Q1. Define Company under the
Company is a separate legal entity property of the company is not the property
Companies Act, 2013. What are the
characteristics?
A company is an artificial legal person.
Company gets its existence only when it is
incorporated by the registrar of companies.
It has independent corporate existence from
separate from its share holders. The
members have limited liabilities. A company
being a corporate body is an artificial person
created by law. it has many rights,
obligation, power and duties prescribed by
law. It is invisible, intangible and having its
existence only in the eye of law.
Section 9 of Companies Act 2013: any
incorporated company has the distinct legal
or juristic existence independent of its
members and is capable of enjoying rights
and being subject to duties which are not the
same as those enjoyed by its members. The
property of the company belongs to it and
not to its members.
The incorporation of company makes it an
independent legal entity distinct from its
share holders or members; therefore, it has
legal personality of its own. The concept of
corporate personality was introduced by the
House of Lords in a leading case; Salomon
vs. Salomon and Company Ltd. (1897) A.C.
22.
Facts of the case: Salomon was having shoe
and boots business. He form a company
called Salomon and Company Limited and
made his wife, daughter and four sons as
share holders of the company. Salomon with
his 2 sons constituted the board of directors
of the company. Salomon’s wife and his 5
children held one share each and all the
remaining share were held by Salomon
himself. He purchased shares of 20000
pounds and debenture of 10000. The
debenture created a charge on the assets of
the company. The company went into
liquidation within a year and its assets
amounting to 6000 pounds were insufficient
to pay the debentures in full and ordinary
creditors received nothing. The creditors
demanded the money from the assets of the
company which was refused by Salomon.
The contention of the creditors was that
Salomon and Salomon and Company limited
had no independent existence. Salomon was
the managing director and the other directors
being his sons were under his control.
Therefore, the company was a one man
show and its existence was contrary to the
spirit and meaning of Company Law.
The House of Lords ruled that though the
business was done by the family members
and majority of the shares were held by
Salomon, Salomon and Company Ltd. Was
a real company complying with all the legal
requirements of the incorporation and
therefore, Salomon and Salomon and
Company Ltd. are not same. The House of
Lords laid down the following points:
1.
different from its share holders.
2. Company can sue or be sued.
3. Company is an artificial person having
common seal and perpetual succession.
4. Company has got limited liability.
5. Shares are freely transferable.
6. It is managed by professionals called
Directors.
7. Funds are collected from the public
(public company)
8. Registration is compulsory.
Characteristics:
Limitation Liability
The unlimited company is a company
where there is no limit on the liability of its
members. This means that if the company
suffers a loss and the company’s property is
not enough to pay off its debts, the private
property of its members is used to meet the
claims of the creditors. This means that there
is a huge risk in such companies. Unlimited
companies are not found in India; instead,
their space is occupied by the proprietary
kind of businesses.
In a company limited by guarantee, the
liability of the members is limited to the
extent of guarantee given by them in the
event of winding up of the company.
In a company limited by shares the
liability of the members on the event of the
company winding up in respect of shares
held by him is limited to the extent of the
unpaid value on such shares. The liability
does not fluctuate but remains limited to the
amount which at the time of winding up
remains unpaid whether from the original
shareholder or the transferee of such shares
as the case may be.
Perpetual succession according to Section
9 of Companies Act 2013, an incorporated
company has perpetual succession, i.e., it
continues to exist practically forever. The
debt of insolvency of a member does not
affect its corporate existence until it is
wound up in accordance with the provision
of the Act.
Transferability of Shares: Section 56 of
the Company’s Act 2013, provides that the
shares or other interest of any members in a
company shall be movable property
provided by the Article of the associated
company.
Corporate finance: If the shares of an
incorporated company are transferable, it
can raise maximum capital in minimum
possible time. An incorporated company has
the privilege of raising its capital through
public subscriptions either by way of shares
or debentures.
Separate property: In a corporate
company, the property of the company is
distinguished from its members. The
of the shareholders rather it is the property
of the company.
Central management: The share holders do
not directly deal with the management of the
company. The management of the company
is generally vested in the interest of the
Directors. The tenure of the Director’s office
is 5 years as to ensure flexibility in
management and eliminate the possibility of
board misusing its power. With skilled
professional managers supported by
financial resources, companies are able to
develop and carry their business efficiently.
Protection of investors against loss: One
of the advantages of incorporated company
is that it gives opportunity to those persons
who are investing their income in the
company by purchasing shares or debentures
without being exposed to substantial loss in
the event of failure of Company’s business.
The Company can also borrow money and
raise its capital and debentures. Thus,
incorporation of companies seek to fulfill
the desires of common man who do not
intend to directly participate in the business
because of the risks involved therein but
wish to invest a part of their money or
income in business ventures to earn profit.
Q2. Define the term promoter. What are
the duties and liabilities of a promoter?
