COMPANY LAW

TABLE OF CONTENTS

S. No. Topic Page No.

1. Companies Act 1956 v. Companies Act 2013: Comparison 02
2. Company: Definition, Meaning and Characteristics 02
3. Types of Company 03
4. Other Forms of Business 04
5. Promoters 05
6. Memorandum of Association 06
7. Articles of Association 08
8. Majority Rule and Minority Rights 11
9. Oppression and Mismanagement 12
10. Related Party Transaction 14
11. Directors 15
12. Mergers & Acquisitions 21
13. Winding up of a Company 27

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 COMPANY ACT 1956 vs. COMPANY ACT 2013: COMPARISON
Company Act, 1956 Company Act, 2013
Contained 658 Sections and 15 Schedules Contains 464 Sections and 7 Schedules.
Even though this new act has lesser
sections, but this will be governed by more
Rules compared to the previous Act.

This act didn’t have the provisions for a This act introduced the concept of OPC.
One Person Company (OPC).
Maximum number of persons allowed for a Maximum number of persons allowed for a
private company was 50. private company is 200.
Articles of association didn’t have AoA contains entrenchment provisions.
entrenchment provisions.  Entrenchment provisions= These are
clauses which allow higher levels of
amendments and changes to be made
to provisions. It means it sets a
higher threshold to amend, remove
or alter a provision in the articles.
The company was free to decide when will It laid down mandatory provisions relating
be the end of the financial year for it. to ending of a financial year, which was on
31st March of every year.

COMPANY: DEFINITION, MEANING AND CHARACTERISTICS

 Sec. 2(20) of Companies Act, 2013 defines a Company as—A company that is
incorporated under this Act or any previous Company Law (defined in Sec. 2(67)).
 Company is an artificial person created by law. It is a voluntary association of person
who together contribute in the capital of the company to do business.
 Company is usually divided into small parts called shares, the ownership of which is
transferable, subject to certain terms and conditions.
Characteristics of a Company
i. Separate Legal Entity/Corporate Personality: Company is an artificial person
which has a separate existence of its own, which is separate from its members.
Therefore, a company can sue, be sued and own properties in its own capacity.
ii. Incorporated Association: A company comes into existence through operation of
law. Hence, its incorporation under Companies Act is a must. Without registration,
a company cannot come into existence.
iii. Limited Liability: Every shareholder of a company has limited liability. His/her
liability is limited to the extent of the unpaid value of the shares held by him. If such
shares are fully paid-up, he is subject to no further liability.
iv. Perpetual Succession: An incorporated company never dies, except for when it is
wound up by law. Members of the company may change, but that will not affect the
existence of the company.
v. Common Seal: This acts as the official signature of the company.
vi. Transferability of Shares: The shares of a company are freely transferable, except
in case of private companies.
Transfer of shares in case of private companies is governed by AoA.

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Doctrine of Piercing the Corporate Viel
 This is a legal principle that allows Courts to disregard the corporate personality of the
company in certain circumstances and hold its shareholders and directors personally
liable for the actions of the company.
 This doctrine is invoked when it is clear that the company is being used to commit
fraud, avoid legal obligations shield some illegal/improper conduct.
 Case: LIC v. Escorts Ltd. (1986): Court held that the company was created to avoid
taxes and hence it will be justified to pierce/lift the corporate viel and hold the members
liable.
TYPES OF COMPANIES
Private Limited Company
 Member: A minimum of 2 members and maximum of 200 members.
 Restrictions on Share transfer: Shares cannot be freely transferred to others. Consent of
existing shareholders is often required.
 Public Subscription: Prohibited from inviting the public to subscribe to its shares or
debentures.
 Compliance: Generally, has less stringent compliance requirements compared to public
companies.
Public Limited Company
 Members: Minimum 7 members and maximum—no upper limit.
 Transferability of Shares: Shares can be freely transferred, and these companies can
invite the public to subscribe to shares and debentures.
 Regulatory Scrutiny: Subject to greater regulatory oversight and disclosure
requirements, including listing on stock exchange.
One Person Company (OPC)
 Only 1 natural person can form an OPC. There can be a nominee as well.
 Provides limited liability protection to the single member.
 Shares are transferable.
 Nominee: The nominee is designated to take over the business in case of the member’s
death or incapacity.
Section 8 Company (Not-to Profit Companies)
 Formed for promoting art, science, sports, education, research, social welfare, religion,
charity or any other socially beneficial purpose.
 Profits, if any, are applied for promoting these objectives and not distributed to
members.
 Compliance: Eligible for exemptions and privileges under the Act, subject to certain
conditions.
Nidhi Company
 A type of mutual benefit society that deals with borrowing and lending money among
its members.
 Membership is limited to its share-holders, lending activities are usually among
members only.

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  Such companies are subject to specific regulations aimed at safeguarding the interests
of its member.
Dormant Company
 A company that is registered but not actively involved in any business operations or
trading.
 Purpose: Typically used for holding assets or IP, with no significant activity.
Government Company
 More than 51% of the paid-up share capital is held by the Central or State Government.
 Such companies are typically created to carry out government related activities.
 Management: May be wholly owned by government or party owned by government
and partly by other private individuals/entities.
Listed Company
 A company whose securities, such as equity shares and debentures, are listed and traded
on recognized stock exchanges.
 Such companies are subject to more rigorous regulatory and disclosures requirement
compared to unlisted company.
Foreign Company
 A company incorporated outside India but engaged in business activities within India.
 Must register and comply with the relevant provisions of Companies Act, 2013.

OTHER FORMS OF BUSINESSES IN INDIA

Sole Proprietorship
 This is the simplest form of business where a single individual owns and manages the
business. The owner has unlimited liability for business’ debts and obligations.
 Registration/incorporation is not necessary.
 Doesn’t have a separate legal status.
 Comes to an end on death or retirement of the proprietor.
 Advantages
i. Easy to setup and dissolve
ii. Complete control and decision-making power with owner
iii. Minimal regulatory compliance
 Disadvantages
i. Unlimited personal liability for business’ debts and obligations
ii. Limited expertise and resources
iii. Lack of continuity in absence of owner
Partnership
 This is a form of business where 2 or more individuals come to together to share the
profits and losses of the business.
 It can be general or limited and it functions based on the partnership deed.
 Advantages
i. Shared decision-making and resources
ii. Flexible and easy to form

