1.

ROLE & RIGHTS AND DUTIES OF DIRECTORS OF THE COMPANY

Role & Rights/Powers and Duties of Directors under the company act:

Section 86: Further issue of Capital:

The decision to increase the capital of the company by the issue of further shares lies with the
directors of such company. With respect to further issue of shares, if existing members
decline or do not subscribe to the offer of new shares, the directors have the power to allot
and issue such shares in such manner as they deem fit.

Directors (or an officer authorized by the directors) are to sign the circular which is to
accompany any offer of new shares under this section.

Section 159: Calling of Extraordinary General Meeting

An extra ordinary general meeting may be called at any time by the directors for
consideration of any matter requiring approval of the company in a general meeting.

Section 160: Presiding General Meeting:

The chairman of the Board of Directors presides as chairman at every general meeting of the
company. If there is no such chairman, or if at any meeting he is not present within fifteen
minutes after the time appointed for holding the meeting, or is unwilling to act as chairman,
any one of the directors present may be elected to be chairman.

Section 174: First Directors

The first directors have the right to hold office until the election of directors in the first
annual general meeting.

Section 180: Casual Vacancy on the Board of Directors

Any casual vacancy in the Board of Directors of a company is filled up by the directors.

Section 191: Remuneration of the Directors:

The directors in general meeting determine the remuneration of a director for performing
extra services, including the holding of the office of chairman.

Section 195: Loans to Directors

The Directors of the company have the right to obtain loan from the company subject to
fulfillment of certain requirements.

Section 196: Powers of Directors with regard to managing the business of the company

The business of a company is managed by the directors, who may pay all expenses incurred
in promoting and registering the company, and may exercise all such powers of the company
as are not by this Ordinance, or by the articles, or by a special resolution, required to be
exercised by the company in general meeting.

The directors of a company exercise the following powers on behalf of the company, and do
so by means of a resolution passed at their meeting, namely:

1. to make calls on shareholders in respect of moneys unpaid on their shares;

2. to issue shares;
3. to issue debentures or any instrument in the nature of redeemable capital;
4. to borrow moneys otherwise than on debentures;
5. to invest the funds of the company;
6. to make loans;
7. to authorize a director or the firm of which he is a partner or any partner of such firm
or a private company of which he is a member or director to enter into any contract
with the company for making sale, purchase or supply of goods or rendering services
with the company;
8. to approve annual or half-yearly or other periodical accounts as are required to be
circulated to the members;
9. to approve bonus to employees;
10. to incur capital expenditure on any single item or dispose of a fixed asset in
accordance with the limits as prescribed by the Commission from time to time;
11. Provided that the acceptance by a banking company in the ordinary course of its
business of deposit of money from the public repayable on demand or otherwise and
 withdrawable by cheque, draft, order or otherwise, or placing of moneys on deposit by
a banking company with another banking companion such conditions as the directors
may prescribe, shall not be deemed to be a borrowing of money or, as the case may
be, a making of loan by a banking company with the meeting of this section;
12. to undertake obligations under leasing contracts exceeding one million rupees;
13. to declare interim dividend; and
14. having regard to such amount as may be determined to be material (as construed in
Generally Accepted Accounting Principles) by the Board-
i. to write off bad debts, advances and receivables;
ii. to write off inventories and other assets of the company; and
iii. to determine the terms of and the circumstances in which a law suit may be
compromised and a claim or right in favour of a company may be released,
extinguished or relinquished.

Section 198 and 200: Appointing CEO and determining Terms of his Appointment

The directors have the right to appoint an individual to be the Chief Executive of the
company and determine the terms and conditions of appointment of a Chief Executive, if
required by the company’s articles.

Section 202: Removal of CEO

The directors of a company by resolution passed by not less than three-fourths of the total
number of directors may remove a chief executive before the expiration of his term of office.

Section 230:  Maintaining Books of Accounts

The directors can decide to maintain books of accounts at a place other than the registered
office of the company.

The directors, during business hours, have the right to inspect the books of accounts and other
books and papers of the company.

