NEW HORIZON COLLEGE

MARATHALLI, BANGALORE

III SEM BBA STUDY MATERIAL

3.6 Corporate Environment

Prepared By

Ms. Shilpa Joshi

Assistant Professor
NEW HORIZON COLLEGE

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 UNIT – I

FORMATION OF COMPANY

Meaning of company:- An association or an organization which is registered or

incorporated under the companies act of 1956 is called a company. It is an
artificial person created by law.

Definition.:-According to justice lord, lindley. “ An association of many

persons who contribute money of money’s worth to a common stock and
invest in some trade and business and who share profit and loss arising
therefore”.

Features or Characteristics of Company

• Registration :- The company is created only when registered under the companies
act Of 1956.
• Legal entity:- A company is an artificial person with a legal entity of its own. It
acts through the board of directors elected by the share holders.
• Common Seal:- The company being an artificial legal entity or person, it can’t act
on Its own. So, it acts through natural persons life or the secretary who is
authorized Hence, The need for a common seal of the company for all the
contracts entered into by the Directors or the secretary. The common seal is like
the signature of a company
• Perpetuity :- The company which is registered never dies with retirement or death
of its members as is the case with partnership. The company will survive for the
longer Period.
• Limited liability:- In a company, by shares, the liability of members is limited to
the Nominal value of the shares held by them. In respect of partly paid shares, the
liability Extends upto the balance of the nominal value of shares.
• Separation of ownership and management:- In a company, the shareholders are
the Owners but the management is interested to the board of directors who are
separate from Form the body of shares holders.

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• Transferability of shares:- In a public limited company, the shares can be easily
Transferred from one person to another.

Kinds of companies

• Chartered Company:- It a company is incorporated under a special monarch. It is

called a chartered company.For eg:- East Indian company, the chartered bank of
Australia, china an India were Incorporated by the grant of a special royal
charter.These companies are not there in India at present
• Statutory Company:- A company which is created by a special act of the
legislature is
Called a statutory company. The state bank of India, industrial finance
corporation, life Insurance, corporation of India etc are the examples of this kind.

• Registered Company:- A company brought into existence by registration with the

Registrar of the companies under the companies act of 1956 is called registered
company.

Types of registered company are:-

(a) Private company Private Company:-

A private company has been defined as a company which:-

a) limits the number of members 50
b) restricts the transfer of shares from one shareholder to another.
c) prohibits an invitation to the public to subscribe to its shares and debentures.

(b)Public Company:-

Public Company is a company which requires atleast 7 members to form and

there is maximum limit. It can invite the public to subscribe its shares and
debentures and it doesnot restrict the transfer of its shares from one shareholder to
another.

c)Unlimited company:-

The companies in which the liability of the members is

Unlimited is called unlimited company.

d)Companies limited by guarantee:-

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In these companies, each member gives a guarantee for the debts of a company
upto a certain extent.
Eg:- Trade associations, clubs and societies which formed to promote social and
cultural Activities.

f)Companies limited by shares:-

In these companies, liability being limited by shares, The member is called upon
to pay only the unpaid amount on the shares held by him.

Government company:-

A company in which not less than 51% of share capital is held By the central
government and or any state government or governments is called a Government
company.

For Eg:- Hindustan Aeronautics Limited (HAL), Indian Telephone Industries

(ITI),Bharath Electronics Limited (BEL).

Foreign Company:-

A foreign company is that company which is incorporated in a Foreign country,

but which has established a place of business in india. Under section 592 of
companies act, every foreign company must, within 30 days of the Establishment
of the business field with the registrar the following documents.

a) a certified copy of its memorandum and articles of association.

d) the full address of the registered office of the company.
c) the list of directors and the secretary of the company with required particulars.
d) the name and address of the person authorized to receive any notice or
documents etc.

Holding and Subsidiary Company:-

A company which has control over another Company is called holding company
in other words, a company which holds more than 50% of the share capital in
other company is called a holding companyA company which is controlled by
other company is called a subsidiaries company.

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Eg:- Company A has 60% of share capital in Company B Here, Company A is
called a Holding company and Company B is called a subsidiary Company.

One Man Company:-

It refers to a company, in which only one person holds the Entire share capital,
but in order to meet the statutory requirements of minimum number Of members,
some of dummy members mostly his relatives, friends, hold one or two Shares
each.

Difference between Private Company and Public Company

Basis Private Public Company

Company

1. Formation 1. It can 1. It can commence its

commence its business only after
business incorporation as well as
immediately obtained of
after commencement of
incorporation business certificates.

2. End words 2. It uses the 2. It uses the word limited

of the name word private in his name
limited in its
name.

3. 3.Minimum 2 3. Minimum 7 members

Membership members and and maximum unlimited
maximum 50
members

4. Prospectus 4. It is not 4. It must file the

required to file prospectus with the
prospectus registrar of the company.
with registrar
of the
company.

5. Allotment 5. No legal 5. There are certain

of shares restriction on restriction.
allotment of

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 shares

6. MOA / 6. Atleast 2 6. Atleast 7 members must

AOA members must sign MOA & AOA.
sign
memorandum
of association
and articles of
association

7. Public 7. It is 7. It can invite public to

issue of prohibited subscribe capital.
capital from inviting
public to
subscribe
capital

8. Transfer of 8. No shares 8. Shares are freely

Shares. are transferable an they can be
transferable quoted on stock exchange.
and cannot be
quoted in the
stock
exchange.

9. Directors 9. It must have 9. It must have atleast 3

atleast 2 directors.
directors

10. Minimum 10. It requires 10. It requires atleast Rs. 1

capital atleast Rs. 5 lakh.
requirement. lakhs.

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11. Statutory 11. It doesn’t 11. It must hold statutory
meeting require to hold meeting and file a
statutory statutory report with
meeting. registrar of company
within 6 months from the
date of obtainment of
business commencement
certificate.

12. Share 12. It cannot 12. It can issue share

warrant issue share warrant.
warrant

13. Quorum. 13. Minimum 13. Minimum 5 members

2 members must be present to conduct
must be the meeting.
present to
conduct
meeting.

14. 14. No 14. Total managerial

Managerial restrictions on remuneration shouldn’t be
remuneration managerial more than 11% of net
remunerations. profit.

Conversion of Private Company into Public Company

A Private Company can be converted into Public Company by altering its articles
of Association and passing special resolutions and by deleting those provisions
relating to-
a) restriction of transfer of shares.
b) the limitations of the maximum membership
c) prohibition of invitation to the public for subscribing to it shares.

Duties of a secretary while converting the Private Company into a public

company.

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1) To arrange a board meeting in consultation with directors and finalise the plan
of Convertion and all general meeting for passing resolution for the conversion of
theCompany.

2) To prepare a new set of articles in consultation with board of directors.

3) To issue notices and circulars of the extra-ordinary general meeting as per the
decision Of the board.

4) To get the resolution passed at the extra-ordinary general meeting.

5) To file prospectus with the registrar of the companies.

6) To file with the registrar, a notice of increase of share capital.

7) To get from the registrar a new certificate of in corporation, the changed name.

8) To take steps to raise additional capital from the public if needed for the further
Expansion of business.

Conversion of Public Company into Private Company

As per the companies amendment act 1960, the conversion of public company
into Private company requires the approval of the central government. The public
Company should put the proposal before the central government regarding the
Conversion of public company into private company ltd. The central government
After scrutinizing (Verifying) the proposal, they permit the conversion into a
private Company. Only if it is in the interest of the company.

Duties of the Secretary and the steps for the conversion of public company into
private Company ltd.

1) To arrange board meeting with the board of directors for calling an extra-
ordinary General meeting.

2) To insure notices and circulars of extra ordinary general meeting.

3) To get the special resolution passed at the extra-ordinary general meeting,

regarding The conversion of public into private company.

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 4) To file with the registrar, copies of special resolution within 30 days of the date
of Resolutions.

5) To apply to the central government with necessary documents for the approval
of Concern.

6) To publish about the conversion in leading newspapers and the newspaper

clippings to Be sent to government .

7) After obtaining the approval of the central government to file with the registrar
within one month of proposal.

FORMATION OF A COMPANY

In the formation of a public limited company mainly four stages are involved:-

• Promotion

• Incorporation

• Capital Subscription

• Commencement of business or trading certificate

In the formation of a private it company only the first two stages say –

Promotion

Incorporation are involved

Promotion of company:-
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 The steps which are taken to persuade / motivate a number of persons to come
together for the achievement of a common objective through the company form is
called promotion.

The person or the persons who undertake the responsibility to bring the company
into existence are called promoters.

Steps in promotion of a company

The promotion may be undertaken either for starting a new business or

Expanding the existing business or for forming a holding company for a merger
etc.

The company promotion has involved 4 stages.

a) Discovery of an idea

The promoters starts with an idea to start some business either in new field or
existing field of business. He makes preliminary investigation to find out whether
the particular business is useful and he roughly estimates income and expenditure
of the proposed business.

b) Detailed Investigation:-

The promoter needs to make detailed investigation of his idea with the assistants
of many experts like engineers, chemists, market analysis’s, finance experts,
management consultants etc. on the basis of reports of these experts the promoters
would be in a position to know the capital requirements, place of location, size of
the unit, demand condition in the market, price of product, cost of production,
Written on capital etc. A detailed investigation will help him to compare the
estimated income is enough to meet the cost of production and other expenses.

c) Assembling:-

After detailed investigation, if he is satisfied with practicability and profitability

of the proposal concern, he starts assembling preposition, assembling means
getting the support and consent of other persons to act as a director or founders,
arranging for patents, a suitable site for the company, machinery and equipment
etc.

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 Incorporation:-

After taking all preliminary steps of for registration an application along with the
necessary documents stamp duty, registration fees etc. has to be made to the
registrar for the issue of certificate of incorporation. After scrutinisation of the
document, if the registrar is satisfied he will issue a certificate of incorporation.

Steps and formalities for the incorporation of the company

The following documents to be filed with the registrar

• Memorandum of Association (MOA) with atleast 7 persons subscribed, each one

share, if it is a public company. If it is a private company atleast 2 persons with
the shares subscribed.

• Articles of Association (AOA) except where table ‘A’ considered as companies

articles.

• Address of the registered office

• A list of directions with their names, address and occupation

• Consest of directions in writing to act ac directions if it is a public company.

• An undertaking by directions to take and to pay for any qualification shares. This
is not required for private company.

Capital Subscription:-

Public company having share capital has to undergo 2 additional stages:-

• Subscription stage

• Commencement of business

In the capital formation stage the company has to make necessary arrangements
for obtaining necessary capital for the company. For this purpose immediately
after getting the certificate of incorporation, The company calls a meeting to deal
with the following:-

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• Appointment or confirmation of appointment of secretary if one has already been
appointed by the promoters at the promotion stage.

• Adoption of preliminary contracts which include the promoters enter into

contracts on behalf of the proposed company such as contract for purchasing of
properties, assets, existing business etc.

• Adoption of a draft of prospectus or the statement in view of prospectus.

• Appointment of bankers solicitors, auditors, legal advisor brokers etc.

• Listing of shares on stock exchange.

• Adoption of undertaking contracts.

• Number of Shares to be issued.

• Collection of share capital etc.

Commencement of business:

The commence the business the business commencement certificate is required.

To obtain this the following conditions must be filled.

1. A prospectus or a statement in lieu of prospectus has to be filed with the

registrar of the company

2. The number of shares allotted should not be less than the minimum
subscription as mentioned in the prospectus.

3. If the directors have taken up and paid for any qualification shares, the amount
paid on such shares should not be less than the amount paid by other member.

