Companies Act-module 5 (3)

8/2/2019 Companies Act-module 5 (3)

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COMPANIES ACT, 1956

Sr. No Topics Pages

1 Company2 Features of a Company

3 Types of a Company

4

Differences between Private Company and Public

company

5 Foreign Companies

6 Government Companies

7 Illegal Association

8 Memorandum of Association and contents

9 Doctrine of Ultra Vires

10 Articles of Association and its contents11 Distinguish between Memorandum & Articles

12 Member

13 Modes of Acquiring Membership

14 How a membership of a company ceases

15 Rights & Liabilities of Members

16 Prospectus & Mis-statements in Prospectus

17 Directors

Define a Company.

Section 3(1) of the Companies Act, 1956 defines a company as An association of individuals

formed for some purpose and registered under the present Companies Act or an earlier Indian

Companies Act.

Essential features of a Company.

The following are the essential features of a company


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1) Separate Legal Entity - A company on registration has a separate identity of its ownwhich is different and distinct from the members who constitute it. This principle of

independent corporate personality was laid down in the case of

Salomon vs. Salomon & Co. Ltd.

In this case Mr. Salomon was carrying on shoe manufacturing business on proprietorship

basis. He sold his business to a company Salomon & Co. Ltd. for 30,000 pounds.

Salomon received consideration in the form of shares for 20,000 pounds of one pound

each and got debentures worth 10,000 pounds. The company had seven members,

consisting of Mr. Salomon, Mrs. Salomon, four sons and a daughter. All the other

members of the company had only one share each. After sometime the company had to

be wound up on account of financial difficulties. The assets realized were 6,000 pounds

while the liabilities were 10,000 pounds to Salomon as a secured creditor and 7,000

pounds to outsiders who were unsecured creditors. The creditors claim priorities over

Salomon (Secured Creditor) on the ground that Salomon and Salomon & Co. were one

and the same. It was however, observed that the company on incorporation has a differentpersonality different from the subscribers. Therefore the identity of the subscriber is

immaterial. Hence Mr. Salomon was paid first as he was a secured creditor.

Lee v/s Lee

The Company was formed for aerial top-dressing. Lee, a qualified pilot contributed to all

the shares except one & by AOA was appointed the governing director & chief pilot by

virtue of his majority shareholding. He was killed while piloting the companys aircraft.

His widow claimed under the Workmen Compensation Act. Company opposed on the

grounds that Lee was not a worker as the same person cannot become employer and

employee. It was observed by the court that there was a valid contract between Lee and

the company and Lee was, therefore, a worker. Mrs. Lees contention was upheld.2) Limited Liability The liability of the shareholders is limited to the face value of the

shares held by them. Once the full amount of the shares is paid, they cannot be called

upon to bear the loss from their personal property.

3) Artificial Legal Person Company on registration becomes a legal person capable ofentering into contracts in its own name.

4) Perpetual Succession A company enjoys perpetual existence. It is created by law andcan be put to an end only by the process of law. Professor Grover highlights this feature

by saying that even a bomb cannot destroy a company.

5) Holding and Disposal of Property A company can hold and dispose of property in itsown name. Property of the company cannot be treated as members property and vice

versa.

Baccha Guzdar V/s CIT

Plaintiff received certain amounts as dividend in respect of shares held by her in a tea co.

Under IT agricultural income is exempt under IT Act. As income of the company is

treated as agricultural income and only 40% thereof is taxable. Hence,Mrs. B claims


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dividend should also be taxed only on the 40% of the dividend under her hands as

dividends received by shareholders represented the income of the company. By the

Supreme Court, that though the income in the hands of the company was partly

agricultural yet the same income when received by Mrs. Guzdar as dividend could not be

regarded as agricultural income.

6) Transferability of Shares The shares of a company are freely transferable in case of apublic limited company. In case of a private company they are restricted.

7) Capacity to sue and to be sued A company having its own independent existence, cansue in its name to enforce any of its statutory or contractual rights and be sued in its name

by others, if it commits breach of contract or fails to discharge its duties.

The Veil Doctrine In Company Law/Lifting or Piercing of the Corporate Veil:

A corporation under Company law or corporate law is specifically referred to as a legal

person- as a subject of rights and duties that is capable of owning real property, entering

into contracts, and having the ability to sue and be sued in its own name.[1] In otherwords, a corporation is a juristic person that in most instances is legally treated as a

person, and empowered with he attributes to own its own property, execute contracts, as

well as ability to sue and be sued.

One of the main motivations for forming a corporation or company is the limited liability

it offers its shareholders. By this doctrine (limited liability), a shareholder can only lose

only what he or she has contributed as shares to the corporate entity and nothing more.

Nevertheless, there is a major exception to the general concept of limited liability. There

are certain circumstances in which courts will have to look through the corporation, thatis, lift the veil of incorporation, otherwise known as piercing the veil, and hold the

shareholders of the company directly and personally liable for the obligations of the

corporation. The veil doctrine is invoked when shareholders blur the distinction between

the corporation and the shareholders. It is worthy of note that although a separate legal

entity, a company or corporation can only act through human agents that compose it. As a

result, there are two main ways through which a company becomes liable in company or

corporate law to wit: through direct liability (for direct infringement) and through

secondary liability (for acts of its human agents acting in the course of their

employment).

The doctrine of piercing the corporate veil varies from country to country.

The various types of Companies

The companies may be classified into the following:-


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1) Chartered Companies: - These are the companies which are incorporated under a specialcharter granted by the King or Queen or the Head of the State. For e.g. East India

Company these are no longer present in India.

2) Statutory Companies: - These are companies which are created by a special act of thelegislature. For e.g. Reserve Bank of India.

3) Registered Companies: - These are companies which are formed and registered under theCompanies Act, 1956 or some earlier Companies Act. They are :-

Companies limited by shares: - In these companies there is a share capital and eachshare has a fixed value. The liability of each member is limited to the face value of the

share he holds. A company limited by shares may be a public company or a private

company.

Limited Companies: A company in which the liability of its members is limited to theamount of share capital subscribed by them or standing in their names in the event of

winding up. There are three types of limited companies: Public limited company

Private company Deemed public company Eg; INDIAN OIL CORPORATIONLIMITED

Companies limited by guarantee: - Where the liability of a company is limited by thememorandum to such an amount as the members undertake to contribute to the assets

of the company in the case of its winding up, the company is called a company limited

by guarantee. Companies limited by guarantee are not formed for the purpose of profit

but for the promotion of art, science, culture, charity or for similar purpose. They may

or may not have share capital.

Unlimited companies: - Where the liability of the members of a company is unlimited,it is known as an unlimited company. Every member of such a company is liable for

its debts, as in an ordinary partnership, in proportion to his interest in the company.

Such a company may be a public company or a private company.

4) Vanishing Companies5) Defunct Companies6) Holding Companies: - The Company which holds more than half of the nominal value of

share capital of another company or controls the composition of board of directors of

another company is known as Holding company.

7) Subsidiary Companies: - A company whose more than half of the nominal value of sharecapital is held by another company or another company controls the composition of board

of directors of such company is known as Subsidiary Company.8) Government Companies

The Companies Act defines Government Company as a company in which

not less than 50% of the paid up share capital is held by the central Government, or

by any State Government or governments, or

partly by the Central Government and partly by one or more State Governments, and


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includes a company which is a subsidiary of a government company thus defined.

Eg; MahanagarTelephone Nigam Limited

9) Deemed public company:A private company incorporated in India, which is a subsidiary of a public company, can

be called as deemed public company in India

10)Foreign CompaniesAny company incorporated outside India and having a place of business within India is

called a Foreign Company. The following are the rules applicable to foreign companies:-

1. Documents Section 592 requires that every foreign company which establishes a

place of business in India shall within thirty days of the establishment of such place of

business, file with the registrar;

a) A certified copy of the charter, statute, Memorandum and Articles of the company b)

The full address of the Registered or Principle Office of the company c) A list of

Directors and Secretary of the company d) The name and address of any person residentin India authorize to accept notices on behalf of the company e) The full address of the

principle place of business in India.

