Company Law Syllabus

MODULE 1:

1.1Basic principles of company law for incorporation, prospects and

Securities

Meaning and Definition of a Company

Types of Companies

Nature and Characteristics of a Company

Doctrine of Lifting of the Corporate Veil

Citizenship of a Company
Promoters – position – duties and liabilities
1.2 Incorporation of companies & matters incidental thereto

Formation and Incorporation of Companies

Commencement of Business

Memorandum of association
Articles of association

Doctrine of constructive notice and indoor management

Rectification of name of company

1.3 Prospectus & allotment of securities

Shelf Prospectus, Red Herring Prospectus, Abridged Prospectus, Offer for Sale -Deemed
Prospectus

Matters to be stated in prospectus

The Golden Rule or Golden Legacy

Public offer of securities to be in dematerialized form

Criminal liability for mis-statements in prospectus
Civil liability for mis-statements in prospectus

Punishment for fraudulently inducing persons to invest money

Punishment for personation for acquisition, etc., of securities
Allotment of securities by company
Securities to be dealt with in stock exchanges

Private placement
1.4 Share capital & debentures

Kinds of share capital

Nature of shares or debentures

Equity Shares with Differential Voting Rights

Issue and Redemption of Preference Shares

Issue of sweat equity shares

Application of premiums received on issue of shares

Prohibition on issue of shares at discount

Transfer and transmission of securities
Power of limited company to alter its share capital

Further issue of share capital

Issue of bonus shares

Reduction of share capital

Restrictions on purchase by company or giving of loans by it for purchase of its Shares

Power of company to purchase its own securities

Prohibition for buy-back in certain circumstances

Debentures
Power to nominate

MODULE 2:
2.1 Acceptances of deposits
Definition of Deposits

Eligibility to accept Deposits

Applicability

Conditions for acceptance of Deposits from its members

Damages for fraud
Time period & Acceptance Limit for Deposit
2.2 Registration of charges
Creation, Modification & Satisfaction of Charges

Floating Charge
Fixed Charges

Crystallization of Charge
2.3Meetings

Kinds of Meetings
Types of Resolutions;

Notice, Quorum, Poll, Chairman, Proxy;

Meeting and Agenda;

Voting and its types-vote on show of hands, Poll, E-Voting, Postal ballot;
Circulation of Members’ Resolutions etc.;
Signing and Inspection of Minutes

Register of Members & other Security Holders

Significant Beneficial Owners

Annual Return
Resolutions and agreements to be filed

Report on annual general meeting

Meetings of Board and its Committees

Frequency, Convening and Proceedings of Board and Committee meetings;

Quorum; Resolution by Circulation;

2.4 Dividend
Declaration of dividend
Unpaid Dividend Account

Investor Education and Protection Fund

Punishment for failure to distribute dividends

2.5Accounts, Audit &Auditors

Books of Accounts;
Financial Statements;
National Financial Reporting Authority;
Auditors-Appointment, Resignation and Procedure relating to Removal,

Qualification and Disqualification;

Rights, Duties and Liabilities;

Audit and Auditor’s Report;

Internal Audit;

Cost Audit
Annual Report & Directors Reports

Integrated Reporting
MODULE 3:

3.1Directors
DIN,
Types of Directors;

Appointment/ Reappointment,
Disqualifications,

Vacation of Office,
Retirement, Resignation and Removal,

Duties of Directors;
Rights of Directors;

Register of directors and key managerial personnel and their shareholding

Loans to Directors;

Disclosure of Interest;
Declaration by the Directors;
Loan and investment by company

Investments of company to be held in its own name

Related Party Transactions

Register of contracts or arrangements in which directors are interested

3.2 Board constitution and its powers
Board composition;
Restriction and Powers of Board;
Board Committees- Audit Committee, Nomination and Remuneration Committee,
Stakeholder relationship Committee and other Committees
Contributions to Charitable Funds, Political Party & National Defense Fund
3.3Appointment and remuneration of managerial personnel

Appointment of Key Managerial Personnel;

Managing and Whole-Time Directors, Manager, Chief Executive Officer, Chief Financial
Officer and Company Secretary
Remuneration of Managerial Personnel
3.4Prevention of oppression and mismanagement

Majority Rule and Minority Rights

The Principle of Non-interference
Meaning of Oppression
Application to tribunal for relief in cases of oppression etc.

Powers of Tribunal
Class action

Reconstruction and amalgamation

MODULE 4:
4.1Corporate Social Responsibility & secretarial audit

Applicability of CSR
CSR Policy & Permitted CSR Activities

CSR Committee and Expenditure

Net Profit for CSR

Reporting requirements
4.2Winding Up

Procedure before Tribunal & Appellate Tribunal

Legal provisions for Winding Up of Companies

Winding Up by the Tribunal

Voluntary Winding Up
4.3Environmental, Social &Governance and Corporate Governance
Meaning of ESG & its Components
History of Corporate Governance

Meaning of Corporate Governance

Requirements under Corporate Governance

Corporate Governance Report

4.4Insider Trading

Definitions – Insider, Connected Person, Person Deemed to be Connected, Unpublished Price

Sensitive Information, Window Closure, Opposite Transaction, Trading Plans
When Applicable

Penalties.

Notes on Company Law

Types of Companies:

“Public Company” means a company which -

(a) is not a private company;
(b) has a minimum paid-up share capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company,
shall be deemed to be public company for the purposes of this Act even where such
subsidiary company continues to be a private company in its articles.

“Private Company” means a company having a minimum paid-up share capital as may be
prescribed, and which by its articles —

(i) restricts the right to transfer its shares;

(ii) except in case of One Person Company, limits the number of its members to two
hundred. Provided that where two or more persons hold one or more shares in a company
jointly, they shall be treated as a single member. Provided further that — (a) persons who are
in the employment of the company; and (b) persons who, having been formerly in the
employment of the company, were members of the company while in that employment and
have continued to be members after the employment ceased, shall not be included in the
number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company.

"Small Company"- A small company has been defined as a company, other than a public
company.
(i) paid-up share capital of which does not exceed 4 Crore rupees; and

(ii) turnover of which as per profit and loss account as per the immediately preceding
financial year does not exceed 40 crore rupees.

Provided that following companies shall not be Small Cos -

(a) a holding company or a subsidiary company;
(b) a company registered under section 8; or

(c) a company or body corporate governed by any special Act.

“Subsidiary Company" means a company in which the holding company -

(i) controls the composition of the Board of Directors; or

(ii) exercises or controls more than one-half of the total voting power either at its own or
together with one or more of its subsidiary companies.

“Dormant company” - A company formed and registered for a future project or to hold an
asset or intellectual property and has no significant accounting transaction such a company or
an inactive company may make an application to the Registrar for obtaining the status of a
dormant company.

"Government Company" means any company in which not less than fifty-one percent of the
paid-up share capital is held by the Central Government, or by any State Government or
Governments, or partly by the Central Government and partly by one or more State
Governments, and includes a company which is a subsidiary company of such a Government
company.

"Body Corporate or Corporation" includes a company incorporated outside India, but does
not include: a co-operative society registered under any law relating to co-operative societies;
and any other body corporate (not being a company as defined in this Act), which the Central
Government may, by notification, specify in this behalf.
“One-person company”: The 2013 Act introduces a new type of Company i.e., one-person
company (OPC). An OPC means a company with only one person as its member.
“Associate Company”: means a company in which some other company has a significant
influence, but which is not a subsidiary company of the company having such influence and
includes a joint venture company. Significant influence means holding 20% or more but up to
50% of the total paid up share capital.

“Foreign Company”: means a company or body corporate incorporated outside India which
— has a place of business in India whether by itself or through an agent, physically or
through electronic mode; and conducts any business activity in India.

Q 1 What is a Company?
A 1 As per Section 2(20) of the Companies Act, 2013 a “company” means a company
incorporated under this Act or under any previous company law or laws. Lord Justice Lindley
has defined a company as an association of many persons who contribute money or money’s
worth to a common stock and employ it in some trade or business and who share the profit
and loss arising therefrom.
Thus, from the above we can say that an association would be called as a Company only if it
is registered as a Company under some law and in India it is the Companies Act. There are
various Company Laws passed, amended and cancelled in past and hence whether an
association is registered under the present law that is Companies Act, 2013 or previous laws,
it will still be considered as a Company. So, with the introduction of every new Law we do
not need to Reregister our Company. As per Famous Justice Lindley, Company is an
association of many persons who contribute Money or Money’s Worth (something in Kind)
for the purpose of doing some business, with an understanding to share the profits arising out
of such business.

From the above discussions we can say that a Company is a body of persons who come
together for the purpose of some business and this association needs to be registered under
the Companies Act.
Q 2 What are Characteristics of a Company?

