Exhaustive Company Law Notes
A HAND OUT ON COMPANY LAW
APPOINTMENT OF AUDITORS ETC.
An auditor has to be an individual or partnership firm. It cannot be a limited company or a body
The first auditors of a company shall be appointed by the Board of Directors (BOD) within one month
of the date of registration of the company. He shall hold office until the conclusion of the first AGM.
If the Board fails to appoint the first director, the Company in general meeting may appoint
auditors.The Company MAY at a general meeting remove any such auditor/auditors and appoint in his
/their places, any other person /persons who have been nominated by any member (of which a special
notice is given to the company). Except in this case, any auditor appointed may be removed from
office BEFORE THE EXPIRY OF HIS TERM only by the company in general meeting after
obtaining the PREVIOUS APPROVAL of the Central Govt. If the Board fails to appoint the first
Auditor, the Company in general meeting may appoint auditors.
There can be one or more auditors appointed for a company.
The Board may fill any casual vacancy in the office of an auditor. The remaining auditor/s, if any, may
act during the continuance of the vacancy.
Vacancy due to RESIGNATION of an auditor shall be filled in by the company in a general meeting
The Auditor appointed under casual vacancy shall hold office until the conclusion of the next AGM.
Remuneration of an Auditor includes any sum paid by the company in respect of auditors’ expenses.
The remuneration of an auditor appointed by the BOD or the Central Govt. shall be that fixed by the
BOD or the Central Govt. In any other case it is as fixed by the Company in the general meeting.
At any AGM, the retiring auditor shall be reappointed UNLESS (1) he is not qualified (2) he has given
notice of his unwillingness to continue (3) a resolution is passed not to appoint the existing Auditor or
to appoint a different auditor or (4) before a resolution is passed BUT AFTER A NOTICE IS SENT
TO APPOINT A DIFFERENT AUDITOR, that proposed different auditor dies or becomes incapable
or is disqualified.
Where at an AGM no auditors are appointed or reappointed, the Central Govt. may appoint a person to
fill the vacancy. The Company shall within 7 days of the Central Govt.’s power become exercisable,
give notice to C.Govt. of its right to appoint auditors. If this is not done, any officer in default will be
fined upto Rs. 5000/-.
Cases where Auditors can be appointed only by means of a special resolution:In case of a Company in which at least 25% of the subscribed share capital is held, whether singly or
in any combination by a Public Financial Institution or a Govt. Company or Central Govt. or any State
Govt. or a State Financial Corporation(where the state govt. holds atleast 51% of the subscribed
capital) or a nationalized bank or an insurance company carrying on general insurance business, the
appointment or reappointment of the auditor at such AGM shall be done by a SPECIAL
RESOLUTION. If no special resolution is passed, it shall be deemed that there is no appointment
of the auditor in such a company giving rise to the right of Central Govt. to appoint an auditor.
Qualification:- Should be a Chartered Accountant under the Chartered Accountants Act.
Disqualification:- Should not be a (1) Body Corporate (2) an officer or employee of the Company (3) a
person who is a partner or who is in the employment of an officer or employee of the Company (4) a
person who owes the Company more than Rs. 1000/- (5) a person who holds any security of the
Company carrying voting rights.
A written certificate has to be obtained by a Company from the auditor or auditors PROPOSED
TO BE APPOINTED before his or their appointment or re-appointment at any Annual General
Meeting. The said certificate shall state that his or their appointment or re appointment will be with in
the limit specified below.
An auditor can audit only 20 Companies. Within this limit he can audit only 10 companies with a Paid
up capital of Rs.25 lakhs or more. In the case of a partnership form of audit organization, this limit is
applicable not to the whole firm but to the individual partners.
No Company or the Board of Directors shall appoint or re appoint a person who is in full time
employment elsewhere or a person or firm if they hold more than the number specified above.
However, these restrictions DO NOT APPLY to a Private Company after the commencement of the
Companies (Amendment) Act, 2000. ie a Private Company can appoint a person who is in full time
employment elsewhere or a person even if he is in the aggregate auditing more than 20 Companies
irrespective of their paid up capital.