2. Accounts The provisions of Section 209 regarding Books of Accounts to be kept by a

company shall also apply to a foreign company so far as it concerns its business in India.

3. Name A foreign company shall display on the outside of its office the name of the

company, together with the name of the country where it is incorporated in English and in

one local language.

4. Registration of Charges The provisions relating to the registration of charges

(Sections 124 to 145), Annual Returns (Section 159), Books of Accounts (Section 209A),

Special Audit in certain cases (Section 233A), in so far as they apply to its Indian

business shall apply to foreign companies also.

5. Requirements as to prospectus Section 603 specifies the following particulars to be

mentioned in prospectus. a) Name of the company in English b) Name of country in

which it is incorporated c) Whether the liability of the members is limited d) Particulars

regarding its constitution, Date and Country of incorporation and the law under which it

was incorporated abroad e) The address of its registered office or principle place of

business f) Other matters required to be included in prospectus of any Indian company.

6. Winding Up if a foreign company ceases to carry on such business in India it may be

wound up as an unregistered company.

11)Government Companies


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A Government Company means any company in which not less than 51 percent of the paid-

up share capital is held by the Central Government, and or by any State Government or

Governments, or partly by the Central Government and partly by one or more State

Governments. The subsidiary of a government company is also a Government company

(Section 617).

The following are special rules for government company:-

The appointment of Auditor: - The auditor of a government company is appointed orreappointed by the Central Government on the advise of the Comptroller and Auditor

General of India. The auditor is required to submit a copy of his audit report to the

Comptroller and Auditor General of India who has a right to review and comment on

the audit report. Any such comments must be placed before the Annual General

meeting of the company.

Audit Report to be placed before Parliament: - Where the Central Government is themember of the government company, an annual report on the working and affairs ofthe company must be prepared within three months of its Annual General meeting

before which the Audit Report is placed. The report must also be submitted to both

houses of parliament. Similar provisions are present in case of Trade Government.

Applicability of Section 619 :- The provisions of Section 619 shall apply to acompany in which not less than 51% of paid-up share capital is held by one or more

of the following or any combination thereof i.e. the Central Government, State

Government, Government Companies, Corporations owned or controlled by Central

Government or State Government.

Certain Provisions not to apply - The Central Government may notify that any of thespecified provisions of the companies act shall not apply to any government

company.

12)Illegal AssociationNo company, association or partnership constituting of more than 10 persons for the

purpose of carrying on banking business and of more than 20 persons for the purpose of

carrying of any other business that has for its objects the acquisition of gain, can be

legally formed unless it is registered as a company under the companies Act, 1956

(Section 11). Thus any organization having more than 10 persons in case of banking or

20 persons in case of other business as owners has to be register as a company. Any

association or partnership in violation of the above mentioned provision is termed asillegal association. A Joint Hindu Family carrying on a business which has more than 20

members is not termed as illegal association as it is governed by Hindu Law.

The following are the consequences or disabilities of an illegal association;

It cannot sue or be sued of debts due to it or from it from carrying the business. Every member of an illegal association is personally liable for all liabilities incurred

in the business and is punishable with fine extending upto Rs. 1,000/-


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It cannot enter into any contract as it has no legal existence. It cannot be wound up under the companies act.

Distinguish between Private Limited Company and Public Limited Company.

Points Private Limited Company Public Limited Company

1. Number ofMembers

A private company cannot haveless than two and more than

fifty members

A public Company cannot have less thanseven members; no maximum has been

fixed for it.

2. Restriction

on transfer of

shares

If a private company has a share

capital it imposes some

restrictions on the right of itsmembers to transfer their shares

it the company.

In a public company there need not be any

such restriction.

3.

Restriction oninvitation to

public

A private company cannot

invite the public to buy itsshares or debentures

A public company may do so.

4. Restriction

on name

A private company must add

the words, Private Limited at

the end of its name (Section13).

There is no such restriction.

5. Prospectus ora statement

A private company has not tofile a prospectus or a statement

in lieu of prospectus, with the

Registrar [Section 70(3)]

A public company must file a prospectus,or a statement in lieu of prospectus, with

the Registrar.

6. Issue of NewShares

A private company can issuenew shares to outsiders.

A public company must offer new sharesfirst to the existing equity share holders pro

rata, unless the members in a generalmeeting decide otherwise.

7. Privileges It enjoys a number of privileges,i.e. exemptions from certain

provisions of the Companies

Act, 1956.

It does not enjoy any privileges.

8. Number ofdirectors

It must have a minimum of twodirectors.

It must have a minimum of three directors.

9. Legal

Controls

There are less legal controls. There are too many legal controls.

10.. Borrowing

of loans

Directors can borrow from

private companies.

Directors cannot borrow from public

companies

Memorandum of Association and its contents


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Section 2 (28) of the act defines Memorandum as Memorandum means the Memorandum of

association of a company as originally framed or as altered from time to time in pursuance of any

previous companies law or of this act. Memorandum of association is the document which

contains the rules regarding constitution and activities and objects of the company. It is

fundamental charter of the company. Its relation towards the members and the outsiders are

determined by this important document.

Section 13 of the act lays down the contents or the clauses required in the memorandum of

association which are as under:-

Name Clause : - the memorandum must specify the full name of the company withlimited as the last word of the name in case of public company and with private

limited as the last word of the name in case of private company.

State Clause: - the state in which the registered office of the company is to be situatedmust be mentioned in the memorandum of association.

Object Clause: - the object of a company should be clearly set forth in the memorandum.The clause must be divided in to 2 major portions viz.

(a) The main object of the company to be pursued by the company on its incorporation and

objects incidental or ancillary to the attainment of main object.

(b) The other object of the company not included in the above clause.

Capital Clause: - the capital clause in the memorandum of a company, having sharecapital, must state the amount of the share capital with which the company is to be

registered and the division of the share capital into shares of a fixed amount. This share

capital is called Authorised or Nominal capital.

Liability Clause: - this clause states the nature of liability of the members in case of acompany with limited liability, it must state the liability of the members is limited

whether by shares or by guarantee. In absence of this clause in the memorandum the

liability of its members shall be unlimited.

Association Clause: - this clause is a declaration made by the subscribers who havesigned the memorandum of their intention to form a company. This clause is also called

subscription clause.

The doctrine of Ultra Vires.

The Object Clause of the Memorandum specifies the activities which a company can under take

everything else is ultra vires to the company. Ultra means beyond and vires means power. The

term ultra vires means the doing of the act which is beyond the legal powers of the company.

Anything that a company does which is ultra vires i.e. beyond the object clause is null and void.

This doctrine was laid down in Ashbury Railway


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Carriages and Iron Co., Vs. Riche. In this case the objects of the company provided to make and

sell or lend or hire railway carriages and wagons and all kinds of railway plants, to carry on the

business of mechanical engineers and general contractors etc., the company contracted with

Riche to finance the construction of railway line in Belgium. The directors repudiated the

contract on the ground that it was ultra vires. Riche brought an action for damages containing

that the contract fell within the scope of the words General Contractors and further the contract

was ratified by a majority of share holders. It was observed by the House of Lords that the

memorandum of association has tow fold effect an affirmative which states the extent of power

of the company and negative that nothing shall be done beyond that ambit. It is to be specific and

the term general contractors cannot be so widely interpreted. Since the act was ultra vires even

majority of shareholders cannot ratify the said act.

Effect of Ultra Vires Transactions

Contract Void: - Ultra vires transactions render the contract void giving no legal rights tothe company or the outsiders. Such contracts can never be ratified.

