Company law

Company Law Notes
By:
Harpreet Singh
Assistant Professor
Sun Institute of Management & Technology
Shahjahanpur

Company Law
Unit 1
Corporate personality: corporate personality is a term used for a company incorporated under
the Companies Act, and has been awarded an esteemed status of being a Corporation.
Meaning of Company: in the ordinary common parlance, a company means a group of persons
associated to achieve some common objectives.
Definition of Company: According to Prof. Haney, “ A company is an artificial person created
by law, having separate entity, with perpetual succession and common seal.
Characteristics of company
The characteristics of a company are:
1) Incorporated association: A company must be incorporated or registered under the
Companies Act. Minimum number required for the purpose is 7 in case of a public
company and 2 in case of a private company.
2) Artificial person: A company is created with the sanction of law and is not itself a
human being, it is, therefore, called artificial, and since it is clothed with certain rights
and obligations, it is called a person. It exists in the eyes of law and cannot act on its own.
It has to act through Board of Directors elected by the shareholders.
3) Separate Legal Entity: A company is regarded as an entity separate from its members.
In other words, it has an independent existence. Any of its member can enter into

contracts with it in the same manner as any other individual can and he cannot be held
liable for the acts of the company even if he holds virtually the entire share capital.
4) Limited liability: A company may be a company limited by shares or a company limited
by guarantee. In a company limited by shares, the liability of members is limited to the
unpaid value of the shares. In a company limited by guarantee, the liability of members is
limited to such amount as the members may undertake to contribute to the assets of the
company, in the event of its being wound-up.
5) Perpetual Existence: A company being an artificial person cannot be incapacitated by
illness and it does not have an allotted span of life. The death, insolvency or retirement of
its members leaves the company unaffected. Members can come and go but company can
go forever.
6) Common seal: A company being an artificial person is not bestowed with a body of
natural being. Therefore, it has to work through its Directors, officers and other
employees. But, it can be held bound by only those documents which bear its signature.
Common seal is the official signature of a company.
7) Capacity to sue: A company can and be sued in its corporate name. It may also inflict or
suffer wrongs. It can in fact do or have done to it most of the things which may be done
by or to a human beings.
8) Separate Property: As a legal person, a company can own, enjoy and dispose of any
property in its own name. A member does not even have insurable interest in the
company’s property.
9) Transferability of shares: The shares of a company are transferable in the manner
provided in the Articles of the company. However, in a private company, certain
restrictions are placed on such transfer of shares but the right to transfer is not taken away
absolutely.
Difference Between Company and partnership
Basis of
difference
Company Partnership
Regulating Act A company is governed by the provisions of
the Companies Act 1956
A partnership firm is governed by the
provisions of the Indian Partnership Act
1932
Legal Entity It has a separate legal existence. A company
is separate from its members.
A firm does not enjoy separate legal
existence. Partners are collectively termed
as a firm and individually as partners.
Agency A member is not an agent of the other
members or of the company, his actions do
not bind others
Every partner is an agent of the other
partners, as well as of the firm
Liability Liability of its members is limited to the
extent of the value of shares held by them
Each partner has unlimited liability and is
personally liable for all the debts of the firm
Number of
membership
A private company may have as many as 50
members but not less than 2 and a public
company may have any number of members
but not less than 7.
In the case of firms carrying on business
other than banking, the number must not
exceed 20 and in case of banks such
member must not exceed 10.
Transfer of In case of a public company, a shareholder A share in a partnership cannot be

shares can transfer his shares freely without
restrictions
transferred without the consent of all the
partners.
Management The right and control of the business is
vested in the hands of the Board of
Directors elected by the shareholders
All the partners of the firm are entitled to
take part in the management of the business.
Registration A company registration is essential A partnership firm may be or may not be
registered.
Winding-up No one member can require it to wound up
at will and winding up involves legal
formalities
A partnership firm can be wound up at any
time by any partner, if it is at will, without
legal formalities.
Kinds of Company
The companies can be categorized on the following basis:
(1) On the basis of Incorporation: From the point of view of its formation,
companies are of three kinds:
i. Chartered Companies: These companies are incorporated under a special charter by
Monarch i.e. King or Queen of England. For Example East India Company and The
Bank of England. Such companies do not exist in India.
ii. Statutory Companies: These companies are incorporated by a special act passed by
the Parliament, i.e. Central or State Legislature. They derive their powers from the
acts constituting them and enjoy certain powers that companies incorporated under
Companies Act have. For Example: RBI, LIC, SBI, UTI, Industrial Finance
Corporation etc.
iii. RegisteredCompanies: These companies are formed under the Companies Act,
1956 or were registered under the Companies Act passed earlier to this. Such
companies come into existence only when they are registered under the Act and a
certificate of incorporation has been issued by the Registrar of Companies.
(2) On the basis of liability: There are three kinds of companies:
i. Companies Limited by Shares: when the liability of the members of a company is
limited by the Memorandum to the amount, if any, unpaid on the shares, such a
company is called a company limited by shares.
ii. Companies limited by guarantee: A company in which the liability of its members
is limited to the extent of the amount guaranteed is known as the company limited by
guarantee. The liability of its members is limited.
iii. Unlimited Companies: section 12 gives choice to the promoters to form a company
with or without limited liability. A company not having any limit on the liability of its
members is called an unlimited company.

(3) On the basis of Number of members: From the point of view of number of
members, company may be of two types:
i. Private Company: A private company is one which restricts the right of the
members to transfer shares, limit the number of members to 50 and prohibit any
invitation from public to subscribe for its shares or debentures.
ii. Public Company: : A public company is one which does not restricts the right of
the members to transfer shares, limit the number of its members and prohibit any
invitation from public to subscribe for its shares or debentures of the company.
iii. One Man Company: This is a company in which one man holds practically the
whole share capital of the company, and in order to meet the statutory requirement
of minimum number of members, some dummy members, who are mostly his
relatives or friends, hold one or two share.
(4) On the basis of control: From the point of view of control, there are two kinds
of companies:
i. Holding Company: A company is known as the holding company of another
company if it has control over that other company. According to Section 4(4),
“A company is deemed to be the holding company of another, but if only, that
other company is its subsidiary.
ii. Subsidiary Company: A company is known as a subsidiary company of
another company when control is exercised by the latter (called holding
company) over the former, called a subsidiary company.
(5) On the basis of ownership: From the point of view of ownership, there are two
kinds of companies:
i. Government Company: A government company means any company in
which at least 51% of paid up share capital is held by the central government
or state government, or partly by central and partly by the state government.
ii. Foreign Company: Foreign company means any company which is
incorporated outside India which has an established place in India
Private Company
Meaning of private company [section3(1) (iii)] According to section 3(1)(iii) of the
Indian Companies Act, 1956, a private company is that company which by its Articles of
Association:
1. Limits the number of its members to 50, excluding employees who are members or ex-
employees who were and continue to be members.
2. Restricts the rights of transfer of shares, if any; and
3. Prohibits any invitation to the public to subscribe for any shares or debentures of the
company.
Special Privileges of a Private Company

A private company enjoys the following privileges:
1. Number of Members: A private company may have only 2 members.
2. Allotment before minimum subscription: It can commence allotment before the
minimum subscription is subscribed for or paid.
3. Prospectus or statement in lieu of prospectus: It may allot shares without issuing a
prospectus or delivering to the registrar a statement in lieu of prospectus.
4. Issue of new shares: A private company can issue new shares as the way they like.
5. Kinds of shares: A private company may issue share capital of such kinds, in such
forms, and with such voting rights, as it may think fit.
6. Commencement of Business: It can commence immediately on incorporation.
7. Index of Business: It need not keep an index of members.
8. Statutory meeting and statutory report: Provisions relating to statutory meeting
and statutory report are not applicable on private company.
9. Managerial remuneration: The rule of overall maximum managerial remuneration
does not apply to a private company which is not a subsidiary of a public company.
10. Number of Directors: A private company needs not to have more than 2 directors.
11. Rules regarding directors: In the case of a private company, the rules regarding
directors are less stringent.
Public Company
Meaning of private company [section 3(1) (iv)] According to section 3(1)(iv) of the
Indian Companies Act, 1956, a private company is that company which by its Articles of
Association:
1. Its articles does not restricts the transfer of shares of the company
2. There is no limit for the maximum number of members.
3. It invites the general public to subscribe its share capital.
Characteristics of Public Company
The main features of a public company are:
1. The minimum number of members is 7.
2. There is no restriction on the maximum number of members.
3. It can invite public for subscription to its shares.
4. Its shares are freely transferable.
5. It has to add word limited at the end of its name.
6. Its minimum paid-up capital is five lacks rupees
Conversion of Private Company into a Public Company
The conversion of a private company into public company can be happen in the following
ways:
1. Conversion by default: Where a default is made by a private company in complying
with the essential requirements of a private, the company ceases to enjoy some of the