4. A declaration is that no money is refundable to the applicants of shares if they

fail to make full payment of shares.

5. A declaration of compliance by one of the directors or secretary that shares

have been allotted for the amount not less the minimum subscription and also that
all the conditions regarding the commencement of business have been complied
with.

6. The registrar after receiving the declaration of compliance with the provisions
of section 149 from the secretary or one of the directors along with required filing
fee, will rutinise the declaration and if satisfied will issue a certificate to

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 commence the business. From the date of this certificate, the company is entitled
to commence its business.

Duties of a Company secretary before incorporation

• To help promoters in making detailed investigation of the proposed business.

• To help the promoters in drawing up the financial plan for the approval of the
business.

• To attend all preliminary meetings of promoters and keep a record of proceedings

of their meetings.

• To get the approval from the registrar for the proposed name of the business.

• To help the promoters in drafting of memorandum of association and articles of

association

• To follow the SEBI (Security Exchange Board of India).

• To collect the certificate registration from the registrar.

• To send a notice of the registered office of the company to the registrar within the
30 days of the date of registration.

Meaning of memorandum:

It is the most important as well as the primary document of the company

without this document no company can be registered in India. Hence it is also
called as life giving document or character of the company it defines companies’
relationship with share holders and outside world. It has to be divided into
paragraphs, consecutively numbered and printed.

Clauses or contexts of memorandum of Association

Name Clause: - This clause contains the name of the company. The name
selected should not be similar to that of the existing company. The name of the
company must be approved by the central govt. The name of the Public company
must have limited and private company must have private ltd. If company is
formed not with the object of declaring dividend, but to promote culture, art etc.
The central govt may permit the company to drop the word limited.

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Situation or Domicile Clause: - In this clause the name of the state in which the
registered office of the company is situated is mentioned. This clause fixes the
jurisdiction (limit) of the court for all the legal matters and that of the registrar of
the company for the company manners.

Object Clause: - This clause defines the object for which the company is formed.
The object should be legal and must not be inconsistent with the companies act.
The object must not be the general. A company is not legally allowed to carry any
business other than specified in this clause.

Liability Clause: - This clause states that the liability of members is limited to
the face value of the shares up by them. If a members has already paid some
amount on shares, he can called upon to pay only the unpaid amount on shares.

Capital Clause: - In this clause, particulars regarding the amount of share capital
with which the company is proposed to be registered and the division of share
capital into a fixed amount are included.

Association or subscription Clause: - The subscribes to the memorandum will

give a declaration to this clause and express the desire to purchase a number of
shares mentioned against the respective names .

Alternation of memorandum of association

The procedure for alternation of the memorandum of association as per the

companies’ act of 1956 is as follows: -

(1) Alteration of Name Clause

Steps or Procedure: -

Ascertainment

The secretary has to certain from the registrar whether the proposed name is
desirable or not.

Written approval from Central government: -

If the registrar informs him that the name proposed is not desirable then the
secretary has to obtain written permission from central government for changing
the name.
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Board meeting: -

The secretary has to arrange a board meeting for recommending the

changed name to the members and to call an extra-ordinary general meeting.

Special resolution: -

The secretary has to get the special resolution at the extra-ordinary

general meeting.

Copy of special resolution to registrar: - Within 30 days of passing a resolution, a

copy of the same has to be filed with the registrar.

Obtainment of fresh incorporation certificate: - On filing of the resolution the

registrar makes necessary changes in the register and issues fresh certificate of
incorporation with changes name.

Arrangement for change of name: - The secretary has to arrange for the change of
name on all the documents and seal etc and also should inform all the parties who
are dealing with the company.

(2) Alteration of domicile or situation clause

Change within the City: - If a company wants to change its registered office from
one place to another within the city, town etc. The board of directors will pass a
resolution and the same to be informed the registrar within 30 days of passing the
resolution.

Change within the State: - A special resolution must be passed and a notice of
such change should be given to the registrar within 30 days of passing the
resolution.

Change of registered office from one state to another: - The shifting of the
registered office from one state to another involves the following steps: -

i) Passing a special resolution at an extra-ordinary general meeting.

ii) Filing a copy of resolution with the registrar of companies within 30 days of
resolution.

iii) Under section 17 of the companies act, the company may after its provisions
of memorandum of association by special resolution with the permission of
central govt and the information about the change of registered office to be given
to the parties dealing with the company.

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 iv) Getting a certificate of registration of the transfer from the registrar of both the
states.

v) Giving a notice of a location of new office to the registrar of the state to which
the company is shifted within 30 days of the transfer.

(3) Alteration of object Clause: -

A change in object clause can be affected by passing a special resolution

and with the sanction of central govt.

Steps or procedure to change the object clause

To arrange board meeting, to discuss the proposed change and also to call an
extra-ordinary meeting to pass a special resolution.

To send notice of extra-ordinary general meeting to all the members and also to
debenture holders, creditors etc.

(4) Alteration of capital clause: -

A company may alter its capital at the general meeting for the following
purposes.

For increasing the capital

For reorganization of capital

For reduction of capital

As per section 94 of the companies Act, the company limited by shares

or guarantee and having share capital if so authorized by articles may alter the
share capital in the following ways: -

• Increases its shares capital by the issue of new shares

• Consolidate its share capital

• Convert its shares into stock and vice-versa.

• Sub- divide its shares into shares of into shares of smaller amount.

• Cancel the shares which have not been taken.

• Procedure to increase authorized share capital

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• To see the articles allow the company to raise the share capital

• If not resolution is required

• To convene a board meeting to fix a date, time and venue of general meeting

• Notice in writing to be serve to the members at least 21 days before the general
meeting.

• To hold general meeting to pass ordinary or special resolution with 3/4th majority

• A copy of resolution passed at the general meeting with regard to increase in

capital to be filed with the registrar of companies.

• Other documents such as-memorandum of association articles of association and

demand draft to be filed with the registrar.

Procedure for consolidation or subdivision of shares

• If articles don’t permit, resolution is required to alter the articles.

• Board meeting to be convened to call for ext general meeting.

• Notice of extra-ordinary general meeting to be given to the members and they are
asked to surrender their old share certificates.

• Issue new shares certificates

• Copy of consolidation and subdivision of shares to be filed with the registrar.

Reduction of capital

An extra-ordinary general meeting has to be convened for the purpose of passing

a special resolution. After passing the resolution a petition must be made to the
court for obtaining confirmation of special resolution for reduction of capital.

The duties of secretary in connection with reduction of capital

• To arrange a board of directors meeting, to consider a plan of reduction and to fix

the date of extra-ordinary general meeting.

• To send the members the notices of extra-ordinary general meeting.

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• To get a special resolution passed at the extra-ordinary general meeting for
reduction of capital.

• To file a copy of minutes with the registrar.

• To make an application to the court only with the copy of minutes for the
confirmation order.

• To receive the court order of confirmation for reduction of capital.

• To file a copy of court order and minutes describing particulars of reduction with
the registrar.

• To take necessary steps to execute the scheme of reduction of capital.

Articles of Association (AOA)

The articles are the internal regulation of the company on the basis of
which its internal affairs are managed. They lay down the powers of directors,
share holders and officers.

• Contests of articles of association

• Share capital and variation of rights.
• Calls on shares
• Transfer, transmission, forfeiture of shares and surrendered of shares.
• Issue of share warrants
• Alteration and reduction of capital
• Voting and reduction of capital
• Borrowing powers.
• Proceedings at the board and the general body meetings.
• Appointment, powers, duties, qualifications, remuneration etc of the directors.
• Dividends and services
• Maintenance of books of accounts and their audits
• The company seal
• Winding up

Steps to alter articles [Secretarial Procedure]

• To arrange board meeting for the alteration of articles and also to fix up the date,
time and place of extra-ordinary general meeting.

• To see that the alterations don’t violate the provisions of company law.
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• To issue notice of general meeting to the members 21 days before the meeting

• To get the resolution passed at the extra-ordinary general meeting.

• File a copy of resolution to registrar within 30 days.

• To file an altered printed copy of articles of association to the registrar within 3

months of resolution.

Differences between MOA & AOA

MOA AOA

It governs external relations It governs internal relations

of a company of a company

It is a character which sets It is the Bye-law of the

out the constitution of a company for internal
company administration

It states the objects for It states the rules for

which the company is carrying out the business
formed

If defines limits and powers It defines rights and duties

of company of directors, members etc.

It is compulsory for It is not compulsory for

incorporation incorporation. Instead of
this table – A can be
prepared

It is a primary and It is secondary and

fundamental documental subsidiary of a company
document of a company

It can be altered by a special It can be altered by special

and subject to sanction of resolution without any

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 court or central govt as the approval from court or
case may be central govt.

Prospectus: -
• The companies’ act 1956 defines prospectus as. “A Prospectus, notice, circular,
advertisement or other document inviting offers from the public for the
subscription or purchase of any shares or debentures of any body corporate”.

• Contents of prospectus: - Section 56 of the companies act lays down that every
prospectus shall have –State the matters specified in part I of schedule II
- Set out the reports specified in part II of schedule II.

Part I of schedule II

1) I General Information
2) Name and address of registered office of company.
3) Consent of central govt for issue.
4) Name of regional stock exchanges and other stock exchanges when the
application is made for listing of present issue.
5) Provisions of sub section 1 of section 68 A of companies act relating to
punishment of fictitations prospectus.
6) Statement of declaration about refund of money is the minimum subscription of
90% or not received within 90 days from the date of close of the issue.
7) Date of opening and closing of issue
8) Name and address of the auditors, underwriters etc.
9) II Capital Structure of the company
o It includes authorized capital, issued capital, subscribed capital, paid-up capital
etc.
10) III Terms of present time
11) Terms of payments
12) Rights of instrument holders (deposit holders debentures holders)
13) How to apply – availability of forms, node of payment etc.
14) Any special tax benefits for the company and its share holders.
15) IV Particulars of issue
16) Objects
17) Project cost
18) Means of financing (including of the promoters)
19) V Company Management and Project
20) History, objects and present business of the company.
21) Promoters and their background
22) Names, addresses and occupation of manager, M.D and other directors.

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23) Location of the project
24) Plant & machinery technology, process etc.
25) Infrastructure facilities like water, electricity, transport, banking etc.
26) Nature of products – consumer or industrial products.
27) Implementation of the projects so far.
28) VI As per section 370 (1B) any capital issue made during last 3 years.
29) Name of the company
30) Year of issue
31) Types of issue
32) Amount of issue
33) Date of closure of issue
34) Date of completing share certificates
35) Rate of dividend etc.
36) Outstanding litigation pertaining to
37) Matters that affect operations, finance including disputed tax liability of any
nature.
38) Criminal prosecution launched against the company
39) Particulars of any default in meeting statutory dues towards instrument holders
like debenture holders deposit holders etc.

Part II of schedule II

I General Information

 Consent of directors, auditors, advocate, managers etc to issue.

 Expert opinion obtain if any
 Reasons for change of directors, auditors in last 3 years if any.
 Authority and details of resolution passed for issue.
 Procedure and time schedule for allotment and issue of certificates
 Names and addresses of company secretary, legal advisors, auditors, managers
etc.

II Financial Information [Reports to be set out]

 A report by auditor of the company with respect to: -
 Profit and losses and Assets and liabilities
 The rate of dividend for each class of shares.

III Statutory and other Information

 Minimum subscription
 Expenses of issue giving separately fee payable to –Advisors
 Registrars to the issue
 Managers to the issue etc.
 Underwriting commission and brokerage

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 Previous issue for cash
 Date of purchase of property
 Details of the directors and their remuneration appointment etc.
 Rights of members regarding voting, dividends etc.

