Corporate Law: Complete Notes

About this subject

Corporate Law (Company Law) studies the company from beginning to end: from what a company is and how it is born, to how it finally comes to an end. The course has six units; the first deals with the introduction to company law and the incorporation of a company.

Phones and most other everyday goods are made by companies. Connecting every rule to real companies is the easiest way to remember it.

Why the Company Exists

• Pooling of capital: thousands of people can join small amounts of money into one large business.
• Limited risk: each of them risks only the money he has put in.

That is why the company has become the main vehicle of modern business. But large companies also employ lakhs of people and affect whole communities, so the law does two things at once:

1. it gives the company freedom to raise money and do business; and
2. it controls the company, so that those who run it do not misuse the money of shareholders, creditors, workers and the public.

Growth of Company Law in India

Year	Development
1600	The East India Company received its charter from Queen Elizabeth I. Early companies were created by a special grant of the Crown, not under a general law.
1850	Joint Stock Companies Act, India's first general company law, modelled on an English Act of 1844. It allowed registration but gave members no limited liability.
1857	An Act introduced limited liability.
1866	Companies Act, based on the English Companies Act of 1862.
1882, 1913	Indian Companies Act of 1882, replaced by the Indian Companies Act of 1913.
1956	On the report of a committee headed by C.H. Bhabha, Parliament passed the Companies Act, 1956, in force from 1 April 1956. It remained the law for almost sixty years.
2005	The economy having changed completely, an expert committee headed by Dr. J.J. Irani reviewed the law and reported.
2013	Companies Act, 2013: President's assent on 29 August 2013; most sections in force from 1 April 2014.
2016	NCLT and NCLAT set up on 1 June 2016, taking over the work of the old Company Law Board and most company matters of the High Courts. The Insolvency and Bankruptcy Code, 2016 took over corporate insolvency.
2015, 2017, 2019, 2020	Notable amendments. The 2020 amendment converted many minor offences into civil penalties.

The Companies Act, 2013, with the Rules made under it, is the law in force.

Meaning of a Company

Section 2(20) of the Companies Act, 2013 defines a company as a company incorporated under this Act or under any previous company law. This does not say what a company is; it only says that a company is created by law, through registration.

Chief Justice Marshall of the American Supreme Court described a corporation as "an artificial being, invisible, intangible, and existing only in contemplation of law". A company cannot be seen or touched, but the law treats it as a person.

Characteristics of a Company

1. Separate legal personality (the most important). Under Section 9, from the date of incorporation mentioned in the certificate, the subscribers and all future members become a body corporate by the name in the memorandum, with perpetual succession and power to acquire, hold and dispose of property, to contract, and to sue and be sued in its own name.
2. Limited liability. In most companies a member's liability is limited to the amount unpaid on his shares.
3. Perpetual succession. Members may die, become insolvent or sell their shares, but the company continues. Even if every shareholder dies in one accident, the company does not die; the shares simply pass to their heirs. A company ends only when the law ends it, for example by winding up or striking off.
4. Transferability of shares. Under Section 44, a member's shares are movable property, transferable in the manner provided by the articles. A shareholder of a public company can usually sell and leave without disturbing the company; a private company must restrict this right.
5. Separate property. The company's property belongs to the company, not to its members. Even a person holding almost all the shares does not own its land or machines.
6. Capacity to sue and be sued in its own name.
7. Separation of ownership and management. Shareholders own the company through their shares, but it is managed by a Board of Directors whom they elect. This is useful but is also the source of many problems.
8. Common seal. Optional since an amendment in 2015. Where a company has no seal, documents that needed it are signed by two directors, or by a director and the company secretary.

Advantages and Disadvantages of a Company

Advantages

• Limited liability, perpetual succession and transferable shares attract investors.
• A public company can raise very large capital from the public through shares and debentures.
• It can be managed by professionals who own no shares at all.
• It can borrow on the security of its assets, including a floating charge over its changing stock of goods.

Disadvantages

• Formation and running involve many formalities and costs.
• Important documents are open to the public, so there is less secrecy.
• Those in control may misuse the money of others, which is why the law imposes so many duties on them.
• The privilege of separate personality can be taken away when misused.

Company and Partnership Compared

Point	Company	Partnership firm
Legal status	A separate legal person.	Under the Indian Partnership Act, 1932, only a collective name for the partners.
Liability	Members of a limited company have limited liability.	Partners are personally liable without limit for the firm's debts.
Transfer	Shares can be transferred.	No outsider can be brought in without the consent of all partners.
Succession	Perpetual succession.	Dissolved by the death of a partner, unless the partners have agreed otherwise.
Management	Managed by its Board.	Every partner is an agent of the firm.
Size	Can be very large; a public company has no upper limit on its members.	Under Section 464 of the Companies Act and its Rules, an association of more than 50 persons cannot be formed to carry on business for profit; it must be registered as a company or formed under some other law.

Between the two stands the limited liability partnership, created by a separate Act of 2008: a separate legal person like a company, but run internally like a partnership.

Separate Legal Personality

The court applied this even though the unsecured creditors lost their money, because they had chosen to deal with a limited company and could have protected themselves.

Consequences

• The company owns its property and owes its debts.
• A member can contract with his own company, lend it money, or even be its employee.
• A creditor of the company must normally sue the company, not its members.

The principle can work against the shareholder

Application in India

Limited Liability

Limited liability is closely linked to separate personality.

• Company limited by shares: liability limited to the amount, if any, unpaid on the member's shares.
• Company limited by guarantee: each member promises to contribute up to a fixed amount if the company is wound up.
• Unlimited company: no limit on members' liability, but it can be enforced only in a winding up.

Limited liability shifts risk to the creditors. That is why the law demands public disclosure, protects the company's capital, and sometimes lifts the veil.

Lifting the Corporate Veil

Separate personality is a privilege given by law. Where it is used as a mask to cheat creditors, escape a legal duty or evade tax, the law may look behind the company at the persons who really control it. This is lifting, or piercing, the corporate veil. The company is like a curtain between the world and its members: normally the court does not look behind it, but when it is used for fraud or to defeat the law, the court lifts it, either under the statute or through judicial decisions.

Statutory instances

• Section 3A: if membership falls below the legal minimum (seven for a public company, two for a private company) and the company carries on business for more than six months while so reduced, every member who knows of this becomes severally liable for debts contracted after those six months.
• Section 7(7): if a company was incorporated by false information or fraud, the Tribunal may even direct that its members' liability shall be unlimited.
• Sections 34 and 35: directors, promoters and experts may be personally liable for untrue statements in a prospectus.
• Section 339: if in a winding up the business appears to have been carried on to defraud creditors, the Tribunal may make the persons knowingly responsible personally liable without any limit.

Judicial instances

The courts have never made a closed list, but the cases fall into familiar groups.

1. Enemy character

2. Fraud, or escaping a legal obligation

3. Evasion of tax

4. Use of a company to defraud people

5. Groups of companies and the purpose of a statute

When a parent works through a wholly owned subsidiary, the question is whether the law should treat them as one.

6. Defeating a welfare law

7. Recognising reality in favour of the person behind the company

Usually an outsider asks the court to lift the veil, but sometimes it is lifted in favour of the person behind the company.

Limits on lifting the veil

Incorporation of a Company

Under Section 3, a company may be formed for any lawful purpose by seven or more persons (public company), two or more (private company) or one person (One Person Company), who subscribe their names to a memorandum and complete the requirements of registration.

Procedure

The whole process is online, on the Ministry of Corporate Affairs portal.

1. Reservation of name: the name must not be identical with, or too similar to, that of an existing company, and must not be undesirable.
2. Preparation of the memorandum and articles.
3. Filing under Section 7 with the Registrar of Companies, signed by all the subscribers, together with:
   • a declaration of compliance with all requirements of the Act, by an advocate, chartered accountant, cost accountant or company secretary in practice engaged in the formation, and by a director, manager or secretary named in the articles;
   • declarations by the subscribers and first directors that they have not been convicted of any offence connected with the promotion, formation or management of a company, and have not been found guilty of fraud or breach of duty towards any company in the preceding five years;
   • particulars of the subscribers and first directors, an address for correspondence, and the first directors' interests in other firms and companies.
4. Certificate of incorporation: if satisfied, the Registrar registers the documents and issues the certificate, carrying a unique corporate identity number. The company is born on the date mentioned in it and, under Section 9, is from that date a body corporate with perpetual succession.

Effect of the certificate

The 1956 Act said that the certificate was conclusive evidence that all registration requirements had been complied with. The 2013 Act does not repeat those words. Instead, Section 7(7) deals with a company incorporated by false information, suppression of material facts or fraud: the Tribunal may regulate its management, make its members' liability unlimited, remove its name from the register, order its winding up, or pass any other suitable order.

Commencement of business: Section 10A

A company having share capital cannot commence business or exercise borrowing powers until a director files a declaration, within 180 days of incorporation, that every subscriber has paid for the shares he agreed to take. The company must also have verified its registered office. If the declaration is not filed, the company and its officers face penalties, and if it seems to be doing no business, the Registrar may act to strike off its name.

Types of Companies

1. By liability of members

Kind	Section	Liability of members
Limited by shares	2(22)	Limited to the amount unpaid on his shares. The most common kind.
Limited by guarantee	2(21)	Members undertake to contribute up to a fixed amount if the company is wound up. Used by clubs, trade associations and charitable bodies; may or may not have share capital.
Unlimited	2(92)	No limit.