privileges of a private company and the provisions of the companies act apply to it as
if it were not a private company. The company law board may relieve the company
from consequences as aforesaid, if it is of opinion that the non-compliance was
accidental or due to inadvertence or other sufficient cause. It may also grant relief, if
on some other grounds it is just and equitable.
2. Conversion by operation of law: Under Section 43A, a private company becomes a
public company (known as deemed public company):
i. Where atleast 25% of its paid-up share capital is held by one or more
corporate bodies.
ii. Where its average annual turnover during the relevant period is Rs. 10 crore or
more.
iii. Where the private company holds atleast 25% share capital of a public
company, having a share capital.
iv. Where a private company invites, accepts, or renews deposits from the public,
such private company becomes deemed public company from the date of such
invitation, acceptance or renewal.
3. Conversion by choice: If a private company so alters its Articles that they do not
contain the provisions, which make it a private company, it ceases to be a private
company as on the date of the alteration. It must then file with the Registrar, within
30days, either a prospectus or a statement in lieu of prospectus. When this is done, the
private company becomes a public company.
Difference between Private and Public Company
Point of
distinction
Public Company Private Company
Minimum paid
up capital
A public company must have a minimum
paid-up capital of Rs, 5lakhs at the time of
incorporation.
A private company must have a minimum
paid-up capital of Rs. 1lakh.
Number of
members
Public company must have atleast 7
members and there is no limit on maximum
members.
In a private company minimum number of
members is 2 and maximum number of
members is 50 excluding its past and
present employees.
Name of the
company
In a public company, the word ‘Limited’
should be added at the end of its name.
In a private company, the words ‘Private
limited’ must be added at the end of its
name
Transfer of
Shares
In a public company, the shares are freely
transferable. There is no restriction on the
transfer of shares.
There is no freedom to transfer shares in a
private company.
Public
Subscription
A public company may invite the public to
purchase its shares or debentures.
Private Company cannot invite public for
issuing shares and debentures.
Issue of
Prospectus
A public company may issue a prospectus or
file a statement in lieu of prospectus with the
Registrar before allotting shares. It is
essential to issue statement in lieu of
prospectus in the absence of prospectus and
Private company cannot issue prospectus
and statement in lieu of prospectus as well.

send it to the Registrar.
Allotment of
Shares
A public company cannot allot shares
without raising minimum capital.
A private company can proceed to allot
shares even before the minimum capital is
subscribed or paid
Issue of Right
Shares
A public company is required to first offer
new shares to its existing shareholders on pro
rata basis.
A private company is not required to do so.
Issue of Share
Warrants
A public company can issue share warrants. A private company cannot to do so.
Commencement
of business
A public cannot commence its business until
it is granted a certificate of commencement
of business.
A private company can commence its
business immediately after obtaining a
certificate of incorporation.
Holding a
Statutory meeting
A public company must hold a statutory
meeting after one month but within six
months of obtaining the certificate of
commencement of business.
A private company is not required to hold a
statutory meeting
Minimum No. of
Directors
A public company is required to have atleast
3 members.
A private company shall have atleast 2
Directors
Promotion and Incorporation of Companies
A company is a separate legal entity which is formed and registered under the Companies Act.
There are four steps in the formation of a company:
(1) Promotion Stage: It is the first and foremost stage of company formation. According to
Gerestenberg; “Promotion of the company is the discovering of business opportunities and the
subsequent organization of funds, property, and management ability into business concern for the
purpose of making profits therefrom.
Those who make a decision about these aspects are known as promoters.
Steps in Promotion Stage:
i. Discovery of a Business Opportunity
ii. Conduct of Preliminary investigation
iii. Assembling and
iv. Financing
(2) Incorporation Stage: Incorporation is the second stage of the company’s formation. It is the
registration of the company as a body corporate under the Companies Act, 1956. An
incorporated association receives recognition as a legal entity separate from its members. It has

all the powers of an individual and is legally able to do things in its own name, such as own land,
sign a lease, sue or to be sued etc.
Steps to be followed for incorporation:
i. Availability and Approval of the Name: A company is identified by the name with
which it is registered. The Memorandum of Association of the company should states the
name of the company. The promoters should decide upon atleast 5suitable names apart
from one main name, in the order of preference to afford flexibility to the registrar to
ascertain the availability.
ii. Filling of Documents: Then the following documents duly stamped together with the
necessary fees are to be filed with the Registrar for Incorporation:
a) Memorandum of Association
b) Articles of Association
c) Notice
d) Agreements
e) List of Directors
f) Written consent of the Directors
g) Statutory Declaration
h) Undertaking of a Director to take and pay for qualification Shares with
necessary stamp duty
i) Payment of Fee
iii. Registration: The Registration of Companies will carefully scrutinize the documents and
if satisfied with compliance of legal formalities regarding registration, he enters the name
of the company in his register.
iv. Certificate of Incorporation: When the requisite documents are filed with the Registrar,
the Registrar shall satisfy himself that the statutory requirements regarding registration
have been duly complied with. 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.
(3). Capital Subscription/Floatation: When a company has been registered and has received its
certificate of incorporation, it is ready for ‘floatation’ that is to say, it can go ahead with raising
capital sufficient to commence business and to carry it on satisfactorily.
(4). Commencement of Business: A private company may commence business immediately
after obtaining the certificate of incorporation. A public company must obtain a ‘Certificate to
commence Business’ from the Registrar before it can commence business.
The Registrar will grant this certificate only when the public company files the following
documents:

i. Prospectus or statement in lieu of Prospectus
ii. Minimum Subscription
iii. Qualification Shares
iv. Return on Allotment
v. Declaration
vi. Statutory Declaration
Meaning and Definition of Promoters
A Promoter is an individual, a firm, a company, an institution or even a Government department,
who conceives the idea whether of exploiting a business opportunity, examining the idea whether
it is worth working, arranges men, money, material and machines and forming a profitable
enterprise.
According to Justice C. Cockburn, “A Promoter is one who undertakes to form company with
reference to a given project, and to set it going, and who takes necessary steps to accomplish that
purpose.
Role and Functions of Promoters
Promotion is the first step of the formation of a company. It includes activities from ideation of
company to obtaining license. It includes the following functions:
i. Ideation: It is the basis of every important activity. In this way, ideation is the first and
foremost function of the Promoter. He must have an idea about the form, size, nature, and
object of the proposed company.
ii. Preliminary Investigation: The Promoters has to investigate that what sort of facilities
are available at the place of establishing company. The Promoter has to satisfy that the
required piece of land, efficient workers, transportation and communication facilities and
raw material etc is available or not.
iii. Arranging resources: The promoter has to make arrangement of sufficient funds.
Though the company obtains its capital by issue of shares and debentures but the
promoter has to make payment of certain expenses before the amount is received from
issue of shares.
iv. Arranging Finance: If the promoter is satisfied after preliminary investigation that the
idea is worth implementing and there is sufficient opportunity for profit, he contacts
different persons and experts and enters into several deals regarding purchase of land,
plant and machines etc.

v. Preparing Preliminary Documents: The promoter has to prepare important documents
because these documents are compulsorily required for obtaining certificate of
incorporation and commencement of business.
vi. Preliminary Contracts: These contracts are made by the promoters before the
incorporation of the company with different parties in the interest of the company.
vii. Naming the Company: The Promoter has to decide the name of the company. He should
ensure that the name of the company should not be the same name or very identical name
of an existing company.
viii. Appointing Bankers, Brokers, Solicitors and Underwriters: The Promoter has to
make these appointments, which are required to be approval by the company.
ix. Obtaining License: The Promoter should obtain the requisite license for the business, if
necessary.
Unit 2
Primary Documents of Incorporation
In order to get incorporation of the company, promoters have to deposit along-with the
application a copy of Memorandum of Association and Articles of Association and Prospectus.
These documents are called the primary documents of incorporation.
Memorandum of Association
According to Lord Cains, “The Memorandum of Association of a company is its charter and
defines the limitations of powers of the company established under the Act. The memorandum
contains the fundamental conditions upon which alone the company is allowed to be
incorporated.
Significance of Memorandum
Memorandum of Association is the supreme basic legal document for a company due to the
following reasons:

1. It is the basis of incorporation and a company cannot be registered without a
Memorandum of Association.
2. It contains the fundamental conditions upon which alone the company can be
incorporated.
3. It is the charter of a company, which defines the objectives of the company’s formation
and the utmost possible scope of its operations beyond which its actions cannot go.
4. It determines the limits of a company’s activities.
5. It informs the investors of the purpose for which their money will be utilized by the
company.
6. It makes to known the shareholders the extent of their liability.
7. It enables the outsiders to know whether the company is authorized to enter into a
particular transaction.
8. It indicates the names and addresses of the people who have promoted the company.
Clauses in Memorandum of Association
The clauses in Memorandum of Association are as follows:
1. Name Clause: The first clause of a Memorandum shall state the name of the proposed
company. The name of the company established its identity and is the symbol of its
existence. A company may subject to the following rules, select any suitable name:
i. Undesirable name should be avoided
ii. Injunction if identical name adopted
iii. Limited or Private Limited as the last word or words of the name
iv. Prohibition of use of certain names
v. Use of some key words according to authorized capital.
2. RegisteredOffice Clauses: Every company shall have an office registered from the
day on which it begins to carry-on business, or as from the 30th day after the date of its
incorporation, whichever is earlier. All the communication and notice are to be addressed
to that registered office. Notice of the situation of the registered office and every change
shall be given to the Registrar within 30days after the date of incorporation of the
company or after the date of change.
3. Objects Clause: The objects clause defines as well as confines the spheres of business
activities that the company would engage in. Any activity which is not specifically and
explicitly allowed by the object clause cannot be carried-on by the company. Such
activities will be treated as ultra vires, which means outside the competence of the
company.
4. Liability Clause: This clause states that the liability of members is limited by the face
value of shares. The change in the liability can be brought by passing a special resolution
to that effect. Directors may have an unlimited liability while members may have limited
liability.

