person
interested in the matter, by order, impose such restrictions on the incurring of any further
liabilities by the company as the Tribunal may consider necessary in the interests of the
debenture-holders.

If any default is made in complying with the order of the Tribunal under this
section, every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to three years or with fine which shall not be
less than two lakh rupees but which may extend to five lakh rupees, or with both.

A contract with the company to take up and pay for any debentures of the
company may be enforced by a decree for specific performance.

The Central Government may prescribe the procedure, for securing the issue of
debentures, the form of debenture trust deed, the procedure for the debenture-holders to

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inspect the trust deed and to obtain copies thereof, quantum of debenture redemption
reserve required to be created and such other matters.

Q.No.7. Who is a Director of Company? Explain the legal position of a director and how
the directors of a company’s are appointed.
SYNOPSIS
 Introduction
 Meaning and Definitions of Directors
 Legal Position of a Directors
 Appointment of Directors.

Introduction:
The success of the company depends upon its proper management and
administration. A company in the eyes of law is an artificial person, it has no physical existence,
it has neither soul nor a body of its own. As such, it cannot act in its own person or a company is
not able to manage its own affairs. It must act only through human agency, although the real
owners of the company are its shareholders and it is their duty to manage the affairs of the
company but, due to the following reasons it is not possible for them to do so,

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

A company as soon as gets the certificate of incorporation it becomes legal person. It is

not seen to human eyes. It is invisible but it does business, performs several functions
through human instrument who are called as the directors.
 Meaning and Definitions of Directors:
The relationship of director and company is very hard to define that is why the
companies Act does not define the term directors completely. But generally “Directors
includes any person who occupying the position of directors by whatever name called”.
This meaning is not clear but it means that the person who performs the duties of the
director is called as the directors of a company.
According to section 2 (34) of the Companies Act 2013, “director” means a
director appointed to the Board of a company.
According to section 2(10) “Board of Directors” or “Board”, in relation to a
company, means the collective body of the directors of the company.
According to Lush “A director is a director or controller of the company’s affairs
but he is not a servant of a company”.

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A director may therefore be defined as a person having control over the directors,
management and affairs of the company. They occupy a very important position in the
structure of a company and also they are the brain and heart of the company.

 Legal position of the Directors:

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

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

The directors in a company can be appointed in the following manner:

1. First Directors [section 152(1)]
At the time of the formation of a company the promoters of the
company generally select some prominent persons to act as the first
directors of a company and also mention their names in the company’s
AOA. Where no provision is made in the articles of a company for the
appointment of the first director, the subscribers to the memorandum who
are individuals shall be deemed to be the first directors of the company
until the directors are duly appointed and in case of a One Person

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Company an individual being member shall be deemed to be its first

director until the director or directors are duly appointed by the member in
accordance with the provisions of this section.

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

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

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

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

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

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

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

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

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

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

 POWER TO SEEK ASSISTANCE (SECTION 429):

The Tribunal may in order to take into custody or under its control all property,
books of account or other documents request in writing the Chief Metropolitan
Magistrate, Chief Judicial Magistrate or District Collector within whose jurisdiction any

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such property, books of account or other documents of a company are situate or found to
take possession thereof. The magistrate or collector shall –
(a) take possession of such property, books of account or other documents; and
(b) cause the same to be entrusted to the Tribunal or other person authorised by it.
The Magistrate or Collector may take steps and use force as may be necessary. No
such act shall be called in question on any court or before any authority on any ground
whatsoever.

B.Essentials of Company Meeting

Meetings are must for every organisation or association to discuss matters and to take
decisions on important issues. Meetings are required to be held by a concerned authority
periodically. The word meeting is not defined anywhere in the Companies Act of 2013.
Generally a meeting may be defined as gathering, assembling or coming together of two or more
persons for discussion and transaction of some lawful business. For proper working of the
company it is necessary to that the shareholders meets as often as possible and discuss the
matters and take important decisions. There must be atleast 2 persons to constitute a meeting.