The persons who initiate the process of
formation of a company are called
promoters. The person who assumes the
primary responsibilities of matter relating to
formation of a company are known as
promoters of a company. They take
necessary steps to complete the formalities
of incorporation and registration and also
make arrangement for capital or assets
which are required for the company which is
to be started. Promoter is defined under
Section 2(69) of the Companies Act 2013.
Promoter means a person:
a) Who has been named in the prospectus
or is identified by the company
b) Who has control over the affairs of the
company, directly or indirectly whether
as share holder, director or otherwise; or
c) In accordance with his advice,
directions or instructions, the board of
directors of the company is accustomed
to act.
Promoters stand a fiduciary position:
The creation and molding of the company is
in the hands of the promoters. Any person
who arranges a director, place shares or
negotiates preliminary agreement may be
called a promoter.
Duties of a promoter
i. A promoter is under duty not to make
any secret profit at the expenses of the
company. However, he can make profit
by purchasing property or a business
 and selling it to the company at a higher
price.
ii. It is also the duty of the promoter to
disclose all relevant facts to the
company including any profit made and
his personal interest in transaction with
the company.
The disclosure should be made to the
board of directors, and where there is
no independent board of directors, it
should be made to prospective share
holders as a whole. The disclosure of
the profit may be made in following
ways:
a) Through the memorandum or
articles of the association of the
company
b) By prospectus; or
c) By communication to the board of
directors of the company.
In case of winding up, if it appears that
a promoter who has taken part in the
promotion or formation of the company,
has misused, misapplied or retained
with himself a capital or property of the
company, the tribunal may direct the
guilty promoter to repay or restore the
money or the property of the company,
or to contribute such sum to the assets
of the company by way of
compensation as the tribunal may think
just and reasonable.
Rights of promoters
i. Rights to receive preliminary expenses:
The promoters are entitled to receive all
the expenses incurred in setting up and
registering the company from the board
of directors. The articles may provide
for payment of preliminary expenses to
the promoters.
ii. Right to recover proportionate amount
from the co-promoters: The promoters
are jointly and separately liable for the
secret profit made by them in formation
of a company. Therefore, if the entire
amount of secret profit is paid to the
company by a single promoter, he is
entitled to recover the proportionate
amount from his co-promoters.
iii. Right to remuneration: A promoter has
a right to be paid remuneration for his
efforts and services for the company. It
may be in the form of fully and partly
paid-up shares, debentures or
commissions as it can even be in the
form of a lump sum amount.
Liabilities of promoters
i. Section 26 of the Act lays down
matters to be stated and reports to be
set out in the prospectus. The promoter
may be held liable for the non-
compliance of the provisions of
Section 26.
ii. A promoter is liable for any untrue
statement in the prospectus to a person
who has subscribed any shares or
debentures on the faith of prospectus.
The aggrieved person may sue the
promoter for compensation for any
loss or damage sustained by him.
Q3. Explain Turquand’s rule. Write the
exceptions thereto with the help of case
laws.
The doctrine of Indoor management,
popularly known as the Turquand’s rule
initially arose some 150 years ago in the
context of the doctrine of constructive
notice. The rule of Doctrine of Indoor
Management is conflicting to that of the
principle of Constructive Notice. The latter
seeks to protect the company against
outsiders; the former operates to protect
outsiders against the company. The rule of
constructive notice is confined to the
external position of the company and,
therefore, it follows that there is no notice as
to how the company’s internal machinery is
handled by its officers. If the contract is
consistent with the public document, the
person contracting will not be prejudiced by
irregularities that may beset the indoor work
of the company. Supposing a party
completes a transaction with the company
only to later discover that the person
representing the company lacked the
authority to bind the company. The
company may be forced honour the
transaction if the transaction was completed
in good faith by the other party. The rule is
based on the English case of Royal British
Bank v Turquand 1856 119 ER 886.
In this case, the directors of the banking
company were authorized by the Article to
borrow on loan bonds such some of money
as should from time to time by resolution of
the company in general meeting authorized
to borrow. It was held that Turquand could
sue the company on strength of loan as he
was entitled to assume that necessary
resolution have been passed.
Exceptions to the doctrine of Indoor
Management
i. Knowledge of irregularity: the
doctrine of indoor management will not
apply where the person dealing with the
company has knowledge of irregularity.
ii. Suspicion of irregularity: the
protection of Turquand’s Rule is
available to a person where in the
circumstances surrounding the contract,
a man of ordinary prudence ought to
have suspected the irregularity and
made necessary enquiries before
dealing with the company.
iii. Forgery and fraud: where the acts
done in the name of a company are void
ab initio due to forgery and fraud.
iv. Ignorance about the contains of the
Article: The doctrine of indoor
management does not apply to cases
where a person dealing with the
company has not, in fact consulted and
gone through the articles and even if he
would have examined those documents,
he would not have known the
irregularities.
v. Lastly, the rule in Turquand’s case does
not bind to the company either to its
officer or other persons who should
know whether the regulation in the
Article can be observed.