5. Capital Clause: This clause states the amount of share capital with which the company is
registered and the mode of its division into shares of fixed valued; i.e. the number of
shares into which the capital is divided and the amount of each share. If there are both
equity and preference shares; then the division of the capital is to be shown under these
two heads.
6. Association Clause: At the end of the Memorandum of every company there is an
association or subscription clause or a declaration of association which reads
something like this:
“We, the several persons whose name and addresses and occupations are subscribed, are
desirous of being formed into a company in pursuance of this Memorandum of
Association, and we respectively agree to take the number of shares in the capital of the
company set opposite our respective names.”
Then follows the names, addresses, description, occupations of the subscribers, and the
number of shares each subscriber has taken and his signature attested by a witness.
Doctrine of Ultra Vires
Ultra means beyond and Vires means powers. An action outside the Memorandum is
ultra vires the company. An act is said to be ultra vires which, though legal itself, is not
authorized by the objects clause in the memorandum of Association.
Doctrine of Ultra Vires can be understood as:
i. It restricts the misuse of corporate funds in unauthorized and illegal activities.
ii. All activities and transactions which are beyond the objects of the company would
be ultra vires the company and shall be entirely void. The company cannot ratify
such acts afterwards even if all the shareholders consent to ratify them.
iii. All actions against the memorandum, or the Companies Act or other law in force
will be ultra vires.
iv. All the ultra vires will not bind the company. If the Directors do any act which is
ultra vires, they can be held personally liable to the company.
v. A person who borrows money which is ultra vires the company can be sued by
the company to recover the amount so lent. If, however, an act is ultra vires the
Articles of Association, the same can be ratified by the shareholders afterwards.
vi. Similarly an act which is ultra vires the Directors can also be ratified. It is only
where an act is ultra vires the company that it becomes wholly void and cannot be
ratified and validated in any event.
Alteration of Memorandum
1. Change in Name: The name of the company can be changed:
i. By Special Resolution: A company may change its name by a special resolution
and with the approval of the Central Government. A change of name, which
merely involves the deletion or addition of the word ‘Private’ on the conversion

of a private company into a public company or vice versa, does not require the
approval of the Central Government
ii. By Ordinary Resolution: In the opinion of the central govt. the name is identical
with, or too nearly resembles, the name of existing company, the company may
change its name by ordinary resolution.
2. Change of RegisteredOffice: This may involve:
i. Change of Registeredoffice from one town to another town in the same state:
In this case, a notice is to be given within 30days of the change to the Registrar.
ii. Change of registered office from one state to another state: In this case a
special resolution is required to be passed at general meeting of the shareholders
and a copy of it is to be filed with the Registrar within 30days.
3. Alteration of Objects clause: The objects clause is the most important clause in the
Memorandum. The legal personality of a company exists only for the particular purposes
of incorporation as defined in the objects clause. By Section 17(1), the objects of a
company may be altered by a special resolution so as to enables the company:
i. To carry-on its business more economically or more efficiently.
ii. To attain its main purpose by new improved means
iii. To enlarge or change the local area of its operations
iv. To restrict or abandon any of the objects specified in the Memorandum
v. To amalgamate with any other company or body of persons
4. Change in Liability clause: A company limited by shares or guarantee cannot change its
memorandum so as to impose any additional liability on the members or to compel them
to buy additional shares of the company unless all the members agree in writing to such
change either before or after the change name.
5. Change in Capital Clause: Section 94 of the Companies Act 1956 provides that, if the
articles authorize, a company limited by share capital may, by an ordinary resolution
passed in general meeting, alter the conditions of its memorandum in regard to capital so
as to increase its authorized share capital by such amount as it thinks expedient by issuing
fresh shares
Articles of Association
The Articles of Association of a company and its bylaws are regulations, which govern the
management of its internal affairs and the conduct of its business. It defines the duties, rights,
powers, and authority of the management, and the Board of Directors in their respective
capacities and of the company, and the mode and form in which the business of the company is
to be carried-out. The Articles of Association must be printed, divided into paragraph and
numbered.
Contents of Articles:

Articles usually contain provisions relating to the following matters:
1. Share capital, rights of shareholders, variation of these rights and payment of
underwriting commission.
2. Lien on shares
3. Calls on shares
4. Procedure for making allotment of shares
5. Procedure for transfer of shares
6. Procedure for issuing share certificate
7. Transmission of shares
8. Procedure for forfeiture and re-issue of forfeited shares
9. Conversion of shares into stock
10. Share warrants
11. Alteration of capital
12. General meeting and proceedings there at
13. Voting rights of members, voting and poll, proxies
14. Directors, their appointment, remuneration, qualifications, powers and proceedings of
Board of Directors
15. Manager
16. Secretary
17. Procedure for declaration and payment of dividends and reserves
18. Matters relating to keeping of statutory books
19. Account, audit and borrowing powers
20. Capitalization of profits
21. Winding-up
Alteration of Articles
Section 31 lays down that subject to the provisions of the Act and to the conditions contained in
its memorandum, a company may, by special resolution alter or add to its articles. A printed or
type written copy of every special resolution altering the articles must be filed with the Registrar
within 30days of the passing of the special resolution. The company is also required to file a
copy of the altered articles of association with the Registrar within 30days of passing of
resolution.
Limitations or Restrictions on Power to Alter Articles:
1. Not to be inconsistent with the Companies Act: The alteration must not be
inconsistent with any provision of the Companies Act or any other statue.

2. Not to be inconsistent with the Memorandum: The alteration must not exceed the
powers given by the memorandum or conflict with other provisions of the
memorandum.
3. Not to be Illegal: The altered articles must not include anything which is illegal, or
opposed to public policy or unlawful.
4. Special Resolutions: Alterations of Articles will be made only by a special resolution as
defined under the Act. Articles can never be altered by an ordinary resolution even if
they provide for such a procedure.
5. Bona fide for the Benefit of the Company as a whole: The alteration must be bona
fide for the benefit of the company as a whole.
6. Not to increase the liability of members: The alteration will not, however, be bad
merely because it inflicts hardship on an individual shareholder.
7. Alteration in breach of contract: A company cannot justify breach of contract with
third parties or avoid a contractual liability by altering articles.
8. No retrospective operation: The amended regulation in the Articles of Association
cannot operate retrospectively but only from the date of amendment.
9. Central Govt. approval in certain cases: An alteration of articles to effect a
conversion of a public company into a private company cannot be made without the
approval of the central government.
10. Not to increase a fraud on the minority: The alteration must not constitute a fraud on
the minority by the majority.
Distinctions between Articles and Memorandum of Association
Basis of
Distinction
Memorandum of Association (MoA) Articles of Association (AoA)
Status MoA is the charter of the company and
defines the fundamental conditions and
objects for which the company is granted
incorporation.
AoA are the rules and regulations framed to govern
the internal management of the company.
Drafting or
Necessity
Every company must prepare and file it. A public company limited by shares may adopt
Table A.
Scope Constitution of the company, defines its
objectives and powers.
Rules and regulations for day to day working of the
company.
Purpose To define the objects and powers of a
company
To lay-down rules and regulations for management
of internal affairs.
Alteration They can only be altered in accordance with
the mode prescribed by the Act.
Members have a right to alter the Articles by a
special resolution.
Provisions The MoA is subordinate to the Companies
Act so it cannot include any clause contrary to
the provisions of the Companies Act.
Whereas the AoA are subordinate to the Companies
Act as well as the MoA so AoA should be consistent
with the provisions of the Companies Act and the
conditions contained in the Memorandum.
Relationship The MoA generally defines the relation While the AoA regulate the relationship between the

between the company and the outsiders. company and its members and between the members
inter se.
Dependent It is dependent upon the Company Law. It is dependent upon the Memorandum
Supremacy It is not governed by the AoA. It is supreme It is governed by the MoA
Legal Effects Acts done by a company beyond the scope of
the MoA are absolutely void and ultra vires
and the company is not bound by it, even
cannot be ratified by shareholders.
But the acts of the Directors beyond the Articles, it
is simply irregular and can subsequently be ratified
by shareholders, provided it is within the scope of
the Memorandum.
Prospectus
According to Section 2(36) of Indian Companies Act, 1956, “Prospectus means document
described or issued as prospectus and includes any notice, circular, advertisement, or other
documents inviting offers from the public for the subscription or purchase of any shares or
debentures of a body corporate.
Thus, a prospectus is not merely an advertisement; it may be a circular or even a notice. A
document shall be called a prospectus if it satisfied two things:
1. It invites subscription to share or debentures or invites deposits.
2. The aforesaid invitation is made to the public.
Objective of Prospectus
The main objects of a prospectus are as follows:
1. To bring to the notice of public that a new company has been formed.
2. To preserve an automatic record of the terms of allotment on which the public have been
invited to but its shares or debentures.
3. This secure that the Directors of the company accept responsibility of the statement in the
prospectus.
Types of Prospectus
The different types of prospectus are as follows:
1. Offer Document: It means prospectus in case of a public issue or offer for sale and
Letter of Offer in case of a right issue which is filed with Registrar of Companies (ROC)
and Stock Exchanges (SE).
2. Draft Offer Document: It means the offer document in draft state. The Draft offer
documents are filed with SEBI atleast 21days prior to the filing of the Offer Document
with ROC/SE.