Powers and Duties of Auditors:- The Auditor can inspect the Books and vouchers of the Company at
any time.(ie not restricted only to business hours). The auditor shall make a report to the members of
the Company on the Accounts examined by him and on every Balance Sheet (B/S)and Profit and Loss
Account(P&L A/C) laid before the Company in AGM. The report shall state whether in his opinion
and to the best of his information and according to the explanations given to him, the said accounts
give information as required by the Companies Act and give a true and fair view , in the case of B/S,
the state of the company’s affairs as at the end of its financial year and in the case of P&L A/C, of the
profit or loss for its financial year.
An auditor shall be removed from his office by giving a special notice to the company and by means
of an ordinary resolution in a general meeting.
A SHORT NOTE ON DIVIDEND:Dividend is to be paid only out of profits arrived after providing for depreciation
Out of the profit of the company for any previous financial year or years arrived at after providing for
Depreciation and remaining undistributed
Out of both above
Out of moneys provided by the C.Govt. or St.Govt. for the payment of dividend in pursuance of a
guarantee given by the C.Govt. or St.Govt.
If a Company incurs loss in a previous financial year or years falling after commencement of
Companies(Amendment)Act 1960, then
the amount of loss
depreciation for that year
whichever is less is to be set off against the profits of the year(after allowing for depreciation)for
which dividend is proposed.
The Central Govt. may (in the public interest) allow dividend without depreciation for any financial
year or previous financial years.
With effect from 01/02/1975, NO dividend shall be paid by a company for any financial year OUT
OF the profits of the company for that year arrived at after providing for depreciation
after transfer to the reserves of the company of such percentage of its profits for that year not
exceeding ten (10%) percent as may be prescribed. A voluntary transfer of a higher percentage is
allowed. [Companies (Transfer of profits to reserves) rules, 1975]. This is applicable to interim
What if there is inadequacy or absence of profits in any year and the company wants to declare
dividend for that year?
For declaration of dividend in any year (owing to inadequacy or absence of profits in any year) out
of the accumulated profits earned by the company in previous years and transferred to the
reserves, the company has to follow the “Companies (declaration of dividend out of reserves) Rules,
1975. If a Company decides to declare dividend utililising the previous years’ profits transferred to
reserves without following this rule, then it has to take previous approval of the Central Govt.
Dividend has to paid in cash only and not in kind. Cash here includes cheques, dividend warrants etc.
The Board of Directors (BOD) may declare interim dividend and the amount of dividend including
the interim dividend shall be deposited in a separate bank account within 5 days from the date of
declaration of such dividend.
Where a company has declared dividend but not paid(or claimed) within 30days from the date of
declaration, the company shall within 7 days from the date of expiry of the said 30 days period,
transfer the total amount of dividend which remains unpaid(or unclaimed)within the said period of 30
days to a special account to be opened by the company in that behalf in any scheduled bank to be
called “unpaid dividend Account of ------------ Company Ltd.
In case of default in transferring unpaid (unclaimed) dividend to the unpaid dividend Account within 7
days of the expiry of thirty days from the date of declaration of dividend, the company shall pay, from
the date of such default, interest on so much amount not transferred @ 12% per annum AND the
interest amount so accruing on such amount shall ENURE(GO) to the benefit of the members of the
company in proportion to the amount remaining unpaid to them.
DIVIDEND WHICH REMAINS UNPAID means any dividend the warrant in respect there of has
not been encashed or which has otherwise not been paid or claimed.
Any money transferred to the Unpaid Dividend Account of a company as above which remains
unclaimed or unpaid for a period of seven years from the date of such transfer, shall be transferred by
the company to the INVESTOR EDUCATION AND PROTECTION FUND established under the
Companies Act. No claim can be made against the Fund or the Company in respect of individual
amounts which were unclaimed and unpaid for a period of seven years from the date they first became
due for payment and no payment shall be made in respect of any such claims.
Penalty for failure to distribute dividends within 30 days from the date of declaration :- every director of the company( who is knowingly a party to the default) be punishable with
simple imprisonment for a term which may extend to 3 years and shall also be liable to a
continuing fine of Rs. 1,000/- for every day during which the default continues.
- The Company shall be liable to pay simple interest @ 18% per annum during the period for
which such default continues.
