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Company law

Topics covered in past papers

 Types of companies, differences in nature and constitution


 Registration of a company
 Member vs. shareholder
 Minority shareholders
 AGM & Board of Directors
 Non-executive Directors
 Holding and subsidiary company
 Information memorandum vs. prospectus
 Winding Up
 Auditor’s duties
 Borrowing by a company
 Corporate restructuring
 Corporate Social Responsibility
 Veil
 Pre-incorporation contracts
 Foss v. Harbottle
 Memorandum of Association
 Indoor management
 Equity and Debt Financew
 Mismanagement
 Promoters + Debt Finance
 Independent Directors

I. Nature and Kind of Companies

Definitions

a. Definition of a company Section 2(20) of Companies Act 2013 :”Company


incorporated under this Act or under any previous company law.”
b. Lord Justice Lindley’s definition: an association of many persons who
contribute money or money’s worth to a common stock and employ it in some
trade or business and who share profit and loss arising there from.
(Companies need not consist of many people, private companies can be a
OPC, 2 people, and public – 7)
c. Companies help facilitate investment, minimising risk, providing an
organisation structure.
d. Sub-division of shares allows for large number of investors to become members of
the company, and with limited liability to minimise risk. Makes individuals feel
more secure of their investment.
e. Unlike a partnership, a company is impervious to death
With the exceptions of it being wound up and an insolvency petition being
admitted by the NCLT
Insolvency NCLT – IRP replaces board, company goes into moratorium, failure to
submit a plan = Liquidation
f. Formal constitution and basic organisational structure. Clear structure as company
not run by shareholders, not completely, their buying of shares entitles them
certain control. Second organ performs this operation through the directors.

Characteristics

g. Companies are incorporated associations (i.e registered), they are artificial


legal persons (buy sell property, enter into contracts, sue or be sued in its
own name), and has a separate legal personality in the eyes of law.

h. Separate legal entity: Separate legal personality in comparison to those who


are its members.
i. Lord Macnaghten in Salomon v. Salomon: “The company is at law a different
person altogether from the subscribers to the Memorandum, the company in
law is not an agent of its subscribers or trustees. Nor are the subscribers,
members liable, in any shape or form, except to the extent provided by
statute.”

Salomon v A. Salomon [1897] AC 22

o Many authors and texts suggest that this case is important because it introduced the
concept of corporate personality. However that is not the case.
o About the case: Salomon manufactured shoes. He formed a new company. (in the
early days, minimum of 7 shareholders were needed to form a company. This is no
longer the case). The shares were distributed to wife and children who were the
members and held one share each. But Salomon took all decision was also managing
director, and the rest had no intention of playing any active role.
o The sole trading company which Salomon had continued to exist, the new company
was different entity all together. This new company took over the sole trader business.
o As a result Mr Salomon no longer personally liable to suppliers and contractors as he
was when he was a sole trader. The change is therefore from unlimited liability of sole
trader to limited liability as shareholder in a company.
o Company was to be wound up, creditors couldn’t get any money from company- no
assets left.
o Couldn’t bring personal claim. A properly formed company has its own personality.
Shareholders are thus not liable. Argument of creditors was that this company was not
formed properly as here a sole trader disguised himself as a company and sought to
make Saloman personally liable.
o Motives of shareholders irrelevant unless there was fraud involved. The business was
thus found to belong to the company and not Salomon. Salomon was agent of
company and not company his agent. The company is a separate legal entity.

o Macaura v Northern Assurance [1925] AC 619

o Property of company are assets of company, shareholders have not ownership interest
in these.
o Mr Macaura owned an estate and sold all the timber, both fell and standing, to a company in
exchange for the entire issued share capital of the company, in other words, he owned all the
shares of the company. Insurance policy was taken in Mr Macaura’s name, a fire destroyed all
the timber. The insurance company refused to pay out saying that Mr Macaura had no
insurable interest over the timber (there were allegations of fraud which was never proven).
HL agreed that the timber belonged to the company not Mr Macaura, he did not own the
timber. Lord Wrenbury: ‘even if he holds all the shares [he] is not the corporation… neither he
nor any creditor of the company has any property legal or equitable in the assets of the
corporation.’

j. Principle of Separate legal entity recognised in India in Re Kondoli Tea


Company ltd. and also in Tata Engineering & Locomotive Company Ltd. Vs.
State of Bihar

Limited Liability

a. Liability of a limited liability company is limited to the extent of unpaid shares


held on them.
b. Limited liability also increases entrepreneurial spirit of directors, encouraging
them to take risks in the knowledge that their shareholders wont lose their
personal assets

Veil

a. Exceptionally, the law can choose to ignore, or look beyond, the separate
legal personality of the company, and one consequence of doing so may be
to impose personal liability directly on particular human beings within the
company. Directors might, in some circumstances, be held liable to third
parties, or to the state, for the torts or the crimes they commit in their
running of the company. Likewise, directors, or even shareholders, might be
held liable for debts incurred by the company.
b. Thus lifting the corporate veil means disregarding the corporate entity and
paying regard instead to the individual members behind the façade.

