mb0051-slm-unit-13

Legal Aspects of Business Unit 13

Sikkim Manipal University Page No. 246

Unit 13 Companies Act, 1956

Structure:

13.1 Introduction

Objectives

13.2 Formation of a Company

Promotion

Registration

Floatation

13.3 Memorandum of Association

Meaning and purpose

Form and contents

Alteration of memorandum

13.4 Articles of Association

Meaning and purpose

Registration of articles

Subject matter of articles

13.5 Prospectus

Contents of a prospectus

Stock Exchange Board of India guidelines relating to disclosure

on prospectus

13.6 Shares

Classes of shares

Preference shares

Equity shares

Cumulative Convertible Preference Shares (CCPs)

Deferred or founder’s shares

Non-voting shares

Sweat equity shares

13.7 Directors

13.8 General Meetings and Proceedings

Need for meetings

Statutory meeting (Section 165)

Annual General Meeting (AGM) (Sections 166-168)

Extra-ordinary Meeting (EGM) Section 169

Class Meetings

13.9 Auditor



13.10 Winding up

Modes of winding up

Winding up by the court

13.11 Summary

13.12 Glossary

13.13 Terminal Questions

13.14 Answers

13.15 Case - Let

13.1 Introduction

In the earlier unit, we have understood about the Foreign Exchange

Management Act. In this unit, we will study about the Companies Act, 1956.

The Companies Act, 1956, deals with the formation and transaction of

business of a company. Generally, a company is defined as the voluntary

association of individuals formed for some common purpose. Section 3 of

the Act defines the word ‘company’ as a company formed and registered

under the Act or an existing company formed and registered under any of

the previous company laws. However, this definition does not define the

nature of a company clearly. A company is construed to be an artificial legal

person created by a process of law for the purpose of conducting its

business. It has perpetual succession and a common seal and is an entity

uniquely different from its constituent members. In this unit, the legal

provisions related to the formation, sustenance and winding up of the

company are discussed in detail.

Objectives:

After studying this unit, you should be able to:

discuss the nature and formation of a company

explain the processes of management and control over company

activities

describe the nature of meetings and resolutions

recognise the methods of winding up of a company



13.2 Formation of a Company

In the previous section, we have had a brief introduction on the Companies

Act. In this section, we shall discuss the formation of a company.

A company is a unique legal entity that is created by the due process of law.

It has unique features that differentiate it from other types of associations.

Some of the key features of a company are that it has:

An independent corporate existence separate from its members

Limited liability

Perpetual succession as a juristic person

Common seal

Ability to transfer ownership by way of shares

Right to property, and

Right to seek legal relief in its own name

The nature of the independent existence of the company forms the basis for

all its activities as a unique legal person, as is evident from the case below.

The process for the formation of a company may be divided into three parts:

Promotion

Registration

Floatation

13.2.1 Promotion

Promotion denotes the preliminary steps undertaken for the purpose of

registration and floatation of the company. The persons who assume the

task of promotion are called promoters. The promoter may be an individual,

syndicate, association, partnership or company. The term ‘promoter’ has not

been defined under the Act, although the term is used expressly in

Sections 62, 69, 76, 478 and 519.

13.2.2 Registration

Before the formation of a company, preliminary decisions regarding the type

of company, share capital, etc. have to be decided by the promoters, who

do the work incidental to the formation of a company. According to

Section 12, seven or more persons (two or more for a private limited

company) associated for a lawful purpose may form an incorporated

company, with or without limited liability. They subscribe their names to



Memorandum of Association (MoA) and comply with other formalities for

registration. A company so formed may be limited by shares or guarantee or

may be an unlimited company.

Before registration, it is necessary to ascertain from the Registrar of

Companies (ROC), whether the proposed company name is approved. The

following documents have to be filed with the ROC, and duly stamped along

with necessary fees:

MoA, duly signed by the subscribers

Articles of Association (AoA), if any, signed by the subscribers of the

MoA. This is optional for a public limited company limited by shares,

which may adopt Table A in Schedule I of the Act.

The agreement, if any, by which the company proposes to enter into with

any individual for appointment as managing director/whole time director

or manager (Section 33(1)).

A list of directors who have agreed to become the first directors of the

company, with written consent to act as directors and take up

qualification of shares (Section 266).

