Elements of company law

DEFINITION OF A COMPANY:
A company is a voluntary association of person formed for some
common purpose, with capital divisible in parts known as shares,
and with a limited liability. It is a creation of law and is some
times know as artificial person created by law, i.e. it is regarded
by the law as a person just as a human being. But it has no
physical existence.
As per the Companies Act, 1956, a company is defined as ‘a
company means a company formed and registered under this Act
or an existing company as defined in section 3 (1) (ii)’.

CHARACTERISTICS OF COMPANY
The main characteristics of the company
• Separate legal entity
• Perpetual succession
• Limited liability
• Separate property
• Transferability of shares
• Common seal
• Capacity to sue and be sued

Types of company:
Private Company [section 3(1)(iii)]
A private company means a company which has a minimum paid
up capital of one lakh rupees or such higher paid up capital as
may be prescribed, and by its articles:
(a) restricts the right to transfer its shares, if any;
(b) limits the number of members to fifty not including: (i) person
ho are in the employment of the company, and (ii) person who,
having been formerly in the employment and have continued to
be members after the employment ceased:
(c) prohibits any invitation to the public to subscribe for any
shares in, or debentures of the company; and

(d) Prohibits any invitation or acceptance of deposits from person
other than its members, directors or their relatives :

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Provided that where two or more persons hold one or more
shares in a company jointly, they shall be counted as a single
member:
there should be at least two persons to form a private
company. A private company can therefore be registered with
a minimum of 2 members and can not have more than 50
members (excluding employee and ex-employee members.
A private company must have at least 2 directors.
The word “ private limited” must be added at the end of its
name by a private limited company.

Public company [section 3 (1) (iv)]
Public company means a company which
a) Has a minimum paid up capital of five lakh rupees or such
higher paid capital as may be prescribed and
b) is not a private company
•
The minimum number of person required to form a public
company is 7. there is no restriction on maximum number of
members in a public company,
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A public company must have at least 3 directors.

Government companies :
Section 617 defines a “Government company” as any company in
which not less than fifty one percent of the paid up share capital
is held by the
a) Central Government, or
b) by any state Government or Governments,
c) partly by the Central Government or partly by one or more
state Governments.
A Subsidiary of a Government Company is also treated as a
Government company.

• Government companies are public sector companies, so their
audit assumes special relevance. Hence, the companies Act
makes separate provision for their audit.
• The auditor of a Government company is appointed or
reappointed by the Comptroller and Auditor General of India

Foreign Companies:
A foreign company is a company which is incorporated in a
country outside India under the law of that other country and
has established a place of business in India. Section 591 to 602
of the Act deal with such companies.
Foreign companies are two classes namely :
a)
b)

Companies incorporated outside India, which has established a
place of business in India after April 1, 1956; and
Companies incorporated outside India, which established a
place of business in India before that date and continue to have
an established place of business in India.

Section 592 of the companies Act lays down that every foreign
company which establishes a place of business in India must, with
in 30 days of the establishment of such place of business, file with
the Registrar of companies at New Delhi and also with the
Registrar of Companies of the State in which such place of business
is situated.

Holding and Subsidiary companies [Section 4]
“Holding and subsidiary” companies are relative terms. A
company is a holding of another if the other is its subsidiary.
According to section 4 of the company Act, 1956 a company shall
be deemed to be a subsidiary of another, if and only if :
a) That other controls the composition of its Board of Directors;
or
b) That other holds more than half of the nominal value of its
equity share capital.
c) The first mentioned company is a subsidiary of any company
which is that other’s subsidiary.

1.
2.
3.

To illustrate, company A is subsidiary of a company B if, but only
if:
Company B (holding company) controls the composition of the
board of directors of company A (subsidiary); or
Company B (holding company) controls more than 50% voting
power of company A (subsidiary);
If company A (the subsidiary) is a subsidiary of the company C
which is subsidiary of company B, then company A is a
subsidiary of Company B.
If company D is the subsidiary of company A, then D will be the
subsidiary of company C and also of company B

Incorporation of company
Before a company is formed, certain preliminary
decisions are necessary, e.g. whether it should be a
private company or public company, what its capital
should be, and whether it is worthwhile forming a new
company or taking over the business of an already
established concern. All these decision are taken by
certain persons known as ‘promoters’. They do all the
necessary preliminary work incidental to the formation
of a company.