Use the cases below to state the general rule about separate personality
c. State Trading Corporation of India Ltd. v. CTO 1963: It was held that
corporations may have nationality in accordance with country of their
incorporation; but does not confer citizenship.
d. Tata Engineering and Locomotive v. State of Bihar: Stating the general rule of
separate legal personality, the court also recognised the exceptions to the
principle and piercing of the corporate veil where such a need arises.
e. R.C.Kapoor v. Union of India: A company is not a holder of fundamental rights
and no petition can be brought which seeks to remedy such infringement.

Exceptions

Factors to consider when piercing: Exceptions estb. In case law

f. Determination of enemy character of company: Daimler Co. Ltd.


g. If the company is used for tax evasion. Income Tax Commission of Madras. V.
Meenakshi Mills.
h. Company is used for fraud or improper conduct. Like evading an existing legal
obligation. : The court will look behind the veil if the company was merely a
sham. Gilford Motor Case.
i. Used to form subsidiary company to circumvent the law.
j. When company is avoiding welfare legislation. Workmen v. Associated rubber
industry.
k. Kapila Mingorani v. State of Bihar: Lifting of veil of government companies is
permissible when the corporate personality is found to be opposed to justice,
and public policy.
l. Subhra Mukherjee v. Bharat Coking Coal: Court justified in piercing the veil of
incorporation to ascertain true nature of transactions, identities of parties,
whether transaction was genuine and bona fide.

Statutory exceptions

m. Section 34,35, 447

Where the company prospectus contains statement which is untrue or


misleading, every person who authorises such prospectus will be held liable
under S.447. The offence is punishable with imprisonment of not less than 6
months in addition to a fine.
Section 35: Deals with person who has subscribed for securities of a company
on the basis of misleading prospectus and has sustained any loss or damage

n. Section 12

Liability for mis-description of name.

o. Section 219

Inspection of affairs of the company


p. Section 216

Investigate ownership of company

q. Section 339

Fraudulent conduct

r. Liability under other statutes like Tax Act.

II. Memorandum of Association, Articles of Association, Prospectus

Memorandum of Association

1. Section 3: Company is formed by subscribing the names of those who form it,
to a memorandum of association of a company as originally framed an
amended from time to time.
2. The memorandum sets out the constitution of the company.
3. It contains the object, scope of operations.
4. Memorandum of association of is a public document. Everyone dealing with
the company is presumed to know its contents.
5. Section 4: Contents of a memorandum: Name clause (not identical to existing
company, not give the impression that it is associated to the government),
registered office, objects clause (new companies act has done away with
“other objects clause” which used to be necessary), liability clause (whether
liability of members is limited or not), capital clause, nomination clause etc.
6. Section 13: Memorandum can be altered by special resolution.
7. Section 61: Limited company with share capital may do it in a general
meeting.
8. Upper Ganges Sugar & Industries Ltd: While granting the confirmation to the
proposed alteration of memorandum, the Company Law Board (now Central
Govt. Companies Second Amendment Act 2002.) should not supplement or
superimpose its wisdom over the shareholders who have already passed the
resolution. In this case the company had all its manufacturing units in Uttar
Pradesh and none in West Bengal. The CLB allowed the shifting of the
registered office from WB to UP.
9. Doctrine of Ultra Vires : A company cannot do anything beyond the powers
expressly or impliedly conferred upon it by its statute or memorandum of
understanding. Ashby Railway Carriage and Iron Co. Ltd. v. Riche
i. Jon Beauforte: Anyone having dealings with a company is
deemed to have of the contents of the objects clause.
Memorandum of association is a constructive notice of the
public. If a debt is beyond the objects of the company it is not
liable to pay for that.
ii. Lakshmanaswami Mudaliar and Others v.LIC: An ultra-vires act
remains ultra vires even if all shareholders agree to it. Power
to a thing and object are two different things.
Articles of Association

1. Definition in Section 2(5).


2. Section 5: Articles contain internal regulations for management of the
company, provisions for entrenchment (certain clauses can only be altered
with more restrictive conditions), shares, dividends, board of directors,
winding up etc.
3. Define duties, rights, powers of the governing body as between themselves
and the company at large, mode, form in which business of the company is to
be carried out.
4. Articles are subordinate to the memorandum of association and are to be
controlled by it. All together they are subordinate to the Companies Act, as
per S.6, which renders any clause contrary to the act, void.
5. Can be altered by special resolution.
6. Differences between memorandum and articles:

Memorandum Article
Charter of company Internal regulations of the company
Objects and scope of activities
Alteration in certain cases requires By special resolution
permission or central govt, tribunal
Act ultra vires is void and cannot be Act in contravention is considered
raitified by shareholders an irregularity and can be confirmed
by shareholders

7. Alteration of Articles

 Section 14: by special resolution.


