Sunday, October 5, 2014






Wednesday, April 20, 2011

SCHEDULE OF 2015 - 2016

SCHEDULE OF 2016 - 2017


Time: 05.30 - 06.30 pm

Sub: A/c, Eng, Eco, SP, OC, MATHS.
Fees: 3,500/- for per subject.


Time: 6.30 - 8.15 pm

Sub: A/c, Eng, Eco, SP, OC, MATHS.
Fees: 4,000/- for per subject.


Time: 4.30 - 5.15 PM.

Sub: A/c.
Fees: 4,000/- for Per Subject


Wednesday, November 18, 2009


In the ancient times, population was limited. So wants of people were limited and uncomplicated. So they were satisfied their wants very easily. They were used barter system in place of money as a means of transactions. They were exchanged goods against goods to satisfy their wants. Later, population expands and barter system become critical. People choose various business fields, as a result, division of labour and medium of exchange become unavoidable. The wants of people become unlimited and money come into existence as means of exchange or trade.
Now, in every country, whether it is developed or not, money plays very important role in economy. All the economic activities like production, marketing and communication are currently running smoothly with help of money. Almost all things in economics are put in form of money.
1] Prof Robertson: “Money is anything which is widely accepted in payment for goods or in discharge of other kinds of business obligation.”
2] Raymond P. Kent: “money is anything which is commonly used and generally accepted as a medium of exchange or as a standard of value.”
3] Crowther: “Anything that is generally accepted as a means of exchange and that at the same time acts a measure and as a store of value.”
1] An entity which is used as money must be transferable. Otherwise it will be used as consumable commodity and holder of it keep for himself only. Money must be exchanged against goods and services.
2] Acceptance of money must be remained constant. Money once accepted, should be given to other person.
3] Acceptance of money must be tangible. Money should be transferred easily with general conformity. If money is accepted after verifying its weight, colour, etc, is not considered as genuine money.
4] It is minor, who gives money. Goodwill of giver is not important.

1] Means of activity (function): Money is not useful to man directly. But money is used as means of exchange for goods and services. It is only an object of exchange.
2] It is means of exchange within the specific limits of country by general agreement of people.
3] Money does not produce anything itself. It is only helping factor in production in form of capital.
Types of Money:
1] Money is available in different forms. Money is broadly divided into two types in today’s economy i.e. 1) State Money and 2) Bank Money.
Types of Money
State Money Bank Money
Metallic Money Paper Money Cheques Drafts Bills of exchange
Full-Bodied Token
Money Money
Convertible Paper Money Fiat Money
1] State Money: Money which has the legal sanction in the discharge of debts is called state money or money proper or legal tender money. Legal tender money is that money which is officially designated by the government as an adequate instrument for the discharge of obligations stated to be payable in domestic money. Such type of money is backed by law and refusal to accept it, as a medium of exchange will be punishable by the state.
2] Metallic Money: It is of two types:
a) Full-bodied Money or Standard Coins: A coin whose face value is equal to its intrinsic (natural) value is called full-bodied money. For example the old-Victorian rupee. Its face value i.e. is the value defined by the government was one rupee and it contained silver worth rupee one. Its intrinsic value (silver content) was exactly equal to its face value (value defined by the government)
b) Token Money or Token coins: A token money or taken coin is one whose face value is much greater than its intrinsic value i.e. value of its component material. E.g. Indian one rupee coin. It contains metal worth hardly twelve paise.
3] Paper Money: It is of two types:
1) Convertible Paper money: The paper money which is convertible either into gold or silver or into metallic coins is called convertible paper money. E.g. Gold Certificate of USA.
2) Fiat Money: When the paper money circulates because of the fiat or authority of the state, it is called fiat money. It is not convertible.
4] Bank Money or Credit Money: Bank money consists of all credit instruments such as cheques, drafts and bills of exchange
A] PRIMARY FUNCTIONS: It is basic functions in which money performs its economic system, under all circumstances.
1] Medium of Exchange: Money performs the basic functions. It is used for the exchange of goods and services. The value of goods and services are expressed in the form of money. Under the barter system, exchange of goods and services was very complicated. But in modern world, government is able to facilitate the people by collecting taxes in the forms of money in place of goods and services. Money offered the support of market and economy. Payments of all transactions can be made easily and conveniently with the help of money. By using money people can get any commodity in the market. Every commodity and service is bought and sold for money in the market. Money acts as a common medium for all exchanges. It is useful for conducting all trade and commercial transactions smoothly.
2] Standard of Value or Measure of Value: Money serves as the standard of value. It is used as a common measure of value. Money serves as the unit in terms of which the value of all goods and services is measured and expressed. Since every commodity is exchanged against money, the value of all goods and services are expressed in terms of money only. In India, the rupee is the standard of money and unit of account. The prices of all commodities are expressed in terms of money.

1] Transfer of Value: Money helps in the transfer of value from one person to another and from one place to another. It serves both for time transfer and place-transfer of purchasing power. It does not involve any difficulty to transfer the value of different assets and properties from one place to another within the country or between two countries.
2] Store of Value: Money has ‘general purchasing power’. It is accepted at any time for goods or services and its value to a great extent remains constant. People can save and store purchasing power for future use out of their income. Many goods are perishable and can’t be stored for a long period. However, they can be marketed and can be converted into money, which can be permanently stored. In modern type of economy, many is stored in the form of currency notes and bank deposits. Money is the most liquid form of all assets.
3] Standard of deferred (delayed or postponed) payments: Moneys acts as a unit in terms of which deferred payments are stated. Money has made possible all present as well as future transactions. It provides as link between the present and future transactions. It makes borrowing and lending less risky.
1] It improves productivity of capital: Money has liquid nature so liquidity nature of money helps in the mobility of capital and increase its productivity.
2. Basis of credit: Credit system is the backbone of modern economy. In this system money plays very vital role. Credit instruments are used in modern economy on large scale. Without money, credit instruments cannot circulate. A person can issue cheques only on the basis of credit.
3. Distribution of Social Income: After invention of money, it is now become possible to determine the share of every factor in production in terms of money.
4] Equalization of Marginal Utility: To get the maximum satisfaction, consumer earns the expenditure in such a way as to equalize these marginal utilities of expenditure in each use.
1] Repayment Capacity: Money is accepted on general assumption so every firm keeps some amount of liquid money to sage guard its repayment capacity.
2] General Purchasing Power: Object of money to keep changing. It jumps on from one shoulder to another every time. So money is not used for one specific purpose only.
3] Motives: Money can be kept for day-to-day transaction purpose, emergency purpose like accident or sickness and businessman keep capital in liquid form to carry on speculative activities.

MEANING: Commercial bank is a financial institution that operates for profit. It accepts deposits from the general public and extends loans to the households, the firms, and the government. In the modern age, bank plays very important role in production, trade and capital collection. Main functions of money are to collect the money as savings or deposits and lend them to others who can use them productively.
Definitions of Bank:
1] Dr. H.L. HART: A banker is one who, in the ordinary course of this business, honours cheques drawn upon him by persons from and for whom he receives money on current account”.
2] Prof. Kinley: “A bank is an establishment which makes to individuals such advances of money as may be required and safely made, and to which individuals entrust money when not required by them for use.
Banks accepts the deposits from general public.
Banks gives advances and loans to the needy people.
Classification of Banks:
1] Central Bank and 2] Other Banks.
In India, Reserve Bank of India is the central bank of India. It controls over all the banks in the country
Under the heading of other banks; banks can be classified as per their field like Agricultural Banks, Industrial Banks, Exchange Banks, and Commercial Banks. Agricultural banks works in agriculture field e.g. to provide loans to farmers in low interest rate. Industrial banks acts in industrial sector. It helps entrepreneurs or businessmen to improve their business. Exchange Banks offers services like to exchange foreign currencies. Commercial Banks provide loan to the traders.

1] ACCEPTING DEPOSITS: It is most important functions of commercial banks. By offering various deposit schemes, banks collect deposits from the people.
a) Fixed Deposit: In such account money is kept for fixed period, like one, two or three years. Deposited money cannot be withdrawn before the certain period. As compared with the other accounts rate of interest for such deposit is higher. Longer the period, higher the rate of interest.
b) Current Account: Actually such type of accounts are maintained or opened by businessman. Account holder can withdraw or deposit amount when he requires. No interest is allowed by on this account. A businessman can withdraw money several times in a day.
c) Savings Bank Account: It is a deposit account, which is operated by individuals for the purpose of savings a part of their income. Main object of such account to promote the habit of savings in general people. There are no restrictions on number and amount of deposits but withdrawals are restricted. The money can be withdrawn from this account either by cheque or by withdraw slip. Banks pay certain percentage of interest on the balance on savings account.
d) Recurring Deposit Accounts: Under this account, regular income earners deposits a certain amount of money at regular intervals for a certain period of time. An individual can deposits certain amount on his account for example Rs. 500 per month for continues 5 years. The period of this account is minimum 6 months and maximum 10 years. Bank offers attractive interest on such accounts.
Bank does not kept deposits only idle cash balances but after keeping certain cash as reserves; bank lend remaining cash to the people as loans or advances.
a) Overdraft: An overdraft facility is granted by the bank only those persons who have their current accounts in the bank. To meet the temporary needs of the customer, the bank mey permit the customer to overdraw the amount from the bank in excess of his balance is called overdraft. The interest is charged by the bank on actually amount is used by the customer. The overdraft is granted only for occasionally and for short period.
b) Loans: When a banker makes a lump-sum advance to the customers, it is called ‘loan. Interest is charged on the entire amount sanctioned. Bank does not consider whether the whole sanctioned amount is utilized or not. Loans are various types e.g. Term Loans, Personal Loans, Collateral Loans.
c) Cash Credit: It is short term credit given by the bank to any businessman to meet regular working capital needs. The bank opens a separate account in respect of cash credit. The borrower is allowed to withdraw / utilize from their account upto certain ‘limit’ against a bond signed by securities or any other eligible securities. Interest is charged only on the actual amount withdrawn by the customer.
d) Bills Of Exchange: It is type of discounting bill with the bank. If the holder of an exchange bill needs money immediately he can get it discounted by the bank. The bank deducts commission for itself and pays the present price of the bill to the holder. Bank retained the bill of exchange with itself till its maturity as a security.
1] Investment of funds functions: Commercial banks invest a part its surplus funds in government securities and earns for itself interest on such investments. From these investments bank does not earns more interest but such investments are for securities.
2] Transfer of Funds: Banks arrange transfer of funds cheaply and safely from one place to another place. Under this heading, bank transfers cheques means demand drafts drawn by one branch of bank to another branch of it.
3] The bank pays premiums of insurance policies on our demand through cheques.
4] The bank collects dividends or interests on deposits of their customers.
1] Credit or Debit Card Facility: Many banks offer debit or credit cards to their account holders to ease them to deposit or to withdraw money from the bank.
2] ATM: Bank also provides the facility of ‘all time money’ to their customers to get money different places and o different time.
3] Safe Deposit Vaults (Lockers): Bank provides facility of lockers or safe deposit vaults to their customers on minimum rent. So that, customer can set their valuable ornaments, important documents in the locker.
4] Foreign Exchange: Bank also facilitates their customer to transfer money from in country account to foreign country account. Bank also provides exchange of foreign currency.
5] Travellers Cheques: Bank offers to their customers’ ‘travelers cheque’ facility also. Except carrying so much money with them, customer may carry a cheque and can in cash in foreign country.
4] Transfer of Money: Bank can transfer money from one place to another place or from one account to another person’s account through cheques, drafts and mail transfer.
5] Standing Instructions: An account holder can give standing instruction to act on his behalf. E.g. bank can directly paid insurance premium, electricity bill, mobile bill, telephone bill, installment of loan or taxes on behalf of account holder after receiving standing instruction.
6] Bank can also collect dividend, interests, salaries, provident Fund or pension directly.
7] To act as a trustee: Bank acts as a trustee of individual, social institutions or charitable trust. To sustain, to protect the properties and to utilize funds in proper way are the acts of banks as trustee. If an individual confers responsibility to distribute the properties, as per will, bank is held responsible to act as per the will of deceased account holder.
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It is very important banking structure in the banking sector of every country. This bank guides and regulates the activities of all the banks in the country. The central bank is treated as a national institution with national duties and responsibilities.
Central Bank is only one bank in the whole country. This bank controls all the other banks in the country. This central bank is the bank of all the banks in the country. There is no directly relationship between this bank and the people. Because it is the bankers bank. All the rules and regulations are decided by the central bank of all the banks in every country.
The Central Bank of our country is called ‘Reserve Bank of India.’ It was established on 1st April 1935 and it was nationalized on 1st January, 1949.
Definitions of Central Bank:
It is impossible to give exact and complementary definition of Central Bank. But on the basis of its functions some definitions are put forward:
W. A. Shaw: “The one true, but at the same time, all-suffering function of a central bank is control of credit.”
Samuelson: “A Central Bank is a bank of bankers. Its duty is to control the monetary base . . . and through control of this ‘high powered money’ to control the community of supply of money.” R. S. Sayers: “The business of a Central Bank as distinguished from a commercial bank is to control the commercial banks in such a way so as to promote the general monetary policy of the state.”
Functions of the Central Bank differ from country to
country because of the economic condition of that country.
1] Monopoly of Note Issue: Issuing of currency notes is the prime and monopolistic function of the Central Bank. The privilege of issuing the notes associated with the Central Bank. Central Banks are given extraordinary monopoly of note-issue. The main function of the Central Bank is to bring monetary stability. Authority of issuing notes is not conferred to commercial banks because it would more confusing situation to the people of using the notes. It would not be satisfactory. Central Bank does not take advantage from the uncontrolled powers but follows the rules of issuing notes, which are conferred by the law. It is the compulsory to maintain to maintain the reserves of gold, silver, selected securities in fixed proportions to inspire the confidence among the people in the paper currency. It may be differ from country to country. In our country, authority of issuing notes is conferred on Reserve Bank of India. Central Bank brings about reliability in the notes circulation and avoids the danger of over issue of notes. Central Bank facilitates better regulation of note-issue. It gives notes a distinctive prestige. Central Bank has authority to control the credit creation activity of commercial bank.
2] Government’s Banker: Commercial banks perform the functions for common people means for customers like this Central Bank performs the functions for the Government. Central Bank acts as a Banker, Agent and Adviser to the government in every economic aspect. It keeps cash balance of the Government and maintains its accounts. The Central Bank receives deposits of money, cheques, drafts and also makes payment on behalf of the Government. It handles the public debt and undertakes the sale and purchase of securities on behalf of the Government. Central Bank also gives short-term advances to the Government. It also gives advice to the government in economic, banking, devolution of currency, budgetary and financial policies. It pays interest on the government borrowing.
3] Banker’s Bank: The Central Bank acts as a Banker’s Bank. In the country, the Central Bank is the financial decision maker for the commercial banks. The Central Bank acts as the custodian (guardian) of cash reserves of the other banks. Commercial bank keep part of their cash with the Central Bank. These reserves can be used in the difficult situation of the commercial bank and controlling the activities of the bank. Such deposits of the commercial banks strengthen the confidence of the people in the banking system of the country. The claims of the bank on another bank are settled by the Central Bank. The Central Bank uses its controlling power in such situation. The Central Bank is the guardian of the commercial banks.
4] It Is The Lender Of The Last Resort: The Central Bank always helps or gives supports to the commercial banks in their critical condition. It means the Central Bank provides timely financial help to the commercial banks. This financial helps is given in form of rediscounting facility or direct advance against Government securities but the Central Banks imposes some terms and conditions while granting such facility to the commercial banks.
5] Custodian of Foreign Exchange Reserves: The Central Bank also responsible to maintain the stability of internal and external value of the currency. All the reserves of a nation’s international currency are held by the Central Bank. The Central Bank keeps reserves of gold, silver and foreign exchange reserves at the appropriate level. Such reserves are also useful for meeting the adverse balance of payments position of the country.
6] Controller Of Credit: If credit is not effectively controlled and kept within the limits, it can have terrible consequences as credit money produces a deep impact on the economy. Thus, the Central Bank can bring stability in the internal price level and erase fluctuation in the foreign exchange rate by controlling the credit effectively. The Central Bank uses its qualitative weapons to control the volume and direction of credit. Bank rate, open market operations, change in reserve ratio etc. can be regulated by the Central Bank.
7] Central Clearance: It is the clearing house for the commercial banks. Every commercial bank has the member of the Central Bank means account holder so the claims and counterclaims of the member banks cab be settled with the minimum use of cash.
8] Informative Centre: The Central Bank has a statically data with them so it publishes economic statistic and other useful information on various aspect of the national economy.
9] Miscellaneous Functions: The Central Banks not only performs regulatory functions but also the developmental functions. The Central Bank also encourage the banking habits among the people, establishes the special financial institutions and agencies, development of money and capital market.
Public economics is considered the base of economics. Public economics consist of economic policies of government. It is essential to study the economic policies of government because government always implements their policies for the welfare of common people. Government budget is the statement of income and expenditure in detail. Period of budget is for one year.
Meaning of Government Budget
Budgets are not merely matters of arithmetic, but in a thousand ways to go to the root of prosperity of individuals and relation of classes and the strength of kingdom. A budget maps out the process of acquiring scares resources for government uses or for use under government direction. Budget means not balance sheet because it doesn’t shows the financial condition of the country. Government budget only shows the receipts and expenditure of a government for the year reference. A government budget is a financial plan covering expenditure and receipts of the government.

Friday, February 20, 2009


Attempt any FOUR of the following:
A) Answer in one sentence.
1) What is Endorsement of a bill?
2) What do you mean by ‘Scrap Value’ of an asset?
3) When is Joint Bank Account opened?
4) What is not for profit concern?
5) What is statement of affairs?
B) Write the word/ term/ phrase, which can substitute each of the following statement:
1) A person who endorse a bill.
2) Written terms of agreement between the partners.
3) Debit balance of trading account.
4) The relationship between persons who have agreed to share profit or loss in Joint Venture Business.
5) Type of activities undertaken to earn profit.

C) Match the following pairs:
Group A .........................................Group B
1) Rebate..............................( a ) Only one aspect of transaction
2) Bill of exchange....................( b ) Financial Position
3) Single Entry Book-keeping system....( c ) 1932
4) Balance Sheet.......................( d ) 1945
5) Partnership Act.....................( e ) Negotiable Instrument
....................................( f ) Profit Sharing Ratio
....................................( g ) Retirement of Bill
....................................( h ) Endorsement of Bill

D) Select the most appropriate alternative from shoes given below
1) Under single entry system, capital at the beginning of the year ascertained by preparing.
a) Cash Account, b) Statement of Affairs at the beginning of the year, c) Statement of Affairs, d) Profit & Loss A/c
2) In the absence of any provision in the partnership agreement, parties can charge –
a) interest @6%, b) interest @2%, c) no interest, d) interest at 12%.
3) Sale of old materials must be shown on credit side of
a) Cash Book, b) Income & Expenditure A/c, c) Balance Sheet, d) Bank A/c.
4) A Bill of Exchange is accepted by
a) Drawer, b) Drawee, c) Payee, e) Debtor
6) Depreciation should be calculated on
a) Fixed assets, b) Outward charges, c) Current asset, d) Intangible asset.

E) State whether True or False (with reasons):
1] A Not Profit Organisation never undertakes trading activities
2] Joint Venture comes to an end as soon as the particular venture is over.

F) Prepare a Bill of Exchange from the following details:
Drawer : Neraj Gupta, Neelam Bahwan, Kalyan
Drawee : Shobha Kale, Dastur Nagar, Amravati
Payee : Nitin Naringrekar, Deogad
Period : 90 Days. Amount : Rs. 7,555
Date of Bill : 15th March, 1995. Accepted on : 20th March,1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence:
i. What do you mean by Scrap-value of an asset?
ii. What is Noting-charges?
iii. Why Joint Venture Account is opened?
iv. What is Balance Sheet?
v. When the bill is said to be honoured?

B) Write the word/term/phrase, which can substitute each of the following statement:
i) A bill drawn in India and made payable in Japan.
ii) Such capital method in which Capital Account and Current Account maintained for each partner.
iii) The system of accounting, which records both the aspects of a transaction.
iv) Written agreement among the partners.
v) List of Debit and credit balances of the ledger accounts.

C) Match the following pairs:
Group A Group B
1. Interest on Partner’s Loan a) Balance Sheet
2. Opening Stock b) Death of Partner
3. Partnership c) Unlimited liability
4. Output Device d) Trading Account
5. Trade Bill e) Not exceeding 6%.
f) With consideration
g) Without consideration
h) Printer

D) Select the most appropriate alternative from shoes given below
1) Goodwill is
a) an intangible asset, b) tangible asset, c) bad debts, d) Profit.
2) A movable mark on a display screen is
a) Driver, b) Cursor, c) DOS, d) monitor
3) Joint Venture Account is
a) a Nominal A/c, b) a Personal A/c, c) Real A/c, d) Impersonal A/c.
4) Discounting of a bill refers to
a) encashment of the bill on due date, b) encashment of the bill on due date c) payment of the bill before due date, d) dishonour of bill.
5) Depreciation is
a) Loss, b) a liability, c) an asset, d) unrecorded revenue.

E) State whether True or False (with reasons):
i. Joint Venture is a non-trading concern.
ii. Drawings are added to capital.

F) Prepare a Bill of Exchange from the following:
On 10th March 1995, Rajesh Bhoyar, Gandhinagar, Nagpur draws a 2 months bill for Rs. 3,000 on Samir Choudhary, Main Road, Bela. Samir Choudhary acvepted the bill on 15th March 1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence
i. Who is called working partner?
ii. What is not for profit concern?
iii. What is statement of affairs?
iv. What is depreciation?
v. What is rebate?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) A person contributes the capital but does not take active part in the conduct of the business.
2) The balance, which cannot be receivable from the debtors.
3) A person who draws the bill.
4) Making the payment of bill before its due date.
5) A person who takes active part in the business of firm.

C) Match the following pairs:
Group A Group B
1. Bill of Exchange a) Asset side
2. Co-venturers b) Drawings A/c
3. Prepaid expenses c) Intangible Asset
4. Fixed Capital d) Negotiable Instrument
5. Goodwill e) Temporary Partners
f) Liability Side
g) Current Account

D) Select the most appropriate alternative from shoes given below
1) Balance Sheet shows
a) financial position on a certain date, b) debit & credit balances of all the accounts, c) receipts and payments of cash, d) Losses
2) Income and Expenditure Account is
a) a real A/c, b) a nominal A/c, c) a personal A/c, d) Impersonal A/c
3) Data relating various activities is called as
a) Tally, b) Disk, c) RAM, d) Monitor
4) Amounts contributed by Co-Venturers is debited to
a) Joint Venture A/c, b) Joint Bank A/c, c) Co-Venturers A/c, d) Agents A/c
5) Retirement of bill refers to
a) Payment of the bill on due date, b) payment of the bill before due date, c) payment of the bill after due date, d) Non payment of the bill.

E) State whether True or False (with reasons):
1) Joint-venture is not a permanent partnership.
2) Balance Sheet is a statement of business result.

F) Prepare a Bill of Exchange from the following details:
Drawer : Hira Sharma, 35, Lakhani Apartment, Ulhasnagar
Drawee : Neepu Shukla, 23, Prasad Bhawan, Thane(East)
Payee : Anita Ambarnath
Period : 90 Days
Amount : Rs. 9,755
Date of Bill : 15th March, 1995
Accepted on : 20th March,1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) What is a Drawer?
2) What is a Bad Debt?
3) What is a Computer?
4) What is a Reducing Balance Method?
5) What does a credit balance on the Joint Venture Account show?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) Payment before the due date of bill.
2) Officer appointed by the Government for noting of dishonoured bill.
3) Continuous, gradual and permanent reduction in the value of a fixed asset.
4) A statement showing the financial position of a business in the form of its assets and liabilities on a particular date.
5) A partnership for specific purpose and for temporary period.

C) Match the following pairs:
Group A Group B
1) Fluctuating Capital Method a) P & L A/c
2) Co-venturer b) Capital A/c
3) Single Entry c) Joint Venture
4) Noting Charges d) Current A/c
5) Special Fund e) Unscientific
f) Dishonour of bill
e) Partnership
f) Liability side

D) Select the most appropriate alternative from shoes given below
1) Salary to Partner should be debited to
a) Profit & Loss A/c, b) Partner’s Capital A/c, c) Trading A/c, d) Salary A/c.
2) Under Not Profit Concerns, Sale of old materials must be shown on credit side of
a) Cash Book, b) Income & Expenditure A/c, c) Balance Sheet, d) P & L A/c.
3) While preparing Statement of Profit & Loss, drawing made during the year is
a) added, b) deducted, c) either added or deducted, d) omitted.
4) Scrap value of asset is
a) Realisable value after the life of the asset, b) Cost at the time of purchase of the asset, c) Market value of the asset, d) Cost price of the asset.
5) Dishonour of a bill refers to
a) non payment of the bill, b) selling the bill to the bank, c) payment of the bill by the drawee on the due date. d) endorsement of the bill.

E) State whether True or False (with reasons):
1) The profit cannot be computed properly unless depreciation is provided.
2) Joint Venture is a non-trading concern.

F) Prepare a Bill of Exchange from the following details:
Drawer :Shri Narayandas Kela, Gandhi Chauk, Dhamangaon
Drawee :Shri Atul Khatke, Mandrup Road, Solapur
Payee :Shri Ranjeet Chavan, Ambajogai
Amount :Rs. 5,000
Period :90 Days
Date of Bill :1st March, 1995
Date of Acceptance : 5th March,1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.

1) Which Account is credited when depreciation is charged?
2) Who is Payee?
3) What is a Joint Venture?
4) What is Goodwill?
5) What are Noting Charges?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) A person on whom the bill is drawn.
2) A bill drawn in India and payable in Japan.
3) A statement showing financial position of business.
4) Credit balance of Income and Expenditure Account.
5) Balancing figure on Joint Venture A/c.