• Commencement of business
A private company or a company having no share capital
may commence business and exercise its various
powers immediately after it is incorporated. Once it has
received its Certificate of Incorporation, nothing further
is required.
A public company, on the other hand, must obtain a
certificate to commence business from the Registrar
before it can commence its business or exercise its
borrowing power. In order to obtain this certificate, the
company must comply with section 149 of the
companies Act. If the company has issued a prospectus
than section 149(1) applies and if it has not issued a
prospectus, Section 149 (2) applies

“ commence any business” does not mean merely the
business for which the company was started but it
includes the power of borrow and any transaction
including sale, and purchase of property, etc.
[kishangarh Electric supply Co. Ltd.v. United State of
Rajasthan, Air 1960 Raj. 49 ]. But commencement of
“business” does not include taking of preliminary steps,
entering into provisional contracts and allotment of
shares.

The certificate is conclusive evidence that a company is
entitled to commence business.
once a certificate of commence business has been issued
to a company a writ cannot be issued to cancel the
certificate of a company under the companies act,
1956[Muluk Mohammed v. capital stock Exchange
Kerala Ltd (1991) 72 Com Cases 333 (ker)].

Mode of forming incorporated company (section 12)
Any 7 or more persons (2 or more in case of private
company) associated for any lawful purpose may form
an incorporated company, with or without limited
liability. They shall subscribe their names to a
Memorandum of Association and also comply with
other formalities in respect of registration. A company
so formed may be1). A company limited by shares, or
2). A company limited by guarantee, or
3). An unlimited company.
Companies limited by shares are the most popular.

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Documents o be filed with the Registrar:
before a company is registered, it is essential to
ascertain from the registrar of companies if the
proposed name of the company is approved. Then the
following documents duly stamped together with the
necessary fees are to be filed with the Registrar.
The memorandum of association duly signed by the
subscribers.
The Articles of Association, signed by the subscribers
to the memorandum of association.
The Agreement, if any,
List of Directors who have agreed to become first
directors of the company and their written consent to
act as directors.

• A declaration stating that all the requirements of the
companies Act and other formalities relating to
registration have been complied with. Such declaration
shall be signed by any of the following persons : viz
a) An advocate of the Supreme Court or of a High Court.
b) an attorney or a pleader entitled to appear before High
Court.
c) a secretary or a chartered accountant in whole time
practice in India, who is engaged in the formation of the
company.
d) a person named in the Articles as a director, manager
or secretary of the company.

Certificate of incorporation
When the requisite document are filed with the
Registrar, the registrar shall satisfy himself that the
statutory requirements regarding registration have been
duly complied with. In exercising this duty, the registrar
is not required to carry out any investigation. If the
Registrar is satisfied as to the compliance of statutory
requirements, he retains and registers the
Memorandum, the Articles and other documents filed
with him and issues a ‘certificate of incorporation’. i.e.
of the formation of the company.

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The memorandum of association is a document, which
contains:
The fundamental rules regarding the constitution and
activity of the company.
It is the basic document, which lays down how the
company is going to be constituted and what work it
shall undertake.
The purpose of memorandum is to enable the members
of the company, its creditors and the public to know
that its powers are and what is the range of its activity.
The memorandum contains rules regarding the capital
structure, the liability of the members, the object of the
company and all other important matters relating to the
company.

• In other words the memorandum defines and confines
the power of the company. alterations to the
memorandum of association are possible only after
certain formalities are completed.

Contents of Memorandum of Association:
Memorandum of Association is divided into following
clauses:
• Name clause
• Registered office clause
• Objects clause
• Capital clause
• Liability clause
• Subscription clause.

Articles of association is a document which contains• The rules regarding the internal management of the
company.
• In order to run the administration of a company
smoothly, it is essential to have set of rules, which will
be followed by everyone working with the company.
These rules are incorporated in the articles of
association.
• The articles are subordinate to the Memorandum in
importance. Therefore rules are made in conformity of
the objects outlined in the Memorandum.