3. Red Herring Prospectus: it is a prospectus which does not have details of either price or
number of shares being offered or the amount of issue.
4. Abridged Prospectus: It means the Memorandum as prescribed in Form 2A under sub-
section (3) of Section 56 of the Companies Act, 1956. It contains all the salient features
of a prospectus. It accompanies the application form of the public issue.
5. Shelf Prospectus: Section 60 A of the Companies Act, 1956 permits any financial
institution or bank to file a shelf prospectus covering one or more issue of securities or
class of securities specified in the prospectus with the ROC.
Contents of a Prospectus
Prospectus is the window through which an investor can look into the soundness of a company’s
venture. The investors must, therefore, be given a complete picture of the company’s intended
activities and its position.
The section 56 lays down that a prospectus issued shall:
Part I of Schedule II:
1. General information: Under this head information is given about:
i. Name and address of registered office of the company.
ii. Name(s) of stock exchange(s) where application for listing is made
iii. Declaration about refund of the issue if minimum subscription of 90percent is not
received within 90days from the closure of the issue.
iv. Declaration about the issue of allotment letters.
v. Date of opening of the issue
vi. Date of closing of the issue
vii. Name and address of auditors and lead managers.
viii. Whether rating from CRISIL or any other agency has been obtained or not.
ix. Names and address of the underwriters and amount underwritten by them.
2. Capital Structure of the Company:
i. Authorized, issued, subscribed and paid-up capital
ii. Size of the present issue, giving separately reservation for preferential allotment
to promoters and others.
3. Terms of the Present Value:
i. Terms of Payment
ii. How to apply
iii. Any special tax benefits
4. Particulars of the Issue:
i. Objects
ii. Project cost
iii. Means of Financing

5. Company Management and Project:
i. History and main objects and present business of the company
ii. Promoters and their background
iii. Location of the Project
iv. Collaboration if any
v. Nature of the product(s) export possibilities
vi. Future prospectus.
Part II of Schedule II
General Information:
1. Consent of Directors, Auditors, etc, their names and addresses.
2. Change, if any directors and auditors during the last 3years, and reason thereof.
The following reports shall also be set out in the prospectus:
i. Report by the Auditors
ii. Reports by the Accountant
Statutory and Other Information:
1. Minimum Subscription
2. Expenses of the issue giving separately fee payable to advisors, Registrar to the issue,
Managers to the issue and Trustees for the debenture holders.
3. Previous public or rights issue if any
4. Commission or brokerage on previous issue
5. Issue of shares otherwise than cash
6. Debentures and redeemable preference share and other instruments issued by the
company outstanding as on the date of prospectus.
7. Details of the purchase of property
8. Details of Directors, proposed directors, whole time directors, their remuneration,
appointment and remuneration of managing directors, interests of directors, their
borrowing powers and qualification shares.
9. Rights of members regarding voting, dividend, lien on shares and the process for
modification of such rights and forfeiture of shares.
10. Restrictions, if any, on transfer of shares.
11. Revaluation of assets if any
12. Material contracts and inspection of documents.
Requirements Regarding Issue of Prospectus
The relevant requirement regarding issue of prospectus is given below:

1. Issue of Incorporation: Section 55 of the Act permits issue of prospectus in relation to
an intended company. A prospectus may be issued by or on behalf of the company.
i. By a person interested or engaged in the formation company or
ii. Through an offer for sale by a person to whom the company has allotted shares.
2. Dating of Prospectus: A prospectus issued by a company shall be dated and that date
shall be taken as the date of publication of the prospectus. Date of issue of the prospectus
may be different from the date of publication.
3. Registration: A prospectus can be issued by or on behalf of a company or in relation to
an intended company when a copy thereof has been delivered to the Registrar for
registration.
Registration of Prospectus
A copy of every prospectus must be delivered to the Registrar for registration before it is issued
to the public. Registration must be made on or before the date of its publication.
The copy sent for registration must be signed by every person who is named in the prospectus as
a Director or proposed Director of the company or by his agent authorized in writing. Where the
prospectus is issued in each language should be delivered to the registrar.
Further, the prospectus must state on the face of it that a copy of it has been delivered to the
Registrar for registration. It must also specify that necessary documents and consent of the
experts have been attached to or indorsed on the copy sp delivered.
Penalty for Non-Registration of Prospectus
If a prospectus is issued without a copy thereof being delivered to the Registrar for registration,
or without the necessary documents or the consent of the experts, the company and every person,
who is knowingly a party to the issue of prospectus, shall be punishable with fine which may
extend to Rs. 5000.

Unit 3
Shares and Company Management
Share Capital: Share capital means capital raised by issuing shares of a company. The
accumulated funds or money collected by a company issuing its shares is generally known as
share capital. Actually the sum total of the nominal value of shares of a company is called its
share capital.
A public company and its subsidiary can issue only two kinds of shares, viz. preference and
equity share capital.
Types of share capital: The expressions “preference share capital” and “Equity share
capital” are used in the following different stages:
1. Authorized, nominal or Registered: It is capital with which a company is registered.
This is the nominal value of the shares which a company is authorized to issue by its
‘MoA’. In the case of a company limited by shares, the MoA must state the amount of
capital with which the company is proposed to be registered and the division thereof into
shares of a fixed amount.
2. Issued and Subscribed Capital: issued capital is the nominal value of the shares
which are offered to the public for subscription. A company does not normally issue

all its capital at once, so that issued capital in such a case is less than the nominal capital.
The issued capital can never exceed the nominal capital; it can at the most be equal to the
nominal capital.
3. Subscribed Capital: A part of the issued capital which is subscribed by the public is
known as “Subscribed Capital”.
4. Called-up capital: Generally, the shareholders pay the price of the shares by
installments, i.e. application, allotment, first call, final call etc. therefore the portion of
the face value of the share which the shareholders are called upon to pay is termed as
called-up capital.
5. Uncalled capital: this is the remainder of the issued capital which has not been called.
The company may call this amount any time, but this is subject to the terms of issue of
shares and the provisions of the articles.
6. Paid-up capital: This is that part of the issued capital which has been paid-up by the
shareholders or which is credited as paid-up capital on the shares.
7. Reserve Capital: That part of the uncalled capital which can be called only at the time of
and for the purposes of winding-up of the company is known as reserve capital.
Shares
Meaning and Definition: The capital of a company is divided into different units
called shares. A share is a movable property of a shareholder and he has a liberty to transfer
his share in the manner prescribed by the Articles of the Company.
According to Justice Farwel, “A share is the interest of a shareholder in the company
measured by a sum of money, for the purpose of liability in the first place and of interest in
the second, but also consisting of mutual covenants entered into by all the shareholders in
terms of the act and the Articles.
A share signifies the following:
1. The interest of a shareholder in the company
2. The liability of the shareholder in the company
3. The right of the shareholder to transfer the shares
4. Binding covenants on the part of the company
Characteristics of shares:
i. It is a unit of capital of the company
ii. Each share is of a definite face value
iii. A share certificate is issued to a shareholder indicating the number of shares and the
amount.

iv. The face value of a share indicates the interest of a person in the company and the
extent of his liability
v. Shares are transferable units.
vi. A share is not a sum of money but is the interest of a shareholder in the company
measured by a sum of money
vii. Each share has a distinct number so as to distinguish it from one another
viii. It is a medium of proprietary relationship between a shareholder and the company.
ix. It is transferable and heritable subject to regulations framed by the Articles.
Kinds of Shares
Under the Companies Act 1956, the shares are classified into following types:
Preference Shares [Section 85]
Section 85(1) of the Companies Act, 1956 provides that a preference share or preference
share capital is that part of the share capital which fulfils both the following requirements:
i. With respect to dividend: It carries a preferential right to be paid a fixed
amount, or amounts calculated at a fixed rate, which may be either free of or
subject to income tax.
ii. With respect to capital: It carries on winding-up or repayment of capital a
preferential right to be repaid the amount of the capital paid up or deemed to have
been paid up whether or not there is preferential right to the payment of either or
both of the following amounts namely: any money remaining unpaid and any
fixed premium.
Types of Preference Shares: Preference shares may be of the following kinds:
1. Cumulative Preference Shares: Preference shares whose dividends accumulate until
such time as the company is in a position to declare dividends. The accumulated
dividends of the preferences shares are to be paid first; only then can dividend for equity
shareholders be paid.
2. Non-cumulative Preference shares: In the case of non-cumulative preference shares if
dividend is not paid in any particular year, it lapses. Dividends are not allowed to
accumulate and such dividend will not be paid in subsequent years.
3. Participating Preference Shares: In addition to the fixed rate of dividend, these shares
carry a further right to participate with the equity shareholders in the surplus profits
which remain after paying a certain rate of dividend to equity shareholders. Thus they get
two kinds of dividend one at fixed rate and other changing every year.

4. Non-participating Preference Shares: These shares are entitled to only a fixed rate of
dividend. They do not participate either in the surplus or in the surplus assets. In such a
case, the entire surplus goes to equity shareholders.
5. Convertible Preference Shares: Where preference shares entitle their shareholders to
convert their preference shares into equity shares within a specified period, they are
known as convertible preference shares.
6. Non- convertible Preference Shares: Where preference shares cannot be converted into
equity shares, they are called non-convertible preference shares.
7. Redeemable Preference Shares: If the Articles of Association authorize, a company can
issue redeemable preference shares. It means, that the capital raised by means of these
shares can be returned after a specified period or at any time at its options after giving
notice as per terms of issue.
8. Irredeemable Preference Shares: Any preference share that cannot redeemed during
the lifetime of the company is known as irredeemable preference shares.
Equity Shares [Section 85(2) and 86]
These shares do not enjoy any special preferences like preference shares. Rights and privileges
of these shares are laid-down in the Articles of the Company.
The Equity share capital issued may be:
1. With Voting rights or
2. With different rights as to dividend, voting or otherwise in accordance with such rules
and subject to such conditions as may be prescribed.
Voting Rights
Section 86 of the Companies Act, 1956, as amended by the Companies Act, 2000 provides that
the new issues of share capital of company limited by shares shall be of two kinds only, namely:
1. Voting Rights of Equity Shareholders
i. Equity Shares with Voting Rights [section 87(1)]: The holders of equity shares
have normal rights on every resolution placed before the company at any general
meeting. Their voting rights on a poll will be in proportion to their share of the
paid-up equity capital of the company.
ii. Equity Shares with Different Rights: The holders of such equity shares shall
have different rights as to dividend, voting or otherwise in accordance with such
rules and subject to the conditions.

