Lesson 7A Elements of Company Law-I 153

Lesson 7
Elements of Company Law-I
Section A

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction Industrialisation plays vital role in the
development of the India. In the post
– Company - Meaning and Characteristics
independence era, industrial regulation is
– Distinction with Other Forms of Business employed as a principle means in the strategy
for attaining constitutional values. Companies
– Advantages and Disadvantages of are no doubt powerful instrument of
Incorporation development. Besides bringing returns and
financial benefits to the capital and labour they
– Kinds of Companies
help amelioration of the living conditions of
– Promotion and Incorporation of a masses. In a developing society like India, vast
Company varieties of consumer goods are manufactured
or produced and different kinds of public utility
– Registration of Company services are generated both for general welfare
and consumption purposes. Obviously, it is
– Commencement of Business
beyond the capacity of one or a few
– How does a company function entrepreneurs to engage into such activities.
Because the problem of raising large capital
– Lesson Round Up needed for such enterprises, there is a looming
danger of market risks.
– Self-Test Questions
Hence, taking sources to the device of
incorporation is the only efficacious way to
surmount all these hurdles.

Corporation: An ingenious device for obtaining profit without individual responsibility.

Ambrose Bierce
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A. COMPANY — MEANING AND CHARACTERISTICS

MEANING

The word “company” is derived from the Latin (Com = with or together; panis = bread), and originally referred to
an association of persons who took their meals together. It may be assumed, since human nature does not
change that in the leisurely past no less than in the speedy present, merchants took advantage of festive
gatherings, to discuss business matters. Now-a-days, the business matters have become most complicated
and cannot be discussed at length on festive gatherings. Therefore, the word “company” has assumed great
importance as it denotes a joint stock enterprise in which the capital is contributed by a large number of people.
Thus, in popular parlance, company denotes an association of like minded persons formed for the purpose of
carrying on same business or undertaking. Though an association may be brought into existence for multifarious
purposes, in Company Law it figures predominantly as a business association with a large and fluctuating
membership formed for making a gain as profit. There may also be non-profit trading concerns like a club or a
society. In Smith v. Anderson, (1880) 15 Ch.D.247, it was observed that “a company, in broad sense, may mean
an association of individuals formed for some purpose”.
A company may be an incorporated company or a “corporation” or an unincorporated company. An incorporated
company is a separate person distinct from the individuals constituting it whereas an unincorporated company,
such as a partnership, is mere collection or aggregation of individuals. Therefore, unlike a partnership firm, a
company is a corporate body and a legal person having status and personality distinct and separate from that of
the members constituting it.
It is called a body corporate because the persons composing it are made into one body by incorporating it
according to the law, and clothing it with legal personality, and, so turn it into a corporation (The word “corporation”
is derived from the Latin term “corpus” which means “body”). Accordingly, “corporation” is a legal person created
by the process other than natural birth. It is, for this reason, sometimes called artificial person. This corporate
being is capable of enjoying many of the rights and incurring many of the liabilities of a natural person - a human
being.
The incorporated company owes its existence to a special Act of Parliament or to Companies Law. The public
corporations like Life Insurance Corporation of India and Damodar Valley Corporation have been brought into
existence through special Acts of Parliament whereas companies like Tata Steel Ltd., Reliance Industries Ltd.
have been formed under the Companies Act, 1956 which is being replaced by Companies Act, 2013. The
trading partnership which is governed by Partnership Act is the most apt example of an unincorporated association.
In the legal sense, a company is an association of both natural and artificial persons incorporated under the
existing law of a country. As per section 2(20) of the Companies Act, 2013 “company” means a company
incorporated under Companies Act, 2013 or under any previous company law;” . In common law, a company
is a “legal person” or “legal entity” separate from, and capable of surviving beyond the lives of, its members.
However, an association formed not for profit acquires a corporate life and falls within the meaning of a company
by reason of a licence under Section 8 of the Companies Act, 2013.

CHARACTERISTICS
The main characteristics of a company are as follow:

Corporate Personality

By incorporation under the Act, the company is vested with a corporate personality quite distinct from individuals
who are its members. Being a separate legal entity it bears its own name and acts under a corporate name. It
 Lesson 7A Elements of Company Law-I 155

has a seal of its own. Its assets are separate and distinct from those of its members. It is also a different ‘person’
from the members who compose it. As such it is capable of owning property, incurring debts, borrowing money,
having a bank account, employing people, entering into contracts and suing or being sued in the same manner
as an individual. Its members are its owners but they can be its creditors simultaneously as it has a separate
legal entity. A shareholder cannot be held liable for the acts of the company even if he holds virtually the entire
share capital. The shareholders are not the agents of the company and so they cannot bind it by their acts. The
company does not hold its property as an agent or trustee for its members and they cannot sue to enforce its
rights, nor can they be sued in respect of its liabilities. The case of Salomon v. Salomon and Co. Ltd., (1897) A.C.
22, has clearly established the principle that once a company has been validly constituted under the Companies
Act it becomes a legal person distinct from its members and for this purpose it is immaterial whether any
member has a large or small proportion of the shares, and whether he holds those shares beneficially or as a
mere trustee. The facts of this case are as follows:
Salomon had, for some years, carried on a prosperous business as leather merchant and boot manufacturer.
He formed a limited company consisting of himself, his wife, his daughter and his four sons as the shareholders,
all of whom subscribed for 1 share each so that the actual cash paid as capital was £ 7. Salomon sold his
business (which was perfectly solvent at that time), to the Company for the sum of £ 38,782. The company’s
nominal capital was £ 40,000 in £ 1 shares. In part payment of the purchase money for the business sold to the
company, debentures of the amount of £ 10,000 secured by a floating charge on the company’s assets were
issued to Salomon, who also applied for and received an allotment of 20,000 £ 1 fully paid shares. The remaining
amount of £ 8,782 was paid to Salomon in cash. Salomon was the managing director and two of his sons were
other directors.
The company soon ran into difficulties and the debentureholders appointed a receiver and the company went
into liquidation. The total assets of the company amounted to £6050, its liabilities were £10,000 secured by
debentures, £8,000 owning to unsecured trade creditors, who claimed the whole of the company’s assets, viz.,
£6,050, on the ground that, as the company was a mere ‘alias’ or agent for Salomon, they were entitled to
payment of their debts in priority to debentures. They further pleaded that Salomon, as principal beneficiary, was
ultimately responsible for the debts incurred by his agent or trustee on his behalf. The trial judge and the Appellate
Court agreed with these contentions and decreed against Salomon. The House of Lords disagreeing with the
lower Courts, repudiated these contentions and accepted the appeal and reversed the order of the Appellate
Court. The House of Lords held that on registration, the company comes into existence and attains maturity on
its birth. There is no period of minority, no interval of incapacity. It has its own existence or personality separate
and distinct from its members and, as a result, a shareholder cannot be held liable for its acts even though he
holds virtually the entire share capital. Thus, the case also established the legality of what is known as “one-man
company”. The case also recognised that subscribers do not have to be independent or strangers to one another.
The case also recognised the principle of limited liability. It also established that a person can be at the same
time a member, a creditor and an employee of the company, as well as its director.
Their Lordships observed:
“When the memorandum is duly signed and registered, though there be only seven shares taken, the
subscribers are a body corporate capable forthwith of exercising all the functions of an incorporated company.
It is difficult to understand how a body corporate thus created by statute can lose its individuality by issuing
the bulk of its capital to one person. The company is at law a different person altogether from the subscribers
of the memorandum; and though it may be that after incorporation the business is precisely the same as
before, the same persons are managers, and the same hands receive the profits, the company is not in law
their agent or trustee.”

Limited Liability

The company being a separate entity, leading its own business life, the members are not liable for its debts.
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The liability of the members of a company is limited to the extent of the nominal value of the shares held by them.
In no event can a shareholder be asked to pay anything more than the unpaid value of his shares. In the case of
a company limited by guarantee, the members are liable only to the extent of the amount guaranteed by them
and not beyond, and only when the company goes into liquidation.

Perpetual Succession

Members may come and members may go but the company goes on for ever. Variation in members or their
identity does not affect the legal existence and identity of a company. It is a creation of law and can be dissolved
only under the law.

Transferability of Shares

The capital of a company is divided into parts, called shares. The shares are said to be movable property and,
subject to certain conditions, freely transferable, so that no shareholder is permanently or necessarily wedded
to a company. The shares of joint stock companies are freely transferable. In the case of a private company, the
Companies Act requires it to put certain restrictions on the transferability of shares. Every member owing fully
paid-up shares is at liberty to dispose them off according to his choice but subject to the articles of the company.
Any absolute restriction on the right to transfer shares is void.

Separate Property

As a corporate person, the company is entitled to own and hold property in its own name. No member can claim
ownership of any item of the company’s assets.

Common Seal

On incorporation, a company acquires legal entity with perpetual succession and a common seal. Since the
company has no physical existence, it must act through its agents and all such contracts entered into by its
agents must be under the seal of the company. The common seal of the company is of very great importance. It
acts as the official signature of a company. The name of the company must be engraved on its common seal. A
rubber stamp does not serve the purpose. A document not bearing common seal of the company is not authentic
and has no legal force behind it.
However, as per the Companies (Amendment) Act, 2015, the requirement of affixing of Common Seal has been
dispensed with. It has been provided in the act that in case a company does not have a common seal, the
authorisation shall be made by two directors or by a director and the Company Secretary, wherever the company
has appointed a Company Secretary.

Capacity to Sue and Be Sued

A company being a body corporate, can sue and be sued in its own name. All legal proceedings against the
company are to be instituted in its own name. Similarly, the company may bring an action against anyone in its
own name. In case of unincorporated association an action may have to be brought in the name of the members
either individually or collectively.

Company as Distinguished from other Associations of Persons

Though there are a number of similarities between a limited company and other forms of associations, there are
many dissimilarities. In both the cases individuals are the subjects, and trading is generally the object. In the
following paragraphs a limited company is distinguished from a partnership firm, a Hindu Joint Family business,
a club and a registered society.
 Lesson 7A Elements of Company Law-I 157

Though there are a number of similarities between a limited company and other forms of associations, there are
a great number of dissimilarities as well. In both the cases individuals are the subjects, and trading is generally
the object. In the following paragraphs, a limited company is distinguished from a partnership firm, a Limited
Liability Partnership, a Hindu Joint Family business and a registered society.

Distinction between Company and Partnership

The principal points of distinction between a company and a partnership firm, are as follows:
1. A company is a distinct legal person. A partnership firm is not distinct from the several persons who
compose it.
2. In a partnership, the property of the firm is the property of the individuals comprising it. In a company, it
belongs to the company and not to the individuals comprising it.
3. Creditors of a partnership firm are creditors of individual partners and a decree against the firm can be
executed against the partners jointly and severally. The creditors of a company can proceed only against
the company and not against its members.
4. Partners are the agents of the firm, but members of a company are not its agents. A partner can dispose
of the property and incur liabilities as long as he acts in the course of the firm’s business. A member of a
company has no such power.
5. A partner cannot contract with his firm, whereas a member of a company can.
6. A partner cannot transfer his share and make the transferee a member of the firm without the consent of
the other partners, whereas a company’s share can ordinarily be transferred.
7. Restrictions on a partner’s authority contained in the partnership contract do not bind outsiders; whereas
such restrictions incorporated in the Articles are effective, because the public are bound to acquaint
themselves with them.
8. A partner’s liability is always unlimited whereas that of shareholder may be limited either by shares or a
guarantee.
9. A company has perpetual succession, i.e. the death or insolvency of a shareholder or all of them does not
affect the life of the company, whereas the death or insolvency of a partner dissolves the firm, unless
otherwise provided.
10. A company may have any number of members except in the case of a private company which cannot
have more than 200 members (excluding past and present employee members). In a public company
there must not be less than seven persons and in a private company not less than two. Further, a new
concept of one person company has been introduced which may be incorporated with only one person.
11. A company is legally required to have its accounts audited annually by a chartered accountant, whereas
the accounts of a firm are audited at the discretion of the partners.
12. A company, being a creation of law, can only be dissolved as laid down by law. A partnership firm, on the
other hand, is the result of an agreement and can be dissolved at any time by agreement.

Distinction between company and Limited Liability Partnership (LLP)

LLP is an alternative corporate business form that gives the benefits of limited liability of a company and the
flexibility of a partnership. LLP can continue its existence irrespective of changes in partners. It is capable of
entering into contracts and holding property in its own name. LLP is a separate legal entity, is liable to the full
extent of its assets but liability of the partners is limited to their agreed contribution in the LLP.
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Further, no partner is liable on account of the independent or un-authorized actions of other partners, thus
individual partners are shielded from joint liability created by another partner’s wrongful business decisions or
misconduct.
Mutual rights and duties of the partners within a LLP are governed by an agreement between the partners or
between the partners and the LLP as the case may be. The LLP, however, is not relieved of the liability for its
other obligations as a separate entity.
Since LLP contains elements of both ‘a corporate structure’ as well as ‘a partnership firm structure’ LLP is called
a hybrid between a company and a partnership.
LLP is a body corporate and a legal entity separate from its partners, having perpetual succession. LLP form is
a form of business model which :(i) is organized and operates on the basis of an agreement.(ii) provides flexibility
without imposing detailed legal and procedural requirements (iii) enables professional/technical expertise and
initiative to combine with financial risk taking capacity in an innovative and efficient manner.
A basic difference between an LLP and a company lies in that the internal governance structure of a company is
regulated by statute (i.e. Companies Act) whereas for an LLP it would be by a contractual agreement between
partners.
The management-ownership divide inherent in a company is not there in a limited liability partnership. LLP
have more flexibility as compared to a company. LLP have lesser compliance requirements as compared to a
company.

Distinction between Company and Hindu Joint Family Business

1. A company consists of heterogeneous members, whereas a Hindu Undivided Family Business consists
of homogenous members since it consists of members of the joint family itself.
2. In a Hindu Joint Family business the Karta (manager) has the sole authority to contract debts for the
purpose of the business, other coparceners cannot do so. There is no such system in a company.
3. A person becomes a member of Joint Hindu Family business by virtue of birth. There is no provision to
that effect in the company.
4. No registration is compulsory for carrying on business for gain by a Hindu Joint Family even if the number
of members exceeds twenty [Shyamlal Roy v. Madhusudan Roy, AIR 1959 Cal. 380 (385)]. Registration
of a company is compulsory.

Distinction between a Company and a Club

1. A company is a trading association. A club, on the other hand, is a non-trading association.

2. Registration of a company is compulsory. Registration of a club is not compulsory.

Distinction between a Company and a Corporation (i.e. Company vis-à-vis Body Corporate)

Generally speaking, an association of persons incorporated according to the relevant law and clothed with legal
personality separate from the persons constituting it is known as a corporation. The word ‘corporation’ or words
‘body corporate’ is/are both used in the Companies Act, 2013.
Definition of the same which is reproduced below is contained in Clause (11) of Section 2 of the Act:
“Body corporate” or “corporation” includes a company incorporated outside India, but does not include –
(i) a co-operative society registered under any law relating to co-operative societies; and
 Lesson 7A Elements of Company Law-I 159

(ii) any other body corporate (not being a company as defined in this Act),
which the Central Government may, by notification, specify in this behalf;
A society registered under the Societies Registration Act has been held by the Supreme Court in Board of
Trustees v. State of Delhi, A.I.R. 1962 S.C. 458, not to come within the term ‘body corporate’ under the Companies
Act, though it is a legal person capable of holding property and becoming a member of a company.

