Contents

1. INTRODUCTION TO DIRECTORS......................................................................................8

2. APPOINTMENT OF DIRECTORS......................................................................................13

3. APPOINTMENT OF INDEPENDENT DIRECTORS.........................................................19

4. CRITICALLY EVALUATE THE POSITION AND ROLE OF INDEPENDENT

DIRECTORS IN A COMPANY...................................................................................................21

5. DUTIES AND DISQUALIFICATION OF A DIRECTOR..................................................26

DUTIES OF DIRECTORS........................................................................................................26

DISQUALIFICATIONS FOR DIRECTORS............................................................................30

REMOVAL OF DIRECTORS.......................................................................................................32

VACATION OF OFFICE OF DIRECTOR CIRCUMSTANCES VACATING OFFICE..............35

6. POWERS OF DIRECTORS..................................................................................................36

7. WHAT ARE THE RESTRICTIONS ON THE POWER OF THE BOARD?......................37

8. TYPES OF DIRECTORS......................................................................................................39

9. DISCUSS THE PROVISIONS RELATING TO RELATED PARTY AND DISCLOSURE

OF INTEREST UNDER COMPANIES ACT, 2013....................................................................43

POSITION OF DIRECTORS IN COMPANY..............................................................................45

10. Procedure to followed in merger of a company and power of court..................................48

11. Amalgamation of companies in public interest..................................................................51

12. Distinction between Amalgamation and Acquisition.........................................................54

13. Powers of the court in case of reconstruction or amalgamation of companies..................56

14. Voluntary winding up by creditors & Voluntary winding up by shareholders of a company

59

Circumstances For Winding Up Of Company...........................................................................60

Voluntary Winding Up by Members/Shareholders..............................................................61

15. Contributories in case of winding up..................................................................................62

Extent of liability of the Past members..................................................................................63

Conclusion................................................................................................................................64

16. Role of liquidators in winding up/ a) Powers of the liquidators (5) (10)/ Dicuss the Role,
powers and duties of the Liquidator appoitned for winding up of a company..............................64

17. What are the different kinds of winding up? Discuss the provision relating to winding up
by the Tribunal...............................................................................................................................67

Circumstances For Winding Up Of Company...........................................................................68

Procedure Of Winding Up.........................................................................................................70

18. What is Compulsory Winding up? What are the circumstances in which the court can
order the compulsory winding up of a company...........................................................................71

Introduction..............................................................................................................................71

Grounds for Compulsory Winding Up..................................................................................72

When there is a Deadlock........................................................................................................72

Loss of Substratum..................................................................................................................73

Loss-making Entity..................................................................................................................73

Fraudulent Purpose.................................................................................................................73

Persecution of Minorities........................................................................................................74

Similar to other Partnership Dissolution Reasons................................................................74

19. Insider trading (5) or What is Insider Trading? Discuss the highlights of the Regulation on
Insider Trading...............................................................................................................................74

Rational Behind Prohibition of Insider Trading..............................................................74

Unpublished Price Sensitive Information..........................................................................76

Penalties................................................................................................................................76

Issues.....................................................................................................................................77

Conclusion................................................................................................................................77
20. Role and powers of SEBI...................................................................................................77

Evolution....................................................................................................................................77

SEBI......................................................................................................................................78

Structure of SEBI.......................................................................................................................78

Functions of the Board...............................................................................................................79

Power and Authority of SEBI....................................................................................................80

Recent Amendments..................................................................................................................81

Conclusion.................................................................................................................................81

21. Explain the role of SEBI in promoting and developing capital market..............................81

SEBI......................................................................................................................................81

Conclusion.................................................................................................................................83

22. What is the role of auditors under Companies Act? or What is the need to appoint auditors
in a company? or Discuss the position of Auditors in a company.................................................83

23. Explain the position of Statutory/External auditors in a company or The role of an

External Auditor in a company with respect to Corporate Governance........................................89

24. Discuss the importance of meeting in a company. (/10) or What is the purpose of
conducting meetings in companies? Explain the various kinds of meetings contemplated under
the Indian Companies Act.............................................................................................................94

Introduction............................................................................................................................94

Importance.............................................................................................................................95

25. What are Annual General Meetings? Annual General Meetings serve a very important
purpose in a company. Critically evaluate the statement............................................................104

Introduction..........................................................................................................................104

Importance...........................................................................................................................105

Requirements.......................................................................................................................105

Failure to conduct AGM......................................................................................................106

 Conclusion...........................................................................................................................107

26. Evalutate the provisions related to Annual General Meetings in a Companies or What are
the statutory provisions with respect to notice of Annual general Meetings as to length, time
place, form and persons entitled thereto?....................................................................................107

Introduction..........................................................................................................................107

Conclusion...........................................................................................................................111

27. Meetings have to be properly convened and conducted. Discuss or "Meetings in a

company must be duly convened, properly constituted and conducted otherwise it will not be
valid." Discuss or Meetings have to be properly convened. What are the provisions related to the
proper convening of meetings in a company?.............................................................................111

Meeting should be called by a proper authority......................................................................112

Notice.......................................................................................................................................112

Length of Notice..................................................................................................................112

Effective Service of Notice..................................................................................................113

Contents of Notice...............................................................................................................113

Benefits of non-disclosure...................................................................................................114

Quorum....................................................................................................................................115

One man Meetings...............................................................................................................115

Chairman..................................................................................................................................116

Conclusion...............................................................................................................................117

28. What are the provisions relating to Extraordinary General Meetings under Companies
Act, 2013?....................................................................................................................................117

29. What are the provisions relating to Board Meetings?......................................................120

Introduction..............................................................................................................................120

Quorum................................................................................................................................121

Minutes of the Meeting........................................................................................................121

 Conclusion...............................................................................................................................121

30. Discuss the legal position and powers of the Board of Directors in a company. Can the
members in a general meeting change the decision taken by the Board of Directors?...............121

31. Quorum of a meeting........................................................................................................124

32. Appointment of Proxies for meetings (5).........................................................................127

33. Powers of the chairman of the meeting (5).......................................................................130

34. Statutory meetings (5).......................................................................................................133

Meeting should be called by a proper authority......................................................................134

Notice.......................................................................................................................................134

Length of Notice..................................................................................................................134

Effective Service of Notice..................................................................................................135

Contents of Notice...............................................................................................................135

Benefits of non-disclosure...................................................................................................136

Quorum....................................................................................................................................137

One man Meetings...............................................................................................................137

Chairman..................................................................................................................................138

Conclusion...............................................................................................................................139

35. Company Secretary- 4 different short notes.....................................................................139

Introduction..........................................................................................................................139

Role – Section 205...............................................................................................................140

Duties...................................................................................................................................141

Position................................................................................................................................143

Liability................................................................................................................................144

36. Purchase of minority shareholding...................................................................................146

Introduction..........................................................................................................................146
 Evaluation of Section 236....................................................................................................146

Observations of the NCLAT................................................................................................147

Whether Section 236(3) is independent from Sections 236(1) and 236(2).........................147

Conclusion...........................................................................................................................148

37. Discuss the duties and powers of Tribunals in sanctioning schemes in case of companies
with the help of relevant case laws..............................................................................................149

Compliance with Statutory Provisions................................................................................149

Bona fide exercise of majority power..................................................................................150

Reasonableness of scheme...................................................................................................150

Burden of proving unfairness..............................................................................................151

Disclosure of material facts.................................................................................................151

Interest of creditors..............................................................................................................151

No power to stay criminal proceedings...............................................................................152

38. What is the significance of maintaining proper accounts in the companies? or What is the
relevance of preparation of proper accounts in a company?.......................................................153

Introduction..........................................................................................................................153

Maintenance of Accounts under Companies Act, 2013......................................................153

Inspection of books of Accounts.........................................................................................154

FINANCIAL STATEMENTS...................................................................................................154

CONCLUSION.......................................................................................................................155

39. Examine the appointment, powers, role and disqualification of an auditor.....................156

Appointment of Auditor......................................................................................................156

Disqualifications of Auditors...............................................................................................156

Role/Power..........................................................................................................................157

Conclusion...........................................................................................................................157

40. Interested Director............................................................................................................159

 Introduction..........................................................................................................................159

Disclosure of interest with respect to a contract or arrangement.........................................159

Exception to Disclosure of interest......................................................................................160

Punishment for failure of disclosure....................................................................................160

Conclusion...........................................................................................................................160

41. Filing Annual Accounts (5)..............................................................................................161

Filing Unadopted Financial Statements...............................................................................161

Filing of financial statements where annual general meeting is not held............................161

Filing of financial statements by One Person Company.....................................................162

Financial statements of subsidiary or subsidiaries incorporated outside India but have not
established business in India................................................................................................162

42. Audit committee (5)..........................................................................................................163

Introduction..........................................................................................................................163

Section 177 of Companies Act............................................................................................163

Composition of Audit Committee.......................................................................................163

Functions- Section 177(4)....................................................................................................164

Powers- Section 177(5) and 177(6).....................................................................................164

Non-Compliance..................................................................................................................165

43. What is meant by rotation of auditors? What are the provisions relating to appointment
and rotation of auditors?..............................................................................................................165

Introduction..........................................................................................................................165

Legal Provisions..................................................................................................................165

44. Discuss the provision under Companies Act relating to authentication, circulation,
adoption and filing of annual accounts in a Public company or What are the provisions under the
Companies Act for preparation of accounts in a company?........................................................168

Introduction..........................................................................................................................168
 Compliance..........................................................................................................................168

Inspection.............................................................................................................................168

Adoption..............................................................................................................................169

Authentication......................................................................................................................169

Filing....................................................................................................................................169

45. Discuss the "Majority Rule". Deliberate upon the case of Foss V. Harbottle and cite the
exceptions to the rule laid down in Foss v Harbottle. or Explain the rule of majority in the light
of Foss v Harbottle. How far is the Rule of Majority relevant in India (923 words)..................170

46. 'Majority has its way but Minority has its Say'. Comment on the Statement (980 words)
172

47. 'A mere dissatisfaction of the minority does not constitute oppression. Discuss.............174

48. Role of Central Government.............................................................................................174

49. Provisions related to Mismanagement- With relevant case laws.....................................174

50. Provisions related to Oppression- With relevant case laws..............................................175

51. Oppression of members in a company (5)........................................................................176

Oppression- Meaning...........................................................................................................176

What constitutes an act of Oppression in a Company?.......................................................177

Case Laws............................................................................................................................177

52. Provisions related to Arrangement and role of the Tribunal/courts.................................178

53. Procedure followed by Company to effect an arrangement.............................................180

CLASSIFICATION...................................................................................................................180

54. Pre-merger steps and scheme for Arrangement................................................................182

55. Compromise and the procedure followed.........................................................................185

56. Power of Tribunal to enforce its orders relating to compromise and arrangement..........185

Introduction..........................................................................................................................185

Legal Provisions..................................................................................................................185
 SECTION 245- CLASS ACTION..................................................................................................185

SECTION 7(7) OF COMPANIES ACT- DEREGISTRATION............................................................186

SECTION 241- OPPRESSION AND MISMANAGEMENT................................................................186

SECTION 13-18- CONVERSION OF COMPANY...........................................................................186

SECTION 97 AND 98- ANNUAL GENERAL MEETING................................................................186

SECTION 242- WINDING UP OF COMPANY...............................................................................186

SECTION 58- REFUSAL TO TRANSFER SHARES........................................................................187

SECTION 213- INVESTIGATION POWERS...................................................................................187

ADDITIONAL POWERS..............................................................................................................187

57. Difference between Compromise and Arrangement........................................................187

CLASSIFICATION...................................................................................................................187
1. INTRODUCTION TO DIRECTORS

A corporation being an artificial being, cannot carry out its intentions and therefore requires
living persons having a mind and knowledge or intention to carry out the company’s intention.
This makes it necessary that the company’s business should be entrusted to some human agents.
Hence the necessity of directors. Section 2(34)] defines a director as a director appointed to the
Board of a company. Section 149 further requires every public company to have at least three
directors and every private company to have at least two directors. In the case of one person
company, there has to be at least one director. There can be a maximum of 15 directors, unless
permitted by a special resolution. Section 2(10) defines the Board of directors or Board, in
relation to a company, to be the collective body of directors of the company.

The erstwhile Companies Act, 1956 ('CA 1956') contained no statement of statutory duties of
directors, and acts of directors were usually reviewed in the context of their powers in terms of
section 291 of the CA 1956 (which dealt with general powers of the board) and other applicable
laws, and their established roles under common law as laid down in several judicial precedents1.

The Companies Act, 2013 ('CA 2013') for the first time has laid down the duties of directors in
unequivocal terms in section 166. In summary, the general duties of directors under the CA 2013
are as follows:

a. to act in accordance with the articles of the company, in other words, to act within
powers;
b. to act in good faith in order to promote the objects of the company for the benefit of its
members as a whole;
c. to act in the best interest of the company, its employees, shareholders, community and for
the protection of environment;
d. to exercise due and reasonable care, skill and diligence and independent judgment;
e. to avoid direct or indirect conflicts of interest;
f. to avoid undue gain or advantage either to himself or relatives, partners or associates; and
g. not to assign his office to any other person;
A Director is part of a collective body of Directors called the Board, which is responsible for the
superintendence, control and direction of the affairs of the company. Under common law rules
and equitable principles, director's duties are largely derived from the law of agency and trusts
(i.e., set of contractual, quasi-contractual and non-contractual fiduciary relationships with the
Company). Under the law of agency, duties of skill, care and diligence are imposed on directors.
On the other hand, law of trusts imposes fiduciary duties on directors. Accordingly, directors are
the trustees of the company's money and property, and also act as agents in the transaction which
they enter into on behalf of the company. Directors are liable as trustees for breach of trust, if
they misapplied the funds or committed breach of byelaws of the company. A director is
expected to perform his duties as a reasonably diligent person having the knowledge, skill and
experience both of as person carrying out that director's function and of that person himself. A
director, therefore plays various roles in the company, may that be of an agent, an employee
(when appointed on the rolls of the company), an officer and/or a trustee of the Company.

Duties of Directors

The duties and responsibilities of directors stipulated by the Indian Companies Act of 2013, can
broadly be classified into the following two categories: ---

[i] The duties and liabilities which encourage and promote the sincerest investment of the best
efforts of directors in the efficient and prudent corporate management, in providing elegant and
swift resolutions of various business-related issues including those which are raised through "red
flags", and in taking fully mature and wise decisions to avert unnecessary risks to the company.

[ii] Fiduciary duties which ensure and secure that the directors of companies always keep the
interests of the company and its stakeholders, ahead and above their own personal interests.

The following duties and liabilities have been imposed on the directors of companies, by the
Indian Companies Act of 2013, under its Section 166: ---0

1. A director of a company shall act in accordance with the Articles of Association (AOA)
of the company.
2. A director of the company shall act in good faith, in order to promote the objects of the
company, for the benefits of the company as a whole, and in the best interests of the
stakeholders of the company.\
3. A director of a company shall exercise his duties with due and reasonable care, skill and
diligence and shall exercise independent judgment.
 4. A director of a company shall 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.
5. A director of a company shall 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.
6. A director of a company shall not assign his office and any assignment so made shall be
void.
7. 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 one Lakh Rupees but which may
extend to five Lac Rupees.
Liabilities of Directors under CA 2013.

