THE COMPANIES ACT, 2013

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470 SECTION
7 SCHEDULE
REPEALED OLD ACT OF 1956
A GREAT REFORM IN LAW TAKEN PLACE IN 2013 BY ENACTING NEW COMPANIES ACT 2013 AND END
OF COMPANY ACT 1956

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 MANY THINGS INTRODUCED IN NEW
ACT OR INTRODUCED IN NEW WAYS

• Introduction
• Key definitions and concepts
• Company
• Management and administration
• Directors
• Accounts and audit
• Dividend
• Compromises, arrangements and amalgamations
• Revival and rehabilitation of sick companies
• Corporate social responsibility
• Implications on private companies

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 HOW TO MAKE COMPANY
Memorandum of association
Articles of association
Incorporation of company
Formation of a company with charitable objects
Commencement of business
Registered office of company
Alteration of memorandum
Subsidiary company not to hold shares in its holding company
Prospectus
Capital

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 Compliance Need to
Annual return
Complete
Place of keeping registers and returns
General meetings
Inform to ROC for each and every moments of company

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 Who own or work
Director
for Company
Woman director
Independent directors
additional director
Board of Director
Audit Committee
Books of accounts
accounting standards
Financial year
Audit and auditors & Appointment of auditors

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 CSR & M&A
The 2013 Act makes an effort to introduce the culture of corporate social responsibility (CSR) in Indian
corporates by requiring companies to formulate a corporate social responsibility policy and at least incur
a given minimum expenditure on social activities.

The 2013 Act has streamlined as well as introduced concepts such as reverse mergers (merger of
foreign companies with Indian companies) and squeeze-out provisions, which are significant. The 2013
Act has also introduced the requirement for valuations in several cases, including mergers and
acquisitions, by registered valuers.

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 How Company
Grow or earn or
need fund
Declaration of dividend
Share
Debenture
IPO

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 Corporate Social Responsibility (Sec. 135)
Every Company

Net worth of Rs. 500 OR Turnover of Rs.1000 OR Net profit of Rs. 5

crore or more crore or more crore or more

As per CSR Rules 2014 ,CSR is applicable to :

Every company including its holding or subsidiary and
A foreign company having its branch office or project office in India
on fulfillment of the specified threshold

Corporate Social Committee (CSC):

Constitution

 Minimum 3 Directors including at least 1

Independent Director

 Composition to be disclosed in Board Report

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 Corporate Social Responsibility (Sec. 135)
 Functions of CSC
 Formulate Corporate Social Responsibility Policy (CSRP)
 Recommend Expenditure for (CSRP) activities
 Monitor policy from time to time

 Eligible CSR activities (Refer Annexure)

 Amount to be contributed towards CSR
 2% of average net profits made during 3 immediately preceding financial years

 What is not considered as CSR?

 Projects/activities for sole benefits of employees of Cos & their families
 Contribution of any amount directly or indirectly to any political party

 CSR Expenditure
 CSR projects or programs undertaken in India only shall amount to CSR Expenditure
 5% of CSR expenditure towards personnel & agencies implementing CSR is allowed

 Board Reporting on CSR

 Board Report to include an annual report on CSR

 Is CSR mandatory?
 If the company fails to spend such amount , the Board shall specify the reasons for not spending the
amount
 Is CSR Deductible expenditure under Income Tax Act?
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 Types of companies- Limited by Shares
(from regulatory perspective)

Company

Private Company Public Company Foreign Company

OPC Unlisted Company

Small Company Listed Company Physical Presence Web Presence

Dormant Company Pvt Co which is

subsidiary of Public Co

Charitable Charitable
Company(Sec 8) Company(Sec 8)