Contents of articles of association
Articles of association usually have the following
contents:
• Share capital, types of share, rights of shareholder, and
meeting of shareholder.
• Calls on share
• Procedure for forfeiture of shares
• Provisions regarding transfer and transmission of shares
• Issuing of shares at premium or discount
• Quorum at a meeting
• Directors, their appointment etc.
• Removal of director

• Remuneration of manager, Secretary and Managing
Director
• Dividend and bonus shares
• Provisions regarding Accounts and audit
• Borrowing powers
• Winding up

COMPANY MEETINGS:
The corporate system of business organization is
essentially democratic in structure. Officials acting
under the orders of the Board of Directors, which is the
executive head of the company, carry on the business of
the company. But the directors are elected to the Board
by the shareholder of the company and must abide by
the wishes of the shareholders as expressed in
resolutions passed in meeting convened for the
purpose. The shareholders are subjects to the provision
of Memorandum of Association and Articles of
Association, the final authority as regards the affairs of
the company.

Types of meeting:
the following are the types of company meeting.
1. Shareholders Meetings
• Statutory meeting
• Annual General Meeting
• Extraordinary General Meeting
2. Creditors Meetings
3. Debenture holders Meetings
4. Board Meetings
Provision of company law regarding these meeting are
discussed in the following paragraphs.

Share holders meeting:
a) Statutory meeting:
Every public company limited by shares and every
company limited by guarantee and having a share
capital, must within a period of not less than one
month and not more than six months from the date
at which the company is entitled to commence
business, hold a general meeting of members to
discuss a report by directors, Known as statutory
report, which contains particulars relating to the
formation of a company.

Statutory Report
This is the report drafted by director and certified as
correct by at least two of them [including managing
director where there is one] A copy of the report must
be sent to every member at least 21 days before the
date of the meeting. A copy is also to be sent to the
registrar for registration. Statutory report must contain
certain particulars.

Annual General Meeting:
• A meeting known as an annual general meeting is
Required to be held by every company, public or
private, limited by shares or by guarantee, with or
without share capital or unlimited company every year.
• The first annual general meeting of a company may be
held within a period of not more than 18 months from
the date of its incorporation.
• Subject to this provision, a company must hold any
annual general meeting each year.
• Not more than 15 months shall elapse between the
date of one annual general meeting and the next

• The Registrar may for any special reason, extend the
time of holding an annual general meeting [other than
the first annual general meeting] by a period not
exceeding 3 months.
• Every annual general meeting shall be called during
business hours, on a day which is not a public holiday, at
the registered office of the company or at some other
place within the town or village where the registered
office is situated.
• A general meeting may be called by giving not less than
21 days notice in writing.

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Extraordinary General Meeting:
Any meeting of shareholder other than statutory
meeting is an extraordinary general meeting.

Who may call extraordinary general meeting
1. By Board of Directors
2. By shareholders subject to fulfillment of certain
provisions
3. By Company Law Board

• Requisites Of A Valid Meeting:
• Proper Authority:
The proper authority to convene a general meeting (whether
statutory, annual general or extraordinary) of a company is a
Board of Director.

• Notice of meeting:
A proper notice of the meeting should be given to the
members and all others who are entitled to attend the
meeting
• Length of notice
A general meeting of a company may be called by giving
not less than 21 days notice in writing to the members.
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Contents of notice
Every notice of a company calling a meeting shall specify
the place and the day and hour of the meeting. It shall
also contain a statement of the business to be
transacted at the meeting.

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(1)
(2)
(3)
(4)

Ordinary business and Special business: (Section 173)
The notice shall contain a statement of the business to
be transacted at the meeting. The business may be
ordinary business or special business.
Ordinary business : in the case of an annual general
meeting, the following business is deemed as ordinary
business, business relating toThe consideration of the accounts, balance sheet and
the reports of the Board of Directors and auditors,
The declaration of dividend,
The appointment of directors in place of those retiring
The appointment of auditor and the fixing of their
remuneration.

Special business: in the case of an annual general
meeting, any business other than the ordinary
business and in the case of any other meeting, all
business, is deemed special. For E.g.
(1) Removal of director
(2) Issue of right/bonus share,
(3) Election of a person (other than retiring director) as
Director.
Explanatory statement. Where any special business is
to be transacted at a meeting of a company, the notice
shall specify its nature.