Requisites or Essentials of a Valid Meeting:

Followings are the requisites or essentials for valid meeting,
1. Proper Authority:
The meeting must be conducted by a proper authority otherwise the meeting will not be
valid meeting. The proper authority to conduct a meeting of a company is BOD’s . in the
absence of BOD’s the proper authority to conduct the meeting would be the Company
Secretary. If the directors of a company do not call the meeting then the NCLT shall
become proper authority to call such meetings.
2. Proper Notice[sec-101]:
The second important essentials of a valid meeting is that a proper notice of the
meeting should be given to all those who are entitled to attend the company meeting. The
notice must be given atleast 21 days before the date of meeting. The notice must be in
writing, it must specify the place, date and time of the meeting. The object of the notice is
to make aware the shareholders with the agenda of the meeting so that they may decide
the matters intelligently. Every member of a company, every directors, every auditor,
every shareholders, creditors, debenture holders or authorities are entitled to get the
notice. Notice may be send either personally or through post.
3. Quorum[sec-103]:
The next requirement of a valid meeting is the presence of a quorum in the
meeting. Any business transacted at a meeting without a quorum is invalid. The main
purpose of the quorum is to avoid taking decisions at a meeting by small majority of
persons which may not be accepted by large majority of members.
Quorum means minimum number of members who must be present in a meeting.
it is the AOA of a company which fixes the quorum for different meetings of the
company according to the size and the nature of the company business. But the
companies Act fixed 2 members as the minimum to attend the quorum in case of private
companies and the 5 members in case of public company
If the quorum is not present within half-an-hour from the time appointed for
holding a meeting of the company, the meeting shall stand adjourned to the same day in

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the next week at the same time and place, or to such other date and such other time and
place as the Board may determine. If at the adjourned meeting also, a quorum is not
present within half-an-hour from the time appointed for holding meeting, the members
present shall be the quorum.
4. Proxy[sec-105] :
A proxy is an authorised agent of the member of a company to attend the meeting.
Any member of a company entitled to attend and vote at a meeting of the company shall
be entitled to appoint another person as a proxy to attend and vote at the meeting on his
behalf provided that a proxy shall not have the right to speak at such meeting and shall
not be entitled to vote except on a poll. Proxy need not be a member of a company, a
minor cannot be appointed as proxy. The letter of appointing a proxy must be in writing
in proper form and must be signed by the appointer.

5. Chairman of the Meeting[sec-104]:

Every meeting must have a chairman to presided over and conduct meeting. The meeting
is not considered valid if it not presided by a chairman. The chairman is the person
responsible for smooth conduct of the meeting. He is the chief authority to control the
meeting. The entire responsibility for the smooth conducting of the meeting lies on his
shoulders. Therefore he must be an efficient and experienced person. The chairman of the
meeting will be appointed by the BOD’s or the members presented at the meeting shall
elect one of them as the chairman of the meeting.
6. Agenda :
The term agenda literally means “things to be done” in relation to the meetings of a
company. It means that the programme of business to be transacted at the meeting. The
preparation of agenda is considered necessary for the conduct of any meetings
systematically without any confusion. The agenda is usually prepared by the company
secretary. All the items included in the agenda must be serially arranged while preparing
the agenda following principles should be clear and exact:
1. It should be clear and exact;
2. It should be in a summary form;
3. The routine items should be put first and other matters
later;
4. All the items included in the agenda should be within the
scope of the meeting.
7. Voting and polling:
Company meetings are held for discussing specific issues relating to the workings of the
company and for taking decisions on the same matter. The sense of meeting is decided by
putting questions before the meeting to vote. There are different methods of voting but
the important methods of voting that are adopted in a company meetings are:
1. Voting by show of hands: it is the most common method adopted in a
company meeting for ascertaining the sense of the meeting. Under this method
the members present in the meeting indicate their opinion by raising their
hands in favour of the proposal in a meeting.
2. Voting by Poll: under this method the members present in a meeting shall
express their view by casting their votes, either in favour of or against the

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proposal. Voting by poll is nothing but a secret voting. Under this method the
decision taken on the basis of the majority of the votes.
3. Voting through electronic means: The Central Government may prescribe the
class or classes of companies and manner in which a member may exercise his
right to vote by the electronic means[ E-Voting].
8. Resolutions :
Business is transacted at a general meeting by passing resolution. Therefore the
resolution means it is the decision of a meeting on a particular proposal. The resolution is
nothing but a final decisions taken in the meeting. Every items included in the agenda is
put before the meeting for the purpose of taking decisions. When the proposal is
approved by a majority of members, it becomes a resolution. Every resolution must be
recorded in the minutes book word by word.
 Types of Resolutions:
1. Ordinary Resolution:
An Ordinary Resolution is that which is passed by a simple majority at
any general meeting of the shareholders. The resolutions may be passed by a
show of hands or by poll or electronically.
2. Special Resolutions:
A special resolution is one which is passed by atleast 3/4 th majority of the
members voting at the general meeting in which such a resolution is passed.
The votes cast in favour of the resolution, whether on a show of hands, or
electronically or on a poll, as the case may be.