Holding/Subsidiary Holding/Subsidiary
Company Company

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1
 COMPANY TYPE
• One-person company: The 2013 Act introduces a new type of entity
to the existing list i.e. apart from forming a public or private limited
company, the 2013 Act enables the formation of a new entity a
‘one-person company’ (OPC). An OPC means a company with only
one person as its member [section 3(1) of 2013 Act]
• Private company: The 2013 Act introduces a change in the definition
for a private company, inter-alia, the new requirement increases
the limit of the number of members from 50 to 200. [section 2(68)
of 2013 Act].
• Small company: A small company has been defined as a company,
other than a public company. (i) Paid-up share capital of which does
not exceed 50 lakh INR or such higher amount as may be
prescribed which shall not be more than five crore INR (ii) Turnover
of which as per its last profit-and-loss account does not exceed two
crore INR or such higher amount as may be prescribed which shall
not be more than 20 crore INR: As set out in the 2013 Act, this
section will not be applicable to the following: • A holding company
or a subsidiary company • A company registered under section 8 •
A company or body corporate governed by any special Act [section
2(85) of 2013 Act]
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• Dormant company: The 2013 Act states that a company can be classified as dormant when it is
formed and registered under this 2013 Act for a future project or to hold an asset or intellectual
property and has no significant accounting transaction. Such a company or an inactive one may apply
to the ROC in such manner as may be prescribed for obtaining the status of a dormant company.
[Section 455 of 2013 Act]
• Associate companyIt includes joint ventures • Significant influence is defined to mean ‘control … of
business decisions under an agreement’ • It differs from the definition of an associate as per the
Accounting Standard 23: Accounting for Investments in Associates in Consolidated Financial
Statements • The status of an associate and a joint venture cannot be equated since, the degree of
control that a company can exercise in such entities, varies significantly. While ‘joint control’ is the
driving factor in case of joint ventures, a company can at the most only ‘participate’ in the operating
or financing decisions in case of an associate company. • With regard to the explanation to the section
in the 2013 Act, which defines the term ‘significant influence, it is to be noted that if a company has
‘control’ [control has been defined in section 2(27) of the 2013 Act] with respect to business decisions
of another company, such other company will in fact be tantamount to a subsidiary and not an
associate company. Hence, the use of the term ‘control’ within the definition of significant influence
leads to a conflict between the two definitions (associate company and subsidiary company).
• “Government company” means any company in which not less than fifty-one per cent of the paid-up
share capital is held by the Central Government, or by any State Government or Governments, or
partly by the Central Government and partly by one or more State Governments, and includes a
company which is a subsidiary company of such a Government company;

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Distinction Private Company Public Company
Minimum Paid-up Capital 1 Lakh 5 Lakh

Minimum Number of 2 7
Members
Maximum Number of 50 No restriction
Members
Transerferability of shares Complete Restriction No Restriction

Issue of Prospectus Prohibited Free

Number of Director At least 2 At least 3
Commencement of Immediately after Only after
Business incorporation commencement of
business certificate is
obtained

Statutory meeting No Obligation Obligatory

Quorum 2 members 5 members
Managerial remuneration No restriction Can not exceed more than
11% of Net Profits
 Board of Directors & Key Management Persons

Type of Directors
 Managing Directors (MD)
 Whole Time Director (WTD)
 Non Executive Director (NED)
 Independent Director (ID)

Board Strength

No of Directors
Type of Companies
Minimum Maximum#

Public Company 3 15
Private Company 2 15
One Person Company 1 15

# By a special resolution maximum strength can be increased (CG approval not required)

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 Board of Directors & Key Management Persons

 Class of Companies to appoint at least 1 woman director

 Every Listed Company
 Every Public Company having:
 Paid up share capital of 100 crore rupees or more; or
 Turnover of 300 crore rupees or more

 Period of stay in India for at least 1 director

 Minimum 182 days or more in the previous calendar year

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 Board of Directors & Key Management Persons

Independent Directors (ID)

 Requirement as per Companies Act, 2013

Type of Companies Requirement of Independent Director

Listed Public Company • At least one-third of the total number of directors shall be Independent Directors

Public Company At least 2 directors as independent directors

• Having paid up share capital of 10 crore rupees or more, or
• Having turnover of 100 crore rupees or more, or
• Having in aggregate outstanding loans, debentures and deposits exceeding 50 crore rupees

For other class of Not Mandatory

Companies

 Intermittent vacancy to be filled up by the Board not later then immediate board meeting or 3 months from
vacancy
 Not entitled to Stock Options
 Remuneration – Only by way of fee, profit related commission (as approved by members) and reimbursement of
expenses

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 Board of Directors & Key Management Persons
Independent Directors (ID)
 Term of Office:
 hold office for a term up to 5 consecutive years
 Maximum 2 consecutive terms allowed
 Eligible for being appointed again after a rest period of 3 years, however, subject to conditions