Q4. Meeting:
A company cannot act on its own, it can
express its will only through resolution
passed at its properly convened meetings of
the members. A meeting may be broadly
defined as the gathering, assembly or the
coming together of 2 or more persons for
transaction of any lawful business.
Kinds of meeting
Company has to convene its meeting to
carry on its own business. The Board of
directors of a company is required to furnish
to the shareholders important particulars so
that they have an opportunity of meeting and
discussing the whole situation including the
management methods and prospect of the
company. the meetings of members may be
broadly categorized into 2 broad leads
namely :- (1) General meeting and (2) Class
meeting.
General meetings signify any meetings with
all those members of a company who have
the right to vote are entitled to attain. The
resolutions passed in general meeting are
binding on all the members of the company
and company itself.
General meetings of a company may be of 2
kinds. They are:
(1) Annual General Meeting: Under
section 96 of the Companies Act 2013,
every company other than a One Person
Company must in each year hold annual
general meeting in addition to any other
meetings in that year and must specify that
the meeting is an annual general meeting in
the notices. The first annual general meeting
must be held within 15 months from the date
of its incorporation and then the next
meeting must be held within the next 15
months.
Every annual general meeting must be called
during business hours, that is, between 9
a.m. and 6 p.m. on any day that is not a
National Holiday and shall be held either at
the registered office of the company or at
some other place within the city, town or
village in which the registered office of the
company is situated.
The company may face 2 consequences if it
fails to hold the annual general meeting:
i. Any member of the company may
apply to the tribunal for giving
directions to the company to hold the
meeting.
 ii. Failure to comply with the order of the
tribunal or to call the annual general
meeting shall be punished with fines
which may extend to Rs.5500 for
everyday until the default continues.
(2) Extraordinary meeting: All general
meeting of a company except the annual
general meeting are called extraordinary
general meetings. It must be called either by
the board of directors towards special or
urgent business which cannot be awarded till
the next annual general meeting or it may be
called on the request of a specified number
of members. The requisition must be signed
by holders of atleast one-tenth paid up
capital of the company having the right to
vote on the matter of requisition. The
meeting can be called by giving notice of
not less than 21 days by the requisition
members.
Class meetings
The article of a company may provide that
certain matters affecting the interest of the
holders of a particular class of shares shall
be subject to the consideration and decision
of a meeting of those holders only. Such
types of meetings are called class meetings.
Class meetings are held by shareholders of a
particular class of shares for e.g. preference
share. It is held when it is proposed to alter,
vary or affect rights of a particular class of
shares.
Meetings of Debenture Holders
The meeting of debenture holder is called to
consider any variation in the conditions of
their security or any alteration in their rights.
The company may also hold debentures
holders meeting for issuing new debentures
or effecting a change in the rate of interest
of the existing debenture.
not necessarily fatal to the validity of their v Riche (1875) LR 7 HL 653, the company
resolution. had been constituted with an objective to do
(2) Notice of meeting [Sec.101]: Proper the business to make, sale, lend or hire
notice of the meeting should be given to the railway carriages and wagons and to carry
members of the company. It may be noted on business of mechanical engineers and
that deliberate missions to give notice to a general contractors, the company entered
single member may invalidate the meeting. into a contract with Riche, a firm of railway
However, an accidental omission to give contractors to finance installation
notice to, non-receipt of it, by a member will construction of a railway line in Belgium.
not invalidate the meeting , notice should be The company refused to provide finance on
given in writing, and it should be given 21 the ground that it was ultra vires act of the
days before the date of receipt of notice and company. Consequently, Riche filed a suit
the date of the meeting should be included. of damages against the company and the
Thus, the gap should be 21 clear and whole company pleaded that the company is not
days. liable because the act is ultra vires as the
(3) Contents of notice[Secs 101-102]: The company is not for finance.
notice of meeting must specify the following
particulars: The House of Lords ruled that the contract
(a)The place, day and hour of the meeting. was ultra vires and therefore, null and void.
(b)The nature of the business to be The court laid down the test to know
transected at the meeting whether an act is ultra vires or intra vires:
(4) Quorum for the meeting [Sec.103]: The
term quorum may be defined as the i. The transaction shall be a bonafide
minimum no. of members that must be
transaction.
present at the valid meeting so that the
ii. It should be incidental and
business can be validly transacted at the
supplementary to the main object.
meeting. If the quorum is not present, the
iii. It should benefit both the company and
meeting shall not be valid and the the share holder.
proceedings of such meeting shall be
invalid. Generally, the quorum is fixed by
the Articles of Assoc. of the company. Exception to the doctrine of Ultra Vires
However, Sec.174 of the companies Act
i. If it is essential for the fulfillment of the
provides for the minimum no. of members to
object, stated in the main object clause
constitute the quorum.
(5) Chairman of the meeting [Sec.104]: The of memorandum.
Chairman – ii. If it is reasonably incidental and
(i) Conducts a meeting. consequential within its permissible
limits of business.
(ii) He is the presiding officer. iii. Which the company is authorized to do
by the Companies Act in course of its
(iii) Keeps order and conducts the meeting. business.