C) Match the following pairs:
Group A Group B
1) Retirement of Bill a) Temporary Partnership
2) Joint Venture b) P & L Account
3) Trading Account c) Profit on sale of asset
4) Depreciation d) Liability side
5) Reserve Fund e) Permanent Partnership
f) Rebate
g) Power and Fuel
h) Carriage Outward

D) Select the most appropriate alternative from those given below
1) An intangible asset, which has realizable value
a) Machinery, b) Computer, c) Land, d) Goodwill
2) Brain of the computer is
a) Microprocessor, b) RAM, c) Disk, d) Mouse
3) Joint Bank A/c is opened when
a) no separate set of books are maintained, b) separate set of book is maintained, c) under no circumstances, d) sale of goods through agent
4) Renewal of the bill implies
a) Cancellation of the old bill and acceptance of the new bill, b) cancellation of the old bill and its payment, c) writing the bill on new paper, d) only cancellation of the old bill.
5) Carriage on purchases should be
a) added to cost of machinery, b) deducted from the cost of machinery, c) transferred to P & L A/c, d) transferred to Capital A/c.

E) State whether True or False (with reasons):
1) Noting Charge should be borne by the drawee.
2) Single Entry is scientific.

F) Prepare a Bill of Exchange from the following details:
Drawee : K. Prabhakar, Nehru Road, Soalpur.
Drawer : M. Sudhakaran, Shivaji Nagar, Nanded.
Period : 3 months. Date of Bill : 5th February, 1996. Amount : Rs. 4,000. Accepted on : 9th February,1996.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) Who is an endorser?
2) In the absence of an agreement in which ratio profit on Joint Venture is shared?
3) What is Fixed Capital Method?
4) What is fixed installment method of depreciation?
5) What is Inland bill?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) The gradual and permanent decrease in the value of fixed asset due to any cause.
2) The request by the acceptor of the bill to drawer to extend the period of credit.
3) The account opened in the bank in joint name of the co-venturers.
4) The part of sundry debtors, which are definitely not recoverable.
5) The account, which records all the expenses and incomes of the firm.

C) Match the following pairs:
Group A Group B
1) Notary Public a) Gross Profit
2) Machinery b) Intangible Assets
3) Trading Account c) Pico Second
4) Goodwill d) Net Profit
5) Speed of Computer e) Noting Charges
f) Acceptance not required
g) Liability
h) Tangible Assets.

D) Select the most appropriate alternative from those given below
1) Unsold stock on joint ventue taken over by a co-venturer is credited to
a) Co-venturers A/c, b) Joint Venture A/c, c) Stock A/c, d) Joint Bank A/c.
2) Under Statement of Affairs Method, net profit/net loss is ascertained by
a) Statement of affairs, b) Statement of Profit, c) Profit & Loss A/c, d) Trading A/c.
3) Under Fixed Capital Method, Partner salary is credited to
a) Partner’s Capital A/c, b) Partner’s Current A/c, c) Partner’s Loan A/c, Profit & Loss A/c. d) Trading A/c
4) The inputs stored permanently in the computer
a) Software, b) Hardware, c) Humanware, d) Monitor
5) Single Entry System of accounting shows
a) only three types of accounts, b) one aspect of the transaction, c) financial position of the business, d) two aspects of the transaction.

E) State whether True or False (with reasons):
1) Interest on partner’s drawings is gain to the firm.
2) A Public Library is a Not for Profit Organisation.

F) Prepare a Bill of Exchange from the following details:
Drawer : Vilas Patil, 44, M.G. Road, Nanded.
Drawee : Pankaj Pawar, 70, Bahavani Gali, Solapur
Payee : Ramchandra Rampure, Rampur.
Period : 60 Days. Date of Bill : 28th January, 1995
Date of Acceptance : 29th January,1995. Amount of the Bill : Rs. 2,800.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) What is Depreciation?
2) What do you mean by Qualified Acceptance?
3) What are the Noting Charges?
4) What is the purpose of opening a Joint Venture Account?
5) What is a Balance Sheet?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) The person who endorses the bill.
2) The method of depreciation under which depreciation is calculated on balance amount.
3) A firm which is formed for temporary.
4) The partner who contributes the capital only.
5) A place where computer programme and data are stored during processing.

C) Match the following pairs:
Group A Group B
1) Valuation of Goodwill a) Blaise Pascal
2) Profit of Partnership b) Gross Profit
3) Joint Venture c) Cash Positon
4) Calculator d) Permanent Partnership
5) Receipt & Payment A/c e) Divided among partners
f) Temporary partnership
g) Capital Fund
h) Average Profit.

D) Select the most appropriate alternative from those given below
1) Members who form and manage the partnership are individually called
a) Partners, b) Firm, c) co-venturers, d) Shareholders
2) Services that renders by not for profit organization...
a) commercial, b) social, c) individual, d) group
3) The difference between the capital at the end of the year and the capital at the beginning of the year called
a) Profit, b) income, c) drawings, d) expenses
4) Under this system the amount of depreciation remains constant every full year.
a) Fixed instalment, b) Reducing Balance, c) Change of Depreciation, d) Diminishing Balance.
5) Parties to a bill of exchange are
a) Four, b) Two, c) Three, d) One

E) State whether True or False ( with reasons ):
1) Days of grace are not allowed in case of Trade bill.
2) Liability of co-venturer is unlimited.

F) Prepare a Bill of Exchange from the following details:
Drawer : Rekha, Main Road, Jalgaon.
Drawee : Basanti, Sandesh, Nandura.
Payee : Uma chandak, Khamgaon.
Amount : Rs. 2,500. Period : 2 months
Date of Bill : 21st January, 1995 Date of Acceptance : 25th January,1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) Which account is to be debited if wages paid for installation of new machinery?
2) What is Goodwill?
3) To which account discount of discounted bill is transferred in Joint Venture Business?
4) Under which capital method partner’s Current Accounts are maintained?
5) What are Noting Charges?

B) Write the word/term/phrase which can substitute each of the following statement:
1) Realisable amount of the fixed asset at the end of its estimated life.
2) The person in whose favor the bill is endorsed.
3) Irrecoverable amount from the debtors.
4) Written agreement among the partners.
5) A partner who takes active part in Partnership firm.

C) Match the following pairs:
Group A Group B
1) Rebate a) Trading Account
2) Bill of Exchange b) Partners in Joint Venture
3) Carriage c) Profit Sharing Ratio
4) Co-venturers d) Profit and Loss Account
5) Admission e) Negotiable Instrument
f) Net Profit
g) Retirement of Bill
h) Reasonable profit of the business

D) Select the most appropriate alternative from those given below
1) CPU is the abbreviation of
a) Central Processing Unit, b) Input Device, c) Output Device, d) Peripheral device.
2) Partners in Joint Venture are called
a) Owners, b) Members, c) Partners, d) Co-venturers.
3) The partner who contributes and takes active part in the business management is called
a) Minor partner, b) Working Partner, c) Financial Partner, d) Sleeping Partner.
4) Wages paid for installation of machinery should be to
a) Wages A/c, b) Machinery A/c, c) Profit & Loss A/c, d) Trading A/c.
5) The difference between assets and liabilities is called
a) Capital, b) Drawings, c) Incomes, d) Expenses.

E) State whether True or False (with reasons):
1) Joint Venture is a Permanent Partnership.
2) Each partner has a right to take part in the business.

F) Prepare a Bill of Exchange from the following details:
Drawer : Shekhar Desai, Shastri Road, Mahad.
Drawee : Sharad Verma, Narayan Peth, Pune.
Payee : Mukund Pande, Panvel.
Amount : Rs. 3,500. Period : 3 months
Date of Bill : 21st June, 1995 Bill accepted for Rs.3,000 on 25th June,1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) What is Depreciation?
2) Who is Drawee of a Bill?
3) What is a Partnership Deed?
4) What is relationship between Drawer and Drawee?
5) What is Balance Sheet?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) A person who draws a bill.
2) Debit balance of Profit and Loss Account.
3) A partner who only lends his name to the firm.
4) Partners of Joint Venture business.
5) Expenses due but not paid.

C) Match the following pairs:
Group A Group B
1) Depreciation a) Minimum Two persons
2) Dishonour of Bill b) Intangible Asset
3) Partnership Firm c) Liability side
4) Goodwill d) Noting Charges
5) Fluctuating Capital Method f) Bad Debts
e) Fixed Asset
f) Capital Balance remain constant
h) Capital balance changes every year.

D) Select the most appropriate alternative from those given below
1) Under Single Entry System, introduced capital during the years should be
a) added in the ending capital, b) deducted from the ending capital, c) deducted from the Profit,
d) added to creditors.
2) Not for profit organization is called
a) commercial, b) profit making, c) trading d) service
3) Under Fixed Capital Method the balance of the drawings A/c of a partner is transferred to
a) Capital A/c, b) Current A/c, c) Personal A/c, d) Firm’s A/c
4) A debit balance of Joint Venture A/c indicates
a) No profit no loss, b) Profit, c) Loss, d) Incomes
5) There are three parts of computer
a) Key Board, CPU, Screen, b) CPU, Mouse, RAM, c) Key board, Mouse, Hard Disk, d) Hard Disk, Mouse, CPU.

E) State whether True or False (with reasons):
1) Joint Venture is a temporary Partnership.
2) There is no maximum limits to the number of partners in a firm.

F) Prepare a Bill of Exchange from the following details:
Drawer : Vijay Bhat, Main Road, Nagpur.
Drawee : Ashok Kulkarni, M. G. Road, Nagpur.
Payee : Anil Jadhav, Pune.
Amount : Rs. 6,950. Period : 80 days
Date of Bill : 7th March, 1996 Accepted on : 10th March,1996.

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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) What is dishonour of the bill?
2) What is interest on drawings?
3) What do you mean by credit balance of Trading Account?
4) What is the relation between the co-venturers?
5) What is Fixed Installment Method?

B) Write the word/term/phrase which can substitute each of the following statement:
1) A bill before acceptance.
2) Partners in Joint Venture.
3) Expenses paid in advance.
4) The written agreement between the partners.
5) It is an output device on which, we can see result given by the computer.

C) Match the following pairs:
Group A Group B
1) Make of a bill a) Income
2) Joint Venture b) Closing Balance of Stock
3) Partnership c) Opening Balance of Stock
4) Entrance Fees d) Partner
5) Closing Stock e) Partner’s Loan Account
f) Co-venturer
g) Drawer
h) Drawee

D) Select the most appropriate alternative from those given below
1) Debit side of Receipt & Payment A/c shows cash
a) Payments, b) Receipts, c) Expenses, d) Transactions
2) I this book-keeping system, every business transactions find two accounts.
a) Single entry, b) Double Entry, c) Triple Entry, d) Fixed Instalment
3) Under this system, the amount of depreciation remains constant every full year.
a) Fixed Instalment, b)Reducing Balance, c) Change of depreciation, d) Diminishing Balance.
4) When drawee makes payment of the bill before its due date, the bill is said to be. . .
a) retired, b) honoured, c) dishonoured, d) endorsed.
5) Expenses incurred by co-venturers are to debited to. .
a) Joint Bank A/c, b) Cash A/c, c) Joint Venture A/c, d) Bank A/c.

E) State whether True or False (with reasons):
1) Under fixed capital method current account of partners must be opened.
2) Joint Venture is a non-trading concern.

F) Prepare a Bill of Exchange from the following details:
Drawer : Namdev Tukaram, Palthan.
Drawee : Nivruti Sopan, Dehu.
Payee : Vitthal Pandurang, Pandharpur.
Amount : Rs. 5,111. Period : 3 months.
Date of Bill : 17th August, 1995 Date of Acceptance : 20th August,1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) What are Days of Grace?
2) What is Fixed Installment Method?
3) Who is a Payee?
4) What is the relationship between the Co-venturers?
5) When is a current Account opened?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) A person who accepts the bill.
2) A partner who takes active part in business.
3) Intangible asset measurable in terms of money.
4) A partnership firm for specific purpose and for temporary period.
5) Expenses paid in advance for the period of which has not expired.

C) Match the following pairs:
Group A Group B
1) Date of Maturity a) Creditors
2) Intangible Asset b) Joint Venture
3) Co-venturer c) Bill of Exchange
4) Outstanding Expenses d) Assets
5) Bad Debts e) Permanent Partnership
f) Sundry Debtors
g) Liability
h) Goodwill

D) Select the most appropriate alternative from those given below
1) It is the most useful accounting software.
a) Tally, b) Calculator, c)MS Word, d) spy ware
2) When drawee accepts the bill, he becomes. . .
a) Payee, b) Acceptor, c) Drawer, d) Drawee
3) Joint Venture is partnership of. . .
a) Real, b) Medium Term, c) Permanent , d) Temporary
4) Under this system amount of depreciation charges every year.
a) Fixed Instalment, b) Original Cost, c) Reducing Balance, d) Change of depreciation
5) To find out excess of income over expenditure service organization prepares. . .
a) Profit & Loss A/c, b) Income & Expenditure A/c, c) Trading A/c, d) Receipts & Payment A/c.

E) State whether True or False (with reasons):
1) Partners are entitled to salary.
2) Receipt and Payment A/c is a Nominal A/c

F) Prepare a Bill of Exchange from the following details:
Drawer : Priti Chavan, Chandrika Road, Malvan.
Drawee : Snehlata Patil, Prashant Nagar, Ambajogai.
Payee : Archana Ghime, Amaravati.
Amount of Bill : Rs. 10,000. Period : 2 months
Date of Bill : 1st January, 1996 Date of Acceptance : 5th January,1996.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.

1) What is an Depreciation?
2) What is a Joint Venture?
3) What is Retirement of Bill?
4) To which account is the amount of depreciation transferred?
5) What is a Balance Sheet?

B) Write the word/term/phrase, which can substitute each of the following statement:
1) The person who endorses the bill.
2) An account to which depreciation is transferred at the end of the every year.
3) The partner who not take active part in business activities.
4) An agreement between the partners that determines the relations among the partners.
5) The persons entered into Joint Venture.

C) Match the following pairs:
Group A Group B
1) Bill of Exchange a) Intangible Asset
2) Goodwill b) Temporary Partnership
3) Joint Venture c) Depreciation
4) P & L A/c d) Trading Account
5) Partnership Firm e) Negotiable Instrument
f) Permanent Partnership
g) Statement of affairs
h) Current Asset.

D) Select the most appropriate alternative from those given below
1) The Indian Partnership Act is in force since
a) 1942, b) 1947, c) 1935, d) 1932
2) ‘Not for Profit Organisation’ prepares this statement at the end of the year to find out financial position
a) Balance Sheet, b) Income Statement, c) Trading A/c, d) Profit & Loss A/c
3) Depreciation p.a. = Cost of Asset - __________
Estimated life of an asset

a) Residual Value, b) Purchase Price, c) Sales Proceeds, d) Installation charges
4) A bill is required to be. . . .by the drawee.
a) drawn, b) discounted, c) accepted, d) honoured
5) Partners in Joint Venture are called. . .
a) Partners, b) Shareholders, c) Members, d) Co-Venturers

E) State whether True or False (with reasons):
1) Depreciation increases the value of asset.
2) The drawer and the payee of a bill of exchange may be one and the same person.

F) Prepare a Bill of Exchange from the following details:
Drawer : Shri Ravindra Patil, Housing Society, Ambajogai.
Drawee : Shri Baburao Deshmukh, Bazar Chawk, Dhamangaon.
Payee : Shri Prasad Shendage, Malvan.
Amount : Rs. 7,500. Period : 3 months
Date of Bill : 1st January, 1995 Date of Acceptance : 5th January,1995.
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Q.1 Attempt any FOUR of the following:
A) Answer in one sentence.
1) What is ‘Fixed Installment Method’ of Depreciation?
2) Who is drawee?
3) What is the relationship between the co-venturers?
4) Who bears the Noting Charges?
5) What is Goodwill?

B) Write the word/term/phrase which can substitute each of the following statement:
1) The gradual and permanent decrease in the book value of fixed asset due to any cause.
2) A person entitled to receive the amount of a Bill of Exchange.
3) A statement showing the financial position of business on a particular date.
4) The reputation of the business of the partnership firm.
5) Debit balance of Profit and Loss Adjustment Account.

C) Match the following pairs:
Group A Group B
1) Notary Public a) Rebate
2) Prepaid expenses b) Discounting bill
3) Retirement of Bill c) Normal Profit – Average Profit
4) Super Profit d) Working Partner
5) RAM. e) Assets side
f) Noting Charges
g) Average Profit – Normal Profit
h) Speed of Computer

D) Select the most appropriate alternative from those given below
1) A person who is responsible when a bill is dishonoured.
a) Drawer, b) Drawee, c) Payee, d) Bank
2) Joint Venture is not. . ………..
a) Real Partnership, b) Medium Term Partnership, c) Permanent Partnership, d) Temporary Partnership
3) Worlds’ fastest computer can do ………...multiplications in just one second.
a) 12 crores, b)10 crores, c) 5 crores, d) two thousand
4) Income received in advance is shown on this side of Balance Sheet.
a) Liabilities, b) Asset, c) Debit d) Credit
5) Not for profit oraganisation never engages in this activities.
a) Charitable, b) non-trading, c) Profit Making, d) commercial.

E) State whether True or False (with reasons):
1) Joint Venture is a trading concern.
2) There is no maximum limit to the number of partners in a firm.

F) Prepare a Bill of Exchange from the following details:
Drawer : Jaydeep Patil, 104, Mondha Road, Parati Vaijanath.
Drawee : Rahul Shinde, M. G. Road, Pune-14.
Date of Bill : 4th October, 2001. Period : 3 months
Amount : Rs. 4,500. Date of Acceptance : 7th October,2001.
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· Definition & Characteristic of Company
· Lifting of corporate veil
· Company & Partnership firm
· Classes of Companies

2. Formation of Company
· Registration
· Document to be filed with the registration
· Promoter
· Pre incorporation Contracts

3. Memorandum of Association
· Meaning
· Purpose
· Form
· Contents
· Alterations
· Doctrine of ultra-virus

4. Articles of Association
· Meaning
· Purpose
· Form
· Contents
· Alterations
· Doctrine of Indoor Management,
Relation Between Memorandum & Articles

5 Prospectus
· Definition
· Contents
· Registration
· Effects of Mis-statement
· Penalty
· Statement in lieu of Prospectus

6. Membership in a Company
· Members & Shareholders
· Qualifications
· Modes of becoming members
· Cessation of membership rights & Liabilities
· Register of members & index of members

7. Share Capital
· Meaning
· Kinds
· Alterations
· Reductions
· Voting right
· Buy back of shares

· Definition
· Nature
· Types
· Issues of share
· Transfer of shares
· Surrenders
· Forfeiture
· Transmission of shares
· Share Certificate
· Share Warrant
· Dividends

9. Borrowing Powers
· Debentures
· Kinds of debentures
· Charges
· Creation of charges
· Fixed & floating charges
· Effects of winding up on floating charges

10. Managements & Administration
· Directors
· Number of Directors
· Appointments of directors
· Restriction on appointments
· Position of directors
· Disqualifications
· Duties & Liabilities of directors
· Board of Directors: Meaning & Powers

11. Meetings
· Meaning
· Kinds of Meetings
· Notice of Meetings
· Contents of Notice
· Conduct of Meetings
· Quorum
· Minutes
· Proxies
· Voting & polls
· Resolution: Kind of Resolution
· Appointment of Auditors
· Power, Right, & Liabilities of Auditors

12. Majority Rule & Minority of Rights
· Foss V/s Harbottle Case

13. Prevention of Oppression & Mismanagement
· Meaning
· Who can apply to Company Law Board
· Power of Company Law Board & Central Govt.

14. Compromise, Arrangement, Reconstruction, & Amalgamation

15. Winding-up
· Meaning
· Type of winding up
· Petition for winding up commencement of winding up
· Liquidator: his right & liabilities
· Consequences of winding up
· Dissolution of Company

16. The Companies Amendment Acts of 2000 & 2002.





IN the terms of the Indian Companies Act, 1956 a Company means a Company registered under the present Act or any of the preceding Acts. Thus, a Company comes into existence only by registration under the Act.

Characteristics / Advantages of Company:

The corporate personality & the nature & advantage of a Company can be best understood by looking at its following characteristic features:-

1.Independent corporate existence:

By registration under the Companies ct, a Company becomes vested with corporate personality, which is independent of & distinct from its members. A Company is a legal person. The decision of House of Lord in Saloman v/s Solaman & Co. ltd 1897, is a well known authority of this principle. One S incorporated a Company to take over his personal business of manufacturing boots & shoes. The seven subscribers to the memorandum were all the member of his own family, each taking only one shares. The Company board of director & his four sons. Through this board, S`s busting was transfer to the Company at or agreed price in payment of which S was allotted 20,000 shares of £1 each & Debenture worth £10,000 creating a charge on the Company’s assets. Within a year the Company came to be wound-up & the State of affair was like this. Assets: £ 6,000 liabilities: Debentures Credits £10,000, Ordinary Creditors £7,000.
It was argued on behalf of unsecured creditors that, though incorporated under the Act, the Company never had an independent existence. It was S himself trading under another name. But the House of Lord held that Saloman & Co. must be regarded as a separate person from S.
Within the memorandum is duly signed & registered the subscribers are a body corporate capable forthwith of exercising all the function of an incorporated individual. It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing the bulks of its capital to one person. The Company is at law a different person altogether from the subscribers of the memorandum.

2.Limited Liability:

Limitation of liability is another major advantage of incorporation. The Company being a separate entity leading its own business life the members are not liable for its debts. If the liabilities of members as are usual is ltd by shares each member is bound to pay the nominal value of the shares held by him & his liability end there. One of the primary & accepted motivations behind incorporating a Company is to limit personal risks by obtaining the benefit of ltd Liability.

3.Perpectual Succession:

“An incorporated Company never dies”. In the words of Prof. Gower: “Members may come & go, but the Company can go for ever. During the war all the members of one Pvt. Company, while in General Meeting, all were killed by a bomb. But the Company survived, not even a hydrogen bomb could have destroyed it. (LCB Gower, Modern Company Law (2nd edition 1957) 71). Thus the death or the insolvency of members does not affect the continued essences of the Company. The Company remains the same entity. In the manner as the river Thames is still the same river though the parts, which compose it, are changing every instance.

4.Transferable Shares:

When joint stock companies were established the great object was that the shares should be capable of being easily transferred. (Lord Blackburn, In re Bahia & Sab Franciso Rly,1868). Sec 82 gives expression to this principle that the share or other interest of any members shall be ownership of any item of the Company’s assets. Thus where a substantial shareholder insured the Company timber in his own name, he could not recover in demy when the timer was burnt by fire as he had no insurable interest in the Company’s property. (Macaura v/s Northern Insurance Co.,1925)

5.Capacity for suits:

A Company can sue & be sued in its corporate name. The names of its managerial personnel or members need not be impleaded. The action of or against a group of person is thus reduced to a unitary action.

6. Professional management:

A Company is capable of attracting professional managers. It is due to the fact, that being attached to the management of a Company. It gives to the person so attached the status of an executive or business class. Similarly the ownership of Company & management of Company are distinct as compared to partnership where both ownership & management of business lives with partners.

7.Acess to money market:

Companies are one of the few legal institutions, which are allowed to the money market for formation of its shares & loan capital. A Company can collect interest free equity & preference Shares capital on which dividend has to be paid only as & when there are profits. This can be done with the help of as prospectus through public issues or Pvt placement. The liquidity of shares is very high whereby one can easily & quickly convert the shares or stock into currency.

Disadvantage of Company:

1.Lifting of corporate veil:

All the above noted advantage of incorporated follow from the principle that for all purposes of law a Company should regarded as a separate entity from its shareholders it may become necessary to look at the persons behind the corporate veil & then some of these advantage disappear. The separate entity of the Company is disregarded & the scheme & intentions of the person behind are exposed to full view. They are made personally liable for using the Company as a vehicle for undesirable purpose. This is usually done in the following cases:

a) When it becomes necessary to determine the legal character of a corporation:
Thus it has been held by the House of Lords in Daimler Co. ltd v/s Continental Tyre & Rubber n1916, that a Company though registered in England would assume an enemy character when persons in de facto control of its affairs are residents in an enemy country or wherever resident are acting under the control of enemies. On the other hand an American Court refused to hold that a Company consistent of Negroes would become a black Company. (People Pleasure Park v/s Rohleder 1908.)

b) For the benefit of revenue:
The separate existence of a Company may be only purpose for which it appears to have been formed id the evasion of taxes.

c) When Company conceived & brought forth for fraudulent purposes:
Thus a Company was restrained from acting when its principal shareholder easy bound by a restraint covenant & had incorporated the Company only to escape the covenant. (Gilford Motors Co. v/s Horne, 1933.)

d) Agency or trust & Govt. Company:
The separate existence of a Company may be ignored where it is being used as an agent or trustee. The court insists upon very strong evidence for this purpose. For e.g., a Govt Company is not regarded as an agent or trustee of the state unless it is performing sovereign as opposed to commercial function. Praga Tools Corp. v/s Imanual,1969. The property of a Govt Company has been held to be not that of the state. Bharat Aluminium Co. ltd v/s Special Area Dev. Authority,1981. a transport Company in which all the shares were held to be not acting as an agent for the Commission. Ebbow Wale ODCv/s South Wales Traffic Area Licening Authority 1951. a wholly owned subsidiary Company is viewed to be as distinct from its parent as any other Company. Freewheels India ltd v/s Veda Mitra Dr.1969,except when the parent control its activities in all respects. F.G. Films Re,1953. Thus the power generating unit created by the Company for its own exclusive supply was not regarded as a separate.
Lifting the veil is not always to the disadv of the Company Promoters. The S.C looked through the veil & finding that the joint0venture sponsors of the Company were qualified for the participating in a Govt. tender held that their Company should also be treated as a qualified tendered. New horizon Ltd v/s Union India ,1995. The Appeal R v/s Broadcastings Standard Commission 1999, held that a Company complain under the Broad Casting Act,1996(English)about unwarranted infringement of its privacy. The court said that the Company may have activities of Pvt nature which need protection from unwarranted intrusion. Without such right the Company wou8ld be disadvantage as against individual under a legislation which is design to encourage & achieve proper standard of conduct in public life. The complaint was about the secret filming of transaction in the Company’s shop by BBC & the allegation was that this constituted an infringement of the Company’s privacy.

e) Under Statutory Provisions:
Besides this the Act itself improper personal liability in certain cases upon persons clothed behind the Company. For e.g. Where business is carried on beyond 6 month after knowledge that the membership of the Company has gone below statutory minimum,s.45, Madanlal v/s Himatlal,1997 or the business is carried on only to default creditors,s.542, member or official who are partners to such transaction are personally liable.
A holding Company means a Company which has power to control the composition of another Company Board of Directors or hold a majority of its shares. Such a controlled Company is known as a subsidiary. Ordinarily even a 100% subsidiary & its holding Company are regarded as two separate legal entities. Freewheel India ltd v/s Veda Mitra Dr. 1969. But under the force of certain statuary provision such companies have to present a joint picture of their account & financial position. S.212-214. where the holding Company control the whole conduct of its subsidiary, it may incur liability for such conduct. Smith Stone & Knight ltd v/s Birmingham, 1939.