When an offence is NOT deemed to have been committed:-
When dividend not paid due to operation of any law.
When shareholder’s directions cannot be complied with.
Where there is dispute regarding right to receive dividend.
Where dividend lawfully adjusted by the company against any sum due from the shareholder.
Where failure to pay dividend or post dividend warrant was not due to any fault on the part of
VERY IMPORTANT:- There is no distinction between a Private Company and a Public Company
under the Companies Act, 1956 so far as the provisions for dividend are concerned.
UNLESS THE BOD RECOMMEND A DIVIDEND THE COMPANY IN GENERAL MEETING
HAS NO POWER TO DECLARE DIVIDEND AT THE AGM OR GM. WHILE THE GENERAL
BODY OF MEMBERS MAY DECLARE A REDUCED PERCENTAGE OF DIVIDEND IT
CANNOT INCREASE THE AMOUNT FOR WHICH THE DIVIDEND IS PROPOSED OR
RECOMMEDED BY THE BOD.
INTERIM DIVIDEND (ID):- The Companies Act defines Interim Dividend as “Dividend includes
Interim Dividend”. If AUTHORISED BY THE ARTICLES OF ASSOCIATION, the Board may
declare an interim dividend. The declaration of Interim dividend does not create a debt against the
company. A Board resolution declaring Interim Dividend does not create any liability and may be
rescinded(cancelled)at any time before actual payment. The distinction between ID and Final
Dividend(FD) is that unlike ID, FD, once declared by the company in the general meeting, is a debt
and creates an enforceable obligation. The declaration of ID depends more upon estimates and
opinions than the declaration of a final dividend which is made upon information contained in a formal
Before the declaration of ID by the Board, the directors should satisfy themselves that the financial
position of the company allows the payment of such dividend out of the profits available for
Views of the Department of Company Affairs:- The declaration of dividend is the privilege of the
General meeting and Board can pay ID, if so authorized by the Articles of Association subject to the
regularization of the ID by the Company in the general meeting.(GM)
REGARDING DIRECTORS:Minimum number of directors is 3 for a public company and 2 for a private company. Only
individuals can be directors. The directors are appointed by the company (shareholders) in a general
meeting. If the first directors of the company are NOT appointed immediately and the Articles of
Association is also silent about the directors, the subscribers to the memorandum who are individuals
shall be deemed to be the directors of the company TILL the directors are appointed in the general
Every director should have a Director Identification Number(DIN). No company shall appoint or re
appoint any individual as director of the company unless he has been allotted a DIN. Every individual
intending to be director shall make an application to the Central Govt. in such form and
manner(including electronic form) as may be prescribed. Once an individual applies, he can be
appointed as a director and shall hold office as director in a company TILL such time such an
applicant has been allotted DIN. The Central Govt. shall allot DIN within one month from the receipt
of application. No individual, who had been already been allotted a DIN shall apply, obtain or possess
another DIN. Every director has to intimate about his obtaining DIN to every company in which he is
a director within one month of receipt of DIN and every company has to inform Registrar of
Companies (ROC) within one week of receipt of information from the Director.
RE-APPOINTMENT OF EXISTING DIRECTOR in the Annual General Meeting(AGM)
Atleast 2/3rd of the total number of directors of a public company shall be persons whose period of
office is liable to determination by retirement of directors by rotation.(articles of association can
provide that all directors shall retire by rotation)
At the first annual general meeting(AGM) of a public company held next after the date of the general
meeting at which first directors are appointed and at every subsequent AGM, 1/3rd of such of the
directors for the time being as are liable to retire by rotation ( if their number is not three or multiple of
three, then, the number nearest to 1/3rd ) shall retire from office. The directors to retire by rotation at
every AGM shall be those who have been longest in office since their last appointment. However, as
between persons who became the directors on the same day, they will retire as agreed among
themselves, and in the absence of an agreement, by lot. At an AGM at which a director retires on
rotation as aforesaid, the company(shareholders) may fill the vacancy by appointing the retiring
director or some other person there to.