A 2 Following are a few Important Characteristics or Features of a Company:

(i) Corporate personality

A company upon incorporation is vested with a corporate personality. It means it uses its own
name, acts under its own name, has a seal or signature of its own and its assets as well as its
liabilities are separate and distinct from those of its members. It is a different person in the
eyes of law different from the members who form it. Here we can have reference of a famous
case of Salomon v. Salomon and Co. Ltd. In this case the court clearly established the
principle that once a company has been validly constituted under the Companies Act, it
becomes a legal person distinct and separate from its members and for this purpose it is
immaterial whether any member or members holds/hold a large or small proportion of the
shares of the Company.
(ii) Company as an artificial person
A Company is an artificial person created by law. It is not a human being but it acts through
human beings. It is considered as a legal person which can enter into contracts, own
properties in its own name, can sue and can be sued by others etc. It is called an artificial
person since it is invisible, intangible, existing only in the eyes of law. It is capable of
enjoying rights and being subject to liabilities as well as duties. Case law: Union Bank of
India v. Khader International Construction and Other In this case, the question which arose
before the Court was whether a company is entitled to sue as an indigent (poor) person under
Order 33, Rule 1 of the Civil Procedure Code, 1908. The aforesaid Order permits persons to
file suits under the CPC as pauper/indigent persons if they are unable to bear the cost of
litigation. The point of argument was that, a company can take the benefit of Order 33, Rule 1
of the Code? The Supreme Court held that the word ‘person’ mentioned in Order 33, Rule 1
of the CPC, includes a company. Thus, a company may also file a suit as an indigent person.
(iii) Company is not a citizen

A company is an artificial and a legal person but it is not a citizen under the Citizenship Act,
1955 or the Constitution of India. Only a natural person is declared and considered to be a
Citizen. In a famous case of State Trading Corporation of India Ltd. v. CTO, the Supreme
Court held that the State Trading Corporation is though a legal person, but cannot be
considered as a citizen as it can act only through natural persons.

(iv) Company has Nationality and Residence

Though it is a well-established principle that a company cannot be a citizen, yet it has
nationality, domicile and residence.

In Gasque v. Inland Revenue Commissioners, it was held that a limited company is capable
of having a domicile and its domicile is the place of its registration and that domicile remains
valid till the Company is wound up. Similarly, a Company has nationality like Indian Co,
Foreign Co. We also know that there are different tax rates applicable to them under Income
Tax Act.

(v) Limited Liability

It is one of the outstanding features of a Co. that the liability of the members of the Co. is
Limited. The privilege of doing the business with limited liabilities makes a Co. form of
Organisation different from a Proprietary Or a Partnership Concern. A company, being a
separate person, is the owner of its assets and is bound by its liabilities. The liability of a
member as shareholder, extends to the the unpaid amount of the shares held by him. All the
Members taken together are neither the owners of the company’s undertakings, nor liable for
its debts.

(vi) Perpetual Succession

A company never dies, unless it is wound up as per the provisions of law. A company, being a
separate legal person remains unaffected by death or departure of any of its members.
Perpetual succession, means that the membership of a company may keep changing from
time to time, but that can not affect its continuity. As per Professor Gower, “Members may
come and members may go, but the company can go on forever.

(vii) Separate Property

A company being a legal person and entirely distinct from its members, is capable of owning,
enjoying and disposing of its property in its own name. The company being a legal person is
capable of Holding, Controlling, Managing and disposing off its property. In a famous case of
R.F. Perumal v. H. John Deavin it was held that no member of a Co. can claim himself to be
the owner of the company’s property during its existence or in its winding-up”. A member
does not even have an insurable interest in the property of the company.

(viii) Transferability of Shares

The capital of a company is divided into smaller parts known as shares. The shares being
movable property are freely transferable, so that no shareholder is permanently bound to
remain the member of the company. The very purpose of forming Companies was that the
shares of Co. should be
capable of being easily transferred. However, there are certain restrictions created under the
Companies Act with respect to transferability of shares of a Private Company.

(ix) Capacity to Sue and Be Sued

A company being a legal person, can sue and be sued in its own name. To sue, means to file
legal proceedings against any person or to bring a civil suit in a court of law. Similarly, all
legal proceedings against the company must be filed in the name of the Co. only and not
against its Members.

(x) Contractual Rights

A company, being a legal person separate and different from its members, can enter into
contracts for the conduct of its business activities, in its own name. A shareholder cannot
enforce a contract made by his company, he is neither a party to such contracts, nor entitled to
the benefits out of such contracts, as a company is not a trustee of its shareholders.
(xi) Limitation of Action

A company cannot go beyond the powers stated in its Memorandum of Association. The
Memorandum of Association of a company regulates the powers and specifies the objects for
which the company is incorporated and provides the boundary within which the Co. must
function. The transactions and activities of the company becomes limited within the scope of
its Memorandum of Association. This is also known as Doctrine of Ultra Vires.
Above are the important features of a Company.
Q 3 Explain the case law of Salomon v/s. Salomon & Co. Limited
A 3 The case of Salomon v. Salomon and Co. Ltd.
The above case has clearly established the principle that once a company has been validly
constituted under the Companies Act, it becomes a legal person distinct from its members and
for this purpose it is immaterial whether any member or members holds/hold a large or small
proportion of the shares, and whether he holds those shares as beneficially or as a mere
trustee.
In this case, Salomon had, for some years, carried on a proprietary business as a leather
merchant and boot manufacturer. He formed a limited company consisting of himself, his
wife, his daughter and his four sons as the shareholders, all of whom subscribed to 1 share
each so that the actual cash paid as capital was £7. Salomon sold his business (which was
perfectly solvent at that time), to the Company formed by him for the sum of £38,782. The
company’s nominal capital was £40,000 in £1 shares. In part payment of the purchase money
for the business sold to the company, debentures of the amount of £10,000 secured by a
floating charge on the company’s assets were issued to Salomon, who also applied for and
received an allotment of 20,000 £ 1 fully paid shares. The remaining amount of £8,782 was
paid to Salomon in cash. Salomon was the managing director and two of his sons were other
directors.
The company soon ran into difficulties and the debenture holders appointed a receiver and the
company went into liquidation. The total assets of the company amounted to £6050, its
liabilities were £10,000 secured by debentures, £8,000 owing to unsecured trade creditors,
who claimed the whole of the company’s assets, viz., £6,050, on the ground that, as the
company was a mere ‘alias’ or agent for Salomon, they were entitled to payment of their
debts in priority to debentures. They further pleaded that Salomon, as a principal beneficiary,
was ultimately responsible for the debts incurred by his agent or trustee on his behalf. Their
Lordships of the House of Lords observed: “the company is a different person altogether
from the subscribers of the memorandum; and though it may be that after incorporation the
business is precisely the same as before, the same persons are managers, and the same hands
receive the profits, the company is not, in law, their agent or trustee.”

Q 4 What are the distinction points between a Co. and a Partnership Firm?

A 4 Distinction is as follows -
A partnership firm does not enjoy separate legal status separate from its partners
persons who form the partnership. A company is a distinct legal person.

In a partnership, the property of the firm is the property of the individual partners comprising
it. In company, it belongs to the company and not to

the individuals who are its members.

Creditors of a partnership firm are creditors of individual partners and the partners are jointly
and severally liable to them. The creditors of a company can take action only against the
company and not against its members.

Partners are the agents of the firm. A partner can act on behalf of and in the name of the firm.
He can incur liabilities on behalf of Firm as well as other partners. Members of a company
are not its agents. A member of a company cannot act on behalf of the Co., neither he can
incur liabilities on behalf of the Co. nor on behalf of other Members.

A partner cannot transfer his share without the consent of the other partners. A
company’s share is ordinarily transferrable without the consent of other members.
A partner’s liability is always unlimited. The liability of shareholder may be limited either by
shares or guarantee.

The death or insolvency of a partner dissolves the firm. A company has perpetual succession,
i.e.; the death or insolvency of a shareholder or all of them does not affect the existence of the
company.
The accounts of a firm are not compulsorily required to be audited. A company is required to
have its accounts audited annually by a chartered accountant.

Q 5 Distinction between a Hindu Undivided Family Business and a Company

A 5 The points of distinction are as follows:

HUF comes into existence out of the Members of the Same family, whereas a Co. comes into
existence out of Members of the same or different families.

In case of HUF the Karta has the Sole right to handle the Business of the Family and
generally he is the eldest person in the Family, whereas in case of a Co. the business is
handled by the Board of Directors elected by the Members of the Co. and there is no concept
of seniority.

A person becomes member of HUF only by Birth, whereas in case of a Co. a person can
become Member as per the provisions of Co. Law and not by Birth.
A HUF can be formed without Registration, whereas a Co. comes into existence only by
Registration.

Q 6 Distinction between a Company and an LLP?

A 6 An LLP is a hybrid or a combination form of an organisation wherein the elements of
Partnership as well as Company are covered. It is a Partnership but enjoying a privilege of
Limited Liability. The main points of distinctions between a Co. and an LLP would be:

An LLP has less compliance requirements under the Companies Act, whereas a Co.
specifically a Public Co. has various compliances under the Act.
An LLP can be formed with just to partners, whereas a Public Co. requires a minimum of 7
Subscribers.