Advantages of Incorporation

As compared to other types of business associations, an incorporated company has the following advantages:
A. Corporate Personality: Unlike a partnership firm, which has no existence apart from its members, a
company is a distinct legal or juristic person independent of its members. Under the law, an incorporated
company is a distinct entity, even the one-man company as discussed above in Salomon & Co. Ltd., case
is different from its shareholders.
As per section 9 of the Companies Act, 2013 from the date of incorporation mentioned in the certificate of
incorporation, such subscribers to the memorandum and all other persons, as may, from time to time,
become members of the company, shall be a body corporate by the name contained in the memorandum,
capable of exercising all the functions of an incorporated company under the Act and having perpetual
succession and a common seal with power to acquire, hold and dispose of property, both movable and
immovable, tangible and intangible, to contract and to sue and be sued, by the said name.
B. Limited Liability: The Companies Act provides that in the event of the company being wound-up, the
members shall have liability to contribute to the assets of the company in accordance with the Act. In the
case of companies limited by shares, no member is bound to contribute anything more than the nominal
value of the shares held by him which remains unpaid. The privilege of limiting the liability is one of the
principal advantages of doing business under the corporate form of organisation.
C. Perpetual Succession: As stated in Section 9 of the Companies Act, 2013 an incorporated company has
perpetual succession. Notwithstanding any change in its members, the company will be the same entity
with the same privileges and immunities, estate and possessions. The death or insolvency of individual
members does not in any way, affect the corporate entity, its existence or continuity. The company shall
continue to exist indefinitely till it is wound-up in accordance with the provisions of the Companies Act.
“Members may come and members may go but the company can go on forever”.
D. Transferable Shares: Section 44 of the Companies Act, 2013 provides the shares or other interest of any
member in a company shall be movable property, transferable in the manner provided by the articles of
the company. This encourages investment of funds in the shares, so that the members may encash them
at any time. Thus, it provides liquidity to the investors as shares could be sold in the open market and in
stock exchange. It also provides stability to the company.
E. Separate Property: A company as a legal entity is capable of owning its funds and other assets. “The
property of the company is not the property of the shareholders, it is property of the company” [Gramophone
& Typewriter Co. v. Stanley, (1906) 2 K.B. 856 at p. 869]. “The company is the real person in which all the
property is vested, and by which it is controlled, managed and disposed of”. In the eyes of law, even a
member holding majority of shares or a managing director of a company is held liable for criminal mis-
appropriation of the funds or property of the company, if he unauthorisedly takes it away and uses it for
his personal purposes.
F. Capacity to Sue: As a juristic legal person, a company can sue in its name and be sued by others. The
managing director and other directors are not liable to be sued for dues against a company.
G. Flexibility and Autonomy: The company has an autonomy and independence to form its own policies and
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implement them, subject to the general principles of law, equity and good conscience and in accordance
with the provisions contained in the Companies Act, Memorandum and Articles of Association. The company
form of management of business disassociates the “ownership” from the “control” of business, and helps
promote professional management and efficiency. The Key Managerial Personnel can carry on the business
activities with freedom, authority and accountability in accordance with the Company Law. The Companies
Act, 2013 has for the first time recognized the concept of Key Managerial Personnel. As per section
2(51) “key managerial personnel”, in relation to a company, means –
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the Company Secretary;
(iii) the whole-time director;
(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed.

Disadvantages of Incorporation

There are, however, certain disadvantages and inconveniences in Incorporation. Some of these disadvantages are:
1. Formalities and expenses: Incorporation of a company is coupled with complex, cumbersome and detailed
legal formalities and procedures, involving considerable amount of time and money. Such elaborate
procedures have been laid down to deter persons who are not serious about doing business, as a company
enjoys various facilities from the community. Even after the company is incorporated, its affairs and
working must be conducted strictly in accordance with legal provisions. Thus various returns and documents
are required to be filed with the Registrar of Companies, some periodically and some on the happening of
an event. Certain books and registers are compulsorily required to be maintained by a company. Approval
and sanction of the National Company Law Tribunal / National Company Law Appellate Tribunal , the
Government, the Court, the Registrar of Companies or other appropriate authority, as the case may be,
is necessarily required to be obtained for certain corporate activities. Certain corporate activities such as
corporate meetings, accounts, audit, borrowings, lending, investment, issue of capital, dividends etc. are
necessarily required to be conducted and carried out strictly in accordance with the provisions of the Act
and within the prescribed time. Any breach of the legal provisions is followed by severe penal
consequences. Other forms of business organisations are comparatively free from these legal complexities
and procedural formalities.
2. Corporate disclosures: Notwithstanding the elaborate legal framework designed to ensure maximum
disclosure of corporate information, the members of a company are having comparatively restricted
accessibility to its internal management and day-to-day administration of corporate working.
3. Separation of control from ownership: Members of a company are not having as effective and intimate
control over its working as one can have in other forms of business organisation, say, a partnership firm.
This is particularly so in big companies in which the number of members is too large to exercise any
effective control over its day-to-day affairs. No member of a company can act in his individual capacity for
and on behalf of the company. The members of a company are neither the owners nor the agents of the
company. Thus, the position of ownership of members is more passive in nature. The members may not
have an active and complete control over the company’s working as the partners may have over the
firm’s affairs.
4. Greater social responsibility: Having regard to the enormous powers wielded by the companies and the
impact they have on the society, the companies are called upon to show greater social responsibility in
their working and, for that purpose, are subject to greater control and regulation than that by which other
forms of business organisation are governed and regulated.
 Lesson 7A Elements of Company Law-I 161

5. Greater tax burden in certain cases: In certain circumstances, the tax burden on a company is more than
that on other forms of business organisation. A company is liable to tax without any minimum taxable limit
as is prescribed in the cases of registered partnership firms and others. Also it has to pay income-tax on
the whole of its income at a flat rate whereas others are taxed on graduated scale or slab system. These
tax implications may have crucial bearing on a decision regarding the selection of any form of business
organisation and the time when the existing form of business organisation should be changed to a new
one. Thus, tax implications may direct the adoption of the partnership form of business organisation as
expedient at the initial stage to be converted into a company later on, when the tax implications may be
more favourable because of the size of the organisation and its scale of operations.
6. Detailed winding-up procedure: The Act provides elaborate and detailed procedure for winding-up of
companies which is more expensive and time consuming than that which is applicable to other forms of
business organisation.
There are, however, some exceptions to the principles of Corporate Personality and the Limited Liability of
members. These are discussed below:

Lifting or Piercing the Corporate Veil

Law has clothed a corporation with a distinct personality, yet in reality it is an association of persons who are in
fact, in a way, the beneficial owners of the property of the body corporate. A company, being an artificial person,
cannot act on its own, it can act only through natural persons.
Indeed, the theory of corporate entity is still the basic principle on which the whole law of corporations is based.
But as the separate personality of the company is a statutory privilege, it must be used for legitimate business
purposes only. Where a fraudulent and dishonest use is made of the legal entity, the individuals concerned will
not be allowed to take shelter behind the corporate personality. The Court will breakthrough the corporate shell
and apply the principle of what is known as “lifting of or piercing through the corporate veil”. The Court will look
behind the corporate entity and take action as though no entity separate from the members existed and make
the members or the controlling persons liable for debts and obligations of the company.
The corporate veil is lifted when in defence proceedings, such as for the evasion of tax, an entity relies on its
corporate personality as a shield to cover its wrong doings. [BSN (UK) Ltd. v. Janardan Mohandas Rajan Pillai
[1996] 86 Comp. Cas. 371 (Bom).]
In the following cases the Courts have lifted the corporate veil:
1. Where the corporate veil has been used for commission of fraud or improper conduct, Courts have lifted
the veil and looked at the realities of the situation. In Gilford Motor Co. v. Horne, (1933) 1 Ch. 935, a
former employee of a company made a covenant not to solicit its customers. He formed a company which
undertook solicitation. The company was restrained by the Court.
2. Where the corporation is really an agency or trust for some one else and the corporate facade is used to
cover up that agency or trust. In re R.G. Films Ltd., (1953) 1 All E.R. 615, an American company produced
a film in India technically in the name of a British Company, 90% of whose capital was held by the
President of the American Company which financed the production of the film. Board of Trade refused to
register the film as a British film on the ground that English company acted merely as the nominee of the
American corporation.
3. Where the doctrine conflicts with public policy, Courts have lifted the corporate veil for protecting the
public policy. In Connors Bros. v. Connors (1940) 4 All E.R. 179, the principle was applied against the
managing director who made use of his position contrary to public policy. In this case, the House of Lords
determined the character of the company as “enemy” company, since the persons who were de facto in
control of its affairs, were residents of Germany, which was at war with England at that time. The alien
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company was not allowed to proceed with the action, as that would have meant giving money to the
enemy, which was considered as monstrous and against “public policy”.
4. For determining the true character or status of the company. In Daimler Co. Ltd. v. Continental Tyre and
Rubber Co., (1916) 2 A.C. 307, the Court looked behind the facade of the company and its place of registration
in order to determine the true character of the company, i.e., whether it was an “enemy” company.
5. Where the veil has been used for evasion of taxes and duties, the Court upheld the piercing of the veil to
look at the real transaction. (Commissioner of Income Tax v. Meenakshi Mills Ltd., A.I.R. (1967) S.C.
819).
6. Where it was found that the sole purpose for which the company was formed was to evade taxes the Court
will ignore the concept of separate entity, and make the individuals liable to pay the taxes which they would
have paid but for the formation of the company. In the case of Sir Dinshaw Manakjee Petit, AIR 1927
Bombay 371, the assessee was a wealthy man enjoying large dividend and interest income. He formed
four private companies and agreed with each to hold a block of investment as an agent for it. Income
received was credited in the accounts of the company but the company handed back the amount to him as
a pretended loan. This way he divided his income in four parts in a bid to reduce his tax liability. The Court
disregarded the corporate entity on the grounds that the company was formed by the assessee purely and
simply as a means of avoiding tax and the company was nothing more than the assessee himself.
7. Where the purpose of company formation was to avoid welfare legislation. Where it was found that the
sole purpose for the formation of the new company was to use it as a device to reduce the amount to be
paid by way of bonus to workmen, the Supreme Court upheld the piercing of the veil to look at the real
transaction (The Workmen Employed in Associated Rubber Industries Limited, Bhavnagar v. The
Associated Rubber Industries Ltd., Bhavnagar and another, A.I.R. 1986 SC 1).

KINDS OF COMPANIES

The Companies Act, 2013 provides for a variety of companies of which can be promoted and registered under
the Act. These companies may be:
(i) limited by shares;
(ii) limited by guarantee; or
(iii) unlimited companies.
Companies may also be classified as:
(a) Private Companies;
(b) Public Companies;
(c) One Person Company
(d) Company with charitable objects, etc. under Section 8 of the Companies Act, 2013;
(e) Small Company
(f) Government companies;
(g) Foreign companies;
(h) Holding companies; and
(i) Subsidiary companies.
(j) Producer Companies.
A brief discussion of each type of company follows hereunder.
 Lesson 7A Elements of Company Law-I 163

A Company Limited by Shares

A company limited by shares may be defined as a “registered company” whether public or private company
having the liability of its members limited by its memorandum to the amount, if any, unpaid on the shares
respectively held by them. In other words, a member of a company limited by shares is required to pay only the
nominal amount of shares held by him and nothing more. If the shares are fully paid-up he has nothing more to
pay.

A Company Limited by Guarantee

A company limited by guarantee is a registered company having the liability of its members limited by its
memorandum to such an amount as the members may respectively undertake by the memorandum to contribute
to the assets of the company in the event of its being wound up.
A special feature of this type of company is that the liability of members to pay their guarantee amount arises
only when the company goes into liquidation and not when it is a going concern.
Clubs, trade associations and societies for promoting different objects are at times incorporated as companies
limited by Guarantee to take the advantages of incorporation without running the risk of heavy liabilities.

An Unlimited Company

An unlimited company is a company not having any limit on the liability of its members. Thus, the maximum
liability of the members of such a company, in the event of its being wound up, might stretch up to the full extent
of their properties to meet the obligations of the company by contributing to its assets. However, the members of
an unlimited company are not liable directly to the creditors of the company, as in the case of partners of a firm.
The liability of the members is only towards the company and in the event of its being wound up only the
liquidator can ask the members to contribute to the assets of the company which will be used in discharging the
debts of the company.
A company registered as an unlimited company may subsequently convert itself as a limited company, subject
to the condition that any debts, liabilities, obligations or contracts incurred or entered into, by or on behalf of the
unlimited company before such conversion are not affected by such changed registration.

Private Company [Section 2(68)]

By virtue of Section 2(68) of Companies Act, 2013 “private company” means a company having a minimum paid
up share capital as may be prescribed, and which by its articles, –
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the number of its members to two hundred:
Provided that where two or more persons hold one or more shares in a company jointly, they shall, for the
purposes of this clause, be treated as a single member:
Provided further that –
(A) persons who are in the employment of the company; and
(B) persons who, having been formerly in the employment of the company, were members of the company
while in that employment and have continued to be members after the employment ceased shall not
be included in the number of members; and
(iii) prohibits any invitation to the public to subscribe for any securities of the company;
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Maximum number of members that a private company can have is 200.

There should be at least two persons to form a private company. A private company can therefore be registered
with a minimum of 2 members and cannot have more than 200 members (excluding employee and ex-employee
members). It cannot invite the public to subscribe for its shares or debentures nor can its shares be freely
transferred.
The words “Private Limited” must be added at the end of its name by a private limited company.
The Companies (Amendment) Act, 2015, had removed the requirement of minimum paid up capital for private
companies. This means that a company can be incorporated with such capital as may be decided by the promoters
while incorporating the company.

Public Company [Section 2(71)]

“Public company” means a company which –

(a) is not a private company;
(b) has a minimum paid-up share capital, as may be prescribed:

Provided that a company which is a subsidiary of a company, not being a private company, shall be deemed to
be public company for the purposes of this Act even where such subsidiary company continues to be a private
company in its articles;
It is clarified the status of a private company which is a subsidiary of a public company by providing specifically
in the proviso that such company shall be deemed to be public company irrespective of its status as private
company in its articles.

The Companies (Amendment) Act, 2015, had removed the requirement of minimum paid up capital for public
companies. This means that a company can be incorporated with such capital as may be decided by the promoters
while incorporating the company.

Distinction between a Public and a Private Company

1. Minimum number: The minimum number of persons required to form a public company is 7. It is 2 in case
of a private company.
2. Maximum number: There is no restriction on maximum number of members in a public company, whereas
the maximum number cannot exceed 200 in a private company.
3. Number of directors: A public company must have at least 3 directors, whereas a private company must
have at least 2 directors.
5. Restriction on invitation to subscribe for shares: A public company invites the general public to subscribe
for the shares in, or the debentures of the company. A private company by its Articles prohibits any such
invitation to the public.
6. Transferability of shares: In a public company, the shares are freely transferable. In a private company
the right to transfer shares is restricted by the Articles.
7. Special privileges: A private company enjoys some special privileges. A public company enjoys no such
privileges.