Property acquired under ultra vires transaction: - if a company acquires property underan ultra vires transaction, the companys right over the property shall be protected

because assets so acquired represent corporate capital.

Injunction: - Any member obtains an order of injunction from the court to restrain thecompany from persisting in ultra vires act.

Ultra vires borrowing: - in case of an ultra vires borrowing, the lender has no right ofaction in respect of the loan to the company. But he has certain rights in respect of money

received by the company. But he has certain rights in respect of money received by the

company provided the same is traceable. But the money lent by a company not

authorized to lend can be recovered by it because the debtor will be stopped from

pleading that the company had no power to lend.

Directors personally liable: - Directors who part with the companys money or propertyfor ultra vires object will be personally liable to restore to the company the funds used for

such purpose.

Liability for torts: - A company can be made liable for any tort, if the following twoconditions are satisfied viz.

(a) in course of which the tort has been committed, falls within the scope of theMemorandum of Association.

(b)The servant of the company must have committed the tort within the course of hisemployment.

The Articles of Association and explain its contents.

Section 2 (2) of the companies act defines articles as Articles means Articles of Association of a

company as originally framed or altered from time to time in pursuance of any previous law or of


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this act including so far as they apply to the company the regulations contain as the case may be

in Table A to Schedule I of this act

The Articles contain rules and regulations for the internal management of the company. They are

framed with the object of carrying out the aims and object of the memorandum of association

and also to monitor that the same are carried as prescribed.

The Model contents of the Article of association as per Table A are as under

1. the business of the company;2. the amount of capital issued and the classes of shares into which the capital is divided; the

increase and reduction of the share capital;

3. the rights of each class of shareholders and the procedure for variation of their rights;4. the execution or adoption of a preliminary agreement, if any;5. the allotment of share; calls and forfeiture of shares for non payment of calls;6.

transfer and transmission of shares;7.companys lien on shares;

8.exercise of borrowing powers including issues of debentures;9.general meeting, notices, quorum, proxy, poll, voting, resolution, minutes;10. number, appointment and powers of directors11. dividends interim and final and general reserves;12. accounts and audits;13. keeping of books both statutory and others;14. regulations as to seal;15. regulation as to winding up.

Distinguish between Memorandum and Articles of Association

Criteria Memorandum Articles

1.

FundamentalConditions or internal

regulations

The Memorandum contains the

fundamental conditions upon whichalone company is allowed to be

incorporated. The conditions are

introduced for the benefit of the

creditors, the shareholders and theoutside public.

The Articles of Association

are internal regulations ofthe company. They provide

the manner, in which the

company is to be carried

and its proceedingsdisposed of.

2.

Dominant or subordinate

The memorandum is a dominant

instrument as its states the purposefor which the company has come into

existence.

The Article is always held

to be subordinate toMemorandum because they

are mere internal

regulations of the company.


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3.

Methods of Alteration

Section 13 provides that some of the

conditions of incorporation,

contained in the Memorandum, suchas the object clause, cannot be alerted

except by the special resolution of the

company and with the sanction of theCompany Law Board or of a Court of

Law.

Section 31 on the other

hand, provides that the

Articles of Association canbe altered simply by a

special resolution. It does

not require the sanction ofthe Company Law Board or

of a Court of Law.

4.Effect of acts done in

contravention

If a company does something outsidethe scope of its objects stated it the

Memorandum, it is absolutely null

and void and incapable of

ratification.

If a company doessomething in contravention

of the provisions of its

Articles, it is only an

irregularity and can alwaysbe confirmed by the

shareholders, and thus

rectified.

Doctrine of Constructive Notice:

Constructive notice also known as the Doctrine of Constructive Notice is a legal fiction used in

the law of both common law and civil law systems to signify that a person or entity is legally

presumed to have knowledge of something, even if they have no actual knowledge of it. S610 of

the Act provides that the MOA & AOA, when registered, become public documents and tehn

they can be inspected by anyone on payment of nominal fees. Therefore, any person who

contemplates entering into a contract with the company has the means of ascertaining and is thus

presumed to know the powers of the company and the extent to which they have been delegated

to the directors. Every person dealing with the company is presumed to have read these

documents and understood them in their true perspective. This is known as doctrine of

Constructive Notice. Even if the party dealing with the company does not have actual notice of

the contents, it is presumed that he has constructive notice of them.

Doctrine of Indoor Management

As per the Doctrine of Indoor Management if a person, who has satisfied himself that a proposed

dealing is not in the nature inconsistent with the Memorandum and Articles of Association of the

company is not bound to make a further enquiries and is entitled to assume that all the due

internal procedures to render the transaction binding on the company have been followed.

This Doctrine is also termed as 'Turquand Rule' and was enunciated in the famous and leading

case of Royal British Bank v Turquand in 1856. It provides shelter and protection to the

outsiders dealing with the company that are, in no way, bound to judge the regularity of the

internal procedures of a company.The doctrine of indoor management may be summarised


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as:"While a person dealing with a company is presumed to have read the public documents and

understood their contents and made sure that the transactions are not inconsistent therewith, he is

also entitled to assume that the provisions of the Articles have been observed by the officers of

the company. It is no part of the duty of an outsider to see that company has carried out its indoor

internal proceedings (or indoor management)."

Exceptions To The Rule: The rule of doctrine of indoor management is however subject to

certain exceptions. In other words, relief on the ground of indoor management cant be claimedby an outsider dealing with the company in the following circumstances:

1. Where the outsider has knowledge of Irregularity2. Suspicion of Irregularity3. Forgery4. Representation through Articles5. Acts outside apparent authority

1. Knowledge of Irregularity: - The first and the most obvious restriction is that the rulehas no application where the party affected by an irregularity had actual notice of it.Knowledge of an irregularity may arise from the fact that the person contracting was

himself a party to the inside procedure. As in Devi Ditta Mal v The Standard Bank of

India[9], where a transfer of shares was approved by two directors, one of whom withinthe knowledge of the transferor was disqualified by reason of being the transfer himself

and the other was never validly appointed, the transfer was held to be ineffective.

Similarly in Howard v. Patent Ivory Manufacturing Co. where the directors could notdefend the issue of debentures to themselves because they should have known that the

extent to which they were lending money to the company required the assent of the

general meeting which they had not obtained. Likewise, in Morris v Kansseen[11], adirector could not defend an allotment of shares to him as he participated in the meeting,

which made the allotment. His appointment as a director also fell through because none

of the directors appointed him was validly in office.

2. Suspicion of Irregularity: - The protection of the Turquand Rule is also not available

where the circumstances surrounding the contract are suspicious and therefore inviteinquiry. Suspicion should arise, for example, from the fact that an officer is purporting to

act in matter, which is apparently outside the scope of his authority. Where, for example,as in the case of Anand Bihari Lal v. Dinshaw & co[13]., the plaintiff accepted a transfer

of a companys property from its accountant, the transfer was held void. The plaintiff

could not have supposed, in absence of a power of attorney, that the accountant hadauthority to effect transfer of the companys property.

3. Forgery: - Forgery may in circumstances exclude the Turquand Rule. The only clear

illustration is found in the Ruben v Great Fingall Consolidates[15]; here in this case theplaintiff was the transferee of a share certificate issued under the seal of the defendants

company. The companys secretary, who had affixed the seal of the company and forged

the signature of the two directors, issued the certificate.The plaintiff contended that


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whether the signature were genuine or forged was apart of the internal management, andtherefore, the company should be estopped from denying genuineness of the document.

But, it was held, that the rule has never been extended to cover such a complete forgery.

4. Representation through Articles: - The exception deals with the most controversial and

highly confusing aspect of the Turquand Rule. Articles of association generally containwhat is called power of delegation. Thus the effect of a delegation clause is that aperson who contracts with an individual director of a company, knowing that the board

has power to delegate its authority to such an individual, may assume that the power of

delegation has been exercised.