 Provisions in respect of retirement of directors by rotation not applicable

Alternate Director (Sec. 161)

 Appointment – By the Board of Directors if authorised by its Articles or by a resolution passed by the
company in general meeting

 Such appointment only when the director’s absence from India is for a period not less than three months

 Alternate director for an independent director – Can be appointed only if he is qualified to be appointed as an
independent director under the provisions of this Act

 Term of Office:
 For period permissible to original director or up to the date of return of the original director to India
 Provisions relating to automatic re-appointment of retiring directors not applicable

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 Board of Directors & Key Management Persons

Limitation of Responsibility of NED and ID

 Liable only in respect of matters:
 Occurred with their knowledge through Board Process
 With their consent or connivance
 Not acted upon diligently

Ceiling on number of directorships (Sec. 165)

 Can hold office of not more than 20 companies (including Alternate directorship)
 Wherein not more then 10 public companies, including private companies that are either holding or
subsidiary company of a public company
 Members by special resolution can restrict the number of directorship

Contravention of said provisions to attract fine not less than five thousand but which may extend up to Rs 25,000
for every day of default

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 Winding Up of Company
This includes the following: -
• By the court
• Under the supervision of the court
• Voluntary

• As against the existing modes of winding-up as prescribed by the 1956 Act, the 2013 Act prescribes
the following two modes: - By the Tribunal - Voluntary • The 2013 Act does not acknowledge the
distinction between members voluntarily winding-up and creditors voluntarily windingup. Additionally,
the new grounds for winding-up by Tribunal are as follows: - In a situation when the company has
acted against the interests of sovereignty and integrity of India, the security of the state, friendly
relations with foreign states, public order, decency or morality - Order has been made under Chapter
XIX (Revival and Rehabilitation of Sick Companies). - An application has been made by the ROC or
any other person authorised by the central government by a notification under the 2013 Act. - The
tribunal is of the opinion that the affairs of the company have been conducted in a fraudulent manner
or the company was formed for fraudulent and unlawful purposes or the persons concerned in the
formation or management of its affairs have been found guilty of fraud, misfeasance or misconduct in
connection therewith, and that it is proper that the company be wound up - The company has made a
default in filing with the ROC, its financial statements or annual returns for immediately preceding five
consecutive financial years

• Shareholder rights or protection

• Special consideration to small shareholders

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 Board of Directors & Key Management Persons

Duties of directors (Sec. 166)

Includes:
 To act in accordance with the articles of the company
 To act in good faith in order to promote the objects of the company
 Shall exercise due care, skill, diligence and independent judgment
 Shall not involve in a situation which may conflict with the interest of the company
 Shall not achieve or attempt to achieve any undue gain, whether for himself or relatives
 If found guilty the gains must be returned to the Company
 Shall not assign his office

Contravention of the said provisions are liable to fine, not less than 1 lakh rupees but which may extend to

5 lakh rupees

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 Annual General Meeting (Sec. 96)

 In each calendar year, AGM should be held

 Within 6 months from the end of the financial year

 In case of first AGM within nine months from the first financial year closing

 Registrar has power to extend time

 Time 9 a.m. to 6 p.m. (Business hours defined)

 Cannot be held on a national holiday

 In Companies Act, 1956, it was ‘Public Holiday’

 OPC not required to hold AGM

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 Notice of AGM (Sec. 101)

 Notice (21 clear days) can be given through electronic mode also, apart from written notice

 Notice must be given to auditors and directors also

 For special business detailed disclosures of interest to be made of

 Every Director
 Every Key Managerial Personnel
 Relatives of director / key managerial personnel

 Voting through electronic means can be provided by

 Every Listed Company
 Company having not less than one thousand shareholders

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 MOA
Name Clause

Object Clause

Liability Clause

Capital Clause or Subscription Clause

Association Clause

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 AOA
Company Name

Purpose of the Company

Organization of the Company

Shareholder Meetings

ALTERING ARTICLES OF ASSOCIATION

SPECIAL RESOLUTION AND IT’S PROVISIONS
A Company can alter its Association of Articles if the need arises. The Company has to pass a Special
Resolution (a 2/3rd majority of members present in the General Meeting) in order to alter its provisions.
It is also important to remember that the Court does not have the power to alter the AOA. These are the
specific guidelines that a company has to adhere to achieve a successful alteration:
The copy of Special Resolution has to be filed with the Registrar within 30 Days of its Passing.
The proposed should not go against the provisions of the Companies Act or the established
Memorandum of Association (MOA).i.e. a document that is prepared during the formation of a Company
and defines the Company’s relationships with the shareholders.
The Company should not propose any illegal activity.
The alteration proposed cannot be bonafide for the benefit of the Company.
The alteration should not increase the liability of the existing members in any manner.