One Person Company (OPC)

With the implementation of the Companies Act, 2013, a single person could constitute a Company, under the
 Lesson 7A Elements of Company Law-I 165

One Person Company (OPC) concept. The introduction of OPC in the legal system is a move that would encourage
corporatisation of micro businesses and entrepreneurship.
As per section 2(62) of the Companies Act, 2013, “One Person Company” means a company which has only
one person as a member.
The memorandum of One Person Company is required to indicate the name of the other person, with his prior
written consent in the prescribed form, who shall, in the event of the subscriber’s death or his incapacity to
contract become the member of the company and the written consent of such person shall be filed with the
Registrar at the time of incorporation of the One Person Company along with its memorandum and articles.
Other conditions for One Person Company are as under:
(1) Only a natural person who is an Indian citizen and resident in India –
(a) shall be eligible to incorporate a One Person Company;
(b) shall be a nominee for the sole member of a One Person Company.
It may be noted that “resident in India” means a person who has stayed in India for a period of not less
than one hundred and eighty two days during the immediately preceding one calendar year.
(2) No person shall be eligible to incorporate more than a One Person Company or become nominee in more
than one such company.
(3) No minor shall become member or nominee of the One Person Company or can hold share with beneficial
interest.
(4) Such Company cannot be incorporated or converted into a company under section 8 of Companies Act,
2013(section 8 deals with Formation of company with charitable objects, etc.)
(5) Such Company cannot carry out Non-Banking Financial Investment activities including investment in
securities of any body corporates.
(6) No such company can convert voluntarily into any kind of company unless two years have expired from
the date of incorporation of One Person Company, except threshold limit (paid up share capital) is increased
beyond fifty lakh rupees or its average annual turnover during the relevant period exceeds two crore
rupees.

Company with charitable objects

Section 8 of the Companies Act, 2013 provides that where it is proved to the satisfaction of the Central Government
that a person or an association of persons proposed to be registered as a limited company –
(a) has in its objects the promotion of commerce, art, science, sports, education, research, social welfare,
religion, charity, protection of environment or any such other object;
(b) intends to apply its profits, if any, or other income in promoting its objects; and
(c) intends to prohibit the payment of any dividend to its members,
The Central Government may, by licence issued in such prescribed manner and on such conditions as it deems
fit, allow that person or association of persons to be registered as a limited company without the addition to its
name of the word “Limited”, or as the case may be, the words “Private Limited”, and thereupon the Registrar
shall, on application, in the prescribed form, register such person or association of persons as a company under
this section.
(2) The company registered under section 8 shall enjoy all the privileges and be subject to all the obligations of
limited companies.
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(3) A firm may be a member of the company registered under this section.
(4) A company registered under section 8 shall not alter the provisions of its memorandum or articles except
with the previous approval of the Central Government.
(5) A company registered under section 8 may convert itself into company of any other kind only after complying
with such prescribed conditions.
(6) The Central Government may, by order, revoke the licence granted to a company registered under this
section if the company contravenes any of the requirements or any of the conditions subject to which a licence
is issued or the affairs of the company are conducted fraudulently or in a manner violative of the objects of the
company or prejudicial to public interest, and without prejudice to any other action against the company under
this Act, direct the company to convert its status and change its name to add the word “Limited” or the words
“Private Limited”, as the case may be, to its name and thereupon the Registrar shall register the company
accordingly.
(7) Where a licence is revoked , the Central Government may, by order, if it is satisfied that it is essential in the
public interest, direct that the company be wound up under this Act or amalgamated with another company
registered under this section.

Small Company

Small company is a new form of private company under the Companies Act, 2013. A classification of a private
company into a small company is based on its size i.e. paid up capital and turnover. In other words, such
companies are small sized private companies.
As per section 2(85) ‘‘small company’’ means a company, other than a public company, –
(i) paid-up share capital of which does not exceed fifty lakh rupees or such higher amount as may be
prescribed which shall not be more than five crore rupees; or
(ii) turnover of which as per its last profit and loss account does not exceed two crore rupees or such higher
amount as may be prescribed which shall not be more than twenty crore rupees:
Provided that nothing in this defintion shall apply to –
(A) a holding company or a subsidiary company;
(B) a company registered under section 8; or
(C) a company or body corporate governed by any special Act;
These companies enjoy some special privileges, which other private or public company do not have.

Government Companies

Section 2(45) of the Companies Act, 2013 defines “Government Company” as any company in which not less
than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government
or Governments, or partly by the Central Government and partly by one or more State Governments, and
includes a company which is a subsidiary company of such a Government company.
Where the Central Government is a member of a Government company, the Central Government shall cause an
annual report on the working and affairs of that company to be prepared within three months of its annual
general meeting, and laid before both Houses of Parliament together with a copy of the audit report and comments
upon or supplement to the audit report, made by the Comptroller and Auditor-General of India.
Where in addition to the Central Government, any State Government is also a member of a Government company,
that State Government shall cause a copy of the annual report prepared within three months of its annual
 Lesson 7A Elements of Company Law-I 167

general meeting and laid before the House or both Houses of the State Legislature together with a copy of the
audit report and the comments upon or supplement to the audit report, made by the Comptroller and Auditor-
General of India.
Where the Central Government is not a member of a Government company, every State Government which is
a member of that company, or where only one State Government is a member of the company, that State
Government shall cause an annual report on the working and affairs of the company to be prepared and as soon
as may be after such preparation, laid before the House or both Houses of the State Legislature together with a
copy of the audit report and comments upon or supplement to the audit report made by the Comptroller and
Auditor-General of India.

Foreign Companies

As per section 2(42) of the Companies Act, 2013 “foreign company” means any company or body corporate
incorporated outside India which –
(a) has a place of business in India whether by itself or through an agent, physically or through electronic
mode; and
(b) conducts any business activity in India in any other manner.
Where not less than fifty per cent. of the paid-up share capital, whether equity or preference or partly equity and
partly preference, of a foreign company is held by one or more citizens of India or by one or more companies or
bodies corporate incorporated in India, or by one or more citizens of India and one or more companies or bodies
corporate incorporated in India, whether singly or in the aggregate, such company shall comply with the provisions
of Chapter XXIII deals with companies incorporated outside India contains Sections 379 to 395 and such other
prescribed provisions of the Companies Act, 2013 as may be with regard to the business carried on by it in India
as if it were a company incorporated in India.

Holding company

As per Section 2(46) of the Companies Act, 2013, holding company, in relation to one or more other companies,
means a company of which such companies are subsidiary companies.

Subsidiary company
Section 2(87) of the Companies Act, 2013 provides that subsidiary company or subsidiary, in relation to any
other company (that is to say the holding company), means a company in which the holding company—
(i) controls the composition of the Board of Directors; or
(ii) exercises or controls more than one-half of the total share capital either at its own or together with one or
more of its subsidiary companies:
Provided that such class or classes of holding companies, shall not have layers of subsidiaries beyond the
prescribed limit.
For the above purpose, –
(a) a company shall be deemed to be a subsidiary company of the holding company even if the control
referred to in sub-clause (i) or sub-clause (ii) is of another subsidiary company of the holding company;
(b) the composition of a company’s Board of Directors shall be deemed to be controlled by another company
if that other company by exercise of some power exercisable by it at its discretion can appoint or remove
all or a majority of the directors;
(c) the expression “company” includes any body corporate;
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It may be noted that according to section 2 (27) of the Companies Act, 2013 , control shall include the right to
appoint majority of the directors or to control the management or policy decisions exercisable by a person or
persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding or
management rights or shareholders agreements or voting agreements or in any other manner.

Producer Company

Section 465(1) of the Companies Act, 2013 provides that the Companies Act, 1956 and the Registration of
Companies (Sikkim) Act, 1961 (hereafter in this section referred to as the repealed enactments) shall stand
repealed.
However, proviso to section 465(1) provides that the provisions of Part IX A of the Companies Act, 1956 shall be
applicable mutatis mutandis to a Producer Company in a manner as if the Companies Act, 1956 has not been
repealed until a special Act is enacted for Producer Companies.
In view of the above provision, Producer Companies are still governed by the Companies Act, 1956. Companies
(Amendment) Act, 2002 had added a new Part IXA to the main Companies Act, 1956 consisting of 46 new
Sections from 581A to 581ZT relating to Producer Companies.
According to the provisions as prescribed under Section 581A(l) of the Companies Act, 1956, a producer company
is a body corporate having objects or activities specified in Section 581B and which is registered as such under the
provisions of the Act. The membership of producer companies is open to such people who themselves are the
primary producers, which is an activity by which some agricultural produce is produced by such primary producers.

PROMOTION AND INCORPORATION OF A COMPANY

Any seven or more persons can form a public company and any two or more persons can form a private
company and one person can form One Person Company. However, the company should be formed for a lawful
purpose i.e. it should not be in contravention of the general law of the country. Every company public or private
has to be registered with the Registrar of Companies (ROC). The ROC is the authority which besides registration
of companies, receives documents and forms from companies and registers them, maintains records of the
companies and makes this record available for public inspection as well as ensures that companies by and
large comply with the provisions of Companies Act, 2013 .
The whole process of the company formation may be divided into three distinct stages, namely:
(i) Promotion;
(ii) Incorporation by Registration; and
(iii) Commencement of Business.

Promotion

“Promotion” is the process of conceiving an idea and developing it into a concrete proposition or project to be
accomplished by the incorporation and floatation of a company. The person who takes the necessary steps to
accomplish these objectives is known as promoter.

Promoters

Section 2 (69) of the Companies Act, 2013 defines the term ‘promoter’ as under:-
“Promoter” means a person –
(a) who has been named as such in a prospectus or is identified by the company in the annual return
referred to in section 92; or
 Lesson 7A Elements of Company Law-I 169

(b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or
otherwise; or
(c) in accordance with whose advice, directions or instructions the Board of Directors of the company is
accustomed to act.
Provided that sub-clause (c) shall not apply to a person who is acting merely in a professional capacity.
By virtue of above definition, persons in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act are also treated as promoters. However, if a person is merely
acting in a professional capacity i.e. giving only professional advice to the Board of directors, he shall not be
treated as a promoter.

Is a director/officer/employee of the issuer a promoter?

A director/officer/employee who has control over the affairs of the company, directly or indirectly whether as a
shareholder, director or otherwise is considered as a promoter. As per section 2 (27), control” shall include the
right to appoint majority of the directors or to control the management or policy decisions exercisable by a
person or persons acting individually or in concert, directly or indirectly, including by virtue of their shareholding
or management rights or shareholders agreements or voting agreements or in any other manner.
However, a director or officer or employee of the issuer or a person, if acting as such merely in his professional
capacity, shall not be deemed as a promoter.

PROMOTERS’ CONTRACT — RATIFICATION THEREOF

As regards ratification of promoters’ contracts, the view taken in Kelner v. Baxter LR (1886) 2 CP 174 was that
the company could not ratify contract made by a promoter before its incorporation. Specific performance of a
contract may be enforced against a company in respect of contracts entered into by promoters on behalf of the
company, if such a contract is warranted by the terms of incorporation and the company has accepted the
contract and communicated the acceptance to the other party. (Section 15 of the Specific Relief Act, 1963).
Section 19 of the same Act provides that the other party can also enforce the contract if the company has
adopted it after incorporation and the contract is within the terms of incorporation.
As long as the company does not ratify, as required by the Specific Relief Act, 1963 the position remains the
same as under the common law.

Legal Position of a Promoter

While the accurate description of a promoter may be difficult, his legal position is quite clear. A promoter is
neither an agent of, nor a trustee for, the company because it is not in existence. But he occupies a fiduciary
position in relation to the company and therefore requires to make full disclosure of the relevant facts, including
any profit made by him.
The corollary which the law deduces from this rule of fiduciary relationship is that a promoter may not make,
either directly or indirectly, any profit at the expense of the company, he promotes, without the knowledge and
consent of the company, and that, if he does make a secret profit in disregard of this rule, the company can
compel him to account for it, and surrender the secret profit. When the promoter defrauds the company, he
becomes liable for damages and on his death his estate remains liable if it has benefitted from the deceit or
breach of trust, but not otherwise.
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INCORPORATION OF COMPANIES - PROCEDURAL ASPECTS

(a) Application for Availability of Name of company

A company being a legal entity must have a name of its own to establish its separate identity. The name of the
company is a symbol of its independent corporate existence. The first clause in the memorandum of association
of the company states the name by which a company is to be known. The company may adopt any suitable
name provided it is not undesirable.
According to section 4(2) of the Companies Act, 2013, the name stated in the memorandum shall not –
(a) be identical with or resemble too nearly to the name of an existing company registered under this Act or
any previous company law; or
(b) be such that its use by the company –
(i) will constitute an offence under any law for the time being in force; or
(ii) is undesirable in the opinion of the Central Government.
Section 4(3) of the Companies Act, 2013 provides that without prejudice to the provisions of section 4(2), a
company shall not be registered with a name which contains –
(a) any word or expression which is likely to give the impression that the company is in any way connected
with, or having the patronage of, the Central Government, any State Government, or any local authority,
corporation or body constituted by the Central Government or any State Government under any law for
the time being in force; or
(b) such word or expression, as may be prescribed, unless the previous approval of the Central Government
has been obtained for the use of any such word or expression.
As per section 4(4) a person may make an application, in such form and manner and accompanied by such
fee, as may be prescribed, to the Registrar for the reservation of a name set out in the application as—
(a) the name of the proposed company; or
(b) the name to which the company proposes to change its name.
Section 4(5)(i) lays down that upon receipt of an application under sub-section (4), the Registrar may, on the
basis of information and documents furnished along with the application, reserve the name for a period of 60
days from the date of the application.
As stated above, section 4(2) provides that the name stated in the memorandum shall not be such that its use by
the company, in the opinion of the Central Government, is undesirable. A name which is identical to or too nearly
resembles, the name by which a company in existence has been previously registered, will be deemed to be
undesirable
The object is to prevent the use of a name likely to mislead the public. For example, a company is not allowed to
use a name which is prohibited under the Emblems and Names (Prevention of Improper Use) Act, 1950, or
suggestive of any connection with Government or of State patronage where there is none
As per Rule 9 of Companies (incorporation) Rules 2014, an application for the reservation of a name shall be made
in Form No. INC.1 along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014.