A declaration stating that all requirements of the Companies Act and

other formalities relating to registration have been complied with. This

declaration shall be signed by any of the following persons:

o An advocate of the Supreme Court or a High Court

o An attorney or pleader entitled to appear before a High Court

o A secretary or a Chartered Accountant in whole-time practice in

India, who is engaged in the formation of the company

o A person named as a Director, Manager or Secretary of the

Company in AoA

o Section 146: Within 30 days of incorporation, a notice of the situation

of the registered office of the company shall be given to the ROC

who shall record the same.

When the documents are filed with the ROC, they have to satisfy

themselves that statutory requirements have been complied. Then, they

retain and register the MoA, AoA and other documents filed with the ROC.

The ROC then issues a “Certificate of Incorporation”, i.e., formation of the

company (Section 33 (3)).This Certificate is issued as a soft copy and not a

hard copy, as per recent changes in the Act.



13.2.3 Floatation

When a company has been registered and has received its COI, it is ready

for ‘floatation’, that is to say, it can go ahead with raising capital that is

needed to commence and carry on its business. Section 70 makes it

obligatory for every public company to take either of the following two steps:

Issue a prospectus in case the public is to be invited to subscribe to its

capital, or

Submit a ‘statement in lieu of prospectus’ in case the capital has been

arranged privately. It must be done at least three days before allotment.

In the next section, we shall study about the memorandum of association.

Self Assessment Questions

1. People who assume the task of promotion are known as __________.

2. ___________ people are the minimum requirement of members for

the formation of a private company?

13.3 Memorandum of Association

In the previous section, we have discussed the three necessary steps

required for formation of a company. In this section, we shall study about the

memorandum of association.

13.3.1 Meaning and purpose

The Memorandum of Association (MoA) of a company is its charter that

contains the fundamental conditions on which the company is incorporated.

It tells us the objects of the company’s formation and the utmost possible

scope of its operations. Thus, it defines as well as confines the powers of

the company. Any act beyond the scope of the memorandum is considered

to be ultra vires (beyond powers of) and is void.

The MoA serves two purposes:

It enables shareholders, creditors and persons who deal with the

company to know the scope of its powers and range of its activities.

The prospective shareholder can find out the field and purpose of capital

as well as the risks involved in investing with the company.



13.3.2 Form and contents

Section 14 requires that the MoA shall be in one of the Forms in Tables B,

C, D and E in Schedule I to the Act, as may be applicable or in similar

Forms. Section 15 requires the MoA to be printed, divided into paragraphs,

numbered consecutively and signed by at least seven persons (two in the

case of a private company) in the presence of at least one witness, who will

attest the signature. Each of the members must take at least one share and

write opposite his name the number of shares they take.

Section 13 requires the MoA of a limited company to contain:

The name of the company, with ‘limited’ as the last word of the name in

the case of a public company and ‘private limited’ as the last words in

the case of a private company

The name of the State in which the registered office of the company is to

be situated

The objects of the company, stating separately ‘main objects’ and ‘other

objects’

The declaration that the liability of the members is limited; and

The amount of authorised share capital, divided into shares of fixed

amounts.

These contents of the MoA are called compulsory clauses and are

explained below.

The name clause: Promoters are free to choose any suitable name for the

company provided:

The last word in the name of the company, if limited by shares or

guarantee is ‘limited’ unless the company is registered under Section 25

as an ‘association not for profit’ (Section 13(1) (a) and Section 25).

In the opinion of the Central Government, the name chosen is not

undesirable (Section 20 (1)).

Too similar name: In case of too similar names, the resemblance between

the two names must be such as to be calculated to deceive. A name shall

be said to be calculated to deceive where it suggests some connection or

association with the existing company.

Publication of name (Section 147): Every company shall paint or affix its

name and the address of its registered office outside every office or place of



business in a conspicuous position in letters easily legible and in the

language generally used in that locality.

13.3.3 Alteration of memorandum

Section 16 provides that the company cannot alter the conditions contained

in MoA except in certain exceptional cases provided in the Act. These

provisions are explained below:

Change of name: Section 21 provides that the name of a company may

be changed at any time by passing a special resolution at a general

meeting of the company and with the written approval of the Central

Government. However, approval of the Central Government is not

necessary if the change of the name involves only the addition or

deletion of the word ‘private’ (i.e., when public company is converted into

a private company or vice versa).