(iv) Must give members present a reasonable
Effects of ultra vires transaction
chance to discuss any proposed resolution.

Meetings of Board of Directors
Section 173: The meeting of Board of
Directors should be held atleast once in
every 3 months and atleast 4 meetings
should be held in every year. The notice of
every board meeting has to be given in
writing to every director who is in India.
Requisites of valid meeting
company:
The requisites of a valid meeting are as
follows:
(1) Proper authority: The proper authority to
convene a general meeting of a company is
the Board of Directors who should pass a
resolution to call the meeting, at a duly
convened Board meeting. if the directors do
not call the meeting, the members of the
company Law Board may call the meeting.
If there is some defect in the appointment or
qualify of the directors present at the Board
meeting and this comes to light after the
board has acted bonafide, such a defect is
(v) Should not adjourn the meeting without
the consent of the members.
(6) Minutes of the Meeting: Section 118 of
the Act states that every company must keep
minutes containing a fair and correct
summary of all proceedings of general
meetings and directors in books kept for that
purpose.
of
The term “minutes” means official record of
all the meetings of a company. These are
summary of the business transacted,
decisions and the resolutions arrived at the
meeting.
Q5. Doctrine of Ultra Vires
The main purpose of the object clause is to
iii. Breach of guarantee: The directors
limit the activities of the company. The
company cannot do beyond its stated
objects. Anything goes beyond it is ultra
vires act. Neither the company nor the other
contracting parties can sue each other for
ultra vires act. The doctrine of ultra vires is
laid down by the House of Lords. In
Ashbury Railway Carriage and Iron Co Ltd
i. Injunction: the member can get an
injunction to restrain the company
where an ultra vires act has been or is
about to be undertaken.
ii. Directors may be held personally
liable: The funds of a company can
only be utilized for carrying out
authorized objectives. If a director of a
company makes an ultra vires payment,
he can be held personally liable and
compelled to refund the money. A share
holder can maintain an action against
the directors to compel them to restore
to the company, the funds of the
company which they have used for
transaction that they have no authority
to enter into without making company,
party to the suit.
being the agents of the company can do
nothing which the company itself
cannot do under its memorandum of
association. And therefore any contract
which is ultra vires will be void. If the
directors acts beyond the limits of the
company’s power, then they would be
 held personally liable for breach of
guarantee
iv. Property acquired through ultra
vires dealings: Where the company’s
money has been utilized in ultra vires
dealing in order to acquire certain
property, the company’s right over such
property shall remain secured.
v. Ultra vires contract: Ultra vires
contracts are null and void. It cannot be
solidified. Companies are not liable for
ultra vires contract. Directors are
personally liable. An ultra vires
contract being void ab initio cannot
become intra vires by reason of
estoppel, lapse of time, ratification,
acquiescence or delay”. However, if
the contract is only ultra-vires the
powers of the directors but not ultra-
vires the company, it may ratify such
a contract in the general meeting and
thereby be bound by it.
vi. Liabilities for ultra vires acts under
tort law: The Company is liable for
ultra vires torts if it is shown that:
a) The activity in question of which the
alleged tort has been committed falls
within the ambit of the memorandum.
b) The tort was committed by the servant
in the course of his employment.
Q6. PROSPECTUS
Where a company intends to issue a public
appeal for subscription of its shares or
debentures, it is essential for it to issue a
prospectus. Section 23 of the Companies
Act 2013 requires that no application for
share or debentures of a company can be
invited unless the appeal is accompanied
with a prospectus. A public company may
issue securities to public to issue public
offers by means of issue of prospectus.
DEFINITION OF PROSPECTUS
SECTION 2 (70)
According to Section 2 (70) of the Act,
prospectus means any document described
or issued as a prospectus and include a red-
herring prospectus under Section 32 or shelf
prospectus under Section 31 or any notice,
circular, advertisement or other documents
inviting offers from the public for the
subscription or purchase of any securities of
a body corporate.
The essential ingredients of prospectus
are:
i. There must be an invitation offering to
the public.
ii. The invitation must be made by or on
behalf of the company or in relation to
an intended company.
iii. The invitation must be to subscribe or
purchase; and
iv. The invitation must relate to shares or
debentures.
Contents of prospectus purporting to be made by an expert; it
was correct and fair representation of the
The prospectus must contain a statement that statement. Hence, he had reasonable
a copy has been delivered for registration ground to believe that the expert was
indicating the requisite documents delivered competent and he had complied with the
therewith. It must be issued within 90 days provisions of Section 26.
of its registration under Sections 26 (8) of vi. Statement based on public official’s
the Act either by newspaper advertisement opinion: The director shall not be liable
or otherwise under Section 26 of the Act, if if he proves that as regards to every
the prospectus includes a statement untrue statement purporting to be a
purporting to be made by an expert, his statement made by an official person or
consent in writing should be obtained and from public official document; it was
this fact must be stated in the prospectus. correct and fair extract from the
document.