• Quorum of Meeting (Sec 174 )
Quorum means the minimum number of members
who must be present in order to constitute a valid
meeting and transact thereat. The Quorum is
generally fixed by the articles if the articles of the
company do not provide for a large quorum the
following rules apply:
Five member personally present incase of public
company and two incase of any other company shall
be quorum for a meeting of the company

• Chairman of the meeting ( Sec 175)
A chairman is necessary is to conduct a meeting. He
is the presiding officer of the meeting. Unless the
Articles of a company otherwise provide, the
members personally present at the meeting shall
elect one of themselves to be the chairman of the
meeting on a shoe of hands. if the poll is demanded
on the election of the chairman, it shall be taken
forthwith.

Minutes of the meeting:
Minutes are a record of what the company and director
do in meetings.
• Minutes of proceeding of meetings:
Every company shall keep a record of all proceedings of
every general meeting and of all proceedings of every
meeting of its Board of Directors and of every
committee of the Board.
• Minutes Books:
the book in which the record of the proceedings of a
meeting is kept is known as the minute book.

• Numbering of pages:
The pages of every minute book shall be consecutively
numbered.
• Signing of minutes:
Each page of the minute book which records
proceedings of a board meeting shall be initialed or
signed by the chairman of the same meeting or the next
succeeding meeting
• Fair and Correct Summary
The minutes of each meeting shall contain a fair and
correct summary of the proceedings at the meeting, so
that the absentee shareholders may be in a position to
form some reliable idea of what transpired at these
meetings.

• Evidentiary value of Minutes
Minutes of meetings kept in accordance with the
provisions of Sec 193 shall be evidence of the
proceedings recorded therein and shall be conclusive
of the facts stated therein

• Proxies (Section 176)
A member entitled to attend and vote at a meeting
may vote either in person or by Proxy. A proxy is an a
authority to represent and vote for another person
at a meeting. It is also an instrument appointing a
person as proxy. The person so appointed is also
called a proxy.

• Voting and Poll
The motions proposed in a general meeting of a
company are decided on the votes of the members of
the company. The members holding any equity share
capital therein have the right to vote on every motion
placed before the company.
The voting may be:
1.by a show of hands, or
2.by taking a poll

• Resolutions:
The Question which generally come for
consideration at the general meeting of the company
are presented in the form of proposals called
motions. A motion may be proposed by the chairman
of the meeting or by any other member of the
company.
• Kinds of Resolutions:
1. Ordinary Resolution [Section 189(1)]
2.Special Resolution [Section 189(2)]

• Definition
Sec.2 (36) defines a prospectus as “any document
described or issued as a prospectus and includes any
notice, circular, advertisement or other document
inviting deposit from the public or inviting offers from
the public for the subscription or purchase of any share
in or debentures of, a body corporate.” in simple Words,
any document inviting deposits from the public or
inviting offers from the public for the subscription of
share or debenture of a company is a prospectus.

• Prospectus to be in writing
• Invitation to public
• Offer to the public

• Registration of prospectus
A prospectus can be issued by or on behalf of the
company only when a copy thereof has been delivered
to the Registrar for registration.
The registration must be made on or before the date of
publication thereof.
The copy must be signed by every person who is named
therein as director or proposed director of the
company, or by his agent authorized in writing.

• Shelf Prospectus:
shelf prospectus means a prospectus issued by any
financial institution or bank for one or more issues of
the securities or class of securities specified in that
prospectus.
• Information memorandum
Information memorandum means a process under
taking prior to the filing of a prospectus by which a
demand for the securities proposed to be issued by a
company is elicited, and the price and the terms of
issue for such securities is assessed, by means of a
notice, circular, advertisement or document.

• Red herring prospectus:
Is a prospectus which does not have details of either
price or number of share being offered or the amount of
issue. This means that in case price is not disclosed, the
number of share and the upper and lower price bands
are disclosed. On the other hand an issuer can state the
issue size and the number of shares are determined
later. An RHP and Draft Offer Document can be filed
with the ROC Without the Price Band and the issuer, in
such a case will notify the floor price or a price band by
way of an advertisement one day prior to an opening of
an issue.