Under CA 2013, directors may be held liable as "officers" of the company. The word "officer"
has been defined to include, inter-alia, directors of the company. CA 2013 contains the concept
of an 'officer who is in default' for the purposes of affixing liability on such person in respect of
any contravention of the provisions of the CA 2013 by the company. The ambit of 'officer who is
in default' is quite wide and includes, inter alia:

A. every whole-time director;

B. every Key Managerial Personnel ('KMP');
C. if no KMP then such director(s) as specified by the Board in its behalf or all directors, if
no director is so specified;
D. any person who is charged with any responsibility by the board or any KMP, actively
participates in, knowingly permits, or knowingly fails to take active steps to prevent any
default;
E. any person in accordance with whose advice, directions or instructions the Board of the
company is accustomed to act, other than a person who gives advice to the Board in a
professional capacity; and
F. every director, in respect of a contravention of any of the provisions of the CA13, who is
aware of such contravention by virtue of the receipt by him of any proceedings of the
 Board or participation in such proceedings without objecting to the same, or where such
contravention had taken place with his consent or connivance.
A director can also be made liable for fraud. "Fraud" in relation to affairs of a company includes
"any act, omission, concealment of any fact or abuse of position committed by any person or any
other person with the connivance in any manner, with intent to deceive, to gain undue advantage
from, or to injure the interests of, the company or its shareholders or its creditors or any other
person, whether or not there is any wrongful gain or wrongful".

Limited Liability of Independent director and non-executive directors: CA 2013, however,

limits the liability of an independent director or of non-executive directors (not being a promoter
or KMP), who are to be held liable, only in respect of such acts of omission or commission by a
company, which (i) occurs with his knowledge, attributable through board processes, and (ii)
with their consent or connivance or where they had not acted diligently.

Nature of Contraventions under CA 2013 – Compoundable vs. Non-Compoundable.

Compoundable Offences: Many of the contraventions under CA 2013 are in the nature of non-
compliances (such as failure to file annual return, contravention of provisions with respect to
related party transactions, acceptance of deposits, giving of loans to directors etc. by the
company) which attract either fine (or in some cases are punishable with fines or imprisonment
or both). Such offences can be remedied or compounded, subject to relevant provisions in the
Act, by paying late fees/penalties/fines as applicable.

Non-Compoundable Offences: There are, however, a few serious contraventions which are
punishable with imprisonment only or with imprisonment and with fines (such as offences of
fraud) where officers of the company who are in default or persons concerned with formation of
the company or the management of its affairs become liable and cannot be
remedied/compounded merely by depositing fines/penalties. These liabilities can be imposed on
the directors if they are in default (including non-executive directors) regardless of the fact that
they are the executive directors of the company or not.

Liability under certain other legislations.

Be Being designated as a director in a company, also has a cascading effect with respect to
exposure of the director to liabilities under various other legislations. From a brief study of a few
other legislations, we note that the duties and liability thereof, for non-compliances by a
company typically vests with the person in charge of the conduct of business/management of the
company.

Other directors/officers (whether executive or non-executive) of the company can also be held
liable in certain cases:

where the offence has been committed with the consent/connivance of, or is attributable to, any
neglect on the part of such director; or

such director has been designated by the company (as notified to the concerned authority) to be
in charge of the management of the company and responsible for compliances (as
occupier/owner) under certain legislations which allow for such nomination, failing which all
directors of the company.

As the liability under such legislations would typically fall on persons who are in charge of, and
responsible to, the company for the conduct of the business of the company, as a safeguard,
companies often designate (and notify the relevant government authorities) a specific person to
be in charge for compliances of relevant unit/factory with respect to certain legislations, (such as
designating such person as an occupier or manager for compliances under the Factories Act,
1948).

Safeguards – Adopt a Precautionary Approach.

5.1. To safeguard their interest and avoid undue liability, it is advisable that directors adopt a
precautionary approach. A few of the safeguards that can be considered and implemented are as
follows:

A. To attend meetings regularly;

B. To be inquisitive and peruse agendas for unusual items and seek additional information in
writing, if necessary;
C. To ensure that disagreements/dissenting views are recorded in the minutes;
D. To act honestly and with reasonable justifications;
E. To report concerns about unethical behaviour, actual or suspected fraud or violation of
the company's code of conduct or ethics policy;
 F. To seek professional advice, establish audit committees, engage external agencies, if
situation demands;
G. To engage external agencies for addressing whistleblowing issues. The Company may
consider appointing an external agency for whistleblowing reporting;
H. To provide requisite disclosures of interests/conflicts, consider excusing oneself from
participation in proceedings in cases of conflict;
I. For ongoing and day to day compliances, have a competent compliance team and
establish committees (for regular internal audits etc.); and
J. To include indemnity provisions in the letter of appointment and seek Directors &
Officers Liability insurance from the company to protect against malicious actions.

Conclusion

Thus, the new Indian Companies Act of 2013 is certainly a very innovative and landmark
legislation in respect of the duties and responsibilities of the directors (of companies) also. Both
broad categories of directors, namely, the directors having pecuniary relationship with the
company, and the independent directors, have been properly considered under this mature
legislation for directors. It is quite obvious from above illustrations that the CA-2013 sincerely
seeks to make the corporate management and governance in India rather efficient, fully
accountable, transparent, and maximally beneficial to all stakeholders and related professionals,
through this intelligent legislation over duties and responsibilities of directors in Indian
companies.

2. APPOINTMENT OF DIRECTORS

The appointment of directors is closely regulated by the Companies Act, and several procedures
have been developed for the appointment of different directors. Promoters have no special power
over the appointment of directors. The appointment of directors follows a set procedure. Even if
directors are not appointed in this manner, promoters have no clear right to function as directors.
APPOINTMENT BY SHAREHOLDERS

APPOINTMENTS AT GENERAL MEETING [S. 152]

Shareholders can have control over a company if they have the power to choose directors.
Section 152 says that the company must choose its directors at general meetings. The person who
wants to be appointed as a director must give his Director's Identification Number and a
statement that he doesn't have any disqualification under the Act that would keep him from being
a director. [S. 152(4)] The person who is appointed as a director can't do his job until he gives
the company written permission to do so. He has to file his consent with the Registrar in the
prescribed manner within 30 days of being appointed. [S. 152(5)] When such a person is
appointed as an independent director, the notice calling the meeting must include a explanatory
statement that, in the Board's opinion, he meets the requirements in the Act for such an
appointment.

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 in physical form DIR-2 i.e. Consent to act as a director of a company.
Company shall file Form DIR-12 (particulars of appointment of directors and KMP along with
the form DIR-2 as an attachment within 30 days of the appointment of a director, necessary fee.
{Rule8}

5. Articles of the Company may provide the provisions relating to retirement of the all 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. Further
independent directors shall not be included for the computation of total number of directors. 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 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) section 162 i.e.
appointment of directors to be voted individually is applicable to the case.

Rotational Directors

The company's Articles of Incorporation may stipulate that all the directors have to step down
every year as rotational directors. If not, only one-third of them can get a permanent
appointment. The rest of them must have their jobs decided by a system of rotation. The articles
can stipulate that all of the directors will be appointed by rotation. The effect of these provisions
is that the rotating directors must be chosen at general meetings, unless the Act says otherwise.
Other directors of a public company and all directors of a private company that is not a
subsidiary of a public company must also be chosen at general meetings, unless the company's
articles say otherwise.

Vacancies
The vacancies created should be filled at the same meeting, according to Section 152. However,
the general meeting may decide that the vacancies should not be filled. If neither of these things
is done, the meeting is postponed for a week. If no new appointment is made at the reassembled
meeting, nor is there a resolution opposing appointment, the departing directors are presumed to
have been reappointed, save under particular situations.

Appointment of New Directors

If a new director is to be appointed in lieu of a retiring one, the procedure outlined in Section 160
must be followed. A written notice of his appointment should be left at the company's office at
least 14 days before the meeting date, along with a deposit of Rs 1,000,000, which will be
refunded to such person or member if the candidate is elected as a director or receives more than
25% of total valid votes cast on show of hands or poll. The prospective director or anybody
intending to propose him may give notice. The company must notify the members about the
candidacy in the approved manner.

Manner of Voting at General Meetings

1) Voting on individual basis [S. 162]- Every director must be appointed by a vote at the
annual general meeting. The candidates cannot be voted on as a group. Rather, each
candidate must be voted on separately. [Section 162(1)] However, if the meeting has
unanimously agreed to do so, a single resolution may elect more than one person. 2
2) Voting on proportional representation [S. 163]-While directors are normally nominated
by majority vote, Section 163 allows the minority to designate a representative to the
board. This clause allows a business to include a system of voting by proportional
representation in its articles for the appointment of directors. Each shareholder's vote is
more significant under this approach than in straight voting. It also makes it easier to get
rid of ineffective management.
Manner of Voting at General Meetings

1) Voting on individual basis [S. 162]- Every director must be appointed by a vote at the annual
general meeting. The candidates cannot be voted on as a group. Rather, each candidate must be
voted on separately. [Section 162(1)] However, if the meeting has unanimously agreed to do so,
a single resolution may elect more than one person.

2) Voting on proportional representation [S. 163]-While directors are normally nominated by

majority vote, Section 163 allows the minority to designate a representative to the board. This
clause allows a business to include a system of voting by proportional representation in its
articles for the appointment of directors. Each shareholder's vote is more significant under this
approach than in straight voting. It also makes it easier to get rid of ineffective management.

APPOINTMENT BY NOMINATION

Section 161(3) states that, subject to the company's Articles, the Board may appoint any
individual as a director nominated by any institution in accordance with the terms of any
legislation in effect at the time, any agreement, or the Central Government. The clause allows for
appointments to be made in conformity with the company's articles without going through the
general meeting. An agreement among the shareholders may be included into the articles to the
effect that each holder of a specified percentage share has the right to nominate a director to the
Board. Lending institutions also insist on putting some of their candidates on the company's
Board of Directors to keep an eye on their interest. The concept of nominee directors is
increasingly a part of the business landscape.

APPOINTMENTS BY BOARD

While the general meeting of shareholders has the general power to nominate directors, the
Board can appoint new directors in at least two instances. To begin, articles may enable directors
to appoint new directors, and Section 161 of the Act itself authorises directors to fill casual
vacancies.

Appointment of Directors in causal vacancy- Section 161 (4)

If any vacancy is caused by death or resignation of a director appointed by the shareholders in

General meeting, before expiry of his term, the Board of directors can appoint a director to fill up
 such vacancy. The appointed director shall hold office only up to the term of the director in
whose place he is appointed. Appointment of directors to be voted individually Section 162(1) A
single resolution shall not be moved for the appointment of two or more persons as directors of
the company unless a proposal to move such a motion has first been agreed to at the meeting
without any vote being cast against it. A resolution moved in contravention of aforesaid
provision shall be void, whether or not any objection was taken when it was moved. A motion
for approving a person for appointment, or for nominating a person for appointment as a director,
shall be treated as a motion for his appointment.

Appointment of Additional Director- Section 161 (1)

The board of directors can appoint additional directors, if such power is conferred on them by the
articles of association. Such additional directors hold office only upto the date of next annual
general meeting or the last date on which the annual general meeting should have been held,
whichever is earlier. A person who fails to get appointed as a director in a general meeting
cannot be appointed as Additional Director.

APPOINTMENT BY TRIBUNAL

The Tribunal has the authority to select directors in order to prevent oppression and
mismanagement. [Section 242(j)]

Appointment of Alternate Director- Section 161 (2)

Section 161(2) of the Act allowed the followings:

i. The Board of Directors of a company must be authorised by its articles or by a resolution

passed by the company in general meeting for appointment of alternate director.
ii. The person in whose place the Alternate Director is being appointed should be absent for
a period of not less than 3 months from India.
iii. The person to be appointed as the Alternate Director shall be the person other than the
person holding any alternate directorship for any other Director in the Company.
iv. If it is proposed to appoint an Alternate Director to an Independent Director, it must be
ensured that the proposed appointee also satisfies the criteria for Independent Directors.
v. An alternate director shall not hold office for a period longer than that permissible to the
director in whose place he has been appointed and shall vacate the office if and when the
director in whose place he has been appointed returns to India.
vi. If the term of office of the original director is determined before he so returns to India,
any provision for the automatic reappointment of retiring directors in default of another
appointment shall apply to the original, and not to the alternate director.

Proportional representation for appointment of directors- Section 163

The articles of a company may provide for the appointment of not less than two-thirds of the
total number of the directors of a company in accordance with the principle of proportional
representation, whether by the single transferable vote or by a system of cumulative voting or
otherwise and such appointments may be made once in every three years and casual vacancies of
such directors shall be filled as provided in sub-section (4) of section 161.
3. APPOINTMENT OF INDEPENDENT DIRECTORS

Every publicly traded company must have at least 1/3rd of its directors be independent. The
Central Government may impose a minimum number of independent directors in a class or
classes of public corporations.

QUALIFICATIONS

According to subsection (6), an independent director in respect to a company is one who is

neither a managing director, a full-time director, or a nominated director:

Such a director must serve on the Board for a maximum five-year term. He is still eligible for
reappointment if the company passes a special resolution and discloses the appointment in the
Board's report. No independent director may serve more than two consecutive terms. Even such
Such a director must serve on the Board for a maximum five-year term. He is still eligible for
reappointment if the company passes a special resolution and discloses the appointment in the
Board's report. No independent director may serve more than two consecutive terms. Even such a
director will be eligible three years after ceasing to be an independent director. During the three
gap years, he must not have been involved with the firm in any other position, either directly or
indirectly.

MANNER OF ELECTION OF INDEPENDENT DIRECTORS AND MAINTENANCE OF

DATA BANK [S. 150]

Independent directors may be chosen from a data bank including the names, addresses, and
qualifications of people who are qualified and willing to serve as such. This must be maintained
by any body, institute, or association as the Central Government may specify. The corporation is
responsible for conducting due diligence before selecting a person from such a data bank.
[Section 150(1)] The appointment must be authorised in a general meeting of the company.

4. CRITICALLY EVALUATE THE POSITION AND ROLE OF

INDEPENDENT DIRECTORS IN A COMPANY.

Directors who have knowledge or network in a particular area or a particular field can be termed
as independent directors. Usually, companies hire ex-officials for such roles because they have
the industrial expertise and the experience which is required to run a company smoothly.
Independent directors help maintain transparency, which is an especially relevant factor,
especially in the corporate regime. They have been defined under Section 149(2) as a director
other than managing director, wholetime director or nominee director and in the opinion of the
Board possesses relevant expertise and experience. Every listed public company is required to
have at least 1/3rd of the total number of directors as independent directors as per Section 149(4)
of the Companies Act, 2013.
POSITION OF INDEPENDENT DIRECTORS
Directors of a company are created by statute and hold a unique position, contrary to being
regarded as trustees, partners, or agents. The concept of independent directors has gained
significant importance in recent times. Independence implies that directors are free from any
inappropriate entanglements with the company's management, enabling them to objectively
monitor the board. Various corporate governance committees worldwide, along with major
legislations like the Sarbanes-Oxley Act 2002 in the US and provisions in listing agreements,
emphasize the essentiality of director independence for good governance. This independence
applies to all directors, not just independent directors.

The Companies Act places great emphasis on the role, powers, functions, and duties of
independent directors. In India, committees on corporate governance have highlighted the
importance of directors for efficient company functioning. Recent developments in Indian
Company Law include provisions concerning audit committees and independent directors. The
Satyam Computers scandal exposed the failure of corporate governance structures. This and
other detected scams have made investors reconsider their expectations of unbiased opinions and
objectivity from independent directors.

India follows an insider model of corporate governance, where most companies are family-
controlled. Despite this, the inclusion of independent directors on the board, as emphasized by
various committee reports, is crucial. The protection of minority shareholders' interests becomes
significant since they often lack influence due to their insufficient holdings. Corporate collapses
such as Parmalat, Daewoo Motors, and issues in the Southeast Asian market collapse highlight
the need for enhanced corporate governance structures and the role of independent directors.