The question of knowledge of Articles came up in the case of Rama Corporation v

Proved Tin and General Investment Co.[17], here; one T was the active director of the

defendant company. He, purporting to act on behalf of his company, entered into acontract with the plaintiff company under which he took a cheque from the plaintiffs. The

companys article contained a clause providing that the directors may delegate any of

their powers, other than the power to borrow and make calls to committees, consisting ofsuch members of their body as they think fit. The board had not in fact delegated any of

their powers to T and the plaintiffs had not inspected the defendants articles and,

therefore, did not know of the existence of power to delegate.

It was held that the defendant company was not bound by the agreement. Slade J, was of

the opinion that knowledge of articles was essential. A person who at the time of

entering into a contract with a company has no knowledge of the companys articles ofassociation, cannot rely on those articles as conferring ostensible or apparent authority on

the agent of the company with whom he dealt. He could have relied on the power ofdelegation only if he knew that it existed and had acted on the belief that it must have

been duly exercised.

5. Acts outside apparent authority: - Lastly, if he act of an officer of a company is one

which would ordinarily be beyond the power of such an officer, the plaintiff cannot claimthe protection of the Turquand rule simply because under the articles power to do the

act could have been delegated to him. In such a case the plaintiff cannot sue the company

unless the power has, in fact, been delegated to the officer with whom he dealt. A clear

illustration is Anand Behari Lal v Dinshaw[18] here the plaintiff accepted a transfer of acompanys property from its accountant. Since such a transaction is apparently beyond

the scope of an accountants authority it was void. Not even a delegation clause in the

articles could have validated it, unless he was, in fact, authorized.

Define a member and explain the modes of acquisition of membership of a company.

Section 41 of the companies act defines a member as Member of a company means a person

(a) Who has subscribed his name to the memorandum.


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(b) Any other person who has agreed in writing to become a member and whose name is entered

in the register of member.

(c) Every person holding Equity share capital of a company and whose name is entered as

beneficial owner in the records of the depository.

The modes of acquisition of membership are as under: -

1. Membership by Scribing: - the subscribers to the memorandum of association are deemed to

have agreed to become members of the company on its incorporation. When the company is

registered their names are automatically entered in the registered of members.

2. Membership by Qualification Shares before a person can be appointed as a director of a

public company he must take, and pay for the qualification shares if required by the articles.

3. Membership by application and allotment an application for share is an offer to take shares

and allotment is the unconditional acceptance of that offer by the company which results in acontract between the applicant and the company.

4. Membership by transfer - A person who takes shares from an existing member by the sale, gift

or from some other transactions, acquires membership on his name appearing in the requester of

members.

5. Membership by transmission on the death of the share holder shares are transmitted to his or

her legal representatives who becomes members of the company on their names being entered in

the register of members.

Enumerate the instances in which the membership of a company ceases.

A person may cease to be a member of a company in the following cases:

(a) If he transfers the shares to another person.

(b) If his shares are forfeited by the company.

(c) If the company sells his shares under some provisions in its articles as for example in the

exercise of its rights to enforce a lien.

(d) If he validly surrenders shares to the company where surrender of shares is permitted.

(e) If he is adjudicated as insolvent and his shares vest in the official receiver or assignee.

(f) If he dies. The deceased members estates liable until the shares are registered in the names of

his legal representatives.

(g) If redeemable preference shares are redeem.


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(h) If he rescinds the contract to take shares on the ground of misrepresentation in the prospectus

or of irregular allotment.

(i) If his shares are sold in execution of a Decree of the court.

(j) If the company is been wound up, a member remains liable as a contributor and is also entitleto share in the surplus assets, if any.

The rights and liabilities of a member

Rights of Members

The following are the rights of a member:

(a)Statutory Rights this are the rights which are conferred on the members by theCompanies Act, 1956. These rights cannot be taken away or modified by the

memorandum or article of association.

(b)Some of the statutory rights are as under :- A member has a right of priority to have shares offered incase of increase of

capital.

Right of receive notices of meeting, attend and vote at meeting. Right to transfer share Right to receive share certificate Right to receive annual accounts of the company. Right to inspect the register of

members, debenture holders and copies of annual returns.

Right to apply to the central government for calling and annual general meeting ifthe board of directors fails to call such meeting.

Right to apply to the court for calling an extra ordinary general meeting. Right to participate in appointments of directors and auditors in the annual general

meeting.

Right to petition to the central government for ordering an investigation into theaffairs of the company.

Right to petition to the High Court for relief in case of Operation andmismanagement

Right to petition to the High Court for winding up of company.(c)Documentary Rights this are the rights given to the members by the memorandum orarticles of associations.(d)Proprietary Rights Proprietary rights include the following rights

Right to be registered as a share holder Right to be registered as a member in the register of member, subject only to valid

and authorize transfer of shares.

Privilege of immunity from personal liability of companys debt.


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Right to participate in dividend distribution if ordered in the discretion of thedirectors

Right to participate in the distribution of assets in case of liquidation of thecompany

(e)Remedial Rights Remedial rights includes the following rights. Right to information and inspection of companies record. Right to bring representative suits on companies cause of action to prevent or

remedy mismanagement or unauthorized act and to compel the company to

enforce its right, and

common law, equitable and statutory remedies for infringement of individualrights.

Liabilities of Members

Liabilities of the Member depend upon the kind of company.

In case of a limited company, the liability of each member is linked to the face value ofthe share he has agreed upon.

In case of a company limited by guarantee, the liability of each member is to the extent ofthe guarantee agreed upon.

In case of a company with unlimited liability the liability of each member is unlimited.Define the term prospectuses. Explain the liability for mis-statements contained in

prospectus.

Section 2 (36) defines a Prospectus as Any document described or issued as prospectus andincludes any notice, circular, advertisement or other documents inviting deposits from the public

or inviting offer from the public for the subscription or purchase of shares in or debenture of a

body corporate.

Any document containing offer of shares or debenture for sale shall be deemed to be prospectus

for and all the provisions shall apply. A document to be prospectus must have been issued to the

public.

A Prospectus is a document which holds out to the public as to what the company is and what it

proposes to do and what is its future prospectus.

Mis- statement in the Prospectus

The obligations imposed on those responsible for the issue of a prospectus are not only but to

state accurately all the relevant facts but not to omit any fact which may be relevant. This is the

Golden rule as to framing of prospectus which was laid down in New Brunswick Rail. Co. Vs.


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Muggeridge. If there is any misstatement of a material fact in a prospectus or if the prospectus is

wanting in any material then the following liabilities could arise:

I] Civil Liabilities

1. Remedy against the company If there is a misstatement or withholding of any material factin a prospectus and if it has induced any shareholder to purchase the shares then he can

a) apply to the Court for the rescission of the contract The Contract can be rescinded if the

following conditions are satisfied :

(i) The statement must be a material misrepresentation of fact.(ii) It must have induced the applicant to take the shares or debentures.(iii) It must be untrue.(iv) The applicant must have relied on the statement in the prospectus.(v) The omission of a material fact must be misleading before rescission must be granted.(vi) The proceedings for rescission must be started as soon as the shareholder or

debenture-holder comes to know of a false or misleading statement in the prospectus.

b) claim damages from the company Any person induced by fraud to take shares or debentures

is entitled to sue the company for damages. But before he does so, he must surrender the shares

or debentures to the company. He cannot do both i.e. retain the shares or debentures and get

damages against the company.

2. Remedies against the directors, promoters and experts The persons who are liable to pay

compensation for any loss or damage to persons who subscribe for shares or debentures on the

faith of a prospectus containing untrue statements are:

(a)Directors at the time of the issue of the prospectus(b)Promoters and(c)Persons who have authorized the issue of prospectus or who have authorized themselves

to be named as directors in the prospectus.