The directors shall from time to time determine whether and to what extent and at what time
and places and under what conditions or regulations the accounts and books or papers of the
company or any of them shall be open to the inspection of members.
Section 248: Recommendation of the Dividend:

The dividend is always recommended by the Directors and declared by the company in
general meeting.

Section 252: Appointment of Auditor

The first auditors of a company are to be appointed by the directors within sixty days of the
date of incorporation of the company.  The directors may fill in any causal vacancy in the
office of auditors.  Moreover, the directors fix the remuneration of the auditors, where the
auditors have been appointed by them.

Section 494: Allotment of Shares for Inadequate Consideration

Any director may apply to the Court for a declaration that any shares have been allotted for
inadequate consideration.

Duties of a director:

Every company director has a personal responsibility to ensure that all the statutory
documents are filed with the Registrar and the Commission as and when required under the
Ordinance. In particular:

1. Audited accounts (only for public limited companies including association not for
profit); and private limited companies having paid up capital of Rs. 7.5 million or
above);
2. Annual returns (Form A/B); 
3. Particulars of directors or other officers (Form 29); and
4. Notice of change of registered office (Form 21)

Section 77: Directors Not to Refuse Transfer of Shares:

The directors of a company shall not refuse to transfer any shares or debentures that are fully
paid unless the transfer deed is for any reason defective or invalid.

Section 146: Commencing Business

With respect to the procedure for commencement of business, the Chief Executive or one of
the directors and the secretary are to file with the registrar a declaration that the conditions for
commencement of business as are mentioned in this section have been complied with.

Section 156: Statutory Meeting of the Company

With respect to the statutory meeting of company the directors have the following duties:

1. At least three directors, one of whom is to be the Chief Executive shall certify the
statutory report.
2. The statutory report is to be forwarded to every member of the company at least
twenty one days before the meeting.
3. At least five certified copies of the statutory report are also to be delivered to the
registrar for registration.
4. At the commencement of the meeting and throughout its duration, a list caused to be
prepared by the directors showing the names, occupations, nationality and address of
the members, and the number of shares held by them respectively is to be produced.

Section 177: Retiring Directors Continue to Perform Functions:

The retiring directors shall continue to perform their functions until their successors are
elected. Moreover, the continuing directors are required to take immediate step to hold the
election of directors and in case of any impediment report the circumstances of the case to the
registrar within fifteen days of the expiry of the term laid down in section 180.

Section 178:  Election of directors.

The directors of a company are required to fix the number of elected directors of the company
not later than thirty-five days before the convening of the general meeting at which directors
are to be elected.

Section 205:  Register of Directors:

The directors are required to furnish to the company the particulars of their appointment or
any change therein, as the case may be.
Section 230: Maintaining Books of Accounts

The directors are responsible for compliance with the statutory requirements regarding
preparation and maintenance of proper books of account and circulation of financial
statements that give a true and fair view.

Section 231: Facilitating Inspection of Books of Accounts

With respect to inspection of books of accounts and books and papers of a company by the
registrar or by any officer authorized in this behalf by Commission, every director of the
company is bound to:

1. Produce all such books of accounts and books and papers as are in his custody or
under his control.
2. Furnish information, statements and explanations relating to the affairs of the
company required by the abovementioned persons; and
3. Provide reasonable assistance for such inspection

Section 233: Annual Accounts and Balance Sheet

The directors of every company are required to lay before the company in annual general
meeting audited balance sheet and profit and loss account etc.

Section: 236: Directors Report

The directors are required to make out and attach to every balance sheet a report with respect
to the state of the company’s affairs and other information and such report is signed by the
chairman of the directors or the chief executive of the company on behalf of the directors if
authorized in that behalf.

Section 241: Authentication of Balance Sheet

The directors shall approve, and the Chief Executive and at least one director shall sign, the
balance sheet and profit and loss account or income and expenditure account of the company.

Section 261: Furnishing Information, Documents etc. to the Registrar

Every director is bound to furnish to the best of his power, such information, explanation or
document as may be required by the registrar.

Section 362: Declaration of Solvency in case of Voluntary Winding-up

In case of voluntary winding up its directors may make a declaration that after a full inquiry
into the affairs of the company, they are of the opinion that the company has no debts and it
will be able to pay all its debts in full within such period not exceeding twelve months from
the commencement of winding up.