• Abridged Prospectus:
The Companies Act 1956 defines ‘abridge prospectus’ to
mean a memorandum containing such salient features
of a prospectus as may be prescribed. It contains all the
salient features of a prospectus. It accompanies the
application form the public.
• Offer document
Offer document means prospectus in case of public issue
or offer for sale and letter of offer in case of right issue,
which (offer document) is filed with the registrar of
companies (ROC) and Stock Exchange. An offer
document covers all the relevant information to help an
investor to make his/her investment decisions.

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The Golden Rule as to framing of prospectus:
The Golden Rule as to framing of prospectus was laid
down by V.C. Kindersley in New Brunswick & Canada
Rly. & Land co. v.Muggeridge,(1860) 1 and Sm. 363 in
the following words:
those who issue prospectus holding out to the public
the great advantages which will accrue to persons who
will take a share in a proposed undertaking, and
inviting them to take share on the faith of the
representations therein contained, are bound to state
every thing strict and scrupulous accuracy and not only
to abstain from stating as fact that which is not so but
to omit no one fact within their knowledge,

existence of which might in any degree affect the nature
or extent and quality of the privileges and advantages
which the prospectus holds as inducement to take
share.”

DOCTRINE OF ULTRA VIRES
A company has the power to do all such things as are1. authorized to be done by the companies Act, 1956;
2. essential to the attainment of its objects specified
in the memorandum;
3. reasonably and fairly incidental to its objects[ Foster
vs. London Chatham & Dover Co., (1895) 1 Q.B 711].

• Every thing else is ultra vires the company. ‘Ultra’
means ‘beyond’ and ‘vires’ means ‘powers’ The term
Ultra vires for a company means that the doing of
the act is beyond the legal power and authority of
the company. The purpose of these restrictions is to
protect-1. Investors of the company so that they may know the
objects in which their money is to be employed; and
2. Creditors by ensuring by the company’s funds are
not wasted in unauthorized activities.

• Ultra vires act is void. If an act is ultra vires the
company, it does not create any legal relationship.
Such act is absolutely void and even the whole body
of share holders cannot ratify it and make it binding
on the company. It is not necessary that an act to be
considered ultra vires must be illegal; it may or may
not be [Anand Prakash vs. Asst. Registrar, A.I.R.
(1968) All. 22]. The leading case on the point is:
Ashbury Rly. Carriage & Iron Co. Ltd. v. Richie, (1875)
L.R. 7 H.L.653. A company was incorporated with the
following objects:

a) to make, Sell, or lend on hire, railway carriage and
wagons ;
b) to carry on the business of mechanical engineers
and general contractors;
c) to purchase, lease ,work and sell mines, minerals,
land and buildings,
• The company entered into contract with Riche for
the financing of construction of a railway line in
Belgium. The question raised was whether that
contract was covered with in the meaning of
‘general contractors’ the House of Lords held that
the contract was ultra vires the company and void
so that not even the subsequent assent of the
whole body of share holders could ratify it.

The main feature and facet of the doctrine of Ultra
vires is of that a company being a corporate person
should not be mulcted (fined or punished) for its
own acts or acts of its agents, if they are beyond its
powers and privileges [Bhidani vs. Bank of Baroda,
(1957) 27 Comp. Cas.233]. Where the company
exceeds its authority, the act is good to the extent of
the authority and bad as to the excess but if the
excess cannot be separated from the authority
conferred on the company; by the memorandum,
the whole transaction would be affected by the
Doctrine of Ultra vires and would be void. But there
is nothing to prevent a company from protecting its
property the leading case on the point is:

• National Telephone Co. vs. St. Peter Port Constable,
(1900) A.C.317. A telephone company put up
telephone wires in a certain area. The company had
no power in the memorandum to put up wires there.
The defendant cut them down. Held; The company
sue for damage to the wires.
• Whether a particular act on the part of the company
is with in its powers is a question of facts and
decided on the construction of the terms of the
Memorandum

• Ultra vires the Directors. If an act or transaction is ultra
vires the directors (i.e. beyond their powers, but with in
the powers of the company), the share holders can
ratify it by a resolution in a general meeting or even by
acquiescence provided they have knowledge of the
facts relating to the transactions to be ratified, If an act
is within the powers of the company, any irregularities
may be cured by the consent of the share holders
[Express Engg. Works Ltd. Re (1920) 1 Ch.466].
• Ultra vires the articles. If an act or transaction is ultra
vires the articles, the company can ratify it by altering
the articles by a special resolution. Again if the act is
done irregularly, it can be validated by the consent of
the share holders provided it is with in the powers of
the company.