 Power to alter the articles is a statutory power, meaning every company
has it and it cannot be contracted out of. Bushell v. Faith, All India
Railway Men’s Benefit Fund v. J.B.Bali, State of Karnataka v. Mysore
Coffee Curing Works.
 Power to alter must be exercised bona fide in the interest of the
company. Shuttleworth v. Cox. Bros. Co.
 Conversion of public to private company requires prior approval from the
Tribunal. S.16.
 Notice regarding alteration shall disclose full facts with accompanying
documents. Bimal Singh Kothari.
 Company can alter articles in breach of contract, but shall pay damages.
Allen v. Gold Reefs.
 Limitations on alteration
 Section 14: should not be inconsistent to companies act.
 Alteration should not be inconsistent to memorandum. Andrews v. Gas
Meter Ltd.
 Section 242: Once the Tribunal has altered articles in exercise of its power
to remedy oppression or mismanagement, the company can make no
alteration which is inconsistent with the orders of the Tribunal, without
prior approval.
 Alteration should not constitute a fraud on the minority. Brown v. British
Abrasive Wheel Co.
 Articles have contractual force between the members of the company,
and between company and members.

Doctrine of Constructive Notice

 S.399
 Articles and memorandum when registered with registrar become public
documents.
 Every person dealing with the company is treated as having constructive
knowledge of the contents of these documents. Therefore, it is the duty
of every person who contemplates dealing with the company to inspect
these documents and make sure that his contract is in conformity with
them.
 Kotla Venkataswamy v. Chinta Ramamurthy: Mortgage deed executed by
fewer people than required by the articles. Mortgage deed was held
invalid. The mortgagee should have consulted the Articles before lending.
Thus the doctrine operates against outsiders dealing with the company
and gives the company protection.

Doctrine of Indoor Management

 While the doctrine of constructive notice protects companies, doctrine of


indoor management protects the outsiders against the company.
 According to the doctrine, it will not be in the interest of business and
commerce if third parties will be expected to investigate the internal
machinery of a company.
 Premier Industrial Bank Ltd. v. Carlion Mfg. when there a persons
conducting the affairs of a company in a manner which appears to be
perfectly consistent with the articles, then the persons dealing with them
are not be affected by any irregularities which might take place in the
internal management of the company.
 The doctrine is also know as Turquand Rule from Royal British Bank v.
Turquand, money was borrowed on bond bearing company’s seal instead
of having been approved in resolution of the general meeting.
 Official Liquidator, Mansuba & Co. v. Commissioner of Police: lenders to a
company should acquaint themselves with the memorandum and articles
but cannot be expected to embark upon on an investigation as to legality,
proprietary and regularity of the acts of directors.
 Similarly, in Varkey Sourir v. Kereleeya Banking Ltd.
 Exceptions
i. Knowledge of irregularity and actual notice of it. Eg: Contracting
person was party to the inside procedure. Eg: a director (Morris v.
Kansren) however, being a director is not sufficient to deem that
such person had knowledge. (Hely Hutchinson v. Brayhead)
ii. Negligence on part of the outsider or in other words where there
is suspicion of irregularity. Such may be evident from
circumstances surrounding the contract, example an officer
seemingly acting outside the scope of his authority. Anand Bihari
Lal. V. Dinshaw & Co. where plaintiff accepted a transfer of
company’s property from the accountant. Plaintiff was not
allowed to plead the doctrine of indoor management given how
unusual the transaction was.
iii. Doctrine does not apply to forgery. Ruben v. Great Fingall
Consolidated. A forged signature on a share certificate was found
not be a part of internal management. It was held that the
doctrine has not been extended to forgery.