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 Things Come in AOA
• valuation of intellectual rights say, the valuations of the IPR of one partner and, in a similar way as
how we value real estate of another partner
• the appointments of directors – which shows whether a shareholder dominates or shares equality with
all contributors
• directors meetings – the quorum and percentage of vote
• management decisions – whether the board manages or a founder
• transferability of shares – assignment rights of the founders or other members of the company do
• special voting rights of a Chairman, and his/her mode of election
• the dividend policy  – a percentage of profits to be declared when there is profit or otherwise
• winding up – the conditions, notice to members
• confidentiality of know-how and the founders’ agreement and penalties for disclosure
• first right of refusal – purchase rights and counter-bid by a founder

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 MOA/AOA

BASIS FOR COMPARISON MEMORANDUM OF ASSOCIATION ARTICLES OF ASSOCIATION

Meaning Memorandum of Association is a
document that contains all the
fundamental information which are
required for the incorporation of the
company.
Defined in Section 2 (56)
Type of Information contained Powers and objects of the company.
Status It is subordinate to the Companies Act.
Retrospective Effect The memorandum of association of the
company cannot be amended
retrospectively.
Major contents A memorandum must contain six clauses.
Obligatory Yes, for all companies.
Compulsory filing at the time of Required
Registration
Alteration Alteration can be done, after passing
Special Resolution (SR) in Annual General
Meeting (AGM) and previous approval of
Central Government (CG) or Company
Law Board (CLB) is required.
Relation Defines the relation between company
and outsider.
Acts done beyond the scope Absolutely void
Articles of Association is a document
containing all the rules and regulations
that governs the company.
Section 2 (5)
Rules of the company.
It is subordinate to the memorandum.
The articles of association can be
amended retrospectively.
The articles can be drafted as per the
choice of the company.
A public company limited by shares can
adopt Table A in place of articles.
Not required at all.
Alteration can be done in the Articles by
passing Special Resolution (SR) at Annual
General Meeting (AGM)
Regulates the relationship between
company and its members and also
between the members inter se.
Can be ratified by shareholders.

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 SHARE /
DEBENTURE

BASIS FOR COMPARISON SHARES DEBENTURES

Meaning The shares are the owned funds of the The debentures are the borrowed funds
company. of the company.
What is it? Shares represent the capital of the Debentures represent the debt of the
company. company.
Holder The holder of shares is known as The holder of debentures is known as
shareholder. debenture holder.
Status of Holders Owners Creditors
Form of Return Shareholders get the dividend. Debenture holders get the interest.
Payment of return Dividend can be paid to shareholders Interest can be paid to debenture holders
only out of profits. even if there is no profit.
Allowable deduction Dividend is an appropriation of profit and Interest is a business expense and so it is
so it is not allowed as deduction. allowed as deduction from profit.

Security for payment No Yes

Voting Rights The holders of shares have voting rights. The holders of debentures do not have
any voting rights.
Conversion Shares can never be converted into Debentures can be converted into shares.
debentures.
Repayment in the event of winding up Shares are repaid after the payment of all Debentures get priority over shares, and
the liabilities. so they are repaid before shares.

Quantum Dividend on shares is an appropriation of Interest on debentures is a charge against

profit. profit.
Trust Deed No trust deed is executed in case of When the debentures are issued to the
shares. public, trust deed must be executed.

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 Doctrine of Indoor
Management
The role of the doctrine of indoor management is opposed to that of the rule of constructive notice. The
latter seeks to protect the company against the outsider; 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 documents, the person contracting will not be
prejudiced by irregularities that may beset the indoor working of the company.
Exceptions to the Doctrine of Indoor Management-
1.Knowledge of irregularity-
The first and the most obvious restriction is that the rule has no application where the party affected by
an irregularity had actual notice of it. Knowledge of irregularity may arise from the fact that the person
contracting was himself a party to the inside procedure.
The principle is clear that a person who is himself a part of the internal machinery cannot take
advantage of irregularities.