The appointment of independent directors is based on the belief that individuals unconnected to
the company's day-to-day management or its promoters can improve transparency,
accountability, and provide unbiased opinions in the company's best interest. However, notable
failures like Enron and Satyam raise questions about the effectiveness of independent directors in
detecting misconduct and financial fraud. The board of directors lies at the core of corporate
governance. Shareholders appoint the board to oversee and direct company management,
maximizing long-term corporate value through legal and ethical means. Directors are fiduciaries
of shareholders, not management, and independent directors must represent the interests of
ultimate owners when they differ from management's objectives. This highlights the critical
nature of independence in determining board composition. Independent directors should exercise
judgment without inhibition or prejudice from any dominant group within the company or
management.

ROLE OF INDEPENDENT DIRECTORS

Umpteen number of studies has evidenced that there exists an undeniable relationship between
good corporate governance and financial performances of the corporate. On the same lines, the
studies conducted by Harvard and the University of Pennsylvania lately succinctly hints that
companies having a strong portfolios by maintaining strong shareholder rights actually outclass
the companies having weaker portfolio's by a margin not less than 10- 12 % per year. This is the
apparent reason why the investors opt for companies having corporate governance practices
essentially in today's time when globalization is at its peak, and we are seeking foreign investors
in our market and the economy. It is of paramount importance to thus have good corporate
conduct and governance to ensure the credibility of a company.

GENERAL ROLE OF INDEPENDENT DIRECTORS

The role and responsibilities of the independent director are enshrined in Section 149(8) read
with Schedule IV of the Companies Act, 2013. Schedule IV and SEBI (Listing Obligations and
Disclosure Requirement) Regulations 2015 impose huge powers and responsibilities in the hands
of Independent Directors.

The independent directors perform the following important roles:

• Facilitate withstanding and countering pressures from owners.

• Fulfil a useful role in succession planning.

• On issues such as strategy, performance, risk management, resources, key appointments and
standards of conduct he or she must support in gaining independent judgment to bear the board’s
deliberations.
• While evaluating the performance of the board and management of the company, he or she
needs to bring an objective view.

• Scrutinizing, monitoring and reporting management’s performance regarding goals and

objectives agreed in the board meetings.

• Safeguard the interests of all stakeholders, particularly the minority shareholders.

• Balance the conflicting interest of the stakeholders.

• Check on the integrity of financial information and ensure financial controls and systems of
risk management are in operation.

• In situations of conflict between management and shareholder’s interest, aim towards the
solutions which are in the best interest of the company.

• Establishing suitable levels of remuneration of executive directors, key managerial personnel,

and senior management.

COMMITTEE AND MEETING SPECIFIC ROLE OF INDEPENDENT DIRECTORS

Their contribution to the company further includes their role in different committees and
capacities: Role of Independent Director in CSR Committee

1. To recommend the CSR Policy to the board;

2. To recommend the CSR activities and programs as per Schedule VII;

3. To specify the CSR expenditure;

4. To monitor the CSR Policy of the Company from time to time. Role of Independent Director
in Board meeting 1. Should give Independent judgement on any matter of the Board; 2. Should
prevent the management from taking decisions that is likely to affect the interest of the
shareholders as large; 3. To ensure that there should not any unethical behaviour or fraudulent
practices adopted by the board; 4. To ensure that there should not violation of any company’s
policy.
Role of Independent Directors in the Separate Meeting of Independent Directors

1. To review the performance of non-independent directors and the Board as a whole;

2. To review the performance of the Chairperson of the company, taking into account the views
of executive directors and non-executive directors;

3. To assess the quality, quantity and timeliness of flow of information between the company
management and the Board that is necessary for the Board to effectively and reasonably perform
their duties.

Role of Independent Director in Audit Committee

1. To recommend for appointment, remuneration and terms of appointment of auditors of the

Company;

2. To review and monitor the auditor’s independence and performance, and effectiveness of audit
process;

3. To examination of the financial statement and the auditors’ report;

4. To review annual financial statements with reference of accounting policies and practices.

Role of Independent Director in Nomination and Remuneration Committee

1. Determine appropriate levels of remuneration of executive directors, key managerial personnel

and senior management and have a prime role in appointing and where necessary recommend
removal of executive directors, key managerial personnel and senior management;

2. Formulation of Succession plan to ensure corporate governance, stability and sustainability of

the business;

3. To ensure that appointment and succession planning on merit basis.

Role of independent director for prevention of fraud

1. Ascertain and ensure that the company has an adequate and functional vigil mechanism and
the interests of a person who uses such mechanism are not affected on account of such use;

2. Report about unethical behaviour, actual or suspected fraud or violation of the company’s
code of conduct or ethics policy;

3. Act within his authority, assist in protecting the legitimate interests of the company,
shareholders and its employees;

4. Not disclose confidential information, including commercial secrets, technologies, advertising

and sales promotion plans, unpublished price sensitive information, unless such disclosure is
expressly approved by the Board or required by law.

5. DUTIES AND DISQUALIFICATION OF A DIRECTOR

DUTIES OF DIRECTORS
Section 166 of the Act establishes a statutory framework of directors' obligations. These
responsibilities are outlined in the six points below:
FIDUCIARY OBLIGATION [DUTY OF GOOD FAITH] [S. 166(2)]

Directors must act in the best interests of the company, its employees, shareholders, community,
and the environment. Directors are required to act honestly and might face penalties if they do
not. Example- In Boston Deep Sea Fishing & Ice Co v. Ansel, director of one company, who
was also a member of another, earned bonuses from the other company by supplying a business
facility of his own, was held accountable for these profits, even though the company itself had
lost nothing and also could not have earned the bonus.

Furthermore, directors are required not to profit personally from the company. Example- In
Albion Steel and Wire Cov Martin, the court held that even if a director made a loss on a sale
of company shares to his firm, he still made a profit since he had purchased the stock previously
at a lower rate. By law, he had to account the court for the money he made.

A director should not misuse the company's resources for his own benefit. Example- In Cook v
Deeks, the directors of a firm decided that the company had no interest in a contract because they
diverted a contract opportunity from the company to themselves. The advantages of the contract
were deemed to belong to the firm and the directors could not legitimately utilise their voting
power to transfer them to themselves. Certain circumstances allow a director to profit from an
unrelated business opportunity without having to account for it. Officers of a defunct or bankrupt
corporation are free to act on their own behalf since this situation is plainly detectable and cannot
be easily disguised. In the same way, if the project will violate the corporation's authority,

the directors can take action on their own. Example- In Peso Silver Mines Ltd v Cropper, In
the case of Peso Silver Mines Ltd v Cropper, the prospect was beyond the realm of corporate
activity and the company had showed no interest in the property and therefore the officer could
acquire it personally.

DIRECTORS' DUTY OF CARE, DILIGENCE AND SKILL [S. 166(3)]

Director negligence and failure to excercise due care and diligence, that allows for the
fabrication of financial data and misleading disclosure has been identified by the Supreme Court
as a breach of corporate governance by directors. Further, N Narayanan v SEBI states that they
are accountable for any mistakes they make. The director must exercise reasonable care in his or
her duties. He must do the tasks entrusted to his care and attention with dedication and care. To
hold directors responsible for their carelessness, the court in Lazunas Nitrate Co v. Lagunas
Syndicate concluded that they had to be guilty and grossly negligent. At common law, directors'
obligations have always been viewed as comparatively low. To hold directors responsible in the
past, it was typically necessary to show egregious misconduct on their part.

DUTY TO ATTEND BOARD MEETINGS

Intermittent duties of directors must be carried out at Board meetings. To put it another way, they
are not obligated to keep tabs on the company's operations at all times. It is not even required for
a director to attend all Board meetings, but he must go whenever he is reasonably able to do so.
Section 167(l)(b) states that a director's office is relinquished after 12 months of continuous
absence from all Board meetings, whether or not a leave of absence has been granted by the
Board.

DUTY NOT TO DELEGATE [S. 166(6)]

A director is often expected to carry out all of his duties on an individual basis. In accordance
with the maxim delegatus nonpotest delegare, he is not allowed to delegate. His appointment is a
testament to the shareholders' confidence in his abilities, knowledge, and moral character, and
they may not have the same confidence in someone else's. However, the principle is not rigid.
Delegation is acceptable in the following two situations. Delegation of functions can be made
only to the degree that it is permitted under the company's constitution [Section 153]. Second,
certain responsibilities may be appropriately delegated to other officials in light of business
needs.

DUTY TO DISCLOSE INTEREST [SS.2(49) AND 184]

Directorial duties need objectivity, which means the director must be devoid of any personal or
professional bias. When a director is personally invested in a corporate transaction, conflicts of
interest are inevitable. Naturally, a person will prioritise his own interests over those of others. In
the landmark case, Aberdeen Railway Ltd. v. Blaikie Bros, this principle was established. There
is a specific procedure outlined in the law for such situations. Companies, bodies corporate,
businesses, and other associations of persons must be made aware of any interest a director may
have in them. To comply with the rules, he must disclose his holdings in such a manner as is
required. Whenever there is a change in the disclosures already made, the disclosure must be
made at the first meeting of the Board at which the director is participating as a director. Every
financial year, such a declaration must be made again. Each and every director of a corporation,
whether directly or indirectly involved in a potential contract or arrangement—whether they are
directly or indirectly involved:
(a) with a body corporate in which such director either himself or in association with any other
director, holds more than 2 per cent shareholding or is a promoter, manager, chief executive
officer of that body corporate, or

(b) with a firm or other entity in which such director is a partner, owner or member, His interest
in the contract or agreement must be disclosed at the Board meeting when it is addressed. He is
not allowed to attend such a conference. If he changes his mind, he'll have to come clean at the
Board's first meeting and say he's interested in the business. If there was no disclosure or the
director participated in the meeting, the contract is voidable. Director in issue must pay over any
profits he may have gained from the transaction and cannot argue for a set-off for any claim
against the business as stated in Guinness pic v Saunders. Under the provision, the court in MO
Varghese v Thomas Stephen & Co Ltd elaborated on the consequences of default under the
section as:

(1) liability to be prosecuted under Section 184(4);

(2) cessation of the office of directorship under Section 167(l)(d)

(3) liability to be prosecuted under Section 283(2) for acting as director after incurring a
disqualification; and

(4) liability to refund remuneration. The sole need is that a director's interest in a contract be
declared, bona genuine, and reasonable.[P Leslie &Co v VO Wapshare]

DISQUALIFICATIONS FOR DIRECTORS

Section 164 lays down the minimum eligibility requirements. A person is not capable of being
appointed a director in the following cases:

(a) If he is of unsound mind. [Provided that the fact has been certified by a court of competent
jurisdiction and the finding is in force]

(b) If he is an undischarged insolvent;

(c) If he has applied to be adjudicated as an insolvent and his application is pending;

(d) If he has been sentenced to at least six months of or otherwise imprisonment for an offence
involving moral turpitude or otherwise and five years have not elapsed from the date of the
expiry of the sentence; [The Proviso to the clause says that if a person has been convicted of any
offence and sentenced to imprisonment for a period of seven years or more, he ceases to be
eligible for appointment as director in any company]

(e) If an order for disqualifying him for appointment as director has been passed by a court or the
Tribunal and the order is still in force;

(f) If he has not paid his calls in respect of any shares of the company held by him, whether alone
or jointly with others, and six months have elapsed from the date fixed for payment;

(g) If he has been convicted of an offence dealing with related party transactions under Section
188 at any time during the last preceding five years;

(h) If he has not complied with the requirement of Director Identification Number. [S. 152(3)]
The Proviso contain the following three points about the effect of conviction: The
disqualifications stated in clauses (d), (e) and (f) are not to take effect

(i) for 30 days from the date of conviction;

(ii) where an appeal or petition is preferred within such 30 days, until the expiry of seven days
from the date on which such appeal or petition is disposed of; or

(iii) where any further appeal or petition is preferred against the order or sentence within seven
days, until such further appeal or petition is disposed of. Furthermore, a private company may by
its articles provide for additional disqualification. [S. 164(3)] Lastly, if a person is already a
director of a public company,—

(a) which has not filed the annual accounts and annual returns for any continuous three financial
years, or

(b) has failed to repay its deposit or interest on it on due date or redeem its debentures on due
date or pay dividend and such failure continues for one year or more. The person shall be
disqualified for appointment as director of any other public company for five years from the date
of the specified types of failure. [S. 164(2)]
REMOVAL OF DIRECTORS

Section 169 enables a company to remove a director before the expiration of his period of office
by an ordinary resolution. Any provision in the company’s articles or in any agreement between
a director and the company by which the director is rendered irremovable by an ordinary
resolution would be void, being contrary to the Act. The section is intended to do away with
arrangements under which directors were either irremovable or removable only by extraordinary
resolutions. However, the following exceptions exist:

1. It does not apply to the case of a director appointed by the Tribunal in pursuance of Section
242.

2. It does not apply to the case of a company which has adopted the system of electing two-thirds
of its directors by the principle of proportional representation under Section 163.

NOTICE AND EXPLANATORY NOTE

A special notice of a resolution to remove a director is required. This notice must clarify the
intention to move the resolution and it should be given to the company not less than 14 days
before the meeting. This is to enable the company to inform the members beforehand. As soon as
the company receives the notice, it must furnish a copy of it to the director concerned who will
have the right to make a representation against the resolution and to be heard at the general
meeting. If the director submits a representation and requests the company to circulate it among
the members, the company should, if there is time enough to do so, send a copy of the
representation to every member of the company to whom notice of the meeting is sent. If this is
not possible, the representation may be read out to the members at the meeting. Where a meeting
is requisitioned by the shareholders for the very purpose of removing a director, the Supreme
Court in LIC v Escorts Ltd laid down that it is not necessary for the requisitionists to state the
reasons on which they wish to proceed against the director. The court found the notice sufficient
for all practical purposes since it allowed the removal of all or any director and provided
sufficient warning to all directors that they were open to attack. In Dabur India Ltd v Anil Kumar
Poddar, the court restrained the company from putting the resolution before the meeting where it
found that the member sending the notice was not honestly motivated.
VACANCY

The vacancy created may be filled at the same meeting, provided special notice of the proposed
appointment was also given. The director so appointed would hold office for the period for
which the director removed would have been in office. If the vacancy is not filled at the meeting,
it may be filled by the Board as a casual vacancy, provided that the director removed is not
reappointed. [169(5) and (6)] The section, however, does not deprive the person removed of any
compensation or damages payable to him on the termination of his appointment.

CLAUSES SAFEGUARDING DIRECTOR’S POSITION

The powers of management are generally vested in the directors and the shareholders do not,
ordinarily, have the right to interfere in the matter. But if they are not agreeable with the policy
of a particular director, they can use their power of removal and thus have a greater voice in the
administration of the company. In House of Lords in Bushell v Faith, the director defeated the
motion for his removal on the basis of a clause granting him special voting powers. The trial
judge held that the clause which gave a shareholder treble voting power was invalid as it would
make a “mockery” of Section 184. The Court of Appeal reversed this decision and found that the
clause was consistent with the Act since the Parliament, had no provision against it. This
decision has been criticised in the basis that it defeats the clear intention of the legislature and
contravenes the spirit, if not letter, of Section 18. However, this decision is meritorious in that it
may be highly desirable that ‘partners’ should be safeguarded in directorships, whether by means
of special voting rights or by means of shareholders’ voting agreements”.