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 iii. Taxation benefit for certain types of partnerships
 Disadvantages
i. Unlimited liability for general partners
ii. Potential for conflicts and disputes
iii. Lack of perpetual existence
iv. Limited access to capital compared to companies
Limited Liability Partnership (LLP)
 This is a hybrid form of business that combines the flexibility of a partnership with the
limited liability of a company.
 It is governed by LLP Act, 2008.
 Advantages
i. Limited liability for partners
ii. Flexibility in operations and management
iii. Perpetual Succession
iv. Reduced compliance requirement compared to companies
 Disadvantages
i. Complex registration and regulatory process
ii. Restrictions on some types of businesses like banking, insurance etc.
PROMOTERS—MEANING, DEFINITON, RIGHTS AND LIABILITIES
 Promoters play a crucial role in the formation and early stages of a company.
 Definition: Promoters are individuals or entities who take the initiative to form a
company and are responsible for the company’s organization and promotion.
Promoters play a pivotal role in the company’s early stages, from conceptualization to
incorporation.
DUTIES OF PROMOTERS
i. Duty of Good Faith: Promoters must act in good faith and honesty. They should
not exploit their position for personal gain to the detriment of the company or its
shareholders.
ii. Duty of Full Disclosure: Promoters must provide accurate and complete
information about the company, its assets and its liabilities to potential investors.
This includes disclosing any conflicts of interest they may have.
iii. Duty of Reasonable Care: Promoters should exercise reasonable care and
diligence when managing the company’s affairs, assets and finances during the pre-
incorporation stage.
iv. Duty to Avoid Unauthorized Profits: Promoters should avoid making secret
profits at the company’s expense. They should not engage in transactions that
benefit them personally without the full knowledge and consent of the company’s
shareholders.
v. Duty to Pay for Property: If a promoter acquires property for the company during
the formation stage, they must pay a fair price and not overcharge the company. The
company must receive full value for the assets acquired.
vi. Duty to Avoid Conflicts of Interest: Promoters should avoid any situation where
their personal interest conflict with the company’s interests. If any such conflicts
arise, they must disclose them to the board and share-holders for proper resolution.

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RIGHTS OF PROMOTERS
i. Right to be Compensated: Promoters may be entitled to compensation for their
efforts in promoting and organizing the company. This compensation is typically
specified in the prospectus.
ii. Right to Influence the Company’s Formation: Promoters have the right to shape
the company’s structure, including selecting the board of directors, determining
share structure and setting up the initial business plan.
iii. Right to Recover Expenses: Promoters can recover legitimate expenses incurred
during the formation of the company, such as legal and administrative costs.
iv. Right to Subscription: Promoters usually have the right to subscribe to shares at a
preferential price during the initial issuance, enabling them to become share-
holders.
LIABILITIES OF PROMOTERS
i. Civil and Criminal Liability: Promoters may be held civilly and criminally liable
for false statements, misrepresentations, or fraud in the company's prospectus or
pre-incorporation activities. This includes liability for any losses suffered by
investors due to false information.
ii. Liability for Unauthorized Profits: If a promoter makes secret profits or benefits
personally at the expense of the company without proper disclosure, they can be
held liable to compensate the company for the amount of the unauthorized gain.
iii. Liability for Misrepresentation: If a promoter misrepresents information or
conceals material facts, they can be held liable for any losses incurred by investors
who relied on such misrepresentations.
iv. Contractual Liabilities: Promoters may enter into contracts on behalf of the
company before its incorporation. If these contracts are not ratified by the company
after incorporation, the promoters may remain personally liable.
MEMORANDUM OF ASSOCIATION (MoA)
 MoA is the charter/constitution of the Company.
 It is a legal document which is prepared during a company’s formation and registration
process.
 It defines the relationship of the company with its shareholders and specifies the
objectives for which the company has been formed.
 The company can undertake only those activities which have been mentioned in the
MoA. If any action of the company goes beyond the MoA, they are considered to be
ultra vires and hence, void.
 According to Sec. 399 of Companies Act, 2013, MoA is a public document and anyone
can have the MoA of a company by paying the prescribed fees to the ROC.
FORMAT OF MoA

 According to Sec. 4 of Companies Act, MoA of a company must be drawn in the form
given in Table A-E given in Schedule I of the Act.
 Table A: Form for MoA of Company—limited by Shares
 Table B: Form for MoA of Company—limited by Guarantee and not having
share capital
 Table C: Form for MoA of Company—limited by Guarantee and having share
capital
 Table D: Form for MoA of Company—unlimited

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  Table E: Form for MoA of Company—unlimited and having share capital.
CONTENT OF MoA
 The following are the mandatory clauses which must be contained in a MoA:
i. Name Clause: This mentions that:
 For a public company—the name of company must end with ‘limited’.
 For a private company—the name of company must end with ‘private
limited’.
 These are not applicable to a Sec. 8 company, and it may have any of
these words—federation, association, chambers, foundation, forum,
council etc.
ii. Registered Office Clause: This indicates the State in which the registered
office of the company is located.
iii. Object Clause: This specifies the objective for which the company is being
incorporated. However, if the company changes its activities, then it must
change its name within 6 months of such changing its activities, or else it will
be an offence.
iv. Capital Clause
 This clause specifies the maximum capital which that company can
raise.
 It provides the maximum capital that can be issued to the company
shareholders.
 It also explains the division of such capital amount into the number of
shares of a fixed amount each.
 It also specifies the type of shares a company is authorized to issue—
equity shares, preference shares or debentures.
v. Liability Clause: This specifies the liability of the members of the company.
 Unlimited Company—liability of its members is unlimited.
 Company limited by Shares—liability is limited up to the amount of
unpaid shares held by the member.
 Company limited by Guarantee—Liability of the members is restricted
to the amount each member has agreed to contribute.
vi. Association Clause: This is the last clause of MoA. This clause clearly specifies
the desire or exact idea/goal of the owner for forming the company.
 Nominee Clause (For OPCs): MoA of OPC must specify the name of the nominee—
the person who shall become the member of the OPC in case of death of its owner.
OBJECTIVES BEHIND REGISTERING MoA

 To provide legal status to the Company

 To define the company’s purpose and objectives
 To protect the interest of Shareholders—MoA outlines rights and obligations of the
Shareholders and protects their interests.
 To facilitate capital raising
 To facilitate decision-making by outlining the companies powers and limitations.
ALTERATION OF MoA

 If there are any changes in the clauses of MoA, the MoA must be altered or amended
to include the changes.
 The following changes will lead to alteration of MoA:

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  Change in Company Name;
 Change in location of Registered Office;
 Change in Company Objects;
 Change in the nature of liability of Company Members;
 Change in the maximum limit of authorized capital of the company or division
of authorized capital.
 Process of alteration of MoA:
 Board Meeting: Company must hold a board meeting to approve the alterations
to the MoA
 General Meeting: A general meeting must be held to obtain the approval of the
shareholders for the alteration of MoA.
 Filing of Special Resolution: Special resolution to alter MoA must be filed with
the ROC within 30 days of passing of the resolution.
 Approval of ROC: ROC will scrutinize the special resolution and approve the
MoA alteration.
Doctrine of Ultra Vires
 The term Ultra Vires means ‘Beyond Powers’.
 The Doctrine of Ultra Vires is a fundamental rule of Company Law. It states that the objects
of a company, as specified in its Memorandum of Association, can be departed from only
to the extent permitted by the Act. Hence, if the company does an act, or enters into
a contract beyond the powers of the directors and/or the company itself, then the said
act/contract is void and not legally binding on the company.
 The doctrine of Ultra vires prevents the company from using the money of the investors
other than those mentioned in the object clause of the memorandum.
 The company cannot sue on an ultra vires transaction. Further, it cannot be sued too.
 An act, legal in itself, but not authorized by the object clause of the Memorandum of
Association of a company or statute, is Ultra Vires the company. Hence, it is null and
void.
 An act ultra vires the company cannot be ratified even by the unanimous consent of all
shareholders.
 If an act is ultra vires the directors of a company, but intra vires the company itself, then
the members of the company can pass a resolution to ratify it.
 If an act is Ultra Vires the Articles of Association of a company, then the same can be
ratified by a special resolution at a general meeting.
ARTICLES OF ASSOCIATION (AoA)
 AoA has been dealt with in Companies Law under Sec. 2(5) and Sec. 5.
 Sec. 2(5): Defines AoA—refers to the document containing the rules and
regulations that govern the management of the company’s affairs.
 Sec. 5: This specifies that the AoA must be in accordance with the provisions of
this Act.
 AoA is a crucial document that defines the internal management framework of a
company. It contains rules and regulations for the daily smooth functioning and conduct
of the affairs of the Company.
 AoA plays an important role in ensuring effective corporate governance and
transparency in business operations.
 AoA must be drafted and filed during the incorporation process of the company. AoA
contains different provisions like:

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  Name of Company and its registered office
 Objective of the Company
 Rights and Obligations of its Members
 Duties and Powers of Directors
 Rules for conducting meetings
 Procedures for issuing and transferring shares
 Procedure for resolving disputes between company and its shareholders, or
between shareholders themselves etc.
FORMAT OF AoA
 Forms of AoA have been provided from Tables F-J, provided in Schedule I of CA, 2013.
 Table F: AoA of Company Limited by Shares
 Table G: AoA of Company limited by guarantee and having a share capital
 Table H: AoA of Company limited by guarantee and not having a share capital
 Table I: AoA of an Unlimited Company and having a share capital
 Table J: AoA of an Unlimited Company and not having a share capital.
OBJECTIVE/PURPOSE OF AoA
 Governing document—provides for rules and regulations for management and
governing of the Company.
 Legal requirement—Every company must have its AoA while filing with Registrar of
Companies.
 Clarity—AoA provide clarity for functioning of shareholders, directors and on office
procedures.
 Protection—provides procedure and remedy to address disputes or conflicts.
 Flexibility—AoA can be amended from time to time, in compliance with CA, 2013.
Entrenchment Clause in AoA
 Entrenchment provisions are a type of provision that can be included in the Articles of
Association of a company, which requires a specified procedure to be followed before
they can be amended or repealed.
 Sec. 5(3): The articles may contain provisions for entrenchment to the effect that
specified provisions of the articles may be altered only if conditions or procedures that
are more restrictive than those applicable in the case of a special resolution, are met or
complied with.
 These provisions can be used to protect important rights or provisions that the company
wants to ensure remain intact despite any changes to the AoA.
 The AoA must have been amended to include the entrenchment provision at the time of
its incorporation, or it must be approved by a special resolution of the shareholders.
 The entrenchment provision must be included in the AoA at the time of its incorporation
or must be approved by a special resolution of the shareholders.
 The entrenchment provision can only apply to the provisions of the AoA that are of a
fundamental nature, such as the rights of the shareholders or the board’s powers.
 The entrenchment provision must be registered with the Registrar of Companies.
 The entrenchment provision must specify the procedure to be followed for amending
or repealing the provision.
 It is important to note that the entrenchment provisions cannot be used to prevent the
company from complying with the requirements of the Companies Act, 2013, or any
other applicable laws.

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ALTERATION OF AoA

 The Articles of Association of a company can be altered in various ways, subject to the
provisions of the Companies Act, 2013.
 Procedure for Alteration of AoA
 By Special Resolution: The AoA can be altered by passing a special resolution
in a general meeting of the shareholders. A special resolution requires the
approval of at least 75% of the votes cast by the shareholders who are present
or represented at the meeting.
 By Board of Directors: The AoA can be altered by the board of directors if the
power to do so is specifically given to them in the AoA. However, any such
alteration must be ratified by the shareholders at the next general meeting.
 By Order of Tribunal: The AoA can be altered by an order of the National
Company Law Tribunal (NCLT) if it is satisfied that the alteration is necessary
for the proper functioning of the company or to protect the interests of the
shareholders.
Doctrine of Constructive Notice
 Doctrine of Constructive Notice is a legal concept that applies to the registration of
companies and states that all persons dealing with a registered company are deemed to
have knowledge of its Memorandum of Association and Articles of Association, as
these documents are available for public inspection.
 This means that any person who enters into a transaction with the company is deemed
to have constructive notice of the provisions of these documents, even if they have not
actually read them.
 The doctrine of constructive notice is based on Section 399 of the Companies Act, 2013,
which provides that any person dealing with a registered company shall be deemed to
have notice of the company’s MoA and AoA.
 However, it is also subject to certain limitations, particularly in cases where there are
irregularities in the internal management of the company.
Doctrine of Indoor Management
 This is an exception to the Doctrine of Constructive Notice.
 Doctrine of Indoor Management, also known as the Rule of Turquand, is a legal concept
that provides protection to third parties who enter into transactions with a company
based on the assumption that the internal procedures of the company have been
complied with, even if they have not been followed.
 The doctrine is based on the principle that outsiders dealing with a company should not
be expected to know the internal affairs of the company.
 The doctrine of indoor management is recognized in Section 128 of the Companies Act,
2013. According to this section, any act of the board of directors or any officer of a
company that is in contravention of the company’s MoA or AoA shall be valid, provided
it is done in good faith and is not ultra vires the company’s powers.

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DISTINGUISH BETWEEN: MoA vs. AoA
Memorandum of Association (MoA) Articles of Association (AoA)
Defines the company’s constitution, powers, Defines rules and regulations of the
objectives, and constraints of the company. It also defines the duties, powers,
organisation. liabilities and rights of individuals associated
with the organisation.
It contains the five mandatory clauses. It contains the provisions as per the
requirements of the organisation.
It defines the relationship between the It defines the relationship between the
company and third parties. company and its members and also amongst
members.
MOA is a supreme legal document and AOA is subordinate to the MoA and the
subordinate to the Companies Act. Companies Act.
The acts done beyond the scope of MOA are The acts done beyond the scope of AOA can
void and cannot be ratified. be ratified by shareholders.
The MOA cannot be amended with AoA can be amended with retrospective
retrospective effect. They can only be effect.
amended prospectively.