The change of name must be communicated to the ROC within 30 days

of the change. The ROC shall then enter the new name on the register

in the place of the old name and issue a fresh Certificate of Incorporation

with necessary alterations (Section 23(1)). The change of name

becomes effective on the issue of a fresh Certificate of Incorporation.

Change of registered office: This procedure depends on whether the

change is within the jurisdiction of the same ROC (Section 146) or

whether the shift is to the jurisdiction of another ROC in the same state

(Section 146 and Section 17A). This may include:

o Change of registered office from one premises to another

premises in the same city, town or village: The company may do

so anytime. A resolution passed by the Board of Directors shall be

sufficient. However, a notice of the change should, within 30 days

after the date of the change, be given to the ROC who shall record

the same in the Register of Companies (Section 146).

o Change of registered office from one town or city or village to

another town or city or village in the same State (Section 146):

In this case, the procedure is:

A special resolution is required to be passed at a general

meeting of the shareholders

A copy of the resolution is to be filed with the ROC within 30

days.



Within 30 days of changing the registered office, a notice of the

new location has to be given to the ROC who shall record the

same.

o Shifting of the registered office from one place to another within

the same state (Section 17A): The shifting of the registered office

by a company from the jurisdiction of one ROC to the jurisdiction of

another ROC within the same state shall (in addition to requirements

under Section 146), also require confirmation by the Regional

Director. For this purpose, an application is to be made in the

prescribed form and the confirmation shall be communicated within

four weeks. Such confirmation is required to be filed within two

months with the ROC who shall register and certify the same within

one month. Such certificate shall be conclusive evidence of the

compliance of all requirements under the Act.

In the next section, we shall study about the Articles of Association (AoA).

Activity 1:

Study the memorandum of association of Reliance industries & suggest

the scope of the same to the employees & investors of the company.

Hint: Refer Sec.13.3


3. _________ tells us the objects of the company’s formation and the

utmost possible scope of its operations beyond which its actions

cannot go.

4. _____________ provides that the company cannot alter the conditions

contained in memorandum except in the cases and in the mode and to

the extent express provision has been made in the Act.

13.4 Articles of Association

In the previous section, we have discussed about the memorandum of

association. In this section, we shall study about the articles of association.



13.4.1 Meaning and purpose

The Articles of Association (AoA) of a company and its bylaws are

regulations that govern the management of its internal affairs and conduct of

its business. They define the duties, rights, powers and authority of the

shareholders and directors of the company and the mode and form in which

the business of the company is to be carried out. The AoA of a company

have a contractual force between company and its members as also

between the members inter se. They are subordinate to and are controlled

by the memorandum. Articles cannot supersede the objects as set out in the

memorandum of association [Birds Investments Ltd. vs. C.I.T. (1965) 35

Comp. Cas. 147 Cal.]

13.4.2 Registration of articles

Section 26 states that a public company limited by shares may register AoA

signed by the subscribers to the memorandum. If, however, it does not

register its own articles, then the articles given in Table A of Schedule I

automatically become applicable. There are three possible alternatives for a

public company to adopt the articles of association:

It may adopt Table A in full

It may wholly exclude Table A and set out its own regulations in full, or

It may set out its own articles and adopt part of Table A.

The alternatives (ii) and (iii) are often employed; and partial adoption of

Table A has particular advantage for small companies, because of economy

in printing and also because any provision of Table A is legally beyond any

doubt.

13.4.3 Subject matter of articles

The articles of a company usually deal with the following matters:

Business of the company

Amount of capital issued and the classes of shares into which the capital

is divided

Increase and reduction of share capital

Rights of each class of shareholders and the procedure for variation of

their rights

Execution or adoption of a preliminary agreement, if any

Allotment of shares; calls and forfeiture of shares for non-payment of

calls



Transfer and transmission of shares

Company’s lien on shares

Exercise of borrowing powers including issue of debentures

General meetings, notices, quorum, proxy, poll, voting, resolution,

minutes

Number, appointment and powers of directors.