Prospectus and Allotment of Securities

1. Definition S.2(70)
2. Includes red-herring prospectus, shelf prospectus, notice, circular,
advertisement or other document inviting offers from the public for
subscription or purchase of securities of a body corporate.
3. The term public means people not personally known to promoters. No
particular number is prescribed. Private communication is not open and thus
not construed to be a prospectus. Nash v. Lynde.
4. Invitation to selective people not prospectus. Rattan Singh v. Managing
Director of Mega Transport.
5. Basic function of a prospectus is to inform investors as to the soundness of a
company. The companies act contains provisions to protect the public.
6. Requirements:
 Must be dated
 Registered with registrar before being issued to public
 Expert should not be connected with formation of company
 Any statement by expert must be with his consent in writing, and thi
should be mentioned in prospectus etc.
 Etc.
7. Golden Legacy
a. This is the golden rule of disclosure New Brunswick and Canada
Railway and Henderson v. Lacon: The public is at the mercy of
company’s promoters. Everything must therefore be stated with strict
and scrupulous accuracy. Nothing should be stated as a fact which is
not, and no fact should be omitted, the existence of which might in
any degree affect the nature or quality of the privileges and
advantages which the prospectus holds out as inducement to take
shares. In a word, the true nature of the company’s venture should be
disclosed.
8. Mis-statement:
a. Definition in Section 65(1) of old act. New Act does not define it.
i. Misleading
ii. Omission calculated to mislead. Suppression of material facts
may render what is stated fraudulent. M.K. Sreenivasan, In Re.
b. R v. Kylsant: Prospectus did not disclose that the dividend in the past
has been paid not out of current earnings, but out of earnings of the
abnormal war period and that in the recent past company was
running a deficit.
c. Liability for misstatement:
i. Civil
 Rescission of contract. Where there has been delay in
rescinding contract, commencement of winding up of the
company, company has become insolvent, this would not
apply. Shiromani Sugar Mills v. Debi Prasad.
 Damages for deceit. Derry v. Peek.
 Compensation for untrue statement under section 35.
Persons under this section are personally liable to investor
for loss sustained by reasons of untrue statement. This
does not require plaintiff to prove fraud. Defences
available are under Section 35(1).
 Under Section 37, affected persons can also file a class
action suit.
 Liability for omission under section 26. Does not require
rescission of contract.

ii. Criminal
 S. 26: fine and imprisonment.
 S.34: liable under 447.
 Under new act, persons who have authorised a misleading
prospectus shall also be criminally liable. Punishment has
been increased. In case of fraud, s.447 applies.

9. Red-Herring Prospectus: Preliminary prospectus which does not have


complete particulars as regards price of securities offered, their quantum etc.
According to S.32, it carries the same obligations as are applicable to a
prospectus.
10. Shelf Prospectus: means prospectus issued by class companies prescribed by
SEBI.
11. Deemed Prospectus, section 25: could be any document by which offer of
sale to public is made.
12. Abridged prospectus, section 33: application of purchase is incomplete
without these, except in underwriting agreements and securities not offered
to public.
III. Directors
a. Persons through whom the company acts and does business.
b. S.2(34) -director
c. S.149
d. S.2(10)- board of directors
e. To some extent they stand in a fiduciary position to the company, and not to
the shareholders. Lee v. Lee.
i. Directors are treated as trusteed qua the particular property which is
in their hands or under their control. Lands Allotment Co.
ii. Ramaswamy Iyer v. Brahmayya & Co. Directors are trustees for the
company.
iii. Nanalal Zaver v. Bombay Life Insurance Directors are not trustees to
individual shareholders.
f. Directors are agents of companies in transactions they enter into on behalf of
the company. Ferguson v. Wilson .
g. Composition of Board of Directors:
1. Section 149(1): Minimum of 3 directors (public company), 2 directors
(private).
2. Same Section: Maximum 15 directors, more than 15 by special resolution.
3. Same section read with Rule 3 of Companies Rules 2014: Company
mentioned therein must have woman director.
4. Section 149(3): One resident director must i.e who stayed in India for not
less than 182 days in the previous year.

Independent directors
5. Institution is independent directors is an important instrument for
ensuring good corporate governance.
6. According to the new act, appointment of independent directors is
compulsory for specified classes of companies.
7. Section 149(6): Definition: other than managing director, whole time
director, nominee director, person of integrity and relevant experience
according to the board, not related to promoters, directors, not
employee, no pecuniary relationship etc.
8. Section 149(4), read with Rule 4: Independent director: every listed
company shall have at least one third of total directors as independent
directors.
9. Qualifications of independent directors. Rule 5: appropriate skills,
experience, knowledge related to company’s business.
10. Tenure of independent director: Section 149(10): 5 consecutive years.
Eligible for re-appointment on special resolution and disclosure of such
appointment in Board’s report. Not hold office for more than 2
consecutive terms (149(11) but eligible for reappointment.
11. Liability: Section 149(12): liable for acts which have occurred with his
knowledge, where he has not acted diligently.
12. Retirement by rotation not applicable to independent directors: Section
152(6), (7), (149(3).

h. Classification of Directors:
i. Shadow Director: person who is not a director but exerts such influence on
the director.
j. Appointment of Director:
 Section 152(2): Appointment in general meeting, saving as
otherwise provided in the act.
 Section 152(3), Section 154: No appointment unless allotted
Director Identification Number.
 Re-appointment of directors retiring by rotation. Section
152(6) -1/3rd of rotational directors retire every annual
general meeting.
 Section 160: Appointment of director other than retiring
director.
 Section 162: Appointment of director to be voted individually.
 Appointment of director by board of directors. (Section 161)
i. Disqualification from appointment as directors: Section 164(1) & (2)–
unsound mind, undischarged insolvent etc.
k. Resignation of Director: Section 168
l. Removal of directors:
i. Removal by shareholders: Section 169 (1): By ordinary resolution.
Such director should not be one appointed by the Tribunal under
S.242. Resolution under this section requires special notice, a copy of
which must be sent to the director concerned.