MAJORITY RULE AND MINORITY RIGHTS

 Company is an artificial legal entity and is run by its directors according to the wishes
of the Majority Shareholders.
 Majority shareholders have the power to rule and also have supremacy in the company.
 However, there are certain limitations to their powers, which are as follows:
 The powers of majority shareholders are subject to the MoA and AoA of the
company. The company cannot authorise or ratify any act which is outside the
scope of MoA—such acts will be considered ultra vires.
 Resolution or decisions taken by the majority must be in accordance to
provisions of Companies Act 2013 and other relevant statutes. Such resolutions
should not commit fraud on the minority my removing their rights.
PRINCIPLE OF NON-INTEREFERENCE

 The general rule states that during a difference between the members of a company,
the majority shareholders decide the issue.
 If the majority crushes the rights of the minority, company law will protect it.
 However, if the majority exercises its powers in the matters of a company’s internal
administration, Courts will not interfere to protect the rights of the minority.
 In such matters, it has been established that the Company can bring an action
and not the minority shareholders. In these matters, the right plaintiff is the
Company itself and not the minority.
 Foss v. Harbottle: This principle of Non-interference was laid down in this landmark
case.
 Benefits and Justifications
 Recognizes the legal personality of the company.
 Emphasizes the necessity of the majority making the decisions.
 Avoids multiplicity of suits.

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  Exceptions to this Principle: This principle is not absolute and is subject to the
following exceptions:
 Ultra Vires acts of the majority
 Fraud committed on minority
 If control of company is in the hands of a wrongdoer
 If resolution requires special majority, but has been passed by simple majority
 If there is any breach of duty by the majority
 If any personal right of an individual shareholder has been infringed
 To prevent Oppression and Mismanagement

OPPRESSION AND MISMANAGEMENT (Sec. 241 to 246, CA 2013)

 Chapter XVI (Section 241-246) of the Companies Act, 2013 lays down the provisions
to effectively deal with oppressing and mismanagement in a company.
 Corporate democracy finds its roots in the concept of majority rule. The principle of
majority originated in the rule of Foss v Harbottle which provided that the individual
shareholders have no cause of action in law for any wrongdoing by the corporation and
the action brought about in respect of such losses shall be brought either by the
corporation itself or through a derivative action.
 While majority rule is the common norm, it often overshadows minority rights. The
objective is to strike a balance between the interest of the small/individual shareholders
and the effective control of the company. Therefore, the Indian company law, 2013 has
put in place section 241 to 246 to safeguard minority rights.
 The majority rule is followed in the company and thereby courts usually don’t interfere
to protect minority rights. However, prevention of Oppression and Mismanagement is
an exception to this rule.
DEFINING ‘OPPRESSION’ and ‘MISMANAGEMENT’
The terms ‘Oppression’ and ‘Mismanagement’ have not been defined in Companies Act, 2013.
 Oppression
 Visible departure from the standards of fair dealing, adversely affecting the
rights of minority shareholders.
 Acts or conduct which are oppressive, unjust and cruel to rights of minority.
 Mismanagement
 Conducting affairs of the company in a prejudicial, dishonest or inept/inefficient
manner.
 This simply refers to practices of managing the company incompetently and
dishonestly.
 Eg: Violation/Departure from MoA or AoA etc.
Section 241: Application to Tribunal for Relief
 This section states that an application to the tribunal for relief in cases of oppression
etc. can be made.
 Any member of the Company can file an application under Sec 241, provided the
conditions mentioned in Sec. 244 has been fulfilled.
 Complaint under Sec. 241 can be made if:
 Company affairs are being conducted in a manner that is prejudicial to public
interest or is against the company’s interest; or

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  Company affairs are being conducted in a manner that is oppressive to a
particular member or other members of the company; or
 A material change has been brought in the company that is prejudicial to the
company or its members.
 Central government may also apply to the tribunal if it believes that the affairs of the
company are prejudicial to public interest. Central government can apply to the tribunal
if it believes that:
 Any person concerned with the management of the company is guilty of fraud,
misfeasance, persistent negligence, default in carrying his obligations, breach
of trust etc.; or
 Sound business practices has not been used; or
 The company has been managed by a person who is likely to cause damage to
the interest of trade and business to which the company pertains; or
 The company has been managed by a person who intends to defraud Creditors,
members or any other for fraudulent purposes
 Sec. 241(5) states that the application filed by the Central Government must contain
concise statement of circumstances and materials necessary for an inquiry.
Section 244: Which members have the right to apply under Sec 241
 If Company has share capital
 Not less than 100 members or not less than 1/10 th of the total members—
whichever is less; or
 Any member or members holding not less than 1/10th of the Issued Share
capital.
 If Company doesn’t have a share capital
 Not less than 1/5th of the total members
 Tribunal has the discretion to waive of some requirements under Sec. 244 to enable
members to apply under Sec. 241.
Section 242: Power of Tribunal
 This section provides powers of the Tribunal. The tribunal is empowered to pass an
order as it deems fit. The order may provide for:
 Regulation of Company’s conduct in future;
 Consequence reduction of share capital if a company’s shares are purchased by
the Company itself;
 Limitation of transfer and allotment of shares;
 Termination/setting aside/modification of an agreement between the Company
and MDs or another person;
 Removal of MD or another Director;
 Recovery of undue gains made by MD, Manager or Other Director;
 Manner as to appointment of new MD, after removal of previous MD;
 Imposition of Costs etc.
 Sec. 242(3): Company is required to file a certified copy of the order of Tribunal before
the Registrar within 30 days of passing the order.
 Sec. 242(4): Tribunal may pass an interim order fit for regulating the company’s
conduct.
 Sec. 242(8): If a company contravenes the Tribunal’s order it shall be liable to pay a
fine of one lakh rupees which may extend to twenty-five lakh rupees. Every defaulting