An LLP has LLP Agreement binding the actions of its Partners, whereas a Co. has
Memorandum of Association and Articles of Association controlling the working of its
Members and Directors.
An LLP is managed mainly by Designated Partners, whereas a Co. is managed by the Board
of Directors appointed by the Shareholders.

Q 7 What is Lifting of Corporate Veil?

A 7 The famous judgement of Salomon v/s Salomon & Co. Ltd. Established the basic and
cardinal concept of Co. Law that upon incorporation a Co. gets separate legal status, separate
from its Members and in the eyes of Law, a Co. is the Owner of its Assets and it is the Co.
only which is liable for its Liabilities and transactions. The Creditors of the Co. are not the
Creditors of the individual members and hence, they cannot sue the Members for their
outstanding dues. Neither they can sue the Members for the Specific Performance of any
contracts entered into by the Co. The responsibility for the mistakes and errors committed by
the Co. shall be on the Co. only and not on the Members. Similarly, the Assets and Liabilities
of the Members are the Assets and Liabilities of theirs only and the Co. cannot claim any
right over the Assets of its Members. Similarly, the liability or punishment for the wrongful
actions of the Members done by them in their individual capacity shall that on Members only
and the Co. cannot be held responsible.
Hence, from the above discussion we can assume or visualise that there is a shield or curtain
or veil between a Co. and its Members. The Co. is on one side and the Members are on the
other side, both are separate.

However, the concept of Separate Legal Status as discussed above may be misused by the
Fraudulent Entrepreneurs and the Corporate shield may be used by them to cheat general
pubic as well as the Creditors or Suppliers of the Co. then in those cases the Courts are
empowered to ignore separate legal status or the court can break through the corporate shield
between the Co. and its Members and punish the Members for wrong doing of the Co. or vice
versa, this is known as Lifting of Corporate Veil.

Following are a few cases or situations where the Courts had Lifted the Corporate Veil:
(a) Where the corporate veil can be used for committing fraud as mentioned in a famous
case of - Jones v. Lipman. In this case, A agreed to sell certain land to B. Pending completion
of formalities of the said deal, A sold and transferred the land to a company which he had
incorporated with a nominal capital of £100 and of which he and his clerk were the only
shareholders and directors. This was done in order to escape a decree for specific
performance in a suit brought by B. The Court held that the company was the creature of A
and a mask to avoid or complete the contract. And hence, by lifting the Corporate Veil the
Court ordered A to complete the Contract with B.
(b) Where a corporate veil was only an agency instrumentality as mentioned in a famous
case of In Re. R.G. Films Ltd. An American company produced a film in India technically in
the name of a British Company, 90% of whose capital was held by the President of the
American company which financed the production of the film. The British Co. was formed
only to take the benefits of Lower Tax Rates. Board of Trade refused to register the film as a
British film which stated that English company acted merely as an Agent of the American
corporation.
(c) Where the conduct conflicts with public policy, courts lifted the corporate veil for
protecting the public policy as decided in a famous case of

Daimler Co. Ltd. v. Continental Tyre & Rubber Co., it was held that a company will be
regarded as having enemy character, if the persons having actual control of its affairs are
residents in an enemy country or, where they were acting under instructions from or on behalf
of the enemy. In this case a few Germans incorporated a Co. in Britain. But during the period
of world war it was held to be an Enemy Co. and was asked to suspend its operations in
Britain.
(d) Where it was found that the sole purpose for which the company was formed was to
evade taxes the Court can ignore the concept of separate entity and make the individuals
forming the Co. liable to pay the taxes, as held in a famous case of
In Re. Sir Dinshaw Maneckjee Petit, in this case an assessee who was a wealthy man
enjoying large dividend and interest income. He formed four private companies and agreed
with each to hold a block of investment as an agent for it. Income received was credited in
the accounts of the company but the company handed back the amount to him as a pretended
loan. This way he divided his income in four parts in a bid to reduce his tax liability. But it
was held “the company was formed by the assessee purely and simply as a means of avoiding
tax and the company was nothing more than the assessee himself. The Court decided to
disregard the corporate entity as it was being used for tax evasion.

(e) Where the Primary intension of forming a Co. is to avoid a Welfare Legislation then
the Court reserves a right to ignore separate legal status, as held by the Court in a famous
case of The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The
Associated Rubber Industries Ltd., Bhavnagar. The facts of the case were that a new company
was created wholly by the principal company with no assets of its own except those
transferred to it by the principal company, with no business or income of its own except
receiving dividends from shares transferred to it by the principal company i.e. only for the
purpose of splitting

the profits into two hands and thereby reducing the obligation to pay bonus. The Supreme
Court of India held that the new company was formed as a device to reduce the gross profits
of the principal company and thereby reduce the amount to be paid by way of bonus to
workmen. The dividends received by the new company should, therefore, be taken into
account in assessing the gross profit of the principal company. As per the provisions of
Payment of Bonus Act, the payment of Maximum Bonus depends upon the Higher Profits
earned by the Employers.

(f) Where the Primary intension of forming a Co. was to Cheat the General Public or
Defraud the Creditors or for any other wrongful purpose, the Court can avoid separate legal
status and make the Members liable for the Companies Transactions or Vice Versa. This is a
general power vested in the Court of Law under the Companies Act and hence, there are no
case laws required but any and every case can fall in this category if the intensions are herein
before mentioned.

Hence, from the above discussion we can say that under normal ordinary circumstances a Co.
is separate from its members but if the corporate format is misused then the Court can ignore
the Separate identity.
PREVENTION OF OPPRESSION AND MISMANAGEMENT

Sec. 241 Application to Tribunal for relief in cases of oppression, etc —

(1) Any member of a company who complains that—

(a) the affairs of the company have been or are being conducted in a manner prejudicial to
public interest or in a manner prejudicial or oppressive to him or any other member or
members or in a manner prejudicial to the interests of the company; or

(b) a material change has taken place in the management or control of the company, whether
by an alteration in the Board of Directors or in the ownership of the company's shares 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 members,

may apply to the Tribunal for an order under this Chapter.

(2) 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 under this Chapter.

Sec. 244 Right to apply under section 241 —

(1) The following members of a company shall have the right to apply under section 241,
namely —

(a) in the case of a company having a share capital, not less than 100 members 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;

(b) in the case of a company not having a share capital, not less than one-fifth of the total
number of its members.
Provided that the Tribunal may, on an application made to it in this behalf, waive all or any of
the requirements specified in clause (a) or clause (b) so as to enable the members to apply
under section 241.

Sec. 242 Powers of Tribunal —

(1) If, on any application made under section 241, the Tribunal is of the opinion—
(a) 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

(b) that to wind up the company would unfairly prejudice such member or members, but the
facts 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 bring to an end the matters complained of, make such order
as it thinks fit.
(2) The Tribunal may provide for —
(a) the regulation of conduct of affairs of the company in future;

(b) the purchase of shares of any members of the company by other members thereof or by
the company;
(c) the termination, setting aside or modification, of any agreement arrived at, between the
company and the managing director, any other director, upon such terms and conditions as
may, in the opinion of the Tribunal, be just and equitable in the circumstances of the case;
(d) the setting aside of any transfer, delivery of goods, payment, execution or other act
relating to property made or done by the company within 3 months before the date of the
application under this section;

(e) removal of the managing director, manager or any of the directors of the company;
(f) recovery of undue gains made by any managing director and transfer the same to Investor
Education and Protection Fund or repayment to the victims if known to the Applicants;

(g) appointment of such number of persons as directors as the Tribunal may direct.
Case Law – Foss V/s Harbottle.

AUDIT

Q 1 What are the qualifications of being appointed as an Auditor of the Co.?

A 1 As per Sec. 141 of the Act, following person is eligible to be appointed as auditor of a
Co.:

a) If individual then only a Chartered Accountant and if a firm then majority of partners
practicing in India are Chartered Accountants can be appointed as auditor.
b) Where a firm including a LLP is appointed as an auditor of a company then, only the
partners who are chartered accountants shall be authorized to act and sign on behalf of the
firm.

Q 2 How the First Auditor can be appointed by the Co.?

A 2 The BOD of a Co. shall appoint an individual or a firm as the first auditor within 30 days
from the date of registration of the Co. The appointment of first auditor shall be ratified by
members at the first AGM.
If the BOD fails to appoint the first auditor, then, it will inform the members of the
Co., who shall appoint the first auditor within 90 days at an EGM. The auditor so appointed
shall hold office till the conclusion of the first AGM.

Q 3 How the First Auditor can be appointed by the Govt. Co.?