2. Formality & expenses:

Incorporation is a very expensive affair. It requires a number of formalities to be complied with both as to the formation of the Company & administration of its affairs.

3. Company is not citizen:

Lastly, a Company, though a legal person, is not a citizen(StateTrading
Corporation Of India v CTO,1963). It can have the benefit of only such fundamental rights as are guaranteed to every “person” whether a citizen or not. A Company does, however, have a nationality domicile & residence. A Company incorporated in a particular country has the nationality of that country, though, unlike a natural person, it cannot change its nationality. (Gasque v Commrs of Inland Revenue, 1990).


Points of Comparison: -
1} Independent corporate existence.
2} Limited liability.
3} Perpetual succession.
4} Transferable shares.
5} Separate property.
6} Capacity for suits.
7} Professional management.
8} Access to money market.
9} Registration, formalities & expenses.
10} Citizenship.


1. Unlimited Companies [S.12]

A Company may be incorporated with unlimited liability. The right of limited liability is desirable, but not a necessary adjunct to incorporation. A Company having no limit on the liability of its members is termed an unlimited Company.
An unlimited Company must have articles of association stating the number of members & the share capital if any, with which it is proposed to be, registered (Sec 27CD). The obvious disadvantage of an unlimited Company is that its members are liable, like the partners of the firm, for all its trade debts without any limit. But the creditors cannot sue the members directly. They have to sue the Company or resort to winding up & the liquidator may call upon the members to contribute to the assets of the Company. The advantages are that such a Company need not have any share capital. Even if it has, it may reduce its capital without any restriction. It may pay back the members & buy their shares. (Sec 77 does not apply) (So the unlimited companies can pay back or buy the capital)

2. Guarantee Companies

The liability of the members of a Company may be limited either by shares or by guarantee. The Memorandum of a Guarantee Company gives a guarantee that the members shall contribute a fixed sum of money towards the assets of in the event of its winding up. (Sec. 3(3)). A Guarantee Company must have articles, but share capital is not necessary. But if it has share capital, it is subject to the same restrictions as to reduction etc… as the capital of a Company limited by shares. It does not have the liberty to purchase its own shares, for Sec 77 applies to such companies.

3. Private Companies

A Private Company is defined in Sec 3(l)(iii). It means a Company whose articles of association contain the following restrictions:
i) The Company has a minimum paid up capital of one lakh rupees or its articles may prescribe such higher amount as. (New requirement introduced by the Companies Amendment Act, 2000).
ii) There must be some restriction upon the right of its members to transfer their shares in the Company. Any restriction, which will enable the directors to maintain the maximum of 50 members, will serve the purpose of the act. The restriction is not necessary in the case of Private Company not being limited by shares Sec 27 (3).
iii) The numbers of its members must be ltd to 50, which shall exclusive of members who are or where in the employment of Company. Joint holder of share is treated as single member.
iv) The Company must prohibit any invitation to the public to subscribe for it shares of debenture.
A Pvt Company is compulsorily required to have articles of asso. Sec 27.
The amendment of 2000 requires that the Company should prohibit any invitation on acceptance of any deposit from persons other than its member, director or their relatives.
Existing Pvt Companies have to increase the capital to one lakh rupees within two year. Amendment Act 2000, w.e.f. January 14,2000. the amendment further provides that if a Company fails to do so it would be liable to be struck off the register of the Company in a manner of a defects Company.

Ø Advantages of Private Company:

Private Co enjoys a number of exceptions from the operation of act. This exemption is commonly known as privileges or advantages of a Private Company. It is by virtue of this exemption that a Private Company has been described as an incorporated partnership, combining the advantages of both elements, the privacy of partnership & performance of the corporate constitution. Ordinary companies are like bees working in grass hives. Private Company can keep their affair to themselves. Private Company exists with the sanction an encouragement of the legislature & enjoy their benediction. Some of the advantages are
i) Its formation requires only 2 person.(Sec 12). This facilitates its harmonious functioning & make the choice of Pvt Company most suitable for friendly & family concern.
ii) Public participation by issuing a prospectus is prohibited & there fore it has to file a statement in lieu of prospectus & can commence business immediately after incorporation without having to obtain a certificate for the commencement of business Sec 73 (3), 149(7)
iii) A Private Company is required to have only 2 directors. All the director can be given permanent appointment & be appointed by a single resolution Sec 252 (2).
iv) A Private Company has not to hold a statutory meeting or file a statutory report Sec165
v) It can issue a new share to outsider. Sec 81 does not apply.

Ø When Private Company became Public Company?

1) Conversion by default-(Sec 43)
When a default is made in complying with the requirement of definition the Company ceases to be entitled to the privileges & exemption conferred by the Act. However the court may grant relief where the default was accidental or due to inadvertence or to some other sufficient cause or that on another ground it is just an equitable to grant relief Sec 43-A.

2) Conversion by operation of law, Deemed Sec 43-A
Sec 43-A has been omitted by the companies’ amendment Act 2000. it was brought into being for compulsorily converting Pvt Company into the Deemed Public Company in circumstances like the amt of turnover an& holding of its capital to certain percentage by the other Public Company or by Private Company in Public Company or issue of advertisement for deposit. This provision has been scraped; the concept of deemed Public Company u/s 43-Ahas disappeared.
The only provision that survives in Sec 43-A is sub Sec2A inserted by amendment of 2000. It became necessary to take care of the fact that a good lot of companies that had become Deemed Public Company would lapse back into Pvt Company & a provision had to be given for the same. The provision says that when a Deemed Public Company becomes a Pvt Company after amendment of 2000 Jan 13,2001, the Company has to inform the Registrar & the latter would make necessary change the record such as the companies memorandum of asso. & Certificate of incorporation. He has to carry out this process within 4 weeks from the date of Company application.

3) Conversion by Choice (Sec 44)
A Pvt Company may also become a Public Company by its own choice it may act any time passé a special resolution deleting from its article. The requirement of definition & then from date of alteration, it become a Public Company. Hindustan Lever v/s Bombay Soda Factory, 1964. Within 30 days a prospectus or a statement in live of prospectus should be filed with Registrar Sec 44(1)(b).

Conversion of public into Private Company (Sec 30(1)):
A Public Company may be converted into Pvt Company by changing its article so as to embody the requirement of definition & with the approved of Central Govt. Radiant Coal Co., re, 1943. Conversion does not affect the identity of the Company. All India Reporter v/s Ram Chandra, 1961.

4. Foreign Companies (Sec 591):

Foreign Company means a Company incorporated outside India but which has a place of business in India. Within 30 days the establishment of business in India, the Company should submit the following documents with the Registrar.
1) A certified copy of Memorandum or Article or any other instrument of its incorporation (in English).
2) The full address of the Registrar office abroad.
3) Names of its Director
4) Names of Secretary
5) Names of persons in India authorised to accept documents.
6) Full address of a principal place of business in India.
These documents should be filed with Registrar of place in which the principal place of business is situated Sec 597 & at New Delhi Sec 595.

5. Govt Companies Sec 617:

Govt Companies means any company in which not less than 51% of the paid up shares capital is held by Central Govt, or by any State Govt or Govt or partly by the Central & partly by one or more State Govt & includes Company which is a subsidiary of the Govt Companies. But takeover of a company by a Govt does not make it V. Kuber Singh v/s Union of India.
The Auditor of a Govt Companies is appointed by the controller & Auditor General of India, whose remuneration is fixed by the shareholders. The whole of the Act applies to Govt Companies. But the Central Govt has the power to declare by notification in the official Gazette that any of the provision of the Act shall not apply to the Govt Companies or what provision shall apply to any such company. The notification is effective to the extent to which it is approved by Parliament Sec 620, S.K. Dehnath v/s Mining & Allied Machinery,1981.

6. Holding Company & Subsidiary Sec.4:

Where one company has control over another, it is called the holding company & the controlled company is the subsidiary. One is said to have control over another within the meaning of Sec 4 in the following cases,

1.Where one company Control the composition of Board of Directors of the another. Central Industrial Investment Corp. v/s Union of India,1981. a is said to control the composition of another company’s boards if it has power of its own to appoint or to remove the majority of the directors & it is said to have this power when a person cannot be appointed to a directorship without its supports, or if a person’s appointment to directorship automatically follows upon his appointment as a director or a manager in the holding company, or if the directorship is held by an individual nominated by the holding company or any of its subsidiaries.
2.Where one company holds the majority of shares in another company which it is deemed to have when it control more than half the total voting power in the company Sec.4.
3.Where the holding company subsidiary has its own subsidiary, it become the subsidiary of the 1st mentioned company
Sec 212 to 214 contained special provision about account & audit of Holding & subsidiary company.



Registration & Documents to be filed with the Registrar:

Registration of a company is obtained by filling an application with the Registrar of Companies under Sec33. The application has to be accompanied by a numbers of document which the following document are the most important.
1. Memarandum of Asso.
2. Articles of Asso. if necessary.Gasque v/s Commr of Inland Revenue 1940.
3. A copy of the agreement, if any which the company proposes to enter into with any individual for his appointment as managing or whole time Director or Manager.
4. A Declaration that all the requirement of the Act have been complied with.
If the Registrar of companies finds document to be satisfactory, he register them & enter the name of the companies in the register of companies & issues a certificate called the Certificate of Incorporation.Sec.34.

Certificate of Incorporation Sec34& 35 :

The Certificate of incorporation brings the company into existence as a legal persons. It marks the birth of the company & the date mentioned on it is conclusive even if wrong. Further the certificate is conclusive evidence that all the requirement of this Act in respect of registration & matters precedent & incidental thereto have been complied with & that the Asso is a registered & duly registered under this Act. Where a Memorandum was materially altered without the subscriber authority before it was registered. Peel’s case LR2Ch674, Okesv/s Turquand,1867. & where a person signed a memorandum himself & made six other signatures on behalf of six minors, the company having been registered, it was held that it was not possible to question the validitely of the certificate of incorporation. Maoso Goolam Ariff v/s Ebraam Goolam Ariff ILR 40 Cal 1 PC. The certificate is however subject to judicial review where it happens to be issued to a company which e.g. on account of illegal objects should not have been registerd. Biwman v/s Secular society 1917.

Commencement of business Sec 149:

A pvt company can commence business straightway after incorporation. It has also to obtain from the Registrar a certificate for commencement of business which is granted subject to the following conditions:-
1. Shares payable in cash must have been allotted up to the amount of minimum subscription. A pvt company can commence business immediately on incorporation. Sec 149 is applicable only to public company.
2. Director must have paid in cash the application & allotment money on shares taken by them.
3. No money should have become refundable failure to obtain for shares or debentures to be dealt in any recognise Stock Exchange.
Any contract made or borrowing power exercised before the certificate is obtain shall be provisional only & shall not bind the company until the certificate is obtain.
A fresh certificate has to be obtain everytime a company incorporated after 1956 commences any business from the oher onject sub clause of the memorandum or existing company commences any business included in it object but which is not germane to the business it has been carrying on. Sec 149(2-A,2-B). in this case the condition is that the share holder have passed a special resolution or the Central Govt should have permitted it where only a ordinary resolution has been passed.

Promoters :

The term promoters is said to be a business, not a legal teem, usually summing up in a single word a number of business operation, familiar to the commercial to the world by which a company is generally bought into existence. Bowen LG in Whaley Bridge Calico Printing Co. v/s Green 1880. A promoter is a person who bring about the incorporation organisation of a corp. he bring together a person who become interested in the enterprise d in procuring subscription & said in the motion. The machinery which lead to the formation itself. Thus the term does have any definite meaning. Whether a person is promoter or not depend upon the role that he plays in the business in the promotion. There may be a professional promoter or the promoter of his own company like Saloman.
A person who acts in ministerial capacity is not a promoter a solicitor who prepare on behalf of promoter, the primary document of the proposed company, & accountant or valuer who helps the promotion in his profession capacity is not a promoter. Such person is excluded by Se 62(6) of the Companies Act. Promotional activities have become a pet topic for regulation by the SEBI. A set of guidelines for disclosure is applicable to the activities to the promoter.

Duties & Liabilities: Fiduciary Relation:

A promoter is not an agent or a trustee of a company, because a company before incorporation is non-entity. But he is in the situation a keen to that of agent or a trustee of a company & his dealing it must be open & fair. Their position was explained by Lord Cairns in the Erlanger v/s New Sombrero Phosphate Co,1878.
They stand in my opinion undoubtfully in a fiduciary position. They have in their hand the creation or moulding of the company. They have the power of defining how & when & in what shape & under what supervision & it shall stand into existence & began to act as a trading corp. the first & foremost duty of the promoter is that if he start a company for the purpose for buying his property & wants to dray his payment from m the money obtain from shareholder, he must faithfully disclose all fact relating to property. He should disclose to the company his position, his profit & his interest in the property, which is subject of purchase or sales. House of Lord held it in Erlanger v/s New Sombrero Phosphate Co.1878. That his disclosure should be made to a board of director who can exercise & intelligent & Independent judgment on the transaction. A disclosure to director who are under the promoters control is not sufficient.
But in certain cases like saloman’s company it is impossible to constitute an independent boards of directors. In such circumstances the real truth should be disclosed to those who are invited to become the shareholders, & not merely to the first few shareholders. Glukestein v/sBarnes 1900 AC240.
Details of property including the price paid for it purchased from promoters within the peceding two years has to be disclosed in the prospectus in accordance with the requirement of Schedules II.

Pre-incorporation Contracts:

Sometimes contracts are made on behalf of a company even before it is duly incorporated. Following are some of the effects of such contracts.

1. The company when it comes into existence is no bound by any contract made on it behalf before its incorporation. A Solicitor who on the request of promoters prepared a company document & spent time & money in getting it registered could not recover his charges from the company. English & Colonial Produce Co, Re,1906. Thus a company has no status prior to it incorporation. It can have no income before incorporation for tax purposes. IT v/s city Mills Distilleries P Ltd,1996.
2. The other party to the contract is also not bound. The Company cannot ratify a pre- incorporation contract & hold the other parties liable. So where the promoters of a company obtained an agreement from a landlord that he would grant lease of Coal mining rights to the company as & when a mine was struck, the company could not after incorporation enforce this contract. Natal Syndicate Ltd, Re, 1904.
Sec 15 of the Specific Relief Act 1963 provides that where the promoters of a public company have made a contract before it if it is within its objects. According to sec 19 of the same act the other party may also enforce it if it is adopted by the company after incorporation.
3. The agent who cannot for a proposed company may sometimes incur personal liabilities. In Kelner v/s Baxter, 1866.
The promoters of a projected hotel company purchased wine from the plaintiff on behalf of the company. The company came into being, but before paying the price went into liquidation. They were held personally liable to the plaintiff.
The agent of a proposed company who received money in advances for recording purposes was held to be personally liable when the company was never formed & no recording contract was ever entered into. Phonogramltd v/s Lane,1981.
But the agent himself may not be able to enforce the contract against the other party. A contract to sell shoes was made in the name of a projected company was not allowed to be enforced against the other party by the person signing. Newborne v/s Sensolid (GB)ltd,1953.




Palmer:- it’s a document of great importance in relation to the proposed company.
Sec2(28) defines memorandum as meaning the Memorandum of Asso. of a company as originally framed or as alter from time to time.
Memorandum of Asso. Is the first document for formation as well as conduct of a company. It provides the area of operation within which company has to carry its business. Transaction or act outside its clause creates & concluded as the utravirus for which concerned official will be held liable.


The purpose of the memorandum can be described by the provision of sec.13 which states requirement with respect to memorandum which every clause of it has to fulfil. In the memorandum there are 5 clauses prescribing boundaries of working scope of company affairs.

Form & Contents:

The first step in the formation of a company is to prepare a document called memorandum of Asso. This document contains the constitution of the company. It has to be divided into 5 clauses sec12 & 13.

1.Name Clause:

The first clause if the memorandum states that the name of the proposed company. The name should not be such as, in the opinion of the Central Govt, is undesirable.Sec.20. Approval of the Central Govt has to be taken in advance. Generally a name is undesirable when it is identical with or too nearly resembles the name of another company. The name should not mislead as to the nature of the company’s business or its scale. e.g. high sounding words like Hindustan, intimation, corporation etc, should not be used for naming small enterprises. An amendment brought in b the Trade Marks Act 1999 as & what it would be enforced provides that a name is not to be adopted where it is similar to an existing company’s or is similar or identical with or too nearly resembles the registered trade mark or a trade mark which is the subject of an application. The Central Govt may consult the registrar of trade mark for the purposes. If the company is with “limited liability” the last would of the nature should be “limited” & in the case of private company “private limited”. This informs personal contracting with the company that the liabilities of its members are limited. The central govt may however permits a company to drop the word “limited” from its name if,
1. the company is formed for the promotion of commerce ,art, religious, science, charity or any other useful object
2. the company is to apply its income in promoting its objects & prohibits the payment of dividends to its members. Such companies are known as sec 25 companies. They have been a minimum amount of such share capital as required by the amendment of sec 3by the Companies Amendment Act, 2000.
The name of the company must be painted on the outside of every place when the company carries on business & painted on every business document & official letter of the company. Misdescription of name entails personal liability.Sc.147.

2.Registerd Office Clause:

The second clause of the memorandum states the state in which the registerd office if the company shall be situate. After incorporation the exact addaress if the registerd office should be sent to the registrar. Sec.146. this has to be done when the company commences business o within the 30 days of incorporation, whichever is earlier.

3.Object Clause:

The IIIrd clause of the memorandum states the object of the proposed company. The company carries on business with other people money & therefore the investors must be informed if the object in which their money is going to be employed. People are more willing to invest in out of one kind of object than in others. Secondly, the creditors of the company are paid out of the company assets & they feel protected when they know that the assets can be used only for the authorised object. Financial institution also needs information as to objects.
The object clause has to be divide into 2 sub clause sec13 (a) Main object:- this sub clause state the main object to be pursued by the company on its incorporation & the object incidental or ancillary to the main object.
(b) Other object :- this sub-clause may state any other object which are not included in the first sub-clause.
In the case of a charitable company, the object clause has also to state whether the object would extend to more than one state.

4.Liability Clause:

The VIth clause has to state the nature of liability that the members incurs. The clause will state whether the liability of the members shall be limited & if so whether limited by shares or guarantee or unlimited.

5.Capital Clause:

The last clause states the amount of capital with which the company is proposed to be registered & the kinds number & value of shares into which the capital id to be divided.
The Companies Amendment Act 2000, has by a, ending sec 3, prescribed the requirement that a public company must have a minimum paid up capital of 5 lakh rupees or such higher amount as may be prescribed. The definition of public company now after amendment is that it is a company, which is not a private company, which is the subsidiary of a company which is not private company. A private company is required to have a minimum paid up capital of one lakh rupees or its articles may prescribe such higher amount as.


The memorandum concludes with the subscribers declaration that the desire to be formed into a company. Sec.12. The memorandum must be subscribed by at ease 7 persons in the case of a private company. Each subscribers must sign the memorandum sc15 & take atleast one shares & writes opposites his name the number of shares he takes, sec13(4)(b)&(c). After incorporation no subscriber can withdraw his name on any ground whatsoever.


Alteration of names sec.21:

A company may change its name at any time by passing a special resolution & with the prior approval of the Central Govt. in such a case the Govt can also direct the company within 12month of registration to alter its name & then it shall be the duty of the company to do so within 3months. Sec 22. the British diabetics Society was compelled to change its corporate name to something that would not impinge upon the goodwill of the British Diabetics Asso. there was a sufficient similarity between the 2 names to necessitate a change, even though there was no intention to mislead the pulic. British Diabetics Asso v/s The Diabetics Society 1995. An injuction was not allowed to prevent the use of an ancestral name Kiloskar. There is a right to use in a bonafide manner ones own name or the name of a place or ancestral name. Kiloskar Proprietary Ltd v/s Kiloskar Dimensions P ltd,1999.
Alteration of name does not affect the right & obligation of the company. Alteration become effective when it registered with the Registrar. Sec 23 & 24. therefore the company should use its new name. The use of the old name would be improper within the meaning of sec 147. Oshkash B Gosh Inc. v/s Dass Marbal Inc ltd,1939.

Alteration of registered office & object Clause sec. 17:
Shifting of registered office from one state to another & alteration of objects may affect not merely the company shareholders, but its creditors, dealers, & employees. Shifting of the registered office cannot oppose by the state on the ground of loss of revenue. Orisa Chemicals v/s Distillerles, Re,1961. That is why the resolution & the sanction of the company law board 7 purpose & by procedure laid down in Sec.17. Configuration of CLB is not necessary for change of objects.
An alteration is allowed only when it is necessary for any of the following purposes:- enables the company to carry on its business more economically or more efficiently.
2.To enable the company to attain its objects by new & improved means.
3.To enlarge the location of the company’s operation. An alteration of this kind was allowed to the Indian Mechanical Gold Extracting Co, Re,1891, by permitting it to drop the words from its object which confined its works to the empire of India & subject to the condition that it also dropped the words “Indian” from its name.
4. To enable the company to carry on some new business which under existing circumstances may conveniently or advantageously be combined with the business of the company. A tyre manufacturing company has been allowed to undertake take general business of bankers 7 financiers. Patent tyre Co, Re, 1923. a company carrying on business in jute has been allowed to include “business in rubber”. Juggilal Kamlapat Jute Mills v/s Reg. of Company.1960 & a “spinning & weaving company” to “manufacture industrial & Power Alcohaole”. Modi Spy & Wvg Mills, Re 1963. the new business should not however be inconsistent with or destructive of the company’s existing objects. Thus a club formed originally to protect cyclist on the road was not allowed to undertake protecting motorists as well. Cyclists Touring Club, Re, 1907.
a)to enable the company to restrict or abandon any of the objects specified in the memorandum.
b)to enable the company to sell or dispose of the whole or any part of it undertaking.
c)to amalgamate with any other company or body of persons.
The first step is to pass a special resolution of shareholder suthorised the alteration. In the cae of inter state dshifting of the registerd office, the second step is to apply to the CLB for its sanction. Pal-Peugeat ltd, Re, 1997- shifting to a place where a majority of the shareholder resides allowed. The CLB must be satisfied that notice has been given to the creditors, debenture holder, shareholders, the registrar & the state Govt to enable them to state their objection if any. If the creditors or shareholder has a genuine objection the CLB can order the company to satisfy the creditor & by the dissenting shareholder’s interest. Where the shifting of the registered office though within the same State is from the jurisdiction of one Registrar in that State. Director would be necessary. sec 17-A introduced by the Amendment of 2000.
In the case of alteration of objects, a copy of the special resolution should be filed with the Registrar, in the case of inter-State shifting of the registered office, if the alteration is confirm, a certified copy of the company law Boards order & a printed copy of the altered memorandum must be filed with the Registrar within 3months of the boards order, otherwise proceeding of the alteration will lapse. Shivalik Steels & Alloys P ltd v/s registrar of Companies,1992, Sec 18.

Doctrine of ultra vires:

The object clause has a two folded operation. It determines affirmatively the field of industry within which the corporation activities are to be confined & it determines negatively that nothing shall be done beyond that field. An act outside the object is ultra vires the company, that is beyond the power of the company. This was most emphatically laid down by the House of Lord in Ashbury Railway Carriage & Wagan Co, v/s Riche,1875.
A company was incorporated.
1. to manufacture & sell railway carriage etc
2. to act as mechnical engineers & general contractors. The company contracted with Riche to finance the construction of a railway line in Belgium. The company subsequently repudiated the contract as one beyond its powers. Riche brought an action for breach of contract.
The company was held not liable. Their Lordship were of the opinion that general terms like “general contract” must be taken reference to the main object of the company, because otherwise would authorise every kind of activity & would be meaning.
The decision thus became the genesis of what subsequently came to be known as the main object rule of construction, following this a company formed to manufacture coffee from dates under a German patent & to work other patent was ordered to be wound up when the German Govt refused its patent & the main objects had thereby failed. German Date Coffee Co, Re, 1882. in Cotman v/s Brougham,1918 the House of Lord had to consider a memorandum with a very long object clause & which concluded by saying that every clauses was independent & was not to be cut down by reference to other clause. Their Lordship felt that such an object clause was self-defeating but were constrained to hold that it excluded the main object rule of construction.
A company may pursue any object which is reasonably & fairky incidental to it stated objects. Thus a chemical manufacturing company was allowed to donate a huge sum of money to universities & scientific institution for research as this would be conductive to the continued progress of the company. Evan v/s Brunner,Mond & Co. ltd, 1921.
But a charity, which could not promote the object of the company, would be ultra-vires. The Supreme Court in a Lakshmanaswami Mudaliar v/s Life Insurance Corp. has pointed this out 1963.
The business of an insurance company was taken over by the LIC directors in accordance with a power in the object & shareholder resolution donated two lakh rupees to a charitable trust formed to promote education in commerce & insurance.
The Director was held personally liable to restore this money. At the time of the donation the company business was under acquisition & therefore it had no business left to promote. Aveling Barford Ltd v/s Perion, 1921.
The object clause should state only the object & not powers. Even where a power is stated it does not become an independent object. Thus where a company borrowed a sum of money from a banker for a purpose known to the banker to be not stated in the memorandum, the loan was held to be ultravires, although the company had an express borrowing power. Introductions ltd, Re, 1969.
An ultravires contract is contract is absolutely null & void. It is incapable of ratification. No amount of performance or acquiescence on either side can give it validity. Thus a contractor who built a workshop for company for an unauthorised purpose could not recover the price. Jon Beauforte,Re,1953. But can a company recover on a transaction which is ultravires ? this question arose in Bell House ltd v/s City wall Proprieties ltd,1966. the defendant refused to pay the plaintiff company for the services rendered by its managing directors on the ground that the services were ultravires the plaintiff company. The court of Appeal escaped the whole question by objects the transaction as within the a company’s objects. But Salomon LJ said “it seems strange third parties could take advantage of a doctrine manifestly for the protection of the shareholder in order to deprive the company of the money which in justice should be paid to it by the third party”.
Looking at the complications & injustices that ultravires is capable of causing the European.