13
 officer shall be liable to pay a fine of twenty-five thousand rupees which may extend
up to one lakh rupees.
RELATED PARTY TRANSACTIONS
Related Party (Sec. 2(76), Companies Act 2013)
 Sec. 2(76) of Companies Act, 2013 defines ‘Related Party’. According to this
provisions, related party means and includes:
i. Director or his relative;
ii. Key managerial personnel or his related;
iii. A firm in which director, manager or relative is a partner;
iv. A private company where director, manager or 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 2% of its paid-up capital;
vi. A body corporate whose BoDs/MD/Manager is required to act in accordance
with the advice/directions/instructions of a director or manager;
vii. Holding/Subsidiary/Associate of such company;
viii. Any company which is a subsidiary of a holding company to which it is also a
subsidiary
Related Party Transactions (Sec. 188, Companies Act 2013)
 RPT refers to transactions that occur between 2 parties who have a pre-existing
relationship or connection.
 Following transactions between a firm and its related party is described as a related
party transaction:
 Sale, purchase or supply of any materials or goods;
 Availing or rendering of any service;
 Selling or buying property of any kind;
 Leasing of the property of any kind;
 Appointment of an agent for the sale or purchase of goods, materials, service or
property;
 Related party’s appointment to the place of profit or office in the company,
associate and subsidiary;
 Firm underwriting the subscription of any securities or derivatives of the
company;
 Exception: The above-mentioned conditions would not be applicable in case of
transactions entered into a company in its ordinary course of business which is on arm`s
length basis. An arm’s length transaction means that a transaction between two related
parties that is conducted as if they were irrelevant so that there is no dispute of interest.
 Prior approval of BoDs is required for any RPT.
 If the value of the transaction exceeds prescribed thresholds, approval of shareholders
by way of ordinary resolution is also necessary.
 Consequences for irregularities of Compliance:
 Ratification of the transaction may be done by the Board or Shareholders within
3 months. If the same is not done, the contract will be voidable at the option of
the Board.
 If any director authorized the contract, he/she must indemnify the company for
any losses.
 The company can proceed against the Director or employee for recovery of
losses, if any, due to RPTs.

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  In case of a private company, if any director or employee had entered into or
authorized any contract in violation of the provisions of Sec. 188, he/she shall
be liable for a fine of Rs 5 lakhs.

DIRECTORS

 Company, being an artificial legal person, doesn’t have a body and mind of its own.
 Director (collectively known as Board of Directors) is the person appointed to
the Board of the Company who uses his mind and takes decisions and is
responsible for managing, controlling and directing the affairs of the Company.

MEANING AND DEFINITION OF DIRECTOR

 Sec. 2(34): This section of Companies Act defines Director as ‘a person appointed to
the Board of a Company.’
 Directors are considered trustees of the Company’s property and money, and they also
act as agents in transactions that are entered into by them on behalf of the company.
 Directors play multiple roles in the Company, such as that of an agent, employee,
officer and also of a trustee of the Company.

LEGAL POSITION OF DIRECTOR

 Director as Agent
 The company is an artificial person and hence, it can only act through its
directors.
 The relation between directors and the Company is that of an ordinary agent and
Principal.
 All directors are agents of the Company and when a director signs on behalf of
the Company, the Company, being the principal, shall become liable and not
the director.
 Ferguson v. Wilson: This case recognized directors as agents of the Company.
 Director as Trustee
 Directors are considered as trustees of the Company as the money and property
of the Company is under the direct control of the directors.
 The nature of office of the director makes him a trustee of the Company.
 Directors can be held liable for misuse of funds as trustees and a cause of action
against a director can survive against their legal representative in case of death
of the director. (Ramaswamy Iyyer v. Brahmayya & Co.)
 Director as Officer
 Sec. 2(59) of CA, 2013 treats the director as an officer of the Company on whose
direction other directors or BoDs are accustomed to Act.
 As per Calcutta HC: Directors are certain officials of the Company and should
be treated as organs of the Company, so that for actions of a particular official,
the Company can be held liable just as a natural person is liable for the action
of his limbs. The absence of director can paralyze the Company.

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MAXIMUM AND MINIMUM NUMBER OF DIRECTORS (Sec. 149)

 This has been provided for in Sec. 149 of Companies Act, 2013. The minimum number
of directors is as follows:
 In case of Public Company: 3 Directors
 In case of Private Company: 2 Directors
 In case of OPC: 1 Director
 The maximum number of Directors which a Company can have is 15. However, a
company can appoint more than 15 Directors after passing a special resolution.

TYPES OF DIRECTORS

 Managing Director (MD)

 A managing director means a director entrusted with the substantial powers of
management of the company by virtue of the AoA, agreement with the
company, resolution passed in the company general meeting or by the BoD.
 He is generally the chief executive of the company.
 A managing director of a company has to exercise his powers subject to the
superintendence, control and direction of the Board of directors.
 Executive Director (ED)
 Also known as Whole-time directors, they are the full-time working directors
of the Company.
 They are involved in the day-to-day management of the company.
 They look after the daily affairs of the Company and have a higher responsibility
towards the Company.
 Non-Executive Director (NED)
 A non-executive director is a non-working director and is not involved in the
day-to-day working of the company.
 The rationale behind appointing non-executive directors is that, as they are not
involved in the day-to-day management, they can bring an independent voice
and perspective to the board.
 They might participate in the planning or policy-making process and challenge
the executive directors to come up with decisions that are in the best interest of
the company.
 Not being part of the internal management of the Company, they are also termed
as ‘Outside Director’.
 Independent Director
 An independent director is a type of Non-Executive Director and is a member
of BoD, who—doesn’t have a material relationship with the Company, is not a
part of the Company’s executive team and is not involved in the company’s
day-to-day affairs.
 According to Sec. 149(4)—Every listed public company shall have at least 1/3rd
of the total number of directors as Independent Directors.
 According to Sec. 149(6)—An independent director in relation to a Company
means a director other than MD or ED or Nominee Director:
a) Who, in the opinion of the Board, is a person of integrity and possesses
relevant expertise and experience;
b) Who is or was not a promoter of the company or its
holding/associate/subsidiary company;

16
 c) Who is not related to the promoter or directors in the Company or its
holding/associate/subsidiary company;
d) Who doesn’t have any money related relationship, except his salary,
with the Company or its holding/associate/subsidiary company;
e) Who, neither himself nor any of his relatives, have any kind of interest
in the Company
 Term of Office
a) Shall hold office for a term up to 5 consecutive years on the Board of a
company, but shall be eligible for reappointment on passing of a special
resolution by the company and disclosure of such appointment in the
Board’s report.
b) No independent director shall hold office for more than two
consecutive terms, but such independent director shall be eligible for
appointment after the expiration of three years of ceasing to become an
independent director, provided that an independent director shall not,
during the said period of three years, be appointed in or be associated
with the company in any other capacity, either directly or indirectly.
 Residential Director: As per Sec. 149(3) of the Act, every Company must have at least
one such director who stays in India for not less than 182 days during the financial year.
Such director shall be known as Residential Director.
 Small Shareholder Director: A listed company, could upon the notice of a minimum
of 1000 small shareholders or 10% of the total number of the small shareholder,
whichever is lower, shall have a director which would be elected by small shareholders.
 Additional Director: A person could be appointed as an additional director and can
occupy the post until the next Annual General Meeting. In absence of the AGM, such
term would conclude on the date on which such AGM should have been held.
 Alternate Director: Alternate director refers to personnel appointed by the Board, to
fill in for a director who might be absent from the country, for more than 3 months.
 Woman Director: A company, public or private, would be required to appoint at least
1 woman director in case it satisfies any one of the following criteria:
 The company is a listed company and its securities are listed on stock exchange;
 The paid-up capital of the company is 100 crore or more and turnover is 300
crore or more.
 Nominee Director: Nominee directors could be appointed by a specific class of
shareholders, banks or lending financial institutions, third parties through contracts to
look after their interests, or by the Union Government in case of oppression or
mismanagement.
 Shadow Director
 Any person, other than a professional adviser, whose instructions the directors
of a company normally comply is a shadow director.
 In other words, where a person who is not a director and yet exerts such an
influence over the company’s directors that those directors are accustomed to
act in accordance with that person’s instructions, that person is a shadow
director.