APPOINTMENT OF AN OUTSIDER AS A DIRECTOR in any General Meeting (which
includesAGM):A person who is not a retiring director as above, shall be eligible for appointment to the office of a
director at any AGM, if he or some member intending to propose him has, atleast 14 days before the
meeting, left at the office of the company a notice in writing under his hand signifying his candidature
for the office of the director or the intention of such member to propose him as a candidate for that
office, as the case may be, along with a deposit of Rs.500/-. The company shall in turn inform the
members about the candidature of a person for the office of a director individually by notices atleast 7
days before the date of the meeting. It shall not be necessary to send individual notices, if the
company advertises in the two newspapers, one in an English language newspaper circulating in the
place where the registered office of the company is situated and the other in the regional language of
that place. A resolution for the appointment of the director is passed by an ordinary resolution of more
than fifty percent majority. If the person succeeds in becoming a director, the deposit of Rs. 500/- shall
be refunded to such person who proposes or to the director who has forwarded his candidature as the
case may be.
Section 264 of the Companies Act, 1956,(This section is not applicable to a Private Company)
provides that every person who is proposed as the candidate for the office of the director by a member,
shall sign and file with the company, his consent in writing to act as a director, if appointed.
This CONSENT IN WRITING need not be signed and filed with the company by the following
Directors, namely:(a) a Director retiring by rotation and getting RE APPOINTED.( case of retirement and reappointment of a director by Rotation)
(b) a Director who left a notice at the office of the company signifying his candidature for office
of director.(case of an outsider being appointed as a director)
Further, a person who is appointed by the shareholders shall not act as a director of the company,
unless he has within thirty days of his appointment, signed and filed with the ROC, his consent (in
form 29) in writing to act as such director. A director who has retired by rotation and re
appointed, need not file his consent with ROC to act as a director after reappointment.
Section 258 provides that a company in a general meeting may increase or decrease the number of
directors within in limits fixed by the Articles of Association (A/A). There is NO maximum number of
directors prescribed under the Companies Act, 1956. However, Section 259 provides that the increase
in the number of directors should not exceed the PERMISSIBLE MAXIMUM fixed by the A/A. If the
Permissible Maximum fixed by the A/A is 12 or less than 12, no approval of the Central Government
is required if the increase in the number of directors does not make the total number beyond 12. If the
Permissible Maximum fixed by the A/A is beyond 12 (ie 13 and above), then, if the total number of
directors after the increase is within the Permissible maximum but beyond 12, the Central govt.
approval is required.
APPOINTMENT OF A DIRECTOR BY THE “BOARD OF DIRECTORS”
Additional Director :- The Board of Directors can appoint additional directors (if permitted by the
to hold office only up to the date of the next annual general meeting of the company. However, the
number of directors and the additional directors shall not exceed the maximum fixed by the A/A.
Filling of Casual Vacancy among directors:- If the office of the director appointed by the Company in
general meeting is vacated before his term of office will expire in the normal course, the resulting
casual vacancy may(subject to any regulation in the A/A) be filled in by the Board of Directors (BOD)
at a meeting of the Board. The person so appointed as a director to fill the casual vacancy, shall hold
office only up to the date up to which the director in whose place he is appointed would have held
office if it had not been vacant.
Appointment and term of office of Alternate Director:- The BOD of a company may (if authorized by
the A/A or by a resolution passed by a company in general meeting) appoint an alternate director to act
for a director(referred to as “original director”) during his absence for a period of atleast three months
from the state in which the meetings of the Board are ordinarily held. An alternate director so
appointed shall not hold office as such for a period longer than that permissible to the original director
in whose place he has been appointed and shall vacate his office if and when the original returns to the
state in which the meetings of the Board are ordinarily held.
DISQUALIFICATION OF DIRECTORS:- These disqualifications are applicable to every person,
whether he is to be appointed as a director of a public company or a private company.