REMEDY AVAILABLE WITH DIRECTORS

A director who has been removed from office has the remedy available to him for applying for
winding up on the just and equitable ground. In Westbourne Galleries Ltd, re, Lord Wilberforce
explained, that the just and equitable provision comes to the assistance of a director if he can
prove some underlying obligation of his fellow members in good faith that so long as the
business continues he shall be entitled to management participation. This obligation must be
proven to be fundamental to the company, such that if it is broken the association must be
dissolved.

OBSTRUCTION TO CAUSING EXTRAORDINARY GENERAL MEETING FOR

REMOVAL

In cases where the director causes obstruction in the meeting called for their removal, either by
not attending the meeting (triggering the quorum provision) or by suspending rights of
shareholder, relief is granted to shareholders enabling them to hold the meeting despite these
actions. This took place in the cases of Shoe Specialities Ltd v Standard Distilleries & Breweries
(P) Ltd and Bharat J Patel v Jyoti Ltd respectively.

CONSEQUENCES OF REMOVAL OF DIRECTOR

When the appointment of a director is so terminated he cannot, except with the leave of the
Tribunal, serve any company in a managerial capacity for a period of five years.[ S. 243(1)(b)] It
is necessary that the Central Government should be notified of the intention to apply for such
leave. The director cannot sue the company for damages or compensation for loss of office.
[Ss.243(1)(a)]
VACATION OF OFFICE OF DIRECTOR CIRCUMSTANCES VACATING OFFICE
As per Section 167, the office of a director is vacated in the following cases:

(b) if he incurs any of the disqualifications specified in Section 164;

(c) if he absents himself from all the meetings of the Board held during a period of 12 months
with or without seeking leave of absence of the Board;

(d) if he acts in contravention of the provisions of Section 184 relating to entering into contracts
or arrangements in which he is directly or indirectly interested;

(e) if he fails to disclose his interest in any contract or arrangement in which he is directly or
indirectly interested in contravention of the provisions of Section 184;

(f) if he becomes disqualified by an order of a court or the Tribunal;

(g) if he is convicted by a court of any offence, whether involving moral turpitude or otherwise
and sentenced to imprisonment for not less than six months. The office has to be vacated even if
an appeal has been filed against the conviction.

(h) If he is removed in pursuance of the provisions of the Act;

(i) if he, having been appointed a director by virtue of his holding any office or other
employment in the holding, subsidiary or associate company, ceases to hold such office or other
employment. A director is obliged to leave office when he incurs any of the above
disqualifications. If he does not do so, he is penalised.

AUTOMATIC OPERATION

The tenor of the section and the penalty provision which becomes effective from the date of
disqualification show that the operation of the section is automatic. The office becomes vacated
from the date of disqualification. No formalities, no show-cause notice, no hearing and no
decision are necessary. All that is necessary is that there should be proof of the happening of the
disqualifying event.
6. POWERS OF DIRECTORS

Section 179 declares that subject to the restrictions contained in the Act, and in the memorandum
and articles of the company, or in any regulations not inconsistent with them including
regulations made by the company in general meeting, the powers of directors are co-extensive
with those of the company itself. Once elected and in control, the directors have almost total
power over the operations of the company, until they are removed.

POWERS EXERCISABLE BY SHAREHOLDERS

There are two important limitations upon their powers. Firstly, the Board is not competent to do
what the Act, memorandum and articles require to be done by the shareholders in general
meeting and, secondly, in the exercise of their powers the directors are subject to the provisions
of the Act, memorandum and articles and other regulations not inconsistent therewith, made by
the company in general meeting. The Act thus tries to demarcate the area of proper management
control and proper shareholder control. However, there is clash between the shareholders and
directors as to their respective powers. In respect to such a clash, in Automatic Self-Cleansing
Filter Syndicate Co Ltd v Cuninghame, it was held that directors are agents not of a majority
of the shareholders, but of the whole entity made up of all the shareholders. And if the whole
entity of shareholders has entrusted the directors with a particular power a simple majority could
not interfere in exercise of it. Further, in Gramophone &Typewriter Ltd v Stanley, it was held
that the general meeting cannot impose its will upon the directors even by a resolution of a
numerical majority, at a when the articles have confided to them the control of the company's
affairs. Moreover, in John Shaw & Sons (Salford) Ltd v Shaw the court explained that if
powers of management were vested in the directors, they and they alone could exercise those
powers. The only way in which the general body of the shareholders can control the exercise of
the powers vested by the articles in directors is by altering their articles, or, if opportunity arises
under the articles, by refusing to re-elect the directors of whose action they disapprove. They
cannot themselves usurp the powers which are vested in the directors by the articles. This
principle was applied to the case even of a private company in Scott v Scott. Thus the
relationship of the Board of directors with the general meeting is more of federation than one of
subordinate and superior. However, in the following exceptional situations the general meeting is
competent to act even in a matter delegated to the Board:
1. If the board acts with Mala fides

2. If the board is incompetent

3. If there is a deadlock in the board

4. If the powers are residuary powers

7. WHAT ARE THE RESTRICTIONS ON THE POWER OF THE

BOARD?

POWERS EXERCISABLE BY RESOLUTION AT BOARD MEETINGS [S. 179(3)]

The Act also makes a careful effort to lay down the manner in which certain powers of the
company are to be exercised. Section179 provides that following powers of the company can be
exercised only by means of resolutions passed at meetings of the Board: This includes the
power:

(a) to make calls;

(b) to authorise buy-back under Section 68(2)(b);

(c) to issue securities including debentures; (d) to borrow money;

(e) to invest the funds of the company;

(f) to grant loans or give guarantees or provide security in respect of loans;

(g) to approve financial statements and the Board's report;

(h) to diversify the business of the company;

(i) to approve amalgamation, merger or reconstruction;

(j) to take over a company or to acquire a controlling or substantial interest in another company;

(k) any other matter which may be prescribed.

Delegation of Powers
The Board may by its resolution at a meeting delegate the powers to borrow moneys and to grant
loans, etc to a committee of directors, the managing director, the manager or any other principal
officer of the company, or in the case of branch office, principal officer of the branch. Additional
Restrictions Furthermore, Sub-section(4) says that the section is not to affect the right of a
company in general meeting to impose restrictions and conditions as to the exercise by the Board
of any of the powers specified in the section. The shareholders in general meeting may place any
restrictions on, or otherwise regulate, the exercise of the above powers.

POWERS EXERCISABLE WITH GENERAL MEETING APPROVAL [S. 180]

Section 180 imposes a restrictions on the powers of the Board of directors of a public company
or any subsidiary of a public company. According to this section, the following powers can be
exercised by the Board only with the consent of the company in general meeting:

(a) To sale, lease or otherwise disposal of the whole or substantially the whole of the undertaking
of the company or where the company owns more than one undertakings, of the whole or
substantially the whole of any such undertakings.

(b) To invest otherwise in trust securities the amount of compensation received by the company
as a result of any merger or amalgamation.

(c) To borrow money, in cases where the money to be borrowed by the company, together with
the money already borrowed, will exceed the aggregate of the paid-up share capital and free
reserves, apart from temporary loans obtained from the company's bankers in the ordinary course
of business. (d) To remit or give time for repayment of any debt from a director.

Effect of breach of provisions

(a) If the directors have in breach of the above restrictions sold or leased the undertaking of the
company, the title of the purchaser or lessee will not be affected, provided he acted in good faith
and with due care and caution.

(b) The purchaser must see that the transaction is executed in accordance with the company's
articles, because otherwise it would be ineffective to pass any title to him. [S. 180(3)]
(c) Where borrowing has been effected exceeding the amount of the paid-up share capital, the
lender may not be able to enforce the loan against the company, unless he can prove that he
advanced the loan in good faith and without knowledge that the limit had been exceeded. [S.
180(5)] Mode of expressing Consent The consent of the general meeting may be expressed by
means of a formal resolution or informally through conduct such as in Joint Receivers and
Managers of Niltan Carson Ltd v Hawthorne.

8. TYPES OF DIRECTORS

BASED ON FUNCTIONS

Based on functions, directors are divided into:

a. Executive Director– The two types of Executive Directors –

• Managing Director,
• Whole time Director.
b. Non-Executive Director – The two types of Non- Executive Directors – • Nominee
Director, • Independent Director.

EXECUTIVE DIRECTOR
Executive directors are internal professionals i.e. they are internal to the organization and
are involved in the daily functions of the company. Section 2(94) of Companies Act and
Rule 2(1)(k) of Companies (Specification of Definitions Details) Rules, 2014 defines
executive director as a whole-time director. Any person who is a full-time employee of
the company (i.e. whole-time director) or who is responsible for the day-to-day
operations of the company (i.e. managing director) will be called an Executive Director.
Thus, an Executive Director can be designated as Managing Director and whole-time
Director. Generally, an executive director is paid more than a non-executive director
because they are believed to have rich expertise and experience in their field. He is
usually responsible for the executive functions in the management and administration of
the company.
 (a) Managing Director – He is an executive director. When considerable power of
managing the affairs of a company is given to a director either by way of Articles of
Association of the Company (AOA) or an agreement with the Company, or a resolution
passed in its general meeting, or by its Board of Directors, then he will be a Managing
Director of that Company.

c. Whole Time Director – A director who is a whole time employee of the company is
considered a whole time director. He has been defined under Clause 2(94) of Companies
Act. He is also an executive director of the company.

NON-EXECUTIVE DIRECTOR
Non-executive directors are external professionals. The Companies Act, 2013 does not
define nonexecutive directors but we can understand the meaning from the definition of
executive directors. Directors who are not involved in the day-to-day functions or
activities of the Company are called non-executive directors. Despite not being involved
in the day-to-day business they are still on the Board. The reason is that the Board needs
their inputs in certain areas, or because there may be a legal requirement to have them on
the Board. Non-executive directors come to the company only to make certain decisions
at the Board meeting.

(a) Independent Director – Directors who have knowledge or network in a particular area
or a particular field can be termed as independent directors. Usually, companies hire ex-
officials for such roles because they have the industrial expertise and the experience
which is required to run a company smoothly. Women directors can also be appointed as
independent directors. Independent directors help maintain transparency, which is an
especially relevant factor, especially in the corporate regime. They have been defined
under Section 149(2) as a director other than managing director, whole-time director or
nominee director and in the opinion of the Board possesses relevant expertise and
experience. Every listed public company is required to have at least 1/3rd of the total
number of directors as independent directors as per Section 149(4) of the Companies Act,
2013.

(b) Nominee Director – Section 149(7) and Section 161(3) of the Companies Act, 2013
deals with a Nominee director. If it is authorized by the Articles of Association (AOA) of
a company then the Board may appoint any person as a director nominated by any
institution in pursuance of the provisions of any law for the time being in force or any
agreement or by the Central Government or the State Government under its shareholding
in a Government company. If the Articles of Association of a Company authorizes it,
only then can a nominee director be appointed by the Board. Nominee Directors represent
the stakeholders on the board of directors and protects their interest. Their job is to see
that the company does not function in a manner detrimental to the interest of the
stakeholders they represent.

BASED ON APPOINTMENT
Based on appointment, directors are divided into:
(a) Additional Director
(b) Alternate Director
(c) Casual Vacancy Director.

ADDITIONAL DIRECTOR
Provisions of Section 161(1) deal with the Additional Director. Where there is heavy
pressure of work on the Board of directors then the Board of directors can appoint an
additional director, if authorized by the Articles of Association of that company. An
additional director can be a managing or a whole-time director. An additional director can
also be considered a rotational director. The powers and rights of the additional directors
will be the same as other directors of the Company.

ALTERNATE DIRECTOR
Provisions of Section 161(2) deal with Alternate directors. When a director of a company
is not in India for more than (3) three months then an alternate director can be appointed
 on the original director’s behalf. Thus, the alternate director exercises his duties for a
limited time only i.e. only till the time the principal director returns to his duties. Even
though a director can be present through video conferencing, at times the shareholders
might find the need to have a physical presence on the Board, which is when an alternate
director gets appointed.

CASUAL VACANCY DIRECTOR

Provisions of Section 161(4) deal with a casual vacancy director. Casual vacancy means a
vacancy in the office due to the reasons of death, resignation, disqualification, incapacity,
and removal. Thus, a director assuming office due to any of these reasons will be
considered as a casual vacancy director. Only the shareholder will have to make a valid
appointment with such a director. The concept of a casual vacancy director applies only
to public companies.
OTHER TYPES Additional types of directors include:
(a) Residential Director
(b) Women Director
(c) Small Shareholders Director
(d) Shadow Director.

RESIDENTIAL DIRECTOR

Provisions of Section 149(3) deals with the residential Director. The new Companies Act
introduced this concept of Resident Director. The Act makes the residence of a Director in India
mandatory. It states that every Company shall have at least 1 Director who has resided in India
for a total period of not less than 182 days in the previous financial/ calendar year. This provision
applies to all companies, both private and public.

WOMEN DIRECTOR

As per the provisions of Section 149(1) of the Act and Rule 3 of the Companies (Appointment &
Qualification of Directors) Rules, 2014, it is mandatory for certain companies to appoint a
woman director. The Companies that need to appoint a women director are as follows –

(a) Every listed company.

(b) Every public company having paid-up share capital of Rs. 100 crores or more.

(c) Every public company which has a minimum turnover of Rs. 300 crores or more.

SMALL SHAREHOLDERS DIRECTOR (also a short note)

Any person who holds shares of the nominal value of not more than Rs. 20,000 in a Public
Company is called a small shareholder. According to Section 151 every listed company may
have 1 director elected by such small shareholders. These directors elected by small shareholders
are called Small shareholders Directors. A small shareholder director can be appointed only if –

(a) The Company is a Public Company;

(b) The Company has at least 1000 or more small shareholders;

SHADOW DIRECTOR

A shadow director is nowhere mentioned in the Companies Act, 2013. A shadow director is
someone who is not appointed officially as a Director of the company but the Board follows his
directions and orders. They are very influential just like any other Director of a company but
they manage to avoid the liability that arises thereof. They give orders and their orders are
followed but they do not have any managerial position in the company. Such Directors are
known as Shadow Directors. The concept has been explained in the case Re Hydrodan (Corby)
Ltd.

9. DISCUSS THE PROVISIONS RELATING TO RELATED PARTY AND

DISCLOSURE OF INTEREST UNDER COMPANIES ACT, 2013.

For the proper exercise of the functions of a director, it is essential that he be disinterested, that
is, be free from any conflicting interest. This conflict invariably arises when a director is
personally interested in a transaction of the company. Naturally a man is likely to prefer his
personal interest. This principle was established in the leading case, Aberdeen Railway Ltd v
Blaikie Bros. The Act lays down a special procedure to be followed in such cases. A director has
to disclose his concern or interest in any company or companies or bodies corporate, firms or
other association of individuals. His disclosure has to include the shareholding in such manner as
may be prescribed. The disclosure has to be made at the first meeting of the Board in which he
participates as a director, whenever any change occurs in the disclosures already made, such
change must be disclosed at the first meeting of the Board after such change. Such disclosure has
to be renewed in every financial year. Every director of a company who is in any way, whether
directly or indirectly interested in an actual or proposed contract or arrangement to be entered
into—

(a) with a body corporate in which such director either himself or in association with any other
director, holds more than 2 per cent shareholding or is a promoter, manager, chief executive
officer of that body corporate, or

(b) with a firm or other entity in which such director is a partner, owner or member, He has to
disclose the nature of his concern or interest at the meeting of the Board in which the contract or
arrangement is discussed. He has not to participate in such meeting. If he becomes subsequently
so interested, he must make the disclosure at the first meeting of the Board. The contract
becomes voidable if there was no disclosure or the director participated in the meeting.