ILLEGAL ASSOCIATION (SECTION-11)
A company, association, or partnership consisting
more than 10 persons for the purpose of carrying on
the banking business and of more than 20 persons
for the purpose of carrying on any other business
with the object of earning profits can be legally
formed only when it is registered under the
companies Act 1956, or is formed in pursuance of
some other Indian law or is a Joint Hindu family
carrying on business on such. If the number of
members of an association or partnership exceeds
this statutory limit and is not registered under the
companies Act, it is an illegal association and has no
legal existence.

• An association of more than 20 persons which exists
not for acquisition for gain but for some other
purpose such as the promotion of art, charity,
religion, science, etc, does not require registration.

CONSEQUENCES OF AN ILLEGAL ASSOCIATION
1. PERSONAL LIABILITY.
Every member of an illegal association is personally
liable for all liabilities incurred in the business and is
punishable with fine which may extend to Rs.10,000.

2. CONTRACTS.
(a) An illegal association cannot enter in to any contract nor
can it sue any member or outsider, not even if the
company is subsequently registered.
(b) It cannot sue or be sued for debts due to it or from it in
carrying on its business for it cannot contract debts, or
enter into any contracts.
(c) No member of the association can sue any other member
in respect of any matter connected with the association
(d) the members cannot either Individually or collectively
bring an action to enforce any contract which they may
have purported to make on behalf of the association, or to
recover any debt given to the association.

3. WINDING UP.
An illegal association cannot be wound up under
companies either at a instance of creditor, or a
member or the association itself. The tribunal will do
nothing in relation to it that will amount to its
recognition
In fact the tribunal does not even
entertain a petition for its winding up, for if it did, it
would be indirectly according to recognition to the
illegal association.

• Powers of Directors
General powers of the Board: the Board of Director of a company is
entitled to exercise all such powers and to do all such acts and
things as the company is authorised to exercise and do. This
means the powers of the Board of directors are Co-extensive with
those of the company. This proposition is, however, subject to
two conditions:
First, the Board shall not do any act which is to be done by the
company in general meeting.
Second, the Board shall exercise its powers subject to the
provisions contained in the companies Act, or in the
Memorandum or the Articles of the company or in any regulation
made by the company in general meeting. But no regulation
made by the company in a general meeting shall invalidate any
prior act of the Board which would have been valid if that
regulation had not been made.

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Powers to be exercised at Board meeting:

The Board of directors of the company shall exercise the following
powers on behalf of the company by means of resolutions
passed at the meetings of the Board, viz., the power toa) Make calls on shareholder in respect of money unpaid on their
shares:
b) Issue debentures:
c) Borrow money otherwise than on debentures (say, through
public deposits)
d) Invest the fund of the company
e) Make loans
The Board may, by a resolution passed at a meeting, delegate
the last three powers to a committee of directors or the
manager or any other principal officer of the company, but the
board shall specify the limits of such delegation.

• Powers to be exercised with the approval of company
in general meeting:
The board of directors of a public company, or of a private
company which is a subsidiary of a public company, shall exercise
the following powers only with the consent of the company in
general meeting (say, under amalgamation scheme):
• To sell lease or otherwise dispose of the whole, or substantially
the whole, of the undertaking of the company.
• To remit or give time for repayment of any debt due to the
company by a director except in the case of renewal or
continuance of a advance made by the banking company to its
directors in the ordinary course of business.
• to invest the amount of compensation received by the company
in respect of the compulsory acquisition of any undertaking or
property of the company.