Section 274 of the Companies Act, 1956 provides certain disqualifications which will debar a person
from being appointed Director of a Company IF
a) He has been found to be of unsound mind by a Court of Competent Jurisdiction and the finding is in
b) He is Undischarged Insolvent.
c) He has applied to be adjudicated as insolvent and his application is pending.
d) He has been convicted by a court of any offence involving moral turpitude and sentenced in respect
thereof to imprisonment for not less than six months and a five years has not lapsed from the date of
the expiry of the sentence.
e) He has not paid any call in respect of share held by him, whether alone or jointly with other and six
months have lapsed from the last date fixed for the payment of the call.
f) An order disqualifying him for appointment as director has been passed by the Court by exercising
powers under Section 203 for preventing fraudulent persons from managing the companies.
g) Such a person is already a director of a public company which-has not filed the annual accounts and annual returns for any continuous three financial years
commencing on or after the first day of April, 1999. or
-has failed to repay its deposits or interest thereon on due date or redeem its debentures on due
date or pay dividend and such failure continues for one year or more.
Further, such person shall not be eligible to be appointed as a director of any other public
company for a period of five years from the date on which such public company, in which he
is a director failed to file annual accounts and annual return or has failed to repay its deposit
or interest or redeem its debentures on due date or pay dividend as above.
This disqualification would come into operation only at the time of appointment or
re-appointment of the person as a director in any public company (including the public
company in respect of which either of the above two defaults has occurred) after the default has
become effective. The existing Director need not vacate the office as there is no such
requirement either in this section or in S.283 dealing with the vacation of office by Directors.
Only a purely Private Company can put any disqualification in addition to those stipulated above.
How does a person cease to be a director?
-by acquiring a disqualification
-by vacation of office
-by withdrawal of nomination.
Section 283 provides for the circumstances leading to AUTOMATIC VACATION OF OFFICE of a
Director and they are as follows:a) He fails to obtain qualification shares within a period of two months after his appointment as a
director, if the A/A provides for share qualification.
b) He absents himself from the Board Meetings without obtaining leave of absence from the
-for three consecutive meetings of the Board OR
-from all meetings of the Board for a continuous period of three months
WHICHEVER IS LONGER.
He accepts loan or security for a loan from the company in contravention of Section 295 which
prescribes previous approval from the Central Government before accepting loan.
He does not disclose his interest in any contract or arrangement entered into by the company.
He is found to be of unsound mind by a court of competent jurisdiction.
He applies to be adjudicated as insolvent.
He is adjudged an insolvent.
He is convicted by a court of any offence involving moral turpitude and sentenced in respect
thereof to imprisonment for not less than six months.
He fails to pay any call in respect of the shares of the Company held by him(whether alone or
jointly with others) within six months from the last date fixed for the payment of the call.
He is disqualified by a Court order under S.203(for preventing fraudulent persons from
managing the companies)
He is removed from the office.
REMOVAL OF A DIRECTOR:- Section 284 provides for removal of a director. It is a common
principle that the authority making the appointment also has the necessary power to remove the
appointee from the position. Thus it is the shareholders who appoint a director has the power to
remove a director. A 14 days’ special notice before the meeting has to be given to the Company by a
member proposing a resolution to remove a particular director. The company should forward the said
notice to the concerned director forthwith (immediately) before the meeting. The said director’s
representation, if any, against the allegations or against removal has to be circulated or if time does not
permit, has to be read at the meeting. He shall also be given an opportunity of being heard at the
general meeting where his removal is being considered. The “representation of the Director” (who is
to be removed) shall be sent to each member. If this could not be done, the representation would be
read at the meeting of the shareholders where his removal is being considered. The copy of the
Director’s representation need not be sent to shareholders and or read out , if the company or any other
person convinces the Company Law Board(CLB) that it contains DEFAMATORY matter.The
resolution for removal, is to be passed by a simple majority. Thus, a director of a company will be
removed in a general body meeting by an ordinary resolution requiring a special notice and is a
Appointment of a Managing Director or Whole time Director or Manager:- Section 269
Every Public Company and every Private company which is a subsidiary of a public company, having
a paid up capital of not less than Rupees Five Crores, shall have a Managing Director or Whole Time
Director or a Manager. No such appointment shall be made without the approval of Central Govt for
which an application has to be made within 90 days of appointment. No such Central Govt. approval is
necessary if such appointment is as per the conditions stipulated in Schedule xiii to the Companies
Act, 1956. A Managing Director or Manager cannot be appointed for more than 5 years at a time.
A director cannot assign his office.
Remuneration of Directors:-There is an overall limit of 11% of the Net Profit fixed for the Managerial
Remuneration as a whole.