In the next section, we will deal with prospectus.


5. Change of name must be communicated to the ROC within

________________ days of the change.

6. Article of association of a company has a contractual force between

__________________ and _________________

13.5 Prospectus

In the previous section, we have discussed about the articles of association.

In this section, we shall study about the prospectus as described in

Section 2(36).

A prospectus, as per Section 2(36), refers to any document described or

issued as prospectus and includes any notice, circular, advertisement or

other document inviting deposits from the public or inviting offers from the

public for the subscription or purchase of any shares in or debentures of a

body corporate. Thus, a prospectus is not merely an advertisement; it may

be a circular or even a notice. A document shall be called a prospectus if it

satisfies two things:

It invites subscriptions to share or debentures or invites deposits.

The aforesaid invitation is made to the public.

13.5.1 Contents of a prospectus

Section 56 lays down that the matters and reports stated in Schedule II to

the Act must be included in a prospectus. The format of a prospectus is

divided into three parts. In the first part, brief particulars are to be given

about matters mentioned below:

General information: Here, information is provided about:

o Name and address of registered office of the company.



o Name/(s) of stock exchange/(s) where application for listing is made.

o Declaration about refund of the issue if minimum subscription of

90 percent is not received within 90 days from closure of the issue.

o Declaration about the issue of allotment letters/refunds within a

period of 10 weeks and interest in case of any delay in refund, at the

prescribed rate, under Section 73.

o Date of opening of the issue.

o Date of closing of the issue.

o Name and address of auditors and lead managers.

o Whether rating from any rating agency has been obtained for the

proposed debentures/preference shares issue. If no rating has been

obtained, this should be answered as ‘No’.

o Names and address of the underwriters and the amount underwritten

by them.

Capital structure of the company

o Authorised, issued, subscribed and paid-up capital

o Size of the present issue, giving separately reservation for

preferential allotment to promoters and others

Terms of the present issue

o Terms of payment

o How to apply

o Any special tax benefits

Particulars of the issue

o Objects

o Project cost

o Means of Financing (including contribution of promoters)

Certain prescribed particulars in regard to the company and other

listed companies under the same management that made any capital

issue during the last three years.

Outstanding litigations relating to financial matters or criminal

proceedings against the company or directors under Schedule XIII.



13.5.2 Stock Exchange Board of India guidelines relating to disclosure

on prospectus

Every prospectus submitted to Stock Exchange Board of India (SEBI) for

vetting shall, in addition to the requirements of Schedule II to the Act,

contain/specify certain particulars as are announced from time to time.

In the next section, we shall study about shares.


7. ___________ lays down that the matters and reports stated in

Schedule II to the Act must be included in a prospectus.

8. SEBI stands for ___________________

13.6 Shares

In the previous section, we have discussed about prospectus and its

contents. In this section, we shall study about the shares.

Section 2 (46) defines a share “as a share in the share capital of a company

and includes stock except where a distinction between stock and share is

expressed or implied”. This definition does not encompass the meaning of a

share. A share of a company in the hands of a shareholder signifies a

bundle of rights and obligations [Viswanath vs. East India Distilleries (1957)

27 Comp. Cas. 175]. However, a share is not a negotiable instrument [C.I.T.

vs. Associated Industrial Dev. Co. (1969) 2 Comp. L.J. 19]

Section 83 requires that each share in a company having a share capital

must be distinguished by its appropriate number. The Companies

(Amendment) Act, 1999, amended Section 82 to the effect that for the word

‘shares’, the words ‘shares and debentures’ shall be substituted.

13.6.1 Classes of shares

The most common classes of shares are:

Preference

Equity or Ordinary

Deferred or Founders’

A public company and a private company that is a subsidiary of a public

company may not issue shares other than equity, preference and

Cumulative Convertible Preference Shares (CCPS).



13.6.1.1 Preference shares

A preference share is one that carries the following two rights over holders

of equity shares:

A preferential right in respect of dividends at a fixed amount or at a fixed

rate, and

A preferential right in regard to repayment of capital on winding up.