QUALIFICATIONS TO BE A DIRECTOR

 Company law doesn’t provide for any specific educational or professional qualification
for becoming the Director of a Company. However, the following can be said to be
some general qualifications to become a director of a Company:

17
  Only a natural person can be a director, and no artificial person can become
director
 The person should be of sound mind and should not be an undischarged
insolvent
 The person should not have applied to be adjudicated as an insolvent
 The person should have a Director Identification Number (DIN) [Sec. 154]
 The person should not have been convicted of an offence dealing with Related
Party Transaction under Sec. 188 at any time during the preceding 5 years
 The person should not have been appointed as Director in 19 companies or 9
Companies (in case of Public Companies)

DISQUALIFICATIONS TO BE DIRECTOR (Sec. 164)

 Sec 164 provides for the following grounds for a person to be disqualified from being
a Director of a Company:
 He is of unsound mind and stands so declared by a competent Court;
 He is an undischarged insolvent;
 He has applied to be adjudicated as an insolvent and his application is pending;
 He has been convicted by Court of any offence and been sentenced to
imprisonment for not less than 6 months and a period of 5 years has not elapsed
from the date of expiry of such sentence;
Provided—if a person has been convicted of any offence for a period of 7 years
or more, he shall no longer be eligible to become director of any company.
 An order disqualifying him for appointment of director has been passed by a
Court or Tribunal and the order is in force;
 He has been convicted of offence dealing with RPT under Sec. 188;
 He doesn’t have a DIN.

Director Identification Number (DIN)

 The DIN is a unique identification number for an existing director or a person intending
to become the director of a company.
 It is mandatory for all directors to acquire a DIN.
 To get the DIN, an online application is to be filed. A provisional DIN will be issued
after online filing. As per Sec. 154, the Central Government shall, within one month
from the receipt of the application, allot a Director Identification Number to the
applicant.
 On resignation of the director from a company, the DIN obtained does not have to be
cancelled. The DIN will remain with the individual only.
 Only a single DIN is required for an individual irrespective of number of directorships
held by him.
 With the introduction of the concept of DIN, the offences committed by the directors
can be immediately detected.

APPOINTMENT OF DIRECTORS (Sec. 152)

 Appointment of First Directors

 First directors of a Company are usually appointed by Promoters, in the manner
laid down in the AoA of the Company.

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  In case the AoA is silent as to appointment of First Directors, the subscribers to
the MoA are deemed to be the First Directors of the Company.
 The first directors can hold office only till the first annual general meeting of
the company when they are replaced by the directors appointed by the company
at this meeting.
 Appointment of Subsequent Directors
 Every director shall be appointed by the Company in General meeting.
 No person shall be director unless he has been allotted a DIN as per Sec. 154
 Every person proposed to be a Director shall furnish his DIN and a declaration
that he is not qualified to become a director under this Act
 A person appointed as 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 30 days of his appointment.
 Appointment of Directors by BoD (Sec. 161)
 Sec. 161 provides for appointment of Additional Director, Alternate Director
and Nominee Director by the Board of Directors.
 The BoD are also empowered to appoint new directors to the Board to fill the
vacancy created, if any, due to a director vacating his office before the end of
his term.

REMOVAL OF DIRECTOR

 Reason for Removal (Sec. 167)

 Incurring any disqualification as given in Sec. 164;
 Absence from all board meetings conducted within 12 months without any
notice;
 Entering into any contract or agreement contrary to the provisions of Sec. 184
(disclosure of interest by director);
 Becomes disqualified by an order of Court or Tribunal;
 Gets convicted of an offence and is imprisoned for at least 6 months;
 Fails to adhere to rules and regulations mentioned in the Companies Act;
 Voluntarily resigns from his post.
 A director can be removed from his office in either of these ways:
i. Removal by Shareholders (Sec. 169);
ii. Removal by Tribunal (Sec. 242).
 Removal by Shareholders (Sec. 169)
 For a director to be removed by Shareholders under Sec. 169, such person must
not be a director appointed by Tribunal under Sec. 242.
 A company may, by ordinary resolution, remove a director, before the expiry of
the period of his office after giving him a reasonable opportunity of being heard.
 A special notice shall be required of any resolution, to remove a director under
this section, or to appoint somebody in place of a director so removed, at the
meeting at which he is removed.
 On receipt of notice of a resolution to remove a director under this section, the
company shall forthwith send a copy thereof to the director concerned, and the
director, whether or not he is a member of the company, shall be entitled to be
heard on the resolution at the meeting.
 A vacancy created by the removal of a director may be filled by the appointment
of another director in his place at the meeting at which he is removed, provided
special notice of the intended appointment has been given. A director so

19
 appointed shall hold office till the date up to which his predecessor would have
held office if he had not been removed.
 Removal by Tribunal (Sec. 242)
 Where an application is made to the Tribunal under section 241 for relief against
oppression and mismanagement of a company’s affairs, the Tribunal may, if
satisfied, order for the removal of any of the directors of the company (Section
242).
 The Tribunal may also pass the order for the termination or setting aside of an
agreement which the company might have made with its directors.
 Such a director (including managing director) shall not be entitled to serve as a
manager, managing director or director of any company for a period of 5 years
from the date of the Tribunal’s order terminating or setting aside his contract
with the company.

DUTIES OF DIRECTORS (Sec. 166)

 Director shall act in accordance to AoA of the Company;

 Director shall act in good faith to promote the objects of the Company for benefit of its
members as a whole and in the best interests of the Company;
 Director shall exercise his duties with due diligence and skill, and reasonable care;
 Director shall not involve himself in a situation which gives rise to a direct or indirect
conflict with interests of the Company;
 Director shall not achieve or attempt to achieve any undue gains or advantage either to
himself or his relatives/partners/associates (if any such gain is made, an amount equal
to such gain shall be paid by him to the Company);
 Director shall not assign his office, and any such assignment, if made, shall be void;

If a director contravenes this section, he shall be liable to pay a fine in the range of Rs 1 lakh
to 5 lakhs.

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 MERGERS & ACQUISITIONS
MEANING OF MERGER AND ACQUISITION

Merger

 Not been defined in the Companies Act, 2013.

 Merger means the combination of 2 or more entities, where their assets and liabilities
accumulate and they come together into forming a single entity.
 Merger usually takes place between companies that are equal in reputation and scale of
operation.
 In a merger, both companies come together, combine and form a new entity and cease
their own independent existence.