2. By number of members and access to the public

Private company: Section 2(68)

Its articles must:

1. restrict the right to transfer its shares;
2. limit its members to 200 (joint holders count as one; employee members, and former employees who became members while in service, are not counted); and
3. prohibit any invitation to the public to subscribe for its securities.

Its name ends with "Private Limited". The old minimum paid-up capital (Rs. 1 lakh for a private and Rs. 5 lakh for a public company) was removed in 2015.

Public company: Section 2(71)

A company that is not a private company. It needs at least seven members and three directors, with no upper limit on members. A private company that is a subsidiary of a public company is treated as a public company, even if its own articles still describe it as private.

One Person Company: Section 2(62)

A new idea of the 2013 Act, allowing a single person to enjoy separate personality and limited liability.

• Only a natural person who is an Indian citizen can form it; since 2021 he need not be resident in India.
• The memorandum must name a nominee, who becomes the member if the sole member dies or becomes incapable.
• A person cannot form more than one OPC.
• It cannot carry on non-banking financial investment activities.

Small company: Section 2(85)

A private company whose paid-up capital does not exceed Rs. 10 crore and turnover does not exceed Rs. 100 crore. These limits were last raised in December 2025. A holding or subsidiary company, a Section 8 company and a company governed by a special Act cannot be a small company. Small companies enjoy lighter compliance, such as fewer Board meetings, simpler annual returns and lower penalties.

3. By control

Subsidiary and holding company, Section 2(87): a company is a subsidiary of another (its holding company) where that other company (i) controls the composition of its Board of Directors, or (ii) exercises or controls more than one half of its total voting power, alone or together with its own subsidiaries.

Associate company, Section 2(6): a company in which another company has significant influence, but which is not its subsidiary. Significant influence means control of at least 20 per cent of total voting power, or control of or participation in business decisions under an agreement. A joint venture company is also an associate.

4. Special kinds

Government company, Section 2(45): at least 51 per cent of its paid-up share capital is held by the Central Government, one or more State Governments, or both together. Its subsidiary is also a government company.

Foreign company, Section 2(42): a company incorporated outside India that has a place of business in India, physically or electronically, and conducts any business activity here. Within 30 days of establishing a place of business in India, it must file its documents with the Registrar under Chapter XXII. If it fails to comply, Section 393 provides that its contracts remain valid and it can still be sued, but it cannot sue on them until it complies.

Listed company, Section 2(52): one whose securities are listed on a recognised stock exchange; the Rules exclude some companies, such as those that have listed only privately placed debt securities.

Section 8 company: formed to promote commerce, art, science, sports, education, research, social welfare, religion, charity, protection of the environment or similar objects. It must apply its income only to those objects, cannot pay dividends to members, and needs a licence from the Central Government.

Dormant company, Section 455: a company formed for a future project or to hold an asset, with no significant transactions, or an inactive company, may get dormant status from the Registrar.

Producer company: producer companies of farmers and other primary producers are now governed by Chapter XXIA.

Promoters

Every company begins as an idea; the person who turns that idea into a registered company is the promoter.

Definition: Section 2(69)

1. A person named as a promoter in a prospectus, or identified as such by the company in its annual return.
2. A person who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise.
3. A person in accordance with whose advice, directions or instructions the Board is accustomed to act.

Legal position

A promoter is not an agent of the company, because it does not yet exist when he acts; nor is he a trustee in the strict sense. But he stands in a fiduciary position, a position of trust and good faith, towards the company he forms.

Disclosure and secret profit

Disclosure must be made to an independent board of directors, to the members as a whole, or to the public in the prospectus. If it is not, the company may rescind the contract, or keep the property and recover the secret profit. A promoter may make an honest profit if he discloses it properly.

Rights

• No automatic right to payment for his work, or even to recover preliminary expenses, because the company did not exist when he spent the money. In practice the articles or a post-incorporation contract provide for his remuneration and expenses, and the company pays them.
• Where several promoters are jointly liable and one pays more than his share, he may claim contribution from the others.

Liabilities

1. To account for any secret profit.
2. Criminal and civil liability for untrue statements in a prospectus under Sections 34 and 35.
3. In a winding up, Section 340 covers any person who took part in the promotion or formation of the company; if he has misapplied its money or property, or committed misfeasance or breach of trust, the Tribunal may order repayment with interest or compensation.
4. Personal liability on contracts made before the company was born.

Pre-incorporation Contracts

Promoters often make contracts for a company before it is born, such as buying land or ordering goods.

Indian position

Indian law softens this rule. Under Section 15(h) and Section 19(e) of the Specific Relief Act, 1963, a company may enforce, and may be compelled to perform, a contract made by its promoters before incorporation, if:

1. it was made for the purposes of the company;
2. it is warranted by the terms of its incorporation; and
3. the company accepts it after incorporation and communicates its acceptance to the other party.

Memorandum of Association

Every company has two basic documents, the memorandum and the articles. The memorandum of association is the charter of the company: it fixes the company's identity and the limits within which it may act.

Contents: Section 4

1. Name clause: ending with "Limited" for a public company and "Private Limited" for a private company, except in a Section 8 company.
2. Registered office clause: the State in which the registered office will be situated, which decides the jurisdiction of the Registrar and the courts.
3. Objects clause: the objects for which the company is formed, and any matter considered necessary in furtherance of them.
4. Liability clause: whether members' liability is limited and, if so, whether by shares or by guarantee.
5. Capital clause: the authorised capital and its division into shares.
6. Subscription clause: the subscribers' desire to form the company and the number of shares each agrees to take.

In a One Person Company, the memorandum also names the nominee. Model forms are in the First Schedule.

Alteration

Change	Requirement
Capital clause	Section 61
Other clauses (general rule)	Special resolution under Section 13
Name	Also approval of the Central Government, now given by the Registrar
Registered office from one State to another	Also approval of the Central Government, now given by the Regional Director
Objects, where the company raised money from the public by prospectus and some remains unused	Special resolution passed through postal ballot; where SEBI (Securities and Exchange Board of India) rules require it, promoters or controlling shareholders must offer an exit to those who disagree

Shifting the registered office: the cases

When these cases were decided, a shift from one State to another needed a court's confirmation, and the question was whether the State losing the registered office could object.

Today the Central Government decides under Section 13. Before approving a shift, it may satisfy itself that the creditors, debenture holders and others concerned have consented, or that the company has made sufficient provision or given adequate security for its debts.

Articles of Association

The articles of association are the internal rulebook of the company, dealing with shares and their transfer, class rights, meetings and voting, appointment and powers of directors, and dividends. Section 5 says that the articles shall contain the regulations for the management of the company.

Model articles are in the First Schedule; Table F is the model for a company limited by shares. A company may adopt them fully or partly, and unless its own articles exclude or modify them, the model articles apply.

Articles of Association (continued)

Entrenchment provisions

The articles may contain provisions for entrenchment: certain provisions can be changed only if conditions more restrictive than a special resolution are met.

• Entrenchment may be made when the company is formed.
• Later, it needs the agreement of all the members in a private company, and a special resolution in a public company.
• Investors use it to protect their special rights.

Alteration of articles (Section 14)

A company may alter its articles by a special resolution, subject to these limits:

• the alteration must not be contrary to the Act or the memorandum; and
• the power must be exercised in good faith for the benefit of the company as a whole (as held by the courts).

A private company becomes a public company, or the reverse, by altering its articles. Turning a public company into a private company also needs the approval of the Central Government.

Binding effect of the memorandum and articles (Section 10)

When registered, the memorandum and articles bind the company and its members as if they had been signed by the company and by each member. They operate as a contract between the company and each member, and among the members themselves.

Memorandum and articles compared

Basis	Memorandum	Articles
Nature	Charter defining the relation of the company with the outside world	Internal rules of the company
Status	Superior document	Subordinate; in a conflict, the memorandum prevails
Relation to the Act	Subject to the Act (Section 6)	Subject to the Act (Section 6)
Function	Tells what the company may do	Tells how it will do it

Doctrine of Ultra Vires

Meaning and purpose

Ultra vires is Latin for beyond the powers. When a company acts beyond the powers given to it by its memorandum, the act is ultra vires the company. The doctrine protects two groups:

• Shareholders, who invest on the faith that their money will be used only for the stated objects; and
• Creditors, who give credit on the faith that the company's assets will not be spent on unknown adventures.

Leading cases

Companies then learned to draft wide objects clauses to escape the doctrine.

Consequences of an ultra vires act

1. The act is void; neither side can enforce it as a contract.
2. No ratification is possible.
3. Any member can obtain an injunction to stop the company from doing an ultra vires act.
4. Directors who apply the company's money to an ultra vires purpose are personally liable to make good the loss.
5. Directors may be personally liable to the outsider (Weeks v. Propert).
6. Property acquired through an ultra vires transaction still belongs to the company; and a person who lent money under a void loan may, in some cases, recover what can still be traced.

Three situations distinguished

Act	Effect
Beyond the memorandum	Void
Beyond the articles but within the memorandum	Can be made valid by altering the articles
Beyond the directors' powers but within the company's powers	Can be ratified by the members

Present position

• England: a company's capacity is no longer limited by its objects.
• India: the doctrine still exists, because Section 4 still requires an objects clause. But objects clauses are now drafted very widely, and the Companies Act, 2013 no longer requires the objects to be divided into main objects and other objects.
• The doctrine also survives in Section 245: members can bring a class action to restrain a company from doing an act ultra vires its memorandum or articles.