A 3 In case of Govt. Co. the First auditor shall be appointed by the Comptroller and Auditor
General within 60 days from the date of incorporation and in case of failure to do so, the
BOD shall appoint auditor within next 30 days and on failure to do so by BOD, it shall
inform the members, who shall appoint the auditor within 60 days at an EGM. The first
auditor shall hold office till the conclusion of first AGM.
Q 4 Write in brief the provision regarding Rotational Auditors.
A 4 The Co.’s Act, 2013, has introduced the concept of Rotational Auditors. This is to check
the working of auditors as well as bring a transparency in their working.
Sec.139 (2) of the Act provides for compulsory rotation of auditors. This provision is
applicable to:

a) all listed companies,

b) all unlisted public companies having paid up share capital of Rs. 10 crore or more,
c) all private limited companies having paid up share capital of Rs. 50 crore or more,

d) all companies having paid up share capital below the limit mentioned above, but having
borrowings from public financial institutions, banks or public deposits of Rs. 50 crore or
more.
However, the concept of rotation of auditors shall not apply to OPC and Small companies.
Meaning and implementation of Rotational Auditors: companies mentioned above shall not
appoint or re-appoint an individual as an auditor of the Co. for more than 1 term of 5
consecutive years. An individual auditor, who has completed his term of 5 consecutive years,
shall not be eligible for re-appointment as auditor in the same company for 5 years from the
date of completion.

If an audit firm is appointed as an auditor of the Co., then it cannot be appointed for more
than 2 terms of 5 consecutive years. An audit firm which has completed its 2 terms of 5
consecutive years shall not be eligible for re-appointment as auditor in the same company for
5 years from the completion of such terms.

Also, if any firm/LLP which has one or more partners who are also partners in the outgoing
audit firm/ LLP cannot be appointed as auditors during the 5-year period. In other words, if
two or more audit firms have common partner(s), and one of these firms has completed its 2
terms of 5 consecutive years, none of such audit firms shall be eligible for re-appointment as
auditor in the same company for 5 years.

However, the right of the Co. to remove the auditor or the right of the Auditor to resign from
the Co. is not affected by this provision. That means the auditor can resign or be removed by
the shareholders before completion of his term.

Q 5 Who is Disqualified to be appointed as an auditor of the Co.?

A 5 Sec. 141 the Act prescribes that the following persons shall not be eligible for
appointment as an auditor of a Co.:

a) A body corporate, except LLP, An officer or employee of the Co.,

b) Any partner or employee of the officer or employee of the Co.,

c) A person who himself or his relative or partner is holding any security or interest in the Co.
or any Co. which is its Holding, Subsidiary or Associate Co.,
d) A person who’s relative is holding any security of or interest in the Co. or its Subsidiary or
its Holding or Associate Co. or a Subsidiary of such Holding Co., may hold security or
interest in the Co. of face value not exceeding Rs. 1lakh. In the event of acquiring any
security or interest by a relative, above the prescribed limit then, corrective action to maintain
the limits as specified above shall be taken by the Auditor within 60 days of such acquisition
or interest,
e) A person who’s relative is a director or is in the employment of the Co. as a Director or
KMP,

f) A person who is in full time employment elsewhere,

g) A person who is already auditor of more than 20 companies,
h) A person who has been convicted by a court of an offence involving fraud and a period of
10 years has not elapsed from the date of such conviction,
i) A person who renders any specified service as mentioned in Sec. 144, to the Co. or its
Holding or Subsidiary Co.

Q 6 Which are the services specified u/s 144 of the Co.’s Act.2013?
A 7 An auditor shall not render following services whether directly or indirectly to the Co. or
its Holding Co. or Subsidiary Co. namely:
(a) accounting and book keeping services,

(b) internal audit,

(c) design and implementation of any financial information system,
(d) actuarial services,

(e) investment advisory services,

(f) investment banking services,
(g) rendering of outsourced financial services,
(h) management services and

(i) any other services as may be prescribed.

Corporate Social Responsibility Sec. 135

Applicability
As per section 135(1) of the Companies Act 2013, the CSR provision is applicable to
companies which fulfils any of the following criteria during the immediately preceding
financial year -
Companies having net worth of Rs. 500 crore or more; or Companies having turnover of Rs.
1000 crore or more; or Companies having a net profit of Rs. 5 crore or more.

"Corporate Social Responsibility (CSR)" means the activities undertaken by a Company in

pursuance of its statutory obligation laid down in section 135 of the Act in accordance with
the provisions contained in these rules, but shall not include the following, namely -
(i) activities undertaken in pursuance of normal course of business of the company. However,
any company engaged in research and development activity of new vaccine, drugs and
medical devices in their normal course of business may undertake research and development
activity of new vaccine, drugs and medical devices related to COVID-19 for financial years
2020-21, 2021-22, 2022-23;
(ii) any activity undertaken by the company outside India except for training of Indian sports
personnel representing any State or Union territory at national level or India at international
level;
(iii) contribution of any amount directly or indirectly to any political party under section 182
of the Act;

(iv) activities benefitting only the employees of the company;

(v) activities supported by the companies on sponsorship basis for deriving marketing
benefits for its products or services;

(vi) activities carried out for fulfilment of any other statutory obligations under any law in
force in India.

CSR Committee
Companies covered under sec. 135 must constitute a Corporate Social Responsibility
Committee of the Board to formulate and monitor the CSR policy of a company. Section
135(1) of the Act requires the CSR Committee to consist of 3 directors or more, including at
least 1 Independent director.

Where a company is not required to appoint an independent director, it shall have in its
Corporate Social Responsibility Committee two or more directors.
Where a private company has only 2 directors on the Board, the CSR Committee can be
constituted with these two directors.
The CSR Committee of a foreign company shall comprise of at least 2 persons of which one
person should be resident in India and the other person nominated by the foreign company.

The role and responsibilities of the CSR Committee are:

To formulate and recommend to the Board, a CSR Policy which would indicate the activities
to be undertaken by the company in areas or subject, specified in Schedule VII of the Act. To
recommend the amount of the expenditure to be incurred on the activities undertaken in
pursuance of the CSR policy.

Contributions –

As per section 135 spending of at least 2% of the average net profits of the company made
during immediately 3 preceding financial years.
If a company has not completed the period of three financial years since incorporation, is it
required to comply with the CSR provisions?

As per the provisions of section 135(5), if the Company has not completed the period of three
financial years since incorporation, but it satisfies any of the criteria mentioned in section
135(1), then it has to comply with CSR provisions. The Company will be required to
constitute a CSR committee and comply with spending of at least 2% of the average net
profits of the company made during such immediately preceding financial years since the
date of incorporation.
Computation of net profit -

"Net profit" as per explanation of Section 135(5) shall not include such sums as may be
prescribed, and shall be calculated as per section 198.
Indian company: The CSR Rules have clarified –

In order to determine the 'net profit', dividend income received from another Indian company
or profits made by the company from its overseas branches have been excluded. Moreover,
the 2% CSR is computed as 2% of the average net profits made by the company during the
immediately preceding three financial years.

Foreign company: The CSR Rules prescribe that in case of a foreign company that has its
branch or a project office in India, CSR provision will be applicable to such offices.
Surplus arising out of the CSR Activities -

Any surplus arising out of the CSR activities shall not form part of the business profit of a
company and shall be transferred back into the same project or shall be transferred to the
Unspent CSR Account.
Excess CSR spends may be set off -

Where a Company spent on CSR in excess of the requirement (i.e., 2%), such excess amount
may be set-off against the requirement of the CSR Spending up to the immediate succeeding
3 financial years.

Penalty on the Company:

• Up to twice the Unspent CSR amount, or Rs.1 Crore, whichever is less.

Penalty on every officer of the company who is in default:
• 1/10th of such amount or Rs.2 Lakhs, whichever is less.

Insider Trading

Insider trading essentially denotes dealing in a company's securities on the basis of

confidential information, relating to the company, which is not published or not known to the
public, used to make personal profits or avoid loss.

The United States of America was the first country to formally enact a legislation to
effectively tackle the menace of insider trading.
Section 12A of SEBI ACT 1992 -
No person shall directly or indirectly —
a) engage in insider trading; b) deal in securities while in possession of material or non-
public information or communicate such material or non-public information to any other
person, in a manner which is in contravention of the provisions of this Act or the rules or the
regulations made thereunder.
Section 15 G of SEBI ACT 1992 -

Penalty for insider trading.

If any insider who — either on his own behalf or on behalf of any other person, deals in
securities of a body corporate listed on any stock exchange on the basis of any unpublished
price-sensitive information; or communicates any unpublished price-sensitive information to
any person, with or without his request for such information except as required in the
ordinary course of business or under any law; or hires any person to deal in any securities of
any body corporate on the basis of unpublished price-sensitive information, shall be liable to
a penalty which shall not be less than ten lakh rupees but which may extend to twenty-five
crore rupees or three times the amount of profits made out of insider trading, whichever is
higher.

Meaning of Insider -
"Insider" means any person who is:

(i) a connected person; or

(ii) in possession of or having access to unpublished price sensitive information.