(b) Preparation of Memorandum and Articles of Association

The Memorandum of Association

The Memorandum of Association is a document which sets out the constitution of a company and is therefore
 Lesson 7A Elements of Company Law-I 171

the foundation on which the structure of the company is built. It defines the scope of the company’s activities and
its relations with the outside world.
The first step in the formation of a company is to prepare a document called the memorandum of association. In
fact memorandum is one of the most essential pre-requisites for incorporating any form of company under the
Act. This is evidenced in Section 3 of the Act, which provides the mode of incorporation of a company and states
that a company may be formed for any lawful purpose by seven or more persons, where the company to be
formed is a public company; two or more persons, where the company to be formed is a private company; or
one person, where the company to be formed is a One Person Company by subscribing their names or his
name to a memorandum and complying with the requirements of this Act in respect of its registration.
To subscribe means to append one’s signature or mark a document as an approval or attestation of its contents.
According to Section 2(56) of the Companies Act, 2013 “memorandum” means the memorandum of association
of a company as originally framed and altered from time to time in pursuance of any previous company law or
this Act.
Section 4 of the Companies Act, 2013 specifies in clear terms the contents of this important document which is
the charter of the company. The memorandum of association of a company contains the objects to pursue which
the company is formed It not only shows the objects of formation but also determines the scope of its operations
beyond which its actions cannot go. “THE MEMORANDUM OF ASSOCIATION”, observed Palmer, “is a document
of great importance in relation to the proposed company”.
Memorandum of Association is the charter of a company. It is a document, which amongst other things, defines
the area within which the company can operate.
Section 4(1) states that the memorandum of a company shall state –
(a) the name of the company with the last word “Limited” in the case of a public limited company, or the last
words “Private Limited” in the case of a private limited company
(b) the State in which the registered office of the company is to be situated;
(c) the objects for which the company is proposed to be incorporated and any matter considered necessary
in furtherance thereof;
(d) the liability of members of the company, whether limited or unlimited, and also state,— (i) in the case of a
company limited by shares, that liability of its members is limited to the amount unpaid, if any, on the
shares held by them; and (ii) in the case of a company limited by guarantee, the amount up to which each
member undertakes to contribute – (A) to the assets of the company in the event of its being wound-up
while he is a member or within one year after he ceases to be a member, for payment of the debts and
liabilities of the company or of such debts and liabilities as may have been contracted before he ceases
to be a member, as the case may be; and (B) to the costs, charges and expenses of winding-up and for
adjustment of the rights of the contributories among themselves;
(e) in the case of a company having a share capital, – (i) the amount of share capital with which the company
is to be registered and the division thereof into shares of a fixed amount and the number of shares which
the subscribers to the memorandum agree to subscribe which shall not be less than one share; and (ii)
the number of shares each subscriber to the memorandum intends to take, indicated opposite his name;
(f) in the case of One Person Company, the name of the person who, in the event of death of the subscriber,
shall become the member of the company.

Article of Association

According to Section 2(5) of the Companies Act, 2013, ‘articles’ means the articles of association of a company
172 FP-BE&L

as originally framed or as altered from time to time or applied in pursuance of any previous company law or of
this Act. It also includes the regulations contained in Table A in Schedule I of the Act, in so far as they apply to the
company.
In terms of section 5(1) of the Companies Act, 2013, the articles of a company shall contain the regulations for
management of the company. The articles of association of a company are its bye-laws or rules and regulations
that govern the management of its internal affairs and the conduct of its business. The articles play a very
important role in the affairs of a company. It deals with the rights of the members of the company inter se. They
are subordinate to and are controlled by the memorandum of association. The general functions of the articles
have been aptly summed up by Lord Cairns, L.C. in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche, (1875)
L.R. 7 H.L. 653 as follows:
“The articles play a part that is subsidiary to the memorandum of association. They accept the memorandum of
association as the charter of incorporation of the company, and so accepting it, the articles proceed to define the
duties, rights and powers of the governing body as between themselves and the company at large, and the
mode and form in which business of the company is to be carried on, and the mode and form in which changes
in the internal regulations of the company may from time to time be made... The memorandum, is as it were...
the area beyond which the action of the company cannot go; inside that area shareholders may make such
regulations for the governance of the company as they think fit”.
Thus, the memorandum lays down the scope and powers of the company, and the articles govern the ways in
which the objects of the company are to be carried out and can be framed and altered by the members. But they
must keep within the limits marked out by the memorandum and the Companies Act.
The articles must be printed, divided into paragraphs, numbered consecutively, stamped adequately, signed by
each subscriber to the memorandum and duly witnessed and filed along with the memorandum. The articles
must not contain anything illegal or ultra vires the memorandum, nor should it be contrary to the provisions of the
Companies Act, 2013.

CONTENTS OF ARTICLES

The articles set out the rules and regulations framed by the company for its own working. The articles should
contain generally the following matters:
1. Exclusion wholly or in part of Table F.
2. Adoption of preliminary contracts.
3. Number and value of shares.
4. Issue of preference shares.
5. Allotment of shares.
6. Calls on shares.
7. Lien on shares.
8. Transfer and transmission of shares.
9. Nomination.
10. Forfeiture of shares.
11. Alteration of capital.
12. Buy back.
13. Share certificates.
 Lesson 7A Elements of Company Law-I 173

14. Dematerialisation.
15. Conversion of shares into stock.
16. Voting rights and proxies.
17. Meetings and rules regarding committees.
18. Directors, their appointment and delegations of powers.
19. Nominee directors.
20. Issue of Debentures and stocks.
21. Audit committee.
22. Managing director, Whole-time director, Manager, Secretary.
23. Additional directors.
24. Seal.
25. Remuneration of directors.
26. General meetings.
27. Directors meetings.
28. Borrowing powers.
29. Dividends and reserves.
30. Accounts and audit.
31. Winding up.
32. Indemnity.
33. Capitalisation of reserves.
Utmost caution must be exercised in the preparation of the articles of association of a company. At the same
time, certain provisions of the Act are applicable to the company “notwithstanding anything to the contrary in the
articles”. Therefore, the articles must contain provisions in respect of all matters which are required to be contained
therein so as not to hamper the working of the company later.
Section 5(1) of the Companies Act, 2013 states that the articles of a company shall contain the regulations for
management of the company.

FILING OF DOCUMENTS WITH REGISTRAR OF COMPANIES

Section 7(1) of the Companies Act, 2013 states that there shall be filed with the Registrar within whose jurisdiction
the registered office of a company is proposed to be situated, the following documents and information for
registration, namely: –

(a) Application for Incorporation of Companies

Rule 12 of Companies (Incorporation) Rules 2014 states that an application for incorporation shall be filed with
ROC in Form No. INC-7 (Part I company and company with more than seven subscribers) and Form No. INC-32
(SPICe) along with the prescribed fees.

(b) Memorandum and Articles of Association of the company duly signed

Section 7(1)(a) the filing of the memorandum and articles of the company duly signed by all the subscribers to
the memorandum in such manner as may be prescribed;
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Rule 13 of Companies (Incorporation) Rules 2014 states that –

The Memorandum and Articles of Association of the company shall be signed in the following manner, namely:-
(1) The memorandum and articles of association of the company shall be signed by each subscriber to the
memorandum, who shall add his name, address, description and occupation, if any, in the presence of at least
one witness who shall attest the signature and shall likewise sign and add his name, address, description and
occupation, if any and the witness shall state that “I witness to subscriber/subscriber(s), who has/have subscribed
and signed in my presence (date and place to be given); further I have verified his or their Identity Details (ID)
for their identification and satisfied myself of his/her/their identification particulars as filled in”
(2) Where a subscriber to the memorandum is illiterate, he shall affix his thumb impression or mark which shall
be described as such by the person, writing for him, who shall place the name of the subscriber against or below
the mark and authenticate it by his own signature and he shall also write against the name of the subscriber, the
number of shares taken by him.
(3) Such person shall also read and explain the contents of the memorandum and articles of association to the
subscriber and make an endorsement to that effect on the memorandum and articles of association.
(4) Where the subscriber to the memorandum is a body corporate, the memorandum and articles of association
shall be signed by director, officer or employee of the body corporate duly authorized in this behalf by a resolution
of the board of directors of the body corporate and where the subscriber is a Limited Liability Partnership, it shall
be signed by a partner of the Limited Liability Partnership, duly authorized by a resolution approved by all the
partners of the Limited Liability Partnership:
Provided that in either case, the person so authorized shall not, at the same time, be a subscriber to the
memorandum and articles of Association.
(5) Where subscriber to the memorandum is a foreign national residing outside India-
(a) in a country in any part of the Commonwealth, his signatures and address on the memorandum and
articles of association and proof of identity shall be notarized by a Notary (Public) in that part of the
Commonwealth.
(b) in a country which is a party to the Hague Apostille Convention, 1961, his signatures and address on the
memorandum and articles of association and proof of identity shall be notarized before the Notary (Public)
of the country of his origin and be duly apostillised in accordance with the said Hague Convention.
(c) in a country outside the Commonwealth and which is not a party to the Hague Apostille Convention,
1961, his signatures and address on the memorandum and articles of association and proof of identity,
shall be notarized before the Notary (Public) of such country and the certificate of the Notary (Public)
shall be authenticated by a Diplomatic or Consular Officer empowered in this behalf under section 3 of
the Diplomatic and Consular Officers (Oaths and Fees) Act, 1948 (40 of 1948) or, where there is no such
officer by any of the officials mentioned in section 6 of the Commissioners of Oaths Act, 1889 (52 and 53
Vic.C.10), or in any Act amending the same;
(d) visited in India and intended to incorporate a company, in such case the incorporation shall be allowed if,
he/she is having a valid Business Visa.
Explanation.- For the purposes of this clause, it is hereby clarified that, in case the Person is of Indian Origin or
Overseas Citizen of India, requirement of business Visa shall not be applicable.

(c) Declaration from the professional

Section 7(1)((b) of the Companies Act, 2013 requires filing of a declaration in the prescribed form by an advocate,
a chartered accountant, cost accountant or company secretary in practice, who is engaged in the formation of
 Lesson 7A Elements of Company Law-I 175

the company, and by a person named in the articles as a director, manager or secretary of the company, that all
the requirements of this Act and the rules made thereunder in respect of registration and matters precedent or
incidental thereto have been complied with;
Rule 14 of The Companies (Incorporation) Rules, 2014 states that for the purposes of clause (b) of sub-section
(1) of section 7, the declaration by an advocate, a Chartered Accountant, Cost accountant or Company Secretary
in practice shall be in Form No. INC.8.
Explanation (i) “chartered accountant” means a chartered accountant as defined in clause (b) of sub section 1 of
section 2 of the Chartered Accountants Act, 1949 (ii) “Cost Accountant” means a cost accountant as defined in
clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 and (iii) “company
secretary” means a “company secretary” or “secretary” means as defined in clause (c) of sub-section (1) of
section 2 of the Company Secretaries Act, 1980.

(d) Affidavit from the subscribers to the Memorandum

Section 7(1)(c) of the Companies Act, 2013 requires the filing of an affidavit from each of the subscribers to the
memorandum and from persons named as the first directors, if any, in the articles that he is not convicted of any
offence in connection with the promotion, formation or management of any company, or that he has not been
found guilty of any fraud or misfeasance or of any breach of duty to any company under this Act or any previous
company law during the preceding five years and that all the documents filed with the Registrar for registration
of the company contain information that is correct and complete and true to the best of his knowledge and belief;
Rule 15 of The Companies (Incorporation) Rules, 2014 states that
For the purposes of clause (c) of sub-section (1) of section 7, the affidavit shall be submitted by each of the
subscribers to the memorandum and each of the first directors named in the articles in Form No.INC.9

(e) Furnishing verification of Registered Office

Under Section 12 of the Companies Act, 2013, a company shall, on and from the 15th day of its incorporation
and at all times thereafter, have a registered office capable of receiving and acknowledging all communications
and notices as may be addressed to it. The company can furnish to the registrar verification of registered office
with in 30 days of incorporation in the manner prescribed. As per Rule 25(1) of Companies (Incorporation) Rules
2014, the verification of registered office shall be filed in Form no INC 22.
Where the location of the registered office is finalised prior to Incorporation of a company by the promoters, the
promoters can also file along with the Memorandum and Articles, the verification of its registered office in Form
no INC 22.

(f) Particulars of subscribers

Section 7(1)(e) of the Companies Act, 2013 requires the filing of the particulars of name, including surname or
family name, residential address, nationality and such other particulars of every subscriber to the memorandum
along with proof of identity, as may be prescribed, and in the case of a subscriber being a body corporate, such
particulars as may be prescribed;
Rule 16 of Companies (Incorporation) Rules states that –
Particulars of every subscriber to be filed with the Registrar at the time of incorporation.
(1) The following particulars of every subscriber to the memorandum shall be filed with the Registrar –
(a) Name (including surname or family name) and recent Photograph affixed and scan with MOA and
AOA:
176 FP-BE&L

(b) Father’s/Mother’s/ name:

(c) Nationality:
(d) Date of Birth:
(e) Place of Birth (District and State):
(f) Educational qualification:
(g) Occupation:
(h) Income-tax permanent account number: (i) Permanent residential address and also Present address
(Time since residing at present address and address of previous residence address (es) if stay of
present address is less than one year) similarly the office/business addresses :
(j) Email id ............................. of Subscriber;
(k) Phone No. ............................. of Subscriber;
(l) Fax no. ............................. of Subscriber (optional)
Explanation. – information related to (i) to (l) shall be of the individual subscriber and not of the
professional engaged in the incorporation of the company;
(m) Proof of Identity:
For Indian Nationals:
– PAN Card (mandatory) and any one of the following
– Voter’s identity card
– Passport copy
– Driving License copy
– Unique Identification Number (UIN)
For Foreign nationals and Non Resident Indians
– Passport
It was clarified by MCA vide Circular No. 16/2014 that, a declaration from foreign national in the
prescribed format shall be furnished as an attachment of INC 7 (Application for Incorporation), in
case if he does not have a PAN.
(n) Residential proof such as Bank Statement, Electricity Bill, Telephone / Mobile Bill:
Provided that Bank statement Electricity bill, Telephone or Mobile bill shall not be more than two
months old;
(o) Proof of nationality in case the subscriber is a foreign national.
(p) If the subscriber is already a director or promoter of a company(s), the particulars relating to-
(i) Name of the company;
(ii) Corporate Identity Number;
(iii) Whether interested as a director or promoter;
(q) the specimen signature and latest photograph duly verified by the banker or notary shall be in the
prescribed Form No.INC.10.
(2) Where the subscriber to the memorandum is a body corporate, then the following particulars shall be filed
with the Registrar –
 Lesson 7A Elements of Company Law-I 177

(a) Corporate Identity Number of the Company or Registration number of the body corporate, if any
(b) GLN, if any;
(c) the name of the body corporate
(d) the registered office address or principal place of business;
(e) E-mail Id;
(f) if the body corporate is a company, certified true copy of the board resolution specifying inter alia the
authorization to subscribe to the memorandum of association of the proposed company and to make
investment in the proposed company, the number of shares proposed to be subscribed by the body
corporate, and the name, address and designation of the person authorized to subscribe to the
Memorandum;
(g) if the body corporate is a limited liability partnership or partnership firm, certified true copy of the
resolution agreed to by all the partners specifying inter alia the authorization to subscribe to the
memorandum of association of the proposed company and to make investment in the proposed
company, the number of shares proposed to be subscribed in the body corporate, and the name of
the partner authorized to subscribe to the Memorandum;
(h) the particulars as specified above for subscribers in terms of clause (e) of sub- section (1) of section
7 for the person subscribing for body corporate;
(i) in case of foreign bodies corporate, the details relating to-
(ii) the copy of certificate of incorporation of the foreign body corporate; and
(iii) the registered office address.
However, recently MCA had issued an Integrated Incorporation Form (INC-29) for incorporation of new company.
E-Form INC-29 deals with the single application for approval of name of the company, incorporation of a new
company and/or application for allotment of DIN. This e-Form is accompanied by supporting documents including
details of Directors & subscribers, MoA and AoA etc. Once the e-Form is processed and found complete, company
would be registered and CIN would be allocated. Also DINs gets issued to the proposed Directors who do not
have a valid DIN. Maximum three Directors are allowed for using this integrated form for filing application of
allotment of DIN while incorporating a company.