2. Forgery-
Doctrine of indoor management does not apply to forgery because forgery is voidab- initio.

The plaintiff contended that whether the signatures were genuine or forged was a part of internal
management and, therefore, the company should be estopped from denying genuineness of document.
But it was held that the rule has never been extended to cover such a complete forgery.

3. Negligence on the part of the outsider-

Anand Bihari Lal vs. Dinshaw and Co.-
In this case the plaintiff accepted transfer of Company’s property from its accountant, the transfer was
held void.

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 Doctrine of
Constructive
Notice-
The memorandum and articles of association of every company are registered with the Registrar of
Companies. The office of the Registrar is a public office and consequently the memorandum and articles
become public documents. They are open and accessible to all. It is therefore, the duty of every person
dealing with a company to inspect its public documents and make sure that his contract is in conformity
with their provisions. But whether a person actually reads them or not, he is to be in the same position
as if he had read them. He will be presumed to know the contents of those documents.

Another effect of this rule is that a person dealing with the company is taken not only to have read those
documents but to have understood them according to their proper meaning. He is presumed to have
understood not merely the company’s powers but also those of its officers. Further, there is a
constructive notice not merely of the memorandum and articles, but also of all the documents, such as
special resolutions [S. 117] and particulars of charges [S. 77] which are required by the Act to be
registered with the Registrar. But there is no notice of documents which are filed only for the sake of
record, such as returns and accounts. According to Palmer, the principle applies only to the documents
which affect the powers of the company.

The common law doctrine of constructive notice should apply to the form. To reiterate the form is a
public document which contains particulars of directors who are the mind and will of a company, as well
as managers and secretaries who are responsible for the day to day running of the company. It is a
document which affects the powers of the company and its agents. Certainly, its purpose must be more
than just to provide information about the company’s directors, managers and secretary. Therefore,
persons dealing with company should check with the Registrar of Companies who its directors, mangers
and secretaries are at given time.

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 Doctrine of Ultra
Vires

The term Ultra Vires means ‘Beyond Powers’. In legal terms, it is applicable only to the
acts performed in excess of the legal powers of the doer. This works on an assumption
that the powers are limited in nature. Since the Doctrine of Ultra Vires limits the
company to the objects specified in the memorandum, the company can be:
Restrained from using its fundsn for purposes other than those specified in the
Memorandum
Restrained from carrying on trade different from the one authorized
The company cannot sue on an ultra vires transaction. Further, it cannot be sued too. If
a company supplies goods or offers service or lends money on an ultra vires contract,
then it cannot obtain payment or recover the loan.
However, if a lender loans money to a company which has not been extended yet, then
he can stop the company from parting with it via an injunction. The lender has this right
because the company does not become the owner of the money as it is ultra vires to the
company and the lender remains the owner.
Further, if the company borrows money in an ultra vires transaction to repay a legal loan,
then the lender is entitled to recover his loan from the company.
Sometimes an act which is ultra vires can be regularized by the shareholders of the
company. For example,
If an act is ultra vires the power of directors, then the shareholders can ratify it.
If an act is ultra vires the Articles of the company then the company can alter the
Articles.
Remember, you cannot bind a company through an ultra vires contract. Estoppel,
acquiescence, lapse of time, delay, or ratification cannot make it ‘Intravires’.
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 Rights of minority
shareholders
Definition of minority shareholders
Minority shareholders are the equity holders of a firm who does not enjoy the voting power of the firm
by the virtue of his or her below 50% ownership of the firm’s equity capital.
Rights of Minority Shareholders
Many provisions of Companies Act, 2013 deals with the situations where minority shareholders rights
have been protected and the same can be divided into various major heads. The rights of minority
shareholders are discussed below.
Oppression and Mismanagement
In Companies Act, 1956, the protection for the minority shareholders from oppression and
mismanagement have been provided under section 397 (An Application to be made to company law
board for relief in cases of oppression) and 398 (An Application to be made to company law board for
relief in cases of oppression).
Therefore, right to apply to the company board for the oppression and mismanagement is provided
under the Section 399, which is,  meeting 10% of shareholding or hundred members or one-fifth
members limit. However, central government under their discretionary powers has allowed any numbers
of shareholders to apply for the company board for the relief under Sections 397 and 398.