13.6.1.2 Equity shares

‘Equity share’ means a share that is not preference share (Section 85). The

rate of dividend is not fixed. The Board of Directors recommends the rate of

dividend that is then declared by the members at the Annual General

Meeting. Before recommending dividend on equity shares, the Board of

Directors have to comply with the provisions of law as regards depreciation,

transfer of a minimum amount to reserves, etc. The holders of equity shares

have voting rights in proportion to the paid-up equity capital of the company

(Section 87 (1)).

13.6.1.3 Cumulative Convertible Preference Shares (CCPs)

The Government of India vide its guidelines dated 19 August 1985 permitted

issue of another class of shares by public limited companies, called

cumulative convertible preference shares.

13.6.1.4 Deferred or founder’s shares

A private company can issue shares of a type other than those discussed

above (Section 90). Thus, it may issue what are known as deferred shares.

As deferred shares are normally held by promoters and directors of the

company, they are usually called founder’s shares.

13.6.1.5 Non-voting shares

‘Non-voting shares’ as the term suggests are shares that carry no voting

rights. These are contemplated as altogether a different class of shares

which may carry additional dividends in lieu of the voting rights. The

Companies (Amendment) Act, 2000, provided for issue of such type of

equity shares under Section 86.

13.6.1.6 Sweat equity shares

The Companies (Amendment) Act, 1999, allowed issue of sweat equity

shares subject to fulfillment of certain conditions. The new Section 79A was

inserted for this purpose.

In the next section, we shall study about directors.




9. Section 83 requires that each share in a company having a share

capital must be distinguished by its appropriate number. True/False

10. CCPS stands for Constant Convertible Permanent Shares. True/False

11. The holders of equity shares have voting rights. True/False

13.7 Directors

In the previous section, we have discussed the shares and various classes

of shares. In this section, we shall study about directors and their

importance in the functioning of a company.

Section 2 (13) defines a director as including "any person occupying the

position of director, by whatever name called." This is a definition based

purely on function; a person is a director if he does whatever a director

normally does. However, the Act gives no further guidance on the function,

duties and position of a director. In reality, directors are persons who direct,

conduct, manage or superintend a company's affairs. Section 291 has

entrusted the management of the affairs of the company in their hands.

They chalk out the general policy of the company within the framework of

the Memorandum of the Company. They appoint the company's officers and

recommend the rate of dividend. The directors of company are collectively

referred to as the 'Board of Directors'.

The exact position of 'director' is hard to define, as no formal definition,

either statutory or judicial, of the term has been given. However, judicial

pronouncements have described them as (i) agents, (ii) trustees, or

(iii) managing partners.

A company acts through its directors who are the elected representatives of

shareholders. They are the agents of the company and are bound by the

law of agency. Directors have also been described as trustees. However,

they are not trustees in the full sense of the term in as much as no

proprietary rights of the company's property are transferred to them and,

therefore, they enter into contracts on behalf of the company and in the

name of the company.



Although directors are not trustees in the real sense of the term, they

occupy an office of the trust and are in certain respects in the position of

trustees for the company. Such cases are:

They are trustees of money that comes to their hands or that is actually

under their control. If they misapply the company's money, they have to

make good the same as if they were trustees.

They are trustees for exercising powers conferred on them for the

benefit of the company. For instance, powers to allot shares, to make

calls, forfeit shares should be exercised bona fide in the interests of the

company.

They stand in a fiduciary relationship to the company and, therefore,

whenever there is clash of their personal interests with that of the

company, they should keep in mind the company's interests.

Directors are in no way a trustee for individual shareholders except when

the former induces the latter by misrepresentation to sell the shares to them.

However, directors of a company incur certain liabilities by virtue of their

positions. These liabilities can be classified as follows:

Liability to third parties arises in the following cases:

o Under the Act – Issue of prospectus that has material

misrepresentation or does not contain facts as required under the

Act. Also, directors incur personal liability for failure to repay

application money if minimum subscription is not met or there is

irregular allotment of shares, etc.

o Independent of the Act – Directors as agents of a company are not

personally liable for contracts on behalf of the company. However,

directors are personally liable for signing negotiable instruments or

contracts entered in their own name.