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

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

 Meaning and Definition of Dividend:

One of the main objects of companies is to earn profits which are distributed
among shareholders by way of ‘dividend’. In general sense ‘dividend’ is the share of the
Company profits distributed among the members.
According to section 2(35) “dividend” includes any interim dividend.

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In Commissioner of Income-Tax v/s Girdhadas & Co. (pvt) Ltd., 1967, it was
observed that the term ‘dividend’ has two meanings:
(1) “As applied to a company which is a going concern, it ordinarily means the portion of
the profits of the company which is allocated to the holders of shares in the company.
(2) In case of a winding up of a company it means a division of the realised assets among
the creditors and contributories according to their respective rights”.

 RULES REGARDING DIVIDEND

1. Declaration of Dividend (SECTION 123):
A company shall declare dividend and pay it, only out of profit of the company
for the financial year or out of undistributed profit of any previous financial year or out of
both. In case, any guarantee give by any Government (Central or State), the company
may dividend out of money provided by that government for payment of dividend.
Before declaration of dividend, a company may transfer a portion from the profit to the
reserves of the company. The company is free to decide the percentage for such transfer
to the reserve. Where a company has no adequate profit or any profit in a financial year
or any accumulated profit to distribute as dividend, it may declare dividend out of
reserves in accordance with the rules made by the government. The company may pay
dividend only from free reserves, not from any other reserves.
2. Interim Dividend:
The Board of Directors may declare interim dividend during financial year out of
surplus in profit and loss account. In case, a company is incurring loss as per financials of
latest quarter, interim dividend shall not be higher than average dividend declared by the
company during last three financial years.
3. Dividend Account in Bank:
The amount of dividend and interim dividend shall be deposited in a separate
account in a scheduled Bank within five days from the date of declaration of such
dividend. The dividend shall be paid to shareholder or to his banker in cash not
otherwise. However issue of bonus shares out of distributable profit or free reserve is
permitted and not be deemed to be a violation of this rule. Making a partly paid share,
fully paid through payment from distributable profit and free reserve is permitted. Any
dividend payable in cash may be paid by cheque or warrant or in any electronic mode to
the shareholder.
4. Right of members pending Registration of (SECTION 126):
Where any instrument of transfer of shares has been delivered to any company for
registration and the transfer of such shares has not been registered by the company, it
shall,—
(a) transfer the dividend in relation to such shares to the Unpaid Dividend Account unless
the company is authorised by the registered holder of such shares in writing to pay such
dividend to the transferee specified in such instrument of transfer; and
(b) keep in abeyance in relation to such shares, any offer of rights shares and any issue of
fully paid-up bonus shares.
5. Punishment for failure to distribute Dividend (SECTION 127):
Where a dividend has been declared by a company but has not been paid or the
warrant in respect thereof has not been posted within thirty days from the date of
declaration to any shareholder entitled to the payment of the dividend, every director of

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the company shall, if he is knowingly a party to the default, be punishable with

imprisonment which may extend to two years and with fine which shall not be less than
one thousand rupees for every day during which such default continues and the company
shall be liable to pay simple interest at the rate of eighteen percent per annum during the
period for which such default continues.
6. Unpaid Dividend Account (Section 124):
Where a dividend has been declared by a company but has not been paid or
claimed within thirty days from the date of the declaration to any shareholder entitled
to the payment of the dividend, the company shall, within seven days from the date of
expiry of the said period of thirty days, transfer the total amount of dividend which
remains unpaid or unclaimed to a special account to be opened by the company in
that behalf in any scheduled bank to be called the Unpaid Dividend Account.

Q.No.9. Solve any two of the following problems

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

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In the present case also Mr. Ramesh being a bearer of debenture of EMPHASIS
Company it is the responsibility of the company to pay Mr. Ramesh the principal sum
and the interest. From the above provisions it is very much clear that the bearer of the
debenture is entitled to claim his principal sum and the interest as it is provided under
Section 71 of the Companies Act, 2013.
From the above it is clear that the bearer debenture is entitled to claim the
principal sum and the along with the interest.