(g) Particulars of first directors along with their consent to act as directors

Section 7(1)(f) of the Companies Act, 2013 requires filing of the particulars of the persons mentioned in the
articles as the first directors of the company, their names, including surnames or family names, the Director
Identification Number, residential address, nationality and such other particulars including proof of identity as
may be prescribed.
Section 7(1)(g) of the Companies Act, 2013 states that the particulars of the interests of the persons mentioned
in the articles as the first directors of the company in other firms or bodies corporate along with their consent to
act as directors of the company in such form and manner as may be prescribed.
Rule 17 of Companies (Incorporation) Rules, 2014 states that –
The particulars of each person mentioned in the articles as first director of the company and his interest in other
firms or bodies corporate along with his consent to act as director of the company shall be filed in Form No.DIR.12
along with the fee as provided in the Companies (Registration offices and fees) Rules, 2014.
As per section 152 (3), no person shall be appointed as a director of a company unless he has been allotted the
Director Identification Number under section 154. Section 152(4) provides that every person proposed to be
appointed as a director by the company in general meeting or otherwise, shall furnish his Director Identification
178 FP-BE&L

Number. By virtue of section 153, every individual intending to be appointed as director of a company shall make
an application for allotment of Director Identification Number in Form no Dir 3. Any individual who intends to be
a director of a company will have to mandatorily apply for DIN first. DIN has to be obtained by the directors of the
company before commencing the procedure for incorporation of a company.

(h) Power of Attorney

With a view to fulfilling the various formalities that are required for incorporation of a company, the promoters
may appoint an attorney empowering him to carry out the instructions/requirements stipulated by the Registrar.
This requires execution of a Power of Attorney on a non-judicial stamp paper of a value prescribed in the
respective State Stamp Laws.

Issue of Certificate of Incorporation by Registrar

Section 7(2) of the Companies Act, 2013 states that the Registrar on the basis of documents and information
filed under sub-section (1) of section 7, shall register all the documents and information referred to in that sub-
section in the register and issue a certificate of incorporation in the prescribed form to the effect that the
proposed company is incorporated under this Act.
From the date of incorporation mentioned in the certificate of incorporation, such subscribers to the memorandum
and all other persons, as may, from time to time, become members of the company, shall be a body corporate by
the name contained in the memorandum, capable of exercising all the functions of an incorporated company
under this Act and having perpetual succession with power to acquire, hold and dispose of property, both
movable and immovable, tangible and intangible, to contract and to sue and be sued, by the said name (Section
9). The subscribers would become the members of the company.

Conclusive Evidence

A Certificate of Incorporation given by the Registrar in respect of any association shall be conclusive evidence
that all the requirements of the Act have been complied with in respect of registration and matters precedent
and incidental thereto, and that the association is a company authorised to be registered and duly registered
under the Act. The Certificate of Incorporation is conclusive evidence that everything is in order as regards
registration and that the company has come into existence from the earliest moment of the day of incorporation
stated therein with rights and liabilities of a natural person, competent to enter into contracts [Jubilee Cotton
Mills Ltd. v. Lewis, (1924) (A.C. 958)]. The validity of the registration cannot be questioned after the issue of the
certificate.
In Moosa v. Ebrahim ILR (1913) 40 Cal. 1 (P.C.) the Memorandum of Association of a company was signed by
two adults and by a guardian of the other 5 subscribers, who were minors. The Registrar, however, registered
the company and issued under his hand a Certificate of Incorporation. It was contended that this Certificate of
Incorporation should be declared void. Lord Macnaughten said: “Their Lordships will assume that the conditions
of registration prescribed by the Indian Companies Act were not duly complied with; that there were no seven
subscribers to the Memorandum and that the Registrar ought not to have granted the certificate. But the certificate
is conclusive for all purpose. Thus, the certificate prevents anyone from alleging that the company does not
exist”.
It is for the purpose of incorporation only that the certificate was made conclusive by the legislature and the
certificate cannot legalise the illegal object contained in the Memorandum. Where the object of a company is
unlawful, it has been held that the certificate of registration is not conclusive for this purpose, [Performing Right
Society Ltd. v. London Theatre of Varieties (1992) 2 KB 433].
 Lesson 7A Elements of Company Law-I 179

Allotment of Corporate identity number

Section 7(3) of the Companies Act, 2013 states that on and from the date mentioned in the certificate of
incorporation issued under sub-section (2), the Registrar shall allot to the company a corporate identity number,
which shall be a distinct identity for the company and which shall also be included in the certificate.
Each Indian company (Listed or Unlisted) has a unique 21 Digit CIN (Corporate Identity Number). This is required
to be quoted on all forms. Once this number is filled, company details are automatically filled in E-Forms issued
by MCA by using pre-fill function. If we look at more closer to the company CIN No. Code, we will have 21 digits
alpha-numeric code with six parts:
1. Part-1 : First character reveals that whether the company is “Listed” in the stock market or “Unlisted”. It
refers to listing status. If Company is Listed in the stock exchange, it will start with ’L’ and if Company is
not Listed it will start with ‘U’.
2. Part-2 : Next 5 numeric digits categorize the industry of the company. MCA has their own categorization
in this regard.
3. Part-3 : Next 2 alphabets represent the state code of the registered office and which ROC has registered
the company.
4. Part-4 : Next 4 numeric digits apparently show the year of incorporation.
5. Part-5 : Next 3 alphabets reveals that what is the classification of the company. ie., public limited or
private limited or etc.
6. Part-6 : Last 6 numeric digits indicate the registration number. This registration number includes the code
of ROCs that company has been registered.

Commencement of Business

The Companies (Amendment) Act, 2015, had omitted Section 11 which deals with certificate of commencement
of business.
Hence, now every company shall commence its business immediately after the incorporation of business.

How does a company function?

A company is an association of persons, upon which law confers a personality. It is an artificial person capable
of doing many things, which a natural person can do, e.g., it can purchase and own property in its own name, it
can enter into contracts, it can sue in its own name and can be sued likewise. In spite of this capacity, it has no
physical personality of its own. It can think, express and take decisions only through others who are natural
persons and who act in the name and upon the authority of the company. They are the agents of the company,
known as its directors, who act together to take decisions for and on behalf of the company. However, to protect
the interest of shareholders the Act provides that a number of important decisions of management have to be
approved by the shareholders.
The decisions of a company are thus taken by its owners who are the shareholders, (only at their meetings and
not acting individually) or by its agents viz. the directors, at their meetings or the meetings of their committees
constituted for certain specific purposes.
A meeting may be generally defined as a gathering or assembly or coming together of two or more persons for
transacting any lawful business. There must be at least two persons to constitute a meeting. In certain exceptional
circumstances, even one person may constitute a meeting.
Company meetings: The meetings of shareholders, debenture holders, directors or creditors must be convened
and held in accordance with the various provisions of the Companies Act.
180 FP-BE&L

LESSON ROUND UP

– Company is referred to an association of persons who took their meals together. A company may be an
incorporated company or a “corporation” or an unincorporated company. It is called a body corporate
because the persons composing it are made into one body by incorporating it according to the law, and
clothing it with legal personality, and, so turn it into a corporation.
– The main characteristics of a company are as follow
• Corporate Personality
• Limited Liability
• Perpetual Succession
• Transferability of Shares
• Separate Property
• Capacity to Sue and Be Sued
– Company is a distinguished form of business as compared to other forms.
– The companies are regulated under Companies Act 2013.
– The Companies Act, 2013 provides for a variety of companies of which can be promoted and registered
under the Act. These companies may be:
• limited by shares;
• limited by guarantee; or
• unlimited companies.
• Companies may also be classified as:
(a) Private Companies;
(b) Public Companies;
(c) One Person Company
(d) Company with charitable objects, etc. under Section 8 of the Companies Act, 2013;
(e) Small Company
(f) Government companies;
(g) Foreign companies;
(h) Holding companies; and
(i) Subsidiary companies.
(j) Producer Companies.

GLOSSARY

Corporate Personality The distinct status of a business organization that has complied with law for its
recognition as a legal entity and that has an independent legal existence from that of
its officers, directors, and shareholders.
 Lesson 7A Elements of Company Law-I 181

Limited Liability Type of investment in which a partner or investor cannot lose more than the amount
invested. The investor or partner is not personally responsible for the debts and
obligations of the company in the event that these are not fulfilled.
Perpetual Succession Continuation of an incorporated firm’s existence, unaffected by the death of any of its
owners or the transfer of its shares to a new entity.
Common Seal A metal stamp for stamping the impression of a company’s official signature on
documents with the name of the company to show that they have been approved
officially.
Foreign Company Any company or body corporate incorporated outside India which -(a) has a place of
business in India whether by itself or through an agent, physically or through electronic
mode; and (b) conducts any business activity in India in any other manner
Government Any company in which not less than fifty one per cent. of the paid-up share capital is
Company held by the Central Government, or by any State Government or Governments, or
partly by the Central Government and partly by one or more State Governments, and
includes a company which is a subsidiary company of such a Government company.
One Person A company which has only one person as a member.
Company

SELF-TEST QUESTIONS

Q1. Public Corporations like LIC have been brought into existence through………
a) Companies Act, 1956
b) Companies Act, 2013
c) Special Act of Parliament
d) None of the above
Q2. Internal governance structure of LLP is regulated by …………..
a) Companies Act,2013
b) Income Tax Act,1962
c) Contractual Agreement between partners
d) Special Act of parliament
Q3.” The property of company is not the property of shareholders, it is the property of the company”
was governed by the case study ………….
a) Gramophone & Typewriter Co. v. Stanley
b) Solamon v. Solamon
c) BSN v. Janardan Mohandas Pilai
d) None of the above
Q4. A company registered under section 8 , shall not alter the provisions of its memorandum or articles
except with the previous approval of................
a) High Court
b) Supreme Court
c) District Court
182 FP-BE&L

d) Central Government
Q5. In ……….. case the court looked behind the façade of the company and its place of registration in
order to determine the true character of the company.
a) Daimler Co. Ltd. v. Continental Tyre & Rubber Co.
b) BSN v. Janardan Mohandas Pilai
c) Saloman v. Saloman
d) None of the above
Q6. As regards to ratification of promoter’s contracts the view taken in the case of ...........was that the
company can not ratify the contract made by promoter before its incorporation.
a) BSN v. Janardan Mohandas Pilai
b) Commissioner of Income Tax v. Meenakshi Mills Ltd.
c) Kelner v. Baxter LR
d) Connors Bros. v. Connors
Q7. Who among them can not become member of One Person Company.
a) Minor
b) Non Resident Indian
c) Both ‘a’ & ‘b’
d) None of the above
Q8. ……….. is a new form of Private Company under the Companies Act, 2013
a) Holding company
b) Small company
c) Body corporate
d) None of the above
Q9. Every company Public or Private has to be registered with ……….
a) Central Government
b) Registrar of Companies
c) RBI
d) None of the above
Q10.A certificate of Incorporation given by the registrar in respect of any association shall be …………..
evidence.
a) Conclusive
b) Persuasive
c) Mandatory
d) None of the above

Answer Key : 1. (c), 2. (c), 3. (a), 4. (d), 5. (a), 6. (c), 7. (c), 8. (b), 9. (b), 10. (a)

Suggested Reading
(i) Company Law Mannual – Taxmann
Lesson 7A Elements of Company Law-I 183
184 FP-BE&L
 Lesson 7B Elements of Company Law-II 185

Lesson 7
Elements of Company Law-II
Section B

LESSON OUTLINE
LEARNING OBJECTIVES
– Introduction
Company has separate legal entity. Its perpetual
– Board of Directors
succession leads it to longer life. The companies
– Minimum/Maximum Number of Directors
acts as artificial person and activities of the
– Number of directorships company are carried out by the persons. The
– Woman Director persons are called as director and key
– Independent Directors managerial personnel who holds the power to
– Director elected by Small Shareholders act on behalf of company. The companies work
– Appointment of directors according to the set pattern of process and the
– Duties of directors process is called meetings. The officers of the
company are responsible for its day to day
– Power of Board
functioning. Company secretary is one of the
– Meetings of the Board
said officers; who is responsible for the legal
– Notice of Board Meetings
compliance of the company. He is the bridge
– Quorum for Board Meetings between Board and shareholders.
– Key Managerial Personnel
– Managing Director The objective of this section is to articulate about
the board processes and providing information
– Whole Time Director
about the officer of the company mainly the
– Manager
directors, key managerial personnel and the
– Chief Executive Officer
company secretary. The appointment, removal,
– Chief Financial Officer qualification, etc., are important aspects of
– Company Secretary persons involved in operations of a company.
– Appointment of Key Managerial Personnel Therefore, it is significant to throw light on these
– Appointment of W hole-Time Company aspects in the backdrop of who are the persons
Secretary and what process is used in laws for their
– Functions of Company Secretary processes.
– Role of Secretary in a Company
– Members’ Meetings
– Annual General Meeting
– Extra Ordinary General Meeting
– Notice of Meeting
– Contents of Notice
– Notice through Electronic Mode
– E-Governance
– E-Governance and MCA-21

There is a veil of corporate personality which protects the individual from any personal liability at
all. That is the fundamental principle of our Company Law. - Lord Denning
186 FP-BE&L

INTRODUCTION

A company, though a legal entity in the eyes of law, is an artificial person, existing only in contemplation of law.
It has no physical existence. It has neither soul nor body of its own. As such, it cannot act in its own person. It can
do so only through some human agency. The persons who are in charge of the management of the affairs of a
company are termed as directors. They are collectively known as Board of Directors or the Board. The directors
are the brain of a company. They occupy a pivotal position in the structure of the company.
The supreme executive authority controlling the management and affairs of a company vests in the team of
directors of the company, collectively known as its Board of Directors. At the core of the corporate governance
practice is the Board of Directors which oversees how the management serves and protects the long term
interests of all the stakeholders of the Company. The institution of board of directors was based on the premise
that a group of trustworthy and respectable people should look after the interests of the large number of
shareholders who are not directly involved in the management of the company. The position of board of directors
is that of trust as the board is entrusted with the responsibility to act in the best interests of the company.
Although the Board comprises individual directors, yet the actions and deeds of directors individually functioning
cannot bind the company, unless a particular director has been specifically authorised by a Board resolution to
discharge certain responsibilities on behalf of the company.
Section 2 (34) of the Companies Act, 2013 prescribed that “director” means a director appointed to the Board of
a company. A director is a person appointed to perform the duties and functions of director of a company in
accordance with the provisions of the Companies Act, 2013.

Board of Directors

A company, though a legal entity in the eyes of law, is an artificial person, existing only in contemplation of law.
It has no physical existence. It has neither soul nor body of its own. As such, it cannot act in its own person. It can
do so only through some human agency. The persons who are in charge of the management of the affairs of a
company are termed as directors. They are collectively known as Board of Directors or the Board. The directors
are the brain of a company. They occupy a pivotal position in the structure of the company. Directors take the
decision regarding the management of a company collectively in their meetings known as Board Meetings or at
the meetings of their committees constituted for certain specific purposes.
Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in relation to a company,
means the collective body of the directors of the company.