Meaning & Purpose:

An article of association is the second important document, which in the case of same companies, has to be registered along with the memorandum. Companies, which must have articles, are unlimited companies, guarantee companies & private companies limited by shares. [Sec. 26]
Articles are internal regulations and by-laws.

Form & Contents:

Schedule 1 of the Act sets out tables of model forms of articles for different companies. Table A is applicable to companies Limited by shares. [Sec. 28(1)] Such a company may either frame its own articles or adopt Table A & the Table automatically applies to the extent to which it is not excluded. The chief advantage of adopting Table A is that its provisions are legal beyond all doubt. The document has to be divided in to paragraphs numbered consecutively & must be signed by every subscriber. [Sec. 30]


Section 31 empowers every company to alter its articles at any time with the authority of a special resolution of the company & filing of a copy with the Registrar. An alteration is not invalid simply because it change the company’s constitution. Thus In Andrews v. Gas Meter Co. (1897), a company was allowed by changing articles to issue preference shares when its memorandum was silent on the point.
Secondly, a company may change his articles even if the alteration could operate as breach of contract. If the contract is wholly dependent upon the company’s articles, the company could not be liable in damages if it commits breach of contract by changing its articles. (Chittabaram Chettair v. Krishna Ayyangar ILR 33 Mad 36) But if the contract is independent of the articles, the company will be liable in damages if it commits breach by changing articles. Thus, where a managing director was appointed for a term of ten year & he was removed earlier under the new articles adopted on the at amalgamation of the company with another company the company was held liable in damages for breach of contract. (Sourthen foundries Ltd. v. Shirlaw, 1940) In such cases, if damages would not be an adequate relief, the company may be restrained form changing its articles. Thus in British Murac Syndicate Ltd. v. Alperton Rubber Co. (1915) company was restrained form changing its articles so as to deprive the plaintiff of his power to nominate two directors give to him by the company’s as long as he held 5000 shares in the company, "It would be dangerous to hold that in a contract of loan or a contract of service or a contract of insurance validly entered into by a company there is any greater power of variation of the rights & liabilities of the parties than would exist if, instead of the company, the contracting party had been an individual."(Baily v. British Equitable Assurance co., 1906). In Hari Chandra v. Hindustan Insurance Society (1925). Where an attempt to change the fund from which a policyholder was to be paid was held to be ineffective.
Thirdly, the alteration must not constitute a fraud on the minority; it should not be an attempt to deprive the company or its minority shareholders of something that in equity belongs to it or to them. The power of alteration should be exercised in absolute good faith in the interest of the company.
Lastly, no alteration can require a member to purchase more shares in the company or increase his liability in any manner except with his consent in writing. [Se.38] Clubs or associations registered under the Act are, however, allowed to increase their subscription. Se. 38(2)

Doctrine of Indoor Management:

"Indoor Management" restricts the operation of " constructive notice" to the public document of the company (Documents required to be registered with Registrar are public documents Irvine v. Union Bank of Australia, 1877). Where " constructive notice" is that, every person contracting with the company must acquaint himself with the contents of the memorandum & Articles of Association, which are public documents & thereby open to public inspection u/Se. 610 & must make sure that his contract is consistent with them otherwise he cannot sue the company. (Kotla Venkatswami v. Ram Murthy, 1934). Accordingly, a person dealing with the company is bound to read only the public documents. If his contract is consistent with them, the company is bound. He will not be affected by any irregularity in the internal management of the company. This is also known as the rule in Royal British Bank v. Turquand. (1856)
The directors of the company borrowed a sum of money from plaintiff. The company's regulations provided that the directors might borrow on bonds such sums as may from time to time be authorized by shareholders' resolutions. The shareholders contended that there had been no such resolutions authorizing the loan.
The company was held libel. Once it was found that the directors could borrow subject to a resolution the plaintiff had the right to assume that the necessary resolution must have been passed.
The rule is based upon obvious reasons. Firstly, the internal procedure is not a matter of public knowledge. An outsider "is presumed to know the constitution of company, but not what may or may not have taken place within the doors that are closed to him." Secondly "the lot of creditors of a limited company is not a particularly happy one; it would be unhappier still if the company could escape liability by denying the authority of officials to act on its behalf.(LCB Gower, Modern Company Law, 154).
The rule is applied to protect persons contracting with companies from all kinds of internal irregularities. It has been applied, for example, to cover acts of de facto directors who have not been appointed but have only assumed office at the acquiesance of the shareholders, (Mohany PO v. East Holyford Mining Co. 1875) or whose appointment is defective (prabodh Chandra Mitra v. Road Oils (India) Ltd. 1929) or who have exercised an authority which could have been delegated to them under the company's articles. But has not in fact been so delegated (Biggerstaff v. Rowatt's Wharf Ltd, 1896), or who have acted without quorum (County of Gloucester Bank v. Rudry, 1895).

The rule is, however, subject to a few limitations.

1. Knowledge of irregularity.
A person who has actual knowledge of the internal irregularity cannot claim the protection of this rule, because he could have taken steps for self-protection. (Devi Datta Mall v. Standard Bank of India, 1927). A person who is himself a party to the inside procedure, such as a director, is deemed to know the irregularities, if any. But where (Hely-Hutchinson v. Bryhead Ltd. 1967) a newly appointed director who knew nothing was induced by another director to sign a guarantee contract, he was allowed to claim the protection of the rule.

2. Suspicion of irregularity
A person contracting with a company is not protected by "the Turquand rule" if the circumstances are so suspicious as to demand inquiry. Suspicion should arise, for example, from the fact that an officer is exercising a power apparently outside his authority.(Anand Bihari Lal v. Dinshaw & Co., 1942). Thus, where a person holding directorship in two companies agreed to apply the money of one company in the payment of the debts of the other, the court said that it was something so unusual "that the plaintiffs were put upon inquiry to ascertain whether the persons making the contract had any authority in fact to make it."(Houghlon & co. v. Nothard Lowe & Wills Ltd., 1927).

3. Forgery.
"The Turquand Rule" is, perhaps, not applicable to the transaction of a company in which forgery of signatures is involved. Thus in Ruben v. Great Eingall Ltd. (1906) a company was held not bound by a certificate issued by its secretary by forgoing the signature of two directors, Lord Loreburn Said that the rule "applies to irregularities which might otherwise affect a genuine transaction. It cannot apply to a forgery". This statement is however, controversial. The Madras High Court did not allow a company to eschew liability upon a document prepared by the company's managing director by forging the signatures of two other directors (official Liquidator v. Commr. of Police, 1969).

4. Representation through articles
A person who does not have actual knowledge of the company's articles cannot claim as against the company that he was entitled to assume that a power, which could have been delegated to the directors, was in fact so delegated. Rama Corporation v. Proved Tin & General Investment Co. (1952) is an authority for this controversial proposition.
The plaintiffs contracted with a director of the defendant company & gave him a cheque under the contract. That director could have been authorized under the company's articles, but was not in fact so authorized. The director misappropriated the cheque & the plaintiffs sued the company. The company was held not liable. The act was outside the ostensible authority of the particular director. The company had done nothing to hold him out as having that authority. If an officer were held out as having an authority by reason only of the provisions in the articles, knowledge of articles would be irrelevant. Thus, where a director was openly acting as the chairman of a company, a guarantee signed by him was held binding on the company. It was immaterial that the party taking the guarantee did not know what the company's articles provided. (British, Thompson Houston co. v. Federated European Bank Ltd, 1932). Similarly, where a director to the knowledge of the other directors & shareholders, acted as managing director, the company was held bound to pay the architects whom he had appointed. (Freeman v. Buckhurst, 1964) The branch-manager accepting bills outside apparent authority, company not liable. (Kredit Bank Cassel v. Schenkers Ltd., 1927).

Relation between memorandum & Articles:

"The Memorandum contains the fundamental condition upon which alone the company is allowed to be incorporated. The articles of association are internal regulations of the company". Secondly, the memorandum is the dominant instrument, articles are subordinate to it. In case of any inconsistency between the two the articles give way. (Baglam Hall Colliery Co, Re, 1870). Thirdly an action of the company outside the scope of its memorandum is void &incapable of ratification. In the words of Lord Cairns (Ashbury Rly Co. v. Riche, 1875). "The memorandum is, as it were the area beyond which the action of the company cannot go inside that area the shareholders may make such regulations for their own government as they think fit". Lastly, some of the clauses of the memorandum can be altered only with the sanction of the Company Law Board. [Sec. 100] Alteration of articles does not require the sanction of any authority.
The memorandum & articles contain the company's constitution & the constitution of every institution is binding upon its members. Accordingly Sec. 36 declares that the memorandum & articles when registered shall bind the company & its members to the same extent as if they had been signed by them & had contained a declaration on their part that the memorandum and articles shall be observed.




A public company, but not a private company, is entitled, by issuing a prospectus, to invite applications for its shares or debentures or other securities. “Prospectus” is defined by Section 2(36) as any document, etc., which invites offers from the public for subscription or purchase of any share or debentures of a company. (Pramatha Nath Sanyal V.Kali Kumar Dutt, 1925 – where an advertisement in a newspaper that some shares are still available was held to be a prospectus.) This definition was slightly amended in 1947, so as to include invitations for deposits within the purview of the definition. Now any document “inviting” “deposits from the public” shall also be deemed to be a prospectus. A prospectus can be issued only by a listed public company.” A listed public company means a public company which has any of its securities listed in any recognized stock exchange.” (S. 2 (23-A), introduced by the Amendment of 2000).

Contents and Registration:

“The Companies Act contains a comprehensive set of regulations intended to protect the investing public from ……victimization”. (A J. Hornby.) The intention of the legislature in making these regulations is “to secure the fullest disclosure of material & essential particulars & lay the same in full view of all the intending purchasers of shares”. The relevant, rules & regulations may be briefly stated here: (1) every prospectus must be dated. [S.55] (2) As copy of the prospectus must be registered with the Registrar & this fact must be stated on the face of the prospectus. The registrar can refuse to register a prospectus, which does not comply with the disclosure requirements. [S.60]. The prospectus must be issued within 90 days of its registration. [S.60 (5)]. Issue of prospectus without registration is punishable (Mansukh Lal V. Jupiter Airways 1951). (3). If the prospectus includes a statement purporting to be made by an expert, consent in writing of that expert must be obtained & this fact must be stated in the prospectus. [S.58] The expert should be unconnected with the formation or management of the company. [S.57]. Section 59 provides that the expression “expert includes an engineer, a valuer, an accountant & any other person whose profession gives authority to a statement made by him. Thus the expert becomes a party to the prospectus & liable for untrue statements, if any. (4) Section 56 requires every prospectus to disclose the matters specified in schedule II of the Act. The information required to be disclosed refers to the objects of the company, details as to shares, managerial personnel, minimum subscription, underwriting, preliminary expenses, material contracts, etc (5) lastly, the “golden rule” as to the statements in prospectus must be observed.” The public is at the mercy of company promoters. Everything must, therefore, be stated with strict & scrupulous accuracy.”

Effects of misstatements:

The fear of heavy liability & criminal sanctions has controlled the directors’ tendency of “using extravagant terms & flattering description.” The law allows the following remedies for misstatement.

1. Damages for deceit:

Those who issue a prospectus with fraudulent statements are liable to pay damages to any one who purchased shares on the faith of the prospectus. In Derry V. Peek (1889), the prospectus of a company stated that the company had been authorized in use steam power in moving its trams. The authority was in fact subject to the approval of the board of Trade, which refused its approval. Yet the directors were held to be not guilty of fraud, because they were honest, whereas fraud requires a statement which maker knows to be false, or does not believe it to be true or is too reckless as to its truth. The company may also be sued for damages provided that, the fraudulent statement was made by its officers within the scope of their authority, though in that case as laid down by the House of Lords in Houldsworth V. City of Glasgaw Bank (1880) the contract of allotment must first be rescinded. But the (English) Misrepresentation Act, 1967, now “entitles the Court to award damages in lieu of rescission”.
When a claim under the tort of deceit has been established, the amount of damages would not be reduced on the ground of contributory negligence, if any, on the part of the claimant. (Standard Chartered Bank V. Pakistan National Shipping Corpn. (No. 2) [2000].

2.Compensation under section 62:

The acquittal of the directors by the House of Lords in Derry V. Peek caused such wide spread resentment that within a year the Directors’ Liability Act, 1890, was which rendered directors liable for false statements although they might have believed their assertions to be substantially true. The provisions of this Act were re-enacted in section 62 of the (Indian) Companies Act, 1956. Following persons are liable under the section: (1) every person who is director at the time of the issue of the prospectus; (2) every person who has authorized himself to be named as a director in the prospectus; (3) every promoter who was a party to the preparation of the prospectus;(4) every person who has authorized the issue of the prospectus. Their liability is joint & several. The person who is made liable may recover contribution from others equally guilty. They are liable to compensate the investor for any loss sustained by him by reason of any statement. (Greenwood V. Leather Shod Wheels Co., 1900). Subject to the special defenses allowed under the section, they are liable for every untrue statement, which are; (1) withdrawal of consent as director before issue of prospectus; (2) prospectus issued without his knowledge & on becoming aware of it, gave public notice to that effect; (3) he was ignorant of untrue statement & on becoming aware of it, he withdrew consent & given public notice; (4) he had reasonable ground to believe & did up to the time of allotment believe the statements to be true ; (5) the untrue statement was contained in the report of an expert & did up to the time of allotment believe the expert to be competent &, if it was in same public official document. That it was a correct & fair representation of the document.

3. Rescission for misrepresentation:

The shareholders can also sure the company for rescission of the contract. Under this remedy the contract is cancelled &the money given by the shareholder refunded. Under Section 75 of the Contract Act, a person who lawfully rescinds a contract is entitled to compensation for any damage, which he has sustained through non-fulfillment of the contract.
Loss of right of rescission – The right is lost in the following circumstances:

a) By affirmation – If the allottee with full knowledge of the misrepresentation upholds the contract, he cannot afterwards rescind. Affirmation may be express or implied. An implied affirmation takes place by the shareholder’s conduct, where for example he endeavours to sell his shares; attends meetings of the company, receives dividends or pays calls. (Dunlop Trufault Cycle Co., Re, 1896).
b) By unreasonable delay – “Any man who claims to retire from a company on the ground that he was induced to become a member by misrepresentation is bound to come at the earliest possible moment after he becomes aware of the misrepresentation.” An action after five months was held to be too late. (Christenville Rubber Estates Ltd., Re, 1911).
c) By commencement of winding up. - The right of rescission is lost on the commencement of the winding up of the company. “ But where a shareholder has started active proceedings to be relieved of his shares; the passing of the winding up order during their pendency would not prevent his getting the relief “. (Shiromani Sugar Mills V. Devi Prasad, 1950, Desai, J.)


1. For omissions [S. 56]:

If a company’s prospectus does no disclose the matters required to be disclosed, persons responsible for the omission are liable to a penalty. It has been held that the section also created civil liability to those who are misled by the omission. (Desai, J. Shiromani Sugar Mills V. Devi Prasad, 1950). A person prosecuted or sued may defend himself by showing; (1) that he had no knowledge of the matter not disclosed; (2) that the contravention arose out of an honest mistake of fact, & (3) if in the opinion of the court the matter not disclosed was immaterial or that the person sued ought to be excused.

2. For Misrepresentation [S.63]

Where a prospectus includes any untrue statement, every person who authorized the issue of the prospectus is punishable with imprisonment for a term, which may extend to two years, or with fine, which may extend to five thousand rupees or with both. A person prosecuted under the section may defend himself by showing that the statement was immaterial or he had reasonable ground to believe & did up to the time of the issue of the prospectus is punishable with imprisonment for a term which may extend to two years, or with fine, which may extend to five thousand rupees or with both.



Members and Shareholders:

The word “member” and “shareholder” are used interchangeably and, generally speaking, apart from a few exceptional cases, they are synonymous. There are; for example, Companies limited by guarantee or unlimited companies, which may not have share capital and, therefore, can have no shareholder, but they do have members. Contrary, the bearer of the share warrant is a shareholder, but not a member, as his name may be struck off the register of members (Sec 115(D). Thus a warrant holder may not be a member. (World wide Agencies P Ltd. v. Margaret T Desor, 1990)


Every person who is competent to contract may become a member. A minor and a person of unsound mind, being incompetent to contract, cannot be members of a company. If shares are allotted to a minor he incurs no liability. Thus, in a Madras case, shares were allotted to a minor under an application signed by his guardian; neither the minor nor the guardians were held liable in the winding up of the company. (Palaniappa v. Official liquidator, 1942). There is nothing in the Companies Act prohibiting a minor from becoming the member of a company. Sec 41(2) read with Art 19(1) of Table A indicates that the agreement in writing can be made by the guardian on behalf of the minor. It will not be a case of a trust because a minor’s name will be entered in the register of members. The shares being fully paid he would incur no liability. (Gautam R Palival v. Karnataka Theatres Ltd., 2000). On attaining the majority and becoming aware of the presence of his name in the register of members he has the option to repudiate his shares within a reasonable time. If he does not do so, his liability as a shareholder commences. This result followed where after attaining majority, he accepted dividends from the company. (Fazulbhoy Jaffar v. Credit Bank of India Ltd.,1914). A company being a legal person can become a member of another company if its memorandum empowers it to invest money in shares.

Modes of becoming members: One may become the member of a company –
(1) By subscribing to its memorandum;
(2) By agreeing to take qualification shares;
(3) By allotment;
(4) By transfer;
(5) By transmission.
One who subscribes to the memorandum automatically becomes a member on the registration of the company. “Neither application form, nor allotment of shares is necessary”. Thus where a person subscribed to a company’s memorandum for 200 shares he was held liable in the winding up of the company for all the 200, although he had taken up only 20. (Official liquidator v. Suleman Bhai, 1955).
Similarly those who agree to take qualification shares for being appointed as directors become members automatically on the registration of the company. Sec 266(2). Where, however, a director fails to take his qualification shares and his office falls vacant automatically on the expiry of prescribed time, his name, in the view of the Bombay High Court, cannot be placed on the list of contributors. (Zamir Ahmed v. DR Banaji, 1958).
In the case of allotment, transfer and transmission a person becomes a member only when his name is entered in the register of members. Sec 41 which defines a “member” says that it includes the subscribers to the memorandum and every other person who agrees in writing to become a member and whose name is entered in the register of members. Thus it requires two things: (a) an agreement in writing and (b) an entry in register. (Shri Balaji Textiles Mills Ltd.,v. Ashok Kavle, 1989). A consequential amendment of Sec 41 made by the Depositories Act 1996 provides that a person holding the equity shares capital of a depository is a member of a company. Holding equity shares through a depository constitutes the holder into a member (Sec 41(3).

Cessation of Membership:

The membership of a person of any particular company will cease by following ways:
(1) Transfer of shares;
(2) Transmission of shares;
(3) Forfeiture of shares;
(4) Surrender of shares.
In case of transfer of a member of a company by selling his shares in secondary markets i.e. stock exchanges can cease his membership, where the transferee will become the new member of the company. Whereas in transmission the shares will be transferred due to some statutory provisions from member to another person, as like in case of death of a member, his successor or heir of the property will become member of the company due to transmission of shares.
If a member is having been called forfeiture of shares upon to pay the unpaid balance on his shares, defaults, the company may sue him or forfeit his shares. A valid forfeiture must satisfy the following conditions:

(1) There must be power to that effect in the company’s articles. Forfeiture must be carried out strictly in accordance with the article.
(2) The payment of a call must be overdue. There are authorities to the effect that forfeiture of shares for any reason other than non payment of a call would be an illegal reduction of capital. (Hopkinson v. Mortimer Harley & Co. Ltd., 1917). But the Supreme Court has held that the shares may be forfeited for any sum due by a member to the Company. (Naresh Chandra Sanyal v. Calcutta Stock Exchange, 1971).
(3) A notice precedent to forfeiture must be given. It has been held by the Supreme Court (in Public Passenger Service Ltd., v. Khadar 1966) that a notice, which does not specify the amount, claimed by the company, interest and expenses, or which claims a wrong amount, is defective and invalidates the forfeiture. Where the notice came back as unserved and the company forfeited and reallotted the shares without any further inquiry, the forfeiture and reallottment were held to be ineffective.(Promila Bansal v. Wearwell Cycle Co, 1978).
(4) If the notice is not complied with a resolution forfeiting the shares should be posed. Lastly, forfeiture must be carried out in good faith for the benefit of the company and not to relieve a member of the burden of his shares.
Forfeited shares become the property of the company, but they may be reissued. If upon reissue, forfeited shares bring in more money than was due from the member, the surplus belongs to him.(Naresh Chandra Sanyal v. Calcutta Stock exchange, 1971). The member remains liable as a contributory for one year from the date of the forfeiture. Further, the articles may provide that he shall remain liable as a debtor.

Surrender of Shares:
It requires the same conditions as forfeiture. The only difference is that instead of going to the length of forfeiture, the member voluntarily surrenders his shares and the company accepts it. Surrender should not be used as a device for relieving a shareholder from his liability.(Collector of Moradabad v. Equity Insurance Co.,1948).

Register of Members and Index of Members (Sec 150):

Every Company is required to keep a register of members containing the particulars about the names and address of members, the number of shares held by each member, the date on which his name was entered in the register and the date on which any person ceased to be a member. Companies with more than fifty members are required to maintain an index of members. The register itself may be kept in the form of an index. The register of members maintained by the depository shall be deemed to be an index.
Right of Inspection- Every member and debenture holder has the right of inspection without fee but a fee of one rupee can be charged from any outsider who wishes to inspect. This right also includes right to make extracts from the register. The company is also to bound to supply on demand a copy of the register.(Sec 163(3)(b) (British India Corpn. V. Robert Menzies, 1936). A company can close the register for 45 days in a year, but not more than 30 days at any one time. (Talayar Tea Co., v. UOI, 1991).
Register prime facie evidence (Sec 164) – The register of members is prime facie evidence of the truth of its contents. If a person’s name is in register, he shall deem to be a member and onus lies on him to show that he is not a member, (Hans Raj Gupta v. Asthana, 1952).



Meaning and kinds of Share Capital:

The memorandum of company has to state the amount of capital with which the company is proposed to be registered. The capital so stated becomes the authorized capital of the company. The whole or any part of it may be issued, and that will be the issued capital of the company. That part of such capital, which has been allotted, is the subscribed capital. The actual amount received is the paid-up capital.
The uncalled capital of a company can be converted into reserve capital. By passing a special resolution the company may declare that a portion or the whole of its uncalled capital shall not be called up except in the event of the company’s winding up. (Sec-99) Such a capital cannot be called except on winding up, it cannot be charged by the directors.

Kinds of Share Capital (Part of Topic – 8 as types of shares):

Capital must be divided into shares of a fixed amount. All the shares may be only one class or may be divided into two different classes of securities. For this purpose securities mean securities as defined in 2(h) of the Security Contracts (Regulation)Act 1956 and includes ‘hybrids’. (As Sec.2(45AA) introduced by the Amendment Act 2000). The Companies Act permitted only two kinds of shares to be issued, namely:
1. Equity share capital, i.e. ordinary share,
2. Preference shares, i.e. preference share.
The Companies (Amendment) Act 2000, has substituted Sec-86 with new provision which are that the share capital of a company limited by shares shall be of two kinds only, namely:
(1) Equity share capital: (a) with voting rights; or (b) with differential rights as to dividend, voting or otherwise in accordance with such rules and subject to such conditions as may be prescribed.
(2) Preference share capital, which further classified into:
(a) Cumulative Preference shares – Preference shares may be either cumulative or non-cumulative. If there are no profits in one year and the arrears of dividend are to be carried forward and paid out of the profits of the subsequent years the preference shares are said to be cumulative. But if the unpaid dividends lapses, the shares are said to be non-cumulative preference shares. Whether they are of one class or the other will depend upon the terms of issue and provisions in the company’s articles. But in absence of any clear provision to the contrary, preference shares are presumed to be cumulative. (Foster v. Coles Foster and Sons Ltd., 1906).
(b) Participating Preference Shares - are either participating or not participating. If after paying dividends to preference and ordinary shareholders there are surplus profits which are proposed to be distributed among the shareholders and in the winding up of the company, after paying back all the shareholders, there is a surplus, if the preference share holders are entitled to participate in such surplus, they are participating, otherwise, not participating preference shares. The general principle is that unless the right to participate is given to them by the terms of the issue or by the articles, they are presumed to be not participating. (Scottish Insurance Co., Ltd., v. Wilson and Cycle Coal Co. Ltd., 1949).
(c) Redeemable Preference shares – (Sec 80) If the Company has the power to do so in its articles, it may issue what are called redeemable preference shares. The company can pay back such shares and this is called redeemable of preference shares. Such shares can be redeemed subject to the following conditions: (1) the shares to be redeemed must be fully paid up. (2) Redemption should be carried out only out of such profits as would be otherwise available for dividends. (3) A sum equivalent to the amount paid on the redemption shall be transferred to a reserve fund called”. The Capital Redemption Reserved Account”. The amount is to be preserved with the same sanctity as the company’s share capital and can be reduced only in a like manner. But it may be used in giving to members fully paid bonus shares. Redemption of preference shares is not a reduction of the Company’s share capital. If the redeemed shares are reissued, that is not an increase of capital.

Ordinary and Preference shareholder compared:

Preference shares particularly redeemable preference shares, are more like debentures than like, shares. They are entitled to a fixed rate of dividend even as debentures earn a fixed rate of interest. The company may choose to pay back the redeemable preference shareholders, but ordinary shareholders cannot be paid back except under a scheme for reduction of capital.
Secondly an ordinary shareholder is entitled to vote on all matters affecting the company. But the rights of preference shareholders are restricted to resolutions, which directly affect them. (Sec 97(2) explanation and clause (b)).
Thirdly, preference shares offer a profitable and safe source of investment. While the fixed rate of income is guaranteed, the risk is less as compared to ordinary shares.