• To borrow moneys where the moneys to be borrowed (together
with the moneys already borrowed by the company) are more.
Than the paid up capital of the company and its free reserves
(that is to say reserve, not set a part for any specific purpose, e.g.
balance in the share premium account, general reserve, profit
and loss account, capital redemption account). The amount of
temporary loans raised from banks in the ordinary course of
business is excluded.
• To contribute to charitable and other funds not directly relating
to the business of the company or the welfare of its employees.

• Every resolution passed by the company in general meeting to
borrowed moneys shall specify the total amount up to which
moneys may be borrowed by the Board of directors.

Liabilities of Directors:
1. Liability to third parties:
Under The Act. Liability of the directors to third parties may
arise in connection with the issue of a prospectus which does
not contain the particulars required by the companies act or
which contain material misrepresentations.
Directors may also incur personal liabilitya) On their failure to repay application money if minimum
subscription has not been subscribed
b) On an irregular allotment of shares to an allottee (and likewise
to the company ) if loss or damage is sustained
c) On their failure to repay application money if the application
for the securities to be dealt in on a recognized stock exchange
is not made or is refused

d)

On failure by the company to pay a bill of exchange, hundi
promissory note cheque or order for money or goods wherein
the name of the company is not mentioned in legible characters

Independent of the Act
Director, as agents of a company, are not personally liable on
contract entered into as a agent on behalf of the company.
But there are number of exception to this rule. If a director fail to
exclude personal liability, for instance, by signing a negotiable
instrument without mentioning the company’s name and the fact
that he is signing on a company’s behalf, he is personally liable to
the holder of such instrument. He is also personally liable if he
acts in his own name.

Liability to the company.
1. Ultra vires acts.

2.

Directors are personally liable to the company in respects to
ultra vires acts and it is not necessary to prove fraud in such a
case, e.g when they pay dividend out of capital or when they
dissipate the funds of the company in ultra vires transactions.
They are liable jointly and severally and inter se, they have a
right to rateble contribution.
Negligence.
A director may incur liability for the
negligence in the
exercise of his duties. There is no statutory definition of
negligence, and as such each case has to be decided after due
consideration of the particular facts thereof.

• Breach of trust:
Directors of a company being in a fiduciary position, hold the
position of trustee as regards its money and property which
comes into their hand and of the powers entrusted to them by
the Articles. They must discharge their duties as such trustees in
the best interest of the company. They are liable to the
company for any loss resulting from breach of trust.

• Misfeasance:
Director are liable to the company for misfeasance which means
‘wilful misconduct’ of directors for which they may be sued in
Law Court. In case of misfeasance proceeding the directors may
apply for relief under section 633.

• Liability for breach of statutory duties:
There are numerous statutory duties of directors which they
must carry out. Most of this duties relate to maintenance of
proper account, filing of returns or observance of certain
statutory formalities. If they fail to perform to these duties, they
render themselves liable to penalties.

• Liability for acts of his co-directors.
A director is not liable for the acts of his co-directors provided he
has no knowledge and he is not a party. His co-directors are not
his servants or agents who can by their acts impose liability on
him

• A Managing director means a director who is entrusted
substantial powers of management which would not
otherwise be exercisable by him. These powers may be
conferred on him by virtue of an agreement with the
company or a resolution passed by the company in general
meeting or its board of directors or by virtue of its
memorandum of association or articles of association.
• The term Managing director includes A director occupying a
position of managing director, by whatever name called but
the power to do administrative acts of routine nature of
when so authorised by the board such as the power to affix
common seal of the company to any document or to draw
or endorse any cheque on the account of the company in
any bank or to draw and endorse any negotiable instrument

or to singe any share certificate or to direct registration
of transfer of any share, shall not be deemed to be
included within substantial powers of management

Manager
Manager according to section 2 (24), means an individual
who has the management of the whole or substantially the
whole of the affairs of a company. He is subject to the
superintendence, control and direction of the board of
directors. ‘Manager’ includes a directors or any other
person occupying the position of the manager, by whatever
name called and whether under a contract of service or not.

• Remuneration to manager
the manager of a company may, subject to the overall limit
of managerial remuneration, receive remuneration either
by way of monthly payment or by way of specified
percentage of the net profit of the company. Excepts with
the approval of the Central Government, such
remuneration shall not exceed in the aggregate 5 per cent
of the net profit of the company

•

‘Share capital’ means the capital raised by a company
by the issue of share. The word ‘capital’ in connection
with the company is used in several senses.