Remedies against misrepresentation in
prospectus Criminal liability for misrepresentation
(Section 34)
Besides damages for deceit or fraud, the
company may also be sued for damage Section 34 of the Act say that where the
provided the fraud was committed by the prospectus includes any untrue statement,
Directors who are the authority of the every person who has authorized the issue of
company. The company is also liable if the prospectus shall be punished for fraud under
prospectus is issued by the promoters and Section 447 of the Companies Act 2013.
rectified by the board which adopts the issue The minimum punishment for fraud is 6
for the prospectus is the basis of the contract months and maximum is 10 years and fine
for shares. may also be imposed which shall not be less
than the amount involved in the fraud which
Defences to civil liability for misstatement may extent to 3 times the amount involved
in prospectus: in the fraud. However, he shall not be
criminally liable if he proves that the
Civil liability: Under Section 35 of the statement was immaterial or that he had
Companies Act 2013, directors, promoters reasonable grounds to believe, and did up to
and every other person who is authorized to the time of issue of the prospectus believed,
issue the prospectus of a company shall be that the statement was true or the inclusion
liable to pay compensation to the investors or omission was necessary.
for any loss sustained by him due to untrue
statement in the prospectus. Q7. LIFTING THE COMPANY VEIL
Defences to civil liabilities: Under Section Veil means curtain. It is said by Justice
35(2) of the Act, a person shall not be liable Bhagawati that there is a veil between the
to pay compensation for any misstatement in company and the members though the
the prospectus under the following members work for the company and their
circumstances: acts are considered as acts of the company.
Because of this, many persons in order to
i. Withdrawal of consent: If he proves avoid liability started forming companies to
that, having consented to become a prevent such misuse, the law of lifting of
director or promoter of the company, he corporate veil is introduced. It is said that
withdrew his consent before the issue of there is a veil and not the wall whenever
the prospectus, and that it was issued there is something fishy, the court can lift
without his authority or consent; or the veil and look into the reality. The
ii. Without knowledge: A director may grounds for lifting of corporate veil are as
also escape liability if he proves that the follows:-
prospectus was issued without his
knowledge or consent, and that on 1) Avoiding payment of taxes: When
becoming aware of its issue, he promptly corporate personality of the company is
gave a public notice that it was issued being misused to avoid taxes then
without his knowledge or consent. corporate personality may be
iii. Ignorance of untrue statement: a disregarded and court may look beyond
director if after the issue of prospectus the veil in the interest of justice.
and before allotment become aware of Dinshaw Maneckji Petit vs. unknown
the untrue statement and withdraws his AIR (1927) Bom 371 case: A person
consent by a reasonable public notice, he formed four companies to invest money
shall not be liable. and to avoid payment of tax. The court
iv. Has reasonable ground for belief: A lifted the corporate veil and held that it
director is not liable if he proves that as was not a company as the company was
regards to every untrue statement, he had
formed for unlawful object.
reasonable ground to believe that the 2) When corporate personality is used
statement was true and he acted honestly. as an instrument of fraud: When the
v. Reliance on expert’s opinion: A corporate: when the corporate entity is
director will not be liable if he proves being used as an instrument of fraud,
that as regards to the untrue statement the principle of corporate personality
 may be disregarded and the doctrine of
piercing the corporate veil may be
applied in the interest of justice.
3) When the company is used as a mere
cloak or sham: When the corporate
personality of a company is being used
as a cloak or sham for doing unlawful
act, the court shall look behind the
corporate veil to know the reality.
4) Enemy character: During war, the court
may ignore the place of registration of
the company and lift the corporate veil
to look whether the company is being
controlled by enemy alliance or not; and
determine the enemy character of the
company. The court may find out the
natural persons who constitute and
control the company by lifting the veil.
Q8. Director
A company is an artificial person having its
existence only in the eye of law. hence, it
cannot act on its own therefore, it acts with
the human agency to carry out its own
business. The living person through whom
the company may act are called Directors
Section 2(34) of the Companies Act 2013
define the term director as any person
Disqualification for
appointed to the board of company.
Director (Section 164)
Board of Directors (Section 149)
According to Section 149(1) of the
Companies Act 2013 every company shall
have a Board of Directors consisting of:
(a) 3 Directors in case of public
company, 2 Directors in case of
public company and 1 director in case
of One Person Company;
(b) and a maximum of 15 directors.
Appointment of Director
Only a natural living person can be
appointed as director of a company, hence,
no corporate, association or firm can be
appointed as director of the company
Appointment of first directors
The first directors are appointed by the
subscriber of the memorandum. In case, they
do not appoint any directors, all the
subscribers who are individuals and
signatory to the memorandum become
directors of the company. They hold office
upto date of the first annual general meeting
of the company in which subsequent
directors are appointed as provided by
Section 149 of the Companies Act 2013.
However, the retired director may be
reappointed.