Doctrine of Constructive Notice

The memorandum, the articles and certain resolutions are public documents registered with the Registrar, and under Section 399 any person can inspect them online. So the law presumes that every person dealing with a company knows their contents, whether he has read them or not. This presumed knowledge is constructive notice.

• The doctrine protects the company against outsiders.
• It is a negative doctrine: it works only against the outsider, never in his favour.
• England: the law now protects a person dealing with a company in good faith from limitations in its constitution, largely removing the doctrine.
• India: the doctrine still applies, but its harshness is reduced by the doctrine of indoor management.

Doctrine of Indoor Management

An outsider cannot see what happens inside the company, such as whether a meeting was properly called or a resolution really passed. The doctrine of indoor management says that an outsider dealing with a company in good faith is entitled to assume that the internal requirements have been properly complied with.

Hence the doctrine is also called the rule in Turquand's case. It is based on convenience: business would stop if everyone dealing with a company had to examine its minute books.

Constructive notice	Indoor management
Outsider is presumed to know the public documents	Outsider may assume internal requirements were complied with
Protects the company against outsiders	Protects the outsider dealing in good faith
Negative doctrine	Reduces the harshness of constructive notice

Exceptions

The doctrine does not protect or apply to:

1. a person who has actual knowledge of the irregularity;
2. a person put on inquiry by suspicious circumstances who fails to inquire, or who is negligent;
3. insiders, such as directors, who are expected to know the internal affairs;
4. forgery, because a forged document is a nullity; and
5. an act outside the apparent authority of the officer, or one that is void, for example ultra vires the company.

In this case, Lord Justice Diplock set out four conditions:

1. a representation that the agent had authority;
2. made by persons with actual authority to manage the business;
3. reliance on it by the outsider; and
4. capacity of the company to make such a contract and to delegate the power to make it.

Doctrine of Alter Ego

A company is an artificial person with no mind or body of its own. The law explains how it can know, intend or commit an offence through the doctrine of alter ego (Latin: the other self).

Share Capital: Meaning of Share and Share Capital

A company raises money mainly in two ways: by issuing shares, which make the investor an owner; and by borrowing (including debentures and deposits), which makes the investor a creditor.

Meaning of share

A share carries a bundle of rights: to vote, to dividend when declared, and to a share of any surplus on winding up. It also carries a liability to pay the full price of the share when called.

Senses of capital

• Authorised (nominal) capital: the maximum capital the memorandum allows the company to issue.
• Issued capital: the part actually offered for subscription.
• Subscribed capital: the part of the issued capital people actually agree to take.
• Called up capital: the part of the subscribed capital for which payment has been demanded.
• Paid up capital: the amount actually received.

Reserve capital (Section 65): an unlimited company registering as a limited company may provide that part of its uncalled capital can be called up only on a winding up.

Classes of Share Capital

Section 43 recognises only two kinds of share capital: equity and preference.

• Preference share capital carries two preferential rights: (i) to dividend, a fixed amount or at a fixed rate; and (ii) to repayment of capital on winding up.
• Equity share capital is all share capital that is not preference capital. It may carry ordinary voting rights, or differential rights as to dividend, voting or otherwise.

Shares with differential voting rights

They let founders raise money without losing control. The Rules allow them only under conditions, such as authorisation by the articles and by the shareholders, and they cannot carry more than 74 per cent of the total voting power.

Voting rights (Section 47)

• Equity shareholder: votes on every resolution; on a poll, in proportion to his share of the paid up equity capital.
• Preference shareholder: normally votes only on resolutions directly affecting his rights, and on resolutions for winding up or for repayment or reduction of capital.
• If the dividend on his class of preference shares is unpaid for two years or more, he votes on every resolution.

Kinds of preference shares

Basis	Kinds	Meaning
Arrears of dividend	Cumulative / non cumulative	In cumulative shares, unpaid dividend is carried forward and must be paid before equity shareholders get any dividend
Surplus profits	Participating / non participating	Participating shares also share in surplus profits
Conversion	Convertible / non convertible	Convertible shares can be converted into equity shares

Redemption of preference shares (Section 55)

• Irredeemable preference shares can no longer be issued.
• Every preference share must be redeemed within 20 years of issue. Companies in infrastructure projects may issue them for up to 30 years, redeeming part every year from the 21st year.
• Redemption only out of profits available for dividend or the proceeds of a fresh issue made for that purpose; only fully paid shares can be redeemed.
• On redemption out of profits, an equal amount goes to a capital redemption reserve account, so that the capital protecting creditors does not simply disappear.
• Section 55(3): a company unable to redeem may, with the consent of holders of three-fourths in value of those shares and the approval of the Tribunal, issue fresh redeemable preference shares in their place.

Issue of Shares at a Premium and at a Discount

Premium (Section 52)

Shares issued above face value are issued at a premium. The premium must go to a separate securities premium account, treated almost like capital, which can be used only for:

1. issuing fully paid bonus shares;
2. writing off preliminary expenses and the expenses of an issue;
3. providing for the premium payable on redemption of preference shares or debentures; and
4. buying back the company's own shares.

Discount (Section 53)

Issuing shares at a discount is prohibited, and such an issue is void. Only two exceptions:

1. sweat equity shares; and
2. shares issued to creditors on conversion of their debt under a statutory resolution plan or a debt restructuring scheme approved under the Reserve Bank's guidelines.

Transfer and Transmission of Securities

A shareholder who sells his shares to leave the company makes a transfer; when he dies and his shares pass to someone else, there is transmission.

Transfer (Section 56)

Transfer is a voluntary act of the holder. A company cannot register a transfer of securities held in physical form without a proper instrument of transfer, duly stamped, dated, signed by or on behalf of both transferor and transferee, and delivered to the company with the share certificate. Securities held with a depository are transferred electronically. New certificates must be delivered within one month of receiving the instrument of transfer.

Transmission

Transmission happens by operation of law, not by any act of the holder: on the death or insolvency of a shareholder, or the winding up of a shareholder that is a company. On death, the shares pass to the legal representative; the company registers the transmission on proof of title such as a succession certificate, probate or letters of administration.

Nomination (Section 72): a holder may nominate a person in whom the securities will vest on his death.

Transfer and transmission compared

Basis	Transfer	Transmission
Nature	Deliberate act of the parties	Operation of law
Document	Instrument of transfer	Proof of the event and of title only
Stamp duty	Payable	Not payable
Consideration	Usually for consideration	None

Refusal to register (Section 58) and rectification (Section 59)

A private company may refuse if its articles give it that power, since restricting transfer is part of its nature. In a public company, securities are freely transferable.

Point	Private company	Public company
Refusal	Notice of refusal, with reasons, within 30 days of receiving the instrument of transfer or intimation of transmission	Refusal without sufficient cause can be appealed
Appeal to the Tribunal	Within 30 days of receiving the notice, or 60 days of lodging the transfer if no notice is sent	Within 60 days of the refusal, or 90 days of lodging the transfer if no reply is received

• The Tribunal may direct the company to register the transfer.
• A contract between persons about transfer of securities, such as a right of first refusal in a shareholders agreement, is enforceable even in a public company (Section 58).
• If a name is wrongly entered in or omitted from the register of members, the aggrieved person may apply to the Tribunal for rectification (Section 59).

Alteration of Share Capital

Section 61: a limited company having a share capital, if authorised by its articles, may alter its capital clause in general meeting in five ways:

1. Increase its authorised capital.
2. Consolidate shares into shares of a larger amount (ten ₹10 shares into one ₹100 share); if this changes shareholders' voting percentage, Tribunal approval is needed.
3. Convert fully paid shares into stock, and reconvert stock into shares.
4. Sub-divide shares into shares of a smaller amount (one ₹10 share into ten ₹1 shares).
5. Cancel shares not taken or agreed to be taken by anyone. This reduces authorised capital but is not a reduction of share capital in the legal sense.

Notice of alteration must be filed with the Registrar within 30 days (Section 64).

Reduction of Share Capital

Reduction is far more serious than alteration, because paid up capital is the cushion that protects creditors; if capital could be freely returned to members, creditors would be left with an empty shell.

Reduction may be in any manner, in particular by:

1. extinguishing or reducing liability on shares not fully paid;
2. cancelling paid up capital that is lost or unrepresented by available assets; or
3. paying off paid up capital in excess of the company's needs.

Safeguards

• The Tribunal gives notice to the Central Government, the Registrar, SEBI (for a listed company) and the creditors, who may make representations within three months.
• It confirms only if every creditor's debt or claim has been discharged, determined or secured, or his consent obtained.
• The accounting treatment must match the accounting standards.
• No reduction is allowed while the company is in arrears in repaying deposits or interest on them.

Buy-back of Shares

Today Section 68 permits buy-back within strict limits. Purposes: returning surplus cash to shareholders, supporting the share price, or improving the earnings per share of the remaining shares.