Meaning of Person deemed to be connected person -

"Person is deemed to be a connected person", if such person is -

(a) an immediate relative of connected person(s); or

(b) a holding company or associate company or subsidiary company; or

(c) a Broker or Sub Broker or an Underwriter or an employee or director thereof; or

(d) an investment company, asset management company or an employee or director thereof;
or

(e) an official of a stock exchange; or

(f) a member of board of trustees of a mutual fund or a member of the board of directors of
the asset management company of a mutual fund; or

(g) a banker of the company.

Meaning of Unpublished price sensitive information -

"Unpublished price sensitive information" means any information, relating to a company or
its securities, that is not generally available which upon becoming generally available, is
likely to materially affect the price of the securities and shall, ordinarily include the following
–

Financial results;
Dividends;

Change in capital structure;

Mergers, de-mergers, acquisitions, and expansion of business;

Changes in key managerial personnel.

Debentures

According to Section 2(30) of the Companies Act, 2013, "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.
Further it is provided that -

(a) the money instruments mentioned in Chapter III-D of the RBI Act, 1934; and
(b) such other instrument prescribed by the Central Government shall not be treated as
debenture.

Kinds of Debentures –
a) Non-Convertible Debentures

b) Partly Convertible Debentures

c) Fully convertible Debentures
d) Optionally Convertible Debentures

e) Secured Debentures
f) Unsecured Debentures

g) Redeemable Debentures
h) Perpetual or Irredeemable Debentures - after the commencement of the Companies
Act, 2013, now a company cannot issue perpetual or irredeemable debentures.

i) Registered Debentures
j) Bearer debentures
An issue of secured debentures may be made, provided the date of its redemption shall not
exceed 10 years from the date of issue. A company engaged in the setting up of infrastructure
projects may issue secured debentures for a period exceeding 10 years but not exceeding 30
years.

LOANS TO DIRECTORS (SECTION 185)

According to section 185(1), no company shall, directly or indirectly, advance any loan,
including any loan represented by a book debt to, or give any guarantee or provide any
security in connection with any loan taken by —
(a) any director of company, or of a company which is its holding company or any partner or
relative of any such director; or
(b) any firm in which any such director or relative is a partner.
(2) Exceptions to sub-section (1) —

(a) the giving of any loan to a managing or whole-time director—

(i) as a part of the conditions of service extended by the company to all its employees; or

(ii) pursuant to any scheme approved by the members by a special resolution; or

(b) a company which in the ordinary course of its business provides loans or gives guarantees
or securities and in respect of such loans an interest is charged at a rate not less than the
prevailing rate; or

(c) any loan, guarantee or security made by a holding company to its wholly owned
subsidiary company; or

(d) any guarantee given or security provided by a holding company to its subsidiary
company.
(3) If any loan is advanced or a guarantee or security is given or provided or utilised in
contravention of the provisions of this section —

(i) the company shall be punishable with fine which shall not be less than five lakh rupees but
which may extend to twenty-five lakh rupees;
(ii) every officer of the company who is in default shall be punishable with imprisonment for
a term which may extend to six months or with fine which shall not be less than five lakh
rupees but which may extend to twenty-five lakh rupees; and

(iii) the director or the other person to whom any loan is advanced or guarantee or security is
given shall be punishable with imprisonment which may extend to six months or with fine
which shall not be less than five lakh rupees but which may extend to twenty-five lakh
rupees, or with both.
LOAN AND INVESTMENT BY COMPANIES (SECTION186)
No Company shall, directly or indirectly:

(a) give any loan to any person or other body corporate;

(b) give any guarantee, or provide security, in connection with a loan to any other body
corporate or person; and

(c) acquire, by way of subscription, purchase or otherwise the securities of any other body
corporate;

exceeding 60% of its paid-up share capital, free reserves and securities premium account or
100% of its free reserves and securities premium account, whichever is more.
Explanation - For the purposes of this sub-section, the word "person" does not include any
individual who is in the employment of the company.

No loan or investment shall be made or guarantee or security given by the company unless
the resolution at a meeting of the Board is passed with the consent of all directors present at
the meeting.
Where the aggregate of the loans and investment so far made exceed, the limits specified
under Section 186 of the Act i.e., 60% of its paid-up share capital, free reserves and securities
premium account or 100% of its free reserves and securities premium account whichever is
more, investment or loan can be made or guarantee can be given or security can be provided
only by passing a special resolution in general meeting.
NON-APPLICABILITY OF SECTION 186

Exemptions
Section 186 has following exceptions -

(a) to any loan, guarantee, security or any investment made by a Banking

company, or an Insurance company, or a Housing finance company in the ordinary course of
its business;

(b) to any investment made by an investment company;

(c) a Government company engaged in defence production.

Penalty for Contravention of Section 186 -

For Company: If a company contravenes the provisions of this section, the company shall be
punishable with fine which shall not be less than twenty-five thousand rupees but which may
extend to five lakh rupees; and
For Officers: Every officer of the company who is in default shall be punishable with
imprisonment for a term which may extend to two years and with fine which shall not be less
than twenty-five thousand rupees but which may extend to one lakh rupees.

RELATED PARTY TRANSACTIONS Sec. 188

According to Section 2(76) of Companies Act 2013, "related party", with reference to a
company, means —
(i) a director or his relative;

(ii) key managerial personnel or his relative;

(iii) a firm, in which a director, manager or his relative is a partner;

(iv) a private company in which a director or manager or his relative is a member or director;
(v) a public company in which a director or manager is a director and holds along with his
relatives, more than two per cent (2%) of its paid-up share capital;

(vi) any body corporate which is — a holding, subsidiary or an associate company of such
company.
List of relatives in terms of Section 2(77)

Relative means anyone who is related to another if -

(1) they are members of Hindu Undivided Family;
(2) they are husband and wife; or

(3) A person shall be deemed to be the relative of another, if he or she is related to another in
the following manner, namely-

(1) Father: Provided that the term "Father" includes step-father.

(2) Mother: Provided that the term "Mother" includes the step-mother.
(3) Son: Provided that the term "Son" includes the step-son.

(4) Son's wife

(5) Daughter

(6) Daughter's husband

(7) Brother: Provided that the term "Brother" includes the step-brother;

(8) Sister: Provided that the term "Sister" includes the step-sister.
Section 188 of the Act provides that except with the consent of the Board of Directors given
by a board resolution, no company shall enter into any contract or arrangement with a related
party with respect to -

(i) sale, purchase or supply of any goods or materials;

(ii) sale, purchase or supply of property of any kind;

(iii) leasing of property of any kind;

(iv) sale, purchase or supply of any services;

(v) appointment of any agent for purchase or sale of goods, materials, services or property;
(vi) such related party is appointment to any office in the company, its subsidiary company or
associate company.

However, such approval by the Board of Directors will not be required for transactions
entered in the ordinary course of business and on at arm's length price.
Prior Approval of the Shareholders by passing an Ordinary Resolution –

If Sale, purchase or supply of any goods or materials, directly or through agent exceeds the
value - 10% of annual turnover;
If Sale, purchase or supply of property of any kind, directly or through agent exceeds the
value - 10% of net worth;

Leasing of property of any kind exceeds the value - 10% of annual turnover
If Sale, purchase or supply of any services, directly or through agent exceeds the value - 10%
of annual turnover;

If Appointment to any office in the company, its subsidiary company or associate company,
exceeds Remuneration - Rs. 2.50 lakh per month.

Key Managerial Personnel means—

(i) the chief executive officer or the managing director or the manager;
(ii) the company secretary;
(iii) the whole-time director;
(iv) the chief financial officer;
(v) such other officer, not more than one level below the directors who is in
whole-time employment, designated as key managerial personnel by the Board;
and
(vi) such other officer as may be prescribed.
APPOINTMENT OF KMP:
Sections 203 of the Companies Act, 2013 provides that every listed company
and every unlisted public company having a paid-up share capital of 10 crore
rupees or more shall have whole-time key managerial personnel i.e., MD or
CEO or Manager or in their absence a WTD and CS and CFO.
Further, Sections 203 of the Companies Act, 2013 read with rule 8A of the
Companies, Rules, 2014 provides that every private company which has a paid-
up share capital of 10 crore rupees or more shall have a whole-time Company
Secretary.
Every key managerial personnel of a company shall be appointed by means of a
resolution of the Board containing the terms and conditions of the appointment
including the remuneration.
Whole-time key managerial personnel shall not hold office in more than one
company except in its subsidiary company at the same time. However, he can
hold directorship in other companies with the permission of the Board.
A company may appoint a person as its managing director, if he is the managing
director or manager of one, and of not more than one, other company and such
appointment is made by a resolution passed at a meeting of the Board with the
consent of all the directors present at the meeting.
If the office of any whole-time key managerial personnel is vacated, the
vacancy shall be filled-up by the Board at a meeting of the Board within a
period of six months from the date of such vacancy.