 LIC v. Escorts Ltd: It is not necessary for the requisitionists to


state the reasons on which they wish to proceed against the
Director.
 Director who has been removed from office shall not be re-
appointed a director by the Board. Section 169(7).
 No deprivation of compensation on premature removal.
Section 169.

ii. Removal by Tribunal:


 S.242. Tribunal has power to order removal.

m. Powers of Board of Directors:


i. Section 179(1): General powers: Board of directors empowered to do
all such acts as the company is authorised to do, subject to provisions
of the company’s act, memorandum, articles, regulations made in
general meeting.
ii. Section 179(2): no subsequent regulation made in general meeting
shall invalidate a prior act of the Tribunal.
iii. Jagdish Prasad v. Pt. Paras Ram: Shareholders cannot interfere in
exercise of powers delegated to Board of Directors.
iv. Suburban Bank v.Tharaih: Unless articles so provide, the shareholders
cannot interfere in day to day management of the company.
v. H.M. Ebrahim Sait v. South Indian Industrials Ltd.: Management of
business of a company included the power to institute suits.
vi. Nibro Ltd. v. National Insurance Co. Ltd: But such power to institute a
suit must specifically be conferred on the director concerned.
vii. Automatic Self Cleansing Filter Syndicate Co. Ltd v. Cuninghame: A
power conferred on directors by the whole body of shareholders
together cannot be taken away by resolution passed by a simple
majority.
viii. Section 179(3): Board of Directors of a company can exercise powers
on behalf of the company by means of resolution passed at meetings.
Eg: make calls on shareholders with respect to money unpaid, borrow
monies.
 Read this section with Rule 8 which provides for such other
powers exercisable by means of resolution. Eg: Make political
contributions.
 Other such powers in S. 161, 181-184,188.
ix. Restriction on powers of the board: S.180(1) – Powers exercisable by
a special resolution. Eg; Investing in trust securities, sell/lease/dispose
off undertaking of the company.

n. Viswanathan v. Tiffins: Majority of the shareholders can exercise the power


vested in the board when the board has become incompetent. Eg; No
director validly in office at a particular material time.
o. Shareholders can intervene when there is a deadlock in the management.
Barron v. Potter.
p. Duties of directors:
 To act as per the articles, subject to provisions of the Act – S.166.
 Act in good faith, to promote objects of the company for the benefit
of its members as a whole.
 To take due and reasonable care in exercise of skill with diligence.
 Avoid direct or indirect conflicts of interest.
 Not to achieve undue gain or disadvantage.
 Not to assign his office/not to delegate.

Duty of good faith and fiduciary obligation

 Observe utmost good faith in any transaction.


 Dikshit & Co. Ltd: Being in a fiduciary position, directors must act
without raising the slightest suspicion.
 Boston Deep Sea Fishing Co. v. Ansell: Profit made by director on
transaction belongs to company. Director cannot transfer to
themselves benefit of a contract obtained on the strength of goodwill
of company.
 Regal (Hastings) v.Gulliver: Property acquired in course of powers
exercised as director, profits on its resale belong to the company.
 D.C..Mehta v. Jogeshwar Prasad: it was held that if an act is done by a
director in the true and reasonable belief that it is for the company’s
interest, the directors also promote their own, does not of itself make
them chargeable with breach of trust.

Duty of care, skill


 Directors not liable for mistakes or errors of judgement which may
cause loss to the company provided they act honestly and for the
benefit of the company as may be reasonably expected of them.
 Liable to company for negligence.
 Lagunas Nitrate Co. v. Lagunas Nitrate Syndicate
 Selangur United Rubber Estates v. Cradock: Directors held liable for
releasing the company’s funds for paying a debt without checking
whether anything was really due.
 Official Liquidator v.P.A.Tenddokar: Director liable for negligence
which enabled fraud to be committed.

Duty not to delegate

 Director must perform functions personally, may delegate in certain


cases – where permitted by articles of association, having regard to
exigencies of business.