1.
2.
3.
4.
5.
6.

Authorised or nominal capital.
Issued and subscribed capital.
Called up capital.
Paid up capital.
Uncalled capital.
Reserve capital.

•

Types of share

A) Preference shares.
Preference shares, with reference to any company
limited by shares, are those which have two
characteristics.
• They have a preferential right to be paid dividend
during the lifetime of the company
• They have a preferential right to the return of capital
when the company goes into liquidation.

B) Equity shares.
equity share, with a reference to any company limited by
share, are those which are not a preference share.
i) with voting rights, or
ii) with differential rights as to dividend, voting or
otherwise in accordance with such rules and subject to
such conditions as may be prescribed.
C) Sweat equity share.
The expression sweat equity share means equity share
issued at a discount or for consideration other than cash
for providing know-how or making available rights in the
nature of intellectual property right or value additions.

•

Kinds of preference shares.

1.
2.
3.
4.
5.
6.
7.

Cumulative preference shares.
Non-cumulative preference shares.
Participating preference shares.
Non-Participating preference shares.
Convertible preference shares.
Non-Convertible preference shares.
Redeemable preference shares.

• the main purpose of winding up of a company is to
realize the assets and pay the debts of the company
expeditiously and fairly in accordance with the law.
However, the purpose must not be exploited for the
benefit or advantage of any class or person entitled to
submit petition for winding up of the company it may be
noted that on winding up, the company does not cease
to exist as such except when it is dissolved. The
administrative machinery of the company gets changed
as the administration is transferred in the hands of the
liquidator. Even after commencement of the windingup, the property and assets of the company belong to
the company until dissolution takes place. On
dissolution the company ceases to exist as a separate

Entity and becomes incapable of keeping property, suing
or being sued. thus in between the winding up and
dissolution, the legal status of the company continues
and it can be sued in the court of law

• Winding up and Dissolution
The terms winding up and dissolution are sometimes
erroneously used to mean the same thing. But
according to the company act 1956 the legal implication
of these two terms are quite different and there are
fundamental difference between them as regards the
legal procedure involved. The main points of distinction
are given below.
• Winding up is the first stage in the process whereby
assets are realised, liability are paid off and the surplus,
if any, distributed among its members. Dissolution is the
final stage whereby the existence of the company is
withdrawn by the law.

• The liquidator appointed by the company or the court
carries out the winding up proceeding but the order for
dissolution can be passed by the court only.
• Liquidator can represent the company in the process of
winding up. This can be done till the order of dissolution
is passed by the court. Once the court passes dissolution
orders the liquidator can no longer represent the
company.
• Creditors can prove their debts in the winding up but
not on the dissolution of the company.

•

Modes of Winding Up
1. By the Court i.e. compulsory winding up.
2. Voluntary winding up, which may be either.
i) members voluntary winding up.
ii) creditor’s voluntary winding up.
3. Winding up subject to the supervision of the court.

• Winding Up by The Court.
Winding up by the court or by the compulsory winding up
is initiated by an application by way of petition to the
appropriate Court for a winding up order. A winding up
petition has to be resorted to only when other means of
healing an ailing company are of absolutely no avail.
• Voluntary Winding Up.
The companies are usually wound up voluntarily as it is
an easier process of winding up. It is altogether different
from a compulsory winding. In voluntary winding up the
company and its creditors are left to settle their affairs
without going to a court, although they may apply to the
court for directions or orders, as and when necessary

• Members voluntary winding up.
When the company is solvent and is able to pay its
liabilities in full, it need not consult the creditors or call
their meeting. Its directors, or where they are more
than two, the majority of its may, at a meeting of the
board make a declaration of solvency verified by an
affidavit stating that they have made full enquiry into
the affairs of the company and that having done so they
have formed an opinion that the company has no debts
or that it will be able to pay its debts in full within such
period not exceeding 3 year from the commencement
of the winding up as may be specified in the declaration.

• Creditor’s voluntary winding up.
Where a declaration of solvency of the company is not
made and delivered to the registrar in a voluntary
winding up it is a case of creditor’s voluntary winding up

Elements of company law

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