2. Winding Up of a company on Court orders

As per Section 433, court may order for the winding up of a company on a petition submitted
to it on any of the following grounds:

1. Passing of special resolution for the winding up:

When a company has by passing a special resolution resolved to be wound up by the court,
winding up order may be made by the court. The resolution may be passed for any cause
what so ever. Court, however may not order for the winding up if it finds winding up to be
opposed to public interest or the interest of the company as a whole.

2. Default in holding statutory meeting:

When default has been committed by a company in the filing of the statutory report or in the
holding of the statutory meeting in the manner and within the time prescribed by the Act,
court may make a winding up order. Instead of ordering for the winding up, court may direct
the company to call the statutory meeting or to deliver the statutory report.

ADVERTISEMENTS:

Petition on this ground can be presented either by the Registrar or by a contributory and it
should not be filed before the expiration of fourteen days after the last day on which the
statutory meeting ought to have been held [Sec. 439 (7)].

3. Failure to commence business:

When a company fails to commence business within a year from its incorporation or
suspends business for a year, it may be ordered to be wound up. The power of the court to
pass an order for the winding up of the company on this ground is discretionary and will not
be exercised unless there are indications that the company has no intention of continuing it
business.

ADVERTISEMENTS:

If the company’s trade has been suspended temporarily owing to the trade depression with
bona fide intention to continue its operations when conditions improve, a prayer made to the
court for the winding up of the company will not be granted as the intention to continue
business after the improvement of conditions is clear. But in case chances of resuming
business are gloomy, the court may order for the winding up of the company.

4. Reduction in membership:
When the number of members has fallen below seven in the case of a public company and
two in the case of a private company, the company may be ordered to be wound up.

5. Inability to pay debts:

As per section 434, a company shall be deemed to be unable to pay its debts under the
following circumstances:

(a) Notice for payment:

When a creditor to whom the company owes a sum exceeding T 500 [the Companies (Second
Amendment) Act, 2002 has increased this amount to Rs. 1 lakh, but that has not yet become
operative] has served on the company a demand for payment and the company has for three
weeks thereafter neglected to pay the sum or otherwise satisfy the creditor, it shall be deemed
that the company has become unable to pay its debt. It is essential that the debt is payable
presently.

Mere omission by itself will not amount to negligence. Further, where a debt is bonafide
disputed, there is no negligence to pay. Failure to pay public deposits on their due dates
amount to inability to pay debts. A dividend when declared becomes a debt due by the
company and the shareholder can also apply for company’s liquidation if the company is
unable to pay his dividend.
(b) Decree:
ADVERTISEMENTS:

If a decree or order issued by a court in favour of a creditor of the company remains

unsatisfied on its execution.

(c) Commercial insolvency:

It is proved to the satisfaction of the court that the company cannot pay its debts. This implies
commercial insolvency of the company as is disclosed by its balance sheet. The mere fact that
the company is incurring losses does not mean that it is unable to pay its debts, for its assets
may be more than its liabilities.

Liabilities for this purpose will include all contingent and prospective liabilities and even if
the debt relied upon in the petition is disputed bona fide, the company may be wound up if
the applicant can prove the insolvency of the company. However, non-payment of a bona fide
disputed claim is no proof of insolvency.

Merely because the liabilities of a company have exceeded the assets, an order for
‘compulsory winding up’ cannot be passed unless it is proved that the company has failed to
pay its liabilities when payment was demanded.

Similarly, courts may pass an order for the winding up of the company when default in the
payment of the debt after demand within three weeks has been committed by the company
even though the assets of the company were much than the liabilities. The debts in all cases
must be real, immediately payable and without any bonafide and reasonable dispute with
regard to it.

6. Just and equitable:

The court may order for the winding up of a company if it thinks that there are just and
equitable grounds for doing so. The court has very large discretionary power in this case.