Part III of schedule II

 In the case of a company which has been carrying on business for less than five
financial years, the reference in Part II of the scheduled for 5 financial years will
mean only for the years for which the company has been carrying on business
 Any report by accountant , required by Part II shall be made by accountant,
qualified under the companies act for appointment as auditor of the company
 The time and place at which copies of all balance sheets and profit loss accounts,
material contracts and document,etc, can be inspected should also be specified
under this part.
 The prospectus must end with the declaration that all relevant provisions of the
companies act 1956, and the guidelines issued by the govt. have been complied
with and no statement made in prospectus is contrary to the provisions of the
companies act 195 and the rules thereunder

Objects of Prospectus

• To inform public about the forming of a new company

• To inspire the investors, to invest in shares or debentures.
• To preserve the authentic record of the terms on which the investors have been
invited.

STATEMENT IN LIEU OF PROSPECTUS

A public company not raising its share capital from general public, need not issue
a prospectus. However, it should file a ‘Statement in lieu of Prospectus’ (Which
contain almost the same particulars) with the Registrar.

This document must be in accordance with the Schedule III of the Companies Act
and must include practically the same information as required in the prospectus. If
a private company converts into a public company, it has to issue a prospectus or
file a statement in lieu of prospectus to the registrar.

LIABLITY FOR ‘UNTRUE STATEMENTS’ IN THE PROSPECTUS

(SECTION 62-63)

Untrue Statement
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 According to Sec. 65 (1) of the companies Act, 1956-

(a) A statement included in prospectus shall be deemed to be untrue, if the

statement is

Misleading in the form and context in which it is included; and

(b) Where the omission from a prospectus of any matter is calculated to

mislead, the

Prospectus shall be deemed in respect of omission, to be a prospectus in

which an

Untrue statement is included.

The expression ‘includes’ with reference to a prospectus means, included in the

prospectus itself or contained in any report or memorandum appearing on the face
thereof or by reference incorporated therein or issued therewith.

A person who has applied for shares in the company, and who has been allotted
shares has certain remedies against the company and the persons issuing the
prospectus. But a buyer of shares in the open market or a subscriber to the
memorandum has no such right. If, however, a prospectus is issued with the
object of including persons to buy shares in the open market, any person who
buys shares even in the open market on the basis of the statement made in it has a
right of action if the statements are untrue or there is material omission from the
prospectus.

A false statement or omission of material gives rise to civil as well as criminal

liability

Questions:-

Section –A (2 marks)

1. Define company . What are the stages in formation of the company?

2. Define Promoters. State any two functions of promoters.

3. What is capital subscription?

4. What is certificate of commencement of business

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5. Define Prospectus. What do you mean by statement of lieu of prospectus.

Section - B( 8 Marks)

1. Distinguish between MOA & AOA.

2. What are the conditions for alteration of the articles of association.

3. What are the contents of AOA.

4. Briefly explain the alteration of MOA.

Section – C (15 Marks)

1. Explain the various stages involved in the formation of a company.

2. Define Prospectus and discuss its objects and contents.

3. What is Memorandum of Association? Explain its clauses briefly.

24
 UNIT-II

Capital Of Company
Share capital:-

Share capital denotes the amount of capital raised by the issue of shares, by a
company. It is collected through the issue of shares and remains with the
company till its liquidation.

Thus the term share capital refers to the amount of capital raised(or to be raised)
by a company through the issue of shares.

Features of Share Capital:

• Owned capital: Share capital is owned capital of the company. It is actually the
money of the shareholders and since the shareholders are the owner of the
company, so share capital is the owned capital.

• Remains with the company: It remains with the company till its liquidation.
• Dependable sources: Share capital is the most dependable source of finance for
the joint stock companies.
• Raises creditworthiness: It raised the credit worthiness of the company.
• Substantial funds: It provides substantial funds to the company.
• Available for: Share capital is easily available for expansion and diversification of
business activities.
• Amendment: The amount of share capital can be raised by amending the capital
clause of the Memorandum of Association.
• No charge: Share capital does not create any charge on the assets of the company.
• Opportunity to participate: Share capital give its shareholders an opportunity to
participate in the company's management with normal rights of shareholders.
• Benefit of bonus shares: It gives it shareholders the benefit of bonus shares.
• Benefit of limited liability: Share capital also gives its shareholders the befit of
limited liability as the liability of its shareholders is limited up to the face value of
each share.
• Meaningful participation: Share capital enables its shareholders to have a
meaningful participation in the expansion of corporate sector.

Types of Share Capital:

• Authorized capital: It is the maximum amount of capital which a company can
collect or raise by selling it's shares to the general public. Authorized capital is

25
 known as nominal capital or registered capital. For example: A company wants to
sell 100 shares of Rs. 10/- each, so the total amount collected by the company is
Rs. 1000/- i.e. 100 shares x 10 each = 1000

The capital with which a company is registered is known as its authorized capital.

• Issued capital: It is that part of the authorized capital which is actually issued to
the general public. For example: A company has issued 80 shares of Rs. 10/- each
so the issued capital is Rs. 800/-

• Unissued capital: It is that part of the authorized capital which is not being issued
to the general public.That is, company has not issued 20 shares of Rs. 10/- each,
so the unissued capital is Rs. 200/-.

• Subscribed capital: It is that part of the issued capital which is actually

subscribed by the general public. That is company has issued 80 shares out of
which 70 shares are being bought by the general public, so the subscribed capital
is Rs. 700/-. That is 70 shares of Rs. 10/- each.

• Unsubscribed capital: It is that part of the issued capital which is not subscribed
by the general public. That is, if the the company has issued 80 shares out of
which 70 are bought by the general public and 10 are not being bought by them,
so the unsubscribed capital is 10 x Rs. 10 = Rs. 100. That is 10 shares of Rs. 10
each.

• Called up capital: It is that part of the subscribed capital which is actually called
up by the company. For instance, if a company has asked its shareholders to pay
Rs. 5/- per share so on 70 shares, they have to pay 70 shares x Rs. 5 each = Rs.
350/-. This is the called up capital.

• Uncalled up capital: It is that part of the subscribed capital which is not being
called up by the company. It may be called up as and when the company need
funds. That is out of Rs. 10/- per share, Rs. 5/- per share is being called up by the
company and Rs. 2 is being uncalled up and Rs. 3 is kept as reserve, that is yet to
be called.

• Reserve capital: Reserve capital is that part of the uncalled capital which is
reserved to be called up only at the time of winding up or liquidation of the
company. It cannot be called during the life time of a company. It is to be used
only for meeting extra- ordinary situation such as liquidation of the company. The
purpose of reserve capital is to meet the interests of the creditors at the time of
winding up of the company.
26
 • Paid up capital: It is that part of the called up capital which is actually paid up by
the shareholders. For example, out of 70 shares which were subscribed for 60
shareholders have paid up their call money, that is 60 x Rs. 5 = Rs. 300/- is called
as the paid up capital of the company.

• Unpaid up capital: It is that part of the called up capital which is not being paid
by the shareholders. For example: out of 70 shareholders, 60 shareholders have
paid up their call money and 10 shareholders have not paid their call money, so 10
x Rs. 5 = Rs. 50/- is called as unpaid up capital.

Unpaid up capital is also known as Calls in Arrears.

Meaning of a Share

“A share is a share in the share capital of a company and includes stock except
where a distinction between stock and share is expressed or implied”.

Meaning of Stock

The term ‘stock’ may be defined as the aggregate of fully paid-up shares of a
member merged into one fund of equal value.

DISTINCTION BETWEEN SHARE AND STOCK

Following is the distinction between Share and Stock

Share Stock

A share has a nominal value A stock has no nominal value

A share has a distinctive which A stock bears no such number

distinguishes it from other shares

Share can be issued originally to the

A company cannot make an original

27
public issue of stock. Stock can be issued by
existing company by converting its
fully paid-up shares

A stock can never be partly paid-up,

it is always fully paid-up

A share may either be fully paid-up

or partly
A stock may be transferred in any
Paid-up Fractions

Stock may be of different

A share cannot be transferred in denominations
fractions

7. Stock can be issued only by a

All the shares are of equal public
denominations Company limited by shares.

Shares can be issued by any

company,

Public or private

Classifications of Shares

A public joint stock company can issue two classes of shares, they are:

1. Preference Shares, and

2. Equity Shares

PREFERENCE SHARES

28
 Preference shares are those which have preferential right to the payment
of dividend during the Life time of the company, and a preferential right to the
return of capital when the company is Wound up.

Feature of preferences shares

• Preference share have been priority over payment of dividend and repayment of
capital.
• Preferences shares do not hold voting rights.
• Cumulative preference shares:- these shares have been a right to claim dividend
for those years also f for which there were no profits.
• Non cumulating preference shares:- the holders of these share have no claim for
the arrears of dividend. They are paid a dividend if there are sufficient profits.
• Redeemable preference share:- neither the company can return the share capital
nor the shareholder can demand its repayment.
• Irredeemable preference shares:- the shares which cannot be redeemed unless the
company is liquidated are known as irredeemable preference shares.

Advantages

1. Helpful in raising long term capital for a company

2. There is no need to mortgage property on these shares.
3. Redeemable preference shares have the added advantages of repayment of
capital whenever there is surplus in the company.
4. Rate of return is guaranteed.

Disadvantages

1. Permanent burden on the company to pay a fixed rate of dividend before

paying anything on the other shares.
2. Not advantageous to investors from the point of view of control and
management as preferences shares do not carry voting rights.
3. Compared to other fixed interest bearing securities such as debentures, usually
the cost of raising the preference share capital is higher.

Kinds of Preference Shares

29
• Cumulative preference shares: The cumulative preference shares are entitled to
fixed
Dividends whether there are profits or no profits. If profits are not sufficient to
pay dividends in a particular year, the dividends are accumulated and paid in the
succeeding year as profit become available for distribution.

• Noncumulative preference shares: Unlike the cumulative preference shares, these

shares
Cannot claim arrears of dividends of any year out of the profits of
subsequent years.

• Participating preference shares: In the case of the participating preference shares

Shareholders receive a fixed rate of dividend in priority to ordinary
shares and, further
Right to participate in the balance of profit in an agreed proportion together with
ordinary Shareholders.

• Non-participating preference shares: These shares are entitled to only a fixed rate
of dividend; they have no claim in the surplus profit which belongs to ordinary
shareholders.

• Redeemable preference shares: These are the shares which can be purchased back
by the company. The company reserves its right to call back or purchase these
shares at any time, subject to the provisions of its Articles.

• Irredeemable preference shares: These are the shares that cannot be purchased
back by the company.

• Convertible preference shares: Convertible Preference Shares are corporate fixed-

income securities that the shareholders have the option of converting them into a
certain number of ordinary shares after a predetermined time span or on a specific
date.
• Non-convertible preference shares:- Non-Convertible Preference Shares are those
which do not have the option of their conversion into the equity shares.

EQUITY SHARES

Equity shares or ordinary shares are those shares which are not preference shares.
Dividend on these shares is paid after the fixed rate of dividend has been paid on
preference shares. The rate of dividend on equity shares is not fixed and depends
upon the profits available and the intention of the board. In case of winding up of
the available and the intention of the board. In case of winding up of the
company, equity capital can be paid back only after every other claim including
the claim of preference shareholders has been settled.
30
Advantages of equity shares:

I. Long-term and Permanent Capital: It is a good source of long-term finance.

A company is not required to pay-back the equity capital during its life-time and
so, it is a permanent sources of capital.