Minimum/Maximum Number of Directors

Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum number of 3
directors in the case of a public company, two directors in the case of a private company, and one director in the
case of a One Person Company. A company can appoint maximum 15 fifteen directors. A company may appoint
more than fifteen directors after passing a special resolution in general meeting and approval of Central
Government is not required.

Number of directorships

As per Section 165 of the Companies Act, 2013, maximum number of directorships, including any alternate
directorship a person can hold is 20. It has come with a rider that number of directorships in public companies/
private companies that are either holding or subsidiary company of a public company shall be limited to 10.
Further the members of a company may restrict abovementioned limit by passing a special resolution.
 Lesson 7B Elements of Company Law-II 187

Residence of a director in India

Section 149 (3) of the Companies Act, 2013 has provided for residence of a director in India as a compulsory i.e.
every company shall have at least one director who has stayed in India for a total period of not less than 182
days in the previous calendar year.

Woman Director

Every listed company shall appoint at least one woman director and Every other public company having paid up
share capital of Rs. 100 crores or more or turnover of Rs. 300 crore or more as on the last date of latest audited
financial statements, shall also appoint at least one woman director under Section 149(1) of the Companies Act,
2013.

Independent Directors

Section 2(47) of the Companies Act, 2013 prescribed that “Independent director” means an independent director
referred to in sub section (5) of section 149 of the Act. In fact reference should have been made to sub section
(6) of 149 as it specified the qualifications of independent director with clarity.
An independent director means a director other than a managing director or a whole-time director or a nominee
director who does not have any material or pecuniary relationship with the company/ directors. Section 149(6) of
the Act prescribes the criteria for independent directors which are as follows:
(a) Who in the opinion of the Board, is a person of integrity and possesses relevant industrial expertise and
experience;
(b) Such individual shall not be a promoter or related to promoter of the company or its holding, subsidiary or
associate company;
(c) Such individuals must not have any material or pecuniary relationship during the two immediately preceding
financial years or during the current financial year with the company or its promoters/directors/holding/
subsidiary/ associate company;
(d) The relatives of such person should not have had any pecuniary relationship with the company or its
subsidiaries, amounting to 2% or more of its gross turnover or total income or Rs. 50 lacs or such higher
amount as may be prescribed, whichever is less, during the two immediately preceding financial years or
in the current financial year;
(e) He must not either directly or any of his relatives :
(i) hold or has held the position of a key managerial personnel or is or has been employee of the
company or its holding, subsidiary or associate company in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed.
(ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately
preceding the financial year in which he is proposed to be appointed, of –
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its holding,
subsidiary or associate company amounting to ten per cent or more of the gross turnover of
such firm;
(iii) holds together with his relatives two per cent or more of the total voting power of the company; or
(iv) is a Chief Executive or director, by whatever name called, of any non-profit organisation that receives
188 FP-BE&L

25% or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary
or associate company or that holds 2% or more of the total voting power of the company, then also he
is not eligible for office of independent director; or
(f) who possesses such other qualifications as prescribed in Rule 5 of the Companies(Appointment and
Qualification of Directors) Rules, 2014 as an independent director shall possess appropriate skills,
experience and knowledge in one or more fields of finance, law, management, sales, marketing,
administration, research, corporate governance, technical operations or other disciplines related to the
company’s business.
Every listed public company shall have at least one-third of the total number of directors as independent directors
(fraction is to be rounded off to one). Central Government has prescribed that public companies with paid up
share capital of Rs. 10 crore or more; or turnover of Rs. 100 crore or more; or in aggregate, outstanding loans/
borrowings/ debentures/ deposits/ exceeding Rs. 50 crore or more as on the last date of latest audited financial
statements shall also have at least 2 directors as independent directors.
Further if there is any intermittent vacancy of an independent director then it shall be filled up by the board of
directors within 3 months from the date of such vacancy or not later than immediate next board meeting, whichever
is later.

Director elected by Small Shareholders

According to section 151 of the Companies Act, 2013 every listed company may have one director elected by
such small shareholders. For the purpose of this section, “small shareholder” means a shareholder holding
shares of nominal value of not more than twenty thousand rupees or such other sum as may be prescribed.

Appointment of directors

First Director
The first directors of most of the companies are named in their articles. If they are not so named in the articles of
a company, then subscribers to the memorandum who are individuals shall be deemed to be the first directors
of the company until the directors are duly appointed.
In the case of a One Person Company, an individual being a member shall be deemed to be its first director until
the director(s) are duly appointed by the member in accordance with the provisions of Section 152 of the
Companies Act, 2013.
General provisions relating to appointment of directors
1. Except as provided in the Act, every director shall be appointed by the company in general meeting.
2. Director Identification Number is compulsory for appointment of director of a company.
3. Every person proposed to be appointed as a director shall furnish his Director Identification Number and a
declaration that he is not disqualified to become a director under the Act.
4. A person appointed as a director shall on or before the appointment give his consent to hold the office of
director.
5. Articles of the Company may provide the provisions relating to retirement of all the directors. If there is no
provision in the article, then not less than two-thirds of the total number of directors of a public company shall be
persons whose period of office is liable to determination by retirement by rotation and eligible to be reappointed
at annual general meeting.
At the annual general meeting of a public company one-third of such of the directors for the time being as are
liable to retire by rotation, or if their number is neither three nor a multiple of three, then, the number nearest to
 Lesson 7B Elements of Company Law-II 189

one-third, shall retire from office. The directors to retire by rotation at every annual general meeting shall be
those who have been longest in office since their last appointment.
At the annual general meeting at which a director retires as aforesaid, the company may fill up the vacancy by
appointing the retiring director or some other person thereto. If the vacancy of the retiring director is not so filled-
up and the meeting has not expressly resolved not to fill the vacancy, the meeting shall stand adjourned till the
same day in the next week, at the same time and place, or if that day is a national holiday, till the next succeeding
day which is not a holiday, at the same time and place.
If at the adjourned meeting also, the vacancy of the retiring director is not filled up and that meeting also has not
expressly resolved not to fill the vacancy, the retiring director shall be deemed to have been re-appointed at the
adjourned meeting, unless –
(i) a resolution for the re-appointment of such director has been put to the meeting and lost;
(ii) the retiring director has expressed his unwillingness to be so re-appointed;
(iii) he is not qualified or is disqualified for appointment;
(iv) a resolution, whether special or ordinary, is required for his appointment or re-appointment by virtue of
any provisions of this Act; or
(v) appointment of directors to be voted individually is applicable to the case.

Duties of directors

As per Section 166 of the Companies Act, 2013, a director of a company shall:
– Act in accordance with the articles of the company.
– Act in good faith in order to promote the objects of the company for the benefit of its members as a whole,
and in the best interests of the company, its employees, the shareholders, the community and for the
protection of environment.
– Exercise his duties with due and reasonable care, skill and diligence and shall exercise independent
judgment.
– Not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may
conflict, with the interest of the company.
– Not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives,
partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to
pay an amount equal to that gain to the company.
– Not assign his office and any assignment so made shall be void.
If a director of the company contravenes the provisions of this section such director shall be punishable with fine
which shall not be less than Rs. 1,00,000 but which may extend to Rs. 5,00,000.

Power of Board

Section 179 of the Companies Act, 2013 deals with the powers of the board; all powers to do such acts and
things for which the company is authorised is vested with board of directors. But the board can act or do the
things for which powers are vested with them and not with general meeting.
The following powers of the Board of directors shall be exercised only by means of resolutions passed at
meetings of the Board, namely :-
(1) to make calls on shareholders in respect of money unpaid on their shares;
190 FP-BE&L

(2) to authorise buy-back of securities under section 68;

(3) to issue securities, including debentures, whether in or outside India;
(4) to borrow monies;
(5) to invest the funds of the company;
(6) to grant loans or give guarantee or provide security in respect of loans;
(7) to approve financial statement and the Board’s report;
(8) to diversify the business of the company;
(9) to approve amalgamation, merger or reconstruction;
(10) to take over a company or acquire a controlling or substantial stake in another company;
(11) to make political contributions;
(12) to appoint or remove key managerial personnel (KMP);
(13) to appoint internal auditors and secretarial auditor;

Meetings of the Board

The way we run board meetings says much about how we run the company. Successful companies use board
meetings to create and improve key business strategies.
The board of directors of a company is primarily an oversight board. It oversees the management of the company
to ensure that the interest of non-controlling shareholders is protected. It also functions as advisory board.
Independent directors bring diverse knowledge and expertise in the board room and the CEO uses the knowledge
pool in addressing issues being faced by the company. The most important function of a monitoring board is to
provide direction to the company. Another very important function of a monitoring board is to set the ‘tone at the
top’. It is expected to create the right culture within the company.
Section 173 of the Companies Act, 2013 deals with Meetings of the Board and it provides that the first Board
meeting should be held within thirty days of the date of incorporation. In addition to the first meeting to be held
within thirty days of the date of incorporation, there shall be minimum of four Board meetings every year and not
more than one hundred and twenty days shall intervene between two consecutive Board meetings.
In case of One Person Company (OPC), small company and dormant company, at least one Board meeting
should be conducted in each half of the calendar year and the gap between two meetings should not be less
than Ninety days. Directors may participate in the meeting either in person or through video conferencing or
other audio visual means.
As per the Companies Act 2013, the company has to file the resolutions of the board meetings of certain
specified agenda to RoC in e-form MGT-14.

Notice of Board Meetings

The Companies Act, 2013 requires that not less than seven days notice in writing shall be given to every director
at the registered address as available with the company. The notice can be given by hand delivery or by post or
by electronic means.
In case the Board meeting is called at shorter notice, at least one independent director shall be present at the
meeting. If he is not present, then decision of the meeting shall be circulated to all directors and it shall be final
only after ratification of decision by at least one Independent Director.
 Lesson 7B Elements of Company Law-II 191

As per SS- 1 “Secretarial Standard on Meetings of the Board of Directors” issued by The Institute of Company
Secretaries of India which has to be mandatorily followed by the companies, requires that not less than seven
days’ notice in writing, unless the Articles prescribe a longer period, shall be given to every director at the
registered address as available with the company. The notice can be given by hand delivery or by post or by
electronic means. The notice of board meeting shall specify the serial number, day, date, time and full address
of the venue of the Meeting.
In case the Board meeting is called at shorter notice, at least one Independent Director, if any, shall be present
at such Meeting. If no Independent Director is present, decisions taken at such a Meeting shall be circulated to
all the Directors and shall be final only on ratification thereof by at least one Independent Director, if any. In case
the company does not have an Independent Director, the decisions shall be final only on ratification thereof by
a majority of the Directors of the company, unless such decisions were approved at the Meeting itself by a
majority of Directors of the company.

Quorum for Board Meetings

One third of total strength or two directors, whichever is higher, shall be the quorum for a meeting. If due to
resignations or removal of director(s), the number of directors of the company is reduced below the quorum as
fixed by the Articles of Association of the company, then, the continuing Directors may act for the purpose of
increasing the number of Directors to that required for the quorum or for summoning a general meeting of the
Company.
One third of total strength or two directors, whichever is higher, shall be the quorum for a meeting. Quorum shall
be present not only at the time of commencement of the Meeting but also while transacting business.
If due to resignations or removal of director(s), the number of Directors is reduced below the minimum fixed by
the Articles, no business shall be transacted unless the number is first made up by the remaining Director(s) or
through a general meeting.
If at any time the number of interested directors exceeds or is equal to two-thirds of the total strength of the
Board of directors, the number of directors who are not interested and present at the meeting, being not less
than two shall be the quorum during such time.
The meeting shall be adjourned due to want of quorum, unless the articles provide shall be held to the same day
at the same time and place in the next week or if the day is National Holiday, the next working day at the same
time and place.

Key Managerial Personnel

The executive management of a company is responsible for the day to day management of a company. The
companies Act, 2013 has used the term key management personnel to define the executive management. The
key management personnel are the point of first contact between the company and its stakeholders. While the
Board of Directors are responsible for providing the oversight, it is the key management personnel who are
responsible for not just laying down the strategies as well as its implementation. Chapter XIII of the Companies
Act, 2013 read with Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014 deal
with the legal and procedural aspects of appointment of Key Managerial Personnel including Managing Director,
Whole-time Director or Manager, managerial remuneration, secretarial audit etc.
The Companies Act, 2013 has for the first time recognized the concept of Key Managerial Personnel. As per
section 2(51) of the Companies Act, 2013 “key managerial personnel”, in relation to a company, means –
(i) the Chief Executive Officer or the managing director or the manager;
(ii) the Company Secretary;
192 FP-BE&L

(iii) the whole-time director;

(iv) the Chief Financial Officer; and
(v) such other officer as may be prescribed.

Managing Director

Section 2(54) of the Companies Act, 2013, defines ‘managing director’. It stipulates that a “managing director”
means a director who, by virtue of the articles of a company or an agreement with the company or a resolution
passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management
of the affairs of the company and includes a director occupying the position of managing director, by whatever
name called.
The explanation to section 2(54) excludes administrative acts of a routine nature when so authorised by the
Board such as the power to affix the common seal of the company to any document or to draw and endorse
any cheque on the account of the company in any bank or to draw and endorse any negotiable instrument or
to sign any certificate of share or to direct registration of transfer of any share, from the substantial powers of
management.

Whole Time Director

Section 2 (94) of the Companies Act, 2013 defines “whole-time director” as a director in the whole-time employment
of the company.

Manager

Section 2(53) of the Companies Act, 2013 defines “manager” as an individual who, subject to the superintendence,
control and direction of the Board of Directors, has the management of the whole, or substantially the whole, of
the affairs of a company, and includes a director or any other person occupying the position of a manager, by
whatever name called, whether under a contract of service or not.

Chief Executive Officer

Section 2(18) of the Companies Act, 2013 defined “Chief Executive Officer” means an officer of a company, who
has been designated as such by it.

Chief Financial Officer

Section 2(19) of the Companies Act, 2013 defined “Chief Financial Officer” means a person appointed as
Chief Financial Officer of a company.

Company Secretary

Section 2(24) of the Companies Act, 2013 defines “company secretary” or “secretary” means a company secretary
as defined in clause (c) of sub-section (1) of section 2 of the Company Secretaries Act, 1980 who is appointed
by a company to perform the functions of a company secretary under this Act;

Appointment of Key Managerial Personnel

Section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and Remuneration of
Managerial Personnel) Rules 2014 mandates the appointment of Key Managerial Personnel and makes it
obligatory for a listed company and every other public company having a paid up share capital of rupees ten
crores or more, to appoint following whole-time key managerial personnel:
 Lesson 7B Elements of Company Law-II 193

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;
(ii) company secretary; and
(iii) Chief Financial Officer:
Every whole-time key managerial personnel of a company shall be appointed by means of a resolution of the
Board containing the terms and conditions of the appointment including the remuneration. An individual shall not
be appointed or reappointed as the chairperson of the company, as well as the managing director or Chief
Executive Officer of the company at the same time unless the articles of such a company provide otherwise; or
the company does not carry multiple businesses. However, such class of companies engaged in multiple
businesses and which has appointed one or more Chief Executive Officers for each such business as may be
notified by the Central Government are exempted from the above.
A whole-time key managerial personnel shall not hold office in more than one company except in its subsidiary
company at the same time. However, he can hold such other directorship with the permission of the Board.
A whole-time key managerial personnel holding office in more than one company at the same time, shall, within
a period of six months from such commencement, choose one company, in which he wishes to continue to hold
the office of key managerial personnel.
A company may appoint or employ a person as its managing director, if he is the managing director or manager
of one, and of not more than one, other company and such appointment or employment is made or approved by
a resolution passed at a meeting of the Board with the consent of all the directors present at the meeting and of
which meeting, and of the resolution to be moved thereat, specific notice has been given to all the directors then
in India.
If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by
the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Appointment of Whole-Time Company Secretary

As per Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 provides
that a company which has a paid up capital of Five crore rupees or more shall have a whole-time company
secretary.