2. Voting Rights of Preference Shareholders: Section 87(2)(a) provides that every
member of a company limited by shares and holding any preference share capital therein
shall have a right to vote in respect of such share capital. On every resolution placed
before the company which directly affects the rights attached to his preference shares.
Difference between Equity Shares and Preference Shares
Basis of
Difference
Preference shares Equity shares
Rate of Dividend The rate of dividend on preference share
is fixed
The rate of dividend on equity share is changed
from one year to year depending upon the
availability of profit.
Payment of
Dividend
They have a right to receive dividend
before any dividend is paid on equity
shares.
Dividend on equity shares is paid after dividend
paid on preference shares.
Participation in
Management
Preference shareholders are not entitled
to participate in management.
Equity shareholders are entitled to participate in
management.
Winding-up On the winding-up, they have a right to
return capital before the capital returned
on equity shares.
In this case, they have been paid only when
preference capital is paid in full.
Arrears of
dividend
If dividend is not paid on these shares in any
year, the arrear of dividend may accumulate.
In case of equity shares, dividend cannot
accumulate.
Voting rights Preference shareholders do not have any
voting rights.
Equity shareholders enjoy voting rights.
Issue of Share at Premium:
If a company issues its shares at a price more than its face value, the shares are said to have been
issued at Premium. The difference between the issue price and face value or nominal value is
called premium. The money received as premium is transferred to Securities Premium A/c. A
company issues its shares at premium only when its financial position is very sound.
Section 78 of the Companies Act, 1956, lays-down conditions for which amount of premium can
be utilized:
1. Issuing fully paid bonus shares
2. Writing-off preliminary expenses, discount on issue of shares
3. Underwriting commission or expenses on issue and
4. Paying premium on redemption of preference shares or debentures.
Issue of Shares at Discount

When the issue price of a share is less than the face value, shares are said to have been issued at
discount.
Section 79of Companies Act 1956has laid-down certain conditions subject to which a company
can issue its shares at a discount. These conditions are as follows:
1. The shares must belong to a class already issued.
2. The sanction of the Central Government must be obtained.
3. The maximum rate of discount must not exceed 10% or as the rate permitted by the
Central Government.
4. Atleast one year must have elapsed since the date on which the company was entitled to
commence business.
5. The issue must be made within two months from the date of receiving the sanction of the
central government.
6. Permission from company law board must be obtained.
Allotment of Shares
Allotment means acceptance by a company of the offer made by an applicant to take shares. It is
done by the Board of Directors by passing resolution to this effect. On allotment the applicant
becomes a holder of allotted number of shares.
Rules as to Allotment
1. Minimum Subscription [section 69]: Minimum subscription refers to the minimum
amount of capital that should be subscribed for by the public before a company can
proceed with allotment of shares. If minimum subscription is not received by the
company than company cannot make allotment. The minimum subscription is 90% for
the company.
2. Application Money: The amount payable on application on each share shall be atleast 5
percent of the nominal amount of the share. All money received from applicants for
shares shall be deposited and kept deposited in a scheduled bank.
3. Statement in lieu of Prospectus: Where a company having a share capital does not issue
a prospectus, it can allot any shares or debentures only when atleast 3days before the first
allotment of the shares or debentures, there has been delivered to the Registrar for
registration a statement in lieu of prospectus.
4. Irregular Allotment: Allotment is considered to be irregular in the following cases:
i. If allotment is made, without receiving atleast 5% of the nominal value of shares
as application money
ii. Without receiving the minimum subscription within 90 days of the issue of
prospectus
iii. If the application money received is not deposited in scheduled bank

iv. Where company does not issue a prospectus.
5. Opening of the subscription List: When shares or debentures of a company are offered
in pursuance of a prospectus issued generally, no allotment may be made until the
beginning of the 5th day from the date of the issue prospectus or on such later day as may
be specified in the prospectus. This date is known as the opening of the subscription lists.
6. Shares and Debentures to be dealt in on Stock Exchange: Every company intending to
offer shares or debentures to the public for subscription by the issue of a prospectus shall,
before such issue, make an application to one or more recognized stock exchanges for
permission for the shares or debentures intended to be offered to be dealt with in the
stock exchange or each such stock exchange.
7. Returns as to Allotment: Within 30days of allotment of share by a company, the
company shall file with the Registrar a statement known as return as to allotment.
Share Certificate
A share certificate is a certificate document of title to the shares in a company. It is issued by a
company to its members in whose names shares registered in the register of members of the
company.
A share certificate certifies the:
1. Nature of the shares i.e. equity or preference
2. Member(s) in whose name(s) it is issued is(are) the rightful owner(s) of the shares, with
distinctive numbers, as detailed therein and
3. Amount paid to the company by the shareholder on each share at various stage i.e. on
application, on allotment, as first call, as final call.
Share Warrants [Sections 114 and 115]
Share warrant is a bearer document of title to the specified shares. As per Section 114 and 115 of
the Companies Act, 1956 a public company, if authorized by its Articles, may, in respect of fully
paid shares, issue under its common seal, and with the previous approval of the Central
Government, a share warrant stating that the bearer thereof is entitled to the shares specified
therein. Shares specified in the warrant are transferable like negotiable instruments by mere
delivery of the warrant. A private company cannot issue share warrants.
Difference between Share Certificate and Share Warrant
Share Certificate Share Warrant
The holder of a share certificate is a registered member of
the company.
The bearer of a share warrant is not a registered
member of the company.
The holder of a share certificate is essentially a member of
the company.
The bearer of a share warrant can be a member only if
Articles provides so.

The issue of a share certificate does not require the
approval of the Central Government
Share warrant can be issued only if the Articles
authorize its issue and the central government has
accorded its previous approval.
Both public and private companies must issue share
certificate.
Share warrants can be issued only by public
companies.
A share certificate is issued in respect of partly of fully
paid shares.
A share warrant can be issued only in respect of fully
paid shares.
A share certificate is not a negotiable instrument. A share warrant is a negotiable instrument.
The holder of share is qualified as director of the
company.
The holder of a share warrant is not qualified as a
director of the company
The holder of a share certificate can present a petition for
winding-up.
The holder of a share warrant cannot do so.
Stamp duty is payable on transfer of shares specified in a
share certificate.
But no stamp duty is payable on transfer of a company
share warrant, although heavy stamp duty is payable at
the time of issue of share warrant itself.
Forfeiture of Shares
Forfeiture means termination of membership as a sort of penalty for the non- payment of calls on
the due date. Forfeiture of shares refers to the cancellation or termination of membership of s
shareholder by taking away the shares and rights of membership.
The following are the conditions for a valid forfeiture:
i. The power to forfeit shares must be expressly given by the company’s Articles.
ii. The procedure given in the Articles must be followed.
iii. There should be a default by the shareholder in payment of a valid call.
iv. A notice of demand, requiring the shareholder to pay calls within the specified period
and specifying the amount, must be given.
v. The Board of Directors must pass a resolution for forfeiture of shares.
Procedures regarding Forfeiture of Shares
1. Provision in the Articles of Association: The Secretary has to check if there is a
provision in the Articles of Association regarding forfeiture of shares. If there is a
provision in the Articles, the company can go ahead regarding forfeiture of shares.
2. Preparing the List of Defaulters: As soon as the due date of payment of call money is
over, the secretary prepares a list of defaulting members. Then calls a meeting BOD and
places the list of defaulters for consideration and suitable decision and action by the
board.
3. Board meeting and resolution by directors: The secretary arranges the meeting of the
BoD and in this meeting a resolution will be passed whereby the secretary will be
authorized to send reminders to the defaulters.