Remuneration of Managerial Personnel:

Q Are the Directors’ eligible to claim Remuneration from the Co.? What are the
provisions regarding payment of Remuneration to Executive as well as Non-
Executive Directors?
Ans – Yes, the Directors are eligible to claim Remuneration from the Co. The
remuneration to the Directors’ is in 4 forms:
Sitting Fees
 Remuneration
Commission
Professional or Technical Fees.
The provision regarding the payment of remuneration to directors is covered u/s
197 of the Co.’s Act, 2013. As per this provision, while calculating the
remuneration, Sitting Fees and Professional or Technical Fees should not be
considered.
It means what is counted is Remuneration and Commission.
Overall Ceiling:
The total managerial remuneration payable by a public company, to its directors,
including managing director and whole-time director, and its manager in respect
of any financial year shall not exceed 11%, of the net profits of that company.
However, (i) the remuneration payable to any one managing director; or whole-
time director or manager shall not exceed 5% of the net profits of the company
and if there is more than one such director remuneration shall not exceed 10%
of the net profits to all such directors and manager taken together.
(ii) the remuneration payable to directors who are neither managing directors
nor whole-time directors shall not exceed —
(A) 1% of the net profits of the company, if there is a managing or whole-time
director or manager;
(B) 3% of the net profits in any other case.
Provided that the company in general meeting may, with the approval of
the Central Government, authorise the payment of remuneration exceeding
11%, of the net profits of the company.
The limits on remuneration for directors in a Public Limited Company having
inadequate profits or having losses:

Effective Capital (in Threshold limit of remuneration Threshold limit of remuneration

INR) payable to Managerial Person (Yearly) payable to other directors (Yearly)
Negative or less than 5 60 Lakhs 12 Lakhs
crores

5 crores and above but 84 Lakhs 17 Lakhs

less than 100 crores.

100 crores and above but 120 Lakhs 24 Lakhs

less than 250 crores.

250 crores and above. 120 lakhs plus 0.01% of the effective 24 Lakhs plus 0.01% of the effective
capital in excess of Rs.250 crores: capital in excess of Rs.250 crores:]”

For Private Company

Director's remuneration in private companies is determined through their
Articles of Association. Private companies have the flexibility to determine
remuneration. The Company’s Act does not prescribe specific provisions
regarding the remuneration of managerial personnel of Private Companies.

WINDING UP OF COMPANIES

Winding up of a company is defined as a process by which the life of a company is brought to

an end and its property is used for the benefit of its members and creditors.
In words of Professor Gower, "Winding up of a company is the process whereby its life is
ended and its property is applied for the benefit of its members & creditors. An Administrator,
called a liquidator is appointed and he takes control of the company, collects its assets, pays
its debts and finally distributes any surplus among the members in accordance with their
rights."

According to Halsbury’s Laws of England, "Winding up is a proceeding by means of which

the dissolution of a company is brought about & in the course of which its assets are collected
and realised; and applied in payment of its debts; and when these are satisfied, the remaining
amount is applied for returning to its members the sums which they have contributed to the
company in accordance with Articles of the Company".

Winding up does not necessarily mean that the company is insolvent. A perfectly solvent
company may be wound up by the approval of members in a general meeting.
There are differences between winding up and dissolution. At the end of winding up, the
company will have no assets or liabilities. When the affairs of a company are completely
wound up, the dissolution of the company takes place. On dissolution, the company's name is
struck off the register of the companies and its legal personality as a corporation comes to an
end.

Legal Provisions for Winding up of Companies

Section 2(94A) of the Companies Act 2013 provides the following definition of Winding up.

Winding up" means winding up under this Act or liquidation under the Insolvency and
Bankruptcy Code, 2016, as applicable."
The procedures for Winding up of companies are provided under Chapter XX of the
Companies Act, 2013 and Insolvency and Bankruptcy Code of India 2016.
WINDING UP BY THE TRIBUNAL
Circumstances in Which Company May be Wound Up by Tribunal -

Section 271 of the Companies Act, 2013 provides that a company may, on a petition under
section 272, be wound up by the Tribunal under following circumstances-
(i) if the company has, by special resolution, resolved that the company be wound up by the
Tribunal;
(ii) if the company has acted against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order, decency or morality;

(iii) if on an application made by the Registrar, the Tribunal is of the opinion that the affairs
of the company have 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 or misconduct and that it is proper that the company be
wound up;

(iv) 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; or
(v) if the Tribunal is of the opinion that it is just and equitable that the company should be
wound up".

Petition for Winding Up

A petition to the Tribunal for the winding up of a company shall be presented by —

(a) the company;

(b) any contributory or contributories;
(c) all or any of the persons specified in clauses (a) and (b);
(d) the Registrar;
(e) any person authorised by the Central Government in that behalf; or
(f) in a case falling under clause (ii) of section 271, by the Central Government or a State
Government.
A petition presented by the company for winding up before the Tribunal shall be admitted
only if accompanied by a statement of affairs. 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 60 days of receipt of such petition.

Powers of Tribunal
Section 273(1) of the Companies Act, 2013 provides the Tribunal may, on receipt of a
petition for winding up under section 272 pass any of the following orders, namely —

(a) dismiss it, with or without costs;

(b) make any interim order as it thinks fit;

(c) appoint a provisional liquidator of the company till the making of a winding up order;
(d) make an order for the winding up of the company with or without costs; or

(e) any other order as it thinks fit.

An order under this sub-section shall be made within 90 days from the date of presentation of
the petition.

VOLUNTARY WINDING UP

Chapter V of the Insolvency and Bankruptcy Code of India 2016 deals with the Voluntary
Liquidation of Corporate Persons.

Section 59 of IBC, 2016 provides that:

(1) A corporate person which intends to liquidate itself voluntarily and has not committed any
default may initiate voluntary liquidation proceedings under the provisions of this Chapter.

(2) The voluntary liquidation proceedings of a corporate person registered as a company shall
meet the following conditions, namely —
(a) a declaration from majority of the directors of the company verified by an affidavit stating
that —

(i) they have made a full inquiry into the affairs of the company and they have formed an
opinion that either the company has no debt or that it will be able to pay its debts in full from
the proceeds of assets to be sold in the voluntary liquidation; and
(ii) the company is not being liquidated to defraud any person;
(b) the declaration under sub-clause (a) shall be accompanied with the following documents,
namely —

(i) audited financial statements for the previous two years;

(ii) a report of the valuation of the assets of the company;
(c) a special resolution of the members of the company requiring the company to be
liquidated voluntarily and appointing an insolvency professional to act as the liquidator.
(4) The company shall notify the Registrar of Companies and the Insolvency Board about the
resolution to liquidate the company.

(5) Where the affairs of the corporate person have been completely wound up, and its assets
completely liquidated, the liquidator shall make an application to the Adjudicating Authority
for the dissolution of such corporate person.
(8) The Adjudicating Authority shall on an application filed by the liquidator pass an order
that the company shall be dissolved from the date of order.

(9) A copy of an order under sub-section (8) shall within 14 days from the date of such order,
be forwarded to the ROC.

Who is a Promoter?
According to Justice C. Cockburn. “Promoter is 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.”
The carrying of persons on the ground of profit to run a business is called promoters. The role
of the promoter is to make a detailed investigation of the weakness and the strongest of the
idea and determine the amount of capital to be invested and estimate the operating expense
and probable income

The concept of the promoter is a term of business and not that of law. It has not been defined
anywhere in the act.
According to L.J. Brown. “The term promoter is a term not of law but of business, usefully
summing up in a single word a number of business operations familiar to the commercial
world by which a company is generally brought into existence.”
According to Justice C. Cockburn. “Promoter is 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.”

According to Guthmann and Dougall. “Promoter is the person who assembles the men, the
money and the materials into a going concern.”
According to Palmer, “Company promoter is a person who originates a scheme for the
formation of the company, has the memorandum and the articles prepared, executed and
registered and finds the first directors, settles the terms of preliminary contracts and
prospectus (if any) and makes arrangement for advertising and circulating the prospectus and
placing the capital”

Functions of Promoters of a Company

(1) The formation of an idea and forming the company and exploring the possibilities
(2) To conduct the negotiation for the purchase of a business

(3) To collect the number for the signing of the MOA and the AOA
(4) To decide the name of the company, location of the registered office, amount and form of
share capital

(5) To get the MOA and the AOA drafted and printed
(6) To arrange for the minimum subscription
(7) To arrange for the registration of the company and certificate of incorporation.

Rights of Promoters

(1) Right to Indemnity

The promotors are severally and jointly liable for any false statement given in the prospects
therefore when more than one person acts as the promoter of the company, one promoter can
claim against another promoter for the compensation and damages paid by him.

(2) Right to Receive the legitimate Preliminary expenses

He has the right to recover the legitimate expenses which had to spend during the process of
the company in cost of advertisement, fees for the solicitor, etc. The right to receive the
preliminary expenses is not a contractual right. It depends upon the discretion of the directors
of the company
(3) Right to receive the remuneration

The right to receive remuneration is not a contractual right. It completely depends on the
company to make sure to provide the same or not. n some cases, articles of the company
provide for the directors to pay a specified amount to promoters for their services but this
does not give the promoters any contractual right to sue the company.