II. No Fixed Burden: Unlike preference shares, equity shares suppose no fixed
burden on the company's resources, because the dividend on these shares are
subject to availability of profits and the intention of the board of directors. They
may not get the dividend even when company has profits. Thus they provide a
cushion of safety against unfavorable development

III. Credit worthiness: Issuance of equity share capital creates no change on the
assets of the company. A company can raise further finance on the security of its
fixed assets.

IV. Risk Capital: Equity capital is said to be the risk capital. A company can
trade on equity in bad periods on the risk of equity capital.

V. Dividend Policy: A company may follow an elastic and rational dividend

policy and may create huge reserves for its developmental programmes.

Advantages to Investors: Investors or equity shareholders may enjoy the

following advantages:

I. More Income: Equity shareholders are the residual claimant of the profits after
meeting all the fixed commitments. The company may add to the profits by
trading on equity. Thus equity capital may get dividend at high in boom period.

II. Right to Participate in the Control and Management: Equity shareholders

have voting rights and elect competent persons as directors to control and manage
the affairs of the company.

III. Capital profits: The market value of equity shares fluctuates directly with
the profits of the company and their real value based on the net worth of the assets
of the company. an appreciation in the net worth of the company's assets will
increase the market value of equity shares. It brings capital appreciation in their
investments.

IV. An Attraction of Persons having Limited Income: Equity shares are mostly
of lower denomination and persons of limited recourses can purchase these
shares.

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V. Other Advantages: It appeals most to the speculators. Their prices in security
market are more fluctuating.

Disadvantages of equity shares:

Disadvantages to company: Equity shares have the following disadvantages

to the company:

I. Dilution in control: Each sale of equity shares dilutes the voting power of the
existing equity shareholders and extends the voting or controlling power to the
new shareholders. Equity shares are transferable and may bring about
centralization of power in few hands. Certain groups of equity shareholders may
manipulate control and management of company by controlling the majority
holdings which may be detrimental to the interest of the company.

II. Trading on equity not possible: If equity shares alone are issued, the
company cannot trade on equity.

III. Over-capitalization: Excessive issue of equity shares may result in over-

capitalization. Dividend per share is low in that condition which adversely affects
the psychology of the investors. It is difficult to cure.

IV. No flexibility in capital structure: Equity shares cannot be paid back during
the lifetime of the company. This characteristic creates inflexibility in capital
structure of the company.

V. High cost: It costs more to finance with equity shares than with other
securities as the selling costs and underwriting commission are paid at a higher
rate on the issue of these shares.

VI. Speculation: Equity shares of good companies are subject to hectic

speculation in the stock market. Their prices fluctuate frequently which are not in
the interest of the company.

Disadvantages to investors: Equity shares have the following disadvantages

to the investors:

I. Uncertain and Irregular Income: The dividend on equity shares is subject to

availability of profits and intention of the Board of Directors and hence the
income is quite irregular and uncertain. They may get no dividend even three are
sufficient profits.

II. Capital loss During Depression Period: During recession or depression

periods, the profits of the company come down and consequently the rate of
32
dividend also comes down. Due to low rate of dividend and certain other factors
the market value of equity shares goes down resulting in a capital loss to the
investors.

III. Loss on Liquidation: In case, the company goes into liquidation, equity
shareholders are the worst suffers. They are paid in the last only if any surplus is
available after every other claim including the claim of preference shareholders is
settled. It is evident from the advantages and disadvantages of equity share capital
discussed above that the issue of equity share capital is a must for a company, yet
it should not solely depend on it. In order to make its capital structure flexible, it
should raise funds from other sources also.

SWEAT EQUITY

“Sweat Equity Shares” means equity shares issued by the company to employees
or directors at a discount or for consideration other than cash for providing know
how or making available rights in the nature of intellectual property rights or
value addition, by whatever name called.

Bonus Shares

Bonus shares are the share allotted to existing equity shareholders without any
consideration being received from them, in cash or in kind.

RIGHTS ISSUE

When a company which has already issued shares wants to make a further issue of
shares. It is under a legal obligation of first offer the fresh issue to the existing
shareholders unless the company has resolved otherwise by a special resolution.
The right of existing shareholders to buy shares from the company in this manner
is transferable. If the market price of shares is higher than the amount at which the
company has offered new shares, the right to buy shares from the company will
carry a price.

Equity Share: According to Indian Companies Act 1956 " an equity share is share
which is not preference share". An equity share does not carry any preferential
right. Equity shares are entitled to dividend and repayment of capital after the
claims of preference shares are satisfied. Equity shareholders control the affairs of
the company and have right to all the profits after the preference dividend has
been paid.

33
 Preference Share: A share that carries the following two preferential rights is
called ‘Preference Share’:

(i) Preference shares have a right to receive dividend at a fixed rate before any
dividend given to equity Shares.

(ii) Preference shares have a right to get their capital returned, before the capital
of equity shareholders is returned in case the company is going to wind up.

Difference between Preference Share and Equity Share are given below:

basis of Preference Equity Share

Difference Share

Right of Preference Equity shares are

Dividend shares are paid paid dividend out
dividend before of the balance of
the Equity profit available
shares. after the dividend
paid to preference
shareholders.

Rate of Rate of Rate of dividend

Dividend dividend is is decided by the
fixed. Board of
Directors, year to
year depending
on profits.

Convertibility Preference Equity shares are

Shares may be not convertible.
converted into
Equity shares,
if the terms of
issue provide
so.

34
 Participation Preference Equity
in shareholders do shareholders have
Management not have the the right to
right to participate in the
participate in management of
the the company.
management of
the company.

Voting Right Preference Equity

shareholders do shareholders have
not carry the voting rights in
voting right. all circumstances.
They can vote
only in special
circumstances.

Redemption Preference A company may

of Share shares may be buy-back its
Capital redeemed. equity shares.

Refund of At the time of On winding up,

Capital winding up of Equity Share
the company, capital is repaid
preference after preference
share capital is share capital is
paid before the paid.
payment of
Equity share
capital.

DEBENTURES

The term debenture is defined as “a document under the company’s seal

which provides for the payment of a principal sum and interest thereon at regular
intervals which is usually secured by a fixed or floating charge on the company’s
property or undertaking which acknowledges a loan to the company.
35
 KIND OF DEBENTURES

• Redeemable and Irredeemable: Lunacy of a member from the point of view of

redemption debentures are classified into redeemable and irredeemable.
Redeemable debentures are those that will be repaid by the company at the end of
a specified period, or on demand, or by installments. Irredeemable debentures are
those that are not repayable during the lifetime of the company. Irredeemable
debentures are also called perpetual debentures.

• Mortgage and Simple: From the point of view of security, debentures are
classified into mortgage and simple or naked debentures. Mortgage debentures,
also called secured debentures, are those which are secured by a charge on the
assets or property of the company, Whereas simple debentures are those that are
not secured by any charge on the assets of the company.

• Registered and Bearer: From the point of view of records, debentures may be
classified into registered and bearer debentures. Registered debentures are those
in respect of which the names, addresses and particulars of the holdings of
debenture holders are entered in the Register of Debenture holders. The transfer
of registered debenture cannot be affected without the execution of a regular
transfer deed. As against this, the company keeps no such records of bearer
debenture holders. Bearer debentures are negotiable by mere delivery of the
document.

• Convertible and Unconvertible: In case of convertible debentures, the holders

have the option to convert their debenture holdings into equity shares of the
company at a specified rate after a specified period.

Advantages of Debentures:

• Control of company is not surrendered to debenture holders because they don’t

have any voting rights
• Trading on equity is possible as debenture holders get a lower rate of return than
the earnings of the company
• Interest on debenture is an allowable expenditure under income tax act, hence
incidence of tax on the company is decreased.
• Debentures can be redeemed when company has surplus funds
Disadvantages of Debentures:-

36
 • Cost of raising capital through debentures is high of high stamps duty.
• Common people cannot buy debenture as they are of high denominations.
• They are not meant for companies earning greater than the rate of interest which
they are paying on the debentures

DISTINCTION BETWEEN DEBENTURES AND SHARES

The following are the points of distinction between the debentures and shares

• Creditorship security vs. Ownership security: Whereas, a debenture is a

Creditorship security, a share is an ownership security. It means that a debenture
holder is a creditor of the company, while a shareholder is a part-owner of the
company. It is the fundamental distinction between a debenture and a share.

• Certainty of return: A debenture holder is certain of return on his investment. The

company has to pay interest on debentures are the fixed rate agreed upon at the
time of issue even if it suffers heavy losses. A shareholder cannot get dividends if
the company does not earn profits. As a matter of fact, even when a company
earns a profit, its directors, may decide to plough back the profits and not declare
a dividend. Thus, there is no certainty of return on investment in shares.

• Order of repayment on winding up: In case of winding up of a company, the

amount of debentures will be repaid before any amount is paid to shareholders to
return share capital.

• Restrictions on issue at a discount: There are no restrictions on issue of

debentures at a discount, but there are legal conditions which have to be fulfilled
to issue shares a discount, but there are legal conditions which have to fulfill to
issue shares a discount.

• Mortgage: There can be mortgage debentures. It means that assets of the company
can be mortgaged in favour of debenture holders by way of security. But there can
be no mortgage shares.

• Convertibility: Debentures which can be converted into shares at the option of

debenture holders can issued. But shares convertible into debentures cannot be
issued.

. Transfer of Shares
37

Shares are movable property transferable by delivery and endorsement, in accordance with the

Articles of Association from Transferor to Transferee.

 Shares are movable property transferable by delivery and endorsement, in
accordance with the Articles of Association. The instrument of transfer, i.e.,
transfer deed is executed both by the transferor and the transferee, and the
transferor endorses his signature on the back of the share certificate and delivers it
to the transferee. A company shall register transfer of shares only when a proper
instrument of transfer duly stamped and executed, along with the share certificate
or (letter of allotment) is lodged with the company.

Transmission of Shares

Transmission of shares means transfer of property or title in shares by law.

Transmission of shares means transfer of property or title in shares by law.

Under this case the shares of the deceased member may be transferred to his legal
representatives. In case of banking member the shares may be transferred to this
legal representative. In case of lunatic member shares are transferred to his
administrator (appointed by the court).

There are two alternatives open to a legal representative: (1) the legal
representative may himself become the member, and or (2) he may transfer the
shares to some other person.

Share Certificates
A share certificate is a declaration that the person whose name is written on that certificate is legal
owner of the number of shares specified therein.

Share Warrant

A share warrant entitles the bearer to the shares specified in that warrant and the shares may be
transferred to him on delivery of the warrant.

Dividend on Shares

38
Dividend refers to the moment of profit received by the share holders on their investment in the
company.

Difference between Transfer and Transmission of Shares

Transfer of Shares Transmission of Shares

It is voluntary one It happens according to the

operations of law
A duly executed instrument of
transfer is essential There is no need t have such
instrument of transfer but a letter
of request with succession
certificate should be enclosed

Consideration is essential
No consideration is essential

Shares are transferred irrespective

of the happening of events like It happens only on the happening
death, bankruptcy, or lunacy of a of events, like death, bankruptcy,
member
of lunacy of member

Stamp duty is necessary

Stamp duty is not necessary

Listing Of Securities

Listing of securities means the securities are admission for trading on a

recognized stock exchange. In the case of securities are not
Listed in the stock exchange such company securities are not trading in the stock
exchange. Listing is compulsory for a public issuing company that intend to offer
shares/debentures to the public for subscription. Listed securities are of two
classes, viz., cash List and Forward List. The securities on the cash list are those

39
 involving ready delivery while securities in the forward list enjoy forward trading
privileges.