Conditions (Section 68)

1. Authorised by the articles.
2. A special resolution; but the Board alone may approve up to 10 per cent of total paid up equity capital and free reserves.
3. Not more than 25 per cent of total paid up capital and free reserves; for equity shares, not more than 25 per cent of paid up equity capital in a financial year.
4. Post buy-back debts not more than twice the paid up capital and free reserves.
5. Only fully paid shares.
6. Funded only from free reserves, the securities premium account, or proceeds of an earlier issue of a different kind of shares or securities.
7. No second buy-back within one year of the close of the first.

After the buy-back

• Complete within one year of the resolution.
• Extinguish and physically destroy the shares within seven days of completion.
• No issue of the same kind of shares for six months, except bonus shares and shares from existing obligations such as conversion of debentures.
• Section 69: if financed from free reserves or the securities premium account, an amount equal to the nominal value of the shares bought back goes to the capital redemption reserve account.

Prohibitions (Section 70)

• No buy-back through a subsidiary or an investment company.
• No buy-back after a default in repaying deposits, debentures, preference shares or term loans, or in paying a declared dividend, until three years after the default is remedied.

Listed companies must also follow the SEBI buy-back regulations on permitted methods, such as a tender offer to all shareholders in proportion to their holdings.

Bonus Shares

In a bonus issue, the company converts part of its accumulated reserves into share capital and gives new fully paid shares free to existing shareholders in proportion to their holdings.

Conditions (Section 63)

• Only out of free reserves, the securities premium account or the capital redemption reserve account.
• Never by capitalising revaluation reserves, since such a gain exists only on paper.
• Authorised by the articles, recommended by the Board and approved in general meeting.
• No default in interest or principal on fixed deposits or debt securities, or in statutory employee dues such as provident fund, gratuity and bonus.
• Partly paid shares must first be made fully paid.
• Not in lieu of dividend.
• Once announced by the Board, it cannot be withdrawn.

Rights Issue (Further Issue of Shares)

Section 62: whenever a company proposes to increase its subscribed capital by issuing further shares, it must first offer them to the existing equity shareholders in proportion to their paid up capital. This is a rights issue. Its purpose is to prevent dilution of the percentage holding and voting power of existing shareholders.

Procedure

• Offer by notice stating the number of shares and the acceptance period, normally 15 to 30 days.
• Notice sent at least three days before the issue opens.
• Unless the articles say otherwise, the offer includes a right to renounce in favour of any other person.
• If a shareholder neither accepts nor renounces in time, the Board may dispose of the shares in a manner not disadvantageous to the shareholders and the company.
• A private company may shorten these periods with written or electronic consent of 90 per cent of its members.

Issue to others

1. Employees, under an employee stock option scheme approved by special resolution. An employee stock option is a right to buy shares at a future date at a price fixed in advance.
2. Any persons, by preferential allotment approved by special resolution, at a price based on a registered valuer's valuation.

Sweat Equity Shares

• Section 54: a special resolution stating the number of shares, current market price, consideration and the class of directors or employees receiving them.
• Annual limit: 15 per cent of existing paid up equity capital, or shares worth ₹5 crore, whichever is higher.
• Overall limit: 25 per cent of paid up equity capital at any time; a start-up may go up to 50 per cent within ten years of incorporation.
• Lock-in of three years; they rank equally with other equity shares.

Debentures

Shareholder and debenture holder compared

Basis	Shareholder	Debenture holder
Status	Owner	Creditor
Return	Dividend, only if there are profits and it is declared	Interest, whether or not there are profits
Voting	Has voting rights	No voting rights (Section 71(2))
Security	Never secured	Usually secured by a charge on assets
Winding up	Paid after debenture holders	Paid before shareholders
Discount	Not allowed, except in the permitted cases	Allowed

Kinds of debentures

• Secured (backed by a charge on assets) and unsecured.
• Redeemable: repaid at a fixed time.
• Convertible into shares, fully or partly; issued only with a special resolution (Section 71(1)). Non convertible debentures remain loans throughout.
• Public and listed, or privately placed.

Debenture trustee and redemption reserve

• Before offering debentures to the public or to more than 500 members, a company must appoint a debenture trustee, usually a bank or a SEBI-registered trusteeship company, who protects the debenture holders and can act for them on default.
• A debenture redemption reserve is created out of profits so that money is available on repayment. Under the present Rules, it is required only for unlisted companies other than financial companies, at 10 per cent of outstanding debentures.

Invitation and Acceptance of Deposits

Because many savers lost money to companies that took deposits and vanished, Sections 73 to 76 strictly control deposits.

• Section 73: no company shall invite, accept or renew deposits from the public, except as the Act allows.
• Deposits from members are allowed subject to conditions such as a resolution in general meeting, a circular to members filed with the Registrar, and a deposit repayment reserve.
• Section 76: only an eligible public company, with net worth of at least ₹100 crore or turnover of at least ₹500 crore and a credit rating, may accept deposits from the public.
• Many receipts are not deposits, such as bank loans, advances for supply of goods, and money from a director who declares it is his own, not borrowed.
• Section 75: if deposits were accepted with intent to defraud depositors, every responsible officer is personally liable for their losses without any limitation of liability.
• Banks and non banking financial companies are governed by the Reserve Bank of India instead.

Prospectus

A public company raising money from the public must tell investors the truth about itself in a prospectus.

Kinds of prospectus

Kind	Section	Features
Red herring	32	Lacks complete details of price or quantity; used in book building, where price is discovered through investors' bids; the final prospectus is filed later
Shelf	31	For certain classes of companies, such as banks and financial institutions, raising money in stages; valid one year from opening of the first offer; later offers need only an information memorandum with new facts
Abridged	33	Short summary that must accompany every application form
Deemed	25	Where securities are allotted to an intermediary with a view to offer for sale to the public, the offer document is treated as the company's prospectus
Offer for sale by existing shareholders	28	Governed by Section 28

Contents and registration (Section 26)

• Must be dated and state the information and reports prescribed by the Act and SEBI: objects of the issue, capital structure, names of directors and promoters, risk factors, audited financial statements, pending litigation and minimum subscription.
• A copy signed by every director, with the consents of experts named in it, must be delivered to the Registrar on or before publication.
• Valid only if issued within 90 days of that delivery.
• Listed issues follow the SEBI Issue of Capital and Disclosure Requirements Regulations, 2018.

Minimum subscription (Section 39)

If the minimum subscription is not received within the prescribed time, application money must be refunded. Under the SEBI rules, the minimum subscription for a public issue of shares is 90 per cent of the issue.

Misstatement in a Prospectus

Common law: Derry v. Peek

The decision left investors without a remedy against careless directors, so the British Parliament passed the Directors Liability Act, 1890 the next year, making directors liable for untrue statements in a prospectus unless they proved reasonable grounds for their belief. The Indian Act goes much further.

Civil liability (Section 35)

A person who subscribes relying on a misleading statement, inclusion or omission in a prospectus and suffers loss can claim compensation from:

• the company; every director at the time of issue; every person named as a director with his consent;
• every promoter; every person who authorised the issue; and every expert whose statement was included.

Escape is possible only in narrow cases, for example where he withdrew consent to become a director before the issue, or the prospectus was issued without his knowledge and he gave public notice as soon as he learnt of it. Where the prospectus was issued with intent to defraud, every such person is personally liable without any limitation of liability.

Criminal liability (Section 34 with Section 447)

Every person who authorises the issue of a prospectus containing an untrue or misleading statement is liable under Section 447 (fraud), unless he proves that the statement or omission was immaterial, or that he had reasonable grounds to believe, and did believe up to the time of issue, that it was true.

Section 447: imprisonment from six months to ten years, and fine from the amount involved up to three times that amount. Small frauds not involving public interest attract lighter punishment.

Other provisions

• Section 36: punishes knowingly or recklessly making a false or misleading statement, or deliberately concealing material facts, to induce another person to invest.
• Section 37: affected persons, or a group of them, may sue for these wrongs.

Misstatement in a Prospectus: Duty of Full Disclosure (continued)

Private Placement

Private placement is an offer of securities to a selected group of persons instead of the public. It is governed by Section 42, which imposes strict limits so that it does not become a public issue by the back door.

Under Section 23, a private company may issue securities only by a rights issue, a bonus issue or a private placement; a public company may also make a public offer.

Conditions of a private placement

1. The offer can be made only to identified persons, not more than 200 in a financial year.
2. The count of 200 excludes qualified institutional buyers (such as banks and mutual funds) and employees receiving shares under a stock option scheme.
3. The offer is made through a private placement offer letter to named persons.
4. No public advertisement is allowed.
5. The money must come from the subscriber's bank account, not in cash.
6. Allotment must be made within 60 days of receiving the money; otherwise the money must be refunded within the next 15 days, failing which interest at 12% a year is payable.

Cases on private placement

Unit 3: Membership in a Company and Meetings

The members own the company, and its decisions are taken in meetings. This unit covers both.

Meaning of a Member

Section 2(55) defines a member in three parts:

1. Subscribers to the memorandum are deemed to have agreed to become members and become members on registration, even before their names are entered in the register.
2. Every other person who agrees in writing to become a member and whose name is entered in the register of members.
3. Every person holding shares whose name is entered as a beneficial owner in the records of a depository.