Alteration of Share Capital (sec 94):

A company can alter its capital in any of the following ways, provided the authority is there in the articles: (1) increase its capital by issuing new shares. If the capital is increased beyond the authorized limit or, where the company is without capital and it increase the number of its members, an information under section 97 has to be given to the Registrar; (2) Consolidate the whole or any part of its share capital into shares of a larger amount; (3) convert shares into stock or vice-versa; (4) sub-divide the whole or any part of its share capital into shares of a smaller amount; (5) cancel those shares which have not been taken up and reduce its capital accordingly.
Any of the above things can be done by passing a special resolution of shareholders and does not require to be confirmed by the court. Within 30 days of alteration the Registrar should be informed (sec 95).

Reduction of Share Capital (Sec 100):

“Conservation of capital is one of the main principles of company law”. Share capital being the fund out of which the creditors are paid, every reduction is going to reduce their security. But sometimes there may be genuine necessity for reduction. Hence Sec 100 permits capital to be reduced only with the sanction of the court. Under this section, a company may reduce its capital in any of the following ways: (1) extinguish or reduce the liability on any one of its shares (2) cancel any paid-up share capital which is lost or is unrepresented by any available assets; (3) pay-off any paid-up share capital which is in excess of the wants of the company.
Authority to reduce capital must be present in the articles. A special resolution should authorize the contemplated reduction. The next stage is to apply to the High Court for an order confirming the reduction.
The main duty of the court is to look after the interests of creditors & different classes of shareholders. Creditors are likely to be affected only when the reduction diminishes the liability of members to pay the uncalled capital or involves refund of capital to shareholders. In other cases, the creditors are not entitled to object. If any creditor raises an objection, the court may either have his interest secured or dispense with his consent. [S.101].
The second duty is the protection of the interests of shareholders. The proposed scheme must be reasonable & fair to all the classes of shareholders. If there is only one class of shareholders & all of them are to bear the reduction proportionately the scheme is obviously fair & must be confirmed. (Se. 101(2) (b) & (c) & sub-section (3). Thus where shares of the value of Rs. 100 were reduced to Rs. 50, the balance being struck off as lost capital; the scheme was confirmed because every shareholder had to bear the same reduction (Marwari Stores Ltd. V. Gouri Shankar Goenka, 1956). Where there are two classes of shareholders & all the members of a class are given the same treatment, the scheme is fair. It has been held by the House of Lords in Scottish Insurance Co. V. Wilson & Clyde Coal Co. (1949) that a company may reduce its capital by paying back its preference shareholders only &, if they do not have the right in the winding up to participate in the distribution of surplus assets, they cannot object. In a Colacutta, a company had lost nearly the whole of its capital. Under the scheme of reduction the preference shareholders had to forego their accumulated dividends & 70% of their capital & ordinary shareholders 80%. The court approved the scheme. (Hindustan Commercial Bank V. H G E Corpn, 1960).
If the court is satisfied in all respects it may make an order confirming the reduction on such terms & conditions as it thinks fit. The court may require the company to add to its name as the last words, “& reduced”, during such period as it thinks proper. The company may also be directed to publish reasons for the reduction for public information. The company should then get the reduction registered with the Registrar & the alteration then becomes effective. (CIT V. Industrial Credit & Devt. Syndicate Ltd., 1989). The liability of the members after reduction is to pay the amount deemed to be unpaid on their shares [Ss. 102-104].

Buy-back of Shares. –[S77-A].

Traditionally, subject only to a few exceptions specified in S.77, companies were not permitted to purchase their own shares. S77-A, brought in by the Companies (Amendment) Ordinance, 1999, has caused this structural change in the theme & philosophy of company Law that, subject to the restriction envisaged in the section, a company may buy-back its own shares.
Sub-section (1) indicates the fund out of which the exercise of buy-back will be finaaneed. The sources allowed are the company’s free reserves, securities premium account, and proceeds of an earlier issue. No buy-back of any kind of shares or other specified securities can be made out of the earlier proceeds of the same kind of shares or the same kind of other specified securities. The expression “free reserves” has the same meaning as is attached it in S. 372-A.
Sub-section (2) prescribes certain formalities. There should be a provision in the articles authorizing buy-back of shares. In the exercise of that authority a special resolution at a meeting of the shareholders should be passed. The amount involved in buy-back should be less than 25% of the company’s total paid up capital & free resources. After the buy-back, the ratio between the debts owed by the company should not be more than twice the capital & free reserves of the company. The shares to be bought back should be fully paid. The buy-back should be in accordance with the regulations made by the Securities & Exchange Board of India. This requirement applies to listed securities. In the case of other securities, the buy-back has to be in accordance with guidelines as may be prescribed by the Central Government.
The section permits shares & other specified securities to be bought back. The explanation to sub-section (2) says that “specified securities” would include employees’ stock option or other securities as may be notified by the Central Government from time to time.
The notice for convening the meeting of shareholders for passing a special resolution should carry the information prescribed by sub-section (3). The information is (a) a full & complete disclosure of all material facts; (b) the necessity for the buy-back; (c) the class of security intended to be purchased; (d) the amount to be invested in buy-back; (e) the amount involved & (f) the-limit for completion of the transaction. This is subject to the restriction set out in sub-section (4) that every such transaction must be completed within 12 months from the date of the special resolution.
Sub-section (6) requires a declaration of solvency has to be filed with the registrar & S.E.B.I. Sub-section (7), where a company has bought back its securities; it has to extinguish them & physically destroy them.
Sub-section (8), where a company has resorted to buying back of its securities, it cannot make a further issue of securities within a period of 24 months. Sub-section (9) requires company to maintain register of bought back shares or securities.
Sub-section (10)-After completing the process of buy-back, the company has to file a return with S.E.B.I. & Registrar, within 30 days. Sub-section (11) prescribes penalty for a default in complying with the particulars of the section & rules made under it has been made a punishable offence up to imprisonment of 2 years or fine up to Rs. 50,000 or both to every officer in default.



Definition & nature:

Share is the share in the whole share capital of the company. The share capital of the company is divided into equal amount of parts which they advertised the sold in the open market through ‘prospectus’ where the contribution to the company capital is asked to the public at large and some of them will invest to the capital in the form of purchase of such shares which are fraction parts of equal sum of the whole capital. This process of sale for the first time of the shares by company to by public at large is called ‘Allotment of shares in primary market’ (i.e. stock exchange where the company has to list its shares). Then there can be resell of such shares by the allottee in the open market i.e. stock exchange to the other person interested to invest in the shares but at the market rate through brokers, this is called as transfer of shares which provides maximum liquidity to the shares and secures the important features of company form of business i.e. transferability of shares.

Issue of shares:

First issue in the demat form [S.68.B]
The Amendment of 2000 has added this new section. It provides that every listed public company making initial public offer of securities of 10 crores or more shall issue the same dematerialized form. For this purpose, the requirements of the Depositories Act, 1996 & Regulations made under that Act. should be complied with.

Allotment of Shares

Distribution of application forms for shares is an offer. When it is accepted, that is an “allotment”. What is termed an allotment is generally neither more nor less than the acceptance by the company of the offer to take shares. “Broadly speaking, it is an appropriation by the directors, of shares to a particular person”. But where a forfeited share is reissued, that is not an allotment. An allotment to be valid, must comply with the following requirements of the Act.

Minimum subscription [S.69]:

When shares are offered to the public the amount of minimum subscription has to be mentioned in the prospectus. It means the amount, which in the opinion of the director is enough to meet the purchase price of any property, preliminary expenses and working capital. The minimum subscription prescribed under the rule making power is 90% subscription against the amount offered to the public. No allotment shall be made until at least so many amounts have been subscribed for. If the minimum subscription has not been received within 120 days of the issue of the prospectus, the money received from the applicants must be repaid without interest. If the money is not paid back within 130 days the director become personally liable to pay it with interest, unless they can show that the default was not due to any negligence or misconduct on their part.

Application money [S.69 (3)]:

Shares are not to be allotted unless the application money, which must not be less than five per cent of the nominal value of a share has been received in cash. An allotment made without the receipt of application money in cash is not only invalid the directors are also guilty of misfeasance. (Malbar Iron & Steel Works Ltd. RE, 1964)

Statement in lieu of prospectus [S.70]:

Where a prospectus has not been issued, no allotment shall be made unless at least 3 days before the statement in lieu of prospectus has been filed with the Registrar.
An allotment made in contravention of the above requirements is avoidable at the instance of the applicant, provided he moves within 2 months of the allotment or within 2 months of the statutory meeting [S.71 (1)]. (Finance and Issue Ltd. V. Canadian Produce Corpn. 1905.) Such an allotment is voidable even if the company is in the course of winding up [S.71{2)]. It is enough if the allottee gives notice of his intension to revoke within 2 months. Where the contravention is willful the guilty directors are liable to compensate both the allottee and the company provided the party suing has sustained a loss and bring the action within 2 yrs. of the allotment. [S.71(3)].

Opening of subscription list [S.72]:
Shares cannot be allotted until the beginning of the 5th day from the date of the issue of prospectus. The directors may extend this time by a statement in the prospectus, but it cannot be cut short. The validity of the allotment is not affected by any contravention of this rule. But the contravention is punishable. [S. 72(3)].
Shares to be dealt in on stock exchange.[S.73]:
Every company intending to offer shares or debentures to the public by issuing a prospectus has to make an application before the issue to any one or more of the recognized stock exchange for permission for the share or debenture to dealt with at the exchange. The amendment of 1988 has made an application to a stock exchange compulsory. Formerly it was optional with the company. The names of such exchange must be specified in the prospectus.[S. 73(1)(proviso)]. It is a condition precedent for the listing permission that the application money is deposited in a separate bank account.[S.69(4)& S.73(3)]. (Universal Incast Ltd. V. AASEBI, 2000). An allotment shall become void if the permission has not been granted by each stock exchange specified in the prospectus. [S.71(3)(Proviso)]. It is a condition precedent for listing permission that the application money is deposited in a separate bank account. [S. 69(4) & S.73(3)]. (Universal Incast Ltd. V. AA SEBI, 2000). An allotment shall become void if the permission has not been granted by each stock exchange specified in the prospectus before the expiry of ten weeks from the closing of the subscription list.
If the stock exchange does not dispose of an application within the above time of ten weeks, it shall be deemed that the application has not been granted. [S.73(5)]. Where an appeal has been made to the Central Government against the refusal of a stock exchange under Section 22 of the Securities Contracts (Regulation) Act, 1956, the allotment shall not become void until the dismissal of the appeal. [S.73(1)(proviso)]. (Urmila Bharuka V. Coventry Spring & Engg. Co. Ltd., 1997).
When an allotment become void, the money received from the applicant shall be refunded forthwith & if it is not refunded with eight days every officer of the company who is in default will be jointly & severally liable to repay the amount with interest at such rate , not less than 4% & not mote than 15% as may be prescribed having regard to the length of the period of delay in making repayment. The presently prescribed interest rate is 15%. Where the prospectus has been over subscribed, the over subscription must also be refunded within the same period & default, if any , will have the same consequences. [S.73 (2A)].
Money received from applicants have to be kept in a separate bank account in any schedule bank until the decision of stock exchange or of any appeal against its decision. After the decision of the money may be adjusted towards allotment or refunded, as the case may be, but it cannot be used for any other purpose. Any condition requiring the applicants to waive their rights shall be void. [S.73 (3), (3-A) & (4)].

General Principles:

Allotment must be made by a person authorized by, & in accordance with the terms of the company’s articles, otherwise it is voidable at the option of the allottee. (Bank of Peshwar Ltd. V. Madho Ram, 1919). Allotment should be also completed within a reasonable time. An allotment made six months after the application has been held to be too late. (Ramsgate Victoria Hotel Co. V. Montefoire, 1866). Allotment should be communicated to the allottee. Posting of a properly addressed & stamped letter is a sufficient communication even if the letter is lost or delayed in the course of post. (Household Fire Insurance Co. V. Grant. 1874). Lastly, allotment should be in accordance with the terms of the offer. Thus, where a person applies for certain shares subject to the condition that he should be cashier, it was held that an allotment without meeting this condition was not binding on him. (Ramanbhai V. Ghashiram, 1918). But where a person agreed to be a share holder subject to the condition that he would pay the price only if the company paid dividends, he was held liable as a contributory when the company went into liquidation without paying any dividend. (Motilal Chunnilal V. Thakorelal Chimanlal, 1912).

Transfer of shares [Sec. 82]:

“When the joint stock companies were established the great object was that the share should be capable of being easily transferred.”(Blackburn J. in Bahia & SunFrancisco Rly Co. Re. 1868). Accordingly, S.82 of the Companies Act provided that the share of a member in a company shall be movable property capable of being transferred in the manner provided by the articles of the company . In a guarantee company without capital any interest of a member would be as much transferable as a share. (Narendra Kumar Agarwal V. Saroj Maloo, 1995). Subject to the company’s articles “the shareholder has…. The right to transfer his shares without the consent of anybody to any transferee, even though he be a man of straw, provided it is a bonafide transaction in the scene that it is an out & out disposal of the property without retaining any interest in the property. (Bennet J. , in Delavenne V. Broadhurst, 1931). Atransfer made with the avowed object of escaping liability would be void. (Discoverers finance Corpn. Ltd., Re, 1910). Section 111-A (Consequential amendment by the Depositories Act, 1996) of the Companies Act, declares that the share etc of public company shall be freely transferable. One of the effect of this declaration is that a public company cannot impose any restriction upon the members right to transfer the company’s securities.
The articles of a private company may impose restrictions upon the right of transfer. It is usual to empower directors to refuse to register a transfer to any person whom they think undesirable. In such a case the court cannot interfere in the exercise of the directors direction. In Smith & Fawcett Ltd., re, (1942), the surviving director shareholder of a company agreed to register a deceased shareholder- director’s son only for half of his father’s shareholding. The court did not interfere. “The director must exercise their direction bona fide in what they consider… not what a court may consider…. Is in the interest of the company.” In the following case., however, the court may intervene in the matter & direct the directors to register a transfer:
(1) Where their refusal is not bana fide in the interest of the company. In Bajaj Auto Ltd. V. Firodia(1970), the Supreme Court quashed the director’s refusal as it appeared that their decision was actuated only by the fear that the transferee would get more numerical strength.
(2) The court would not ask the directors to supply reasons for their refusal. (Now, reason has to be stated as a compulsory statutory requirement under sec. 111). But, if they voluntarily gave reason, the court could look into them & if they were not sufficient to justify their decision, the court would set it aside.
(3) Director’s refusal must be based only upon the grounds specified in the articles. A refusal on any other ground is liable to be set aside. (Bede S.S. Co. Ltd. Re, 1917). Where the directors had the power to refuse transfer of partly paid shares to a person whom they would not approve, their rejection of a transfer of fully paid shares was held to be invalid.(Jalpaguri Cinema Co. Ltd. V. Pramatha Nath MUkerjee, 1971).
Where the directors , being equally divided, could not decide upon a transfer, it was held that the transferee was entitled to be registered. Further,” the power must be exercised within a reasonable time.”(Swaldale Cleaners, Re,1968). The period of two months now specified in sec.111(2) of the Company’s Act may safely be taken as the outside limit after which there is unnecessary delay. By reason of such delay the power ceases to be capable of being exercised. (S.P. Mehata V. Calico Dyeing & printing Mills Ltd., 1990). Where the shares are listed at a stock exchange, the period for refusal is only 30 days & thereafter there is unreasonable delay. It has been now laid down by the Supreme Court that the company does not lose the right of rejection by the expiry of the prescribed period foe refusal. (Shailesh Praphudas Mehta V. Calico Dying & printing mills Ltd., 1994).

Statutory remedy against refusal.[s.111]:

The company has to notify its refusal within two months giving reason for the refusal. If it a private company the transferor or transferee can, within two months, prefer an appeal to the Company Law Board. The CLB hears all the parties & requires the directors to disclose, at the pains of adverse presumptions, their reasons. If the refusal is not justified , the transfer which must be done within 10 days. The order of CLB appealable on a question of law but not on a question of fact. The CLB has to act according to its direction & to follow the principle of natural justice. Thus the power is of judicial nature. The CLB must justify its decision on objective reasons. Subjective satisfaction is not sufficient. The order of the CLB may be quashed if it is not in accordance with the law. Refusal by the directors on the ground of inadequacy of consideration was held to be not proper.(Vicas Jalan V. Hydrabad Industries Ltd., 1997).

Procedure of transfer.[S.108]:

The provisions of this section as to procedure & formalities of transfer are not to apply where both the transferor & transferee are entered as beneficial owners. In the record of a depository, (consequential amendment made by the Depositors Act., 1996). A transfer is incomplete until it is registered with the company. Thus where the transferee has presented the necessary documents for registration, but before the company could do anything, it went into liquidation, the transferor was held liable as a contributory. But where the registration of a transfer was by mistake or oversight, omitted by the company, it was held that, not withstanding winding up, the transferor was entitled to have his name removed from the list of contributories.

Both the transferor & transferee are entitled to apply for registration. [S.110(1)].
The following conditions must be satisfied before a company can lawfully register a transfer (S. 108):
(1)The instrument of transfer, which should be in the prescribed form, should be executed both by the transferor & transferee.
(2)The instrument should be duly stamped.
(3)The instrument should be delivered to the company along with the certificate late in the shares under transfer.
(4)Before the instrument of transfer is completed by signature, & endorsement of date should be obtained from the prescribed authority. The instrument should then be presented to the company for registration either within 2 months of the endorsement or in the case of quoted companies before the company closes its register of member for the year, or 12 months, whichever is later.

Blank Transfer:

This last mention requirement is intended to restrict the evil of blank transfers. A blank transfer means that the transfer form has been sand only by the transferor. It is given over to the transferee along with the share certificate either to gate himself registered or to transfer it further still. The validity of such a transfer has been recognized by the Supreme Court in Vasudeva Ramchandra Shelat V. Pranlal Jayanand Thakur (1974). A lady signed blank transfer forms and handed them over to the transferee along with the share certificates by way of gift. The lady died before the transfers could be registered with the various companies. The other heirs questioned the validity of the gift. It was held, reversing the decision of the Gujarat High Court, that the transferee had acquired a good title. Formerly a blank transfer form could have been remained in the circulation for any length of time. But now after the prescribed authority has signed it, it can remain in circulation only for 2 or 12 months or up to the time when the company closes its register of members.

When these requirements are complied with, the company registers transfer. The name of the transferor is struck of the register of members & that of the transferee substituted.

Certification of transfer [S.112]:

Where the shares transferred are less than the number of shares included in a certificate, or where they are transfer to different persons, the transferor has to lodge a share certificate with the company. The company then gives him a certificate that a certificate in respect of the shares under transfer has been lodged with the company. This is called as “certification of transfer” in effect it is a representation to any person acting on the faith of certification that the company has received such documents as show a prima facie title of the transferor [S. 112(1)]. (Bishap V. Balki’s Consolidation Co. 1890). Where a company issues of false certification negligently or deliberately, it would be liable to any person who is deceived by having acted on the faith of the certification

Transmission of shares:

The executor or successor of a deceased member is entitled to have shared transmitted to him in the company’s register of members. Transmission is different from transfer for Section 108, which lays down the formalities of transfer specially provided that nothing in the section shall prejudice the power of the company to register as shareholder any person to whom certain shares have been transmitted by operation of law. It follows that an instrument of transfer is not necessary. If the company unduly refuses to accept the transmission, the same remedies are available as in the case of a transfer. In the case before the Supreme Court, the state of Orissa become entitled by the evolution to the shares of a Maharaja, it was held to a case of transmission and company bound to accept this state as a share holder.(Indian Chemical Products Ltd. v State Of Orisa, 1966)
The executor of the successor also has the right to transfer the share [S.109]. He must make up his mind within a reasonable time. If the directors have so required him, he should disclose his option within 90 days. Failing which payments due on the shares may be with held. [Clause 20(proviso Table A, schedule 1).]

Share Certificate:

[S.113] Every company making an allotment of shares, debentures or debenture stock is required to deliver all certificates etc., to the allottee within 3 months of the allotment. In the case of default, an allottee may give notice to the company &, if the default is not made good within 10 days, an application may be made to CLB which may order delivery of the certificate & also payment of cost & expenses. (Federal Bank Ltd. V. Sarala Ddevi Rathi, 1997).
In the case of transfer, the certificate has to be issued within 2 months. The CLB may grant an extension of time up to, but not more than, 9 months.
A consequential amendment to the section introduced by the Depositories Act, 1996 provides that where share are dealt with in a depository, the company has to intimate the details of the allotment to the depository immediately on such allotment. Shares in a depository record would not have to be given their distinctive members.

Estoppels as to title- “a share certificate under the common seal of the company, specifying any shares held by any member, shall be prima facie, evidence of the title of the member, to such share.” [S. 84(1)]. The share certificate enables a member to sell his in the open market by at once showing a marketable title. It creates two kinds of estoppels against the company. Firstly, a share certificate once issued “is a declaration by a company to all the world that a person on whose name the certificate is made out & whom it is given, is a share holder in a company.” (Cockburn, CJ in Bahia & San Francisco Rly Co. Re., 1868). If he sells the shares to a bona fide purchaser the company will not be permitted to say against the purchaser, that the certificate was issued by mistake or otherwise. The company must either register the bona fide purchaser as a shareholder or compensate him for his loss. (Dixon V. Kennaway, 1900).

Share Warrant: [S.s. 114& 115]

A public company may convert its fully paid shares into share warrants. Partly paid shares cannot be converted into warrants. (Home & Foreign Investment Co. Re. 1912). This requires on authority in the articles & approval of the Central Government. The advantage of a share warrant is that it can be transferred by simply delivery of the warrant. Registration on of transfer with the company is not necessary. The name of the member is struck off the register of members in respect of the shares converted into warrants. The register should then state the fact of the issue of the warrant, showing the number of shares included in it, & the date of the issue. The bearer of warrant has, subject to the articles, the right to surrender his warrants & to have them converted into shares. The articles may also provide that the holder of the warrant shall be deemed to be a member for all or any purposes of membership.



Dividend means the share of profits that falls to each individual member of a company. It is that portion of the corporate profits, which has been set aside & “declared by the company as liable to be distributed among the share holders.” (Gulam Hasan, j. in Bacha f Guljar V. CIT). Two fundamental rules governed payments of dividends. The first is that dividends must never be paid out of capital. It is supplemented by the second that dividend shall be paid only out of profits. Dividends may be paid out of the following three sources:
(1)Profits of the year;
(2)Undistributed profits of the previous year;
Money provided by the Central or any State Government for the payment of dividends in pursuance of a guarantee given by the government concerned [S.206].
Payments of dividends out of the capital are a breach of trust & company may require the directors to replace the capital. (K. Madhava V. Popular Bank, 1970). Thus, in Flitcroft’s (Exchange Banking Co. Re. 1882). Certain bad debits were credited to the accounts & the fictitious profits thus created were paid away as dividends. The directors were held liable. Similarly, where the payment of dividends was guaranteed by a person & the company in turn promised to indemnify him, the agreement was held to be void because it was direct way of paying back capital to the members (Walter’s Deed of Guarantee, Re, 1933). Where dividend was paid in face of the auditor’s qualified report, the payment was held to be wrong. The statutory requirements cannot be waived by shareholders’ resolution in this respect. The recipient of such dividends was held to be constructive trustees for the amounts received by them (Cleveland Trust plc, Re, 1991).

Dividend Fund

“As dividends can be paid only out of surplus earnings, there must be an exact method of determining whether surplus earnings for that purpose actually exist.” (CIT v. Standard Vacuum Oil Co. 1966). But the Act provides no guidance. “There is nothing in the Act about … how profits are to be reckoned.” (Lee v. Neuchattel Asphalt Co., 1889). Neither have the courts thought it fit to formulate any rigid rules. Thus, the question whether there are profits available for distribution can answered according to the circumstances of each case. “Dividend Fund” is a fluid concept. The primary concern of the court has been that the capital is maintained in the form of assets if not equal to the paid up capital at least sufficient to go round the creditors (Verner v. General & Commercial Investment Trust, 1894). Once this is done, complete latitude is given to businessmen to pay dividends in good faith so as to keep up their company’s reputation.
Where the assets of a company are of a wasting character, such as mines or ships, it is not necessary for the company before paying a dividend to transfer out of revenue a sum equivalent to the annual wasting. This is known as the rule in Lee v. Neuchattel (1889). In a subsequent case where this rule, despite criticism, was reaffirmed, it was held that the decline in the value of the land belonging to a company was not relevant to the calculation of divisible profits (Bolton v. Natal Land & Colonisation Co., 1982). In the still subsequent case of Verner v. General & Commercial Investmenty Co. (1894), the Court pf Appeal tightened the rule only to this extent that “circulating capital” must be maintained out of revenue. Lindley LT. said: Fixed capital may be sunk & lost, & yet the excess of current receipts over current profits may be dividend, but floating or circulating capital must be kept up.” In Kingston Cotton Mills, Re, (1896) where depreciation of the mill property of a company was held not relevant to the calculation of distributable profits.
Fixed assets remain permanently with the company & are used to produce income. Circulating assets, like stock-in-trade, are turned over in the course of business. What is fixed assets for one kind of business may be circulating for another kind of business. Further fixed capital may in the course of time become floating capital & vice-versa (Bond v. Barrow Haematile Steel Co., 1902)
Unrealized appreciation of the value of fixed assets may be distributed as dividends (Ammonia Soda Co. v. Chamberlain, 1918).
Appreciation should not be blindly but reasonably fixed. Nor should it be taken in isolation. The assets as a whole must be considered. Thus where certain promissory notes declared as bad debts were unexpectedly paid up in full, the court held that this could not be deemed as profits without reference to the whole accounts taken up fairly (Foster v. New Trinidad Asphalt Co., (1901)).

Statutory provisions

Separate bank account for dividends.
Three sub-sections have been added to S.205 by the Amendment Act of 2000, Sub section (1A) provides that the B.o.D. may declare an interim dividend. The amount of dividend including interim dividend has to be deposited in a separate bank account within 5 days from the date of the declaration of such dividend. Sub. S. (1B) provides that the amount of dividend including interim dividend so deposited shall be used for payment interim dividend. S.s. 3 declares that the provision contain in sections 205, 205-A, 205-C, 206, 206-A & 207 shall, to the extent possible, apply as much to interim dividend as they apply to regular dividend.