Whereas, on the other hand, under Companies Act, 2013, the relief from the oppression and
mismanagement has been provided under Section 241-246 where the relief can be sought from the
tribunal in case of mismanagement and oppression through section 244(1) which provides the right to
apply to tribunal with the same minority limit mentioned in Companies Act, 1956 but however, the
tribunal, while exercising discretionary powers, may allow any numbers of shareholders and to be
considered as minority.
Further, under the Section 245, Companies Act, 2013, the new concept of class action has been
introduced which was non-existent in Companies Act, 1956 wherein it provides for class action suits to
be instituted against the company as well as against the auditors of the company.

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 Lifting of the
Corporate Veil
This theory of corporate entity is indeed the basic principle on which the whole
law of corporations is based. Instances are not few in which the Courts have
successfully resisted the temptation to break through the corporate veil.
But the theory cannot be pushed to unnatural limits. “There are situations
where the Court will lift the veil of incorporation in order to examine the
‘realities’ which lay behind. Sometimes this is expressly authorized by
statute…and sometimes the Court will lift its own volition”. The human
ingenuity however started using the veil of corporate personality blatantly as a
cloak for fraud or improper conduct. Thus it became necessary for the Courts
to break through or lift the corporate veil and look at the persons behind the
company who are the real beneficiaries of the corporate fiction.
Lifting of the corporate veil means disregarding the corporate personality and
looking behind the real person who are in the control of the company. In other
words, where a fraudulent and dishonest use is made of the legal entity, the
individuals concerned will not be allowed to take shelter behind the corporate
personality. In this regards the court will break through the corporate shell
and apply the principle of what is known as “lifting or piercing through the
corporate veil.” And while by fiction of law a corporation is a distinct entity,
yet in reality it is an association of persons who are in fact the beneficial
owners of all the corporate property.
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 How to
Incorporate A
Company

Steps in Incorporation of a Company

1. Ascertaining Availability of Name
The first step in the incorporation of any company is to choose an appropriate name. A company is
identified through the name it registers. The name of the company is stated in the memorandum of
association of the company. The company’s name must end with ‘Limited’ if it’s a public company and
‘Private Limited’ if its a private company.
To check whether the chosen name is available for adoption, the promoters have to write an application
to the Registrar of Companies of the State. A 500 rupee is paid with the application. The Registrar then
allows the company to adopt the name given they fulfill all legal documentation formalities within a
period of three months.
2. Preparation of Memorandum of Association and Articles of Association
The memorandum of association of a company can be referred to as its constitution or rulebook.
The memorandum states the field in which the company will do business, objectives of the company, as
well as the type of business the company plans to undertake. It is further divided into five clauses
3. Printing, Signing and Stamping, Vetting of Memorandum and Articles
The Registrar of Companies often helps promoters to draw up and draft the memorandum and articles of
association. Above all, with promoters who have no previous experience in drafting the memorandum
and articles.
4. Power of Attorney
To fulfill the legal and complex documentation formalities of incorporation of a company, the promoter
may then employ an attorney who will have the authority to act on behalf of the company and its
promoters. The attorney will have the authority to make changes in the memorandum and articles and
moreover, other documents that have been filed with the registrar.
5. Other Documents to be Filed with the Registrar of Companies
SPICE-32 COMPANY DETAILS
SPICE -33 eMOA
SPICE-34 eAOA
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6. Statutory Declaration in e-Form No.1
This declaration, furthermore states that ‘All the requirements of the Companies Act and the rules
thereunder have been compiled with respect of and matters precedent and incidental thereto.’
7. Payment of Registration Fees
A prescribed fee is to be paid to the Registrar of Companies during the course of incorporation. It
depends on the nominal capital of the companies which also have share capital.
8. Certificate of Incorporation
If the Registrar is completely satisfied that all requirements have been fulfilled by the company that is
being incorporated, then he will register the company and issue a certificate of incorporation. As a
result, the incorporation certificate provided by the Registrar is definite proof that all requirements of the
Act have been met.

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