INTEREST

Section 2(49) identifies persons who can be said to have interest. ‘interested director’ means a
director who is in any way, whether by himself or through any of his relatives or firm, body
corporate or other association of individuals in which he or any of his relatives is a partner,
director or a member, interested in a contract or arrangement, or proposed contract or
arrangement, entered into or to be entered into by or on behalf of a company. The interest to be
disclosed is that which in a business sense might be regarded as influencing judgment; the
essence of the matter being that any kind of personal interest which is material in the sense of not
being insignificant must be revealed. In short, the interest must be such which conflicts with the
director's duties towards the company. Example- In North Eastern Insurance Co Ltd, re, the
directors took part in and voted at a meeting of the Board which granted debentures to two of
them, the resolution was held to be bad.

DISCLOSURE
Where the whole body of directors is already aware of the facts, a formal disclosure is not
necessary. Example- In Pidah Venkatachalapathy v Guntur Cotton Jute and Paper Mills Co
Ltd, where a loan was advanced by the wife of a director, it was held that the fact was already
known to the directors there was no necessity of a formal disclosure.

DEFAULT

The director in question is bound to hand over the benefits, if any, that he might have secured
under the transaction and he cannot ask for set off for any claim that he may have against the
company as held in Guinness pic v Saunders. The court in MO Varghese v Thomas Stephen
& Co Ltd elaborated on the consequences of default under the section as:

(1) liability to be prosecuted under Section 184(4);

(2) cessation of the office of directorship under Section 167(l)(d)

(3) liability to be prosecuted under Section 283(2) for acting as director after incurring a
disqualification; and

(4) liability to refund remuneration. However, it must be noted that here is no ban on a contract
in which a director is interested; only that it should be disclosed, bonafide and fair. [P Leslie
&Co v VO Wapshare].

POSITION OF DIRECTORS IN COMPANY

A director's role inside a firm is a tricky one. Despite the fact that they are employed by the
corporation to oversee its activities, these individuals are not its servants. They are, in fact, the
company's top executives. A company's affairs are directed or controlled by a director. A
director, on the other hand, may serve in another position as an employee. In the case of Lee v
Lee's Air Farming Ltd., for example, the company's chief controller and director also served as
the company's pilot. His wife was awarded compensation under the Workmen's Compensation
Act following his death while working as a pilot. None of the Companies Act's definitions
attempt to clarify their status. Section 2(13) only stipulates that “director includes any person
occupying the position of a director, by whatever name called”. The The Nigerian Act carries a
better definition: “Directors of a company registered under this Act are persons duly appointed
by the company to direct and manage the business of the company”. According to Bowen LJ,
directors are sometimes referred to as agents, trustees, or managing partners, depending on the
context. Rather than implying a full list of their capabilities and duties, these statements serve to
highlight relevant vantage points from which they might be seen at a given time and for a certain
purpose.

AS AGENTS

Directors are, in the viewpoint of law, the company's agents. This was made plain in Ferguson v
Wilson. According to the court's ruling, a corporation does not have a person; it can only act via
its board of directors, and the case is simply a matter of principle and agent. Director-company
relations and transactions facilitated by those directors are governed by the broad rules of
agency. The following are some of their duties and rights as agents:

(a) When the directors contract in the name, and on behalf of the company, it is the company
which is liable on it and not the directors. In Elkington & Co v Hurter, the plaintiff supplied
certain goods to a company through its Chairman, who promised to issue him a debenture for the
price, but never did so and the company went into liquidation, he was held not liable to the
plaintiff.

(b) In Ferguson v Wilson, the directors allotted certain shares to the plaintiff, they were held not
liable when the company, having exhausted its shares, failed to give effect to the allotment.

(c) In TR Pratt (Bombay) Ltd v MT Ltd, it was held that just as notice to an agent in the
course of business amounts to notice to the principal so it is true of directors in relation to the
company.

(d) Directors have to disclose their personal interest, if any, in any transaction of the company.

AS TRUSTEES

Although directors are not legally trustees, they have always been held accountable for the
money they have misapplied on the same basis as if they were trustees since joint stock
companies were created. It was noted by the Madras High Court in Ramswamy Iyer v
Brahamayya & Co: Directors are trustees for the firm and can be held accountable as trustees if
they misuse their ability to utilise company funds. Their cause of action survives their death. The
uniqueness of the position of director has led to comparisons to trusteeship. York & North
Midland Railway Co v Hudson explains that the directors are chosen to oversee the company's
business on behalf of the shareholders. It's a position of trust, and if they take it on, they owe it to
the public to do their best. They have some responsibilities to the firm that are similar to those of
a trustee, As an example, they, like trustees, hold themselves to a higher standard of care. In
addition, practically all of the director's powers are held in trust such as, such as:

• The power to make calls [Alexander v Automatic Telephone Co]

• The power to forfeit shares [Esparto Trading Co, re]

• The power to issue further capital [Nanalal Zaver v Bombay Life Assurance Co Ltd]

• The general powers of management [Marshall’s Valve Gear Co Ltd v Manning, Wardle & Co
Ltd]

• The power to accept or refuse a transfer of shares.

Directors, on the other hand, do not have the authority to act as trustees. Ownership of property
and legal contracts are held in trust by a trustee, who is the legal owner of the trust property.
Unlike a shareholder, a director is a paid employee or official of the firm. The real truth of the
matter as stated in Coal Mining Co, re is that “directors are commercial men managing a trading
concern for the benefit of themselves and of all the shareholders in it”.

TRUSTEES FOR INDIVIDUAL SHAREHOLDERS

The directors of a corporation serve as trustees of the firm, not shareholders. Percival v Wright,
decided in 1902, established this rule. It was challenged in Coleman v Myers, where the
Supreme Court ruled that courts will not automatically impose fiduciary duties on directors when
they engage in transactions with the company's shareholders. Consequently, Face-to-face
discussions, dependence on directors to reveal all significant information; high degree of inside
knowledge with directors; declaration of a scheme by the directors, etc. are all situations in
which a duty to disclose material information would arise. According to Allen v. Hyatt, the
directors were deemed to be fiduciaries entrusted with managing the company's wealth for the
benefit of the company's shareholders. They can't constantly operate as if they don't owe
individual shareholders any obligation.

TRUSTEES OF INSTITUTION

The contemporary firm isn't just a profit-making engine, but rather an organisation that has social
duties to a wide range of stakeholders, not just shareholders. In Charanjit Lal Chowdhury v
Union of India, the Supreme Court acknowledged a company's social responsibility. Mukherjee
J observed, “A corporation which is engaged in the production of a commodity vitally essential
to the community, has a social character of its own and it must not be regarded as the concern
primarily or only of those who invest money in it.” As a result, it is now universally accepted
that directors must take into account the interests of workers and customers as well as those of
the wider public. It is to their benefit, as trustees, that directors must engage with outside
interests.

10.PROCEDURE TO FOLLOWED IN MERGER OF A COMPANY AND POWER OF

COURT

Introduction

The term ‘merger’ is not defined under the Companies Act, 2013 or under Income Tax Act, 1961
(“ITA”). As a concept, a ‘merger’ is a combination of two or more entities into one; the desired
effect being not just the accumulation of assets and liabilities of the distinct entities, but
organization of such entity into one business.

The ITA goes on to specify certain other conditions that must be satisfied for an ‘amalgamation’
to be eligible for benefits accruing from beneficial tax. Sections 230-234 of Companies Act,
2013 deal with the schemes of arrangement or compromise between a company, its shareholders
and/or its creditors.

Merger Provisions

The Merger Provisions govern schemes of arrangements between a company, its shareholders
and creditors. The Merger Provisions are in fact worded so widely that they provide for and
regulate all kinds of corporate restructuring that a company can possibly undertake, such as
mergers, amalgamations, demergers, hive off, and every other compromise, settlement,
agreement or arrangement between a company and its members and/or its creditors.

Application for Order of a Meeting

An application for compromise or agreements under section 230 of the Act may be brought to
the National Company Law Tribunal (Tribunal) for holding a creditors' or shareholders' meeting
in the required format (Form No. NCLT-1). The application must include a notice of admission
(NCLT Form No. 2), an affidavit (NCLT Form No. 6), and a copy of the scheme of compromise
or arrangement.

Hearing of Application

During the hearing, the Tribunal selects creditor classes, sets meeting details, appoints a
chairperson, determines quorum and procedures. It also issues directives for creditor notices and
publication, with the power to waive any creditor meeting if necessary.

Notices for Meetings

The chairperson must send meeting notices (Form No. CAA.2) to each creditor or member,
including a copy of the compromise or arrangement scheme and any additional information. The
notices should be provided before the meeting, along with a copy of the scheme. They must also
be published in at least one English and one vernacular publication widely circulated in the State
where the company's registered office is located, as well as on the company's website for at least
30 days.

Voting and Proxies

The proposed compromise or agreement will be considered during the meeting. Voting at the
meeting will take conducted via poll or technological means. Voting by proxy shall also be
permitted. Within three days following the conclusion of the meeting, the chairperson shall
submit a report to the Tribunal (Form No. CAA.4) detailing the meeting.

Filling and Hearing of Petition

If the proposed compromise or arrangement is approved in the meeting, the company must file a
petition (Form No. CAA.5) within seven days of the chairperson's report submission. The
Tribunal will schedule a hearing date for the petition. On that date, the Tribunal will consider the
petition and issue an order approving the scheme (Form No. CAA 6). The Tribunal may include
additional instructions or amendments as necessary. A certified copy of the order must be filed
with the relevant RoC within 30 days.

Application for Directions in lieu of Section 232

1. When the scheme involves the restructuring or merger of companies, and the simple sanction
of the scheme by the Tribunal is insufficient for its implementation, a request may be made
to the Tribunal for directives about the scheme.
2. The application requires an admission notice and affidavit. The Tribunal decides how notices
are delivered. After a hearing, the Tribunal may issue orders or directions (Form No. CAA.7)
for reconstruction or amalgamation processes. It can also investigate the transferor company's
creditors and secure debts and claims of dissenting creditors.
3. Once the order in support of the scheme has been granted and until the completion of the
scheme for restructuring or amalgamation, a statement (Form No. CAA.8) must be filed
within 210 days of the end of the financial year with the RoC.
4. The Tribunal may, at any time following the issuance of the order sanctioning the scheme,
request a report on the scheme's operation and request that it be submitted within a set
timeframe. Any creditor or member, company or liquidator may petition to the Tribunal to
determine any question concerning the operation of a compromise or arrangement.

Fast Track Merger

The Fast Track merger covered under Section 233 of CA 2013 requires approval from
shareholders, creditors, the Registrar of Companies, the Official Liquidator and the Regional
Director. Under the fast track merger, scheme of merger shall be entered into between the
following companies:

i. Two or more small companies (private companies having paid-up capital of less than
INR 100 million and turnover of less than INR 1 billion per last audited financial
statements);
ii. A holding company with its wholly owned subsidiary; or iii. such other class of
companies as may be prescribed.
The scheme, after incorporating any suggestions made by the Registrar of Companies and the
Official Liquidator, must be approved by shareholders holding at least 90% of the total number
of shares, and creditors representing 9/10th in value, before it is presented to the Regional
Director and the Official Liquidator for approval.

Thereafter, if the Regional Director/ Official Liquidator has any objections, they should convey
the same to the central government. The central government upon receipt of comments can either
direct NCLT to take up the scheme under Section 232 (general process) or pass the final order
confirming the scheme under the Fast Track process.

Cross Border Mergers

Section 234 of the CA 2013 permits mergers between Indian and foreign companies with prior
approval of the Reserve Bank of India (“RBI”). A foreign company means any company or body
corporate incorporated outside India, whether having a place of business in India or not. The
following conditions must be fulfilled for a cross border merger:

i. The foreign company should be incorporated in a permitted jurisdiction which meets

certain conditions.
ii. ii. The transferee company is to ensure that the valuation is done by a recognized
professional body in its jurisdiction and is in accordance with internationally accepted
principles of accounting and valuation.
iii. iii. The procedure prescribed under CA 2013 for undertaking mergers must be followed.

The RBI also issued the Foreign Exchange Management (Cross Border Merger) Regulations,
2018 (“Merger Regulations”) on March 20, 2018 which provide that any transaction undertaken
in relation to a cross-border merger in accordance with the FEMA Regulations shall be deemed
to have been approved by the RBI.

Conclusion

In a globalized world, mergers and amalgamations driven by foreign direct investment are on the
rise. Companies are actively pursuing deals to form new entities by combining smaller firms,
aiming to expand their market presence and explore diverse aspects of the marketing chain. This
trend is particularly evident in the Indian market, with a focus on creating innovative entities for
the next generation.
11.AMALGAMATION OF COMPANIES IN PUBLIC INTEREST

Introduction

Mergers and amalgamations form an integral part of the world of business we live in today. To
put it succinctly, a merger is when two companies agreeing to unite to become one entity; it may
be thought of as an agreement taken by two “equals,” while an amalgamation or takeover is
characterized by a much bigger corporation purchasing a smaller one.

The Central Government has the authority to allow for the amalgamation of corporations in the
public interest under the aegis of Section 237 of the Companies Act, 2013. It is through this
provision that it may order the compulsory amalgamation of two or more corporations if it is
convinced that such amalgamation is essential for the public good.

Public Interest

Public Interest is something about which the general public, or the society at large, has a
financial interest, or an interest that affects their civil rights or liabilities. It does not apply to
something as limited as a mere curiosity or the desires of individual localities that could be
influenced by the problems at hand. The Companies Act, 2013 has provided the same statutory
recognition in Sections 62(4), 129, 210, 221, 233(5), and 237. Despite the approval of
management and creditors, Company Law in India acknowledges that public policy priorities
must take precedence.

The Central Government under Section 237 has the power to order compulsory amalgamation of
two or more corporations if it is convinced that such amalgamation is essential for the public
good as affirmed in Moon Technologies Limited vs Union of India. A copy of the Central
Government’s amalgamation order must be given to the companies involved, and any
amendments proposed or objected to by the companies are taken into account by the government
in the draft order.

Procedure to Facilitate such Amalgamation

The following are the measures that companies must take in order to merge under Section 237 of
the Companies Act 2013:

1. The first step is for the company to call a board meeting to decide whether or not to merge
with the other company; this is done through the power conferred under Section 173 of the
Companies Act, 2013.
2. The application must be sent electronically to the stock exchanges for clearance. The
company must receive a letter of approval from the stock exchanges.
3. Application to the tribunal– Under Form-1, the company must submit an application to the
applicable jurisdiction’s NCLT. The Tribunal may refuse. [Wiki Kids Ltd. and Avantel Ltd.
v. Regional Director, South East Region and Others].
4. The chairperson assigned for the meeting shall provide a notice to all shareholders or classes
of members, creditors or classes of creditors, and debenture holders of the corporation in
prescribed Form no. CAA 2.
5. A copy of the scheme of amalgamation and a statement disclosing the specifics of the
NCLT order must be enclosed with the notice. Alongside, details of the company; date of
the board meeting; disclosure of the effect of the amalgamation on the directors, etc. are
required for the scheme of amalgamation; and a statement to the shareholders.
6. Publication of a notice of meeting in one English and one vernacular newspaper in
accordance with Form No. CAA 2. A copy of the notice will also be available on the
company’s website. It is still up to the firms to decide whether or not to publish one jointly.
7. The Central Government, IT authorities, RBI, Registrar of Companies (Form GNL-1),
Official Liquidator, Competition Commission of India, and other related authorities will be
notified, along with a copy of the scheme. CAA 3 is the form used to submit this notice.
8. Affidavit of service– an affidavit must be lodged with the NLCT at least seven days before
the meeting date or the first meeting date, confirming that the directions on the issue of
notice and advertisement have been observed. To give the scheme approval, a meeting of
members and creditors will be held.
9. Order on the petition– After the members’ and creditors’ agreement on the scheme, the
companies must file Form No. CAA 5 with the NCLT within 7 days of the Chairperson’s
report. The NCLT will set the final hearing date.
10. Stamp duty as affirmed in the State Stamps Duty Acts must be complied with after the final
order has been issued. Shareholders will be allocated shares in accordance with the plan;
stock exchanges will be notified of the listing of new shares released as consideration, and
stakeholders will be notified of the Scheme of Amalgamation’s effectiveness.