Functions of Company Secretary

According to Section 205 of the Companies Act, 2013 the functions of the company secretary shall include,—
(a) to report to the Board about compliance with the provisions of this Act, the rules made thereunder and
other laws applicable to the company;
(b) to ensure that the company complies with the applicable secretarial standards;
(c) to discharge such other duties as may be prescribed.
Explanation. – For the purpose of this section, the expression “secretarial standards” means secretarial standards
issued by the Institute of Company Secretaries of India constituted under section 3 of the Company Secretaries
Act, 1980 and approved by the Central Government.
For the purposes of clause (c) of sub-section (1) of section 205, the Central Government has prescribed that the
duties of Company Secretary shall also include –
(1) to provide to the directors of the company, collectively and individually, such guidance as they may
require, with regard to their duties, responsibilities and powers;
194 FP-BE&L

(2) to facilitate the convening of meetings and attend Board, committee and general meetings, and maintain
the minutes of these meetings;
(3) to obtain approvals from the Board, general meetings, the Government and such other authorities as
required under the provisions of the Act;
(4) to represent before various regulators, Tribunal and other authorities under the Act in connection with
discharge of various functions under the Act;
(5) to assist the Board in the conduct of the affairs of the company;
(6) to assist and advise the Board in ensuring good corporate governance and in complying with the corporate
governance requirements and best practices; and
(7) to discharge such other duties as may be assigned by the Board from time to time;
(8) such other duties as have been prescribed under the Act and Rules.
Section 205(2) of the Companies Act, 2013 provides that provisions contained in section 204 and section 205
shall not affect the duties and functions of the Board of Directors, chairperson of the company, managing director
or wholetime director under this Act, or any other law for the time being in force.

E-voting and Role of CS

As per Rule 20 of the Companies (Management and Administration) Amendment Rules, 2014, every company
which has listed its equity shares on a recognised stock exchange and every company having not less than one
thousand members shall provide to its members facility to exercise their right to vote on resolutions proposed to
be considered at a general meeting by electronic means:
– during the e-voting period, shareholders holding shares either in physical form or in dematerialized form,
as on the record date, may cast their vote electronically;
– once the vote on a resolution is cast by the shareholder, he shall not be allowed to change it subsequently;
– the Board of directors to appoint one scrutinizer, who may be chartered Accountant in practice, Cost
Accountant in practice, or Company Secretary in practice or an advocate, but not in employment of the
company and is a person of repute who, in the opinion of the Board can scrutinize the e-voting process in
a fair and transparent manner;
– the scrutinizer to maintain a register either manually or electronically to record the assent or dissent,
received and other details as provided under the rules;
– Manner in which the Chairman of meeting shall get the poll process scrutinised and report thereon is
provided under the rules.

Authorities under the Companies Act, 2013

– Registrar of Company
– Official liquidator
– Regional Director
– National Company Law Tribunal (NCLT)
– National Company Law Appellate Tribunal (NCLAT)
 Lesson 7B Elements of Company Law-II 195

Role of Secretary in a Company

Generally speaking, the role of a secretary is threefold, viz., as a statutory officer/Key Managerial Personnel, as
a co-ordinator and as an administrative officer. Similarly, the responsibility of a company secretary extends not
only to the company, but also to its shareholders, depositors, creditors, employees, consumers, society and the
Government.
Thus a company secretary plays a vital role in company administration. His role can conveniently be studied
from three different angles:
(a) as a statutory officer/key managerial personnel ;
(b) as a coordinator;
(c) as an administrative officer.
(a) Statutory Officer/Key Managerial Personnel
According to Section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and
Remuneration of Managerial Personnel) Rules 2014 mandates the appointment of Key Managerial Personnel
and makes it obligatory for a listed company and every other public company having a paid up share capital of
rupees ten crores or more, to appoint following whole-time key managerial personnel:
(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;
(ii) company secretary; and
(iii) Chief Financial Officer:
As per Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules 2014 provides
that a company which has a paid up capital of Five crore rupees or more shall have a whole-time company
secretary.
Under the Indian Stamp Act, it is the duty of a Secretary to see that the documents such as letter of allotment,
share certificate, debentures, mortgages are issued duly stamped. He is the principal officer under Section
2(35) of the Income-tax Act, 1961.
Thus, the responsibility of a secretary as a statutory officer has been expanded by the enactment of various
economic legislations, like Industries (Development and Regulation) Act; Foreign Exchange Management Act
and Competition Act etc. Accordingly, the numerous provisions which the company is obliged to comply with
makes the Secretary’s job onerous and difficult. The duties imposed upon a secretary by various statutes clearly
indicates the important place that he occupies in corporate administrative hierarchy.
(b) Co-ordinator
The Company Secretary as a co-ordinator has an important role to play in the administration of a company’s
business and affairs. It is for the secretary to ensure effective execution and implementation of the management
policies laid out by the Board. The position that the Company Secretary occupies in the administrative set up of
the Company makes his function as one of co-ordinator and link between the top management and other levels.
He is not only the communicating channel between the Board and the executives but he also co-ordinates the
actions of other executives vis-a-vis the Board. The ambit of his role as a co-ordinator also extends beyond the
company and he is the link between the company, its shareholders, society and the Government. Thus, the role
of a company secretary as a co-ordinator has two aspects, namely internal and external. The internal role of a
co-ordinator extends to the Board including the Chairman and Managing Director, various line and staff functions,
the trade unions and the auditors of the company. His role as an external co-ordinator extends to the relationship
of the company with shareholders, Government and Society.
196 FP-BE&L

Where, the company has a Managing Director, he must seek his guidance and instructions regarding
implementation of the policies laid down by the Board and also on matters arising out of the implementation of
the decisions. He is also required to keep the chairman and the managing director apprised of changes made in
the Government Policies/Acts, obligations under various statues and to give balanced advice on matters which
have legal ramifications.
Relationship with other Functionaries
We have seen that the Secretary is responsible for conveying the Board’s decisions on various aspects of the
company’s policies to the persons incharge of such functions. He is, in addition, responsible to ensure that the
returns and reports received from various operational executives are submitted in time complete in all respects,
and do not conflict with the corporate objectives.
Even where different persons are in-charge of other functions, e.g., sales, personnel, etc., it is usually the
Secretary who normally communicates with outside agencies, particularly with government and semi-government
bodies to ensure that the information given to various agencies do not conflict with each other and are in
accordance with the statutory requirements and corporate objectives of the organisation.
Trade Union
Where the Secretary is responsible either directly or through his assistants for industrial relations, he must be
very careful with trade union officials whether they belong to recognised unions or not. He must ensure that
proper notes are kept of the discussions and negotiations and all decisions arrived at during such negotiations.
Whenever long term settlement with recognised unions is finalised he should see that the agreement embodying
these settlements are in accordance with the relevant statutes applicable. It is the responsibility of the Secretary
to ensure compliance with the provisions of various labour legislations such as Industrial Disputes Act, 1947,
Employees’ Provident Funds and Miscellaneous Provisions Act, 1952, Payment of Bonus Act, 1965, Payment of
Gratuity Act, 1972, Payment of Wages Act, 1936, etc. Whilst he must ensure that the employees guilty of
misconduct are charge-sheeted and punished but before doing so all formalities, e.g., holding of enquiries, etc.,
must be scrupulously followed. He should see that industrial labour relations are always cordial and he should
ensure that various creative activities of the employees are encouraged wherever possible by grants and subsidies
from the company.
Shareholders
The relationship with the shareholders is an important sphere of his co-ordinating role and, therefore, the Secretary
will have to maintain proper relationship with the shareholders of the company. He should ensure that there is no
delay in the inspection of books and registers required by a shareholder provided all formalities are complied
with. He must ensure that extracts of registers demanded by shareholders are furnished to them within the
statutory periods.
However, the most important thing for a Secretary is to ensure that all correspondence from shareholders is
dealt with promptly, and their queries are answered as far as possible keeping the statutory provisions in mind.
As part of public relations he should be able to attend to the shareholders who personally come for information,
to furnish documents or details or any other matter as the image of the company will, to a great extent, depend
on the relationship of the Secretary with the shareholders.
Government
All information and correspondence with the Government are normally coordinated or routed through the Secretary
to ensure uniform reporting. The Secretary has a very important role vis-a-vis the Government. He should
endeavour to have information on Government policies and programmes in advance wherever possible to
ensure effective implementation. Good relationship with the Government can be developed where the company
sincerely tried to implement various statues both in law and spirit.
 Lesson 7B Elements of Company Law-II 197

Community
In recent years the responsibility of a company towards society has become very important since the company
has to function within the parameters of the environment of the country. With this in view, a number of companies
have undertaken rural development including adoption of villages and have built schools, colleges and hospitals
to cater to the needs of society. In respect of companies in consumer goods industry, it is necessary to project
that the products and their prices are in consonance with the standards expected by the consumers. Arising out
of such social responsibility many companies have also allowed small sectors to manufacture ancillaries and
raw materials required by the organisation for promotion of employment opportunities.
(c) Administrative Officer
The principal duty of a secretary as an administrator is to ensure that the activities of a company are in conformity
with the company’s policy. In his role as an administrator, the secretary provides the very foundation on which
the entire structure of company administration is constructed. The role of company secretary can be subdivided
into organisational, financial, office and personnel administration.
Organisational Administration
Since the secretary has an opportunity of looking at the entire organisation with some amount of detachment, he
has the scope to advise the top management including the Board of directors on the need to develop a good
structure. Since the secretary collects, interprets and assimilates information relating to all aspects of business
to aid and assist the board in carrying out its function, he therefore, gets an opportunity to know the strengths
and the weaknesses of the functional executives.
In his role as administrator, he has to make a detailed analysis of various activities, decision-making machinery,
inter-relations of departments and functions. He has, therefore, to ensure that the organisational structure must
always be kept under constant study. The making of such examination and study and the consequent advice
and recommendation for making changes is a task which the company secretary has to perform.
Financial Administration
Since various monthly and periodical operating reports and financial statements are routed for consideration of
the board through the secretary, he should analytically study these statements. Thus as a secretary to the
Board, the Company Secretary has in consultation with the Chief Finance Officer to devise suitable and proper
systems of accounting procedure, internal control and internal audit with a view to safeguard the company’s
funds. The Company Secretary should have a good knowledge of budgetary control and procedures, accounts
and other related matters. He is also expected to be proficient in dealing with matters connected with taxation.
The Company Secretary is generally assisted by Chief Finance Officer in the discharge of his functions relating
to financial administration. In many companies, the Secretary is also the Chief Finance Officer. He has to negotiate
with banks and financial institutions the terms of finance both for working capital requirements and capital
expenditure.
Office Administration
In all big companies, the office administration is carried on by an officer called the Office Manager who generally
reports to the Company Secretary. It is the duty of the Secretary to ensure that different departments of the office
are properly staffed, organised, co-ordinated and supervised. He has to review from time to time, the various
procedures and systems with a view to making the administration effective. In the discharge of these functions,
he is normally assisted by organisation methods section of the organisation. He is also responsible in most
organisations for office services including transport. The image of a company depends on the design and office
layout from the reception to the records. The Secretary has not only to ensure that these services are maintained
and increased but also to ensure that the cost of such services is reviewed from time to time.
198 FP-BE&L

Personnel Administration
Personnel Administration includes recruitment, training, payment, promotion, retirement, discharge and dismissal
of staff. This is a very important and at the same time a difficult task to administer. Whilst in big organisations
there may be a separate personnel manager or officer, in smaller companies the Secretary may be called upon
to advise and assist the directors on principles and legal points involved in this area of administration.
Administration - Company’s Properties
The Secretary has an important role to play in safeguarding the company’s interest in property matters, ensure
all properties are properly maintained and insured and keep a suitable register for each property containing
relevant information. He should have a good knowledge of relevant rules and by-laws applicable to property. He
should also ensure that registration of trade marks, patents, licences is done from time to time and legal action
is taken in respect of infringement of such industrial rights.
Corporate Records
The secretary is required to maintain certain records in addition to those under the Companies Act. The volume,
the method and the procedure will vary with the size and nature of the company. The secretary has also to ensure
that the statutory time limits relating to directors and shareholders meetings, payment of dividend and interest,
filing of returns under the Companies Act, 2013, Income-tax Act, etc., are adhered to and formalities under stock
exchange regulations are compiled with. He must also ensure timely renewal of contracts and leases.
Personnel and Property
The secretary has to ensure that adequate system of security of personnel based on technical advice are
available in the factory and office. He is also responsible for devising and maintenance of systems to safeguard
the valuable company records, or information against loss, theft, fire, etc. He is to review from time to time to
ensure that the properties of the company are adequately insured. The company secretary should have good
knowledge of insurance law and practice.
Whilst the above discussion only gives a brief outline, the duties and responsibilities of the company secretary
are subject to continuous change and has, therefore, to be reviewed from time to time to ensure that he effectively
contributes in respect of the above matters. He should, therefore, keep himself abreast of legal changes and
practice.

Members’ Meetings

A company is composed of members, though it has its own entity distinct from members. The members of a
company are the persons who, for the time being, constitute the company, as a corporate entity. However, a
company, being an artificial person, cannot act on its own. It, therefore, expresses its will or takes its decisions
through resolutions passed at validly held Meetings. The primary purpose of a Meeting is to ensure that a
company gives reasonable and fair opportunity to those entitled to participate in the Meeting to take decisions as
per the prescribed procedures.
The decision making powers of a company are vested in the Members and the Directors and they exercise their
respective powers through Resolutions passed by them. General Meetings of the Members provide a platform
to express their will in regard to the management of the affairs of the company.
Convening of one such meeting every year is compulsory. Holding of more general meetings is left to the choice
of the management or to a given percentage of shareholders to exercise their power to compel the company to
convene a meeting. Shareholder Democracy, Class Action Suits and Protection of interest of investors are the
essence and attributes of the Companies Act, 2013.
 Lesson 7B Elements of Company Law-II 199

A company is required to hold meetings of the members to take approval of certain business items, as prescribed
in the Act. The meetings to be held for seeking approval to ordinary business and special business are called
annual general meeting and extraordinary general meeting. In certain cases, a company may have to hold a
meeting of the members of a particular class of members.
Members’ Meetings are:
– Annual General Meeting
– Extraordinary General Meeting
– Class Meeting
The company shall mandatorily follow SS-1 “SECRETARIAL STANDARD ON GENERAL MEETINGS” issued
by The Institute of Company Secretaries of India regarding the procedure of general meetings.