4. Issue of Warning Letter: Even after reminders have been sent to the defaulters, no need
has been taken to pay the call money; the secretary has to issue a warning notice under
the authority of the board’s resolution and the Articles. Defaulting members have to pay
dues within 14days from the date of notice.
5. Board meeting for resolution on forfeiture: If the default continues even after 14days
warning notice, the secretary has to arrange a meeting of the BoD. In this meeting a
resolution will be passed by the BoD to forfeit the shares of the defaulting members.
6. Notice of the forfeiture: The Secretary has to send a formal notice to the defaulting
members informing them about the forfeiture and asking them to surrender the forfeited
shares. Such notice of forfeiture or letter of forfeiture is required to be sent by recognized
post to the individual share holders concerned.
7. Removal of the names from the register of members: Finally, the secretary has to
remove the name of defaulters, from the register of members and enter the same with
other particulars in the register of forfeiture of shares.
Members
The word ‘member’ and ‘shareholder’ are used interchangeably and generally speaking, apart
from a few exceptional cases, they are synonymous.
Definition of ‘Member’
According to section 41 of the Companies Act, 1956:
1. The subscribers of the memorandum of a company shall be deemed to have agreed to
become members of the company, and on registration, shall entered as members in its
register of members..
2. Every other person who agrees in writing to become a member of a company and whose
name is entered in its register of members shall, be a member of the company.
3. Every person holding equity share capital of a company and whose name is entered as
beneficial owner in the records of a depository shall be deemed to be a member of the
concerned company.
Modes of Acquiring Membership
The effect of Section 41 is that a person may become a member, either:
1. By subscribing the Memorandum: A subscriber to the memorandum, who must take
directly from the company the agreed number of shares, becomes a member the moment
the registration of the company takes place, without being placed on the register of
members.
2. By agreeing to purchase qualification shares: Directors who have signed and delivered
to the Registrar an undertaking to take up their qualification. Shares are in the same

position as subscribers to the memorandum and are also deemed to have become
members on the registration of the company.
3. By application and Allotment: A person who applies for a certain number of shares
becomes a member when shares are allotted to him, a notice of allotment is given, and his
name is entered in the register of members.
4. By transfer of shares: A person can become a member by buying shares from an
existing member and by having the transfer registered and getting his name placed on the
register of members.
5. By Transmission of shares: A person may become a member by registration if he
succeeds to the estate of a deceased member. The official receiver or assignee is entitled
to be a member in the place of a shareholder who is adjudged an insolvent.
6. By Estoppel: A person is deemed to be a member if he allows his name, apart from any
agreement to become a member, to be on the register of members, or otherwise holds
himself out or allows himself to be held out as a member.
Who can become Members
The following can become member of a company:
1. Minor: A minor can become a member of a company by acquiring or holding shares of a
joint stock company, if he is properly represented and acts by a lawful guardian.
2. Company: A company or any-body corporate being a legal person can be a member of
another company. However, a subsidiary company cannot be a member of a holding
company. Any allotment or transfer of shares by a holding company to its subsidiary
shall be void.
3. Trust: A trust cannot hold shares in a company. A trustee can hold shares in his name for
and on behalf of the Trust.
4. Partnership Firm: A partnership firm is not a legal person or a body corporate. It cannot
hold shares in a company; but partners in their individual capacity or as nominees of the
partnership firm can hold shares in a company. A firm can become a member of any
association registered under section 25 of the Act such as Chamber of Commerce or any
other social club.
5. Society: A registered society under the Societies Registration Act 1860 can hold shares
in a company.
6. Non-Resident: A Non-resident cannot become a member of a company without the
permission of the RBI.
7. Insolvents: The Insolvent remains a member until his name appears on the register of
members. He is also entitled to vote even though his shares vest in the Official Assignee
and to make use of the rights of a minority shareholder.
8. Hindu undivided Family: Shares in a company can be purchased by a Hindu Undivided
Family through Karta. In this case Karta shall become a member of a company.

9. Married Women: There is no objection to a married woman subscribing to a
memorandum of association or to be allotted shares in respect of her own property
provided she is competent to enter into a contract.
Termination of Membership
A person may cease to be a member of a company on the following grounds:
1. On a valid surrender of shares: If a member surrenders his shares in accordance with
the provisions contained in company’s Articles, he ceased to be a member.
2. On Transfer of Shares: If a member transfer all his shares held in the company he
ceases to be a member as soon as the transfer is registered in the name of the transferee.
3. By rescissionof contract of membership on the ground of misrepresentation or
mistake: If a person who has applied for allotment of shares on the basis of the
prospectus issued by the company having misrepresentation or mistake, he may opt for
cancellation and may claim compensation.
4. On bankruptcy of a member: A bankrupt is held to be a member of the company so
long as his name is on the register of members. If the receiver is appointed by the court
then receivers name shall be entered in the Register of members.
5. On Forfeiture of Shares: A company has powers in its Articles to forfeit the shares in
the case of any call remains unpaid. On the date of valid forfeiture of all shares, a person
may cease to be a member on his shares being forfeited.
6. On death of the member: A person may cease to be the member on his death, but in
such a case the deceased member’s state remains liable until the registration of some
person entitled under a transfer from his executors or administrators.
7. On Buy-back of Shares: If a shareholder/member offers all his shares for buyback by a
company and the same are bought back as per the relevant provisions. Then he ceases to
be a member.
Company Management
Separation of Management from Ownership: In the world of business, ownership,
managerial right and risk-bearing functions generally go together and all these three aspects are
unite in one and the same person in proprietary forms of business organisations such as sole
trader and partnership.
However, in company organisation we find almost complete separation or divorce between the
ownership on the one side and management on the other side.
The following are the reasons for a clear-cut separation between ownership and management:
1. Distinctive Legal Personality: The people who organize a corporate enterprise are not
the corporation but merely owners of the enterprise. The corporation so created as a form

of organisation has an independent legal status of life and it is absolutely separable from
the owners.
2. Very Large Membership: A public company may have thousand or lac shareholders
and it is not possible to participate all of them actively. Directors are the chosen or
elected representatives of members and they form a Board of Directors to look after the
management of a company.
3. Wide distribution of membership: Not only the membership is very large, but also it
may be widely scattered or diffused over a very wide area. It is physically impossible for
all the proprietors of the company to look after the routine management of the company
even in the Jambo-jet age.
4. Uninterested members: Investors invest their savings in the shares of a company and
interested in income or dividends and not in the day-to-t=day management of the
company.
5. Ever-Changing membership: Shares of a public limited company can be quoted on a
stock exchange and they are considered as transferable as well as marketable assets.
Hence, membership may be ever changing.
6. Specialized management: Company organisation is very suitable for a big business
because it provides ample scope for division of labor and specialization in management.
Directors
Meaning and Definition of Directors [Section 252]: A company is an artificial person,
invisible, intangible, and existing only in the eyes of law. It has neither a mind nor a body of its
own. Hence, we have to entrust its business to human agents. Therefore control of its
management and the exercise of its powers must necessarily be delegated. Directors have to act
as agents of the company which delegates to them most of its powers through the Memorandum
and Articles of association. The general body of shareholders entrust the management and the
conduct of the business of the company to their representatives who form the Board of Directors.
The Directors are responsible for contemplating and determining the general policy of
management and directing the company’s business in the best manner possible.
Kinds of Directors:The following are the kinds of directors:
1. Full-Time Working Director: A director may be full time working Director, namely-
managing or Whole Time Directors covered by a service contract. Managing and whole
time directors are in charge of the day-to-day conduct of the affairs of a company and are
together with other team members collectively known as “management” of the company.
2. Non-Executive Directors: A company may also have Non-Executive Directors who do
not have anything to do with the day-to-day management of the company.
3. Shadow Directors: Another category of Directors can be recognized as per certain
provisions of the Indian Companies Act- “Shadow Directors”. These so called “Deemed

Directors” acquire their status by virtue of their giving instruction according to which
“appointed” Directors are accustomed to Act.
Appointment of Directors
The appointment of directors happens in the following ways:
1. First Directors: The articles of a company usually name the first Director by their
respective names or prescribed the method of appointing them. If the Directors are not
named in the Articles, the number of Directors and the names of the first Directors are
determined in writing by the subscribers of the memorandum or a majority of them.
2. Appointment of Directors by Company: According to section 255, Directors must be
appointed by the company in general meeting. At the first annual general meeting of a
public company or a private company which is a subsidiary of a public company, held
after the general meeting at which the first Directors are appointed and at every
subsequent annual general meeting, 1/3rd of the Directors liable to retire by rotation must
retire from office.
3. Appointment of Directors by the Board of Directors: The Board of Directors may
appoint Directors:
i. As additional directors
ii. In a casual vacancy
iii. As alternate director
4. Appointment of Directors by Third Parties: The Articles under certain circumstances
give power to the debenture-holder or other creditors, e.g. a banking company or a
financial corporation, who have advanced loans to the company to appoint their nominees
to the board.
5. Appointment of Directors by Proportional Representation: The Articles of a
company of a company provide for the appointment of not less than 2/3rd of the total
number of Directors of a public company, or of a private company which is a subsidiary
of a public company, according to the principle of proportional representation, whether
by the single transferable vote or by a system of cumulative voting or otherwise.
6. Appointment of Directors by the Central Government: The central government may
appoint such number of Directors on the board of a company as the Company Law Board
may specify as being necessary to effectively safeguard the interest of the company, its
shareholders or the public interest. The period of appointment shall not succeed 3years
on any one occasion
Removal of Directors
Directors may be removed by:

1. Shareholders [Section 282]: The shareholders may, by passing an ordinary resolution at
their general meeting, remove a Director before the expiry of his period of office. A
special notice of 14days is required of any proposed resolution to remove a Director.
2. Central Government [Sections 388B to 388E]: The Central Government may state a
case against a Director of a company and refer the same to the Company Law Board.
3. Company Law Board: Where, on an application to the Company Law Board for
Prevention of oppression or mismanagement, the Company Law Board finds that the
relief ought to be granted, it may by an order provide for the termination, setting aside or
modification of any agreement between the company and the Director.
Rights or Powers of Directors [Section 291 & 292]:
1. The Board of Directors derives their powers from:
i. The Companies Act
ii. Articles of Association
iii. Board resolutions
iv. Regulations in general meetings
v. Agreements or contracts with the company
2. Subject to the provisions of the Act, the Board of Directors of a company shall be entitled
to exercise all such powers, and do all such acts and things, as the company is authorized
to exercise and do. The Board shall not exercise any power or thing which is required to
be done by the company in a general meeting.
3. The BoD shall exercise the following powers on behalf of the company by means of
resolutions passed at the meeting of the Board.
4. By a resolution passed at a meeting, the Board may delegate, to any committee of
Directors, the managing Director, the manager or any other principal officer of the
company, the above powers on such conditions as the Board may prescribe.
5. The resolution delegating the power, to borrow money otherwise than on debentures,
shall specify the total amount outstanding at any one time upto which money may be
borrowed by the delegate.
6. The resolution delegating the power to invest the funds of the company shall specify the
total amount upto which the funds may be invested and the nature of investment which
may be made by the delegate.
Duties of Directors
Duties of the directors can be dived into two heads:
1. Statutory Duties of Directors: A director required to perform the following statutory
duties:
i. To file return of Allotment: Section 75 charges a company to file with the
registrar, within a period of 30days, a return of the allotments stating the specified

particulars Failure to file such return shall make Directors liable as ‘officer in
default’.
ii. Not to issue Irredeemable Preference Shares or Shares redeemable after
10years: Section 80, forbids a company to issue irredeemable preference shares or
preference shares redeemable beyond 10years. Director making any such issue may
be held liable as ‘officer in default’ and may be subject to fine upto Rs. 1,000.
iii. To disclose interest: A director who is interested in transaction of the company
must disclose his interest, to the Board. This disclosure must be made at the first
meeting of the Board held after he has become interested.
iv. To disclose receipt from Transferee of property: Section 319 provides that any
money received by the Directors from the transferee in connection with the transfer
of the company’s property or undertaking must be disclosed to the members of the
company and approved by the company in general meeting.
v. To disclose receipt of compensation from transferee of shares: If the loss of
office results from the transfer of all the shares of the company, its Directors would
not receive any compensation from the transferee unless the same has been
approved by the company in general meeting before the transfer takes place.
2. General Duties of Directors: Directors also perform the following general duties apart
from statutory duties:
i. Duty of good faith: The Directors must act in the best interest of the company.
Interest of the company implies the interest of present and future members of the
company on the footing that the company would be continued as a going concern.
ii. Duty of care: Director should carry out their duties with such care, skill and
diligence as is reasonably expected from a person of their knowledge and status.
If they fail to exercise due care in the exercise of their duties they are guilty of
negligence.
iii. Duty to attend Board meeting: A number of powers of the company are
exercised by the Board of Directors in their meetings held from time to time.
Although a Director is not expected to attend all the meetings but if he fails to
attend three consecutive meetings or all meetings for a period of three months,
whichever is longer, without permission, his office shall automatically fall vacant.
iv. Duty not to delegate: Director being an agent is bound by maxim ‘delegatus non
potest delegare’ which means a delegate cannot further delegate. Thus, a Director
must perform his functions personally.
Liability of Directors
1. Liability to third parties: This may arise:
i. Under the Act: Liability of Directors to third parties may arise in connection
with the issue of a prospectus which does not contain the particulars required by
the Act, or which contains material misrepresentations.

ii. Independently of the Act. Directors, agents of a company, are not personally
liable on contracts entered into as agents on behalf of the company. For whatever
an agent is liable, those Directors would be liable; where the liability would attach
to the principal only, the liability is the liability of the company. In general, the
Directors, who contract as agents, incur no personal liability.
2. Liability to the Company: The liability to the company may arise from:
i. Breach of Fiduciary Duty: Where a Director acts dishonestly in disregard to the
interest of the company, he will be held liable for breach of fiduciary duty. Most
of the power of Directors are ‘powers in trust’ and therefore, should be exercised
in the interest of the company and not in the interest of the Directors or any
section of members.
ii. Ultra Vires Acts: Directors are supposed to act within the parameters of the
provisions of the Companies Act, Memorandum and Articles of the Association
since these lay down the limits to the activities of the company and accordingly to
the powers of the BoD. Thus where the Directors pay dividend or interest out of
capital, they will be liable to indemnify the company for any loss.
iii. Negligence: The Directors shall be deemed to have acted negligently in discharge
of their duties and consequently liable for any loss or damage resulting there from
where they fail to exercise reasonable care, skill and diligence. However, error of
judgment will not be deemed as negligence.
iv. Misfeasance: Directors are also liable to the company for any misfeasance which
means ‘misconduct’ of Directors for which they may be sued in Law Court. But
in order to amount misfeasance, the misconduct must be willful.
3. Liability for breach of statutory duties: There are numerous provisions of the
Companies Act which is the duty of the Directors to carry out. Most of these duties relate
to maintenance of proper accounts, filing of returns or observance of certain statutory
duties, they render themselves liable to penalties.
4. Liability for Acts of his Co-Directors: A Director is not liable for the acts of his Co-
Directors of which he has no knowledge and in which he has taken no part. This is
because his Co-Directors are not his servants or agents who can be their acts impose
liability on him.
Company Secretary
Definition of Company Secretary: Section 2(45) of the Companies Act, 1956 states that the
term secretary means a company secretary within the meaning of section 2(1) of the
Company Secretary Act 1980 and includes any individual possessing the prescribed
qualifications, appointed to perform the duties which may be performed by a secretary under
this Act and any other ministerial or administrative duties.
Appointment of a Company Secretary

1. At present appointment of a Company Secretary is required for every company.
2. A director, but not a sole director, may be the company Secretary; there must always be
atleast two persons.
3. The first company secretary must be in office when the company is performed and must
be named in Form G.10.
4. It provides that the secretary shall be appointed by the directors for such term, at such
remuneration and upon such conditions as they may think fit, and any secretary so
appointed may be removed by them.
5. As per the Companies Act only an individual who possess the qualification prescribed by
the Central Government can be appointed as the secretary of the company.
Individuals who are not eligible for Appointment as a Secretary
1. Director of a Company
2. Auditor of the Company
3. Any person not competent to enter into a contract.
Procedure for the Appointment of the Company Secretary: The procedure for the
appointment of the secretary of a company is as follows:
1. Passing of resolution at the first board meeting: A resolution has to be passed at the first
board meeting held after incorporation of the company for appointing regular secretary
on certain terms and conditions.
2. Execution of Service Agreement: An agreement should be executed between company
and the secretary so appointed.
3. Recording the appointment of secretary: As per the Companies Act the name and address,
nationality of the person appointed as a secretary must be recorded in the register of
Directors and managing Directors which are maintained by the company.
4. Filling the Return of appointment with the Registrar: The particulars of appointment must
be filled in duplicate with the Registrar within 30days of appointment.
5. Notifying to Other Company for his Appointment: In case the person appointed as a full-
time secretary of the company has been functioning as a secretary in any other company
he has to notify the other company within 20days of his appointment.
6. Passing of Special Resolution at the General Body Meeting: If the Director is appointed
as a secretary of a company or his relative, a special resolution has to be passed in the
general body meeting for such an appointment.
7. Disclosure by a Director of his interest in the Appointment of the Secretary: Any Director
interested in appointment of secretary must disclose his interest and he must not take part
in the discussion or voting on the resolution.
8. Obtain permission of the Central Government: Any Director is appointed as the secretary
of the company and his remuneration is fixed Rs. 6,000 or more per month the
permission of Central Government must be obtained

Unit 4
Capital management and Company Meetings
Capital Management is an accounting strategy that strives to maintain sufficient and equal
levels of working capital, current assets, and current liabilities. This helps a company to meet
its expenses obligations while also maintaining sufficient cashflow and is primarily related to
short-term financial decisions.
Borrowing Powers
To borrow is to receive with an implied or express intention of returning the same.
Borrowing necessarily implies repayment at some time and under some circumstances.
Types of Borrowing
The following are the types of Borrowings:
1. Long-term Borrowings: Funds borrowed for a period ranging for five years or more are
termed as long-term borrowings. The long-term borrowings may be made from All India
Financial Institutions or jointly from Financial Institutions and Banks.
2. Short-Term Borrowings: Funds needed to be borrowed for a short-term period say for a
period upto one year or so are termed as short-term borrowings. Working capital needs
are covered by obtaining loans from commercial banks on the securities of inventories,
goods in progress, finished goods, book debts etc.