A dvantage s

• Listing of securities provides the marketability and liquidity of the securities

• Listing protects the interest of both shareholders and the investing public•
• Listing encourages investment and flow of savings into the capital market
• Listing offers wide publicity to the concerned companies
• Listing provides buying and selling of securities in the stock exchange
• Listing promotes better corporate practices and lead to progressively higher
standards of corporate procedures and practices
• Listing enjoys higher public confidence as the stock exchange compels the issuer
to comply with high standards

Disadvantages

• Listed securities offers wide scope for the speculators to manipulate the values in
such a way as detrimental to the interest of the company
• Sometimes listed securities are subject to wide fluctuations in their value. The
wide fluctuations in their values have the effect of degrading the company’s
reputation and images in the eyes of the public as well as the financial
intermediaries
• Listing discloses vital information such as operating environment to competitors

Questions
Section – A(2 MARKS)

1. What is share capital?

2. What do you mean by share?
3. Mention the different kinds of shares?
4. What are the types of preference shares?
5. Give the meaning of listing of securities.

Section – B (8 MARKS)

1. State the merits & demerits of equity shares.

2. Give the meaning of debentures. What are its features?

40
3. Distinguish between shares & Debentures

Section – C(15MARKS)

1. What is a share? What are the different types of shares? Explain.

2. Define debenture. Explain the different kinds of debenture.

UNIT - III

COMPANY MEETINGS

Meaning

A meeting may be defined as ‘ Any gathering, assembly if two or more

persons in a particular place to discuss some lawful business of common concern
and to take decisions in the form of resolutions on the basis of opinion expressed
by members present at the meeting’.

Kinds of company meetings:

1) Share holders meetings

a) Statutory Meeting:- It is the first general meeting of the shareholders which is

held just after the commencement of the business every public company having
share capital should hold this meeting. It should be used within 6 months of
commencement but not before 1 month.

41
b) Annual general meeting:- This is the meeting of the share holders of the
company held once in a year. Every company should hold this meeting to discuss
the affairs of the company, to pass the accounts. It should be held within 18
months from the date of incorporation, one after every year but the gap between 2
should not be more than 15 months.

c) Extra-ordinary general meeting:- This meeting is held whenever required to

transfer special business of an urgent nature which can’t be postponed to the
annual general meeting.

d) Class meeting:- It refers to the meeting of a particular of class of shareholders

say-preference share holders, equity shareholders etc.

2) Director’s meeting

a) Meeting of board of directors:- These meeting are often held to frame policies
and review the progress of the company. This meeting is attending by directors of
the company.

b) Meetings of committee:- These meetings may be held as and when necessary

and send their reports to board of directors.

3) Creditors meeting

a) Debenture holders meeting:- Egm requisition – the members of the co have the
right to can the quantity if required. The acquiate must be rated & signed be
require no (1/10). One it is deposited meeting must be held within 45 days but the
call should made within 25 days.

4)Other Meetings

Meeting of Debentureholders: A company issuing debentures may provide for the

holdings of meetings of the debentureholders. At such meetings, generally matters
pertaining to the variation in terms of security or to alteration of their rights are
discussed. All matters connected with the holding, conduct and proceedings of the
meetings of the debentureholders are normally specified in the Debenture Trust
Deed. The decision at the meeting made by the prescribed majority is valid and
lawful and binding upon the minority.
42
Meeting of Creditors: Sometimes, a company, either as a running concern or in
the eventof winding up, has to make certain arrangements with its creditors.
Meetings of creditors may be called for this purpose. Example U/s 393, a
company may enter into arrangements with its creditors. The court, on
application, may order the holding of a creditors’ meeting. If the scheme of
arrangement is agreed to by majority in number of holding debts to value of the
three-fourths of the total value of the debts, the court may sanction the scheme. A
certified copy of the court’s order is the filed with the registrar and it is binding on
all the creditors and the company only after it is filed with Registrar.

Similarly, in case of winding up of a company, a meeting of creditors

and of contributories is help to ascertain the total amount due by the company and
also to appoint a liquidator to wind up the affairs of the company.

b) Preside over by (1) Chairman (ii) Deputy chairman (iii) one among the
members

The meeting should be prescribed over by the person who is duly elected
as the chairman of the company if the chairman is not present the deputy
chairman should preside if the deputy chairman is not present, one among the
members should preside.

Essentials of valid meeting

Proper conduct of meeting:- The meeting must be properly conducted as per the
provisions of the companies act and the articles of the company concerned.

To be convened by proper authority:- It should be convened by proper authority

i.e., a person authorized by the act or the articles convened to convenes a meeting.

Notice to members:- Notice regarding the holding of meeting should be sent to all
the persons entitles to receive the notice as per the provisions of the companies
act.

4) Proper constitution of meeting:-

a) Quorum:- Quorum of the members must be present at the commencement of

the meeting according to companies act on the articles.

43
 5) Agenda:- There should be an agenda for the meeting and the items discussed at
the meeting should be according to the items on agenda.

6) Quorum

A quorum is the minimum number of members required to attend a meeting and

transact business validly.

According to the companies act in the case of a private company two members.
While in the case of public company 5 members must be personally present to
constitute the quorum.

Quorum of board meeting:-

In the case of board meeting of the articles are silent, the quorum shall be 1/3 rd
of the total strength of directors (any fraction being rounded of as 1) or atleast 2
directors whichever is higher.

Disinterested Quorum :- It means the quorum of those directions who are not
interested directly or indirectly in certain matters before the board meeting i.e.,
the purpose of finding the quorum.

Total No. of directions present – Directors who are interested

Duties of a secretary at:

1. Statutory meeting (Sec 165)

It is the first official meeting of the shareholders which is held after the
commencement of the business. This meeting is a must for a public company. It
must be held within 6 months not earlier than one month from the date on which
the company is entitled to commence its business.

Secretarial duties related to statutory meeting

• To prepare a draft of statutory report

• To arrange for board meeting, to get approved the report by the board of directors

• To get the report certified by auditors and atleast 2 directors.

• To send a notice and printed report to all the members 21 days before the
statutory meeting.

• To file a copy of statutory report to the registrar

44
• To prepare a detailed agenda for meeting in consultation with chairman.

• To make necessary arrangements for holding the meeting.

• To ascertain the quorum before starting the meeting.

• To produce the list of the members of the meeting

• To take down the notes of proceedings

• To prepare minutes from notes.

• To implement the decisions arrived at the meeting

2.Annual general meeting :-

It is a meeting which is held at the end of the year for the shareholders of the
company.

Procedure relating to annual general / secretarial duties relating to annual general

meeting.

a) Before the meeting

1) Approval of financial statements

To get the finance statements by the based and further. They have to get audited
by co-ordinators and his report must be recorded.

2) Preparation of annual reports:- The secretary has to prepare the annual reports
in consultation with chairman.

3) Conduct of board meeting:- To convene a board meeting before the annual

general meeting to consider the matter such as disposal of profits, to determine the
rate of dividend, to fix up the date, time and venue of the meeting etc.

4) Arrangement for printing of important documents such as notice, annual a/c’s,

reports of the directors etc.

5) Notice to members:- The notice of annual general meeting along with the
relevant documents is sent by post to the members.

6) Public notice in newspaper:- The secretary has to make an arrangements to

publish a public notice of the meeting in newspapers.

7) Copies of notice and directors report to stock exchange.

45
8) Copies of notice and annual a/c’s to registrar of the companies

9) Preparation of agenda

10) Securing of proxy forms.

b) During the meeting:- The secretary has to take steps during the meeting.

1) Collection of admission card:- The secretary has to collect admission card from
the members at the gate and also record their attendance

2) Ascertainment of quorum:- The secretary should ascertain the quorum for

general meeting If no provisions the quorum for public company is 5 members
and for private company 2 members

3) Presentation of directors report to members:- The secretary has to present the

directors report to the members who attend the meeting.

4) Auditors to read out the report:- The secretary has to help the auditors to
readout the report.

5) Discussion of matters:- To help the members to take up the matters for

discussion.

c) After the meeting

1) Preparation of minutes of meeting

2) Implementation of directions and instructions of annual general meeting

3) Filing of annual a/c’s and balance sheet with the registrar of the companies.

3. Extra – ordinary general meeting

It is held for transacting special business which are so urgent and that these cant
be kept pending till the next annual general meeting.

Secretarial duties related to extra –ordinary general meeting:-

46
 • To fix up the date time and venue of extra ordinary general meeting in
consultation with chairman, if the meeting is concerned on boards initiative.

• If the meeting is called on members requisition after the securing of requisition to

arrange for members meeting within consultation with chairman to fix up the
date, time and venue of the meeting.

• To get appointed the draft resolutions and arrange for their printing.

• To send the notices to the members about the meeting and advertisement in
newspapers.

• The scrutiness the proxies and prepares list of proxies.

• He makes seating arrangement for members for their attendance.

• He has to arrange for checking admission cards at the entrance

• He has to ascertain the quorum for the meeting.

• He has to assist the chairman in conducting the meeting

• He should take the notes of the proceedings during the meeting.

• After meeting, he has to draft the minutes of meeting

• To carry out the instructions and decisions of the meeting.

• He should file a copy of special resolution within 30 days of passing a resolution.

Class Meeting

Class meetings are meetings which are held by holders of a particular class of shares,

e.g., preference shareholders

Voting
Voting is a means of determining the sense or opinion of a meeting. i.e., whether the

meeting approves or disapproves of the proposals placed before it.

47
 Voting is a means of determining the sense or opinion of a meeting, i.e., whether
the meeting

approves or disapproves of the proposals placed before it. A proposal is also

known as a

Methods of Voting

The sense of meeting is ascertained through the mind of the people. A majority
of the opinion

of the minds of the members is determined by means of voting.

There are various methods in which the Chairman of the meeting determines the
sense of the meeting. They include:

a) Acclamation: If the members of the meeting express their approval or disapproval

of a

motion through applause, clapping or cheering, it is called ‘Voting by

Acclamation’.

b) Voice: Under this method, if the chairman is satisfied with the sufficient
discussion was

held on a motion, he puts the motion before the members asking members in
favour of

the motion and members against the motion. Therefore, he will be in a position to
ascertain

the sense as per the volume of the voice of the members. He finally declares the
result

of voting as per the volume of the voice.

c) Show of Hands: It is a usual method of finding the sense of a meeting. In case of

companies

and registered bodies, voting through show of hands is normally applied. The
Chairman

puts the motion before the members asking members in favour of the motion and
members

48
 against the motion to raise their hands. The raise of hands is counted in favour or
against to the motion and the Chairman declares the result of the voting.

d) Division: Under this method, the chairman asks the members to divide into two
groups consisting those in favour of resolution and against to the resolution. In
case the supporting members are more, the motion is carried and if the number
supports are less, then the motion is lost.

e) Standing Vote: This is another method in which the members are requested to
stand up

on their seats in favour of the motion or against the motion. The teller would
count the

number of members for and against the motion and chairman declares the result
on the

basis of the counts.

f) Ballot: According to this method, normally a piece of paper called ‘Ballot’ is

provided to

each member of meeting to vote. The candidate names are printed or written in
alphabetical

order on the ballot card. The person who votes has to put a cross mark against the
name

g) he is going to elect. Finally the votes are counted and the Chairman announces the
result

along with the number of votes for and against the motion.

h) Poll: Since voting through hands is a round method of taking the sense of the
meeting

and it does pay due regard to the wishes of members ‘Poll’ method is generally
followed.Poll is accurate and effective means of determining the wishes of all the
members of the Meeting.