Acquisition

 Not been defined in the Companies Act, 2013.

 Acquisition means the process of acquiring of one company (target company) by
another company.
 In an acquisition, the acquirer or buyer company is usually the bigger fish in the sea
and the target company is smaller in scale compared to the buyer.
 The buyer can acquire the target company by either of the 2 methods:
 Buying significant amounts of shares of the target company; or
 Buying significant amounts of assets of the target company.
 In an acquisition, the acquired company continues to retain its separate legal identity or
existence (this happens in case of shares deal, and not assets deal).

REASONS FOR M&A

 To eliminate competition
 To establish a bigger market share
 To create a bigger and stronger brand value
 To set-off losses of one entity against the profits of another

TYPES OF MERGERS

 Horizontal Merger
 Both companies operate in the same industry and have the same line of business.
 Usually, such merger happens between competitors
 Such merger happens for expansion of customer base, increasing market share
and market power, creation of synergy etc.
 Example: Vodafone-Idea, Lipton India-Brookebond
 Vertical Merger
 Merging and merged company operate in the same line of business, but at
different stages of the food chain.
 This is mostly done to achieve economies of scale.
 Example: Amazon-Whole Foods, Reliance-Flag Telecom Group

21
  Reverse Merger
 Merger in which a parent company merges with its subsidiary, or a profit-
making firm, merges with a loss-making firm.
 Also called a Triangular Merger.
 Example: Godrej Soap-Gujarat Godrej Innovative Chemicals Ltd.
 Conglomerate Merger
 Merger of companies operating in different lines of business.
 This merger takes place for diversification and to spread risk, in case current
business doesn’t yield much profit.
 Example: L&T- Voltas Ltd.
 Congeneric Merger
 Merger between companies who are in same or related industries but don’t offer
the same products.
 Merging companies usually have the same target audience and may also be
indirect competitors.
 Also known as Concentric Merger or Product-Expansion Merger.
 Such mergers happen to increase market share and to expand product lines.
 Exampls: Zomato-Grofers.

TYPES OF ACQUISITIONS

 Friendly Acquisition
 This occurs when one company acquires another with the consent of BoDs of
both companies.
 It works towards shared advantage of both companies.
 In such acquisition, shareholders and management of both companies are in
concurrence and have approved the transaction.
 Example: Flipkart-Walmart, Facebook-WhatsApp.
 Hostile Take-Over
 This occurs when the target company doesn’t consent to the acquisition and the
acquiring company has to gather majority stake to force the acquisition.
 This is typically consummated by a tender offer.
 In a tender offer, the acquiring corporation tries to purchase the shares of the
outstanding shareholders of the target company at a premium as compared to
current market price, and shareholders are given limited time to accept it.
 Example: Takeover of Ashok Leyland by Hindujas.

STAGES INVOLVED IN M&A

Stage 1: Formulation of Strategy

 For a merger to be successful, it is essential to know what they are going to gain
throu gh the merger.
 A good acquisition strategy revolves around the acquirer having a clear idea
of what they expect to gain from making the acquisition and what their
bu siness purpose is for acquiring the target company.
 Thus, the first and foremost step involved in the M&A process is creating a
good acquisition strategy.

22
Stage 2: Cost-Benefit Analysis

 This step involves evaluation of expenditure of the merger process an d

assessment of revenu e post synergy.
 To maximise the probability of M&A success and prediction of resources t o
be allocated, costs -benefits analysis is inevitable before making an y
decisions on the deals.
 A preliminary valuation involving the cost and estimated returns throu gh
acqu isition is essential for the su ccess of M&A.

Stage 3: Due Diligence Process

 It involves an investigation of the target company, its operations, huma n

capital, tax and legal structure and its financials prior to the signing of a
contract.
 A detailed examination is done in this stage by analysing each and every
aspect of the target company's operations.
 The objective of du e diligence is to ensure that information is correct based
on which the offer was made.

Stage 4: Valuation Process

 This stage involves the examination and evaluation of both present and
future market valu e.
 The acquirer may ask the target company to provide substantial informatio n
that will enable the acquirer to further evaluate the target, both as a bu siness
on its own and as a suitable acquisition target.
 It also tries to know what would be a reasonable offer for the target or
purchaser of bu sinesses.

Stage 5: Post-Integration Issue

 The main purpose of this stage is to mak e the merged organisatio n

operational so that the strategic value expectations can be delivered.
 After the deal is closed, the management teams of both the companies work
together to integrate the two bu sinesses into one as possible.
 It involves the integration of processes, systems, strategies etc. It also
involves integrating people and changing the organisational cu ltu re of the
merging firms, possibly to develop into a hybrid culture.
 This integration involves change in the mindset and behaviour of t he people.
It is therefore necessary to address the cultural issu es during the integration
process.

LEGAL FORMALITIES AND PROCEDURES RELATED TO MERGERS

 Sec. 230-240 of Companies Act, 2013 deal with Mergers, Amalgamations and
Compromises.

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Section 230: Power to Compromise or make arrangement with Creditors/Members

 When a compromise or arrangement is proposed:

a) Between a company and its creditors or any class of them; or
b) Between a company and its members or any class of them,

company/member/creditor/liquidator (as the case may be) shall make an application to the
NCLT regarding the same.

 The application shall contain—material details of the transaction, consent of

shareholders, reduction of share capital (if any) and other disclosures.
 Additionally, notice has to be published on website of the company and advertised on
newspaper—1 English paper and 1 vernacular paper.
 If the company is listed company, notice has to be given to SEBI.
 Notice about the same will also be given to authorities like—Central Govt., IT
Authority, RBI, CCI for their objections within 30 days.
 If authorities don’t object within 30 days, their consent will be assumed.
 NCLT will order a meeting and notice of such meeting will be sent to all members,
creditors and debenture holders.
 Meeting shall be conducted within 1 month from the order.
 The resolution at the meeting shall be approved and passed by 75% majority.
 Any person can object to the scheme of compromise/arrangement, provided:
 If he is a shareholder—must have at least 10% of share capital;
 If he is a creditor—must have at least 5% of the outstanding debt.
 Once the resolution is passed, the scheme goes back to the NCLT for passing of
final order along with ancillary orders. The final order must be filed with ROC
within 30 days.

Section 231: Power of Tribunal to Enforce Compromise or Arrangement

 When NCLT makes an order sanctioning a compromise/arrangement under Sec. 230,

it shall have the power to oversee the implementation of such compromise/arrangement.
 NCLT may also give such directions or make any other modifications which it deems
fit for proper implementation of such compromise or arrangement.
 If Tribunal is of the opinion that the compromise sanctioned cannot be implemented
satisfactorily and the company is unable to pay its debts—tribunal may order winding
up of such company, and such order shall be deemed to be an order u/Sec. 273.