Since the Amendment Act of 1960, it has become obligatory to provide for depreciation for the current year as well as for arrears since the amendment [S.205(2)]. The previous years’ losses incurred after this amendment must also be set of against profits of any subsequent year or years before any dividend can be paid [S.205(1) proviso. (6)].

Compulsory reserves
The requirement of creating compulsory reserves has been introduce by the companies (Amendment) Act, 1974. Before any dividend is declared, certain percentage of profits as may be prescribed by Central Government, but not exceeding 10%, will have to be transferred to the reserves of the company. The company may voluntary create greater reserves. [S. 205 (2A)].
If all account of inadequacy of profits in a particular year, the company has to pay dividend out of previous years’ reserves, it should follow the rules made by the Central Government. A departure from such rules can be made with the previous approval of the Central Government [S. 205(3-A)].

Unpaid Dividend Account [S.205-A]

Dividend that remain unpaid or had remain unpaid up to the commencement of the companies (Amendment) Act 1974, should be transfer to an “unpaid dividend account” which should be open in any scheduled bank. The amendment of 1988 has added this explanation that the expression “Dividend which remains unpaid “ means any dividend warrant in respect there of has not been cashed or which has otherwise not been claimed or paid. The company shall have to credit 12% interest on any amount which is not so deposited. If the amount remain unclaimed for a period of 3 years from the date of deposit, the company has to transfer it to the general revenue account of the Central Govt. The party entitled may claim from the Govt. [S.205-A(5),(6)& S. 205-B].

Payment to Registered Holders [Sec. 206 & 206-A].

Dividend warrant should be sent within 30 days to the registered holder of the shares or to his bankers & where share warrants have been issued, to the bearer of the warrant or his bankers.
Where an instrument of transfer of the share has been lodged with the company, but such transfer has not been registered by the company, the amount of dividend should be transferred to the “ Unclaimed Dividend account” unless the company is authorized by registered holder to pay it to the transferee. The rights or bonus shares in respect of shares under transfer must be kept by the company in abeyance until the matter is fully disposed of.

Effect of declaration
Once a dividend declared it becomes a statutory debt from the company to its share holders (Bacha F. Guzdar V. CIT, 1955). But a declaration “subject to remittances from Pakistan” or some other condition precedent does not create a debt unless the condition is fulfilled (Jhimi Bajoria V.CIT, 1970). Similarly the declaration of interim dividend does not create a debt against the company. Dividends can be declared only by a resolution of the share holders in accordance with the directors’ recommendation. But if so permitted by the articles, the directors can declare an interim dividend between two meetings, but they can rescind their resolution before the actual payment.
Dividends must be paid within 30 days from the date of declaration [S. 207].

Interim Dividend

The expression “Interim dividend” has been defined by the Amendment Act., 2000 by providing that dividend includes any interim dividend [S. 2 (14A)]. The declaration of an interim dividend does not create a debt against the company. The dividend can be declared only by a resolution of the share holders in accordance with the directors’ recommendation at a general meeting. But, if so permitted by the articles, the directors can declare interim dividend between two meetings. “It does not create a debt enforceable against the company, for it is open to the directors to rescind resolution before payment.” Share holders do not get any vested right under a directors’ resolution declaring an interim dividend (CIT v. Express News papers Ltd., 1998).

Topic : 9



Broadly speaking when a company takes A lone & issue a loan certificate, that is a debenture. In the terms of section 2(12) “debenture includes debenture stock, Bands & any other securities of a company whether constituting a charge on the company’s assets or not.” Thus “debenture “ is a which either creates a debt or acknowledges it & any document which fulfils either of these conditions is a debenture.(Chitty J. in Levy V. Abercorris State & Slab Co. 1888). To determine whether a particular document issued by the company is a debenture or not, the courts look at the substance of the transaction. Thus, where a company issued certain documents for money, the documents bore serial numbers, acknowledged a debt 7 provided for the payment of interest by determining lucky numbers, the court held them to be debentures despite the fact that they were described as patron bonds. (Laxman Bharamji V. Emperior, 1946).
The usual features of the debenture are that is a certificate issued under the seal of the company, (British India etc. Co. V. Commissioners, 1881), it generally acknowledges a debt, (lemon V. Austin Friars Investment Ltd., 1926), it usually provides for the payment of principal at a specified time with interest in the mean time,; it is usually one of the series; it generally create s a charge on the company’s assets, (Debentures may be secured or unsecured. Narendra Kumar Maheshwari V. Union of India, 1990). These features are there in debentures but they are not compulsory features. They vary as per the kind of debenture.

Kinds of Debentures:

Redeemable debentures:

Debentures are generally redeemable. This means that on the expiry of the term of the loan the company has the right to pay back the debenture holders. Redeemed debentures can be re-issued. Upon such re-issue the debenture holder have the sane rights & properties as if the debentures had not been redeemed. [S.121].

Perpetual Debenture:

A debenture which contains no clause as to payment or which contains a clause that it shall not be paid back is called a perpetual or irredeemable debenture. Section 120 provides that a “condition contained in any debenture… Shall not be invalid by reason only that thereby the debenture are made irredeemable, or redeemable only on the happening of a continence, however remote, or on the expiration of a period, however long.”

Debentures to registered holder & bearer debentures:

When the name of a debenture holder is recorded in the register of debenture holders & on the debenture certificate, such a holder is registered holder. Such debentures are transferable in the manner of shares. Registration of transfer can be avoided only by issuing debentures payable to bearer as the company does not have to maintain a register of such debenture holders. Such debentures are transferable, like negotiable instruments, by simple delivery & are called debentures payable to the bearer. The Calcutta High Court has held it. In Calcutta, Safe Depository Co. Ltd. V. Ranjeet Mathuradas Sampat (1971). That a person to whom a bearer instrument is transferred becomes its holder. Section 118 of the Negotiable Instruments Act. applies & therefore, every holder of a bearer debenture is presumed to be a holder in due course unless the company is shown. If the payment is denied to him, he will be entitled to all rights of a creditor.


The charges, which a company may create on its assets, are of two kinds:
(1) Fixed charges &
(2) Floating charge.
The normal idea of a charge is that it is created on same definite or specific assets. But where the assets to be charged are liquid & are likely to be turned over in the course of business, only a floating charge would be the most appropriate security. The validity of such a charge was clearly recognized in Panama New Zealand, etc. Co. Re, (1870), where a company’s “undertaking” was charged and the court held that the charges was effective against the present & future assets of the company.
Romer J. in Yorkshire Woolcombers Association Ltd. explained the chief characteristics of a floating charge, which distinguish from a fixed charge,, Re, (1903). “A mortgage or charge by a company which contains the three following characteristics is a floating charge: (1) It should be a charge upon a class of asserts both present & future; (2) The class of assets charged must be one which in the ordinary course of business would be changing from time to time.; (3) it should be contemplated by the charge that until some step is taken by the mortgagee, the company shall have the right to use the assets comprised in the charge in the ordinary course of its business.” (Indus Films Corpn Ltd., Re, 1939)
If the company is not permitted to use the assets charged in the ordinary course of its business, (JD Jones & Co. Ltd., V. Ranjit Roy, 1927) or to use them only with the permission or license of the lender, (Mansukhrai M Karundia V. O.L, Andhra Paper Mills, 1949) or under his supervision, (bank of Baroda V. H.B. Shivdasani, 1926) it is not a floating charge. The company should be free even to dispose of the property charged in the ordinary course of business (State of A.P. V. Rajah Ram Jonardhana, 1965).
If the company is not prohibited from doing so, it may create subsequent mortage on the property charged & the mortgage will have priority over the charge-holder unless he had knowledge of the charge & prohibition (Borax, Re, (1901)). Registration of the charge with the Registrar of Companies under Section 125 amounts too constructive notice to every subsequent mortgagee.
According to Section 529 a floating charge created within 12 months. Immediately preceding the commencement of winding up shall be invalid, except in following cases: (a) if the company immediately after the creation of the charge was solvent; (b) to the extent to which any cash was paid under the charge. Eric Holmes Property Ltd., Re, (1965), a company created a charge in favour of an existing creditor who also advanced in cash a further sum of £ 400. Winding up of the company, workmen’s claims as stated in Section 529 rank pari passu with & the preferential payments as detailed in Section 530 have priority over the charge holders [S.123]. In I.R.C. V. Goldbelt, (1972) a receiver held personally liable for paying debenture-holders with knowledge that there were unpaid- preferential-creditors.

Crystallization of floating charge:

When the company makes a default in the payment of the principal or interest, the charge holders may enforce their security by seizing the assets over which the charge was until then floating. When they do this the charge crystallizes; it becomes a fixed charge. It is not the default by the company, but the intervention of the charge holders that crystallizes the charge. This was laid down by the House of Lords in Government Stock & Other Securities Investment Co. V. Manila Railway co. (1897) where their lordships said that before the charge holders intervene, the company can use the assets in the ordinary course of its business & accordingly a mortgage created by the company in the ordinary course of business was held to be valid. The making of a demand for payment is a sufficient interference for this purpose (Permanent Houses (Holdings) Ltd., Re, 1988).

TOPIC : 10


Directors and numbers of directors:

A corporation is an artificial being, invisible, intangible & existing only in contemplation of law. It has neither a mind nor a body of its own.
“A living person has a mind which can have knowledge or intention & he has hands to carry out his intention. A corporation has none of these; it must act through living persons.” (Tesco Supermarkets Ltd. V. Nattraso, 1977).
Section 252 requires that every public company shall have at least three & every private company at least two directors. By an amendment of the section by the Amendment Act, 2000 it has been provided that a public company having a paid up share capital of rupees five carore or more; one thousand or more small shareholders, should have a direct elected by the small shareholders. The manner of such election is to be prescribed. A small shareholder for this purpose means a person having shares of the nominal value of twenty thousand rupees or less in a public company.

Appointment & their Restrictions: (Sec.s 254 to 257)

The first directors of a company are to be appointed by the subscribers to the memorandum. If they do not appoint any, all the subscribers who are individuals automatically become directors on the registration of the company. They hold office up to the first annual general meeting of the company & the subsequent directors are appointed at the meeting by the shareholders. In the case of a public company & its subsidiaries, of the total number of directors only one third can be given permanent appointment. The office of the rest of them must be liable to determination by rotation. But at one annual meeting only one third of such directors retire. Those who have been longest in office retire first. As between persons who become directors on the same day, retirement is to be determined either by mutual agreement, or, in default, by lot. [S. 256(2)].
The vacancies created should be filed at the same meeting, or the meeting may resolve that they shall not be filed up at the same meeting, or the meeting may resolve that they shall not be filed up. If the meeting does neither, it is adjourned for a week. If at the reassembled meeting also no decision is taken, the retiring directors are deemed to have been automatically re-appointed, except where a particular director’s appointment was lost on voting, or has expressed his unwillingness to continue, or has incurred a disqualification or a special resolution is necessary for his appointment. [S. 256(3)].
If anew director is appointed, a notice in writing for his appointment should be left at the office of the company at least 14 days before the meeting along with a deposit of Rs. 500, which will be refunded to the depositor if the candidate gets elected. The company is required to inform the members at least 7 days before the meeting. [S. 257].
The appointment made by an ordinary resolution for each individual candidate. (S. 263). If two or more individuals are appointed by single resolution, the same is void. (Raghunath Swarup Mathur V. Raghuraj Bahadur, 1966). But if the meeting has unanimously so resolved, more than one person may be elected by a single resolution. [S. 263(1)]. A company can adopt by its articles the system of voting by proportional representation. [S. 265].

Casual Vacancies: [S. 206].

Addition directors may be appointed by the directors if they have the power to do so in the company’s articles & subject to maximum number fixed there. Such director hold office until the next general meeting. Where the AGM was stayed or deferred at the order of the CLB, the nominee director remain in the office till the stay was vacated & the meeting actually held, (Ador- Simla Ltd. V. Indocan Engg. Systems Ltd. 2000).

Appointment By Central Government:

The Central Government has the power under Section 408 to appoint directors for the purpose of prevention of oppression & mismanagement.

Position of Directors:

The position that the directors occupy in the corporate enterprises is not easy to explain. (Ram Chandra & Sons v. Kanhaiya Lal, 1966). They are professional men hired by the company to direct its affairs. Yet they are not servants of the company. (Moriarty V. Regent’s Garage & Engg. Co. 1921). They are rather officers of the company. A director may, however, become a servant in a different capacity. For example, the create & controller o f an air farming company was also working as its pilot. He was lost in an accident. His widow was allowed compensation under the Workman Compensation Act. (Lee v. Lee’s farming Ltd. 1961).
The Companies Act makes no efforts to define their position. It only says in Sec. 2(13) that director includes any person occupying the position of the director, by whatever name called. In the words of Bowen LJ., :”Directors are described sometimes as agents, sometimes as trustee & sometimes as managing directors. But each of these expressions is used not as an exuastive of their powers & responsibilities, but as an indicating useful points of view from which they may for the moment & for the particular purpose be considered.” (Imperial Hydrophythic Co. V. Hampson, 1882).

Directors as agents:
It was clearly recognized as early as in 1866 in Ferguson v. Wilson (1866) that directors are in the eyes of law agents of the company. The court said: “The company has no person; it can act only through directors & the case is as regards those directors, merely the ordinary case of principal & agent.” In this case the directors allotted certain shares to the plaintiff. They were held not liable when the company, having exhausted its shares, failed to give effect to the allotment. Similarly, where the plaintiff supplied certain goods to a company through its chairman, who promised to issue him a debenture for the price, but never did so & the company went into liquidation, he was held not liable to the plaintiff (Elkington & Co. v. Hirter, 1892).

Directors as trustees:

“Although directors are not properly speaking, trustees yet to have always been considered & treated as trustees of money which comes to their hands or which is actually under their control & ever since joint stock companies were invented directors have been held liable to make good money which they have misapplied upon the same footing as if they were trustees.” (Lindley LJ, in Lands Allotment Co., Re, 1894). Their office is of fiduciary nature.
Most of their powers are powers in trust. The power to make calls (Alexander v. Automatic Telephone Co., 1900), to forfeit shares (Esparto Trading Co, Re, 1879), to issue further capital (Nanalal Zaver v. Bombay Life Assurance Co, 1950) to approve transfer of shares are all powers in trust which have to be exercised in good faith for the benefit of the company. Yet directors are not trustees in the real sense of the word. It is only some of their functions & duties which are like those of trustees.
Directors are trustees for the company & not individual shareholders. It was held in Percival v. Wright (1902), that the directors were not bound to disclose pending negotiations for the sale of the company’s undertaking before buying the shares voluntarily offered to them by the shareholders. But if they induce the shareholders to sell their shares to them concealing the fact that they were going to merge the company into another company at a profit, they would become trustees of this profit to the individual shareholders (Allen v. Hyatt, 1914). This principle was applied by the New Zealand Court in Coleman V Myers (1977). In a struggle for control in a privately held family company, the shares of the minority shareholders were bought at $4.80 per share. The purchasing majority knew but the selling minority did not known that if the accounts were taken of the true assed backing of the shares, they were worth $7.75 each. The minority share holders had no access to the inside formation on the true value of assets. Mohan J. said that the case would not be distinguish from Percival V. Wright but that, in fact, Percival V. Wright was incorrectly decided & in the circumstances of the two cases where the directors were buying share in their own company, a fiduciary duty was owed to share holder. The Court of Appeal where however content to distinguish Percival V. Wright on the special facts of the case. It held that the court will not impose a fiduciary duty automatically upon directors when they entered into transactions with the company’s shareholders. Because of the special circumstances of this casa, the court did impose a fiduciary duty. The circumstances where face-to-face negotiations in which the members relied upon the directors to disclose all material information “the directors had a high degree of inside knowledge & the directors actively promoted the scheme & advice share holders to accept.

Further to a certain extent, directors are trustees not merely of the company, but also of a public institution. A company is a social institution (Charanjeet Lal V. Union of India,1951) & as such owes certain obligations to persons other than shareholders, such as the labour, customer, consumer & the like. TO the extent to which directors have to keep in mind such outside interest affected by corporate operation, they are trustees of such interest.

Directors as organs:

The organic theory of corporate life “treats certain officials as organs of the company for whose action the company is to be held liable just as a natural person is for the action of his limbs.” (Takukadar J. In Gopal Khaitan V. State, 1969). Thus the modern directors are something more than mere agents or trustee.”The Board is also correctly recognized to be a primary organ of the company. Directors and managers represent the directing mind or will of the company & control what is does. The state of mind of these mangers is a state of mind of the company 7 is treated by the law such “ (Denning LJ In H.L. Bolton(engg.) Co. Ltd. V. T.J. Graham & Sons, 1957). The practical effects of this rule are that the directors’ personal fault in the business of the company becomes the “fault of the company” (Lennard’s Carrying Co. v. Asiatic Petroleum Co., 1915); the reason to believe is attributed to the company (Chuter v. Freeth & Peacock Ltd., 1911), & the intention to occupy a premises as expressed by their conduct is the intention of the company.
Personal liability of the organ-
Where a tort or some other wrong happens to be committed in the working processes of a company, the question would be whether the responsibility for it would be attributed to the company or it should be borne by the director alone. The applicable principle has been thus stated:
“The authorities…. clearly show that a director of a company is not automatically to be identified with his company for the purpose of the law of tort, however small the company may be & however powerful his control over its affairs. Commercial enterprise & adventure is not to be discouraged by subjecting a director to such onerous potential liabilities. In every case where it is sought to make him liable for his company’s torts, it is necessary to examine with care what part he played personally in regards to the act or acts complained of” (Slade LJ. In C. Evans & Sons Ltd. V. Spriteboard Ltd., 1985).
In a New Zealand case (Trevor Ivory V. Anderson, 1992). The director of the one-man company gave advice through the company, to a client for spraying of an insecticide around fruit trees. The advice was so negligent that fruit trees perished along with their parasites. The court did not consider the circumstances to be such as to hoist the personal liability on the director. He had made it clear that he was trading through the company and the company was the legal contracting party to be charged with the liability. As compared with this, in Fair Line Shipping Corpn. V. Adamson (1971) the director becomes personally liable for loss of perishable good from the storage of perishable goods by his one man company. The liability hinged on a letter written by the managing director to the plaintiff on his own note paper rather than that of the company, an act which the court thought displayed and assumption of personal duty of care.

Qualification & Disqualification :

Share qualification [S. 270].

If the articles of the company require its directors to hold a certain number of shares, they are called qualification shares. A director must obtain them within two months of his appointment. The value of qualification shares cannot exceed five thousand rupees. Only shares must be held, & not share warrants, & also in the directors own right. He must not take them as a present from the company or its promoters. (Boschok Propritary Co. V. Fuke, 1906). A director who fails to hold his qualification shares, automatically vacate his office on the expiry of 2 months & become liable to punishment if he continues to act. [S. 272].

Disqualifications [S.274]:

A person is not capable of being appointed a director in the following cases:
(a) where he is a person of unsound mind.
(b) Where he is an undercharged insolvent (Mukul Harikisandass Dalal V. Jayesh Ramniclal Doshi, 1997).
(c) Where he has applied to be adjudicated as an insolvent.
(d) Where he has been sentenced to at least six months of imprisonment for an offence involving moral turpitude & five years have not passed since the date of the expiry of the sentence. (Joy V. State of Kerala, 1991).
(e) Where he has not paid for six months any calls on the shares.
(f) Where he has been disqualified under Section 203 for the purpose of preventing fraudulent person from managing companies.
(g) Where such person is already a director of public company,-
i) Which has not filed the annual accounts & annual returns for any continuous three financial years; (commencing on & after the first day of April 1999); or
ii) has failed to repay its deposit or interest on its on due date or redeem its debentures on due date or redeem its debentures on due date or pay dividend & such failure continues for one year or more. (The person so qualified shall not be eligible for appointment as director of any other public company for five years from the date of the specified types of failure).

Duties & Liabilities Of Directors:

Corporate executive are today possessed of “immense power which must be regulated not only for the public good, but also for the protection of those whose investment are involved.” (Jorchester Finance Co. Ltd. V. Stebbing, 1989). The law tries to regulate the exeresice of this power by imposing upon the directors the following duties & liabilities:-

1. Duty of good faith:

Liability of breach of trust:

Directors being fiduciary agents of the company, they are bound by the principle of good faith. “Greatest good faith is expected in the discharge of their duties.” As fiduciaries they are bound to account to the company for any profit made by them while acting as directors or by the use of the company’s property (Boston Deep sea Fishing & Ice Co. v. Ansell, 1888). They should not exploit to their own use the business opportunities of the company. In Cook V. Deeks (1916) the directors of a company, carrying on the business of railway constructions, obtained a contract belonged in equity to the company. They must remember, the court said:
“That they are not at liberty to sacrifices the interest which they are bound to protect, &, while ostensibly acting for the company direct in their own favour business which should properly belong to the company they represent.” Where a managing director resigned under pretence of ill health & obtained a gas contract which the Gas Board has refused to allot to the company, he was held liable to account for the profit of the contract (Industrial Development Consultancy Ltd. V. Cooley,1972).
Even where the company is financially unable to make use of it’s opportunities, directors should not use it for themselves. If they do so, & make a profit, that also belong to the company. If they are permitted to retain such profits, they would be temptation to induce such inability on the part of the company and to profit by it. Thus, in Regal Hastings Ltd. V. Gulliver, 1942, the directors were held liable to restore to the company the profits made be them in selling the shares acquired by them in the company’s subsidiary. They initially wanted their company to acquire those shares but they company being financially unable to do so, they had themselves taken up the shares.
A director may however, make use of a business opportunity where the company is insolvent, or the business is outside the scope of its objects and the company has shown no interest in the opportunity or where the directors in good faith decide that the opportunity is one that the company ought not to take. (Peso Silver Mines Ltd. V. Cropper, 1966).

Trading in corporate control [S.s. 319-321]:

The Act provides that if the directors receive any
money on the sell of their controlling block of shares which is over an above the money received by the other selling shareholders, the extra money is in essence a prize for the for the sell f controlling power & the directors would have it in trust for the selling shareholder. Sellers of controlling block also become liable when for their personal gain they too negligently allow the control of the company to pass into the hands of persons who intended to loot the company.

Misuse of corporate information :

If a director makes any use of unpublished & confidential information belonging to the company suffers a loss in consequence, it can ask the director to make the good loss. Any knowledge or information generated by the company is the company’s property. Turn over of business, profit margins, list of customers, future plans, manufacturing formulas & process are the company’s trade secrets. Any gain made out of the use of such information has to be accounted for the company. If any side information is used for the purpose of trading in the company’s shares; it would amount to violation of SEBI (Insider Trading) Regulations, 1992. Insiders involved can be disqualified & also held liable for the company’ losses or those of any other victim.
Apart from violation of the regulatory frameworks, director’s dealing in their own company share is not illegal. It is considered desirable that directors of listed company’s should hold the shares of their companies. As a part of remunerations package, directors of ten given share option which unable them to acquire the share in their company, which they may afterwards sell. When directors decide to sell their shares however acquired or to buy more shares, their trading comes to be governed by the legislation on insider trading. They commit an offence if they trade on some specific non public information abut their companies securities. “For instance, if the director has access to unpublished price sensitive information, such as information on future earning figures, securities issues, assets disposal & purchases, etc., Which if it were made public would have significant effect on the share prices, it is illegal for them to trade on the information. Consequently, directors can trade in the shares of their own company but the trading must not be based on any inside information.” ( David Hillier & Andrew Marshall ).

Competition by Director:

A director commits no breach of duty if he competes with his company or holds some interest in a rival company or is a director in a competing company. (London & M. Explorate Co. v. New M. Exploration Co., 1891). But he should not make use of the company’s secrets or assets or any special skill for which he has been trained by the company. By an agreement with a director, he can be restrained from engaging himself in activities of competing nature.
2. Duty of care:

Liability for Negligence:

Fidelity alone is not enough. A director has to perform his functions with reasonable care & skill. “His duties will depend upon the nature of company’s business and manner in which the work of the company is distributed among the directors and the other officials of the company. In discharging these duties a director must exercised some degree of skill & diligence. But he does not owe to the company to take or possible care or to act with the best care. Indeed, he must not exhibit in the performance of his duties greater degree of skill than may reasonably expected from a person of his knowledge & experience…. Directors are not liable for mere errors of judgment.” This is a well known observation of Romer J. in the celebrated case of City Equitable Fire Insurance Co. Re. (1925). A director of an insurance company plunged the company into winding up by his frauds, misappropriations & bad investments. He was accordingly convicted. The question was whether his co-directors were not guilty of negligence in not detecting such extensive frauds. The court held that they were, but they escaped liability because under the company’s articles, directors could be made liable only for gross negligence.
“This acquittal caused such ferment as to lead to legislation abolishing contracting out.” Accordingly, Section 201 renders void any provision in the articles or in any agreement which excludes liability for negligence, default, and misfeasance, breach of duty or breach of trust. The company is also not allowed to indemnify its officers against such liability. But where an officer sued or prosecuted has been acquitted, the company may indemnify him for his costs [S.201 (proviso)].
The courts are also trying to infuse Romer J.Subjective standers with some objectivity. For example, in a recent case Buckley J. said that a director has to act “in the way in which a man of affairs dealing with his own affairs, with reasonable care and circumspection could reasonably be expected to act.” (Dumotic Ltd. Re. 1969). Applying this standard to the case before him the learned judge held that the payment of 4000, without legal advice , as compensation to a director for retirement when, in fact, he was entitled to no compensation, was an act which could not be regarded as reasonable.

3. Duty to attend board meetings:

Liability for non attendance:

Duties of the directors are of an intermittent nature to be performed at periodical board meetings. A director is not even bound to attend all meetings. “they do not undertake to manage the company.” The Act only says that the office of the director is automatically vacated if he fails to attend three consecutive meeting of of the board or on meeting for a period of three months whichever is longer [S.283(1)(g)]. Moreover, a director’s habitual absence may become evidence of negligence. In an early case in which liability was imposed in this respect, the court said: “if some persons are guilty of gross non attends an live the management entirely to others, they me guilty by this means if breaches of trust are committed by others.” (Caritable Co. V. Sutton, 1726).