Liability of directors to company


 Section 463.

i. Breach of fiduciary duty


ii. Negligence
iii. Ultra Vires acts and,
iv. Malafide acts

 S. 195: Prohibition on insider trading

Key Managerial Positions

 S. 2(51): Definitions. Include Chief Executive Officer, Chief Financial


Officer etc.
 S.203 read with Rule 8: Every listed company and public company
having paid-up share capital of 10 crore or more shall have the
following whole time key managerial personnel.
 Every appointment is my resolution of the Board.
 Managing Director S. 2(54). A director entrusted with substantial
powers of management. Appointment may happen by virtue of
articles, agreement with company, resolution in general meeting or
board meeting.
 Whole Time Director, S.2(94): Does not have powers as substantial as
a managing director, a person can be MD for many companies but
WTD for only one, requires approval of shareholders.
 Manager, S. 2(53): Person subject to superintendence, control and
directions of Board, in substantial management of company. May or
may not be director, appointed by contract or resolution of
shareholders. While there can be more than one managing director,
there can only be one manager. Entitled to lesser remuneration than
managing director (5% as opposed to 10%)

IV. General and Board Meetings

a. Annual General Meeting


i. Annual meeting for transaction of ordinary business. Agenda includes:
discussion of balance sheet, declaration of dividends, auditor’s
reports.
ii. Ultimate control of the company should be with shareholders, and
therefore should assemble once a year to review the performance.
iii. S.96(1) – mandatory to hold AGM in not more than every 15 months.
Extension is permissible, but must in every calendar year.
iv. Authority to convene meeting vests with Board of Directors.
v. Notice of meeting
vi. Section 101, must give not less than 21 days notice before calling
meeting.
vii. Section 97, power of Tribunal to call AGM on application by member
viii. Section 99, default in holding meeting under section 96 and/or 97 is
punishable with a fine.
ix. Shree Meenakshi Mills Co. Ltd. v. Assistant Registrar of Joint Stock
Companies.: Company prosecuted for its failure to call petitioner in
AGM.

b. Extraordinary General Meeting

i. Discussion of matter which cannot be postponed till the holding of


the AGM.
ii. S.100 – Board can call on it s own or on requisition of a specified
number of members. Requisitionists can call meeting themselves
where the Board does not after passing of 3 months since requisition.
iii. LIC v. Escorts Ltd. every shareholder has the right to call such a
meeting subject to statute.
iv. S.98, Power of Tribunal to call such meeting on application or suo
moto.
c. Procedure and Requisites of valid meeting
i. Called by proper authority. Board of directors, Tribunal
ii. Notice should be given (S.101 -102)
iii. Place, day and time of meeting. Usually at registered office. Rao
Bahadur v. M.Chettiar, meeting held at different venue was held
valid.
iv. Quorum, S.103 – subject to provisions of the Articles, for public
company – quorum will depend on number of members as on that
date.
v. Adjournment, S.103 – meeting to be adjourned if quorum not present
within half n hour of the meeting starting.
vi. Single member meeting not usually meetings, unless on order of
Tribunal that they be recognised as such. Sharp v. Davies.
vii. Chairperson of meeting, S.104 – subject to articles, meeting should be
presided over by a chairperson, elected by a show of hands.
viii. Attendance by proxy (personal representative of member), S.105
ix. Voting:
 Every member has right to vote at AGM. But may be
prohibited under S.106 in the following circumstances:
a. Where articles provide that no voting rights be
exercised by member where some sums remain
payable by him.
b. Where articles provide so with respect to shares to
which company has exercised any right of lien.
 S.47: Voting right of preference shareholders.
 S.107: Voting by show of hands.
 S.108: Voting through electronic means.
 S.109: Exercising voting by number of shares.
 Demand for poll
 Withdrawal of demand for poll
 Demand for poll for adjournment of meeting
 Demand for poll for in all other cases
 Appointment of scrutinizer
 Regulation of manner in which poll is to be taken
 Result of poll
 Postal ballot
 Minutes

x. Passing of resolution through postal ballot

 Voting through electronic means


 S.2(65)
 S.110

xi. Minutes of proceedings

 S.118 – maintaining written records of meetings is mandatory


xii. Resolutions

 Ordinary Resolution: S.114 – simple majority


 Special Resolution: S.114

xiii. Meetings of Board of Directors

 S.173(1): first meeting and frequency of subsequent meetings


 S.173 (2): participation of directors in a meeting
 173(3)(4): minimum 7 days’ notice for meeting to be called
 S.174: Quorum – 1/3rd of total strength of two directors
whichever is higher. Participation by audio-visual means is
acceptable (Rule 3 and 4)
 S.175: Passing of resolution of Board by circulation of draft
resolution (as opposed to being passed in a meeting).
 S.177: Compulsory to constitute Audit Committee.
 Should endeavour to contribute to CSR.
V. Majority Rule and Minority Protection