1. Appointment by proportional
representation (Section 163): Section
163 of the Companies Act allows a
company the option to adopt principle of
proportional representation or
appointment of directors under this
section. The Article of company may
provide for appointment of not less than
two-third of the total number of its
directors in accordance with the principle
of proportional representation whether by
a single transferable vote or by a system
of system of cumulative voting or
otherwise and such appointments may be
made once in every three years and casual
vacancies of such directors shall be filled
by the Board of Directors at a meeting of
the Board as provided in sub-section (4)
of section 161.
2. Appointment of Directors by the
Board: Under Section 161 of the
Companies Act 2013, the Board of
Directors has the power to appoint any
person other than the person who failed
to get appointed as director in general
meeting.
3. Appointment of Key Managerial
personnel Section 203: the Companies
Act 2013 makes it compulsory for
every company to appoint a managing
Director a whole-time key managerial
personnel namely Managing Director
or CEO, Company Secretary and Chief
Financial Officer.
appointment of
a) A person certified by a court of
competent jurisdiction to be of
unsound mind;
b) He is an undischarged insolvent;
c) A person who has applied to be
adjudicated as an insolvent and his
application is pending; or
d) A person who has been convicted
by a court for an offence, whether
involving moral turpitude or
otherwise, and sentenced to
imprisonment of not less than 6
months and a period of 5 years has
not lapsed from the date of expiry
of the sentence.
Provided that if a person has been
convicted of any offence and
sentenced in respect thereof to
imprisonment for a period of seven
years or more, he shall not be
eligible to be appointed as a
director in any company;
e) A person has been disqualified
from being appointed as a director
by a court or tribunal and the order
is in force.
f) A person has not paid any calls in
respect of any shares of the
company held by him whether
alone or jointly with others, and six
months have elapsed from the last
day fixed for the payment of the
call;
g) he has been convicted of the
offence dealing with related party
transactions under section 188 at
any time during the last preceding
five years; or
h) he has not complied with sub-
section (3) of section 152.
Removal of Director
1. Removal by the company: Under
Section 169 of the companies Act,
a company may remove a director
by a special notice or by ordinary
reservation before the expiry of
each period of office.
2. Removal of Director by Tribunal
(Section 242): Tribunal may
remove managing director or
manager of the company for
mismanagement in the company.
They cannot be appointed as
managing director or manager in
any company until the expiry of a
period of 5 years without the
consent of the tribunal.
Powers of Directors
1. General powers vested in the
Board of Directors: According to
Section 179 of the Companies Act,
the Board of Directors is entitle to
exercise all the powers and all the
Acts as authorized to do so. But the
powers are subjected to two
restrictions:
a. The directors can do nothing
that the company itself cannot
do under its memorandum and
any ultra vires act shall be
void.
b. When acting within the powers
of the company, the powers of
the board are limited to the
extent within the powers of the
company. Powers of the board
are limited to the extent the
company has delegated them
by its Article.
Duty
Director’s duty of care: Directors should
exercise their duty with reasonable care and
attention because if breach of duty of care is
there, loss is suffered by the company. They
must perform their duties and obligation
with skill and diligence as expected from a
reasonable person of its knowledge and
exercise.
Director’s duty to individual member:
Generally directors owe no pituitary duty to
the members but in certain situation they do
owe a duty to exercise reasonable skill and
care in advising members about a particular
transaction relating to the company or
undertaking.
Duty to disclose personal interest (Section
184): Directors are under duty to ensure that
their personal interest does not clash with
those of the company’s interest. They must
not use for their own benefit, the company’s
assets, opportunity or information.
Director’s duty to attend board meeting:
Though directors are not bound to attend all
the meeting of the Board. Section 67 (1)(b)
of the Companies Act 2013 requires a
Director to vacant his office if he absent
himself for 3 consecutive meeting of the
Board of Directors held between a period of
12 months with or without leave of absence
of the Board.
Director’s duty towards other person (i.e.
third person): Directors may be held
personally liable to 3rd party under the
Companies Act under the following
circumstances:
i. Where they issued a prospectus
which denote the contain particulars
required by the Act;
ii. For misrepresentation in the prospectus
or;
iii. When an irregular allotment was
made, or;
iv. Where the company is unable to allot
shares within 120 days of the first issue
of the prospectus and money received
from the application for shares has not
been repaid within next 10 days.
v. Where the company is being born up
the directors may be made liable for the
debts of the company incurred through
fraudent transaction by directors on
behalf of the company.
Criminal Liability
Directors may be criminally liable for fraud,
misrepresentation, embezzlement of funds,
per jury, etc. Section 450 of the Act provides
that when a director or any officer of the
company who is in default of any provisions
of the Act, for rule may thereunder forbid no
specific penalty is prescribed by the Act. He
may be punishable with fine which may
extend to Rs.1000 and where the
contravention is continuing one with a future
fine which may extend to Rs.1000 for
everyday after the first during which the
contravention continues.
If a director of a company which is being
wound up destroy, mediates, alters, falsify
or secrets any paper of securities or is
instrumental to such acts, he shall be
punishable with imprisonment which may
extend to 7 years and fine may also be
imposed ( section 337).