4. Duty not to delegate:

Liability for co- directors default:

Directors being agents, or bound by the maxim ‘delegates non- protest delegre’ A director should not delegate his function to another person. But delegation of functions may be made to the extent to which it is authorized by the Act or the Constitution of the company. Directors must be able to entrust details of management to subordinate or else business could carried on. A proper degree of delegations & division of responsibility by the Board is permissible but not a total abrogation of responsibility since this could undermine the collogue gate all corrective responsibility of the board of director which is of fundamental importance to corporate Governors. A director might in breach of duty if he left to other A matter for which the Board as a hall ha to take responsibility. (Landhurst leasing plc. Re., 1999). Secondly, there are certain duties, which keeping in mind the exigencies of business, may be left to some other official. In Dovey V. Gory (1901) the defendant’s to co- directors manipulated the account and showed profits when there was loss, but assured defendants of the correctness of the account. The defendant gave his authority to the payment of dividend which was obliviously paid out of the capital. But he was held not liable for this loss for the capital. He had right to trust his co-directors unless there was something to create a doubt their integrity & competence. Similarly where one of the director misappropriated the Security money of employees his co- director where held not liable (D. Doss V. C.P. Connel, 1933).
On the same principle, directors were not liable for misappropriation of stores by the stores manager (Vijai Laxmi Sugar Mills, Re, 1963) or for failure to direct cashier’s concealment of overdrafts (Perfontaine V. Grenior, 1907) or for payment of dividends on false accounts declared at a meeting where the director sought to be made liable was absent (Nagendra Prabhu V. Popular Bank, 1969) or for allowing by one of the two directors the company’s premises to be used for gambling purposes without license, the other director knowing nothing (Huckerby V. Elliot (1970)).
This does not however, mean that directors can always throw up their hands & say ‘we know nothing & believed that everything was alright.’ Thus where in the case of a banking company, dividends were paid for as many as twenty two years on the basis of manipulated accounts, the directors were not permitted to say that they relied upon competent staff & auditors (Palai Central Bank ltd. V. Joseph Augusti, 1966).

5. Duty to disclose interest [S.s. 299-300]

Where a director is personally interested in a transaction of the company, he is required to disclose his interest to the board. If he is a member of a company or a firm with which the company has to deal, he should give a yearly notice to the board of his interest in that concern. Secondly, an interested director is neither to vote on the matter of his interest nr his presence shall count for the purposes of quorum. If he does vote, his vote shall be void. [S.300 (2)] These provisions are based upon the principle that an agent should not allow a conflict between his duty & interest. (Alexander Timber Co, Re, 1901). Thus, where the directors took part in & voted at a meeting of the board which granted debentures to two of them, the resolution was held bad. (North Eastern Ins. Co. Ltd., Re, 1919). But the appointment of a director as a chairman or as a managing director or allotment of shares to a director is not such an interested as would exclude the director from voting. (Foster V. Foster, 1916) But the Madras High Court has held otherwise. (B. Ramaswami Iyer V. Madras Times Printing & Publishing Co. 1915).
Where the whole body of directors is already aware of a director’s interest, a formal disclosure is not necessary. (Venkata Chalapathi V. Guntur Mills, 1929) His vote will not be vitiating the contract, provided that without his vote there were enough quorums. (P. Leslie & Co. V. V.O. Wapshare, 1969). EVEN where the interest is not disclosed, the transaction is only voidable by the company & not void. If the company waives the irregularity & confirms the transaction, he becomes bound by it; he cannot insist on the irregularity (Narayandas V. Sangli Bank, 1966). A director was not allowed to recover remuneration for his services in connection with the company’s takeover rendered without disclosing that he was interested in the other company & it was not sufficient that the committee of directors dealing with the takeover knew the matter. It had to be disclosed to the Board of directors (A. Chettiar V. Kaleshwal Mills, 1957).
This procedure has not to be followed where the contract is between two companies & the director in question does not hold more than 2% [or tow or more directors together held not more than 2%] of the paid up share capital of the company [S. 299 (6)].

TOPIC : 11


Meaning & kinds of Meetings:

Statutory Meeting: [S. 165]:

The first meeting of the shareholders of public company is known as the “Statutory Meeting.” It has to be called within six months from the date on which the company is entitled to commence business, but it cannot be held within one month from the date. The directors are required to prepare & to send to every shareholder a statutory report at least twenty-one days before the day on which the meeting is to be held. The report should set out the particular relating to the total number of shares allotted, & for what consideration, actual cash receipt & payments; commissions & discounts paid; names & addresses of director & manager, material contracts & underwriting contracts; arrears, if any, due from the directors or the manager & commission or brokerage paid to any one of them. A copy of the statutory report should be sent to the Registrar also. A default in holding this meeting or filing statutory report is not merely punishable; the company may also be ordered under Section 433 to be wound up.

Annual General Meeting [S. 166]:

Every company is requires calling at least one meeting of its shareholders in each year. This meeting is known as the annual general meeting. The first annual general meeting must be held within 18 months from the date of the incorporation, & then no meeting will be necessary for the year of incorporation & the following year. Thereafter one meeting must be held every year. There must be as many meetings as there are years. (Shree Minakshi mills Co. Ltd. V. Asstt. Registrar of Joint Stock Companies, 1938). The gap between one meeting & the next should not be more than 15 months. Any default holding this meeting has two consequences. Firstly, any member can apply to the Company Law Board for an order requiring the company to call the meeting.[S. 167(2)]. Secondly, the failure to call this meeting either generally or in pursuance of the order of the CLB is an offence punishable with fine. It is no defense that because books were lodged in a court, accounts could not be prepared & meetings could not be held. But where one of the two members of a company was held to be not willful. [S168]. (Ramchandra & Sons V. State, 1967).
The Registrar has the power, for any special reason, to extent the time for holding an annual meeting for a period of only 3 months. But the time for holding the first general annual meeting cannot be extended. [S.166(1)(a), proviso].
The meeting should be held during business hours & on a day which is not a public holiday & at the registered office of the company or at the place within the two where the registered office of the company or at any place within the town where the registered office is situated. The appointment of additional directors was held to be prima facie void where the meeting was held at a different place from the place specified in the notice. Individual notice was not given to members & the change of venue of meeting was not notified. (Sikkim Bank Ltd. V. R. S. Chowdhari, 2000).
The business to be transacted at the meeting is generally provided for in the company’s articles & that is known as ordinary business. The meeting may take up any other business & that will be known as special business.

Extraordinary general meeting [S. 169]:

Any meeting other than the annual general meeting is known as an extraordinary general meeting. The directors may call it whenever they think fir & must call it when the shareholders requisition it. The holders of at least one-tenth paid-up capital having the right to vote on the matter of requisition must sign the requisition. If the company has no share capital the requisition must be signed by as many as have one tenth of the total voting power [S. 169 (4)].
The requisition must set out the matter for the consideration of which the meeting is requisitioned. When a meeting is requisitioned for the purpose of removing directors, it is not necessary to state reasons for the same. (LIC V. Escorts Ltd., 1986). The directors should move within twenty-one days to call the meeting which should actually be held within forty-five days. If they fail to do so, the requisiteness may themselves call the meeting (M.R.S. Rathnavelusami V. M.R.S. Manickavelu,1951) & recover the necessary expenses from the company. (S.169(1))

Power of Company Law Board to call meeting (S.186):
By the Companies (Amendment) Act 1974, the power of the court to call a meeting has been transferred to CLB. The power of the Board, being of judicial nature, the Board is likely to follow the principles on which the courts have been acting. Where for some reason it is not practicable to hold an extra ordinary meeting, the proper course to apply to the CLB. The Board may order a meeting to be called & held in accordance with its directions. Where the shareholders of a company were fighting a suit over the competence of a director to be the chairman of the meeting (Indian Shipping Mills Ltd. V. King of Nepal, 1953) or as to who are lawful directors of the company (Ruttanjee & Co. Ltd., Re 1968), it was held that it was “impracticable” to hold a meeting & a meeting was accordingly ordered to be called. In a two-member director company, there was a petition for preventing of unfair prejudicial conduct (oppression). For that reason, one director would not sit with the other at a meeting. Additional directors could not be appointed for carrying on the management: A meeting for appointment of additional directors was ordered to be held (Sticky Fingers Restaurant Ltd., Re, 1992).

Meeting of directors – [S.s 285 & 286]:

Directors have to meet at least once in every three months & at least four meetings should be held in every year.

Notice of Meeting: [S.s 171-172]

Notice must be proper & it should be severed in accordance with the provisions of section 53. Proper notice of the meeting should be given to the members. Deliberate omission to give notice to a single member may invalidate the meeting (Smith V Darley, 1849). Even where the shareholders were not insisting upon their rights because they had agreed to sell their shares, omission to give notice invalidated the meeting (Akbar Ali V. Konkan Chemicals P. Ltd., 1997), although an accidental omission to give notice to or non-receipt of it by a member is not fatal [S.172 (3)]. Notice should be given twenty-one days before the date of the receipt of the notice by members & the notice shall be deemed to have been received at the expiration of forty-eight hours from the time of posting [S. 58 (2)(b)] (Pioneer Motors V. Municipal Council Nagar coil, 1960). Members can be unanimously concede to a shorter notice either before or after the meeting (Self Help Private Industrial Estate Ltd., Re, 1972) or may acquiesce to it (Bailey Hay & Co., Re, 1971). Where notices were posted on Aug. 31 & Sept. 1 for a meeting to be held on Sept. 21 & they were held to be not valid (Balwant Singh V. Zorawar Sigh, 1988).

Contents of Notice [S. 172 (1)]:

Notice must specify the place, day & hour of the meeting to be valid must be held accordingly. But where the directors looked up the premises, a meeting held by the shareholders at some other place was held to be valid (MRS. Rathnavelusami V. MRS Manickavelu, 1951).
The notice must also contain a statement of the business to be transacted at the meeting. Sec. 173 puts business into two kinds: (1) General business – At the annual general meeting the business of considering accounts, auditors & directors’ report, he declaration of dividends, the appointment of directors & auditors & fixing the remuneration are called general business. (Ramjilal Baisiwala V. Baiton Cables Ltd., 1964). (2) Special business – Any other business at an annual meeting & all business at an extraordinary meting are regarded as special business.
In any special business is to be transacted, a statement of that business must be annexed to the notice calling the meeting. Thus, where the terms of appointment of managing agents were proposed to be changed, but the notice only disclosed the resolutions to be proposed, the resolution were held to be invalid (Narayan Lal Bansi Lal V. Maneckji Petit Mfg, Co, 1931). Similarly where the proposed regulations were not sent with the notice, but the members were requested to see them at the office of the company, the notice was held to be not proper (Bimal Singh Kothari V. Muir Mills Co. Ltd., 1952). But it was pointed out by the Privy Council in Parashuram V. Tata Industria Bank Ltd., (1928), that a shareholder who by his conduct shows that he knew the real effect of the work to be transacted at the meeting cannot complain of the notice on the ground of insufficiency.
The purpose of the explanatory statement is that the members should be informed of the nature of the business to be transacted at the meeting (Rajiv Nag V. Quality Assurance Institute (India) Ltd., 2000).

Quorum [S.174]:

Quorum means the minimum number of members that must be present at the meeting. Section 174 provides that unless the articles provide for a larger number, five members personally present in the case of a public company & two in the case of a private company shall be the quorum. If within half an hour a quorum is not present, the meeting is automatically adjourned to reassemble on the same day in the next week. If at the reassembled meeting also a quorum is not present, as many member as are actually present shall constitute the quorum. But there would be at least more than one member. (Sharp v. Dawes,1876). But where in a meeting of preference share holders, all the shares are held by one person, he may alone constituted a valid meeting. (East v. Bennet Bros.Ltd., 1911). Similarly, when the CLB calls a meeting it may direct that only one member of the company present in person or proxy shall be deemed to constitute a meeting. [S. 167 (1)] & [S. 186 (1)] where there is a quorum when the meeting proceeds to business, the subsequent departure of a member reducing the number below quorum does not invalidate the meeting (Beard Ltd., Re, 1955). A court in England ordered a single member to constitute a valid meeting where of the only two member directors of a company, the majority shareholder wanted to remove the other from directorship & the other would not attend the meeting. (L’Opera Photographic Ltd.,Re, 1989). But where of the two members present the one in majority wanted to get himself appointed as liquidator, the other left in protest, it was held that the self appointment as liquidator at the meeting attended by him was not valid (London Flats Ltd., Re, 1969).

Minutes [S.193]:

Within 30 days of every meeting of the company, or of its board or commits thereof, entries of the proceedings must be made in the books kept for the purpose & their pages must be consecutively numbered. Minutes kept in accordance with these provisions are evidence of the proceedings recorded in them. [S.194, 195, & 196]. (Bawley & Co.,Re., 1989). Section 197 requires that no document purporting to be report to the proceedings of a general meeting shall be circulated or advertised at the cost of the company. Circulation of any such matter can be made if it is such that it is required to be included in the minutes of the proceedings. [S. 197(1) & S.197 (2)].


A member may vote either in person or by proxy. Unless the articles allow the proxy to vote on a show of hands, he can vote only on a poll. A proxy is a representative of the shareholder &, therefore, has to follow his instructions. A proxy does not have the right to speak. [S.176].
The instrument appointed a proxy must be in writing, signed by the shareholder & should be deposited with the company 48 hours before the meeting.[S. 176(3)]. Where the articles are silent, the power of revocation can be exercised at any time before the votes are actually cost. (Narayan Chettiar V. Kaleshwar Mills, 1952).

Voting & Poll [S.187]:

The business of a meeting is done in the form of resolutions passed at the meeting. Every holder of equity shares has the right to vote. The company cannot prohibit any member from exercising his voting rights on the ground that he has not held his share for any specified period before the meeting or on any other ground. [S.182]. The only grounds of evolution are the non-payment of any calls or other sums due against a member or where the company has exercised lien over his shares. [S.181]. Before the Amendment of 2000 shares with differential voting rights were not permitted to be issued. Such voting rights existed up to the enactment of the 1956 Act. Now they have been brought back by the Amendment of 2000. Section 2(46A) provides that shares with differential voting rights means shares, which are issued with differential rights in accordance with the provisions of Section 86. A preferential shareholder has right to vote only on the resolutions, which directly affect the right attached with such shares. [S.37(2)].
Initially voting takes place by show of hands [S.177] & one number has one vote. [S.37(1)(a)]. In such cases the declaration by the chairman that the resolution is carried is conclusive [S.178]. (E.D. Sasoon United Mills Ltd. Re. 1929), unless a poll is demanded or his declaration is otherwise erroneous in fact. (Dhakeshwari Mills V. Nil Kamal Chakrawarti, 1937).
“the voting right of member on a poll shall be in proportion to his share of the paid up equity capital of the company.” [S.87(1)(h)]. Shares with disproportionate voting rights where not allowed to be issued. [S.88]. Section 88 which so provided has been omitted by Amendment of 2000. Sec. 86, as replaced by the same Amendment, permits shares with differential rights to be issued. But so long as a company does not have such share, the regime of equality of voting rights would prevail. A poll may be ordered by the chairman of his own motion & he will be bound to order it when it is demanded in the case of a public company having share capital, by any member or members present in person or by proxy 7 having shares in the company. (i) Which confer a power to vote on the resolution not being less than one tenth of the total voting power in respect of the resolution or (ii) on which an aggregate such of not less than Rs. 50,000 has been paid & in the case of the private company by at least one if less than seven members are present & by two if more than seven are present or by the holders of one tenth of the total voting power in respect of the resolution. [S.179(1)]. Where a poll was demanded on a valid ground but was not allowed by the chairman, the CLB held that the business on the agenda for which poll was carried through by show of hands become invalid. (Namita Gupta v. Cachar Native Joint Stock Co. Ltd.1999).
On a poll a member is free to split his votes for as well as against the same resolution. [S. 183]. (Maharashtra v. fort Gloster Jute Mfg. Co., 1955). The chairman appoints two scrutinizers (one of whom must be a member if available & willing) to scrutinize the votes given on the poll. The chairman’s declaration that resolution has or has not been carried is prima facie evidence of the resolution. [S.195].
Where a Government or company is member of the company, it may attend meeting through a representative. The person nominated as representative holds the position of proxy. [S.s.187 (2)&187-AA].


Kinds [S.189]:

Resolutions are of two kinds: (1) ordinary resolution, & (2) special resolution. A resolution is said to be ordinary when the votes cast in favor of it at a general meeting of a company exceeds the votes, if any, cast against it. It means a resolution passed by a simple majority of the shareholders present & voting. A special resolution , on the other hand, requires the support of a three fourth majority of shareholders present & voting. The intention to propose the resolution as a special resolution should have been mentioned in the notice calling the meeting. A copy of the resolution must be registered with the Registrar within 30 days of its date. [S192(1)].
If any member proposes to move a resolution a requiring special notice, the intention must be notified to the company at least 14 days before the meeting. [S.195]. Sometimes an ordinary resolution also requires a special 14 days’ notice. Such a notice is necessary, for example, for removing a director or an auditor or for proposing the appointment of anew director. Every member has a right to give a special notice of this kind relating to a proposed resolution, but he does not have the right to have the resolution included in the agenda of the meeting unless he is supported by as many shareholder members as can requisition a meeting or can ask for circulation of member’s resolution u/s188.

Appointment of Auditors [S.224]:

Auditors are appointed by the share holders every year at the annual general meeting. An auditor appointed at one annual meeting holds office until the conclusion of the next annual meeting. But a retiring auditor is reappointed except where he is not qualified or has expressed his unwillingness to act or a resolution has been passed appointed another or resolving that he shall not be re-appointed or where the intended resolution for the appointment of another person could not on account of his death, incapacity or disqualification, be proceeded with, where at an annual meeting no auditor has been appointed or re-appointed, the central Government gets the right to appoint a person to fill the vacancy. The board can fill a casual vacancy but the appointee holds office only up to the next annual meeting of the company. [S.224 (3) & (6)].
By the Companies (Amendment) Act, 1974 & 1988 the number of companies in which an auditor can accept auditor ship has been restricted to twenty, [S.224 (I-B)], Further, Section 224-A, also added by the amendment, specifies cases in which an auditor can be appointed only by a special resolution. In the case of the company in which 25% or more of the subscribed capital is held, whether singly or jointly, by a public financial institution, or by any nationalized bank or an insurance company, the appointment or re-appointment of an auditor can be made only by a special resolution. Where a special resolution has not been passed, the Central Government will get the right to make an appointment.

Powers, Rights & Liabilities of Auditors [S.227]:

Every auditor has the right of access to the books & accounts & vouchers of the company. He may require from the officers any information he thinks necessary. For the performance of his duties. The auditor has to inquire whether the loans & the advances are properly secured, & their terms are not prejudicial; whether the company is not an investment or a banking company & whether any securities have been sold by the company at a price less than that at which they were purchased; whether loans & advances have been shown as deposits; whether personal expenses have been charged to revenue account & whether cash has actually received for shares shown to have allotted for cash & if no cash has been received, whether position as stated in the books is correct [S.227(I-A)].
Sub section (3) also requires the auditor’s report to state:
“(a) Whether he has been obtained all the information & explanations which to the best his knowledge & belief necessary for the purposes of audit;
(b) Whether in his opinion proper books of account as required by law have been kept by the company so far as appears for his examination of those books & proper returns adequate for the purposes of his audit have been received from branches not visited by him;
(c) Whether the report on the accounts of any branch office audited under section 228 by a person other than company’s auditor has been forwarded to him as required by clause (c) of sub section (3) of that section & how he has dealt with the same in preparing the auditor’s report;
Whether the company’s balance sheet, profit & loss account dealt with by the report are in agreement with the books of account & returns.
(d) Whether in his opinion the profit & loss account, balance sheet comply with accounting standards referred to in sub section (3c) of section211.
(e) In thick type or in italics the observations or comments of the auditors which have any adverse effect on the functioning of the company;
(f) Whether is disqualified from being appointed as director under clause (g) of sub-section (1) of section 274.”
The auditor has to submit a report to the members of the company. The report should state whether the accounts are kept in accordance with the provisions of the Act. & whether they give a true & fair view of the state affairs of the company. His duty is “not to confine himself merely to the task of verifying the arithmetical accuracy of the balance sheet, but to inquire into its substantial accuracy.” (Stirling J. in leads Estate Co. V. Sheperd, 1887). Thus where a auditor failed to verify the cash balance claimed by the management & the actual cash in hand turned out to be much less than was shown in the books, he was held to be guilty of neglect of duty (Dy. Secretary V. S.N. Das Gupta, 1956). In matters of technical nature, for example, the valuation of stock-in-trade, the auditor may rely on a skilled person & was held not liable when the relied upon the manager of a cotton mill, unless there was suspicion of something wrong (Kingston Cotton Mills Co, Re, (No. 2), 1897).
Secondly, the auditor must exercise reasonable care & skill in the discharge of his duty (City Equitable Fire Ins. Co., Re, 1925). The auditor “is a watchdog, but not a blood hound” (Lopes L.J., in Kingston Cotton mills Co, Re, (No. 2), 1897). “He is not an insurer”. If the company owns securities the auditor should see that they are in proper custody. Thus whether the stockbrokers of a company certified to its auditors that they were holding the company’s securities when in fact they did not do so & the company suffered loss, the auditors were held guilty of negligence. They should have at once reported the matter to the share holder (City Equitable Fire Ins., Co., Re.,1925). Similarly where the auditors fail to ask of the directors as to why a selling agency commission paid to managing agents was not included in their remuneration (Ganeshan v. A.K Joscelyne,1957) & where they confidentially told directors that the securities were inadequate & told the shareholders only this that the value of assets dependent upon realizations, they were held liable (London & General Bank, Re, (No. 2), 1895).
If they approved of accounts showing false income, they will be liable for the extra income tax that company had to pay, or for dividends paid on the basis of such accounts. (Thomas Garrard & son, Re, 1967)
Auditors are under no responsibility to persons other than share holders unless they be misled by any error in the audited accounts. (Caparo Industries plc v. Dickman,1989)
Default in disclosing fraud:
The auditors of company discovered that a senior employee had been defrauding the company at a grand scale & that he was on position to go on doing so. The court said that in such situation it would the auditor’s duty to report the matter to the company’s management & not to postpone it till submit the report (Sasea Finance Ltd. V. RMPG, 2000).

Topic : 12


The modern Companies Act contains a large number of revisions for the protection of the interest of the investor in incorporated companies. The aim of these provisions is to require those who control the affair of a company to exercise their power according to certain principles of natural justice & fair play.

Rule in Foss V. Harbottle:

The basic principle relating to the administration of the affairs of a company is that the court does not at the instance of shareholder interfere in the administration of the company by its directors. This is known as the rule in Foss V. Harbottle (1843). In this case certain shareholders had brought an action against the directors to force them to make good the loss they had caused to the company by their illegal & fraudulent transaction. The action was dismissed in respect of matters, which a majority of the shareholders had power to confirm. Thus the rule:
(1) That for any wrong done to the company either by the directors or by the outsiders the proper plaintiff is the company itself &
(2) Where the alleged wrong is transaction which majority can affirm, it is no use having litigation about it the ultimate end of which is going to be a that a meeting has to called & the wishes if the majority will prevail.
A 50% shareholder brought an action against a director to hold him liable for misappropriation of the company’s assets. The court did nit allow it. Such loss is recoverable only by the company. It is not recoverable by a shareholder because he does not suffer any distinct loss from that suffered by all the shareholders. (Stein v. Blake(No.2),1998).
The briefest possible statement of the rule accures in the observation (CORDOZO, J. that for erring (directors or) shareholdes there may be absolution if the shareholder are satisfied (McCandless v. Furland). The two English cases, Hogg v. Cramphorn Ltd. (1967) & Bamford v. Bamford (1969) bear witness to this absolving power of the majority of the shareholder. In either case there was a disposal by the directors of the unissued capital of the company as a tactical move in the battle for control of the company. The court conceded that the power to allot the shares was exercised for & improper motive & the directors were guilt of misfeasance, but held that it a common place for company law that the directors can be making a full & frank disposal & calling together the general body of the shareholder obtains absolution & forgiveness of their sins.
There are, however certain situations in which a shareholder may sue to enforce obligations owned to the company. He brings the action as a representative of the corporate interest; In the American literature a representative action of this kind is called “Derivative action.” Such situations as follows”

1. Acts ultra vires:-
Every shareholder can restrain the company from acting ultra virus. A shareholder can also sue to recover the assets of the company from any person to whom they have been given in a ultra virus transaction. (Bharat Insurance Co. Ltd. V. Kanhaiya Lal, 1955).

2. Fraud on minority:
The conduct of majority of shareholders can be impeached if it constitutes of a “fraud on the minority.” This parse refers to such a conduct of the majority which has the effect of the discriminating “between the majority shareholders, so as to give to the former & advantage of which the latter were deprived.” (Evershed MR InGreenhalgh v. Ardene Cinemas Ltd.,1951). Thus, in Menier v. Hooper’s telegraph Works (1874), the majority shareholders were not permitted to scarifies the rights of the company in favor of another company in which they had an interest.
Similarly the majority cannot be allowed to expropriate the interest of minority shareholders. Thus, the holder of 2% interest in a company was not allowed to compiled at the pain of confiscation of his interest to contribute further capital (Brown v. Br Abrasive Wheels Co. 1919).
Thus, it appears that the majority power must be exercised in the good faith for the benefit of the company as a whole. (Lindley MR in Allen v. Gold Reefs Of West Africa, 1900). The present trend is towards a principle that any breach of duty, which causes loss to company, should be regarded as a fraud on the minority.

3. Acts requiring special majority:
there are certain acts which can only be done by a special resolution. If the majority purport to do any such act by passing only an ordinary resolution or in a different manner than required by law, any member can bring an action to restrain the majority.

4. Wrongdoers in control:
some times an obvious wrong may be done to the company, but the controlling shareholders would not permit an action to be brought against the wrongdoer or they themselves being the wrongdoers, would not enforce the company’s right. Thus, where the majority shareholders had converted the company’s assets to their own use, minority action was allowed. (Glass v. Atkin, 1967).