Conclusion

The Indian tribunals and courts have established that only because a scheme of amalgamation is
favourable to or in the interests of a certain group of members, it does not imply that the scheme
is in the public interest. There is a distinction to be made between exercising powers under
Section 237 of the Companies Act 2013 for compulsory acquisition and mergers in the public
interest; this distinction should be the government’s primary concern when exercising its control
under the above clause.

12.DISTINCTION BETWEEN AMALGAMATION AND ACQUISITION

Introduction

The core goal of the any corporate is to maximize its wealth and shareholder’s value. This
objective can be achieved internally either through the process of introducing new products or by
enlarging the capacity of the existing products. On the other hand, the growth process can be
facilitated externally by acquisitions, takeovers, mergers and so on. There are strengths and
weaknesses of both the processes of achieving goals.

What is an Amalgamation

Amalgamation occurs when two or more companies are joined to form a third entity or one is
absorbed into or blended with another as held in Somayajula v Hope Prudhomme & Co Ltd. In
the Central India Industries Ltd. vs. C.I.T., It was held that amalgamation is an arrangement
whereby the assets of two companies become vested in or under the control of one of the original
two companies, which has its shareholders all or substantially all the shareholders of the two
companies.
In General Radio vs. M.A. Khader, the Supreme Court held, that after amalgamation, Transfers
Company doesn’t become tenant of premises, even if tenancy rights are transferred to transferee
company.

What is an Acquisition

An acquisition occurs when one company purchases and takes over the operations and assets of
another. Acquisition occurs when one company buys the shares of another company in an effort
to gain control over that company. In simple terms you can say that acquisition is an act of one
company taking over or acquiring another company’s controlling interest.

This can be done either by buying assets of that company or buying shares or stocks of the
company. If the acquirer purchases more than 50% of the company’s stocks, shares or other
assets, they gain the power of making decisions regarding the company without the involvement
or permission off the other shareholders.

Key Differences between Acquisition, and Amalgamation

Mergers, Acquisitions and Takeovers etc. are terms that are commonly used interchangeably but
often differ by situation. Merger generally refers to unification of two equal players into one unit,
while Acquisition refers to one competitor buying out another to combine the bought entity with
itself.

Acquisition Amalgamation

Minimum 2 companies are required wherein Minimum 3 companies are required since
one company takes over the shares and amalgamation of 2 results in a new entity.
assets of another company.

Small to medium size firms are acquired by The sizes of the target companies are
the larger companies. comparable.

The buyer company purchases more than Shares of the new entity are given to the
50% shares of the target company. shareholders of existing firms.
 The acquired company ceases to exist and Existing companies lose their identity to form
becomes the part of acquiring company. an entirely new company.

Acquisition is driven by the buyer company Amalgamation is initiated by both the

with or without consent of the acquired companies with equal interest.
company.

One firm acquires all the assets and Assets and liabilities of the existing firms are
liabilities of the target firm. transferred into the balance sheet of the
newly form company.

Conclusion

There is a slight difference between merger, acquisition, and amalgamation as all three processes
are a form of consolidation to create new entities or strengthen the existing ones. These methods
serve numerous benefits to the companies depending on their business needs.

13.POWERS OF THE COURT IN CASE OF RECONSTRUCTION OR AMALGAMATION

OF COMPANIES

Introduction

The term ‘merger’ is not defined under the Companies Act, 2013 or under Income Tax Act, 1961
(“ITA”). As a concept, a ‘merger’ is a combination of two or more entities into one; the desired
effect being not just the accumulation of assets and liabilities of the distinct entities, but
organization of such entity into one business.

The ITA goes on to specify certain other conditions that must be satisfied for an ‘amalgamation’
to be eligible for benefits accruing from beneficial tax. Sections 230-234 of Companies Act,
2013 deal with the schemes of arrangement or compromise between a company, its shareholders
and/or its creditors.

Merger Provisions

The Merger Provisions govern schemes of arrangements between a company, its shareholders
and creditors. The Merger Provisions are in fact worded so widely that they provide for and
regulate all kinds of corporate restructuring that a company can possibly undertake, such as
mergers, amalgamations, demergers, hive off, and every other compromise, settlement,
agreement or arrangement between a company and its members and/or its creditors.

Application for Order of a Meeting

An application for compromise or agreements under section 230 of the Act may be brought to
the National Company Law Tribunal (Tribunal) for holding a creditors' or shareholders' meeting
in the required format (Form No. NCLT-1). The application must include a notice of admission
(NCLT Form No. 2), an affidavit (NCLT Form No. 6), and a copy of the scheme of compromise
or arrangement.

Hearing of Application

During the hearing, the Tribunal determines creditor classes, meeting details, appoints a
chairperson, sets quorum and procedures. It also issues directives for creditor notices and
publication, with the power to waive any creditor meeting if necessary.

Notices for Meetings

Notices (Form No. CAA.2) must be sent to creditors and members by the meeting chairperson,
including the compromise scheme, additional information, and a copy of the arrangement. The
notice should be provided before the meeting and published in one English and one vernacular
publication widely circulated in the company's registered state. It must also be posted on the
company's website for at least 30 days prior to the meeting.

Voting and Proxies

The proposed compromise or agreement will be considered during the meeting. Voting at the
meeting will take conducted via poll or technological means. Voting by proxy shall also be
permitted. Within three days following the conclusion of the meeting, the chairperson shall
submit a report to the Tribunal (Form No. CAA.4) detailing the meeting.

Filling and Hearing of Petition

If the compromise or arrangement is approved in the meeting, the company must file a petition
(Form No. CAA.5) within seven days. The Tribunal will schedule a hearing date for the petition
and approve the scheme (Form No. CAA 6) through an order. The Tribunal may issue additional
instructions or amendments. A certified copy of the order must be filed with the relevant RoC
within 30 days.

Application for Directions in lieu of Section 232

5. When the scheme involves the restructuring or merger of companies, and the simple sanction
of the scheme by the Tribunal is insufficient for its implementation, a request may be made
to the Tribunal for directives about the scheme.
6. The application requires an admission notice and affidavit. The Tribunal decides how
admission notices are delivered. After the hearing, the Tribunal may issue an order (Form
No. CAA.7) or give directions regarding reconstruction or amalgamation processes. It can
also investigate the transferor company's creditors and secure debts and claims of dissenting
creditors.
7. Once the order in support of the scheme has been granted and until the completion of the
scheme for restructuring or amalgamation, a statement (Form No. CAA.8) must be filed
within 210 days of the end of the financial year with the RoC.
8. The Tribunal may, at any time following the issuance of the order sanctioning the
scheme, request a report on the scheme's operation and request that it be submitted within
a set timeframe. Any creditor or member, company or liquidator may petition to the
Tribunal to determine any question concerning the operation of a compromise or
arrangement.

Fast Track Merger

The Fast Track merger covered under Section 233 of CA 2013 requires approval from
shareholders, creditors, the Registrar of Companies, the Official Liquidator and the Regional
Director. Under the fast track merger, scheme of merger shall be entered into between the
following companies:

iii. Two or more small companies (private companies having paid-up capital of less than INR
100 million and turnover of less than INR 1 billion per last audited financial statements);
iii. A holding company with its wholly owned subsidiary; or iii. such other class of
companies as may be prescribed.

The scheme must be approved by shareholders holding 90% of shares and creditors representing
9/10th in value. It is then presented to the Regional Director and Official Liquidator for approval.
If objections arise, they are conveyed to the central government. The government can direct
NCLT for general process or pass a final order under the Fast Track process based on comments
received or under Section 232 (general process) confirming the scheme

Cross Border Mergers

Section 234 of the CA 2013 permits mergers between Indian and foreign companies with prior
approval of the Reserve Bank of India (“RBI”). A foreign company means any company or body
corporate incorporated outside India, whether having a place of business in India or not. The
following conditions must be fulfilled for a cross border merger:

iv. The foreign company should be incorporated in a permitted jurisdiction which meets
certain conditions.
iv. ii. The transferee company is to ensure that the valuation is done by a recognized
professional body in its jurisdiction and is in accordance with internationally accepted
principles of accounting and valuation.
iv. iii. The procedure prescribed under CA 2013 for undertaking mergers must be followed.

The RBI also issued the Foreign Exchange Management (Cross Border Merger) Regulations,
2018 (“Merger Regulations”) on March 20, 2018 which provide that any transaction undertaken
in relation to a cross-border merger in accordance with the FEMA Regulations shall be deemed
to have been approved by the RBI.

Conclusion

In the globalized world Mergers and Amalgamation through foreign direct investment are
growing more day by day to the top of companies discussing deals of two small companies to
form a new company together, as every company wishes to deal and enter into all the aspects of
the marketing chain. It is witnessed by the Indian Market a new development for the next
generation through merging and amalgamation with other companies to form new entities

14.VOLUNTARY WINDING UP BY CREDITORS & VOLUNTARY WINDING UP BY

SHAREHOLDERS OF A COMPANY

Introduction

Winding up is the method of putting an end to the life of a company. An administrator, called a
liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and
finally distributes any surplus among the members in accordance with their rights. Section
2(94A) of the Companies Act, 2013 (hereinafter referred to as “the Act”), “winding up” means
winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016
(hereinafter referred to as “the Board”). A company is said to be dissolved when it ceases to exist
as a corporate entity.

The company is not dissolved immediately at the commencement of winding up. Its corporate
status and powers continue. Winding up precedes dissolution. The Act provides only for one
kind of winding up:

 Compulsory winding up under the order of the Tribunal.

 Voluntary winding up, which itself is of two kinds, namely: (a) Members’ voluntary
winding up, and (b) Creditors’ voluntary winding up. [These two types of winding up have
been abolished by the enactment of Insolvency and Bankruptcy Code, 2016, Section 255]

Circumstances For Winding Up Of Company

Section 271 of the Act stipulates the circumstances for winding up of a company. In the case of
B. Viswanathan v. Seshasayee Paper and Boards Ltd. 1992, the company may, by special
resolution, resolve that it can be wound up by the Tribunal. The resolution may be passed for any
cause whatsoever.
The directors are not entitled to file a winding up petition without the authority of the general
meeting. The directors may file such a petition, subject to the general meeting ratifying their
action. [Galway & Salt Hill Tramways Co., In re 1918]

Voluntary Winding Up

Section 59 of the Insolvency and Bankruptcy Code, 2016 (Code) provides that a corporate
person who intends to liquidate itself voluntarily and has not committed any default may initiate
voluntary liquidation proceedings under the provisions of Chapter V of the Code. The IBBI
(Voluntary Liquidation Process) Regulations, 2017 govern the process.

A corporate person may initiate a voluntary liquidation proceeding if majority of the directors or
designated partners of the corporate person make a declaration to the effect that:

i. The corporate person has no debt or it will be able to pay its debts in full from the
proceeds of the assets to be sold under the proposed liquidation
ii. The corporate person is not being liquidated to defraud any person.

Within four weeks of the declaration, a resolution needs to be passed by a special majority of the
partners or contributories, as the case may be, of the corporate person requiring the corporate
person to be liquidated and appointing a resolution professional to act as the liquidator.

Voluntary Winding Up by Members/Shareholders

Sections 304 to 323 of the Companies Act, 2013 shall apply in relation to a members’ voluntary
winding up. When the company is solvent and is able to pay its liabilities in full, it need not
consult the creditors or call their meeting. Its directors, or where they are more than two, the
majority of its directors may, at a meeting of the Board, make a declaration of solvency verified
by an affidavit stating that they have made full enquiry into the affairs of the company and that
having done so they have formed an opinion that the company has no debts or that it will be able
to pay its debts in full within such period not exceeding three years from the commencement of
the winding up as may be specified in the declaration.

In Collector of Moradabad v. Equity Insurance Co. Ltd., Section 355 does not require that
there should be an affidavit by each of the directors making the declaration. An affidavit by one
director is sufficient. In De Courcy v. Clement, held that while failure to satisfy the conditions
under this section makes the declaration of no effect i.e., a nullity, a mere error or omission,
while it may expose the declarant to the penal consequences, will not prevent the statement from
being a statement for the purpose of satisfying the requirements of the section.

Such a declaration must be made within five weeks immediately preceding the date of the
passing of the resolution for winding up the company and be delivered to the Registrar for
registration before that date. The declaration must embody a statement of the company’s assets
and liabilities as at the latest practicable date before the making of the declaration. Any director
making a declaration without having reasonable grounds for the aforesaid opinion, shall be
punishable with imprisonment extending up to six months or with fine extending up to Rs.
50,000 or with both. In Shri Raja Mohan Manucha v. Lakshminath Saigal, it was held that
“where the declaration of solvency is not made in accordance with the law, the resolution for
winding up and all subsequent proceedings will be null and void.

Conclusion

Section 59 of the Insolvency and Bankruptcy Code, 2016 (Code) provides that a corporate
person who intends to liquidate itself voluntarily and has not committed any default may initiate
voluntary liquidation proceedings under the provisions of Chapter V of the Code.

In addition to those powers as mentioned above, A liquidator also has the power to order costs
(Section 298), power to summon persons suspected of having property of company, etc. (Section
299), power to order examination of promoters, directors, etc. (Section 300) and the power to
arrest of person trying to leave India or abscond (Section 301).

15.CONTRIBUTORIES IN CASE OF WINDING UP

Introduction

The concept of contributory arises only at the time of winding up of a company. A member does
not become a contributory until the winding up. Section 428 defines the term “contributory” as
every person liable to contribute to the assets of a company in the event of its being wound up
and also includes the holder of any shares which are fully paid up.

Fully paid shareholders are not included in the list of contributories as they are not required to
contribute to the company's assets. However, in the case of unlimited companies, fully paid
shareholders are still considered contributories as they may be liable to pay additional amounts.
The definition of "contributory" covers both those liable to contribute and fully paid
shareholders. In the case of Gulzari Lal Bhargava v. The Official Receiver-cum-official
Liquidator of Ammonia Supplies Corporation P. Ltd., it was observed that fully paid
shareholders also fall within the definition of "contributory." The list of contributories consists of
present members under List A, who have primary liability, and past members under List B,
whose liability is secondary. Fully paid shareholders do not belong to either list but can enjoy the
rights of a contributory without being liable to contribute during winding up. They can
participate in the distribution of residual assets after meeting all liabilities. It is important to
distinguish between being a "contributory" and having one's name placed on the list of
contributories.