3. Liability under general Law Under the general law, a shareholder or debenture holder can

hold all or any of the persons responsible for the issue of prospectus liable for mis-statement or

fraud on their or his part if he was actually deceived by reason of his having acted on the faith of

the mis-statement or fraud on the prospectus. But a person can only be liable in fraud where he

makes a statements to be acted ipen by others, which is false and is made (a) knowingly or (b)

without belief in its truth or (c) recklessly, not caring whether it was true or false.

II] Criminal liabilities Where a prospectus contains any untrue statement, every person who

authorized the issue of the prospectus is punishable with imprisonment, which may extend to 2

years, or with fine which may extend to Rs. 5,000/- or both. He will be discharged from the

charges if he proves either


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(i) that the statement was immaterial or(ii) that he had reasonable ground to believe, up to the time of the issue of prospectus,

that the statement was true.

Director in a Company

Company is an artificial person incapable of acting by itself. A company has no mind of its own,

it has no eyes to see, no ears to hear, no hands to sign and no brain to think and take decisions.

Therefore directors are appointed to act on behalf of the company.

Separation of ownership from management. The members do not participate in the management

of the company since (a) they cannot interfere in day-to-day management of the company, (b)

they have neither time nor expertise to manage its day-to-day affairs; (c) a large-sized companymay numerous shareholders who are scattered throughout the country. Therefore, directors are

appointed by the members to manage the affairs of the company.

Meaning of Director [Section 2(13)]

"Director" includes any person occupying the position of director, by whatever name called; The

main criteria to determine whether a person is a director or not is to refer to the nature of his

office, functions performed and discharged by him.

Only individuals to be directors (Section 253)

No body corporate, association or firm can be appointed as director. Only an individual shall be

appointed as director.

Position of directors

Directors are appointed by the shareholders. Shareholders are also empowered to removethe directors.

Overall control and supervision of affairs of the company is entrusted to directors. The Board of directors is entitled to exercise all the powers of the company except those

powers which the Companies Act requires a company to exercise in General Meeting

only.

However, the power of directors can be restricted by articles of the company. Shareholders are authorized only to take decisions only to the extent specified in the

Companies Act. They cannot interfere in day-to-day management of the company. The

only thing they can do is to remove directors and appoint new ones; or to alter the articles

to restrict the powers of the Board in respect of future transactions.


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Directors owe a duty to the shareholders to exercise care, skill and diligence in dischargeof their functions.

All the powers vested in the directors are exercisable by the directors collectively. (i.e. bypassing a resolution at a Board meeting or by circulation). As an individual director, no

director has the power to act on behalf of the company unless such powers have been

delegated to him.

Types of directors

There are two types of director, executive and non-executive. There is no legal distinction made

between executive and non-executive directors - the difference is that non-executive directors do

not get involved in the day-to-day running of the business.

1. Executive directors perform operational and strategic business functions such as: managing people looking after assets hiring and firing entering into contracts

Examples- Managing Director, Whole-time Directors, Executive Directors

2. Non-executive directors use their experience and expertise to provide independent adviceand objectivity, and they usually have a role in monitoring executive management. Anon-executive director might be appointed to carry out a specialist role on a part-time

basis or for their expertise in specific activities, such as strategy and contractnegotiation.They usually work part time, attending board meetings and spending time on

specific projects.

Non-executive directors bring an objective view of the business, can improve the board's

effectiveness at relatively low cost and provide valuable business connections.

Examples- Independent Directors, Non-Executive Directors.

Number of directorships:

Whole-time Directorship :A person cannot be appointed as a whole-time director in morethan one company. Part-time Directorship: Not more than 15 companies excluding the directorships of,

private companies [other than subsidiaries or holding companies of public company(ies)].

unlimited companies, associations not carrying on business for profit or which prohibit

payment of a dividend, and alternate directorships ( i.e., he is appointed to act as a

director only during the absence or incapacity of some other director).


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Managing Director: A managing director, as defined in Section 2(26), means a directorwho is encrusted with substantial powers of management which would not otherwise be

exercisable by him. The "substantial powers" of management may be conferred upon him

by virtue of an agreement with the company, or by a resolution of the company or the

Board or by virtue of its memorandum and articles. The powers so conferred are alterable

by the company. He is also removable the same way as he was appointed irrespective ofthe fact that his appointment has been approved by the Central Government. But if he is

prematurely removed from office he is entitled to compensation. A managing director isan employee of the company, but not to the extent so as to be entitled to preferential

payments.

Whole time Director: As per the explanation under section 269 of the Companies Act, awhole-time director includes a director in the whole-time employment of the company. Inother words, a director who devotes his whole time to the affairs of a company is called a

whole-time director of the company. A whole-time director of a company cannot accept

the position of a whole-time director in other companies, though he may accept office ofnon-whole-time director in other companies subject to the limits imposed by section 275

read with sections 277 and 278. Unfortunately the Companies Act has not defined anExecutive Director in the Act, hence An executive director is the senior manager of an

organization, company, or corporation. The position is comparable to a chief executiveofficer (CEO) or managing director. An executive director is remunerated for his work.

Further even a Whole time Director can be an Executive Director but not Vice versa.

Independent Directors: After Satyam scandal the issue of independent directors is backin focus. It is not only in Satyam that independent directors showed lack of commitment;

earlier in the case of Enron, WorldCom and other companies in which corporategovernance as well as independent directors failed to perform effectively. Appointment

of independent directors on the board provides support as well as contribute in better

corporate performance. It is not defined under the Companies Act but is define under

clause 49 of the listing agreement wherein it is defined as For the purpose of this clausethe expression independent directors means directors who apart from receiving

directors remuneration, do not have any other material pecuniary relationship ortransactions with the company, its promoters, its management or its subsidiaries, which in

judgment of the board may affect independence of judgment of the directors.

Alternate Directors: (1) The Board of directors of a company may, if so authorised byits articles or by a resolution passed by the company in general meeting, appoint analternate director to act for a director (hereinafter in this section called "the original

director") during his absence for a period of not less than three months from the State in

which meetings of the Board are ordinarily held.

[(2) An alternate director appointed under sub-section (1) shall not bold office as such for

a period longer than that permissible to the original director in whose place he has beenappointed and shall vacate office if and when the original director returns to the State in

which meetings of the Board are ordinarily held.](3) If the term of office of the original director is determined before he so returns to the

State aforesaid, any provision for the automatic re-appointment of retiring directors in

default of another appointment shall apply to the original, and not to the alternate,director.


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Additional Directors: Where the Articles so authorise, the Board can appoint additionaldirectors, if by such appointment, the total strength of the Board is within the limit fixed

by the Articles. The appointment may be made at a Board meeting or by a circular

resolution. The person so appointed can act as an additional director up to the date of next

annual general meeting.

Casual Vacancy Director: A director who is so appointed u/s 262 will hold office tillthe tenure of the director's office whose vacancy he filled up. Director appointed by small shareholders: Small shareholder means a shareholder

holding shares of nominal value of Rs 20,000/- or less. The Companies Act contains

provisions regarding appointment of Small Shareholders Director (SSD). Nature of

Company Public Company; Paid up Capital Rs 5 crores or more; Number of SmallShareholders 100 or more The Company may suo motu appoint a SSD. If Notice is

given by 1/10thor more small shareholder, the company shall be bound to act on such

notice for appointment of SSD. The Notice shall be given at least 14 days before theAnnual General Meeting. The Notice shall specify the name; address & number of shares

held & folio number of shareholders proposing the resolution; and the person whose

name is proposed as SSD. SSD has to be a small shareholder. A person cannot become aSSD for more than 2 companies. SSD cannot be appointed as a Whole Time Director/

Managing Director. He is not required to obtain the qualification shares.