a. Majority rule: The rule in Foss v Harbottle says that, because the duties are
owed to the company, if those duties are breached, the company is the
proper plaintiff.
i. Rajamundry Electric Supply Corporation v. A. Nageshwar Rao: At the
instance of a shareholder the Court will not interfere in the matters of
internal management of the company, so long as the directors are
acting within their powers.
ii. Conduct with which the defendants are charged is an injury not to the
plaintiffs exclusively. It is an injury to the whole corporation. In such
cases the rule is that the corporation should sue in its own name and
corporate character. (Foss)
b. Exceptions to the rule:
i. Rule does not apply where acts complained of are ultra vires or illegal.
 Bharat Insurance Company Ltd. v. Kanhaiya Lal. Directors
found acting illegally in the application of the funds of the
company.
 Lowe v.Fahey: Case of diversion of funds illegally.

ii. Fraud on minority: Where conduct of the majority of a company’s


members amounts to fraud on minority, the majority of the
shareholders can be impeached even by a single shareholder.
 Cook v. Deeks: Directors found to have committed fraud on
minority, in passing resolutions on contracts in their own
names.
 Daniels v.Daniels: Sale of company’s property below natural
market value was held to be a fraud.

iii. Act requiring special majority is done by means of an ordinary


resolution:
 Dhakeshwari Cotton Mills v. Nilkamal Chakravarty: Resolution
not passed by statutory majority. Even after the plaintiff
complained to the company, no remedial steps were taken.

iv. Wrong doer is in control


 Individual shareholder can sue in his own name where
company is in the hands of wrong doers and controlling
shareholders do not allow actions to br brought for obvious
wrongs committed.
 Foss v. Harbottle
 Glass v. Atkin
 Satya Charan v. Rameshwar Prasad Bajoria: When directors
themselves are wrongdoers against the company, have acted
mala fide, and their personal interest is in conflict with their
duty in such a way that they cannot or will not take steps to
seek redress for the wrong done to the company, the majority
of the shareholders can bring an action.

v. Statutory exceptions
 Variations of shareholder’s rights – Section 48 -
 Oppression and mismanagement – S.241 –circumstances in
which application can be made to the tribunal by any member
for relief. Application is made under s.244.
 S. Vardarajan v. Vekateswara Solvent Extractions: once
consent of the requisite number of members is obtained in
writing, application may be made by one or more of them.
 Rajamundary Electric Supply Corp. v. Nageswara Rao: Right to
apply is not affected if some members withdraw consent
subsequently.
 Shanti Prasad Jain v. Kalinga Tubes: It must be shown that
conduct of majority shareholders was oppressive to the
minority as member. There must be continuous acts on part of
the majority shareholders, continuing up to the date of
petition, showing that affairs of the company were being
conducted in a manner oppressive to some part of the
members. The conduct must be burdensome, harsh and
wrongful, and mere lack of confidence between the majority
shareholders and minority shareholders would not be enough
unless lack of confidence springs from oppression of minority
by majority in the management of the company’s affairs and
such oppression must involve at least an element of lack of
probity or fair dealing to a member in the matter of his
proprietary rights as shareholder.
 Chander Kishan Gupta v. Pannalal Girdhari Lal: S.241 has two
facets. First is that positive acts of mismanagement are
conducted. Second, the section may be attracted, even where
no action at all is taken by the management and such non-
action results in prejudice being caused in the company.
 Relief against mismanagement runs in favour of company and
not any particular member. Suresh Kumar Sanghi v. Supreme
Motor Ltd.
 Powers of the Tribunal to grant relief, under S.242. The
powers are very wide. It may make an order for regulation of
the conduct of company’s affairs upon such terms and
conditions as may in its opinion, be just and equitable in the
circumstances of the case. Pramod Kumar Mittal v. Andhra
Steel Corp. Ltd.
 S.245: New section introduced by the Act while allows class
action suit by specified number of members against
companies, excluding banking companies. Factors which are
taken into account by Tribunal in such an action are listed
under S.245(4): Eg. Whether member is acting in good faith.
 Order of the Tribunal is binding on the company.
 Conditions of relief:
a. Oppression: there must be a visible departure from
standards of fair dealing. Elder v Elder Watson Ltd.
i. Shanti Prasad Jain v. Kalinga Ltd.
ii. Failure of distribution of amount of
compensation on nationalisation of business.
Hindustan Co-operative Insurance Society Ltd.
iii. An attempt to deprive a member of his ordinary
membership rights is an oppression. Mohan Lal
Chandumall v. Punjab Company.
iv. Directors do not call general meeting and keep
shareholders in the dark. Hindustan
Cooperative Insurance Society
v. Non- Maintenance of statutory records and not
conducting affairs of the company as per the
provisions of the companies. Bhajirao G. Ghatke
v. Bombay Docking. Co.
b. Negligence and inefficiency is not oppressive
i. Needle Industries India Ltd. v. Needle Industries
Newey (India) Holding Ltd.
ii. Mohta Brothers v. Calcutta London Shipping
Company Ltd.
c. Oppression must be in the capacity of member not
otherwise. Quinlan v. Essex Hinge.
d.
VI. Winding up