Section 467 provides for settlement of list of contributories. Sub-section (1) provides that the
Tribunal shall settle a list of contributories as soon as possible after making a winding up order
and shall cause the assets of the company to be collected and applied in discharge of its
liabilities. The proviso to this section provides discretion to the Tribunal to dispense with the
settlement of list of contributories where it appears to it that it will not be necessary to make calls
on, or adjust the rights of the contributories. In settling the list of contributories, the Tribunal
shall distinguish between those who are contributories in their own right and those who are
contributories as being representatives of, or liable for the debts of, others

The Tribunal has the discretion to waive the settlement of the list of contributories when there
are surplus assets, all issued shares are fully paid, and the number of contributories is small. The
term "contributory" refers to both past and present members and their legal representatives. In a
specific case (Re, Lakshmi Flour Mills Co.), the question arose whether debtors of a company in
liquidation could be included as contributories. The court held that the word "contributory" does
not encompass a debtor. While every member is a contributory, not every contributory is
necessarily a member. The definition of "member" under Section 41 includes subscribers of the
memorandum, individuals who agree in writing to become members, and persons holding equity
share capital. Subscribers to the memorandum automatically become members and are liable as
contributories, even if no shares were allotted or payment was not made.
In Universal Transport Co. Ltd. v. S. Jagjit Singh And Ors , the court held that no allotment of
shares is necessary to create liability on the part of a person who has subscribed to the
Memorandum of Association

Past members, listed under List B of contributories, include those whose shares have been
forfeited, surrendered, transferred, or cancelled. In the event of company liquidation, both
present and past members are liable to contribute to the company's assets to settle its debts,
liabilities, winding-up costs, and for adjusting the rights of contributories among themselves.
Section 426 of the Companies Act, 1956 imposes statutory liabilities on shareholders who
haven't fully paid for their shares, subject to provisions under sections 426(1)(a) to 426(1)(g) and
section 427.

Extent of liability of the Past members

In the case of a company limited by shares, the present or past members shall be required to
contribute only to the extent of an amount that remains unpaid on the shares in respect of which
he is liable as such member.17 In the case of a company limited by guarantee, no contribution
shall be required from any past or present member exceeding the amount undertaken to be
contributed by him to the assets of the company in the event of its being wound up. This
provision is subject to section 426 (2). Section 426(2) provides that in the winding up of a
company limited by guarantee which has a share capital, every member of the company shall be
liable, in addition to the amount undertaken to be contributed by him to the assets of the
company in the event of its being wound up, to contribute to the extent of any sums unpaid on
any shares held by him as if the company were a company limited by shares.

On the death of a contributory, either before or after he has been placed on the list of
contributories, his legal representatives and heirs shall be liable to contribute to the assets of the
company in discharge of his liability, and they shall also be regarded as a contributory
accordingly. They shall be liable in due course of administration to contribute to the assets. In
case of default made by the legal representatives in paying any money ordered to be paid by
them, proceedings may be taken for administering the estate of the deceased contributory and
payment of the money due shall be made from it. The liability of the legal representative of a
deceased contributory is only a liability to pay out of the estate of the deceased and extends only
to the extent of the value of the estate coming into the hands of the legal representatives
Conclusion
Thus Past members are made liable during winding up of a company as a contributory placed in
List B of contributories and the liability is based on a contract whereby members agrees to
contribute during winding up. Since it is only a secondary liability, such liability does not arise
unless it is found that the present member‟s contribution and the assets of the company are not
sufficient to pay the debts. But such liability is not unlimited as certain limits are set out under
the Companies Act, 1956. In case of companies limited by shares, to the extent of the amount
unpaid on the shares held because shareholder need not pay the whole amount of the shares at
the time of allotment, but is liable to pay when a call is made by the company. In case of a
company limited by guarantee, past member is liable to the extent of the amount undertaken to
be contributed by him to the assets of the company in the event of its being wound up

16.ROLE OF LIQUIDATORS IN WINDING UP/ A) POWERS OF THE LIQUIDATORS (5)

(10)/ DISCUSS THE ROLE, POWERS AND DUTIES OF THE LIQUIDATOR
APPOITNED FOR WINDING UP OF A COMPANY

Introduction

Liquidators, official or provisional, are appointed as agents of the company to complete the
process of winding up and liquidation of the company by realising its assets and distributing
them to the debenture-holders, creditors, shareholders etc. Rights, powers and duties of the
liquidator, as observed in winding up by Tribunal and summary winding up, are as follows:

Powers of Liquidator

The powers of liquidator have been provided in Section 290 and they are enumerated as follows:

i. The company liquidator has the power to carry on the business of the company to the
extent it is necessary for the beneficial winding up of the company.
ii. The power to act and execute all deeds, receipts and other documents in the name and
on behalf of the company. The liquidator is further entitled to use the company’s seal for
the same.
iii. Power to raise any money required on the security of the assets of the company.
iv. Power to sell immovable and movable property and actionable claims of the company
by public auction or private contract. The liquidator further had the power to transfer
 such property to any person or body corporate. In this regard, it was held in Remu Pipes
Ltd. (In Liquidation) v. IFCI that the power of the company liquidator to sell
immovable property can only be done by a sanction of the Tribunal. Opposing view,
removing the requirement of sanction has been taken in Jatan Kanwar Golcha v.
Golcha Properties (P) Ltd.
v. Power to sell the whole of the undertaking of the company.
vi. Power to acquire and retain possession of company’s properties. Rule 17 of the Draft
Companies (Winding Up) Rules, 2013 provides that for this purpose, liquidator shall be
treated as the receiver of the property.
vii. Power to inspect records and returns of the company on the files of the Registrar.
viii. Power to institute and defend any suit or legal proceeding in the name of the company.
ix. The liquidator is empowered to invite and settle the claim of creditors, employees or
any other claimant and distribute them in accordance with the priorities established in the
Act.
x. Power to draw, accept and endorse any negotiable instruments on behalf of the company.
xi. Power to take out letters of administration in his official name in cases of deceased
contributory and Appoint agent in furtherance of all such duties and functions where for
he is authorized
xii. Power to file income tax returns of the company. The liquidator thus acts as the
principle officer of the company.
xiii. The liquidator is further empowered to sign, execute and verify any paper, deed,
document, application, petition, affidavit, bond or instrument required for winding up of
the company, distribution of assets and in discharge of his duties and obligations and
functions as a company liquidator.
xiv. Power to apply to the Tribunal for such orders and directions required for the
winding up of the company.

Duties and Responsibilities:

i. The liquidator must conduct all proceedings in the winding up according to the
provisions of the law in an impartial and equitable manner. It must further adhere to
all duties imposed by the Tribunal.
 ii. He has the duty to bring into his custody and control the property of the company under
Section 283. It has been held in Indian Official Liquidator, U.P. & Uttarakhand v.
Allahabad Bank that the Tribunal does not have the right to interfere in the auction or
sale held by the Recovery Officer under Recovery of Debts Act.
iii. The liquidator is further required to submit a preliminary report on the winding up
procedure within sixty days to the Tribunal.
iv. The liquidator is required to call a meeting of the creditors and contributories for
determining the persons who are to be members of the Advisory Committee, if such
committee is to be appointed. The same shall be done within thirty days from the date of
direction of the Tribunal.
v. Section 350 requires the liquidator to deposit the sums received by him in a schedule
bank, unless otherwise allowed by the Tribunal. Detailed provision for the same is given
in Rule 32 of the Draft Companies (Winding Up) Rules, 2013.
vi. Liquidator is required to keep proper books of accounts in the manner prescribed. Section
293 further provides that subject to the control of the Tribunal, any creditor or
contributory may inspect any such books personally or by his agent.
vii. He must, present to the Tribunal an account of his receipts and payments as Company
Liquidator, at least twice in each year, in the manner prescribed. The same shall be open to
inspection by any creditor, contributory or person interested. Further, according to Rule 20
of the Draft Companies (Winding Up) Rules, 2013, the company liquidator must file the
accounts made up to the 31st March and 30th September within the next t three months (30 th
June and 31st December respectively).

In the case of Jatan Kanwar Golcha v. Golcha Properties (P) Ltd., 1971 the court held that it is
not worthy that the official liquidator cannot recourse to the sale proceedings without the
directions of the court.

It is for the court to give directions only when a summons has been served upon the petitioner
creditor for he must have an opportunity of being heard and in this way the principles of natural
justice are to be kept in consideration. If the court does not afford such an opportunity to the
aggrieved petitioner, any such direction the effect of sale proceedings shall be null and void.

Conclusion
It is noted that the Companies Act, 2013 provides extensive powers, duties and responsibilities to
the company liquidator to act as an agent of the company in facilitating the winding up and
liquidation of the company.

Section 59 of the Insolvency and Bankruptcy Code, 2016 (Code) provides that a corporate
person who intends to liquidate itself voluntarily and has not committed any default may initiate
voluntary liquidation proceedings under the provisions of Chapter V of the Code.

In addition to those powers as mentioned above, A liquidator also has the power to order costs
(Section 298), power to summon persons suspected of having property of company, etc. (Section
299), power to order examination of promoters, directors, etc. (Section 300) and the power to
arrest of person trying to leave India or abscond (Section 301).

17.WHAT ARE THE DIFFERENT KINDS OF WINDING UP? DISCUSS THE PROVISION
RELATING TO WINDING UP BY THE TRIBUNAL.

Introduction

Winding up is the method of putting an end to the life of a company. An administrator, called a
liquidator, is appointed and he takes control of the company, collects its assets, pays its debts and
finally distributes any surplus among the members in accordance with their rights. Section
2(94A) of the Companies Act, 2013 (hereinafter referred to as “the Act”), “winding up” means
winding up under this Act or liquidation under the Insolvency and Bankruptcy Code, 2016
(hereinafter referred to as “the Board”). A company is said to be dissolved when it ceases to exist
as a corporate entity.

The company is not dissolved immediately at the commencement of winding up. Its corporate
status and powers continue. Winding up precedes dissolution. The Act provides only for one
kind of winding up:

 Compulsory winding up under the order of the Tribunal.

  Voluntary winding up, which itself is of two kinds, namely: (a) Members’ voluntary
winding up, and (b) Creditors’ voluntary winding up. [These two types of winding up have
been abolished by the enactment of Insolvency and Bankruptcy Code, 2016, Section 255]

Circumstances For Winding Up Of Company

Section 271 of the Act stipulates the circumstances for winding up of a company. In the case of
B. Viswanathan v. Seshasayee Paper and Boards Ltd. 1992, the company may, by special
resolution, resolve that it can be wound up by the Tribunal. The resolution may be passed for any
cause whatsoever.

The directors are not entitled to file a winding up petition without the authority of the general
meeting. The directors may file such a petition, subject to the general meeting ratifying their
action. [Galway & Salt Hill Tramways Co., In re 1918]

Section 271 empowers the Tribunal in its discretion to order the winding up of a company in the
following cases:

a. If the company has resolved by a special resolution that it be wound up by the Tribunal.

The Tribunal is, however, not bound to order winding up simply because the company has so
resolved. The power is discretionary and may not be exercised where winding up would be
opposed to the public or company’s interests.

a. If the company has acted against the interests of sovereignty and integrity of India

b. If the Tribunal is of opinion that the affairs of the company have been conducted in a
fraudulent manner or the company was formed for fraudulent or unlawful purpose or
persons.

Section 213(b) of the Act states that the Tribunal is empowered to order investigation into the
affairs of a company on the grounds mentioned.

a. If the company has made a default in filing with the Registrar its financial statements or
annual returns for immediately preceding five consecutive financial years.

b. If the Tribunal is of opinion that it is just and equitable that the company should be
wound up.
The Tribunal has discretionary power to order winding up based on desirability. It may refuse if
another remedy is available, and the petitioner unreasonably seeks winding up instead of
pursuing that remedy.

In the case of Gadadhar Dixit v. Utkal Flour Mills (P.) Ltd., 1989, the court opined that the
relief based on the just and equitable clause is in the nature of a last resort when the other
remedies are not efficacious enough to protect the general interests of the company.

Role of the Tribunal to exercise discretion

The role of the tribunal discretion is to consider all the affected interests and not merely those of
creditors.

i. Firstly, when there is a deadlock in the management of a company, it is just and equitable
to order winding up. [Yenidje Tobacco Co Ltd, re., 1916]

ii. Secondly, it is just and equitable to wind up a company when its main object has failed to
materialise or it has lost its substratum. [German Date Coffee Co, re, 1882]

iii. Thirdly, it is considered just and equitable to wind up a company when it cannot carry on
business except at losses. It will be needless, indeed, for a company to carry on business
when there is no hope of achieving the object of trading at a profit. [Shah Steamship
Navigation Co, re, 1901]

iv. Fourthly, it is just and equitable to wind up a company where the principal shareholders
have adopted an aggressive or oppressive or squeezing policy towards the minority. [R
Sabapathi Rao v. Sabapathi Press Ltd., 1930]

v. It is just and equitable to wind up a company if it has been conceived and brought forth in
fraud or for illegal purposes. [Universal Mutual Aid & Poor Houses Assn v. AD Thappa
Naidu, 1933]

vi. The company should take into account public interest.

Procedure Of Winding Up

Section 272 of the Act provides for the procedure of winding up of the company and states who
can apply for the same. An application to the Tribunal for the winding up of a company is made
by a petition. A petition may be presented by any one of the following:
 1. Petition by company [S. 272(1)(a)] - The company may itself present a petition for
winding up. Petition by the company will be particularly necessary when the only ground
for winding up is that the company has passed a special resolution to that effect. There
must be a valid resolution to enable the company to take this step.

2. Creditor’s petition [S. 272(1)(b)] - A creditor may apply for winding up. A creditor who
is proceeding against the company on the ground of the company’s inability to pay its
debts has to proceed under the Insolvency and Bankruptcy Code, 2016. His petition under
the Companies Act is not going to be entertained. [Moor v. Anglo-Italian Bank, 1879]
3. Contributory’s petition- A contributory shall be entitled to present a petition for the
winding up of the company when the holder of fully paid-up shares or investors. On the
commencement of the winding up of a company, its shareholders are called
contributories.
4. Registrar’s petition [S. 272(1)(e) and (4)] – The Registrar of Companies can file a
winding-up petition based on grounds other than the company passing a special resolution.
However, a petition based on the company's inability to pay debts can only be filed if it is
evident from the company's financial condition or an inspector's report under Section 210.
5. Central Government’s petition or a State Government - The Central Government is
also authorised by the Act, in certain cases, to present a petition for winding up. Section
224 enables the Government to petition for winding up where it appears from the report of
inspectors appointed to investigate the affairs of a company under Section 206 that the
business of the company has been conducted for fraudulent or unlawful purposes.

POWERS OF TRIBUNAL

Section 273 of the Act empowers the Tribunal to take decisions pertaining to the winding up of
the Company. In the case National Textile Workers’ Union v. PR Ramakrishnan, 1983, the
court stated that after hearing a winding up petition, the Tribunal may-

a. dismiss it with or without costs; or

b. make any interim order as it thinks fit; or

c. appoint a provisional liquidator of the company till a winding up order; or

d. make an order for winding up with or without costs; or

 e. any other order it thinks fit.

The Tribunal can issue a conditional winding up order and cannot refuse based on the company's
mortgaged assets or lack of assets. The order must be made within 90 days from the petition
date. The Tribunal may refuse if it believes another remedy is available and the petitioners are
acting unreasonably. A winding up petition is filed in the Tribunal with jurisdiction over the
company's registered office. In the case of Vijay Lakshmi Talkies v. Roa, the Supreme Court
held that a company can be wound up if it engages in unlawful commerce and benefits only a
few shareholders.

Conclusion

In conclusion, above stated are the powers of the Tribunal in lieu of winding up. As given under
Section 302 of the Act, when the affairs of the company have been completely wound up, the
liquidator has to make an application to the Tribunal for dissolution of the company. If the
Tribunal is of opinion that it is just and reasonable in the circumstances of the case to order
dissolution, it may pass an order of dissolution from the date of the order.