Nominee Directors1. Appointment:Nominee Directors are Directors appointed by Central Government u/s 408 or

Financial institutions constituted under an Act of parliament. Following provisions shall apply to

nominee directors appointed by Central Government u/s 408 and financial institutions

constituted under the Act of Parliament:

they are not required to retire by rotation they are not counted in the total number of directors they may be appointed even if there is no provisions in the articles for their appointment their appointment may result in increasing the strength of the Board beyond the

Maximum number of directors as specified in the articles

they are not required to hold qualification shares they can be removed only by the authority appointing them

2. Other provisions: All the provisions of Companies Act, 1956 shall apply to such directors,

specifically, the following provisions must be checked:

the articles of the company must specifically provide that nominee directors may beappointed

the appointment of nominee directors must not result in a contravention of Section 255.Procedure for removal of a director


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1. Notice of removal of a director is given by a member to company. The notice must be aspecial notice.

2. A copy of notice is given by company to director.3. The director has a right to make representation to the company.4. Representation given by company is sent by the company to every member. The

company shall give a copy of the representation made by the director to every member. If

the representation was not sent to the members, the representation shall be read at the

General Meeting.

5. The General Meeting shall be held.6. The director has right to be heard at the meeting. The right to make an oral

representation is in addition to written representation.

7. The director shall be removed if an ordinary resolution is passed for his removal.8. Any other person may be appointed at the place of the director removed, only if special

notice of the new appointee was given to the company.

The disqualifications of Directors in a company

The Grounds of disqualification of Directors applicable to every company are as under -

Following persons are disqualified to become a director:

A person who has been found to be of unsound mind by a court of competent jurisdiction A person who is an undischarged insolvent. A person who has applied to be adjudicated as an insolvent A person who has been convicted by a court and the following conditions are fulfilled : He is convicted for an offence involving moral turpitude. He is sentenced to imprisonment for 6 months or more or 5 years have not elapsed from

the expiry of sentence.

A person who has not paid any call on shares and the default has continued for 6 months. A person who is disqualified by an order of court u/s 203 on the ground of fraud or

misfeasance in relation to a company.

The Grounds of disqualification applicable to a public company are as under [section 274 (1)

(g)]-

A director of a public company shall be disqualified from being appointed as a director inany other company, if the public company of which he is already a director

does not file the annual accounts and annual returns for any continuous 3 financial yearscommencing on or after 1.4.1999 or

fails to repay its deposits or interest thereon on due date or redeem its debentures on duedate or pay dividend and such failure continues for 1 year or more.

Where a public company fails to repay its deposit or interest thereon on due date orredeem its debentures on due date or pay dividend on the due date, all the persons who


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has been directors from the due date till the expiry of one year after the due date, shall be

disqualified.

The disqualification u/s. 274)1)(g) shall remain in force for a period of 5 years. Even where the

default made u/s 274(1)(g) is subsequently cured by the directors shall continue to remain

disqualified.

Additional GroundsThe Articles of Association of a private company may provide additional

grounds of disqualification of a director.

Meetings

A company is an association of several persons. Decisions are made according to the view of themajority. Various matters have to be discussed and decided upon. These discussions take place at

the various meetings which take place between members and the directors. Needless to say, the

importance of meetings cannot be under-emphasised in case of companies. The Companies Act,

1956 contains several provisions regarding meetings.

For a meeting, there must be at least 2 persons attending the meeting. One member cannot

constitute a company meeting even if he holds proxies for other members.

Kinds of Company Meetings: Broadly, meetings in a company are of the following types :-

Meetings of Members Meetings of the Board ofDirectors

Other Meetings

Statutory Meetings Meetings of the Board of

Directors

Meeting of debenture holders

Annual General Meetings Committee Meetings Meeting of creditors

Extra Ordinary General

Meeting

Class Meetings

Meetings of Members: These are meetings where the members / shareholders of the companymeet and discuss various matters. Members meetings are of the following types :-

A. Statutory Meeting:A public company limited by shares or a guarantee company having share

capital is required to hold a statutory meeting. Such a statutory meeting is held only once in thelifetime of the company. Such a meeting must be held within a period of not less than one month

or within a period not more than six months from the date on which it is entitled to commence

business i.e. it obtains certificate of commencement of business.


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The purpose of the meeting is to enable members to know all important matters pertaining to theformation of the company and its initial life history. The matters discussed include which shares

have been taken up, what money has been received, what contracts have been entered into, what

sums have been spent on preliminary expenses, etc. The members of the company present at themeeting may discuss any other matter relating to the formation of the Company or arising out of

the statutory report also, even if no prior notice has been given for such other discussions but noresolution can be passed of which notice have not been given in accordance with the provisions

of the Act.

A notice of at least 21 days before the meeting must be given to members unless consent is

accorded to a shorter notice by members, holding not less than 95% of voting rights in the

company.

A statutory meeting may be adjourned from time to time by the members present at the

meeting.The Board of Directors must prepare and send to every member a report called the

"Statutory Report" at least 21 days before the day on which the meeting is to be held. But if all

the members entitled to attend and vote at the meeting agree, the report could be forwarded lateralso. The report should be certified as correct by at least two directors, one of whom must be the

managing director, where there is one, and must also be certified as correct by the auditors of thecompany with respect to the shares allotted by the company, the cash received in respect of such

shares and the receipts and payments of the company. A certified copy of the report must be sent

to the Registrar for registration immediately after copies have been sent to the members of the

company.

A list of members showing their names, addresses and occupations together with the numbershares held by each member must be kept in readiness and produced at the commencement of the

meeting and kept open for inspection during the meeting.

If default is made in complying with the above provisions, every director or other officer of the

company who is in default shall be punishable with fine upto Rs. 500. The Registrar or acontributory may file a petition for the winding up of the company if default is made in

delivering the statutory report to the Registrar or in holding the statutory meeting on or after 14

days after the last date on which the statutory meeting ought to have been held.

The auditors have to certify that all information regarding calls and allotment of shares are

correct.

B. Annual General Meeting

Must be held by every type of company, public or private, limited by shares or by guarantee,

with or without share capital or unlimited company, once a year. Every company must in eachyear hold an annual general meeting. Not more than 15 months must elapse between two annual

general meetings. However, a company may hold its first annual general meeting within 18

months from the date of its incorporation. In such a case, it need not hold any annual general

meeting in the year of its incorporation as well as in the following year only.


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In the case there is any difficulty in holding any annual general meeting (except the first annualmeeting), the Registrar may, for any special reasons shown, grant an extension of time for

holding the meeting by a period not exceeding 3 months provided the application for the purpose

is made before the due date of the annual general meeting. However, generally delay in thecompletion of the audit of the annual accounts of the company is not treated as "special reason"

for granting extension of time for holding its annual general meeting. Generally, in suchcircumstances, an AGM is convened and held at the proper time . all matters other than theaccounts are discussed. All other resolutions are passed and the meeting is adjourned to a later

date for discussing the final accounts of the company. However, the adjourned meeting must be

held before the last day of holding the AGM.

A notice of at least 21 days before the meeting must be given to members unless consent isaccorded to a shorter notice by members, holding not less than 95% of voting rights in the

company. The notice must state that the meeting is an annual general meeting. The time, date

and place of the meeting must be mentioned in the notice. The notice of the meeting must beaccompanied by a copy of the annual accounts of the company, directors report on the position

of the company for the year and auditors report on the accounts. Companies having share capitalshould also state in the notice that a member is entitled to attend and vote at the meeting and isalso entitled to appoint proxies in his absence. A proxy need not be a member of that company.

A proxy form should be enclosed with the notice. The proxy forms are required to be submitted

to the company at least 48 hours before the meeting.The AGM must be held on a working day

during business hours at the registered office of the company or at some other place within thecity, town or village in which the registered office of the company is situated. The Central

Government may, however, exempt any class of companies from the above provisions. If any

day is declared by the Central government to be a public holiday after the issue of the noticeconvening such meeting, such a day will be treated as a working day. A company may, by

appropriate provisions in its its articles, fix the time for its annual general meeting and may also

by a resolution passed in one annual general meeting fix the time for its subsequent annualgeneral meetings.