Voting may be conducted either by show of hands or by poll. On a show of hands,

one member has one vote, the number of members who raise their hands in favour
and those against the motion,are counted and the motion is declared carried or

49
 lost, as the case may be. Proxy votes are not counted on a show of hands unless
the Articles provide otherwise.

MOTION

Before meeting of a company all the matters are placed in the form of proposals

which are called as ‘Motion’.

AMENDMENT

Amendment means any modification to a motion before it is put to vote for adoption.

PROXY
Any member entitled to attend and vote at a general meeting may appoint another

Kinds of Proxies

There are two types proxies. They are

 Special Proxy; and

 General Proxy,

Special proxy is authorized to vote only on a particular resolution, whereas

General Proxy is

empowered to vote on all resolutions in a meeting.

50
 MINUTES

Minutes refer to a record of business transacted and decisions arrived at a meeting.

RESOLUTIONS

Resolution is defined as ‘formal decisions of a meeting on any motion before it’.

Classifications of Resolutions

Resolutions may be

Ordinary Resolution,

Special Resolution and

Resolutions requiring special notice.

Ordinary Resolution:
An ordinary resolution is one which requires a simple majority, i.e., more than 50%

of the votes cast in person or by proxy in favour of the resolution.

An ordinary resolution is one which requires a simple majority, i.e., more than
50% of the votes cast in

Person or by proxy in favour of the resolution. If the votes (including the casting
vote, if any, of the chairman),at a general meeting cast by members entitled to
vote in its favour are more than votes cast against it. Voting may be by way of a
show of hands or by a poll provided 21 days notice has been given for the
meeting.

Special Resolution: A resolution is said to be ‘Special Resolution’, where;

 The intention to propose the resolution as special resolution is specified in the

notice of

the general meeting.

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 It requires at least 75% of the votes cast either by show of hands or on poll in
person or

proxy, in favour of the resolution.

A Special Resolution shall be required in matters such as:

 Altering the objects clause in the memorandum,

 Changing the registered office from one state to another,

 Changing the name of the company,

 Alteration of the Articles,

 Paying interest out of capital,

 Reduction in share capital,

 Determining the remuneration of any director or managing director,

 Voluntary winding up of the company commencement of new business,

 Further issue of shares to persons other than the existing shareholders, etc.

Special Resolutions Requiring Special Notice: Apart from above two types of
resolutions ,there is another kind of resolution which requires a special notice to
be given in respect of them.There are certain matters specified in the Companies
Act, 1956 which may be discussed at a general meeting only if a special notice is
given regarding the proposal to discuss these matters at a meeting. A special
notice enables the members to be prepared on the matter to be discussed and gives
them time to indicate their views on the resolution. In case special notice of
resolution is required by the Companies Act, 1956 or by the Articles of a
company, the intention to proposes uch a resolution must be notified to the
company at least 14 days before the meeting. The company must within seven
days before the meeting give the notice of the proposed resolution to its members

Notice of the resolution is required to be given in the same way in which notice of
a meeting is given, or if that is not practicable, the company may give notice by
advertisement in a newspaper having an appropriate circulation or in any other
manner allowed by the Articles, not less seven days before the meeting.

52
 The following matters requiring Special Notice before they are discussed
before the meeting:

 To appoint at an annual general meeting appointing an auditor a person other than

a retiring auditor.

 To resolve at an annual general meeting that a retiring auditor shall not be

reappointed.

 To remove a director before the expiry of his period of office.

 To appoint another director in place of removed director.

Where the Articles of a company provide for the giving of a special notice for a
resolution,in respect of any specified matter or matters.A resolution requiring
special notice may be passed either as an ordinary resolution (Simple majority) or
as a special resolution (75% majority).

Difference between Motions and Resolutions

Motions Resolutions

A motion is a proposition or a question A resolution is the decision of a

put meeting on a

before the meeting for discussion or matter placed before it. It is the final
for decision outcome

of a motion, which is carried.

2. A motion is formally moved by one 2. No such formalities are required

and secondedby another member for its adoption

3. A motion must be in written form

and signed by the
3. A resolution being a final
mover decision of the

4. A motion may be changed at any Meeting is recorded in the

time before it is put for voting minutes.

4. A resolution once adopted cannot

be amended,
5. A motion may be withdrawn if all
the members agree to that save by passing a repealing

53
 6. There may be three types of motions, resolution at some
i.e., main
subsequent meeting.
motion, formal motion and
substantive motions 5. It cannot be withdrawn as it
becomes a part of
7. A motion initiates discussion on an
agenda item the minutes

6. Resolutions of two types, viz.,

Ordinary and

Special Resolutions passed at

General meeting

7. A resolution includes discussion

on an agenda

Item

Adjournment

Adjournment means suspending the proceedings of a meeting for the time being so the meeting may
be continued at a later date.

Postponement

Postponement of meeting means deferring the holding of the meeting itself at a later date

Dissolution

Dissolution of meeting means termination of a meeting. The meeting no

longer exists once it has been dissolved. If within half an hour after the time
appointed for holding a general meeting;

the quorum is not present, the meeting shall stand dissolved if it was called on
requisition by members.

54
Dissolution of a meeting means termination of a meeting. The meeting no longer exists once

Once it has been dissolved

Questions:-

Section – A

1. Define a meeting

2. What are Minutes of meeting?

3. What is meant by taking a poll?

4. Who is a proxy

5. What is an agenda?

Section –B

1. What are the essentials of a valid meeting

2. What is statutory meeting? State the legal provisions applicable

to it and state the contents of a statutory report.

3. What are the essentials of resolution?

Section –C

1. What are the different type of meetings held by public

companies? Explain.

2. What is AGM? Explain the duties of the company secretary in

connecting with AGM.

55
UNIT -IV

COMPANY SECRETARY
Meaning of Secretary

The word secretary is derived from a latin word “ Secretaries’ which means
Confidential officer.

A person employed to handle correspondence, to keep files and do clerical work.

For another person or an organization is called a secretary.

In other words, an officer who keeps records takes minutes of meeting and
answers correspondence is called a secretary.

Definition of Secretary

Oxford dictionary has defined secretary, “one whose office is to write for
another especially one who is employed to conduct correspondence to keep

56
 records and to transact various other business for another person or for a
society. Corporation on public body.

Types of Secretary

1) Private Secretary:

He is usually appointed by an important person such as minister in government.

Member of parliament manager, business magnate or professional men like
doctor, lawyers etc. His main work is to attend the personal correspondence and
other personal work of the employer.

2) Secretary of a club or an association.

A full time secretary appointed by business association, cultural association,

professional association and sports club to conduct day to day activities of the
association or club is called a secretary of a club or an association.

Important functions of a secretary.

1) To attend administrative functions

2) Maintenance of accounts and records

3) Supervision of staff

4) Registration of new members of club

5) Collection of fees

6) Conducting meetings

3) Secretary of Co-operative Society

Generally the full time secretaries are appointed in co-operative society. In some
cases, one of the members of managing committee may be elected to act as
secretary.

Functions of Secretary

• To assist managing committee in managing, the affairs the society.

57
• To maintain proper records and registers.

• To arrange meetings.

4) Secretary of a government company:

Each department of the government is under the control of a secretary .

For Eg:- Secretary finance dept, secretary education dept etc.

He is also executive head and advison to the minister who is concerned with a
particular department.

Functions

1) Administrative and executive functions

2) Advisory functions

5) Secretary of local body:

Usually, municipal corporations and panchayats appoint a paid secretary who

will function as a office executive

Functions:-

1) To supervise and co-ordinate all the activities of the office

2) Prepare budgets statements

3) Arrange meetings

4) Prepare minutes.

6) Secretary of trade union:

He is to hold the meetings of the union, to record their proceedings

to maintain accounts and statutory books and to conduct correspondence on
behalf of the union.

7) Company Secretary:

58
 The secretary of a company guides the management the day to day
work of company law, mercantile law and of accounts, taxation, holding
meetings, drafting of reports, resolutions etc.

Appointment of Secretary

Under the companies with Act 1956, “Companies with a paid of capital of Rs. 5
Crore or more must appoint a full time secretary.

The promoters of a company generally 1st appoint the secretary

who assists them in the formation of a company by attending to all preliminary
work, such as preparation of various documents and statements required for
registering the company. Arranging meetings etc. he is also called as ‘Protem
secretary’ or ‘1st secretary’ or ‘secretary for time being’ and his name may be
included in the articles of association of the company.

The board of directors has power to appoint a regular secretary by

passing a resolution in its meeting. The first secretary appointed by the promoters.
May or may not be appointed by the board. If the board of directors decides to
appoint another person as a secretary after incorporation of the company the first
secretary can’t issue the company.

However in such a case he should be given a prior notice

otherwise, he can sue the company for damages. Hence to secure his position, the
first secretary who has been acting as proten secretary must immediately after
incorporation get his appointment confirmed by a resolution at the first board
meeting.

The procedure for appointing the company secretary other than the first
secretary is as follows:-

1) A resolution has to be passed the board of directors meeting regarding the

appointment of a secretary on certain conditions & terms.

2) The particulars of appointment must be filled in duplicate with the registrar

within 30 days of the appointment.

3) If the person appointed as secretary functions as a secretary in any other

company, he should inform the other company within 20 days of his appointment.

4) Any director interested in the appointment of secretary must give his intention.

59
5) If any director or the relative of the director, he is appointed as a secretary of
the company. A special resolution has to be passed at the general body meeting
for such appointment..

In addition to this resolution, the secretary should enter into written service
agreement which usually provide for the following matters:-

1. Period of appointment if any

2. Terms of dismissal

3. Remuneration’

4. P.F (Provident Fund) pension etc

5. Conditions of learn

6. Medical and other benefits

7. Conditions of resignation and retirement etc

Duties and functions of a company secretary:

The duties of company secretary may be classified under the full heads :-

1)Statutory duties:-

These duties are described by the companies act as any other legislation such as
income tax act (1961) sales tax act stamp act (1899), contract act (1872). MRT
pact (1969) etc.

Duties:-

(a) Maintenance of books & registers of the company.

(b) Filing returns

(c) Supervising issue, allotment, transfer of shares, fonfeiture of shares etc.

(d) Attending the meetings and recording proceedings

2) Duties in relation to directors

(a) To conduct board meeting, under the direction of managing director.

60
(b) To prepare minutes and execute the orders and instructions of the board.

(c) To advice the directors on various provisions of the act.

(d) To act as an agent of company

(e) To act as mouthpiece of the board of director

(f) To look after correspondence with directors

3) Duties in relation to shareholders

The secretary has to organise and supervise correspondence with the shareholders
with regard to follows

(a) Application and allotment of shares

(b) Calls on shares

(c) Forfeiture of shares

(d) Transfer and transmission of shares

(e) Distribution of dividend

(f) Notices and circulars to members

(g) Meetings of the shareholders

(h) Enquires and complaints from shareholders

4) Duties towards organisation and office

(a) To supervise the various activities of the office

(b) To co-ordinate the activities of various departments

(c) To select organise and guide the personnel

(d) To maintain good relationship with the members.

5) Duties in relation with public

(a) To act as a medium of communication between the directors and general

public consisting of debenture holders, bankers, creditors, solicitors etc.

(b) To be in constant touch with the above persons

61
(c) To see that no confidential information is disclosed to the public.