Civil Liability
Directors are liable for ultra vires acts i.e.
acts which are beyond their power or
authority. If the directors act malafide
misusing the powers bestowed on them, they
would incur civil liabilities or breach of
warranty like any other agent. Likewise, he
shall also be liable for negligence in
performance of his duties resulting in loss to
the company.
Legal Position of Directors
Generally the function of a director in a
corporate enterprise is to manage his
company’s affair to the best of his ability
primarily with a view to profit for the
shareholder.
Directors as agents
Directors are considered as agents of the
company because it is considered that all the
intra vires acts of the directors are the acts of
the company. The relationship between the
directors and the company is governed by
the principle of law of agency.
Directors as trustees
The function of the directors is to safeguard
the interest of the company as well the
interest of the shareholders. The directors
are in the position of trustees of the
company in the following aspects:
1. They are the trustees of the company’s
money which comes to their hand as
which is actually in their control.
2. Directors are in the position of trustees for
their company regarding the financial
powers when they are authorized to
exercise on company’s behalf. Thus,
power of allotment of shares, making calls
in advance, allowing and rejecting transfer
of shares, forfeiture or surrender of shares,
etc. are powers entrusted to the directors.
Hence, they must act in good faith in the
interest of the company and they can do
nothing which may promote their personal
interest.
3. Being a trustee of a company, he is
precluded from allowing his personal
interest to clash with the interest of the
company. They cannot make secret profits
out of the company.
Directors as an organ of the company
As a human being is liable for any acts of
the organ, directors are considered as organs
of the company. They are the brain of the
company, the organic theory of co-operate
life. Certain officials are treated as organs of
the company for huge action, the company is
held liable just as a natural person is
accountable for the action of his limbs.
Hence, the modern directors are something
more than mere agents or trustees. They are
recognized to be a primary organ of the
company.
Case: in Bath vs. Standard Land Company
(1910) 2 Ch 408(416) observed that the
board of directors are the brain of the
company through the company’s functions.
In State Trading Co-operation vs. CDO AIR
1963 SC 1811, it was held that directors
function is like brain of the company.
Q9. Winding up of a company + Modes
of winding up + Effect of order of
winding up of a company:
The term ‘Winding Up’; of a company may
be defined as the proceedings by which a
company is dissolved (i.e., put to an end).
According to according to Prof. Gower:
“Winding up of a company is the process
whereby its life is ended and its property is
administered for the benefit of its creditors
and members. And an administrator called a
liquidator, is appointed and he takes control
of the company, collects its assets, pays its
debts and finally distributes any surplus
among the members in accordance with their
rights”.
Thus, the winding up is the process of
putting an end to the life of the company.
During this process, the assets of the
company are disposed of, the debt of the
company are paid out of the realized assets
from the contributors of its members. If any
surplus is left it is distributed among the
embers in proportion to their rights in the
company. The winding up of the company is
also called the liquidation of the company.
Modes of winding up:
A company registered under the Companies
Act, may be wound up in any of the
following three heads, namely:
1) compulsory winding up by the court;
2) Voluntary winding up without the
intervention of the court;'
3) Voluntary winding up under the
supervision of the court.
Compulsory Winding up: Compulsory
Winding up takes place when a company is
directed to be wound up by an order of court
under the circumstances specified under
Section 433 of the Act.
Voluntary winding up: Voluntary winding
up means winding up by the members
themselves without the intervention of the
Court. Section 484 of the Act specifies the
circumstances under which a company can
be wound up voluntarily. There are two
types of voluntary winding up – (i)
Members’ Voluntary Winding up. And (ii)
Creditors’ Voluntary winding up.
Winding up subject to the supervision of
Court : At any time after a company has
passed a resolution for voluntary winding
up, the Court may make an order that the
voluntary winding up shall continue but
subject to the supervision of the Court.
Section 522).
Effect of order of winding up of a
company:
(1) Intimation to Official Liquidator and
Registrar:
Where the court makes an order for the
winding up of the company, it shall
forthwith cause intimation to be sent to the
Official Liquidator or Registrar of the order
of winding up [Sec. 444].
(2)Copy of winding up order to be filed with
the Registrar :
On the making of the winding up order, the
certified copy of the order must be filed with
the Registrar within 30 days from the date of
the making of the order. The duty to file it is
of the Petitioner and of the Company
[Sec.445].
(3)Suits stayed on winding up order: When a
winding up order has been made, no suit or
other legal proceedings can be commenced
against the company without the leave of the
court [Sec.446].
(4) Order of winding up deemed to be notice
of discharge:
Once such a order is made it shall be
deemed to be notice of discharge to the
officers and employees of company except
when the business of the company is
continued. [Section 445 (3)]
(5) Power of the tribunal:
The court which is winding up the company
shall have jurisdiction to entertain or dispose
of any new or pending suit or proceedings
by r against the company. Any suit or
proceeding in nay other court shall also be
transferred to the court in which the winding
up of the company is proceeding.