Annual General Meeting

Annual general meeting (AGM) is an important annual event where members get an opportunity to discuss the
activities of the company. Section 96 of the Companies Act, 2013 provides that every company, other than a one
person company is required to hold an annual general meeting every year.
Following are the key provisions regarding the holding of an annual general meeting:
Holding of annual general meeting
1. Annual general meeting should be held once every year.
2. First annual general meeting of the company should be held within 9 months from the closing of the first
financial year. Hence it shall not be necessary for the company to hold any annual general meeting in the
year of its incorporation.
3. Subsequent annual general meeting of the company should be held within 6 months from the closing of
the financial year.
4. The gap between two annual general meetings should not exceed 15 months.
Extension of validity period of AGM
In case, it is not possible for a company to hold an annual general meeting within the prescribed time, the
Registrar may, for any special reason, extend the time within which any annual general meeting shall be held.
Such extension can be for a period not exceeding 3 months. No such extension of time can be granted by the
Registrar for the holding of the first annual general meeting,
Time and place for holding an annual general meeting
An annual general meeting can be called during business hours, that is, between 9 a.m. and 6 p.m. on any day
that is not a National Holiday. It should be held either at the registered office of the company or at some other
place within the city, town or village in which the registered office of the company is situate. The Central Government
is empowered to exempt any company from these provisions, subject to such conditions as it may impose.
“National Holiday” for this purpose means and includes a day declared as National Holiday by the Central
Government.
Default in holding the annual general meeting
Section 99 of the Companies Act, 2013 provides that if any default is made in complying or holding a meeting of
the company, the company and every officer of the company who is in default shall be punishable with fine which
may extend to Rs. 1 lakh and in case of continuing default, with a further fine which may extend to Rs. 5,000/- for
each day during which such default continues. If any default is made in holding the annual general meeting of a
200 FP-BE&L

company, any member of the company may make an application to the Tribunal to call or direct the calling of, an
annual general meeting of the company and give such ancillary or consequential directions as the Tribunal
thinks expedient. Such directions may include a direction that one member of the company present in person or
by proxy shall be deemed to constitute a meeting.
Business to be transacted at annual general meeting:
Sub-section (2) of Section 102 of the Companies Act, 2013 provides that all other businesses transacted at an
Annual General Meeting except the following are special business:
(i) the consideration of financial statements and the reports of the Board of Directors and auditors;
(ii) the declaration of any dividend;
(iii) the appointment of directors in place of those retiring;
(iv) the appointment of, and the fixing of the remuneration of, the auditors.

Extra Ordinary General Meeting

All general meetings other than annual general meetings are called extraordinary general meetings. Extraordinary
General Meetings shall called by:
– By Board
– By Board on requisition of shareholders
– By requisitionists
– By Tribunal
All businesses items can be transacted at the extraordinary general meetings are special business. Following
are the key provisions, provided in section 100, regarding calling and holding of an extraordinary general meeting:
(I) By Board
The Board may, whenever it deems fit, call an extraordinary general meeting of the company.
(II) By Board on requisition of shareholders
The Board must call an extraordinary general meeting on receipt of the requisition from the following number of
members:
(a) in the case of a company having a share capital: members who hold, on the date of the receipt of the
requisition, not less than one-tenth of such of the paid-up share capital of the company as on that date
carries the right of voting;
(b) in the case of a company not having a share capital: members who have, on the date of receipt of the
requisition, not less than one-tenth of the total voting power of all the members having on the said date a
right to vote.
The requisition should set out the matters to be considered at the proposed meeting and the same should be
signed by the requisitionists and sent to the registered office of the company. The Board must, within 21 days
from the date of receipt of a valid requisition, proceed to call a meeting on a day not later than 45 days from the
date of receipt of such requisition.
(III) By requisitionists
If the Board does not within 21 days from the date of receipt of a valid requisition in regard to any matter, proceed
to call a meeting for the consideration of that matter on a day not later than 45 days from the date of receipt of
such requisition, the meeting may be called and held by the requisitonists themselves.
 Lesson 7B Elements of Company Law-II 201

However in such case, the meeting should be held within a period of 3 months from the date of the requisition.
Reasonable expenses incurred by the requisitionists in calling such a meeting shall be reimbursed by the
company to the requisitionists. The company in turn recover such expenses from any fee or other remuneration
under section 197 payable to such of the directors who were in default in calling the meeting. In case, the
quorum is not present within half-an-hour from the time appointed for holding a meeting called by requisitionists,
the meeting shall stand cancelled.
(IV) By Tribunal
Section 98 of the Companies Act, 2013 provides that if for any reason it is impracticable to call a meeting of a
company or to hold or conduct the meeting of the company, the Tribunal may, either suo motu or on the application
of any director or member of the company who would be entitled to vote at the meeting:
Order a meeting of the company to be called, held and conducted in such manner as the Tribunal thinks fit;
and
Give such ancillary or consequential directions as the Tribunal thinks expedient, including directions modifying
or supplementing in relation to the calling, holding and conducting of the meeting, the operation of the provisions
of this Act or articles of the company. Such directions may include a direction that one member of the company
present in person or by proxy shall be deemed to constitute a meeting. Meeting held pursuant to such order
shall be deemed to be a meeting of the company duly called, held and conducted.

Notice of Meeting

A general meeting of a company may be called by giving not less than 21 clear days’ notice either in writing or
through electronic mode. Notice through electronic mode shall be given in such manner as may be prescribed.
Short notice
A general meeting may be called after giving a shorter notice also if consent is given in writing or by electronic
mode by not less than 95% of the members entitled to vote at such meeting.

Contents of Notice

Place of meeting
The notice should state the place where the general meeting is scheduled to be held. In case of an annual
general meeting, the place of the meeting has to be either the registered office of the company or some other
place within the city, town or village in which the registered office of the company is situated. No such restriction
applies to an extraordinary general meeting.
Day of meeting
The day and date of the meeting should be clearly stated in the notice. In case of an annual general meeting, the day
should be one that is not a National Holiday. An extraordinary general meeting can however be held on any day.
Time of meeting
Exact time of holding the meeting should be given in the notice. An annual general meeting can be called during
business hours only, that is, between 9 a.m. and 6 p.m. There is no need to follow such timings in case of an
extraordinary general meeting.
Agenda
A statement of the business to be transacted at the general meeting should be given in the notice. In case, the
meeting is to transact a special business, a explanatory statement should be attached about such item.
202 FP-BE&L

Proxy clause with reasonable prominence

Every notice calling a meeting of a company which has a share capital, or the articles of which provide for voting
by proxy at the meeting, should carry with reasonable prominence, a statement that a member entitled to attend
and vote is entitled to appoint a proxy, or, where that is allowed, one or more proxies, to attend and vote instead
of himself, and that a proxy need not be a member.

Notice through Electronic Mode

A company may give notice through electronic mode. Electronic mode’ means any communication sent by a
company through its authorized and secured computer programme which is capable of producing confirmation
and keeping record of such communication addressed to the person entitled to receive such communication at
the last electronic mail address provided by the member.

Class Meetings

Class meetings are those meetings which are held by holders of a particulars class of shares/ debenture holders/
creditors.

E-GOVERNANCE

With the advent of Information and Communication Technology in all sectors today, Governments across the
globe are taking major initiatives to integrate IT in all their processes. These initiatives aimed at electronic
governance, embrace policy changes, legal reforms, business process reengineering, change management
and infrastructure creation. They are also realizing that public/private partnership is very critical to the success
of any e- governance Project and are accordingly entering into partnerships with private IT companies to implement
e-governance. It is being felt that IT enablement of various Government to Business processes along with
Business Process Reengineering will not only improve efficiency and transparency of the government operations,
but will also provide speedy transactions between the government and the businesses.

E-GOVERNANCE AND MCA-21

Electronic Governance is the application of Information Technology to the Government functioning in order to
bring about Simple, Moral, Accountable, Responsive and Transparent (SMART) Governance. E-governance is
a highly complex process requiring provision of hardware, software, networking and re-engineering of the
procedures for better delivery of services.
MCA-21 is an ambitious e-governance initiative of Government of India that builds on the Government’s vision
of National e-governance in the country. As part of the Government’s focus on governance norms to meet the
expectations arising from globalization, MCA project was launched as a flagship initiative of Ministry of Corporate
Affairs (MCA). The project was named MCA 21 as it aimed at repositioning MCA as an organization capable of
fulfilling the aspirations of its stakeholders in the 21st Century. Rather than compelling the business community
to physically travel to MCA offices, MCA services are made available at the place of their choice, be it their
homes or offices. The scope of MCA 21 includes services provided by the Regional Directors (RDs), Offices of
Registrar of Companies (ROCs) and the Ministry Headquarters etc . MCA 21 fully automates all processes
related to the proactive enforcement and compliance of the legal requirements under the Companies Act, 2013.
E-filing facility includes incorporation of new companies, filing annual return and other statutory returns, registration
and verification of charges and processing of various approvals/ clearances etc. applied on time. Besides,
inspection of company documents, request for certified copies is also facilitated through MCA portal.
 Lesson 7B Elements of Company Law-II 203

LESSON ROUND UP

– A company, though a legal entity in the eyes of law, is an artificial person, existing only in contemplation
of law. It has no physical existence. It has neither soul nor body of its own. As such, it cannot act in its
own person. It can do so only through some human agency.

– The persons who are in charge of the management of the affairs of a company are termed as directors.
They are collectively known as Board of Directors or the Board. The directors are the brain of a company.

– Section 149(1) of the Companies Act, 2013 requires that every company shall have a minimum number
of 3 directors in the case of a public company, two directors in the case of a private company, and one
director in the case of a One Person Company.

– Every company shall have a minimum number of 3 directors in the case of a public company, two
directors in the case of a private company, and one director in the case of a One Person Company.

– As per Section 165 of the Companies Act, 2013, maximum number of directorships, including any
alternate directorship a person can hold is 20.

– Every listed company shall appoint at least one woman director and every other public company having
paid up share capital of Rs. 100 crores or more or turnover of Rs. 300 crore or more as on the last date
of latest audited financial statements, shall also appoint at least one woman director.

– Every listed company may have one director elected by small shareholders.

– The first Board meeting should be held within thirty days of the date of incorporation. In addition to the
first meeting to be held within thirty days of the date of incorporation, there shall be minimum of four
Board meetings every year and not more one hundred and twenty days shall intervene between two
consecutive Board meetings.

– Section 203 of the Companies Act, 2013 read with Rule 8 of the Companies (Appointment and
Remuneration of Managerial Personnel) Rules 2014 mandates the appointment of Key Managerial
Personnel and makes it obligatory for a listed company and every other public company having a paid
up share capital of rupees ten crores or more, to appoint following whole-time key managerial personnel:(i)
managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;(ii)
company secretary; and (iii) Chief Financial Officer:

– As per Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules
2014 provides that a company which has a paid up capital of Five crore rupees or more shall have a
whole-time company secretary.

– Annual general meeting (AGM) is an important annual event where members get an opportunity to
discuss the activities of the company. Section 96 of the Companies Act, 2013 provides that every
company, other than a one person company is required to hold an annual general meeting every
year.

– All general meetings other than annual general meetings are called extraordinary general meetings.
Extraordinary General Meetings shall called by Board; by Board on requisition of shareholders; by
requisitionists ; by Tribunal.

– Electronic Governance is the application of Information Technology to the Government functioning in

order to bring about Simple, Moral, Accountable, Responsive and Transparent (SMART) Governance.
204 FP-BE&L

GLOSSARY

Board of Directors The collective body of the directors of the company.

or Board
Director A director appointed to the Board of a company.
Independent An independent director referred to in sub section (5) of section 149 of the Companies
director Act, 2013.
Small shareholder A shareholder holding shares of nominal value of not more than twenty thousand
rupees or such other sum as may be prescribed.
Key Managerial Key Managerial Personnel in relation to a company, means— (i) the Chief Executive
Personnel Officer or the managing director or the manager;(ii) the company secretary;(iii) the
whole-time director;(iv) the Chief Financial Officer; and (v) such other officer as may
be prescribed.
Managing Director A director who, by virtue of the articles of a company or an agreement with the company
or a resolution passed in its general meeting, or by its Board of Directors, is entrusted
with substantial powers of management of the affairs of the company and includes a
director occupying the position of managing director, by whatever name called.
Whole-Time Director A director in the whole-time employment of the company.
Manager An individual who, subject to the superintendence, control and direction of the Board
of Directors, has the management of the whole, or substantially the whole, of the
affairs of a company, and includes a director or any other person occupying the position
of a manager, by whatever name called, whether under a contract of service or not.
Chief Executive An officer of a company, who has been designated as such by it.
Officer
Company Secretary A company secretary as defined in clause (c) of sub-section (1) of section 2 of the
or Secretary Company Secretaries Act, 1980 who is appointed by a company to perform the
functions of a company secretary under this Act;

SELF-TEST QUESTIONS

1. As per Section 149(1) of the Companies Act, 2013, every public company shall have a minimum number
of ............................ directors.
a) 1
b) 2
c) 3
d) 7
2. As per Section 165 of the Companies Act, 2013, maximum number of directorships, including any
alternate directorship, a person can hold is .............................
a) 20
b) 15
c) 21
d) 30
 Lesson 7B Elements of Company Law-II 205

3. Every company shall have at least one director who has stayed in India for a total period of not less
than ............................. days in the previous calendar year.
a) 180
b) 150
c) 182
d) 365
4. According to section 151 of the Companies Act, 2013 every listed company may have atleast
............................. director elected by small shareholders.
a) 5
b) 3
c) 2
d) 1
5. The Companies Act, 2013 requires that not less than ............................. days’ notice in writing shall
be given to every director at the registered address as available with the company.
a) 3
b) 4
c) 7
d) 10
6. ............................. shall be the quorum for a board meeting.
a) One third of total strength or two directors, whichever is higher
b) two third of total strength or two directors, whichever is higher
c) One third of total strength or three directors, whichever is higher
d) One fourth of total strength or two directors, whichever is higher
7. A general meeting of a company may be called by giving not less than ............................. clear days’
notice either in writing or through electronic mode.
a) 7
b) 15
c) 21
d) 30
8. A general meeting may be called after giving a shorter notice also if consent is given in writing or by
electronic mode by not less than ............................. of the members entitled to vote at such meeting.
a) 75%
b) 90%
c) 95%
d) 100
206 FP-BE&L

9. An annual general meeting can be called during business hours only, that is, between ..............................
a) 9 a.m. and 6 p.m.
b) 10 a.m. and 5 p.m.
c) 9 a.m. and 7 p.m.
d) 9 a.m. and 9 p.m.
10. If the Board does not, within 21 days from the date of receipt of a valid requisition in regard to any
matter, proceed to call an EGM for the consideration of that matter on a day not later than .............................
days from the date of receipt of such requisition, the meeting may be called and held by the requisitionists
themselves.
a) 21
b) 30
c) 45
d) 90

Answer Key : 1. (c), 2. (a), 3. (c), 4. (d), 5. (c), 6. (a), 7. (c), 8. (c), 9. (a), 10. (c)

Suggested Reading
(i) Company Law Mannual – Taxmann