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

No the preferential shareholders are not entitled to claim 15% of the dividend from
the surplus profit of the company. Because, according to Section 43(2) of the
Companies Act, 2013, “Preference Shares” are shares which have preferential rights
with respect to –
1.Payment of dividend, either as a fixed or an amount calculated at a fixed rate. Which
may be either be free or subject to income tax; and
2.Repayment of amount of share capital or share capital deemed to be paid up, whether or
not, there is preferential right specified in the memorandum or articles of the company.
But the Preference Shareholders may or may not carry such other rights.
 preferential right to any arrears of dividend
 A right to share in surplus profit by way of additional dividend.
 Right to be paid a fixed premium.
 Right to share in surplus assets in the event of winding up of after all kinds of
capital have been repaid.
 The preferential shareholders do not have normal voting rights in the company.

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

The preferential shareholders right to share in the dividend is already be fixed by the
company’s AOA. Therefore the company should distribute the dividend based upon the
provisions contained in the Companies AOA. Every preference shareholders are entitled
to fixed rate of dividend in a company. In case in any financial year if the company earns

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huge profit, the preference shareholders may have the right to participate in the surplus
profit of the company. But the preference shareholders cannot claim it as a matter of their
right. It is left to the discretionary power of the companies to decide whether rate of
dividend should be exceed and preference shareholders are entitled to share in the surplus
profit of the company or not. But in no case the preferential shareholder do not have the
right to claim share in the surplus profit of the company, they are entitled to claim the
fixed rate of dividend which is already fixed by the AOA of a company.

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

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

(c) ‘X’ a minor was registered as a shareholder. After attaining majority he received
dividend from the company subsequently the company went into liquidation. ‘X’ denies
liability as a shareholder. Decide
No ‘X’ cannot deny his liability at the time of winding up of a company.
Because, generally speaking, all persons who are competent to enter into a contract may become
a member of a company but a person of unsound mind and a minor, being incompetent to
contract, cannot be member of a company. A minor’s contract is absolutely void under the Indian
Law of Contract but it being voidable under English Law, it becomes valid on attainment of
majority by the minor. In India also a contract on behalf of a minor and for the minor’s benefit
may be entered into by his natural or legal guardian. Therefore, a transfer of fully paid shares in
favour of a minor on the basis of a transfer deed signed by his natural or legal guardian is
perfectly valid, unless the Articles of the company expressly forbid registration of such transfer.
Likewise, an allotment of shares to a minor is valid if the shares are fully paid but he shall incur
no liability, whatsoever, during his minority.
In Palaniappa v/s Official Liquidator, it was held that a minor share holder has the option
to continue or not to continue as a member on attainment of majority. However, this option must
be exercised within a reasonable time on attainment of majority.
In Fazulbhoy Jaffar v/s Credit Bank of India Ltd., an infant was registered as a
shareholder. After attaining majority he continued to accept dividends from the company. The
court held that under these circumstances he is deemed to have opted for being permitted to
continue as a shareholder of the company. He is, therefore, estopped from denying that he is a
shareholder when the company was being wound up.

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Further companies Act, 2013 makes it abundantly clear that the guardian of the minor can
enter into a written contract with the company on behalf of the minor and the minor may become
member of the company on the basis of such contract. Where the shares held on behalf of the
minor are fully paid, there will be no liability of any kind on the part of minor member in the
event of winding up of the company.
From the above it is clear that a minor can become a shareholder of a company through
his natural or legal guardian. After attaining the age of majority it is left to the minor to decide
whether to continue as a member or not to continue. Once he agreed to continue as a member of
a company, he is entitled to all the privileges of the company and he is entitled to have right to
share in the dividend of the company. As he is agreed to continue as a shareholder he is held
liable to the company at the time of its winding up if his shares are not fully paid. If the shares
are already fully paid up then the minor is not liable to company.
In the present problem it is very clear that ‘X’ minor who registered as a shareholder of a
company. After attaining his age of majority he received dividend from the company but
subsequently the company went into liquidation. Here in this stage ‘X’ is denying the liability of
the company. As we discussed above if it is fully paid up shares ‘X’ can easily deny the liability
of the company at the time of its liquidation even though he has received the dividends, but in
case if the shares are not fully paid up, but he has received the dividends then he cannot deny his
liability as he is agreed to continue as a shareholder even after attaining the age of majority,
therefore his liability continues till his shares are fully paid up.

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