Duties of Promoters of a Company

(1) To disclose the secret profit
The promotor should not make any secret profits. If in case he has it is his duty to disclose the
same he is empowered to deduct the reasonable expense incurred by him

(2) To disclose all the material facts

The promotor of the company must disclose all the material facts and information,
(3) The promoter must make good to the company what he has obtained as a trustee

The promotor has a fiduciary relationship with the company. It is the duty of the promotor to
make the best for his company to whatever he has obtained ad a trustee.

(4) Duty to disclose the private arrangement

It is the duty of the promoter to disclose all the private arrangements resulting in him profit
from the promotion of the company.

(5) Duty of promoter against the future allottees

The promotor has a fiduciary relationship with the company. In the same way, the promotor
also has a fiduciary relationship with the future allottees of the share.

Liabilities of Promoters of a Company

(1) Liability to account for profits
The promoter is liable to account to the company for all secret profits made by him without
full disclosure to the company. They will sue the promotor for the amount of profit and
recover the same with interest
(2) Personal Liability

The promoter is personally liable for all contracts made by him on behalf of the company
until the contracts have been discharged or the company takes over the liability of the
promoter.
(3) Liability of the misstatement in the prospectus

In the case of Mismanagement of the prospectus, the promotor is liable and needs to pay
compensation of every share and debenture for any loss or damage sustained due to the
wrong information on the prospectus.
(4) Liability at the time of winding up the company

In the Case of winding up of the company, on an application made by the official liquidator,
the court may make a promoter liable for misfeasance or breach of trust. Further, where fraud
has been alleged by the liquidator against a promoter, the court may order his public
examination

What are the Civil, Criminal & Tortious Liabilities against the Companies?

Liability in Tort
It is difficult to describe precisely the circumstances under which this can arise. The courts
have therefore attempted to strike a balance between legal concepts, such as

1] An incorporated corporation should be treated as separate from its owners, directors, and
officers and as distinct from its shareholders.
2] For their tortious acts, anyone must be held responsible.

As far as a tort is concerned, a company usually has a degree of responsibility that must be
met, depending on the extent and consequence of the tort, for the tort committed by its
directors and/or workers during the course of their employment.
In the case of Williams and another v Natural Life Health Foods Ltd, it considered whether a
business director should be personally held responsible for a reckless misrepresentation. The
House of Lords held that a director would be held liable in compliance with the rules of
common tortuous principles only if the presumed personal responsibility for the
representation had been assumed and the other party fairly depended on that presumption of
liability.

Companies Act- Civil Liability

A civil liability was levied pursuant to misstatements in the prospectus. If any person has
subscribed to the company’s securities containing mistakes in prospectus and therefore has
sustained any harm or loss, the director of the company, the promoter of the company and any
person referred to in the prospectus will be liable for reimbursement to individuals who have
suffered any loss due to mistakes in prospectus.
Vicarious Liability

The corporation is an artificial entity with no brain or body of its own, but it will be held
responsible during the course of its employment for the unlawful actions committed by its
agents or servants. This liability is founded on the vicarious liability principle. Therefore, the
company is responsible for the wrongs of its workers and agents just like a master is held
liable for the wrongful and negligence of his servants.

Companies Act- Criminal Liability

Under the Companies Act, 2013, if a prospectus has been issued by a corporation and is
circulated and distributed among the general public or creditors and contains such omissions
or false statements then, any person who has approved the issuance of the prospectus shall be
liable for fraud in accordance with Section 447. Section 447 specifies that any person found
guilty of fraud within the management of the company shall face imprisonment for up to 10
years and be liable for a fine that may be three times the amount involved.

Quorum for an AGM

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

5 members personally present at the meeting if the number of members is within 1000.
15 members present at the meeting if the number of members is more than 1000 but within
5000.

30 members present at the meeting if the number of members is more than 5000.
In case the quorum for the meeting is not present within half an hour from the scheduled
time, the meeting will be adjourned to the same day in the following week for the same time
and at the same place.

Quorum for Board Meeting

Section 174 is not be applicable for One Person Company as it has only one director on its
Board. As per Section 174(1) quorum for Board meeting shall be 1/3 rd of total strength or 2
directors whichever is higher. For the purpose of quorum, directors participated through
Video conferencing or audio-visual means shall also be counted. Provided that the quorum
shall not be less than 2 members. Any fraction of number of Director shall be rounded off as
one.
As per section 174(2) if at any time the number of directors is reduced below quorum, then
the continuing directors may act for the purpose of increasing the number of directors to that
fixed for quorum, or of summoning a general meeting of the company and for no other
purpose.

Modes of acquiring Membership in a Company –

By Subscribing to the MOA
By Allotment

By Agreement in Writing
By Transfer

By Transmission
By Estoppel.

ACCOUNTS

Q 1 What is the meaning of Books of Account?

A 1 As per Sec. 2(13) of the Act, books of account include those records maintained by the
Co. in respect of —
• all its receipts and expenditure,
• all sales and purchases of goods and services,

• the assets and liabilities of the company,

• cost records in the case of a specified company.

Q 2 What is the meaning of Financial Statement?

A 2 As per Sec. 2(40) of the Act, financial statement includes

a) balance sheet prepared at the end of the F.Y.

b) profit and loss account or income & expenditure account for the F.Y.

c) cash flow statement for the F.Y.

d) statement of changes in equity, if applicable

e) any explanatory notes to accounts.

Q 3 What is the meaning of Financial Year?

A 3 As per Sec. 2(41), financial year means the period ending on the 31st day of March every
year, and if the Co. is incorporated on or after the 1st day of January of a year but up to 31 st
March, then the F.Y. means the period ending on the 31st day of March of the following year.

Q 4 What are the provisions regarding maintaining and place of keeping the books of
account?
A 4 The provisions are mentioned u/s 128 of the Act, which are as follows:

Maintenance of books of account

i. The company must prepare the books of account and other relevant papers and financial
statement for every F.Y.

ii. The books of account must give a true and fair view of the affairs of the company or its
branches.

iii. The books of account must be kept on accrual basis and according to the double entry
system of accounting.

Place of keeping
Every Co. must keep its books of account and other relevant papers and financial statements
at its Registered Office.
However, the Co. may keep all or any of the books of accounts at such other place in India as
the BOD may decide. In that case, the Co. must inform the ROC within 7 days of such
decision. The intimation to be given in prescribed format that is AOC 5.

Q 5 What are the provisions regarding the maintenance of books of account in Electronic
Form?

A 5 The Co.’s Rules permit the maintenance of books of account & other relevant papers in
electronic mode.
However, the Co. should comply the following rules:

a) Such books of accounts maintained in electronic mode should remain accessible in India.
b) The information contained in the electronic records should remain complete and unaltered.

c) The information received from branch offices shall not be altered and shall be kept in
original format as received from the branches.
d) The information in the electronic record should be capable of being displayed in a legible
form.

e) There shall be a proper system of storage, retrieval, display or printout of the electronic
records and the BOD should ensure not to dispose of or render unusable, unless permitted by
law.
f) The BOD should ensure to keep back-up of the books of account and other records
maintained in electronic format.
g) If the Co. has appointed any service provider in India or outside India, for maintenance of
its books of accounts I electronic form then, the Co. should intimate to the ROC on an annual
basis at the time of filing of financial statement -

(a) The name of the service provider,

(b) The IP address of service provider,

(c) The location of the service provider,

(d) Where the books of account and other records are maintained on cloud then such cloud
address.

Q 6 For how many years the Co. must preserve its books of accounts?
A 6 Every Co. must preserve its books of account for a period of not less than 8 F.Ys.
immediately preceding the current F.Y. However, if the Co. is in existence for a period less
than 8 years then, it should preserve its records for all the preceding years.
However, if an inspection, Inquiry or investigation has been ordered in respect of any Co.
then, the CG may order that the books of account must be kept for a longer period than 8
years.

Q 7 Who are held responsible to maintain books of account on behalf of a Co.?

A 7 As per Sec. 128, following persons are held to maintain books of accounts:
i. Managing Director,

ii. Whole-Time Director who is in charge of finance

iii. Chief Financial Officer
iv. Any other person appointed by the BOD.

Q 8 What is the meaning of True & Fair view?

A 8 The Words True & Fair view are often used in reference to the financial statements and it
means that the financial statements are prepared by complying with the accounting standards
notified u/s 133 and the financial statements are in the form or format prescribed as per
Schedule III.

Write a note on Branch Audit.

Branch Auditor: Accounts of branch office can be audited by the Co.’s auditor or any other
person, qualified to be appointed as an auditor of a Co. as branch auditor and In case of
foreign branch, by the Co. ’s auditor or by an accountant or a competent person appointed as
the prevailing laws of the foreign country.

Write a note on Secretarial Audit.

Secretarial Audit is a compliance audit and it is a part of Compliance Management in an
organisation.