Companies licensed under Section 25 are exempt from the above provisions provided that the

time, date and place of each annual general meeting are decided upon beforehand by the Board

of Directors having regard to the directions, if any, given in this regard by the company in

general meeting.

Business to be Transacted at Annual General Meeting:

At every AGM, the following matters must be discussed and decided. Since such matters arediscussed at every AGM, they are known as ordinary business. All other matters and business to

be discussed at the AGM are specila business.

The following matters constitute ordinary business at an AGM :-

a. Consideration of annual accounts, directors report and the auditors reportb. Declaration of dividendc. Appointment of directors in the place of those retiringd. Appointment of and the fixing of the remuneration of the statutory auditors.


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In case any other business ( special business ) has to be discussed and decided upon, anexplanatory statement of the special business must also accompany the notice calling the

meeting. The notice must also give the nature and extent of the interest of the directors or

manager in the special business, as also the extent of the shareholding interest in the company ofevery such person. In case approval of any document has to be done by the members at the

meeting, the notice must also state that the document would be available for inspection at theRegistered Office of the company during the specified dates and timings.

C. Extraordinary General Meeting

Every general meeting (i.e. meeting of members of the company) other than the statutory

meeting and the annual general meeting or any adjournment thereof, is an extraordinary generalmeeting. Such meeting is usually called by the Board of Directors for some urgent business

which cannot wait to be decided till the next AGM. Every business transacted at such a meeting

is special business. An explanatory statement of the special business must also accompany the

notice calling the meeting. The notice should also give the nature and extent of the interest of thedirectors or manager in the special business, as also the extent of the shareholding interest in the

company of every such person. In case approval of any document has to be done by the membersat the meeting, the notice must also state that the document would be available for inspection at

the Registered Office of the company during the specified dates and timings.

The Articles of Association of a Company may contain provisions for convening an

extraordinary general meeting. Eg. It may provide that "the board may, whenever it thinks fit,

call an extraordinary general meeting" or it may provide that "if at any time there are not withinIndia, directors capable of acting who are sufficient in number to form a quorum, any director or

any two members of the company may call an extraordinary general meeting".

Extraordinary General Meeting on Requisition :

The members of a company have the right to require the calling of an extraordinary generalmeeting by the directors. The board of directors of a company must call an extraordinary general

meeting if required to do so by the following number of members :-

a. members of the company holding at the date of making the demand for an EGMnot less than one-tenth of such of the voting rights in regard to the matter to be

discussed at the meeting ; or

b. if the company has no share capital, the members representing not less than one-tenth of the total voting rights at that date in regard to the said matter.

The requisition must state the objects of the meetings and must be signed by the requisitioning

members. The requisition must be deposited at the company's registered office. When the

requisition is deposited at the registered office of the company, the directors should within 21days, move to call a meeting and the meeting should be actually be held within 45 days from the

date of the lodgement of the requisition. If the directors fail to call and hold the meeting as

aforesaid, the requisitionists or any of them meeting the requirements at (a) or (b) above, as thecase may be, may themselves proceed to call meeting within 3 months from the date of the


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requisition, and claim the necessary expenses from the company. The company can make goodthis sum from the directors in default. At such an EGM, any business which is not covered by the

agenda mentioned in the notice of the meeting cannot be voted upon.

Power of Company Law Board to Order Calling of Extraordinary General Meeting :

If for any reason, it is impracticable to call a meeting of a company, other than an annual generalmeeting, or to hold or conduct the meeting of the company, the Company Law Board may, either

i) on its own motion, or ii) on the application of any director of the company, or of any memberof the company, who would be entitled to vote at the meeting, order a meeting to be called and

conducted as the Company Law Board thinks fit, and may also give such other ancillary and

consequential directions as it thinks fit expedient. A meeting so called and conducted shall be

deemed to be a meeting of the company duly called and conducted.

D.Class Meeting: Class meetings are meetings which are held by holders of a particular class of

shares, e.g., preference shareholders. Such meetings are normally called when it is proposed to

vary the rights of that particular class of shares. At such meetings, these members discuss the

pros and cons of the proposal and vote accordingly. (See provisions on variations ofshareholders rights). Class meetings are held to pass resolution which will bind only the

members of the class concerned, and only members of that class can attend and vote.

Unless the articles of the company or a contract binding on the persons concerned otherwise

provides, all provisions pertaining to calling of a general meeting and its conduct apply to class

meetings in like manner as they apply with respect to general meetings of the company.

II. Meetings of the Board of Directors

- Meeting of the Board of Directors

- Meeting of a Committee of the Board

III. Other Meetings

A. Meeting of debenture holders: A company issuing debentures may provide for the holding

of meetings of the debentureholders. At such meetings, generally matters pertaining to the

variation in terms of security or to alteration of their rights are discussed. All matters connectedwith the holding, conduct and proceedings of the meetings of the debentureholders are normally

specified in the Debenture Trust Deed. The decisions at the meeting made by the prescribed

majority are valid and lawful and binding upon the minority.

B. Meeting of creditors: Sometimes, a company, either as a running concern or in the event ofwinding up, has to make certain arrangements with its creditors. Meetings of creditors may be

called for this purpose. eg U/s 393, a company may enter into arrangements with creditors with

the sanction of the Court for reconstruction or any arrangement with its creditors. The court, onapplication, may order the holding of a creditors' s meeting. If the scheme of arrangement is

agreed to by majority in number of holding debts to value of the three-fourth of the total value of

the debts, the court may sanction the scheme. A certified copy of the court's order is then filedwith the Registrar and it is binding on all the creditors and the company only after it is filed with


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Registrar. Similarly, in case of winding up of a company, a meeting of creditors and ofcontributories is held to ascertain the total amount due by the company and also to appoint a

liquidator to wind up the affairs of the company.

Requisites of a Valid Meetings The following conditions must be satisfied for a meeting to be

called a valid meeting :-

1. It must be properly convened. The persons calling the meeting must be authorised to doso.

2. Proper and adequate notice must have been given to all those entitled to attend.3. The meeting must be legally constituted. There must be a chairperson. The rules of

quorum must be maintained and the provisions of the Companies Act, 1956 and the

articles must be complied with.4. The business at the meeting must be validly transacted. The meeting must be conducted

in accordance with the regulations governing the meetings.

Notice of General MeetingA meeting cannot be held unless a proper notice has been given to all persons entitled to attend

the meeting at the proper time, containing the necessary information. A notice convening ageneral meeting must be given at least 21 clear days prior to the date of meeting. However, an

annual general meeting may be called and held with a shorter notice, if it is consented to by all

the members entitled to vote at the meeting. In respect of any other meeting, it may be called andheld with a shorter notice, if at least members holding 95 percent of the total voting power of the

Company consent to a shorter notice.

Notice of every meeting of company must be sent to all members entitled to attend and vote at

the meeting. Notice of the AGM must be given to the statutory auditor of the company.

Accidental omission to give notice to, or the non-receipt of notice by, any member or any other

person on whom it should be given will not invalidate the proceedings of the meeting. The notice

may be given to any member either personally or by sending it by post to him at his registeredaddress, or if there is none in India, to any address within India supplied by him for the purpose.

A notice calling a meeting must state the place, day and hour of the meeting and must contain the

agenda of the meeting. If the meeting is a statutory or annual general meeting, notice mustdescribe it as such. Where any items of special business are to be transacted at the meeting, an

explanatory statement setting out all materials facts concerning each item of the special business

including the concern or interest, if any, therein of every director and manager, is any, must beannexed to the notice. If it is intended to propose any resolution as a special resolution, such

intention should be specified.

A notice convening an AGM must be accompanied by the annual accounts of the company, the

directors report and the auditors report. The copies of these documents could, however, be sentless than 21 days before of the date of the meeting if agreed to by all members entitled to vote at

the meeting.