(6) Effect of winding up order:
An order for winding up of a company
operates in favour of all the creditors and all
the contributories of the company as if it had
been made on the point petition of a creditor
and of a contributory [Sec.447].
(7) Official liquidator to be liquidator:
On a winding up order being made in
respect of a company, official liquidator
shall by virtue of his office become the
liquidator of the company. [Section 449]
Compulsory wounding up by the Court :
The compulsory winding up of a company
which is also called winding up by the court,
it is initiated by an application by way of
Petition to the appropriate court for a
winding up order.
The circumstances in which a company may
be wound up by the court are stated in sec.
433 of the companies Act. They are as
follows :
1) Special resolution for the winding up of
the company by the Court [Sec. 433 (a)]:
Sometimes the companies shareholders
passes a special resolution to the effect that
the company be wound up by the court, in
such cases, the court may order the winding
up of the company on a petition presented to
it. The court has discretionary power in this
regard. Thus, the court may refuse the
winding up when it is opposed to public
interest or the interest of the company.
2) Default in holding statutory meeting [Sec.
433 (b)]:
The company must hold then statutory
meeting within 6 months from the date on
which the company is entitled to commence
its business if default is made in delivering
the statutory report to the registrar, it may be
ordered to be wound up. If the petition on
this ground is brought by any person such as
creditors etc., then it is presented before the
expiration of 14 days of the last day on
which the statutory meeting ought to have
been held. The court may order the winding
up o the statutory meeting to be held as the
case may be. However, if the company fails
to comply then, the court orders winding up.
3) Failure to commence business [Sec.
433(c):
Sometimes, the company fails to commence
the business within 1 year from its
incorporation, or suspends its business for
the whole year. In such case, the court may
order the winding up of the company.
4) Reduction in membership [Sec. 433(d)}:
A public company must have at least seven
members and a private company at least
two. If the membership of any company is
reduced below this limit, the court may
order the winding up of the company.
5) Inability to pay debts [Sec.433(e)]:
A company may be ordered to be wound up
if it is unable to pay its debts. The basis of
an order for winding up under this clause is
that the company has ceased to be
commercially solvent. Thus, inability to pay
debts is to be taken in the commercial sense.
Sec. 434 further provides that a company is
deemed unable to pay its debts if a creditor
for an amount exceeding Rs. 500 does not
get his money within 3 weeks after it fell
due, and the creditor is entitled to make a
petition to the court for an order of winding
up of the company.
6) Just and equitable clause [Sec. 433(f)] :
Sometimes the court is of the opinion that it
is just and equitable that the company
should be wound up. This clause gives the
court a wide variety of power to order
winding up whenever the court considers it
just and equitable to do. In such cases, the
court may order the winding up of the
company for just and equitable reasons as
are not covered by the preceding five
clauses. What is just and equitable cause
depends upon the facts of each case.
Dissolution of company:
The dissolution of a company is the ultimate
result of the winding up whereby the
existence of the company comes to an end in
the eyes of law. On its dissolution the
company ceases to exist. A company which
has been dissolved, no longer exists as a
corporate entity capable of holding property
or of being sued in any court. Since,
dissolution puts an end to the existence of
the company, the statutory duty of the
liquidator towards the creditors and the
contributors ceases after a dissolution order
is made by the court.
Winding up under the supervision of the
court:
The winding up with the intervention of the
court is ordered where the voluntary
winding up has already commenced. As a
matter of fact, it is the voluntary winding up
but under the supervision of the court.
At any time after a company has passed a
resolution for voluntary winding up, the
court may make an order that the voluntary
winding up shall continue but subject to the
supervision of the court. The order may be
made by the court on such terms and
conditions as it thinks fit and the court may
also determine the extent of the supervision.
The application for court’s supervision may
be made by creditors, contributories, or by
others as the court may think just u/s 522 of
the companies Act, 1956.
Ordinarily, such an order is passed by the
court in the following circumstances:
i) When the liquidator appointed under the
voluntary winding up is partial or negligent
in collecting the assets of the company, or
ii) When the provisions relating to the
winding up are not being observed, or
iii) When the resolution for voluntary
winding up was obtained by fraud.
The other provisions w.r.t. the winding up
under the supervision of the court may be
summed up as under :
i) The court may appoint an additional
liquidator. It may also remove any
liquidator, and may fill up the vacancy
caused by the removal, death or resignation
of the liquidator (Sec.524)
ii) The additional liquidator appointed by the
court shall have the same powers and he
subject to same obligations as if he had been
duly appointed in accordance with the
provisions in respect of the appointment of
the liquidators in a voluntary winding up.
However, the liquidator’s powers shall be
subject to the restrictions imposed by the
court [Sec.525, 526(i)].
iii) For all purposes, any order made by the
court for a winding up under the supervision
of the court shall be deemed to be an order
of the court made in compulsory winding
up. And the court shall get all the powers as
it has in case of compulsory winding up.
[Sec.526 (2)].