6) Duties before incorporation

(a) To attend preliminary meetings of the promotions and prepare the minutes of
meeting (b) To guide the promoters regarding the provisions of the companies act
relating to incorporation of a company

(c) To assist the promoters in preparation of various documents such as

memorandum of association, articles of association etc

7) Duties after incorporation

(a) To arrange for 1st board meeting and get the necessary resolution passed.

(b) To take necessary steps to get the business commencement certificate by filing
necessary documents with the registrar of the companies.

(c) To arrange for statutory meeting after obtaining business commencement

certificate.

(d) To look after the work-in-connection with application, allotment, calls on

shares, transfer and forfeiture of shares etc.

8) Duties under MRTP Act:-

As section 12 and 33 of MRTP act, the secretary should see that all the
agreements entered into by the company pertaining to the restriction trade
practices are registered with the directors of general investigation and registration.

Rights and Powers of Secretary:

The companies act doesn’t confer any special powers to secretary.

He cannot do anything express or implied authority of the board. However as an
employee an officer of the company, he derives certain powers by implication.
They are:-

1) He has the right to control and manage the departments under his control

2) He has the rights to the document which require authentication

3) He has the right to claim his salary as a preferential creditor at the time of
widing up of the company.

62
4) He has the right to allot the shares to the applicants with the permission of the
directors, but it should be mentioned in the articles of association.

Restrictions on powers or limitations on secretarial duites

Through the post of secretary is important in the companies

administrative structure, the secretary has no powers to do any of the foll without
express authority:-

a) To converse a meeting

b) To allot shares

c) To transfer shares

d) To remove a name from the registrar of the members

e) To make representation and enter into contract on behalf of the company

f) To borrow money on behalf of the company

g) To take policy decisions

The liabilities of the secretary

The liabilities of the company secretary can be classified into 2

categories:-

1) Statutory liabilities:- As the principle executive officer of the company, the

secretary has certain statutory obligations under companies act, income tax act,
stamp act, sales tax act, MRTP act, factories act etc. Hence, he may be held liable
for various acts of omission and commission in the administration and
management of the company if he fails to comply legal requirements. He may be
held liable for the following:-

1) If he fails to hold a statutory meeting

2) If he doesn’t circulate the statutory report

3) If he fails to hold annual general meeting

4) If he fails to give notice of board meeting

63
5) If he fails to record the minutes of board and general meeting

6) If he fails to submit the registrar of companies of annual account and other

statements

7) If he fails to maintain minutes at the registered office.

8) If he fails to make ready share certificates and debenture certificates within the
specified period.

9) If he fails to maintain registrar of directors, share holders and debenture

holders.

10) If he fails to comply with the provisions of the act regarding the appointment
of auditors report.

11) If he fails to rectify mistakes within 2 months in case the company registered
by name, which is identical with the name of existing company.

12) If he fails to file with the registrar of the companies, the relevant documents.

13) If he fails to have the name and the address of the registered office painted
outside the every office.

14) If he fails to have name of the company engraved on the seal.

Liabilities under income tax Act 1961

Under this act the secretary is responsible for –

a) Collection of TDS [Tax detect at source) of income from salaries and dividend
paid to share holders.

b) Payment of income tax so collected

c) Payment of corporate tax.

Under Indian stamp Act

64
 Under this act the secretary is responsible for –

a) Verifying the documents like share certificates, debentures certificates, transfer

form etc. are properly stamped as per the provisions of Indian stamp act.

Statutory duties under Sales Tax

Under this act, secretary is responsible for –

a) To carry out the correspondence work related to sales tax.

b) To collect VAT [value added tax]

c) To submit the returns and payments of tax on time

2) Contractual liabilities

Apart from statutory liabilities the company secretary has certain

liabilities to the company arising out of his contract of service with the company.
These liabilities are known as contractual liabilities.

a) He is liable to the company for damage caused by his willful misconduct.

b) He should not do anything beyond the authority

c) He is under obligation not to disclose any secret information relating to the

affairs of the company

d) If the makes only secret profit on account of his position as a secretary of the
company, he will be liable for that fault.

e) If he commits any fraud, he is held liable for that.

Qualifications of a Company Secretary

Statutory qualifications

a) Paid up capital of Rs. 2 Crores

b) No member shall be appointed unless his a member of ICSI

c) In case of company paid up capital less than 2 crores.

65
 d) Members of ICSI

e) Intermediates

As per the companies (appointment and qualifications of secretary

and amendment) rules 1993, the qualification which a person shall posses in order
to be eligible for a company secretary are as follows:-

(1) Every company with paid up capital of not less than 2 crores, shall be
appointed as whole time secretary.

(2) No person shall be appointed as whole time secretary, unless he is a member

of the institute of a company secretaries of India.

(3) In case of companies with paid up capital less than Rs. 2 Crores any individual
possessing any of the following qualifications may be appointed as a whole time
secretary

• Membership of Institute of company secretaries of India [ICSI]

• Pass in intermediate examination conducted by institute of company secretary of

india

• Post graduate degree in commerce or corporate secretaryship awarded by any

university in India.

• Degree in law awarded by any university.

• Membership of institute of chartered accountants of India.

• Post graduate in company law and secretarial practice granted by the university of
udaypur.

• Membership of association of secretaries and managers kolkatta.

• Diploma in corporate law and management granted by the Indian law institute
new delhi.

• Post graduate or Diploma in management sciences granted by any university

• Post graduate degree or diploma granted by IIM, Bangalore, Kolkatta, Lucknow,

Ahmedabad etc.

66
The above company secretary qualification rules, don’t apply to a limited
company which is formed for the promotion of arts, religion , charity etc.

2) Other qualification:

a) Sound general education

b) Command over language

c) Knowledge of industry

d) General knowledge

e) Knowledge of various acts relating to staff

f) Knowledge of Company law

g) Knowledge of mercantile law

h) Knowledge of accounting and taxation

i) Knowledge of office organisation

j) Impressive personality

Dismissal of a Company

By Whom:

The secretary may be removed from the office by the board of directors under
the powers expressively given in the articles.

How:

Secretary being a servant of a company his suspension and dismissal are

governed by the normal law applicable to the employer and employee he may be
terminated by giving him a notice as per the terms of the service agreement.
Sometimes he may be terminated without giving any notice when his frauds are at
large scale.

Reason:

The secretary may be terminated for the foll reasons

67
When he makes the profit secretly

Willful disobedience, misconduct, negligence, incompetence, disability etc

Questions:-

Section – A

1. Define Secretary. Or Who is a company secretary?

2. Mention different types of securities

3. State the duties of a secretary

4. Who is pro – term secretary?

Section – B

1. Who is a company secretary? How he is appointed in a company?

2. What is the position of a secretary in a company? How can he be

removed?

Section – C

1. Briefly explain the duties and functions of a company secretary.

2. Explain the duties, rights and liabilities of the company secretaries.

68
 UNIT -V

WINDING UP OF COMPANIES
Meaning of Winding Up

Winding up is the process by which a company is dissolved and its properties are
administered for the benefit of its creditors and members. It involves realization
of a company’s assets, payment of its liabilities and return of money back to the
members in proportion to the contribution made by them to the capital of the
company.

According to Pro. Gower, “The liquidation or winding up of a company is the

process whereby its life is ended and its property is administered for the
benefit of its creditors and members. An Administrator, called a liquidator,
is appointed and he takes control of the company ,collects its assets, pays its
debts and finally distributes any surplus among the members in accordance
with their rights”

Thus winding up ultimately leads to the dissolution of the company. In between

winding up and dissolution the legal entity of the company remains and it can be
sued in a court of law.

Modes of Winding Up

According to sec 425 of the Indian Companies Act, 1956, a company which is
registered under the Act may be wound up in any of the following ways.

• Compulsory winding up or winding up y the order of the court.

69
• Voluntary Winding up:

• Members’ Voluntary Winding Up

• Creditors’ Voluntary Winding Up

• Winding up subject to the supervisor of the court.

Compulsory winding up by the order of the court (Sec 433):

Compulsory winding up takes place under the following circumstances

• Special Resolution:- A company will be compulsorily wound up when a special

resolution is passed in the general meeting of the company. However, the power
of the court mey be discretionary. The court may not issue any order for winding
up of the company keeping in mind the larger interest of the company or public
interest.

• In case of default in holding statutory meeting or default in filing the statutory

report with the ROC:- In case of any default in holding the statutory meeting or in
filing statutory report with the registrar of companies, the court may issue the
winding up order on the request of the ROC or y a contributory.

• Failure to commence business within one year of incorporation or when the

business of the company is suspended for the whole year:- Failure on the part of
the company to commence its business within one year of its incorporation will be
ground for the court to exercise its power to order for winding up. Further, the
court can exercise this power if the company suspends its business for the whole
year.

• Number of Members going below the statutory minimum:- The court will have
ground to order for winding up of the company in case where the number of
members of the company goes below the statutory minimum(7 in case of public
company & 2 in case of private company)

• Inability on the part of the company to pay its debts:- Incase where a company is
unable to honour its debt commitment the court may deem to be a sufficient
ground for ordering winding up of the company. In the following circumstances a
company will be presumed to be unable to pay its debts:-

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• In case where a company fails to pay its debts, exceeding Rs.500, within three
weeks from the date of demand by the creditors. However, it must be noted that
the said debt must be real, justifiable and is immediately payable without any
bonafide and reasonable dispute.

• In case where a company fails to satisfy a court decree in favour of the creditors,
either in whole or in part.

• In case where it is proved to the satisfaction of the court that the company is
“unable to pay its debts”.

• Just and Equitable:- The “ Just and Equitable” clause of sec 433 offers reasonable
degree of discretion to the court to decide the ground for ordering winding up of
the company on the basis of facts and circumstances relating to individual case.
The court will carefully consider all the supporting facts and circumstances of
each individual case before ordering for winding up of the company under the just
and equitable clause.

In the following cases the court may invoke just and equitable clause:

• Where the substratum of the company is gone

• When the subject matter of the company is gone

• When it is realized that the main object of the company has substantially failed or
has become impracticable.

• When it is strongly felt that it is impossible to carry on the business of the

company

• When the assets of the company are inadequate to pay off its liabilities .

• In case where it is found that there is oppression of minority shareholders and

mismanagement on the part of the company

• Where there is deadlock in the management, wherein the directors of the BOD do
not see eye to eye for a meaningful and sustained discussion.

• Failure on the part of the directors to hold meetings, produce accounts or to pay
dividends.

Who May petition for compulsory Winding Up?

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 In case of compulsory winding up, an application for the winding up of the
company has to be made by way of petition to the court. U/c 439 the petition for
compulsory winding up of a company can be made by any of the following
persons:

• The company, or

• Any creditors or creditors, including any contigent or prospective creditor or

creditors, (however, the creditors’ petition will not be considered if the claim of
the creditors is time barred) or

• Any contributory or contributories, or

• All or any of the parties specified above in clauses (a),(b),(c) whether together or
separately, or

• Registrar of companies, or

• Any person authorized by the central government u/s 243, consequent to the
report of inspectors, or

• By the central government or a state government u/s 433(h)

Commencement of Winding Up

In case where the winding up order is issued by the court against a company, the
winding up shall be deemed to have commences from the time filing the winding
up petition.

However, in case where a resolution for winding up has been passed at the
company before filing the winding up petition, the winding up of the company
shall be deemed to have commenced at the time of passing the resolution. In case
of multiple petitions, the date of the earliest petition shall be taken as the date for
commencement of winding up.