Member and shareholder

The two are usually the same, but not always:

Person	Member?	Shareholder?
Member of a company limited by guarantee without share capital	Yes	No (such a company has members but no shareholders)
Buyer of shares whose name is not yet in the register	Not yet, in law	May call himself a shareholder

Modes of Acquiring Membership

1. By subscribing to the memorandum.
2. By applying for shares and receiving an allotment.
3. By buying shares and getting the transfer registered.
4. By transmission, when shares pass to him on the death of a holder.
5. By holding shares in a depository as a beneficial owner.
6. By estoppel: a person who knowingly allows his name to remain on the register and behaves like a member cannot later deny that he is one.

Who can become a member

Any person competent to contract.

• Minor: cannot contract, so cannot become a member by himself; but fully paid shares, which carry no further liability, may be held for him through a guardian.
• Company: can hold shares in another company if its memorandum allows.
• Subsidiary (Section 19): cannot hold shares in its holding company, except as the legal representative of a deceased member, as a trustee, or where it held them before becoming a subsidiary; in the last case it cannot vote them.
• Partnership firm: not a legal person, so its shares are held in the names of its partners.
• Hindu undivided family: holds shares through its karta (the Vickers case, Unit 2).
• Foreign national: may hold shares, subject to the foreign exchange laws.

Rights and Privileges of Members

The rights of members fall into five groups:

1. Financial rights: to receive dividend when declared, to receive bonus shares, to be offered rights shares, and to share in the surplus on winding up.
2. Rights of information: to receive notices of general meetings and copies of the financial statements and reports; to inspect the registers, annual returns and minutes of general meetings.
3. Rights of control: to attend and vote at general meetings, appoint a proxy, elect and remove directors, requisition an extraordinary general meeting, and demand a poll.
4. Right to transfer shares, subject to the articles.
5. Rights of protection: to apply to the Tribunal against oppression and mismanagement, to join a class action, and in some cases to petition for winding up.

Register of Members

Section 88: every company must keep a register of members showing each member's name and address, the shares held and the date on which he became a member. It may be kept in electronic form. For shares held with a depository, the depository's register of beneficial owners is treated as the register of members for those shares.

Section 95: the register is prima facie evidence of the matters entered in it, so an entry is taken as correct unless proved otherwise.

Disclosure of the real owner

The register shows the holder, but not always the real owner. So:

• Section 89: a registered holder who does not hold the beneficial interest must declare this to the company, and so must the person who really holds that interest.
• Section 90: every individual holding a significant beneficial ownership (fixed by the Rules at 10% or more), or exercising significant influence or control, must disclose it to the company.

If the register itself is wrong, the remedy is rectification by the Tribunal under Section 59 (Unit 2).

Dematerialisation and Rematerialisation of Securities

Shares were once issued only as paper certificates: transfers took weeks, and certificates were lost, stolen or forged. The Depositories Act, 1996 changed this: most shares now exist only as electronic entries, like money in a bank account.

• Depository: an institution holding securities in electronic form. India has two: the National Securities Depository Limited and the Central Depository Services India Limited.
• Depository participant: an intermediary such as a bank or stockbroker, through whom the investor deals with a depository and with whom he opens a demat account.

Dematerialisation	Rematerialisation
Converting paper certificates into electronic holdings: the investor surrenders the certificates through the participant, the company verifies and cancels them, and the shares are credited to his demat account.	The reverse: converting electronic holdings back into paper certificates. Still permitted in some cases, but rarely useful, since listed securities can be transferred only in demat form.

Legal position under the Depositories Act

• Section 10: the depository is deemed the registered owner only for effecting transfers; it has no voting or other rights. The beneficial owner (the investor) enjoys all the rights and bears all the liabilities of a shareholder.
• Section 9: securities in a depository are fungible; individual shares are not identified by distinctive numbers.
• Transfer: simply a debit to the seller's account and a credit to the buyer's; no instrument of transfer is needed.
• Transmission: the heir or nominee applies to the participant with the death certificate, and the securities move into his account.

Is demat compulsory?

• Listed companies: largely yes. Since April 2019, transfers of listed securities can be made only in demat form; since January 2022, transmission and transposition as well.
• Unlisted public companies: under Section 29 and the Rules, must issue securities only in demat form and help dematerialise existing securities.
• Private companies: under a Rule notified in 2023, the same applies, except to small companies and government companies.

A shareholder of such a company must dematerialise his holding before transferring shares or subscribing to new ones.

Company Meetings

A company is an artificial person, so its decisions are taken by human beings meeting together: some by the members in general meeting, others by the directors in Board meetings. If the rules for either are broken, a decision may be invalid.

• General meetings: the annual general meeting and the extraordinary general meeting.
• Class meetings of a particular class of shareholders, e.g. to vary the rights of that class.
• Meetings of creditors, e.g. in a scheme of arrangement.

Annual General Meeting

The annual general meeting (AGM) is the yearly meeting of the members, at which the directors account for their stewardship. Under Section 96:

• Every company other than a One Person Company must hold one every year.
• First AGM: within 9 months of the close of the first financial year.
• Later AGMs: within 6 months of the close of the financial year, with not more than 15 months between two AGMs.
• Extension: the Registrar may extend by up to 3 months for a special reason, but not for the first AGM.
• Time: business hours, 9 a.m. to 6 p.m., on a day that is not a national holiday.
• Place: the registered office or another place in the same city, town or village; an unlisted company may hold it anywhere in India if all members consent in advance.

Ordinary business

1. Considering the financial statements and the reports of the Board and the auditors.
2. Declaring a dividend.
3. Appointing directors in place of those retiring.
4. Appointing the auditors and fixing their remuneration.

Everything else is special business.

Failure to hold the AGM

1. Section 97: any member may apply to the Tribunal, which may call the meeting or direct it to be called, give any directions it thinks fit, and even direct that one member present in person or by proxy shall be deemed to constitute the meeting.
2. Section 99: the company and every officer in default are punishable with a fine.
3. Continued failure to file financial statements and annual returns can disqualify the directors (Unit 4).

Extraordinary General Meeting

Any general meeting other than the AGM; it deals with business that cannot wait for the next AGM. The Board may call it at any time.

Requisition by members (Section 100)

• The Board must call it on the requisition of members holding at least one tenth of the paid-up capital carrying voting rights (in a company without share capital, one tenth of the total voting power).
• The requisition must state the matters to be considered.
• Within 21 days, the Board must call a meeting to be held within 45 days of receiving the requisition.
• If the Board fails, the requisitionists may themselves call and hold it within 3 months.
• The company must repay their reasonable expenses and deduct them from the fees or remuneration of the directors in default.

Meeting ordered by the Tribunal (Section 98)

Where it is impracticable to call or conduct a meeting (other than an AGM) in the normal way, e.g. because of a deadlock between two groups, the Tribunal, on its own motion or on the application of a director or a member entitled to vote, may order a meeting to be called, held and conducted as it thinks fit.

Procedure at General Meetings

Notice (Section 101)

• At least 21 clear days' notice, in writing or by electronic mode. Clear days exclude the day of sending the notice and the day of the meeting.
• It must state the place, date, day and hour of the meeting and the business to be transacted.
• It must be sent to every member, the legal representative of a deceased member, the assignee of an insolvent member, the auditors and every director.
• Accidental omission to give notice to anyone entitled, or its non-receipt, does not invalidate the meeting. A defective notice is a different matter (see the case below).

Shorter notice

Meeting	Consent needed
Annual general meeting	At least 95% of the members entitled to vote
Any other meeting	A majority in number of members entitled to vote, holding at least 95% of the paid-up voting capital

Explanatory statement (Section 102)

For every item of special business, the notice must include an explanatory statement disclosing the nature of the concern or interest of every director, manager and key managerial person, and their relatives, in that item, and any other information members need, so that members decide with full knowledge. A resolution passed on a misleading explanatory statement can be challenged.

Quorum (Section 103)

Quorum is the minimum number of members who must be present for a meeting to transact business. Unless the articles require more:

Company	Quorum (members personally present)
Public company with up to 1,000 members	5
Public company with more than 1,000 and up to 5,000 members	15
Public company with more than 5,000 members	30
Private company	2

• If no quorum within half an hour, the meeting stands adjourned to the same day next week at the same time and place, or to a date, time and place fixed by the Board; either way, members must get at least 3 days' notice of the adjourned meeting.
• A meeting called by requisitionists is simply cancelled.
• If again no quorum within half an hour at the adjourned meeting, the members present shall be the quorum.

Proxies (Section 105)

A member entitled to vote may appoint another person, who need not be a member, as his proxy to attend and vote for him. But:

• a proxy has no right to speak and can vote only on a poll;
• one person can be proxy for not more than 50 members, holding in total not more than 10% of the voting share capital;
• the articles cannot require the proxy form to be lodged more than 48 hours before the meeting.

Voting

• Show of hands (Section 107): the first method, unless a poll is demanded or voting is electronic. Each member present in person has one vote, however many shares he holds. The chairman's declaration, recorded in the minutes, is conclusive evidence of the result.
• Poll (Section 109): the chairman may order one on his own, and must order one when demanded by members holding at least one tenth of the voting power or shares on which at least 5 lakh rupees has been paid up. Votes are counted in proportion to shareholding.
• E-voting (Section 108 and Rules): listed companies and companies having 1,000 or more members must let their members vote by electronic means.
• Postal ballot (Section 110): certain important matters, such as altering the objects clause or selling a whole undertaking, must be decided by postal ballot, members voting by post or electronically without a meeting. A company that must offer e-voting may instead decide them at a general meeting.