Sec. 232: Mergers and Amalgamations of Companies

 Section 230 talks about compromise or arrangement (Internal reconstruction), but if

there is a compromise or arrangement that also involves a merger or an amalgamation
(External Reconstruction) then both Section 230 and 232 will apply to such companies.
 This section is a continuation of section 230 for merging or amalgamating companies
where in there are some additional requirements to be followed.
 Along with the notice of the meeting in section 230, the following must also be given:
 Draft scheme of merger and amalgamation;
 Report of effect or impact of such M&A on each class of shareholders;
 Report of valuation; and

24
  Other necessary disclosures.
 While passing the final order, tribunal can make provisions for other required matters.

Sec. 233: Mergers and Amalgamations of Certain Companies—deals with Fast Track
Mergers

 ‘Certain Companies’ under this section are—2 or more small companies, i.e., private
companies:
 With paid-up share capital of not more than Rs 10 crores; and
 Having turnover of less than Rs 100 crores.
 Such companies shall merger as per Sec. 233 and not Sec. 232, and such mergers are
called ‘Fast Track Mergers’, and have an easier route.
 Following are the Steps involved in such mergers:
 Invite objections and suggestions from ROC, Liquidator and any other person
affected by the scheme.
 Merger shall be approved by 90% majority shareholders.
 File declaration of solvency (capacity to pay-off debts) with ROC.
 Merger shall be approved by 90% of majority creditors.
 Merger shall be sent to Central Govt. and ROC for approval. If ROC has any
objections, it shall give it to Central Govt. within 30 days.
 If CG feels that the merger is in interest of public and creditors, it shall approve
it and communicate it to the ROC.
However, if CG or ROC have any objections, the matter will be referred to
NCLT.

Sec. 234: Merger/Amalgamation of a Company with a Foreign Company

 If an Indian company wants to merge with a foreign company, it has to follow the
procedures given under Section 232 and additionally approval of the RBI must be
obtained and the scheme must provide for the manner of payment of considerations.

Sec. 237: Power of Central Govt. to provide for a Merger, in public interest

 If it is essential and is in public interest, the Central Government, by notification in the

official gazette, can order amalgamation of companies.
 Central Government usually passes such amalgamation order between a healthy
company and a sick company, to revive the sick company and its employees.
 Central Government will have to give orders for pending legal proceedings by or
against Transferor Company.
 Central Government will also have to give orders for all members, creditors to have
nearly same interest in the transferee company and if there is any difference then they
have to be compensated.
 If any person is aggrieved by the compensation, he/she can appeal to the NCLT.
 If the transferor and transferee company have any objections with the order for merger,
then they can put forward their objections to the NCLT. NCLT will hear their objection
and pass a final order.

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Sec. 239: Preservation of books and papers of Amalgamated Company

 Books and papers of the Amalgamated Company (the company that ceases to exist after
the merger) shall not be disposed of without the permission of the Central Government.
 Before giving such permission, the Central Government shall appoint a person to
examine such books and papers.

Sec. 240: Liability of Officers in respect of offences committed prior to M&A etc.

 The liability of officers who had committed an offense prior to merger or amalgamation
will continue even after merger or amalgamation.

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 WINDING UP OF A COMPANY
 Winding up is a means by which the dissolution of a company is brought about and its
assets realized and applied in payment of its debts, and after satisfaction of the debts,
the balance, if any, remaining is paid back to the members in proportion to the
contribution made by them to the capital of the company.
 The liquidation or winding up of a company is the process whereby its life is ended and
its property is administered for the benefit of its creditors and members.
 Winding up ultimately leads to the dissolution of the company. In between winding up
and dissolution, the legal entity of the company remains and it can be sued in a court of
law/Tribunal.
 Winding up has been defined in Sec. 2(94A) of Companies Act, 2013. As per Sec.
2(94A): Winding up under this Act, or liquidation under the IBC, 2016.

Dissolution
 A company is said to be dissolved when it ceases to exist as a corporate entity.
 On dissolution, the companies name is struck off from by the Registrar from the
Register of Companies and he shall also get this fact published in the Official Gazette.
 Dissolution puts a complete end to the existence of a company.
 Dissolution can be brought about in any of the following ways:
 Through transfer of a company’s undertaking to another under a scheme of
reconstruction or amalgamation. In such a case the transferor company will be
dissolved by an order of the Tribunal without being wound up.
 Through the winding up of the company, wherein assets of the company are
realized and applied towards the payment of its liabilities. The surplus, if any is
distributed to the members of the company, in accordance with their rights.

Winding Up Dissolution
This is one of the methods by which This is the end result of winding up of a
dissolution of a company is brought about. company.
Legal entity of the company continues at the This brings about an end to the legal entity of
commencement of the winding up. the company.

MODES OF WINDING UP OF A COMPANY

 A company may be wound up in any of the following 2 ways:
i. Winding up by Tribunal (Compulsory Winding up): Sec. 270, 271, 272
ii. Winding up under IBC, 2016 (Earlier provided as Voluntary Winding up under
Companies Act, 2013—Sec. 304-323).
Compulsory Winding Up (Sec. 271)
 Winding up by order of Tribunal is also known as Compulsory Winding Up.
 Grounds of Compulsory Winding Up: As per Sec. 271, Tribunal may order for the
winding up of a Company on any of the following grounds:
i. Passing of a Special Resolution—When a company has, by passing of a special
resolution, resolved to be wound up by the Tribunal, the tribunal may make an
order for the winding up of the Company;
ii. If the company has acted against the interests of the sovereignty and integrity
of India or against decency, morals or public interests;
iii. If tribunal is of the opinion that affairs of the company are being conducted in a
fraudulent or unlawful manner, or persons concerned with management of the

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 company have been guilty of fraud, misfeasance or misconduct in connection
with the company;
iv. If company has made default in filing with the Registrar—its financial statement
or annual returns—for immediately preceding 5 financial years;
v. If tribunal is of the opinion that it is just and equitable that the company should
be wound up. This can be on the following grounds:
 Oppression of Minority Shareholders
 Deadlock in Management
 Loss of Substratum (Object for which company was constituted—
completely failed or has become substantially impossible)
 Excessive Losses of the Company.
Who may file a Petition for Winding Up (Sec. 272)
 An application for winding up of a company has to be made by the way of a petition to
the Court, and as per Sec. 272, such petition may be presented to the Court by any of
the following persons:
a) The Company; or
b) Any creditor or creditors; or
c) Any contributory or contributories; or
d) All or any person mentioned in (a) or (c); or
e) The Registrar; or
f) Any person authorized by the Central Government in that behalf; or
g) By Central Govt. or State govt.—if company is acting against the interest of the
sovereignty and integrity of India.
 A copy of the petition must be filed with the Registrar and he shall, without any
prejudice, submit his views to the Tribunal within 60 days of receipt of such petition.

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