The term ‘just and equitable’ grounds may include any of the grounds for the winding up of
the company. This power has been given to the court to safeguard the interests of the
minority and the weaker group of members.
Court, before passing such an order, will take into account the interest of the shareholders,
creditors, employees and also the general public. Court may also refuse to grant an order for
the compulsory winding up of the company if it is of the opinion that some other remedy is
available to the petitioner to redress his grievances and that the demand for the winding up of
the company is unreasonable. A few examples of ‘just and equitable’ grounds on the basis of
which the court may order for the winding up of the company are given as follows:

(i) Oppression of minority:

In cases where those who control the company, abuse their power to such an extent that it
seriously prejudices the interests of minority shareholders, the court may order for the
winding up of the company.

The court will issue such an order only when it is impossible for the business of the company
to be carried on for the benefit of the company as a whole owing to the way in which voting
power is held and used.

(ii) Deadlock in management:

Where there is a complete deadlock in the management of the company, the company may be
ordered to be wound up. But mere incompatibility of good relations between the rival
factions of the directorate i.e., the majority group and minority group will not be sufficient for
ordering winding up.

Re. Yenidje Tobacco Ltd. W and R were the only two shareholders as well as the directors of
a private company. Subsequently some serious differences developed and they became
hostile to each other.

They stopped even talking to each other. It was held that there was complete deadlock in the
management of the company and, therefore, it would be just and equitable to order for its
winding up.

(iii) Loss of substratum:

Where the objects for which a company was constituted have either failed or become
substantially impossible to be carried out, i.e., ‘substratum of the company’ is lost; the
company may be ordered to be wound up on just and equitable grounds.
However, a temporary difficulty which does not knock out the company’ objects and
purposes may not be permitted to become a ground for liquidation. Loss of substratum is a
question of fact depending on the circumstances of the case.

Re. Steam Navigation Co:

A steamship was formed mainly with the object of acquiring the business of a firm engaged
in plying steamers. The business was acquired, but later on due to serious differences
between the two, seven out of nine steamers acquired were returned.

A shareholder filed a petition to the court for the compulsory winding up of the company on
the ground of loss of substratum. The petition was rejected since the company could purchase
more steamers and carry out its original objects.

The substratum of a company is said to disappear when the objects have substantially failed
or it is impossible to carry on business except at a loss or existing liabilities are far in excess
of existing and possible assets. An illustration is:

Re. German Date Coffee Co:

A company was incorporated to manufacture coffee from dates under a patent to be granted
by the Government of Germany. The German patent was not granted and the company
embarked upon other patents.

The company was ordered to be wound up on just and equitable grounds as the company was
held to lost its substratum and it was impossible to carry out the objects for which it was
formed.

(iv) Losses:
When the business of a company cannot be carried on except at a loss, the company may be
wound up by an order of the court on just and equitable grounds. But mere apprehension on
the part of some shareholders that the company will not be able to earn profits cannot be just
and equitable ground for the winding up order.

(a) Fraudulent object:

If the business or the objects of the company are fraudulent or illegal, or have become illegal
with the changes in the law, the court may order the company to be wound up on just and
equitable grounds. It will not be a valid defence in such a case that the profits earned will be
used for philanthropic purposes.

However, the mere fact of having been a fraud in the promotion or fraudulent
misrepresentation in the prospectus will not be sufficient ground for a winding up order, for
the majority of shareholders may waive the fraud.

(vi) Bubble company:

When a company is a bubble company i.e. it does not carry on any business in reality or does
not own any property.

(vii) Private companies in the nature of partnership:

Where a private company consisting of one or more families or relatives or friends is in the
nature of partnership business and circumstances justify dissolution of partnership under the
Partnership Act, such as loss of mutual confidence on account of mis- conduct of one or more
partner or a state of complete dead-lock, such a company may be ordered to be wound up on
just and equitable grounds. This is because in such a case it is impossible to carry on business
of Die Company (Re. Dais collates).

Besides these grounds the Companies (Second Amendment) Act, 2002, which has not yet
been notified to be effective, has added three more grounds of compulsory winding up of a
company. These are:

(i) Default in filing Annual Accounts or Annual Returns with the Registrar for any 5
consecutive financial years.

(ii) Company working against the interests of State — sovereignty, integrity and security; or
public order, decency or morality.

(iii) Winding up of a Sick Industrial Company when its revival is unlikely within a
reasonable time.