Following class of companies shall do secretarial audit:

(a) every Public Co. having a paid-up share capital of Rs. 50 crore or more,

(b) every Public Co. having a turnover of Rs. 250 crore or more,
(c) every Co. having outstanding loans or borrowings from banks or public financial
institutions of Rs. 100 crore or more,
(d) every Listed Co.
AGM
Annual general meeting (AGM) is an important annual event where members get an
opportunity to discuss the activities of the company. Section 96 provides that every company,
other than a one-person company is required to hold an annual general meeting every year.
Holding of Annual General Meeting

1.Annual general meeting should be held once in each calendar year.

2.First annual general meeting of the company should be held within 9 months from the
closing of the first financial year. Hence it shall not be necessary for the company to hold any
annual general meeting in the year of its incorporation.

3. Subsequent annual general meeting of the company should be held within 6 months from
the date of closing of the relevant financial year.
4. The gap between two annual general meetings shall not exceed 15 months.

In case, it is not possible for a company to hold an annual general meeting within the
prescribed time, the Registrar may, for any special reason, extend the time within which any
annual general meeting shall be held. Such extension can be for a period not exceeding 3
months. No such extension of time can be granted by the Registrar for the holding of the first
annual general meeting.

Meaning of “financial year”, in relation to any company or body corporate, means the period
ending on the 31st day of March every year, and where it has been incorporated on or after
the 1st day of January of a year, the period ending on the 31st day of March of the following
year.

Section 99 provides that if any default is made in holding AGM of the company, the company
and every officer of the company who is in default shall be punishable with fine which may
extend to one lakh rupees and in case of continuing default, with a further fine which may
extend to five thousand rupees for each day during which such default continues.
EXTRA-ORDINARY GENERAL MEETING (SECTION 100)

All general meetings other than annual general meeting are called extra-ordinary general
meetings (EGM).
QUORUM FOR MEETINGS (SECTION-103)

Quorum refers to the minimum number of members required to constitute a valid meeting.
Following are the minimum numbers provided in section 103, for various categories of
companies. However, the Articles of Association of the company may provide for a higher
number.

(a) Public company:

5 members personally present if the number of members as on the date of meeting is not
more than 1000;
15 members personally present if the number of members as on the date of meeting is more
than 1000 but up to 5000;

30 members personally present if the number of members as on the date of the meeting
exceeds 5000.
(b) Private company: 2 members personally present, shall be the quorum for a meeting of
the company.

Consequences of no quorum- 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 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.

No quorum in an adjourned meeting- 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, being not less than two in numbers, will constitute the quorum.

PROXIES (SECTION 105)

A person who is appointed by a member to attend and vote at a meeting in his absence is
termed as proxy. Section 105 of the Companies Act, 2013 provides that a member, who is
entitled to attend and vote, can appoint another person as a proxy to attend and vote at the
meeting on his behalf.
Time limit for deposit of proxy forms: The instrument appointing the proxy must be
deposited with the company, 48 hours before the meeting.

ESG (Environmental, Social, & Governance)

ESG stands for environmental, social, and governance.

1. Environmental

Environmental factors refer to an organization’s environmental impact(s) and risk

management practices. These include direct and indirect greenhouse gas emissions,
management’s stewardship over natural resources, and the firm’s overall resiliency against
physical climate risks (like climate change, flooding, and fires).

2. Social
The social pillar refers to an organization’s relationships with stakeholders. Examples of
factors that a firm may be measured against include human capital management (HCM)
metrics (like fair wages and employee engagement) but also an organization’s impact on the
communities in which it operates.

A hallmark of ESG is how social impact expectations have extended outside the walls of the
company and to supply chain partners, particularly those in developing economies where
environmental and labour standards may be less robust.

3. Governance

Corporate governance refers to how an organization is led and managed. ESG analysts will
seek to understand better how leadership’s incentives are aligned with stakeholder
expectations, how shareholder rights are viewed and honoured, and what types of internal
controls exist to promote transparency and accountability on the part of leadership.

PROSPECTUS
In general parlance prospectus refers to an information booklet or offer document on the basis
of which an investor invests in the securities of any company. It has been defined under
section 2(70) to - mean any document described or issued as a prospectus and includes a red-
herring prospectus or shelf prospectus or any notice, circular, advertisement or other
document inviting offers from the public for the subscription or purchase of any securities of
a body corporate.

Types of Prospectuses – refer class notes

MISSTATEMENT IN A PROSPECTUS
The prospectus is trusted by the members of the general public for subscribing or purchasing
the securities and any misstatement by the prospectus can lead to punishment. Misstatement
in a prospectus occurs when a untrue or misleading statement is included and issued in the
prospectus.
Misleading Prospectus or Mis-statement in prospectus:

A prospectus is said to be misleading or untrue in two following cases:

1. A statement included in a prospectus shall be deemed to be untrue, if the statement is false.
2. Omission from the prospectus of any matter to mislead the investors.
LIABILITY FOR MISSTATEMENT IN THE PROSPECTUS
The one who gives the consent and signs the prospectus is liable for any misstatement in a
prospectus. The Managers, CS and also the Directors of the Co. are answerable for the same.
CRIMINAL LIABILITY FOR MISSTATEMENT IN PROSPECTUS
When any statement within the prospectus includes misleading or untrue information is
distributed then everyone who authorized the issue of the prospectus is liable under section
447of this Act.
The people who can be sued are:

The company who issues the prospectus.

Every Director of the company.

Every Promoter of the prospectus.

Every person who authorized the issue of the prospectus.
Any expert such as an engineer, a chartered accountant, a company secretary, a cost
accountant, etc.

CIVIL LIABILITY FOR MISSTATEMENT

Section 62 of the Companies Act deals with the civil liability and makes the persons
responsible to pay every single individual who has contributed for any shares or debentures
and has suffered any damages by believing the prospectus. Every person and the company is
liable who -

Is a director when prospectus was issued

The promoter of the Co.

Has authorized the issue of the prospectus.

Issue of Securities at a Premium

A company may issue securities at a premium when it is able to sell them at a price above par
or above nominal value. When a company issue shares at a premium, the premium received
on those shares shall be transferred to a "securities premium account".
Utilisation of Securities premium
The securities premium can be utilised only for:
(a) issuing fully paid bonus shares to members;

(b) writing off commission paid or discount allowed, or the expenses incurred on issue of
shares or debentures of the company; or
(c) for Buy Back of its own shares or other securities under section 68.

EMPLOYEE STOCK OPTION SCHEME

The term 'Employee Stock Option' (ESOP) means the option given to the directors, officers
or employees of a company or of its holding company or subsidiary company, the benefit or
right to purchase, or to subscribe for, the shares of the company at a future date at a pre-
determined price.

Who is an employee for the purpose of ESOP:

(a) a permanent employee of the company who has been working in India or outside India; or

(b) a Director of the company, whether a whole time Director or not but excluding an
Independent Director; or
(c) an employee of a subsidiary or of a holding company of the company but does not
include:

(i) an employee who is a promoter; or

(ii) a Director who holds more than 10% of the equity shares of the company.

Minimum one year vesting period - there shall be a minimum period of 1 year between the
grant of options by the Co. and vesting of option (that means the Employees will be eligible
to purchase the shares offered under ESOP).

SWEAT EQUITY SHARES

Issue of Sweat Equity Shares

According to section 2 (88), sweat equity shares means such equity shares issued by a
company to its directors or employees at a discount or for consideration other than cash.
Normally, such shares are given free of cost, also, they are given immediately, without any
waiting period of 1 year, as seen in ESOP.
For the purposes of Sweat Eq. Shares "Employee" means -

(a) a permanent employee of the company who has been working in India or outside India;
(b) a director of the company, whether whole time director or not, excluding Independent
Director; or
(c) an employee or a director of a subsidiary or of a holding company of the company.
Limits on issue of sweat equity shares - the company shall not issue sweat equity shares for
more than 15% of the existing paid up equity share capital in one year or shares of the value
of Rs. 5 crores, whichever is higher. The total issuance of sweat equity shares in the company
shall not exceed 25%, of the paid-up equity capital of the company at any time.

PRIVATE PLACEMENT OF SHARES

"Private Placement" means any offer or invitation to subscribe or issue of securities to a
select group of persons by a company (other than by way of public offer) through private
placement offer-cum-application, which satisfies the prescribed conditions.

Maximum number of persons to whom offer can be made:

A private placement shall be made only to a select group of persons who have been identified
by the Board (herein referred to as "identified persons"), whose numbers hall not exceed 50,
excluding the qualified institutional buyers and employees of the company being offered
securities under ESOP, in a financial year.
Prescribed form for private placement cum application letter:

A private placement offer cum application letter shall be in the prescribed form and addressed
specifically to the person to whom the offer is made and shall be sent to him, either in writing
or in electronic mode. No person other than the person so addressed in the private placement
offer cum application letter shall be allowed to apply through such application form.