Powers of the Court in case of winding up petition

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 U/s 442 and 443 the court enjoys certain powers on receipt of a winding up
petition, which can be enumerated as below:

• Power to restrain proceeding against the company:- The court enjoys the power to
restrain any suit or proceedings against the company which is being wound- up.
At any time after the presentations of a winding up petition but before the passing
of the winding order, the court can exercise power to restrain any suit or
proceedings pending against the company in any other court on such terms as it
think fit. For this purpose, the application must be made to the court by the
company or any creditor or contributory.

• Power to hear the petition:- After the receipt of the winding up petition, the court
can hear the petition. It will issue a notice to the company to appear and state its
case on a specified date.A public notice will be issued by the court to all the
creditors and contributories to the effect that the winding up petition has been
received. This is to enable them to present their objections, if any, on the date of
hearing. This public notice will be given by the court atleast 14 days prior to the
fixed for hearing the case. After hearing the petition the court may pass the order
to:

i) dismiss the petition, with or without costs, or

ii) Adjourn the hearing conditionally or unconditionally, or

iii)Pass an interim order as it thinks fit, or

iv)Pass an order for winding up of the company with or without costs, or pass
any other appropriate

Consequences of Winding Up Order

The following consequences are associated with a winding up order of the court:-

• Intimation of the winding-up order will be sent by the court to the official
liquidator and to the registrar of companies(ROC)

• The petitioner and the company to file with the ROC a certified copy of the
winding up order of the court within 30 days of the court’s order. The RoC will
make necessary entries in his records and shall notify the same in the official
gazette.
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• The court’s order of winding up shall be deemed to be the notice of discharge to
the staff of the company except when the business of the company is continued.

• The winding up order will result in the power of the board of directors will come
to end and it will be vested with the official liquidator.

• The order of winding up will operate in favour of all creditors and all all
contributories of the company.

• Another consequences of the winding up order is that no suit or other legal

proceedings shall be commenced, or if pending at the date of the winding up
order, shall be proceeded with, against the company, except by leave of the court
and subject to such terms as the court may impose.

Official Liquidator

The liquidator is the official who helps the Tribunal in the completion of the
winding up proceedings. In the case of winding up, by the tribunal only the
official liquidator appointed by the tribunal only can act as the company’s
liquidator(sec 449).

The official liquidator

May be appointed from a panel of professional firms of chartered accounts,

advocates, company secretaries, costs and work accountants or firms having a
combination of these professions, which the central government shall constitute
for the tribunal;or

May be a body corporate consisting of such professionals as may be approved by

the central government from time to time; or

May be a whole a time or a part time officer appointed by the central government.
Provided that, before appointing the official liquidator, the tribunal may give due
regard to the views or opinion of the secured creditors and workmen(sec448)

Powers, Duties and Liabilities of the Liquidator

Powers

Sec 457(1) of the companies act confers the following powers to the official
liquidator:

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• The liquidator can exercise powers to institute or defend any suit, prosecution or
other legal proceedings civil or criminal on behalf of the company and in the
name of the company

• The liquidator can carry on the business of the company so for may be necessary
for its beneficial winding up

• Power to sell any property of the company, movable or immovable, and

actionable claim of the company. He can also transfer the whole or part of such
property.

• Power to raise money on the security of the property of the company.

• Power to do all other things as may be necessary for the winding up of the
company.

• However, the official liquidator does not enjoy absolute powers. He can exercise
certain powers only with the sanction of the court. These powers are:

• He can execute deeds, receipts and other documents in the name of the company
and for this purpose to use the seal of the company.

• He has power of inspection of records and returns of the company as filed by the
company with the ROC

• Power to appoint an agent to act on his behalf

• Power to draw, accept bill of exchange on behalf of the company.

• Any letter of administration for any deceased contributory can be taken out by the
liquidator.

Duties

The official liquidator has certain duties which he needs to discharge very
carefully for the effective winding up procedures. These duties can be enlisted as
below:

• Duty to conduct the winding up procedure equitably and impartially:- Conducting

the winding up procedures in an equitable and impartial manner, as per the
provisions os the act, is the most important and primary duty of the
liquidator.Further,the liquidator has to perform those duties as may be ordered by
the court.

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• Duty to submit preliminary report:- Within six months on the receipt of the
winding up order,the liquidator shall submit a preliminary report to the court
containing capital issued,subscribed and paid, the estimated amount of assets and
liabilities, causes for failure of the company. The Liquidator shall also mention
his opinion in the report about the possible fraud and punishable offence that
could have been committed by the directors and other officers of the company and
about the desirable enquiry relating to any matter relating to promotion or
formation of the company

• Duty to act as custodian of company’s property:- It is the duty of the liquidator to

take into custody all the property and actionable claims to which the company is
entitiled. The assets of the company will be treated as being in the custody of the
court on passing of the winding up order. The liquidator is just the custodian of
the property of the company and the property does not vest in him.

• Duty to follow the directions:- Any directions given by the creditors or

contributories or by the committee of inspection shall be followed the liquidator

• Duty to maintain proper books:- It is the duty of the liquidator to maintain proper
books in the prescribed manner to record necessary entries or minutes of the
meetings and other required matters. These books can be inspected by any
creditor or contributory.

• Duty to follow directions from the court:- The liquidator shall follow court’s
direction in the administration or distribution of assets of the company among the
creditors, though he can exercise his own discretion in this regard.

• Duty to maintain and present the account of receipts and payments to the court:-
An account in the prescribed form, in duplicate, regarding receipts and payments
shall be presented to the court at least twice in a year by the liquidator. After
getting the account audited the court keeps one copy in its record and the other
copy is filed with the Roc. Any interested creditor or contributory can inspect the
account. Printed copy of the audited account shall be sent by the liquidator to each
creditor or contributory. In case of a government company in liquidation, a copy
of such account shall be sent to central govt. or state govt. as the case may be.

• Duty to submit statement proceedings and position to liquidation:- In case where

the winding up of the company extends beyond one year from the date of its
commencement, the liquidator shall within two months of the expiry of such and
thereafter until the winding up is concluded at intervals of not more than one year,

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 file a statement in the prescribed form and containing information about the
proceedings and position of liquidation.

• Duty to appoint committee of inspection:- Sometimes the court may direct the
liquidator to appoint committee of inspection to assist him in the process of
liquidation. The members of the committee of inspection will be decided in the
meetings of the creditors which is to be called within two months from the date of
courts direction.

Liabilities

Any negligence on the part of the liquidator will result in liability .The negligence
could be:-

Distributing the company’s assets without making due provision for liabilities or
contingent claims of which he has notice

Applying the assets of the company for paying a doubtful claim without taking
proper direction or legal notice from the court.

Breach of any statutory duty will make the liquidator liable in damage to a
creditor or contributory

II) Voluntary Winding Up

Voluntary winding up is the usual mode of winding up since it is an easy mode. In

case of voluntary winding up the members and creditors of the company settle
their affairs without going to the court, though they may seek from the court
directions or orders, whenever needed. The company may appoint one or more
liquidators in the general meetings for conducting the winding up procedure and
for distributing the assets of the company. The remuneration of the liquidator is
required to be fixed in the meeting.

Voluntary winding up takes place under the following circumstances:-

• In case where the duration of the period fixed for the company expires; or

• In case of happening of an event, as provided in the articles of association of the

company, that may lead to dissolution of the company; and

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• In case where the company passes a special resolution to the effect that the
company is wound up voluntarily.

Kinds of Voluntary Winding Up

U/s 485 (5) voluntary winding up of a company can be classified into two:

Members’ Voluntary Winding Up

In this case the company is solvent and it can meet all its liabilities in full. A
declaration of solvency is made by the directors, or where there are more than
two directors, by the majority of the directors, at a meeting of Board of Directors.
This declaration will indicate clearly the financial ability of the company to pay
all its liabilities.

The declaration of solvency must be verified by an affidavit stating that the

directors have made full enquiry into the Affairs of the company and that having
done so they have formed an opinion that the company has no debts or that it will
be able to pay its debts in full within such period not exceeding three years from
the commencement of the winding up, as the case may be.

Creditors’ Voluntary Winding Up

The voluntary winding up where declaration of solvency is not made and

delivered to the RoC, is called Creditors’ Voluntary winding up. Not making
declaration of solvency is an indication of inability of the company to pay its
debts and liabilities. It is only a company that is insolvent can go for creditors’
voluntary winding up. In case of creditors’ voluntary winding up the creditors will
have a controlling voice.

Members’ Voluntary Winding Up and Creditors’ voluntary winding up – A

comparison

Ability to pay debts :- In case members’ voluntary winding up the company will
be able to pay its debts. On the contrary, when a company is not in a position to
pay its debts, the result is creditors’ voluntary winding up.

Declaration of solvency:- In case of members’ voluntary winding up, declaration

of solvency is made by the directors of the company. However, there is no
declaration of solvency in case of creditors’ voluntary winding up.
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 Meeting :- It is the only meeting of members which is convened is case of
members’ voluntary winding up. However, in case of creditors’ voluntary
winding up, meeting of both members and creditors is convened.

Authority to appoint the liquidator:- The authority to appoint the liquidator and to
fix his remuneration rests with the company itself in case of members’ voluntary
winding up. But in case of creditors’ voluntary winding up, the liquidator is
appointed by the creditors and remuneration is fixed by the committee of
inspection.

III) Winding up Subject to the supervision of the court

After commencement of the proceedings for voluntary winding up, a creditor ,

contributory or the voluntary can make an application to the court for its
intervention, the following reasons:

• Irregularities or fraud in the voluntary winding up.

• The majority is playing fraud with the minority

• The liquidator is partial or negligent

• The provisions of the companies act pertaining to winding up of a company are

not adequately complied with.

The court may pass an order for winding up subject to the supervision of the
court, considering the interest of creditors and contributories, on such terms and
condition as it thinks fit. This is also termed as supervisory winding up. The court
may appoint a additional liquidator or liquidators. The court is empowered to
appoint official liquidator as liquidator or to fill any vacancy caused by the
removal, death or resignation of the originally appointed liquidator.

Questions:-

Section –A

1. What is winding up of companies mean?

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 2. State the types of winding up of companies.

3. What is compulsory winding up?

4. Who is a liquidator?

Section – B

1. Explain consequences of winding up of a company?

2. Explain official liquidator

Section – C

1.State the different mode of winding up

2. Who is an official liquidator? What are his powers and duties? Discuss.

MODEL PAPER

III Semester BBM Examination

CORPORATE ENVIRONMENT

Time: 3 Hrs Max. Marks:100

Instruction: Answers should be written completely in English.

Section – A

(I) Answer any 8 sub-questions. Each question carries 2 marks: (8*2=16)

(a) What is Company?

(b) What is capital subscription?
(c) What are preference share?
(d) What do you mean by convertible debentures?
(e) What is Motion?
(f) Write the differences between resolution and motion.
(g) Define Secretary.(or) Who is a company secretary?
(h) Who is pro-term secretary?
(i) What is winding up companies?
(j) Who is liquidator?
Section- B:

Answer any 3 questions. Each question carries 8 marks.

(3*8=24)

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 (2) Discuss the role and functions of promoters in the formation of company.
(3) Distinguish between Shares and Debentures.
(4) What are the essentials of resolution?
(5) Who is a company secretary? How he is appointed in a company?
Section- C:

Answer any 4 questions. Each question carries 15 marks.

(4*15=60)

(6) What are conditions of alteration of articles of association?

(7) What is a share? What are the different types of shares that a company can
issue?
(8) Briefly explain duties and functions of a company secretary.
(9) What is Annual General Meeting? Explain the duties of the Company Secretary in
connecting with Annual General Meeting.
(10) Explain the duties of a secretary relating to the member Voluntary winding up.

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