Resolutions (Section 114)

Ordinary resolution	Special resolution
Votes cast in favour (including the chairman's casting vote, if any) exceed the votes cast against.	Needs three things: (1) the notice states the intention to propose it as a special resolution; (2) the notice is duly given; (3) votes in favour are at least three times the votes against, i.e. 75% of the votes cast.

Important matters, such as altering the memorandum or articles, reducing capital or shifting the registered office from one State to another, need a special resolution.

Special notice (Section 115)

• The member intending to move the resolution gives notice to the company at least 14 days before the meeting; the company informs members at least 7 days before it.
• The member, alone or with others, must hold at least 1% of the total voting power or shares with at least 5 lakh rupees paid up.
• Required, for example, to remove a director or to appoint someone other than the retiring auditor.

Minutes (Section 118)

Minutes of every general meeting and Board meeting must be prepared and signed within 30 days. They are evidence of the proceedings, and until the contrary is proved, the meeting is presumed to have been duly called and held.

Meetings through Electronic Modes

General meetings: during the coronavirus pandemic, the Ministry of Corporate Affairs allowed general meetings through video conferencing or other audio-visual means; a series of circulars extended this, and the circular of September 2025 allows such meetings until further orders.

Board meetings stand on a firmer footing: Section 173 itself allows directors to participate through video conferencing or other audio-visual means that can record and recognise their participation, and such participation counts for the quorum.

Board Meetings

Section 173

• First meeting: within 30 days of incorporation.
• Thereafter: at least four meetings a year, with not more than 120 days between two consecutive meetings.
• One Person Company, small company, dormant company and private start-up company: only one meeting in each half of the calendar year, with a gap of at least 90 days between them.
• Notice: at least 7 days, in writing, to every director. A meeting may be called at shorter notice for urgent business, but then at least one independent director (if the company has one) must be present or must later ratify the decisions.

Quorum (Section 174)

One third of the total strength of the Board or two directors, whichever is higher.

Resolution by circulation (Section 175)

A resolution may be passed without a meeting if the draft is sent to all directors and approved by a majority of those entitled to vote; but if at least one third of the directors require it, the matter must be decided at a meeting.

Powers exercisable only at Board meetings (Section 179)

Some powers can be exercised only by resolutions passed at Board meetings, including making calls on shares, issuing securities, authorising a buy-back, approving financial statements and approving a merger.

Company Administration: Meaning and Legal Position of Directors

Members meet only occasionally. The day-to-day running of the company is in the hands of the directors and the key managerial personnel.

Definitions

• Director (Section 2(34)): a director appointed to the Board of a company.
• Board of Directors (Section 2(10)): the collective body of the directors of the company.

Who can be a director, and how many (Section 149)

Only an individual can be a director; a company or a firm cannot be appointed.

Type of company	Minimum directors
Public company	3
Private company	2
One Person Company	1

The maximum is 15; a company may have more only by passing a special resolution.

Legal position of directors

Courts have described directors in different ways. Each description captures part of the truth; none is complete.

1. Agents: when a director signs a contract for the company within his authority, the company is bound and he is not personally liable, unless he exceeds his authority.
2. Trustees, in some respects: they hold the company's money and property that come into their hands, and the powers given to them, in trust for the company, and must use those powers only for the purposes for which they were given. Hence directors owe fiduciary duties, that is, duties of loyalty and good faith.
3. Managing partners: they manage a business in which they may also have a stake.

A director holds a special office of trust. Under Section 2(59) he is an officer of the company, so he can be an officer in default, personally liable for breaches of the Act.

To whom are the duties owed?

To the company, not to individual shareholders.

The law has since moved on. Directors of a listed company who deal in its shares using unpublished price sensitive information commit insider trading, prohibited by the SEBI (Prohibition of Insider Trading) Regulations, 2015 and punished under the SEBI Act.

Types of Directors

Executive and non-executive directors

Executive directors	Non-executive directors
Work full time and handle daily management	Do not work full time; attend Board meetings, bring outside experience and keep a watch on the management

• Managing director (Section 2(54)): a director entrusted with substantial powers of management by the articles, an agreement, a resolution or the Board.
• Whole-time director (Section 2(94)): a director in the whole-time employment of the company.

Directors defined by the way they come in (Section 161)

Type	Appointment	Key features
Additional director	By the Board, if the articles allow	Holds office until the next annual general meeting (AGM); if that meeting is delayed, his term ends on the date it was due
Alternate director	By the Board, if the articles or the general meeting allow	Acts for a director who is away from India for at least three months
Director in a casual vacancy	Members must approve it at the next general meeting	Vacancy caused, for example, by death or resignation; holds office only for the remaining term of the director he replaces
Nominee director	By the Board, subject to the articles, on nomination by an institution under a law or an agreement, or by the Government because of its shareholding in a Government company	Protects the interests of the nominating body

Directors required by law

• Resident director (Section 149): every company needs at least one director who has stayed in India for at least 182 days during the financial year.
• Woman director: at least one in every listed company, and in every other public company with paid-up capital of ₹100 crore or more, or turnover of ₹300 crore or more.
• Small shareholders' director (Section 151): a listed company may have one director elected by small shareholders, i.e. those holding shares of nominal value up to ₹20,000.

Appointment of Directors

• First directors: named in the articles. If the articles are silent, the subscribers who are individuals are deemed to be the first directors until directors are duly appointed.
• Later directors (Section 152): appointed by the members in general meeting. Before appointment a person must have a Director Identification Number (a unique number allotted by the Central Government), give his written consent to act, and declare that he is not disqualified.

Retirement by rotation (Section 152)

In public companies, unless the articles make all directors retire at every AGM:

• at least two-thirds of the directors must be liable to retire by rotation;
• at every AGM, one-third of these rotational directors retire, the longest in office first, and may be re-appointed;
• independent directors are not counted for this purpose.

Purpose: shareholders get a regular chance to review the Board.

Separate resolutions (Section 162)

Members must vote on each director's appointment by a separate resolution. Resolutions may be combined only if the meeting first agrees to this without a single vote against. This stops the majority from forcing an unwanted director on members as part of a package.

Proportional representation (Section 163)

The articles may provide that at least two-thirds of the directors shall be elected by proportional representation, giving minority shareholders a chance to elect their own representatives.

Independent Directors

Why needed: in most Indian companies promoters hold a large block of shares and control the Board, and may run the company for their own benefit at the cost of minority shareholders. The law therefore requires directors with no material link to the company or its promoters, who can take an objective view.

Which companies must have them (Section 149(4))

• Every listed public company: at least one-third of its directors.
• A public company: at least two, if any one of three tests is met: paid-up capital of ₹10 crore or more; turnover of ₹100 crore or more; or outstanding loans, debentures and deposits totalling more than ₹50 crore.
• Exempt: unlisted public companies that are joint ventures, wholly owned subsidiaries or dormant companies.

Who can be an independent director (Section 149(6))

1. Not a managing director, whole-time director or nominee director.
2. In the Board's opinion, a person of integrity with relevant expertise and experience.
3. Not, now or earlier, a promoter of the company or of its holding, subsidiary or associate company, and not related to their promoters or directors.
4. No significant money relationship with these companies or their promoters or directors in the current or two preceding financial years.
5. Neither he nor his relatives hold positions or shareholdings that would compromise his independence.

Appointment, tenure and remuneration

• Name must be in the data bank of eligible persons maintained by the Indian Institute of Corporate Affairs.
• Must pass an online proficiency self-assessment test, unless his experience exempts him.
• Term: up to five consecutive years; re-appointment for a second term of up to five years by special resolution.
• Maximum two consecutive terms. Then a three-year gap before re-appointment, during which he cannot be associated with the company in any other way.
• Does not retire by rotation.
• No stock options; may receive sitting fees, reimbursement of expenses and profit commission approved by the members.

Role: Code for Independent Directors (Schedule IV)

He must bring an objective view on strategy, performance and risk; protect the interests of all stakeholders, particularly minority shareholders; balance conflicting interests; attend meetings and seek clarification; report concerns about unethical behaviour or suspected fraud; and see that related party transactions are properly considered. Independent directors must meet at least once a year without the other directors and the management.

Limited liability (Section 149(12))

Independent directors, and non-executive directors who are not promoters or key managerial personnel, are liable only for acts of the company that occurred with their knowledge, attributable through Board processes, and with their consent or connivance, or where they did not act diligently. Without this protection no honest person would accept the risk of the office.

Powers of Directors

General powers of the Board (Section 179)

The Board may exercise all the powers and do all the acts the company is authorised to do, subject to the Act, the memorandum, the articles and regulations made by the company in general meeting. It cannot do anything that the Act or the articles require the company to do in general meeting.

Powers needing members' special resolution (Section 180)

• Selling or leasing the whole or substantially the whole of an undertaking (the most important).
• Borrowing beyond the total of paid-up capital, free reserves and securities premium, leaving out temporary loans from the company's bankers in the ordinary course of business.

Private companies have been exempted from Section 180 since 2015.

Duties of Directors

The duties of directors are the most important part of company administration. Before 2013, they were found mainly in case law. Section 166 now puts them into the statute.

1. Act in accordance with the articles.
2. Act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and the protection of the environment.
3. Discharge duties with due and reasonable care, skill and diligence, and exercise independent judgment.
4. Not involve himself in a situation where he has a direct or indirect interest that conflicts, or may conflict, with the company's interest (no conflict).
5. Not achieve or attempt any undue gain or advantage for himself or his relatives, partners or associates; if he does, he must pay an amount equal to that gain to the company.
6. Not assign his office; any assignment is void.