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ProxyIn case of a company having a share capital and in the case of any other company, if the articles

so authorise, any member of a company entitled to attend and vote at a meeting of the company

shall be entitled to appoint another person (whether a member or not) as his proxy to attend andvote instead of himself. Every notice calling a meeting of the company must contain a statement

that a member entitled to attend and vote is entitled to appoint one proxy in the case of a privatecompany and one or more proxies in the case of a public company and that the proxy need not be

member of the company.

A member may appoint another person to attend and vote at a meeting on his behalf. Such other

person is known as "Proxy". A member may appoint one or more proxies to vote in respect of

the different shares held by him, or he may appoint one or more proxies in the alternative, so that

if the first named proxy fails to vote, the second one may do so, and so on.

The member appointing a proxy must deposit with the company a proxy form at the time of the

meeting or prior to it giving details of the proxy appointed. However, any provision in the

articles which requires a period longer than forty eight hours before the meeting for depositingwith the company any proxy form appointing a proxy, shall have the effect as if a period of 48

hours had been specified in such provision.

The proxy form must be in writing and be signed by the member or his authorised attorney duly

authorised in writing or if the appointer is a company, the proxy form must be under its seal or be

signed by an officer or an attorney duly authorised by it.

The proxy can be revoked by the member at any time, and is automatically revoked by the death

or insolvency of the member. The member may revoke the proxy by voting himself before theproxy has voted, but once the proxy has exercised the vote, the member cannot retract his vote.

Where two proxy forms by the same shareholder are lodged in respect of the same votes, the lastproxy form will be treated as the correct proxy form.

A proxy is not entitled to vote except on a poll. Therefore, a proxy cannot vote on show of hands.

QuorumQuorum refers to the minimum number of members who must be present at a meeting in order to

constitute a valid meeting. A meeting without the minimum quorum is invalid and decisionstaken at such a meeting are not binding. The articles of a company may provide for a quorum

without which a meeting will be construed to be invalid. Unless the articles of a company

provide for larger quorum, 5 members personally present (not by proxy) in the case of a publiccompany and 2 members personally present (not by proxy) in the case of a private company shall

be the quorum for a general meeting of a company.

It has been held by Courts that unless the articles otherwise provide, a quorum need to be present

only when the meeting commenced, and it was immaterial that there was no quorum at the time

when the vote was taken. Further, unless the articles otherwise provide, if within half an hourfrom the time appointed for holding a meeting of the company, a quorum is not present in the

person, the meeting :-


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a. if called upon the requisition of members, shall stand dissolved;b. in any other case, it shall stand adjourned to the same day in the next week, at the same

time and place, or to such other day and time as the Board of Directors may determine.

If at the adjourned meeting also, the quorum is not present within half an hour from the time

appointed for holding the meeting, the members present shall a quorum.

ChairmanThe chairman is the head of the meeting. Generally, the chairman of the Board of Directors is the

Chairman of the meeting. Unless the articles otherwise provide, the members present in person at

the meeting elect one of themselves to be the chairman thereof on a show of the hands.

Duties of the chairman:Without a chairman, a meeting is incomplete. The chairman is the

regulator of the meeting. His duties include the following :-

1. He must ensure that the meeting is properly convened and constituted i.e. that propernotice has been given, that the required quorum is present, etc.2. He must ensure that the provisions of the act and the articles in regard to the meeting andits procedures are observed.

3. He must ensure that business is taken in the order set out in agenda and no businesswhich is not mentioned in the agenda is taken up unless agreed to by the members.

4. He must impartially regulate the proceedings of the meeting and maintain discipline atthe meeting.

5. He may exercise his powers of adjournment of the meeting, should he in good faith feelthat such a step is necessary. The chairman has the power to adjourn the meeting in case

of indiscipline at the meeting. A chairman however does not have the power to stop oradjourn the meeting at his own will and pleasure. If he adjourns the meeting prematurely,

the members present may decide to continue the meeting and elect another chairman andproceed with the business for which it was convened.

6. He must exercise his power to order a poll correctly and must order it to be taken whendemanded properly.

7. He must exercise his casting vote bonafide in the interest of the company.Voting and Demand for PollGenerally, initially matters are decided at a general meeting by a show of hands. If the majority

of the hands raise their hands in favour of a particular resolution, then unless a poll is demanded,

it is taken as passed. Voting by a show of hands operates on the principle of "One Member-OneVote". However, since the fundamental voting principle in a company is "One Share-One Vote",

if a poll is demanded, voting takes place by a poll. in the case of a private company having a

share capital, by one member having the right to vote on the resolution and present in person or

by proxy if not more than seven such members are personally present, and by two such members

present in person or by proxy, if more than seven such members are personally present.

MotionMotion means a proposal to be discussed at a meeting by the members. A resolution may bepassed accepting the motion, with or without modifications or a motion may be entirely rejected.


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A motion, on being passed as a resolution becomes a decision. A motion must be in writing and

signed by the mover and put to the vote of the meeting by the chairman.

AmendmentAmendment means any modification to a motion before it is put to vote for adoption.

Amendment may be proposed by any member who has not already spoken on the main motion orhas not previously moved an amendment thereto.

Kinds of ResolutionsResolutions mean decisions taken at a meeting. A motion, with or without amendments is put to

vote at a meeting. Once the motion is passed, it becomes a resolution. A valid resolution can bepassed at a properly convened meeting with the required quorum. There are broadly three types

of resolutions :-

1.Ordinary Resolution :An ordinary resolution is one which can be passed by a simplemajority. I.e. if the votes (including the casting vote, if any, of the chairman), at a general

meeting cast by members entitled to vote in its favour are more than votes cast against it. Votingmay be by way of a show of hands or by a poll provided 21 days notice has been given for the

meeting.

2. Special Resolution :A special resolution is one in regard to which is passed by a 75 %

majority only i.e. the number of votes cast in favour of the resolution is at least three times the

number of votes cast against it, either by a show of hands or on a poll in person or by proxy. Theintention to propose a resolution as a special resolution must be specifically mentioned in the

notice of the general meeting. Special resolutions are needed to decide on important matters of

the company. Examples where special resolutions are required are :-

a.

To alter the domicile clause of the memorandum from one State to another or toalter the objects clause of the memorandum.

b. To alter / change the name of the company with the approval of the centralgovernment

c. To alter the articles of associationd. To change the name of the company by omitting "Limited" or "Private Limited".

The Central Government may allow a company with charitable objects to do so

by special resolution under section 25 of the Companies Act, 1956.

3. Resolution requiring Special Notice :There are certain matters specified in the Companies

Act, 1956 which may be discussed at a general meeting only if a special notice is given regardingthe proposal to discuss these matters at a meeting. A special notice enables the members to be

prepared on the matter to be discussed and gives them time to indicate their views on the

resolution. In case special notice of resolution is required by the Companies Act, 1956 or by the

articles of a company, the intention to propose such a resolution must be notified to the companyat least 14 days before the meeting. The company must within 7 days before the meeting give the

notice of the proposed resolution to its members. Notice of the resolution is required to be given

in the same way in which notice of a meeting is given, or if that is not practicable, the company


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may give notice by advertisement in a newspaper having an appropriate circulation or in any

other manner allowed by the articles, not less 7 days before the meeting.

The following matters requiring Special Notice before they are discussed before tha meeting :-

a.

To appoint at an annual general meeting appointing an auditor a person other thana retiring auditor.

b. To resolve at an annual general meeting that a retiring auditor shall not bereappointed.

c. To remove a director before the expiry of his period of office.d. To appoint another director in place of removed director.e. Where the articles of a company provide for the giving of a special notice for a

resolution, in respect of any specified matter or matters.

Please note that a resolution requiring special notice may be passed either as an ordinary