5.Individual membership rights:
Every member has vested in him certain rights conferred by the Act or by the constitution of the company & which are called individual membership rights. (Pender v. Lushington, 1877). The ordinary examples are the rights to vote, the right to have his vote recorded or his right to stand for the directorship at the election. (Toseph v. Jos, 1964). Where as director refused to retire in accordance with the articles, a shareholder was allowed to sue “as the individual rights of the plaintiff as a member were invaded”. (Karus v. Lloyed Property Ltd., 1965).

Topic : 13




The grounds on which an application can be made under a Section 397 are that the affairs of the company are being conducted in a manner or some member or in a manner which is prejudicial to the public interest. Oppression must be of such a nature as will make it just & equitable for the court to wind up would be prejudicial to the interest of the oppressed members. The Company Law Board may by then make such an order “with a view to bringing to an end the matter complained of as it thinks fit”.
The circumstances in which oppression may arise are so “infinitely various that it is impossible to define them with precision”. The noble attempt by Lord Cooper to define the expression in the Scottish case of Elder v. elder & Watson Ltd. (1952) was cited with approval by Wanchoo, J. of the Supreme Court of India in Shanti Prasad Jain v. Kalinga Tubes (1965). “The essence of the matter seems to be that the conduct complained of should at the lowest involve a departure from the standards of fair dealing & a violation of the conditions of fair play on which every shareholder who entrusted his money to the company is entitled to rely.” The complaining shareholder must be under a burden which is unjust or harsh or tyrannical. (Scottish Co.-op. Wholesale Society v. Meyer, 1959). “Persistence & persisting course of unjust conduct must be shown.” Thus, where the majority shareholders of an insurance company whose business had been acquired tried to force new & more risky objects upon an unwilling minority. (Hindustan co-op. Insurance Society ltd. Re., 1961); where the non trading members of a company where deprived of their right to vote, to elect directors & to receive dividends (Mohanlal Chandumal v. Punjab Co. Ltd., 1961); where a need of subsidiary company ceased to exist & its parent company adopted the policy of running down its business which depressed the value of its shares (Scottish Co.-op. Wholesale Society v. Meyer, 1959); where a majority controller persistently flouted the decision of the board & made it impossible for the company to function (H.R.Harmer Ltd. Re., 1959); where there was an unreasonable refusal to accept a transfer or transmission of shares (Gajarabai v. Patni transport Co. ,1965), oppression was held to have been established & the appropriate relief was granted.
A member can complain of oppression only in his capacity as member & not as a director (Belloador Silk, Re, 1965). The remedy can be availed of by a majority of shareholders as well, if the circumstances of the case, they have been completely nullified by the minority incontrol. (Smdhri iron foundry P. Ltd. Re., 1968). Wven where majority shareholders are suffering, the courts are usually very reluctant in ordering the majority to sell out to the minority. Such on order may be passed only exceptionally. Generally, the minority shareholders will be required to sell to majority. (Mahabir Pd Jalan v. Bajrang Pd Jalan, 1999). This iginious remedy ha snot only permitted redress of many abuses, buts its mere availability has had deterrent effect upon the management.


Section 398 provides for relief against mismanagement. It has to be established that the affairs of the company are being conducted in a manner prejudicial to the interest of the company or public interest or that, by reason of change in the management or control of the company, it is likely that its affairs will be conducted in that manner. The court can make an appropriate order. Relief against mismanagement provided by the Supreme Court in Rajahmundry Elecric Supply Corporation v. Nageshwara Rao (1956), & Richarson & Crudas Ltd. V. Haridas Mundra (1959). Where directors preferred objects of their liking & made huge allotment of shares for a consideration other than cash, this was held to be a mismanagement of affairs (Akbarali v. Konkan Ltd Pvt. Ltd. 1997).
There should be persent & continuing mismanagement. The charge of mismanagement in the past, even if proved, is not enough to establish an existing injury to the interest of the company or public interest. Event subsequent to the date of the petion are also not to be taken into the account. (Ashoka Betelnut Co. P. Ltd. V. M.K. Chandrakant, 1997). The mere fact of business losses does not by itself show either oppression or mismanagement. (Ibid).
A probe into the affairs of th a company for finding out the fact of mismanagement may include an inquiry into the company’s subsidiaries. (L.I.C. v. Haridas Mundra, 1966). Where a set of properly appointed director, where not permitted to join & function as directors, their complaint was taken to be indicative of a symptom of mismanagement & was accordingly entertained. (Adove Samia Ltd. V. Indocan Engg. Systems ltd. 1999).
Relief against mismanagement runs in favor of the company & not to any particular members. Secondly it is not necessary for the court to find cause for winding up incases of mismanagement in order to grant relief. Thirdly, the section enables the court to take into account outside interests. Thus, the Calcutta High Court refused to order the winding up of a grossly mismanaged company & appointed special officers to manage it because the company was engaged in special industries necessary for the implementation of the country’s plans. (Sindhri Iron Foundry P. Ltd., Re, 1968).

Who can apply to Company Law Board:

The first statutory remedy in the hands of the oppressed shareholder is too moved to Company Law Board. The application must be signed by at least 100 members of the company, or by the any member or members holding one tenth of the issued share capital of the company. If the company is without share capital, the application should be signed by one fifth of the total numbers of the members. Once the requisite number has signed the application, the application be preceded with, even if some of the signatories have withdrawn their consent (Rajahmundry Electric Supply Corpn. V. A Nageshwar Rao, 1956) or disposed of their shares. (Jagdish Chand Mehata v. New India Embroidery Mills, 1964). A person who is entitled, to have his name entered in the company’s register of members, may only apply for the relief (Stadmed (P) Ltd. V. Kshtra Mhan, 1968), & so also the representative of a deceased shareholder. (Bayswater Trading Co. Re., 1970). The Central Government has also the power to apply, [S. 401] or it may authorize a lesser number of members to apply. [S.399(4)] (Kult & Rubber Co. v. K.T.I., 1997).
The conduct of the petitioner is an improper factor in the matter of the relief that he deserves. Generally he would be required to move out the company at a fair value being put upon his stakes in the company. (Surinder Singh Bindra v. Hindustan Fasteners P. Ltd., 1990).

Power of Company Law Board and Central Government:

Company Law Board: [S.402].

The Board has power to make any order for the regulation of the conduct of the company’s affairs & upon such terms & conditions as it thinks fit. But without prejudice to the generality of the power under the sec. 397 & 398, Sec. 402 provides that the Boards order may provide for: (1) the regulation of the conduct of the company’s affair in the future. Thus for example, in LIC v. Haridas MUndra (1959) a special offer with on advisory board was appointed to the exclusion of the shareholders (Pradip Kumar Sarkar v. Laxmi Tea Co. Ltd., 1990); (2) the purchase of the shares or interest of any members of the company (Mohan Lal v. Pujab Co., 1961); (3) In the case of the purchase of shares by the company, the consequent reduction of the capital; (4) The termination or modification of the agreement between the company & the managerial personnel; (5) The termination or modification of any agreement with any person, provided due notice has been given to him & consent obtained; (6) Setting aside any fraudulent preference made within three months before the date of the application ; (7) Any other matter for which in the opinion of the Board, it is just & equitable that provision should be made. (In the above seven situations the Supreme Court has emphasized that the normally the winding up of the concerned company should not be ordered in the exercise of these powers.)
The situation of irreconcilable disputes, the usual approach of the CLB has been order to rival groups to part ways in the interest of the company & those of the public financial institution having large stakes in it. The CLB can direct the partition of the assets of even a listed company & reducing the capital to the extent. (K.N. Bhargava v. tracharts of India Ltd., (2000)).
The managerial personnel whose contract is set aside shall not be entitled to damage or compensation, nor capable of serving the company in any managerial capacity for a period of 5 years except with the leave of the Company Law Board. [S. 407].
The power under the section is not affected by the existance of an arbritation clause though the matter may be refered to arbitration pending further action. (Gurnir Singh Gill v. Saz International P. Ltd., 1987).
[S.409] The Company Law Board has the power to prevent any proposed change in the board of directors or membership of the company, if it is likely to affect the company prejudically. The managing director, or any other director can exercise this power on a complaint.

Central Government: [S.408].

The Central Government has the power to appoint such number of persons, known as Government directors, on the board of directors of a company as the Company Law Board can take up the matter for such a direction on a reference by the Central Government or on an application by not less than 100 members of the company or of those holding not less than 10% of the total voting power. The Board such inquiry as it deems fit in order to find out whether such an appointment is necessary to prevent the affairs of the company being conducted in a manner which is oppressive to any member of the company or which is prejudicial to the company’s or public interest. The Company Board has to indicate the period for which such an appointment may be made, but the same should not exceed three years on any one occasion. Further appointment for an extended period is possible only if the oppression or mismanagement still persists. (Vinod Kumar v. Union of India, 1081).
In lieu of such an appointment, the Board (CLB) may order the company to amend its articles by including sec. 265 & to appoint fresh directors by proportional representation within such time as the Board (CLB) may specify. In the mean time the Board may ask the Central Government to put certain additional directors on the company’s board of directors.
Any director so appointed shall not have to hold qualification shares, nor is liable to retire by rotation. After such an appointment any change in the board of directors can only be made with the consent of the Company Law Board. The Government can give such direction to the company, as it considers necessary. The Government can also ask the directors to present their report from time to time. Such directors may include an order to remove an auditor already appointed and to appoint another auditor in his place or to after the articles of the company. Such removal, appointment or alteration shall have effect as if the relevant requirements of the Act have been complied with.

Investigations: [S. 235-251].

Sections provides for investigation of the affairs of a company. Section 235 enables the Central Governments & the Company Law Board to appoint inspectors for investigation in the following cases:

1. On members’ application:
On the application of two hundred members, or members’ holding one tenth of the total voting power; & where the company is without share capital, on the application of one fifth of the members.
The applicant must show a good cause for requiring the investigation. (S.236). They have also to give security for costs of investigation.
2. On report by Registrar u/s. 234:
The Registrar can make report for this purpose when any information or explanation submitted to him by a company is not satisfactory.
3. Under section 237:
This section is in two parts. The first part requires the Government to appoint Inspectors if the company by special resolution or the court by order declares that the affairs of the company ought to be investigated. (Alembic Glass Industries Ltd.,Re, 1972 )
The second part enables the Company Law Board to appoint inspectors whenever in its opinion there are circumstance suggesting: (1) that the business of the company inbeing conducted with intent to defraud creditors. Members, or any other persons, or for a fraudulent or unlawful purpose, or in manner oppressive to certain members, or that the company was formed for any fraudulent or unlawful purpose; (2) that the person concerned with the management of the company have been guilty of fraud, misfeasance or other misconduct towards the company or its members; (3) that the members of the company have not been given all the information with respect to its affairs which they might reasonably expect.
The elementary philosophy of the companies Act is to trust the shareholders for assuring efficient performance. But for reasons more than one the shareholder has already receded to the background. Firstly, he is an investor who, for the most part, does not wish to be bothered except by dividends. Secondly, due to great diffusion of stock, shareholders become indifferent to voting & controlling. Thirdly, the shareholders are ill equipped to challenge the wisdom & expertise of officers. Fourthly,” few shareholders have the means or ability to act against management.”(Otto K Freund).
For these reasons, shareholder demoeracy has been a failure. “The reality of control can only be found oin the organized supervision execised by Government agencies. Hence the importance of investigations.” (Otto K Freund, Company Law Reform, 1946).

Topic : 14


Compromises & Arrangements:

A “compromise” presupposes the existence of a dispute. “Arrangement” is a term of wider connotation, because it is possible to arrange rights & liabilities even where there is no dispute. (Gurdian Assn.Co. Re.,1971). Section 390 itself provides that “the expression “arrangement” includes reorganization of the share capital of the company by the consolidation of share of different classes or by subdivision.” The provisions of sec. 391 & 393 show that a compromise or rearrangement can be proposed between a company & its creditors or between a company &its members. Such a compromise would also cover any scheme amalgation or merge of one company with another. (Miheer h. Mafatlal v. Mafatlal Industries Ltd., 1997).
When a scheme of compromise arrangement is proposed, the company or its liquidator, if the company is in winding up, any member or creditor can apply to the court. In order to assure the fairness of the scheme between all classes of shareholders & creditors, the court directs a meeting of the class or classes to be called. The notice calling the meeting should make a full & frank disclosure of the effect of the scheme upon the interest of the classes concerned. Where proper information is not given, the court will refuse to sanction the scheme even if the requisite majority has approved it. Thus, where the trustees of debenture holders who being the company’s bankers also, were interested approved a scheme, the court refused it sanction as this fact was not disclosed to the debenture holders. (Dorman, Long & Co., Re., 1934).
If the scheme is approved by three fourth majority (Bessemer Steel Co., Re., 1876), it may be sanctioned by the court. The court has to see, firstly, that the procedure prescribed by the Act has been observed (Anglo Continental Supply Co., Re., 1922); Secondly, that the majority who approved the scheme acted in good faith for the benefit of the class as a whole (Cooper Cooper v. Johnson, Re., 1902); thirdly, that the arrangement is such as a man of business would ordinarily approve. (Br American Nickel Corpn. v. M.J. O’Brien Ltd. 1927). Schemes involving surrenders of arrears of accumulated preference dividends ; requiring debenture holders to accept shares in place of debentures (Empire Minig Co. re., 1890) or to accept as their debator the company to whom the company’s assets have been transferred (Brown Guild Property Society re., 1898) have been upheld under the section.
The court sanctioning the scheme has the power to supervise its implementation. [sec.392]. If the courts find that the scheme is unworkable, it may make an order for the winding up of the company. Thus, where one of the parties failed to provide finance in terms of the scheme, the court observed winding up. (New Kaiser-i-Hind Spg. & Wvg. Co. Re.,1968). But the mere inability to meet the claim of a former employee does not make the scheme unworkable. (Chaugule v. New Kaiser-i-Hind Spg., & Wvg. Co., 1968.)

Reconsruction & Amalgamation :

“There is ‘reconstruction’ of the company. When the company’s business & undertaking are transferred to another company formed for that purpose…” (J.A. Hornby). This may become necessary for radical change of objects or variation of class rights. “Amalgamation occur when two or more companies are joined to form a third entity or one is observed or blended into another. (Somoyajula v. Hope Prudhomme & Co. Ltd. 1963).
A reconstruction or amalgamation may take place:
(1) by the sale of shares;
(2) by the sale of undertaking;
(3) by a scheme of arrangement.
An application can be made to the court for it sanction. [s.394].
None of the above scheme can be sanctioned unless the court has received a report from the Company Law Board or Registrar that the affairs of the company have not been conducted in a manner prejudicial to the member’s or company’s interest.[S.394(3) & 394-A]. The court has also to give notice to the Central Government & to take into the account its objection, if any. But where the scheme has been approved by an over helming majority of members, the court may not entertain the Government’s objection as to the made of valuation. (Associated Hotels of India Ltd. Re., 1968). The court may interfere in valuation where loans & advances have been ignored or there is fraud or undue influence or where the accounts are unreliable. (Cotton Agents v. Vijay Laxmi Trading Co.,1968). The Supreme Court did not interfere where the valuer was appointed by overwhelming majority (95%) of the shareholders of both companies though he was a director of the amalgamating company. (Hindustan Lever Employees’ Union v. Hindustan Lever Ltd., 1995). In another case, independent auditors, who had followed the proper methods & considered all the financial aspects, worked out the exchange ratio. The calculation could not be questioned only because one of the auditors was the statutory auditor of the transferee company. (Asian Coffee Ltd., Re., 2000).
The court can also order dissolution of the transferor company without winding up. (C.I.T. v. Dalmia Magnecite Corpn. ,1999).
Where the latest auditors’ report is necessary for work out the exchange ratio, it would be the report, which is available at the time of the application, namely report on the preceding year’s accounts. (All India Blue Star Employees’ Fedn. V. Blue Star Ltd., 2000).

Amalgamation in national interest: [S.396].

Where the Central Government is satisfied that an amalgamation of two or more companies is essential in the public interest, the Government may by order notified in the Official Gazette provide for the amalgamation of those companies into a single company. Members & creditors of amalgamation companies, as far as possible, are given the same rights & interests as they had in the original companies & they may compensated for any inadequacy in this respect. A copy of the proposed order is sent to the companies in advance to enable them to file their objections, if any.

Topic : 15

Winding Up


Winding up is the process by which the life of a company is ended & its property administered for the benefits of the members & creditors. Winding up of a company is different from the insolvency of an individual because a company can never be declared insolvent & , on the other hand, a perfect solvent company may bw winding up. Winding up is also different from dissolution. It is only at the end of winding up that the company is dissolved. In the meantime it continues as the juristic entity & such as liable to taxing authorities. (Official Liquidator, Gannon Dunkereley & Co. v. Asstt. Commr., Urban & Land Tax.1992).

Types of Winding Up:
The Act provides for three kinds of winding up:
(1) Winding up by the court;
(2) Voluntary winding up, which itself is of two kinds, namely, (i) members & (ii) creditors’ voluntary winding up;
(3) Voluntary winding up under the supervision.

(1) Winding up by the court:
Section 433 empowers the court in its discretion to order the winding up of a company in the following cases:
a) Special resolution:
When the company has, by special resolution , resolved that it be wound up buy the court.
b) Default in holding statutory meeting:
When the company has made a default in holding its statutory meeting or in filing a statutory report. [S. 433(b) & (c)].
c) Failure to commence the business:
Where the company has not commenced its business within a year from its incorporation or has suspended business for a whole year. Where, however, the sustention is temporary & there is intention to resume business, winding up order may be refused. Thus where the steamers of accompany were acquired for war purpose only, the court rejected winding up petition. (Murlidhar v. Bengal Steam Co., 1920.. Where on the one hand, business remained suspended for 5 years & the prospectus were also gloomy, winding up was ordered (Rupa Bharati Ltd. V. Registrar of companies, 1969), where of the several business of the company, the business of one unit was closed with a proposal to dispose it of & to use the proceeds in the exploitation of other objects, the court did not agree that it was a ground for winding up. Even if the business in all units of the company were suspended, it would still be open to the court to examine whether it would be possible for the company to resume the business (Paramjeet Lal Bhadwar V. Prem Spg & Wvg mills, M, 1986).
d) Reduction in membership:
When the number of members has been reduced in the case of public company below 7 & in case of private company below 2.
e) Inability to pay debts:
Where the company is unable to pay its debts. A company is said to be unable to pay its debts in the following three cases:[S.434]
Firstly, when a creditor to whom the company owes Rs. 500 or more has served a demand and the company has for 3 weeks neglected to pay or otherwise satisfy him (Baburam V. Krishna Baratdwaj Cold Stores & General Mills, 1965). The debt must be presently payable and the company should not have any bona fide dispute about it. The court does not allow this remedy to be used as a shortcut (Vanaspati Industries Ltd. V. Prabhu Dayal, 1950) or Cheap Device to coerce payment of a disputed debt. The power is discretionary. The Supreme Court has pointed out in M. Gordhan Das & Co. V. Madhu Woolen Industries (1971) that in the exercise of it discretion the court can take all the relevant factors in the account including the wishes of creditors, the benefit that with the acquired to the petitioners and nature of debts.
Secondly, a company is unable to pay its debts if execution or any other process issued on a decree against the company is returned unsatisfied in whole or in part (P. Mehta V. Steel Equipment & Construction Co., 1967).
Lastly, if the court is satisfied that the company is unable to pay its debts the company is commercially insolvent. “Commercial Insolvency” means that the assets & liabilities are such as to make it reasonably certain that the existing & probable assets would be insufficient to meet the existing liabilities. Inability to pay taxes or bill of exchange (Coimbatore Transport Ltd. V. GG in Council, 1949). As they fall due is an evidence of commercial insolvency. Even where assets & liabilities are equal the company may be insolvent if the fixed assets without which the company cannot go on have to be sold in meeting its liabilities (Shri. Shanmugar Sugar Mills V. Dharam Raja Nador, 1970), where the assets of the company were taken over by the state and in reply to the creditor’s claims and petitions, the company was only telling them that it was trying to retrieve those assets and there was nothing to show any benefit to the creditors in the continuity of the company, the court ordered the winding up (Shri. Laxmi Traders Ltd., Re., 1987). The Bombay High Court refused to pass a winding up order even the company’s business had come to a stand still owing to paucity of working capital, the company’s experience in ship repairing etc., being very useful for the country.
f) Just and equitable:
Where the court is of the opinion that it is just & equitable to wind up the company. This gives the court a wide discretionary power to order winding up when it is desirable in the circumstances. Taking the interest of members, creditors, employees & of public account & also whether the petition has been brought bona fide, the court may either order winding up or refuses it.

Winding up orders on this ground have been passed in the following cases:
Firstly, where there is a dead lock in the management of the company. This occurs when the only two members of a company are not on speaking terms. (Yenidije Tobacco Co., Re., 1916). Mere dispute is not enough. (Hind Overseas ltd. Re.,1968).
Secondly, when the main object of the company has failed to materialize or its substratum has failed. This occurred when a company incorporated to work a German patent could not obtain it. (German Date Coffee Co. Re.,1882), or when a company’s assets were seized by a creditor. Temporary acquisition or difficulty is not the same thing. (Seth Mohan Lal v. Grain Chambers Ltd. 1968).
Thirdly, when the business of the company cannot carried on except at losses (Mahamandal Shastra Prakashak Samiti Re, 1917).
Fourthly, where the principal or majority shareholders have adopted on aggressive or oppressive or quizzing policy towards the minority.
Fifthly, where the company is conceived & brought forth in fraud or for illegal purposes. (Universal Mutual Aid & poor Houses Assn. v. A.D. Thappa Naidu,1963).
Lastly, if the courts find that a small private company is in essence a partnership, as it is called, it may ordered to be wound up where there is an abuse of power or breach of good faith which partner owes to each other. Winding up on this ground has been ordered where a member was removed from directorship. (Ebrahimi v. West bourne Galleries Ltd. 1972), or where there has been breach of articles. (American Pioneer leather Co. Re.,1989).

Who can apply (S.39):
Any winding up petition can be presented by any of the following:
i) Petition by company – The company is entitled to petition when it has passed a special resolution requesting that it be wound up by the court.
ii) Creditor’s petition (S. 439(8)) – A creditor secured or otherwise debenture-holder & a trustee for debenture-holders can apply for winding up.
iii) Contributory’s petition (S. 439(3)) – On the winding up of a company its members are called contributories. Where the ground is reduction in membership, any contributory can apply, but for any other ground, petitioner must be the shareholder to whom shares are allotted by the company & not otherwise.
iv) Registrar’s petition (S. 439(5)) – THE Registrar is entitled to apply on all the grounds specified in sec. 433 except the first, namely special resolution. In all cases he has to obtain permission of the Central Govt., which is granted after giving the company opportunity to show cause (S. 439 (6)).
v) Central Govt.’s petition – It can apply when a investigation shows that the conditions specified in sec. 235 or 237 are satisfied (sec. 243).

(2) Voluntary Winding Up:

A company may be wound up voluntarily at any time by passing a special resolution. But where the articles provide for a period on the expiry of which the company is to be wound up & that period has expired or for a contingency on the happening of which the company is to be dissolved & that contingency has happened winding up may be commenced with an ordinary resolution (S. 484).
Voluntary winding up is of two kinds: (1) Members’ winding up & (2) Creditor’s winding up. If a declaration of solvency is made in accordance with the provisions of the Act, it will be the members’ winding up & if it is not made, it is the creditor’s winding up.

Members’ winding up –
A liquidator is appointed & his remuneration fixed by the members in a general meeting (S. 490). The fact of appointment should be notified to the Registrar (S. 493). IT the liquidation continues for more that a year, the liquidator should call a meeting at the end of each year (S. 496) & lay before it the final accounts. When the affairs are completely wound up he calls the final meeting & lays before it the final accounts. Within a week after the meeting & the Official Liquidator, the later scrutinizes the accounts & reports the result of his scrutiny to the court. If the report shows that the affairs were not conducted in a manner prejudicial to the public or member’s interest then the company is dissolved from the date of the submission of the report. If the report shows any such thing, the court directs the Official Liquidator to the conduct further examination & on the receipt of the final report, the court may either order dissolution of the company or pass such other order as it thinks fit (S. 497 (5)).

Creditors’ Winding Up –
In a creditor’s winding up, the liquidator has to call, in addition to members’, creditors’ meetings. The liquidator is appointed by the concurrent of both & if no concurrence can be attained, creditors’ nominee becomes the liquidator. But any director, member or creditor may apply to the court for appointment of some other person as liquidator (S. 502).
The creditors may appoint a committee for inspection consisting of five persons, to which the company adds its own fine (S.503). the procedure is just the same as in the case of the members’ winding up, except that in addition to the members’, the liquidator has also to call the creditors’ meetings.

(3) Voluntary winding up under Supervision:

When a company has passed a resolution for voluntary winding up, the court may make an order that winding up shall proceed subject to its supervision. The advantages of this are: firstly, the court may appoint an additional liquidator & remove a liquidator according to exigencies. Secondly, the court gets the same powers as it has in the case of winding by the court. Thirdly, any creditor, contributory or person may apply to the court for determining any question connected with the winding up [sections 522-526].


The liquidator can exercise the following powers with the sanction of the court: (1) institute & defend suits & proceedings by & against the company; (2) to carry on the business of the company if that is necessary for beneficial winding up; (3) to sell the movable or immovable property of the company & it’s actionable claims; (4) to raise money on the security of the company’s assets; (5) to do all such other things as may be necessary for winding up & distributing the company’s assets.
He can exercise the following powers without the sanction of the court: (1) to act or behalf of the company & to execute deeds, receipts & other documents under its sea; (2) to inspect the records & returns of the company in the Registrar’s file without any fee; (3) to prove the company’s claim in the insolvency of a contributory; (4) to draw, accept or indorse negotiable instruments on behalf of company; (5) to take out letters of administration for the uncalled share money of any deceased contributory; (6) to appoint any agent for any business which he cannot do himself.
The exercise of these powers is subject to the control of the court. Any aggrieved person may apply to the court. (Sections 457(3) & 460(6)). The liquidator has to present twice a year an account of his receipts & payments as liquidator (sec. 460(1)) & the court gets the accounts audited. If it appears that the liquidator is not faithfully performing his duties, the Central Govt. may inquire into the matter & take necessary action. He may be required to answer any inquiry or to be examined in the court on oath [S. 463].