Penalty: fine of not less than ₹1 lakh, which may extend to ₹5 lakh.

The strict no-profit rule

Statutory control of conflicts

Disclosure of interest (Section 184)

• Every director must disclose his concern or interest in other companies, firms and bodies at the first Board meeting he attends, every year, and whenever it changes.
• If interested in a proposed contract, he must disclose the nature of his interest at the Board meeting where it is discussed and must not take part in that meeting.
• A contract made without such disclosure is voidable at the option of the company.

Related party transactions (Section 188)

• Covers, for example, sale or purchase of goods, property or services between the company and its directors, their relatives, or firms and companies in which they are interested.
• Needs Board consent and, above prescribed limits, prior approval of members by ordinary resolution. A member who is a related party cannot vote on it (private companies exempt from this rule).
• Exempt: transactions in the ordinary course of business and at arm's length, i.e. on the same terms the company would give an unrelated party.
• Without the required approval and not ratified within three months, the transaction is voidable at the option of the Board or the members, and the director concerned must make good any loss to the company.

Loans to directors (Section 185)

Restricts loans by a company to its directors and to persons in whom they are interested.

Liability of Directors

Liable to	When
The company	Breach of duties; secret profits; company money applied to ultra vires purposes. In a winding up, under Section 340, the Tribunal may make him repay or restore misapplied money or property, or pay compensation for misfeasance or breach of trust.
Outsiders	Contracting without authority; signing a misleading prospectus; taking part in fraudulent trading.
Penalties and punishment under the Act	When he is an officer in default.

But he is not automatically liable for every wrong of the company.

Disqualification and Vacation of Office

Personal disqualifications (Section 164(1))

1. Of unsound mind and so declared by a court.
2. Undischarged insolvent, or application to be declared insolvent pending.
3. Convicted of any offence and sentenced to imprisonment for at least six months, until five years from the end of the sentence; if sentenced to seven years or more, never again a director of any company.
4. Disqualified by an order of a court or the Tribunal.
5. Has not paid a call on his shares for six months.
6. Convicted of an offence relating to related party transactions in the last five years.
7. Has no Director Identification Number.
8. Holds more directorships than the law allows.

Directors of defaulting companies (Section 164(2))

A person who is or has been a director of a defaulting company is disqualified for five years from re-appointment in that company or appointment in any other company. A company is defaulting if it has:

• not filed its financial statements or annual returns for three continuous financial years; or
• failed for one year or more to repay deposits, redeem debentures, pay interest on them, or pay a declared dividend.

It punishes sitting on the Board of a company that ignores its basic duties.

Limit on directorships (Section 165)

Not more than 20 companies at the same time, of which not more than 10 may be public companies.

Vacation of office (Section 167)

The office becomes vacant automatically if the director incurs a disqualification; absents himself from all Board meetings held during twelve months, with or without leave; fails to disclose his interest in contracts; or is convicted and sentenced to imprisonment for at least six months.

Resignation (Section 168)

By written notice to the company, effective from the date the company receives it or a later date he specifies. He remains liable for offences committed while in office.

Removal of Directors

Under Section 169, a company may remove a director before his term ends by ordinary resolution, after giving him a reasonable opportunity of being heard. The articles or an agreement cannot take this power away.

Safeguards for the director

1. Special notice is required for the resolution.
2. He must be sent a copy of the notice and has a right to be heard at the meeting.
3. He may make a written representation and ask that it be sent to every member, or read out at the meeting if it arrives too late.

Exceptions and consequences

• Directors appointed by the Tribunal under Section 242, and directors elected by proportional representation, cannot be removed this way.
• An independent director re-appointed for a second term can be removed only by special resolution.
• A removed director cannot be re-appointed by the Board.
• Removal does not take away any right to compensation for loss of office under his contract.

Removal through the back door

Courts closely watch attempts by those in control to remove a director by misusing the rule on vacation of office for absence.

Key Managerial Personnel

Section 2(51) defines key managerial personnel (KMP) as:

• the Chief Executive Officer, or the managing director, or the manager;
• the company secretary;
• the whole-time director;
• the Chief Financial Officer;
• any officer not more than one level below the directors, in whole-time employment, designated as KMP by the Board; and
• any other officer prescribed.

Company (Section 203 and the Rules)	Whole-time KMP required
Every listed company, and every other public company with paid-up capital of ₹10 crore or more	Managing director or Chief Executive Officer or manager (in their absence, a whole-time director), plus a company secretary and a Chief Financial Officer
Private company with paid-up capital of ₹10 crore or more	A whole-time company secretary

• A vacancy must be filled within six months.
• KMP can be officers in default, so they share personal liability for breaches of the Act.
• Section 197: total managerial remuneration of a public company cannot normally exceed 11 per cent of net profits, unless the members approve more by special resolution.

Prevention of Oppression and Mismanagement: Majority Rule and Minority Rights

The majority controls the general meeting and chooses the Board. The question is what the minority can do when the majority, or the directors it chooses, use that power unfairly.

A company runs on majority rule: members decide by ordinary or special resolutions, and the majority usually elects the Board. A company with thousands of members cannot work if every member can block every decision. By joining, a member accepts the will of the majority expressed in the manner laid down by the articles and the Act.

Two rules from the case

1. Proper plaintiff rule: for a wrong done to the company, the company alone is the proper plaintiff.
2. Rule of internal management: the court will not interfere in matters that the majority can lawfully decide or ratify.

Reasons for the rule

• Respects the separate personality of the company.
• Prevents a flood of suits by individual shareholders.
• Avoids useless litigation where the majority would ratify anyway.
• Keeps courts out of business decisions.

Exceptions to the Rule in Foss v. Harbottle

Without exceptions the minority would have no protection, so the courts allow an individual member to sue in these cases:

1. Ultra vires or illegal acts

No majority can ratify them, so any member may sue to restrain them.

2. Special majority required but simple majority used

3. Infringement of personal rights

E.g. the right to vote, to receive a declared dividend, or to have a transfer registered. The member sues for himself, not for the company.

4. Fraud on the minority by wrongdoers in control

The most important exception. If those in control take the company's money, property or opportunities for themselves, the company will never sue them, so a minority shareholder may bring a derivative action.

Classification of shareholder remedies

Remedy	Nature
Personal action	Protects the member's own rights
Derivative action	Enforces the rights of the company
Representative action	By some members on behalf of themselves and all others in the same position
Statutory remedies	Application for relief against oppression and mismanagement; class action; in some cases a winding up petition

Oppression and Mismanagement: Section 241

A member may apply to the Tribunal where:

1. the company's affairs have been or are being conducted in a manner prejudicial to public interest or to the interests of the company, or prejudicial or oppressive to him or any other members; or
2. a material change has taken place in the management or control of the company (for example in its Board or the ownership of its shares), and he shows that, because of it, the affairs are likely to be conducted in a prejudicial manner.

The Central Government may also apply if it believes the affairs are being conducted in a manner prejudicial to public interest.

Meaning of oppression

The Act does not define oppression; the courts have explained it.

Mismanagement

Oppression	Mismanagement
Unfairness to members	Harm to the company: the way the company itself is run
Continuing burdensome, harsh and wrongful conduct towards members in their rights as shareholders	E.g. continued siphoning of funds, destruction of the business, serious violations of law, a deadlock that paralyses the company

A single petition often alleges both.

Who May Apply: Section 244

Company	Eligible applicants
With share capital	At least 100 members or one-tenth of total members, whichever is less; or members holding at least one-tenth of the issued share capital, provided all calls on their shares are paid
Without share capital	At least one-fifth of total members

The Tribunal may waive any of these requirements, so that even a smaller minority can apply in a deserving case.

Powers of the Tribunal: Section 242

Two conditions

1. The company's affairs have been conducted in a manner prejudicial or oppressive; and
2. winding up would unfairly prejudice the members, although the facts would otherwise justify winding up on the just and equitable ground.

If both are met, the Tribunal may make any order it thinks fit to end the matters complained of.

Illustrative orders

• Regulate the future conduct of the company's affairs.
• Order purchase of some members' shares by other members or by the company, with consequent reduction of capital.
• Restrict transfer or allotment of shares.
• Terminate, set aside or modify agreements between the company and its managing director, directors or manager.
• Set aside certain transfers of property made within three months before the application.
• Remove the managing director, manager or any director, and recover undue gains made by them.
• Appoint directors to report to the Tribunal; impose costs; make any other just and equitable provision.
• Pass interim orders while the case is pending.

Leading Cases on Oppression and Mismanagement

The Tata Sons and Mistry dispute

Family companies

Nature of the company

Class action (Section 245)

Section 245, in force from 2016, provides a newer remedy: the class action. It is needed because a single small shareholder cannot afford to fight a large company, but thousands of affected shareholders together can.

Ground and orders sought

Members or depositors who believe the company's affairs are being conducted prejudicially to the interests of the company or its members or depositors may ask the Tribunal to:

• restrain an act ultra vires the memorandum or articles, or a breach of them;
• declare void a resolution altering the memorandum or articles passed by suppressing or misstating material facts to members or depositors;
• restrain acts contrary to the Act or to members' resolutions;
• award damages or compensation against the company or its directors (fraudulent, unlawful or wrongful act), the auditors (misleading audit report), and experts, advisers and consultants (misleading statements).