a. A.Ramaiya: Winding up is a means by which the dissolution of a company is


brought about and its assets realised and applied in payment of its debts, and
after satisfaction of the debts, the balance, if any, remaining is paid to the
members in proportion to the contribution made by them to the capital of
the company.
b. M.V.Jairam v. ICICI Ltd.: Court under whose territorial jurisdiction the
company comes has jurisdiction in the case.
c. Winding up can happen on order of the NCLT or voluntary winding up on
resolution of the company.
d. S.271(1), S.272: Company may petition to be wound up under the
circumstances stated in the section for instance. Eg: Company is unable to
pay its debts, company has by special resolution decided to be wound up.
Etc.
e. New Kerala Chits and Traders ltd. v. Official Liquidator: court has discretion to
take decisions under the section.
f. Aluminium Corp. of India v. Lakshmi Ratan Mills: while the power to wind is
discretionary, it has to be exercised judiciously. Equitable considerations
have a decisive effect even when the power to wind up a company is invoked
under the Section.
g. Navjivan Trading Finance, Re: Winding up is the last resort and the court may
not order the winding up of the company even if it is unable to pay its debts
so long as it can be resurrected by a scheme or arrangement.
h. Sudarsan chits v. Sukumarran Pillai: possibility of revival must always be
looked into, winding up is the last option.
i. Kamadenu Enterprises v. Vivek Textile Mills: The section can’t be invoked for
settling money disputes.
j. Cotton Corp. of India v. United Commercial Banks: The provision cant be used
as pressure tactics.
k. PICUP v. North India Petrochemicals: There must be a debt due and the
company must be able to pay the same.
l. Amalgamated Commercial Traders v. A.C.R. Krishnaswami: winding up order
is not a legitimate means of seeking to enforce payment of the debt.
m. Where it is just and equitable for the company to be wound up, 271(1)(g):
i. N.V.Prasad v. Andhra Bank
ii. Hind Overseas ltd. v. Raghunath Prasad Jhunjhunwala: In an
application under this clause, allegations in the petition are of prime
importance.
iii. Atul Drug House Ltd, Re: Petitioner must disclose the alternate
remedies which have been tried. Where alternative remedies are
available this close cannot be invoked.
iv. Cases where there is a loss of substratum, fall under this. German
Date Coffee Co., Re, Kaithal Cotton & General Mills Co Ltd.
 Seth Mohan Lal v. Grain Chambers Ltd: For the substratum to
fail, the purpose for which the company was created must
have failed, that it is impossible to carry on business except at
a loss.
n. Who can petition for winding up: S.272 – Company, Creditors, Registrar etc.
o. What are the consequences of winding up: S.277
p. Voluntary Winding up S.304.
q. Appointment of company liquidator (S.310), power and duties (S.314),
submission of report on winding up (S. 316)
r. National Textile Workers Union v. P.R.Ramakrishna: Nothing in the
Companies Act prohibits workers from being heard in a winding up petition.
Workers will be heard, but only as interveners, not as parties.
s.
VII. National Company Law Tribunal
a. Prior to the Companies (Amendment) Act 2002, powers relating to reduction
of capital, amalgamation of companies and the winding up etc. were vested
in the High Court.
b. Similarly, powers in respect of transfers of shares, rectification of register of
members were exercised by the Board. After the 2002 Act, these powers
have been divided between the NCLT.
c. Companies Act 2013, Section 408 constituting the Tribunal, as comprising
members with technical expertise.

VIII. CSR
a. Companies (Corporate Social Responsibility Policy) Rules 2014
b. Companies to constitute CSR committee, and mandate a CSR policy
c. undertake CSR activities excluding activities undertaken in pursuance of its
normal course of business, and activities which only help its own employees.
d. May take such steps through holding or subsidiary company, registered trust,
society etc.
e. Responsibility of the Board to endeavour to spend 2% of average net profit in
the last three financial years in pursuance of CSR policy. Where it does not do
so, must specify reasons thereof, as pect s.134(3).
f. Activities which may be included in CSR are found under Schedule VI of the
Policy:
i. Eradicating hunger, poverty, malnutrition
ii. Promoting healthcare, sanitation
iii. Promoting gender equality, promoting socially and economically
backward groups
iv. Ensuring environmental stability
v. Rural project
vi. Slum area development