Liability to company arises from the following:

o Ultra Vires Acts – Directors are personally liable for ultra vires acts

and it is not necessary to prove fraud in such cases

o Negligence – A director may incur liability for negligence in the

exercise of his duties, if the company has suffered some damage

due to such negligence

o Breaches of trust – Directors hold a fiduciary position with regard to

the company’s money and property. They are liable for any loss



suffered by company due to breach of trust and are also liable for

any secret profits made by them at the company’s expense

o Misfeasance – Directors are liable for willful misconduct for which

they can be sued in a court of law

Liability for breach of statutory duties – Statutory duties of directors

pertain to proper maintenance of accounts, filing of returns and

observing statutory formalities. Directors are personally liable for

penalties.

Liabilities for acts of co-directors – Directors are not liable for acts of co-

directors, provided they have no knowledge and they are not a party to

such acts. The co-directors are not their agents or servants who can

impose liability on them by their actions.

In the next section, we shall discuss general meetings and proceedings.


12. Section ____________ defines a director.

13. The directors act as agents of the company. True/False

13.8 General Meetings and Proceedings

In the previous section, we have discussed about directors and their roles

and responsibilities. In this section, we shall study about general meetings

and proceedings.

13.8.1 Need for meetings

A company is an artificial person and therefore, must act through some

human intermediary. The various provisions of law empower shareholders

to do certain things. They are specifically reserved for them to be done in

company’s general meetings. Section 291 empowers the Board of Directors

to manage the affairs of the company. In this context, meetings of

shareholders and directors become necessary. The Act has made

provisions for following different types of meetings of shareholders:

(i) Statutory Meeting; (ii) Annual General Meeting; (iii) Extraordinary General

Meeting; and (iv) Class Meetings.



13.8.2 Statutory meetings (Section 165)

The most important legal provisions regarding statutory meetings are:

It is required to be held only by a public company having share capital. A

private company or a public company registered without share capital is

under no obligation to hold such a meeting.

It must be held within a period of not less than one month and not more

than six months from the date on which the company is entitled to

commence business.

At least 21 days before the day of meeting, a notice of the meeting is to

be sent to every member stating it to be a Statutory Meeting.

13.8.3 Annual general meeting (AGM) (Sections 166-168)

As the name signifies, this is an annual meeting of a company. The

provisions relating to this meeting are:

Every company, whether public or private, having a share capital or not,

limited or unlimited must hold this meeting.

The meeting must be held in each calendar year and not more than 15

months shall elapse between two meetings. However, the first AGM may

be held within 18 months from the date of its incorporation and if such

general meeting is held within that period, it need not hold any such

meeting in the year of its incorporation or in the following year. The

maximum gap between two such meetings may be extended by three

months by taking permission of the Registrar, who may so allow for any

special reason.

The meeting must be held

o On a day that is not a public holiday

o During business hours

o At the registered office of the company or at some other place within

the city, town or village in which the registered office is situated.

(Section 166 (2)).

13.8.4 Extraordinary Meeting (EGM) Section 169

Clause 47 of Table A (Schedule – I) provides that all general meetings other

than AGMs shall be called the EGMs. The legal provisions as regards such

meetings are:

EGM is convened for transacting some special or urgent business that

may arise in between two AGMs, for instance, change in the objects or



shift of registered office or alteration of capital. All business transacted at

such meetings is called special business. Therefore, every item on the

agenda must be accompanied by an ‘Explanatory Statement’.

An EGM may be called by:

o Directors of their own accord

o Directors on requisition

o Requisitionists themselves

o The Tribunal. The Board of Directors may call a general meeting of

the members at any time by giving not less than 21 days notice. A

shorter notice may, however, be held valid if consent is accorded

thereto by members of the company holding 95 percent or more of

the voting rights (Section 171).

13.8.5 Class Meetings

A company has two classes of shares – equity shares and preference

shares. The class meetings are held for these different classes of

shareholders, as and when their rights are affected.


14. The notice for a statutory meeting should be sent _________________

days prior to the meeting to every member of the company

15. Section _________ empowers the Board of Directors to manage the

affairs of the company.

In the next section, we shall study about the auditors.

Activity 2:

The Board of Directors of a public company met on three times in the

previous year, the fourth meeting though called, but not held for want of

quorum on two occasions successively. Discuss whether any provisions

of the Companies Act have been contravened.