Who may apply (fixed by the Rules)

Applicants	Minimum requirement
Members of a company with share capital	At least 100 members or 5% of total members, whichever is less; or members holding at least 5% of the issued share capital (unlisted company) or 2% (listed company)
Depositors	At least 100 depositors or 5% of all depositors, whichever is less; or depositors to whom the company owes at least 5% of its total deposits

The Tribunal considers the members' good faith and the views of other members. The order binds the company and all its members and depositors. Banking companies are excluded.

Protection of minority shareholders

Examiners often ask for these protections together.

Protection	Rule
Special resolution	Important decisions need a special resolution, which a minority holding more than 25% of the votes can block.
Variation of class rights (Section 48)	Needs the consent of three-fourths of the class; dissenting holders of at least 10% of the class can apply to the Tribunal.
Further issue (Section 62)	Must first be offered to existing shareholders.
Proportional representation (Section 163)	The articles may provide for it on the Board.
Small shareholders' director (Section 151)	A listed company may have a director elected by small shareholders.
Independent directors	Watch over the interests of the minority.
Related party transactions (Section 188)	Related parties cannot vote on approving their own transactions.
Investigation (Section 213)	Members may apply to the Tribunal for an investigation into the company's affairs.
Remedies	Relief against oppression and mismanagement; class action; winding up on the just and equitable ground.

Meaning of winding up

Unit Six deals with winding up. Company law begins with the birth of a company and ends with its death.

The company does not die when winding up begins. It still exists as a legal person, though its powers pass to a liquidator.

Concept	Meaning
Winding up	The process.
Dissolution	The end of the legal existence of the company, which follows the winding up.
Striking off (Section 248)	A separate, simpler route: the Registrar removes the company's name from the register, for example if it has not started business within a year of incorporation, or has done no business for two financial years without applying to become a dormant company. A company may also itself apply to be struck off after paying off all its liabilities.

Modes of winding up under the present law

Before 2016, a company could be wound up in three ways:

• by the court;
• voluntarily, by its members or creditors;
• voluntarily, under the supervision of the court.

The Insolvency and Bankruptcy Code, 2016 changed this completely:

• A company that cannot pay its debts is now dealt with under the Code. A creditor, or the company itself, may start a corporate insolvency resolution process. It first tries to rescue the company through a resolution plan; only if that fails does the company go into liquidation.
• Voluntary liquidation of a solvent company is now governed by Section 59 of the Code.
• The main mode left under the Companies Act is winding up by the Tribunal under Section 270, on the grounds listed in Section 271.

Grounds for winding up by the Tribunal (Section 271)

1. The company has passed a special resolution to be wound up by the Tribunal.
2. 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.
3. On an application by the Registrar or a person authorised by the Central Government, the Tribunal finds it proper to wind up the company because its affairs were conducted fraudulently, or it was formed for a fraudulent and unlawful purpose, or those who formed or managed it were guilty of fraud, misfeasance or misconduct.
4. The company has not filed its financial statements or annual returns for the last five consecutive financial years.
5. The Tribunal is of the opinion that it is just and equitable that the company should be wound up.

Inability to pay debts: removed in 2016

Inability to pay debts, once the most common ground, was removed in 2016 because it now belongs to the Code. Under the old law, a creditor's petition failed if the company raised a genuine dispute about the debt.

A similar idea, that only a genuine pre-existing dispute can defeat a creditor, applies today when an operational creditor starts insolvency proceedings under the Code.

Before 2016, creditors often used winding up petitions to recover their dues, and courts treated winding up as a last resort.

The just and equitable ground

This is the widest ground. It covers situations where it would be unfair to keep the company alive, such as:

• complete deadlock in management;
• loss of the main object for which the company was formed;
• a small private company run like a partnership in which mutual trust has broken down;
• a company run oppressively against the minority.

The Tribunal uses it with caution, because winding up destroys a running business. If another remedy is available, such as relief against oppression under Section 241, and the petitioners unreasonably ignore it, the Tribunal may refuse to wind up under Section 273.

Who may petition (Section 272)

• The company itself, with a statement of its affairs.
• Any contributory.
• The Registrar, with the previous sanction of the Central Government.
• Any person authorised by the Central Government.
• The Central or a State Government, where 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.

Powers of the Tribunal

Under Section 273, the Tribunal may dismiss the petition, make an interim order, appoint a provisional liquidator, order winding up, or make any other order it thinks fit. It should pass its order within 90 days of the petition being presented.

Effect of a winding up order

• The Tribunal informs the Registrar.
• The order operates in favour of all creditors and contributories, as if they had all joined in the petition.
• Section 279: no suit or legal proceeding can be started or continued against the company without the Tribunal's leave.
• Section 334: after the winding up begins, any disposition of company property, transfer of its shares or change in the status of its members is void, unless the Tribunal orders otherwise.
• Section 357: a winding up by the Tribunal is deemed to begin when the petition is presented.

The Company Liquidator and his work

• Appointment (Section 275): the Tribunal appoints as Company Liquidator either the Official Liquidator or an insolvency professional registered under the Code; it may first appoint a provisional liquidator. The liquidator steps into the shoes of the Board.
• Custody (Section 283): he takes custody of all the property, effects and actionable claims of the company. Promoters, directors and officers must cooperate with him.
• Within 30 days, the directors must give him the books of account, audited up to the date of the order.
• Report (Section 281): within 60 days of the order, he reports to the Tribunal on the assets and liabilities, debts due to the company, pending legal cases and the list of contributories, and whether any fraud was committed in promoting, forming or managing the company.

The liquidator's work has three stages.

Stage 1: Collection and realisation of assets

• Section 290: he may carry on the business so far as necessary for its beneficial winding up, sell property, recover debts, raise money on the security of assets, and sue or defend in the company's name.
• The list of contributories is settled; they must pay any amount unpaid on their shares. Property wrongly transferred can be recovered.
• Fraudulent preference (Section 328): a transaction giving one creditor an unfair advantage over others within six months before the winding up application can be set aside.
• Misfeasance (Section 340): directors and promoters who misapplied money can be made to repay it.
• Fraudulent trading (Section 339): those who carried on business to defraud creditors can be made personally liable (see Unit One).

Stage 2: Proof and payment of liabilities

Creditors prove their debts before the liquidator. Under Section 324, all debts, present or future, certain or contingent, are admissible to proof. Order of payment:

1. Section 326: workmen's dues first, before all other debts. A secured creditor who has realised its security ranks equally with them, but only for a limited part of its unpaid debt. Workmen's wages for the two years before the winding up order come even before secured creditors and must be paid within 30 days of the sale of the assets.
2. Section 327 (preferential payments): these include revenues, taxes and cesses due to the Government that became payable in the twelve months before the relevant date (the date a provisional liquidator is first appointed or, if none, the date of the winding up order); employees' wages and salaries for up to four months; holiday remuneration; and dues to the provident fund, pension fund and gratuity fund. They rank equally among themselves.
3. Ordinary unsecured creditors.

Stage 3: Distribution of remaining assets

The surplus goes to the members according to their rights: preference shareholders are repaid capital first, then equity shareholders, and any surplus is divided as the articles provide.

Waterfall under the Code (Section 53)

Sections 326 and 327 do not apply to a liquidation under the Code, where Section 53 of the Code lays down a different waterfall.

Winding up under the Companies Act (Sections 326, 327 and distribution)	Liquidation under the Code (Section 53)
Workmen's dues, with secured creditors' limited share Preferential payments, including Government dues Ordinary unsecured creditors Preference, then equity shareholders	Costs of the insolvency process and liquidation Workmen's dues for 24 months and secured creditors who give up their security, ranking equally Other employees Unsecured financial creditors Government dues with the unpaid balance of secured creditors Remaining debts Preference, then equity shareholders

Dissolution

When the affairs of the company have been completely wound up, the Company Liquidator applies to the Tribunal under Section 302. The Tribunal orders the company dissolved, and from the date of that order it ceases to exist. Within 30 days a copy goes to the Registrar, who records the dissolution in the register.

Summary procedure (Section 361): a quicker liquidation for companies of the classes laid down in the Rules whose assets have a book value of up to one crore rupees. The Central Government orders it and appoints the Official Liquidator to conduct it.

From the High Courts to the Tribunal and the Code

Until 2016, winding up petitions were heard by the High Courts. Pending petitions were dealt with by Section 434 and the Rules on transfer of pending proceedings (2016):

Petition based on inability to pay debts	Result
Notice not yet served on the company	Went to the Tribunal; treated as an application under the Code
Notice served	Stayed with the High Court

A proviso added to Section 434 in 2018 allows any party to a winding up proceeding pending in a High Court to apply for its transfer to the Tribunal, where it is dealt with as an insolvency case under the Code. Two Supreme Court decisions explained it.

Quick revision

Corporate Law runs from the birth of a company to its dissolution. Three habits for examination answers:

• In every problem, first ask who the real party is — the company, its members, its directors or its creditors — because the company is a separate person.
• Always name the section of the Companies Act, 2013, and support it with the leading case.
• Whenever two concepts look similar, such as transfer and transmission, oppression and mismanagement, or winding up and dissolution, write their differences clearly, with an example.