3. Medium-Term Borrowings: Where the funds to be borrowed are for a period ranging
from two to five years, such borrowings are termed as medium-term borrowings. The
commercial banks normally finance purchase of land, machinery, vehicles etc.
Borrowing Powers of a Company
A company, like an individual, may have to borrow for the exigencies of its business. The
powers of a company are determined by the Memorandum and Articles of Association.
Therefore, a company can borrow money, and if so to what extent, are matters depending upon
the interpretation of these two documents. The Companies Act 1956 does not contain any section
expressly empowering companies to borrow.
A trading company or commercial company has implied powers to borrow, even without any
specific power to do so in their memorandum or Articles of Association, because borrowing can
be regarded as properly incidental to the conducting of their business. In spite of having an
implied power to borrow it is wise to include an express power to borrow in the objects clause of
the Memorandum of a trading company.
Non-Trading companies have no implied powers to borrow. However, a non-trading company
must have borrowing power specifically expressed in its memorandum and Articles. In such
companies, the Memorandum must state specifically whether or not the company shall be
entitled to borrow. A company having power to borrow may do so to any extent within the
limitations laid-down by the Memorandum or Articles or the Act. If a company borrows beyond
its powers, the borrowing is ultra vires the company and void.
Borrowing on Security of Property
Where the Memorandum and the Articles give the power to borrow, loans may be taken in any
one or more of the following ways:
1. Mortgage of immovable properties of the company.
2. Hypothecation or mortgage of movable goods, including stock in trade and furniture.
3. Charge on uncalled capital.
4. Floating charge on all the assets of the company.
5. Mortgage of book debts.
6. Promissory notes, hundies and bill of exchange.
7. Debenture and debenture stock.
8. Charge on patents, licenses and copyrights and goodwill
Mortgages and Charges

According to section 58 of the Transfer of Property Act, 1882, “A mortgage is the
transfer of an interest in specific immovable property for the purpose of securing the payment
of money advanced or to be advanced by way of loan, an existing or future debt or the
performance of an agreement which may give rise to pecuniary liability.
Essentials of a Mortgage
The following are the essentials of a mortgage:
1. Transfer of Interest: A mortgage is a transfer of interest in the specific immovable
property. The mortgagor as an owner of the property possesses all the interest in it, and
when he mortgages the property to secure a loan, he only parts with a part of the interest
in that property in favour of the mortgagee. After mortgage, the interest of the mortgagor
is reduced by the interest which has been transferred to the mortgagee.
2. Specific Immovable Property: The second point is that the property must be specifically
mentioned in the mortgage deed. The reason why the immovable property must be
distinctly and specifically mentioned in the mortgage deed is that, in case the mortgagor
fails to repay the loan the Court is in a position to grant a decree for the sale of any
property on a suit by the mortgagee.
3. To Secure the Payment of a Loan: The transaction is for the purpose of securing the
payment of a loan or the performance of an obligation which may give rise to pecuniary
liability. It may be for the purpose of obtaining a loan, or if a loan has already been
granted to secure the repayment of such loan.
Kinds of Mortgages
There are in all six kinds of mortgages in immovable property, namely:
1. Simple Mortgage: According to the section 58(b) of the Transfer of the Property Act,
1881, simple mortgage is when the debtor creates a personal obligation to repay the debt.
The creditor gets the right to sell the mortgaged property and recover debts but the
property cannot be sold without court order.
2. Mortgage by Conditional Sale: Section 58© of the Transfer of the Property Act defines
the “Mortgage by Conditional Sale”. It may be defined as an ostensible sale on condition
that upon repayment, the buyer shall transfer the property to the seller.
3. Usufructuary Mortgage: Section 58(d) of the Transfer of the Property Act defines
Usufructuary mortgage. In a Usufructuary mortgage, the possession of the mortgaged
property is transferred to the mortgagee.
4. Legal or English Mortgage: Section 58(e) of the Transfer of the Property Act, 1881
defines legal or English mortgage. The debtor binds himself to repay the debt on a certain
date and mortgaged property is transferred absolutely to the creditor, who has to return
ownership interest to the debtor upon repayment of loan.

5. Mortgage by Deposit of Title-Deeds or Equitable Mortgage: Section 58(f) defines the
debtor has merely to hand over the creditor title deeds to fixed property. It is a mortgage
by deposit of title deeds.
6. Anomalous Mortgage: Section 58(g) defines anomalous mortgage which does not
belong to any of the above categories is called anomalous mortgage.
Meaning and Definition of Charge
A charge is security given for securing loans or debentures by way of a mortgage on the assets of
the company. Because a company has power to borrow which also includes the power to give
security so a company like a natural person, can give security.
According to Section 124 of the Companies Act, 1956 “A charge includes a mortgage”. A charge
also includes a lien and equitable charge whether created by an instrument in writing or by the
deposit of title deed.
Types of Charge
The power of a company to borrow includes the power to create a charge on its assets. The
charge on the assets of the company may be:
Fixed Charge
A charge is fixed when it is attached to a particular asset. Company can deal with the said asset
subject to the charge. A fixed or definite charge is a charge on definite or specific property of a
permanent nature i.e. land or heavy machinery.
Floating Charge
A floating charge is one which is not attached to a definite property, but covers property of a
fluctuating type e.g. stock-in-trade. In other words, it is an equitable charge on the assets for the
time being of a going concern. In a floating charge the property can be dealt with by the
company without consulting the holders of the charge. The company is left free to deal with the
property so charged as if no charge has been created.
Characteristics of a Floating Charge
1. It is a charge on a class of assets, present and future.
2. The class is one which in the ordinary course of business, is changing from time to time.
3. Until some steps are taken to enforce the charge, the company may carry-on its business
in the usual way.

Effect of Winding-Up on Floating Charge
A floating charge on the undertaking or property of the company created within 12months
immediately preceding the commencement of the winding-up is void unless:
1. The company was solvent immediately after the charge was created;
2. The amount was paid to the company in cash at the time of or subsequently to the
creation of, and in consideration for, the charge together with interest at 5% per annum or
the rate prescribed by the Central Government.
Priority of Charge
The priorities of charges are as follows:
1. Priority of Fixed Charge over Floating Charge: A fixed charge over the same assets
has priority over the floating charge. This is because a company which has created a
floating charge can, without the consent of the holder of the charge; deal in those assets
in the ordinary course of business.
2. Fixed charge first in point of time takes priority: When a fixed charge is created on
the same property, the fixed charge which is first, in point of time, takes priority over the
second.
3. Prohibition of mortgages ranking in priority after crystallization of floating charge:
A company cannot create mortgages ranking in priority to the floating charge after it has
crystallized.
4. Prohibition of Second floating charge having priority: A company is allowed to create
a second floating charge over the same assets or undertaking of the company. But the
second floating charge can-not have priority over the first charge.
Registration of Charges [section 25]
When a company creates a charge over its property, section 125 requires that charge to be
registered with the Registrar of Companies. The charges, which must be registered, are:
1. A charge for the purpose of securing any issue of debentures.
2. A charge on uncalled share capital of the company.
3. A charge on any immovable property, wherever situated, or any interest therein.
4. A charge on any book debts of the company.
5. A charge, not being a pledge, on any movable property of the company.
6. A floating charge on the undertaking or any property of the company including stock-in-
trade.
7. A charge on calls made but not paid.
8. A charge on a ship or any share in a ship

9. A charge on goodwill, on a patent or a license under a patent, on a trade mark, or on a
copyright or a licence under a copyright.
Debentures
According to Chitty, J, “Debenture means a document which either creates a debt or
acknowledges it, and any document which fulfills either of those conditions is a debenture”.
The term ‘debenture’ simply means a document acknowledging a loan made to the company
and providing for the payment of interest on the sum borrowed until the debenture is redeemed.
Features of a Debenture
1. A debenture is usually in the form of a certificate issued under the common seal of the
company.
2. The certificate is an acknowledgement by the company of its indebtedness to a holder.
3. A debenture usually provides for the payment of a specified principal sum at a specified
date.
4. A debenture usually provides for payment of interest until the principal sum is paid back.
5. A debenture is, as rule, on of a series, although a single debenture is not uncommon.
There may be a single debenture issued to one person.
6. The debentures carry no voting rights at any meeting of the company.
Types of Debentures
1. Bearer Debenture: Debenture which are payable to bearer and whose names do not
appear in the register of debenture-holders are known as bearer debentures. Bearer
debentures are transferable by mere delivery.
2. Secured Debentures: These debentures are secured by a charge or mortgage on the
whole or a part of the assets of the company. The charge may fixed charge such as charge
on land and building or floating charge on assets like stock, cash etc.
3. Unsecured Debenture: Such debentures which are not secured by any charge on the
assets of the company are called unsecured debentures.
4. Redeemable Debentures: Where debentures are to be redeemed, after a specified period
or at the option of the company, they are known as redeemable debentures.
5. Irredeemable or Perpetual Debentures: This term does not connote that they will never
be redeemed. It only indicates that no time limit is fixed for their redemption.
6. Convertible Debentures: These are debentures which give an option to their holders to
convert them into equity or preference shares at specified rate of exchange after a certain
period. The convertible debentures may be fully convertible or partly convertible.

7. Non-Convertible Debentures: Where no option is given to the holders of such
debentures to convert them into equity or preference shares, they are called non-
convertible debentures.
Difference between Shares and Debentures
Basis of
Difference
Shares Debentures
Rights Shares represent a part of the share capital of the
company.
Debentures constitute loan to the
company. Debenture-holder is only a
creditor of the company.
Level of Profit While a fixed rate is paid on preference shares, rate of
dividend paid to equity shareholders changes with the
level of profit.
A fixed rate of interest is payable.
Payment of
Profit
Dividend is paid to the shareholders only when there
are adequate profits.
A fixed rate of interest is payable
regardless of profit or loss.
Approval Dividend is payable only when it is recommended by
the BoD.
The question of getting approval for
payment of interest does not arise.
Payment of
returns
Dividend paid is an appropriation of profit. Interest paid is a charge on profits.
Liability The liability of a shareholder is limited to the unpaid
amount of the shares.
There is no such liability.
Issue at
Discount
Shares can be issued at discount only under certain
conditions specific in the Companies Act.
There is no such restriction on the issue
of debentures at a discount.
Charge on
Assets.
Shares have no charge on the assets of the company. Debentures are generally secured.
Return of
Capital
Shares are non-repayable during the life-time of the
company except in some cases.
Debentures are redeemable either at a
fixed date or at option of the company
during the life-time.
Participation
in Meetings
Shareholders have rights to participate in the meetings
of the company.
Debenture holders do not enjoy such
rights.
Repayment of
capital
Share capital is returned only after claims of all the
outsiders at the time of winding-up.
Debenture holders have a prior claim
over the shareholders even if they are
unsecured.

Company law

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