Hint: Refer the provisions related to meetings of a company in the

Companies Act, 1956



13.9 Auditors

In the previous section, we have discussed about general meetings and

proceedings. We have also discussed the need of these meetings and

various kinds of meetings held at appropriate intervals. In this section, we

shall study about auditors.

It is compulsory for every company to appoint qualified auditors to do the

audit of the accounts maintained by the company. The first auditors(s) can

be appointed by the Board of Directors within one month of the date of the

incorporation of the company and hold office until the conclusion of the first

AGM of the company. However, they can be removed by members at their

meeting held before the first AGM by giving a special notice of intention.

Moreover, if the Board of Directors do not appoint the first auditors, then the

company in general meeting may do so.

A person will not be eligible for appointment as an auditor of a company if

be, after a period of one year from the commencement of the Amendment

Act, is holding any security in that company. Auditors so appointed, must

within 30 days of the receipt from the company of the intimation of their

appointment, inform the Registrar in writing that they have accepted the

appointment or haves refused the same.

Powers and duties or obligations of auditors

Section 227 enumerates some of the powers of auditors:

Every auditor of a company has right of free and complete access at all

times to the books, accounts and vouchers of the company whether kept

at the head office or elsewhere.

They have the right to require from the officers of the company such

information and explanation as may be necessary for the performance of

their duties as auditors.

They are entitled to receive notice of and to attend general meetings of

the company and present any information required, in their role as

auditor.


16. Every company has to appoint qualified auditors to audit its accounts.

True/False



17. Every auditor of a company has right of free and complete access at

all times to the books, accounts and vouchers of the company whether

kept at the head office or elsewhere. True/False

In the next section, we shall study about the process of winding up.

13.10 Winding up

In the previous section, we have discussed about the auditors and their

roles and responsibilities. In this section, we shall study the process of

winding up of a company.

Winding up of a company is the process whereby the company’s life has

ended and its property administered for the benefit of its creditors and

members. An administrator, called a ‘liquidator’, is appointed and he/she

takes control of the company, collects its assets, pays its debts and finally

distributes any surplus among the members in accordance with their rights.

In simple words, winding up means applying the assets of a company in the

discharge of its liabilities and returning any surplus to those entitled to it,

subject to the cost of doing so. The statutory process by which this is

achieved is called ‘liquidation’. Winding up of a company differs from

insolvency of an individual in as much as a company cannot be made

insolvent under the insolvency law. Besides, even a solvent company may

be wound up. The official appointed by the order of the court for overseeing

the winding up, is called as the Official Liquidator or Assignee.

13.10.1 Modes of winding up

A company may be wound up in any of the following three ways:

Compulsory winding up under an order of the Court.

Voluntary winding up.

Voluntary winding up under the supervision of the Court.

13.10.2 Winding up by the court

Winding up by the Court, also called compulsory winding up, may be

ordered in cases mentioned in Section 433. The Court will make an order for

winding up on an application by any of the persons enlisted in Section 439.

The court may order winding up on just and equitable grounds, failure to pay

debts or commence business and in the event of deadlock within the

company.



Case: In Re Yenidji Tobacco Co. Ltd

W and R, major shareholders and directors of the company, had equal

managing and voting rights. They were bitter enemies and all

communication was conducted through secretaries. Though the company

was making profits, it was wound up due to deadlock in the management.

Activity 3:

A company issued a prospectus advertising that it has a great potential

with turnover of a million bags of cement per year. It was discovered later

that while the company has the installed capacity of one million bags, it

had never produced more than six lakh bags of cement in a year. A buyer

of shares seeks remedy against the misleading statement. Would they

succeed? Also, analyse the penalties that the company may suffer for

making false statements.

Hint: Refer provisions of the Companies Act, 1956 on misstatements in

the prospectus


18. An administrator at the time of winding up is called a

_________________

19. The statutory process by which winding up is achieved is called

___________.

13.11 Summary

Let us recapitulate the important concepts discussed in this unit:

A company is an association of many persons who contribute money or

money's worth to a common stock, and employs it in some business,

and who share the profit and loss arising there from. Shares in a

company are transferable.

The affairs of the company are conducted according to its Memorandum

and Articles of Association.

The company can raise capital by the issue of the document called

prospectus. The capital of a company is offered by way of shares to its

members.



The routine business of the company is conducted by its directors, with

the participation of shareholders by way of meetings.

The company is both created and extinguished by process of law.

13.12 Glossary

Company – A company is an association of many persons who contribute

money or monies worth to a common stock and employed in some trade or

business and who share the profit and loss arising there-from.

Memorandum of Association – The memorandum of association of a

company as originally framed or altered from time to time in pursuance of

any previous companies’ law or of the Companies Act.

Private Company – A company where the minimum number of member is

two and maximum fifty.

Prospectus – Any document described or issued as a prospectus and

includes any notice, circular, advertisement or other document inviting from

the public.

13.13 Terminal Questions

1. What are the characteristics of a company?

2. What do you mean by memorandum of association? What does it

contain?

3. Write a short note on prospectus.

4. What are the different kinds of general meetings of a company?

5. How is an auditor appointed? What are the matters to be stated in his

report?

13.14 Answers


1. Promoters

2. Two

3. Memorandum of Association

4. Section 16

5. 30 days



6. Company and its members

7. Section 56

8. Stock Exchange Board of India

9. True

10. False

11. True

12. Section 2(13)

13. True

14. 21 days

15. Section 291

16. True

17. True

18. Official Liquidator

19. Liquidation

Terminal Questions

1. The whole process of formation of a company may be divided into three

parts, for convenience. These are: (i) Promotion; (ii) Registration and

(iii) Floatation. For further details, refer to section 13.2.

2. The Memorandum of Association of a company is its charter that

contains the fundamental conditions upon which alone the company can

be incorporated. For further details, refer to section 13.3.

3. A prospectus, as per Section 2(36), refers to any document described or

issued as prospectus and includes any notice, circular, advertisement or

other document inviting deposits from the public or inviting offers from

the public for the subscription or purchase of any shares in or

debentures of a body corporate. Thus, a prospectus is not merely an

advertisement; it may be a circular or even a notice. For further details,

refer to section 13.5.

4. The Act has made provisions for following different types of meetings of

shareholders: (i) Statutory Meeting; (ii) Annual General Meeting;

(iii) Extraordinary General Meeting; and (iv) Class Meetings. For further

details, refer to section 13.8.

5. It is compulsory for every company to appoint qualified auditors to do the

audit of the accounts maintained by the company. The first auditors(s)



can be appointed by the Board of Directors within one month of the date

of the incorporation of the company and hold office until the conclusion

of the first AGM of the company. However, they can be removed by

members at their meeting held before the first AGM by giving a special

notice of intention. For further details, refer to section 13.9.

13.15 Case Study

Mr. Salomon was a leather merchant. He sold his business for £30,000 to a

company formed by him and his family members. The purchase

consideration was satisfied by allotment of 20,000 shares of £1 each and

issue of debentures worth £10,000 secured by floating charge on the

company's assets in favour of Mr. Salomon. All the other shareholders

subscribed for one share of £1 each. Mr. Salomon was also the managing

director of the company. Soon after, the company ran into difficulties,

became insolvent and winding up commenced. At the time of winding up,

the total assets of the company amounted to £6,050; its liabilities were

£10,000 secured by the debentures issued to Mr. Salomon and £8,000

owing to unsecured trade creditors.

The unsecured sundry creditors claimed the whole of the company's assets,

viz. £6,050 on the ground that the company was a mere alias or agent for

Salomon.

Discussion Question:

Do you agree to the claims of the unsecured trade creditors? Comment.

(Hint: No, the company was a separate legal person, independent from

Mr. Salomon, in the eyes of the law and was not his agent.)

References:

Aggarwal, Rohini (2003). Student’s Guide to Mercantile and Commercial

Laws, Taxmann’s, New Delhi

Kapoor, N.D. (2003). Elements of Mercantile Law, Sultan Chand and

Sons, New Delhi.

Kucchal M.C. (2002). Business Law, Vikas Publishing House Pvt. Ltd.,

New Delhi.



Tulsian P.C. (2002). Business Law, Tata McGraw-Hill Pvt. Ltd., New

Delhi.

Gulshan S.S. (2006). Business Law, Excel Books, New Delhi.

E-reference:

http://www.indialawinfo.com/bareacts/soga.html

mb0051-slm-unit-13

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