18.WHAT IS COMPULSORY WINDING UP? WHAT ARE THE CIRCUMSTANCES IN

WHICH THE COURT CAN ORDER THE COMPULSORY WINDING UP OF A

COMPANY

Introduction
Winding up is a process in which the company is dissolved by clearing all the debts or liabilities,
dissolution of its assets is collected, and other important items are returned to the creditors and if
any contributions are made by the members, they are also returned. Therefore, winding up we
can say is a process of putting an end to the life of a company. If the company has any surplus
left, then, it is distributed among the members in accordance with their rights. It is also called
liquidation. “According to Section 2(94A) of the Companies Act, 2013 or Insolvency and
Bankruptcy Code, 2016, “Winding up” means winding up under this Act or liquidation under the
Insolvency and Bankruptcy Code, 2016, as applicable.” Chapter XX Sections 270–378 of the
Companies Act, 2013 deals with winding up and other aspects of it
Grounds for Compulsory Winding Up
Section 271(1)(g) empowers the Tribunal to order a company's liquidation for 'just and equitable'
reasons. The provision's interpretation does not imply that the phrase has a precise meaning.
However, the Court first applied the maxim 'ejusdem generis' to the term. This approach, adopted
in Cowasjee v. Nath Singh Oil Co. Ltd., restricted the provision's reach and allowed the court to
exercise its discretion only where the facts of the case were analogous to those of preceding
provisions. If the Tribunal finds that the parties have recourse to an alternative remedy, the
remedy under this paragraph may be refused.

In Jivabhai Marghabai Patel v. Extrusion Processes (P) Ltd., the courts disregarded this view
and now regard the provision as having extensive discretionary power, allowing the Tribunal to
establish the grounds for issuing orders under it. The courts have refused to categorise the
situations under which a company might be liquidated under this section due to the wide and
subjective nature of the power. As a result, the extent of this clause, which permits Tribunals to
dissolve a firm based on the circumstances of the case, is still unclear.

According to the jurisprudence of the provision, courts have already liquidated organisations on
Just and Equitable grounds if specific requirements are met. These are the conditions:

When there is a Deadlock

The courts have previously used their discretionary authority under Section 271(1)(g) by
concluding that the company's management was deadlocked. In Yenidje Tobacco Co. Ltd., re.,
for instance, it was noted that two individuals decided to merge their firms and become the sole
shareholders and directors of the company at issue. Due to the antagonistic atmosphere created in
the company, however, the two refused to engage with one another, resulting in a managerial
deadlock. In this instance, the court ordered the liquidation of the business.

It is essential to note, however, that the simple disagreement of directors' ideas that causes
administrative issues does not constitute a stalemate. In Vasant Holiday Homes (P) Ltd. v.
Madan V. Prabhu, the courts declined to dissolve the company when the directors had a
disagreement about their rights inside the corporation, therefore damaging the firm's operations.

Loss of Substratum
The incapacity of a company to realise its original purpose or the loss of its substratum may also
be seen as just and equitable grounds. In the case of German Date Coffee Co., re., a company
whose primary function was to produce patent-protected coffee and dates moved its attention to
the production of other products when it was unable to get a patent for its coffee and dates.
Owing to the complexity of achieving the objective, the court ordered the company's dissolution
on just and equitable grounds.

Interim conditions do not satisfy the criteria for dissolution based on reasonable and fair grounds.
In Steam Navigation Co. re., when a disagreement between the manufacturer and the clients over
the manufacturing of a particular good did not meet the criteria for dissolution on just and
equitable grounds due to transitory circumstances, the Tribunal did not impose dissolution.

Loss-making Entity
On just and equitable reasons, a Tribunal may order the liquidation of a firm if it concludes that
it cannot continue operations without suffering more losses. In such situations, momentary
deficits would not necessitate a court order liquidating the company. In Shah Steamship
Navigation Co., re, the Bombay High Court refused the company's application to be dissolved
on this ground since the business's losses were just temporary and did not indicate a bigger issue
with the company itself.

Fraudulent Purpose
The Tribunal has the authority to order the dissolution of a corporation whose sole purpose is to
commit fraud or an unlawful activity. In the case of Universal Mutual Aid & Poor Houses
Association v. AD Thappa Naidu, a lotto jackpot business was forced to liquidate
notwithstanding its philanthropic goals. However, the mere existence of a false misrepresentation
in the prospectus or inside the corporation would not enough to trigger this dissolution grounds.

Persecution of Minorities
The tribunal may order the dissolution of a company based on just and equitable grounds if it
finds that the majority shareholders' practises oppress the minority shareholders. This was upheld
by the court in R Sabapathi Rao v. Sabapathi Press Ltd.

Similar to other Partnership Dissolution Reasons

When a company's share capital is owned by its directors and it is private, its corporate structure
resembles a partnership. In such a situation, the Tribunal may order the liquidation and winding
up of the business in the same way it dissolves partnerships. In Official Liquidator v. Ram
Swarup, in which the court liquidated a private limited business, the Supreme Court approved
this strategy.

19.INSIDER TRADING (5) OR WHAT IS INSIDER TRADING? DISCUSS THE

HIGHLIGHTS OF THE REGULATION ON INSIDER TRADING

Introduction

Insider trading is the buying or selling of a security by someone who has access to material non-
public information about the security. Insider trading can be illegal or legal depending on

when the insider makes the trade. It is illegal when the material information is still not public.
Insider trading occurs when someone who has a fiduciary duty to another person, institution,
corporation, partnership, firm, or entity makes an investment decision based upon information
related to that fiduciary duty that is not available to the general public. This insider information
allows them to profit in some cases and avoid loss in others.

Rational Behind Prohibition of Insider Trading

Insider trading leads to loose of confidence of investors in securities market as they feel that
market is rigged and only the few, who have inside information get benefit and make profits
from their investments. Thus, process of insider trading corrupts the “level playing field”. Hence,
the practice of insider trading is intended to be prohibited in order to sustain the investor’s
confidence in the integrity of the security market.

In India, SEBI (Insider Trading) Regulations 1992, framed under Section 11 of the SEBI Act,
1992, are intended to prevent and curb the menace of insider trading in Securities. SEBI has with
effect from 20th February 2002 amended these Regulations and rechristened them as SEBI
Prohibition of Insider Trading Regulation, 1992. These Regulation have been further
amended various times.

Provisions under Companies Act

Provisions of insider trading have also been dealt with under the Companies Act, 2013 under sec.
195. But, the 2017 amendment removed this provision from the Act as this has significance only
to those companies that have been listed on the stock exchange and not all other private and
public companies.

Important Precedents:

1. N.Narayanan v. Adjudicating Officer, SEBI, 2013 - The SC urged for more transparency
and accountability in the share market and also directed SEBI to take strict actions on
directors involving in insider trading. Sec. 11 of the SEBI Act gives this authority to
prohibit insider trading.

2. Indian Council of Investors v. Union of India, 2014 - In this case, the Supreme Court held
that SEBI has the wild power under section 11 and it also has the power to obtain call
records from the concerned telecommunication providers. Therefore, SEBI has the power
to access individual’s data on call records.

3. Rakesh Agrawal v. SEBI, 2004 - In this case, SAT held that SEBI has the authority to
sanction monetary penalties in case of insider trading and such penalty can exceed up to 25
crores or three times the sum of profit earned, whichever is greater.

4. Samir Arora v. SEBI, 2005 - In this case, the SAT deliberated upon the aspect of standard
of proof. Since these acts are done in secrecy, there cannot be direct evidence but only
circumstantial evidence. Furthermore, the court held that their suspicion cannot be
considered as evidence for insider trading.

5. Dilip.S.Pendse v. SEBI, 2009 - There has to be a higher degree of the preponderance of

probability to establish the case of insider trading as this is a very serious charge. The same
was held in the case of R.K.Global Shares and Securities Ltd. v. SEBI, 2010.

Unpublished Price Sensitive Information

The case of Hindustan Lever limited (HIL) v. SEBI, 1998, was one of the earliest cases where
SEBI acted against Insider trading. After this case SEBI made an amendment to the regulations
and added and defined the word ‘unpublished’. This was the origin for the definition of the term
‘Unpublished Price Sensitive Information in India’.

Penalties
Following punishments can be imposed in case of violation of SEBI (Prohibition of Insider
Trading) Regulations, 1992 by SEBI. It may-

 Impose a penalty of INR 25 Crores or three times the amount of profit made out of
insider trading, whichever is higher.

 Initiate criminal prosecution.

 Issue orders declaring transactions in securities based on unpublished price sensitive

information.

 Issue orders prohibiting an insider or refraining an insider from dealing in the securities
of the company.

The prevention of insider trading is widely treated as an important function of securities

regulation. Section11(2)(e) of the Companies Act, 1956 prohibits the insider trading but does not
define it.

The SEBI (Prohibition of Insider Trading) (Amendment) Regulations, 2020:

As stated above, a few important changes have been introduced to the PIT Regulation. They are-

1. Structured digital database

Before the amendment, the directors of the listed companies simply had to maintain a
database having details like the name and PAN of UPSI beneficiaries. By this 2020
Amendment, SEBI has directed all the entities handling UPSI To include additional
details like nature and the names of those persons with whom the UPSI has been shared
to. SEBI has now also prohibited outsourcing maintenance of the internal database.

2. Reporting of violations of code of conduct

The 2019 amendment makes it mandatory for companies to report code of conduct
breaches, now to the concerned Stock Exchange instead of SEBI. The 2020 amendment
does not specify the manner of reporting or whether the information should be publicly
disclosed or kept internally by the stock exchange.

3. Restriction in the Trading Window

 The 2020 Amendment has created room for SEBI to consider and recognise additional
categories of transactions as an exception to the closure of trading window related
restrictions. This has enabled offers for sale and rights entitlement transactions to be
carried out while the trading window is closed.

Issues

Insider Trading is against the integrity of the market. This is because the it gives an unfair
advantage to the people having access to such information as there is no risk or losses that such
people suffer. Also, it causes the investors to lose their money as the people having such
sensitive information carry out certain malpractices of manipulating and spreading rumours
which leads to change the mind of many investors while trading in the stock markets.

Conclusion

It is a high time for India to implement such measures for the persons who have been found
guilty and not treat Insider Trading just as a white-collar crime. As there is only a less than three
percent conviction rate in such crimes in India there is a need to amend the regulations and to
add strict criminal proceedings and awards against such offences. There also needs to be another
regulatory body along with SEBI to track down high profile cases and prevent such sensitive
information flowing in the market.

20.ROLE AND POWERS OF SEBI

Evolution

The capital market grew in the 1970s, but malpractices like insider trading arose. To address this,
the Indian government established SEBI in 1988. Its purpose was to regulate the securities
market, rebuild trust, and ensure transparency for investors, thereby facilitating efficient
functioning of the Indian capital market.

Broadly, the role of SEBI is to conduct the following activities:

 Creating and approving the by-laws of stock exchanges.

 Inspecting accounting books of various recognized stock exchanges in India.
  Inspecting books and records of Financial Intermediaries.
 Stop companies from getting listed on any stock exchange.
 Handling registration of stockbrokers.

SEBI

SEBI functioned under the overall administrative control of the Ministry of Finance. The year
1992 led to the establishment of the SEBI which was to be appointed by the Central
Government. The Board would be a body corporate and shall have a common seal and perpetual
succession. Members of the Board could acquire, hold and dispose of property, both movable
and immovable, in the name of the Board. Further, they could contract by the said name, sue or
be sued. The head office of SEBI is at Bombay.

Structure of SEBI

As of now, 17 exchanges are operating in India, and the guidelines of SEBI regulate all the
trades, including the National Stock Exchange and the Bombay Stock Exchange. SEBI has a
hierarchical structure which includes various departments which are headed by its respective
department heads.

The Board shall consist of the following members, namely:

 a Chairman;
 two members from amongst the officials of the Ministry of the Central Government
dealing with Finance and administration of the Companies Act, 1956;
 one member from amongst the officials of the Reserve Bank;
 five other members of whom at least three shall be the whole-time members, to be
appointed by the Central Government.
The term of office of the Chairman and members of the Board is to be not more than 5 years.
The Central Government shall remove a member from office if

 he is, or at any time has been, adjudicated as insolvent;

 is of unsound mind and stands so declared by a competent court;
 has been convicted of an offence which, in the opinion of the Central Government,
involves a moral turpitude;
  has, in the opinion of the Central Government, so abused his position as to render his
continuation in office detrimental to the public interest.
No member shall be removed under this clause unless he has been given a reasonable
opportunity of being heard in the matter.
The Board shall meet at such times and places, and shall observe such rules of procedure in
regard to the transaction of business at its meetings (including quorum at such meetings) as may
be provided by regulations.

The Chairman of the Board shall preside over the Board meetings. In case of his absence, any
other member chosen by the members present from amongst themselves at the meeting shall
preside at the meeting. Also, vacancies shall not invalidate the proceedings of Board.

Functions of the Board

Section 11 in The Securities and Exchange Board of India Act, 1992 grants wide powers to the

Board which broadly include:

 Regulating the business in stock exchanges and any other securities markets;
 Registering and regulating the working of parties who may be associated with securities
markets in any manner.
 Promoting and regulating self-regulatory organisations.
 Prohibiting fraudulent and unfair trade practices relating to securities markets.
 Calling for information and records.
 Levying fees or other charges.
SEBI can take interim measures in the interest of investors and securities market. It can suspend
trading, restrain persons from accessing the securities market, suspend office bearers, issue
directions to intermediaries not to dispose of or alienate any asset. Primarily there are three key
functions performed by SEBI:
1. Protective Functions- This function is performed by SEBI to conserve the interest of
investors and financial institutions. Its core protective functions are to check:

 Price Rigging- The primary purpose of SEBI is to prevent manipulated fluctuations in the
financial market. Unusual built-up fluctuations made by a group of corporates so that the
 investors can incur a loss is called price rigging. The role of SEBI is to stop these sudden
fluctuations.
 Prevent insider trading- Insider trading occurs when individuals with advance knowledge
of company news use it to their advantage in buying or selling securities before the news
is made public. SEBI plays a vital role in curbing insider trading by regulating and
monitoring such activities.
 Financial education for investors- Another primary role of SEBI is to provide online and
offline seminars or training by multiple means to train the traders and investors. These
seminars should include money management and the basics of the financial market.

2. Development Functions- SEBI should ensure provision of training to the intermediaries.

SEBI also works on bringing innovation in Indian Financial Market. Some of the
development functions comprise of:

 DEMAT Form of securities.

 IPO is permitted through an exchange.
 Education of electronic platform for financial market.
 Information on discount brokerage.
 Underwriting is optional to lessen the cost of issue.
 Training for financial intermediaries.
3. Regulatory Functions-
SEBI monitors the financial market, enforces its bye-laws, and regulates various entities
to ensure transparency and smooth operation. It formulates guidelines for intermediaries,
regulates takeovers, conducts audits of exchanges, and charges fees on participants. SEBI
also oversees mutual funds and directs credit rating agencies..

Power and Authority of SEBI

SEBI possesses high power as its primary purpose was to control the market systematically by
preventing any fraudulent activity. It has three significant powers:

1. Quasi-Judicial Functions- This comprises of drafting legislations with respect to the

capital markets. With the help of this authority, SEBI has the right to conduct hearings and
pass judgments in case of any fraudulent activities. Such power assures fairness, reliability
and accountability in the capital market.
 2. Quasi-Executive Functions- Implementation of the drafted legislation also falls under the
authority of SEBI. SEBI has the absolute authority to build rules and regulations to shield
the interest of investors.

3. Quasi-Legislative Functions- The role of SEBI is to create guidelines for the security of
interest of investors. Rules and regulations made by SEBI deal with disclosure
requirements, trading regulations and listing obligations.

Although SEBI has a lot of powers, still, it has to go through the Securities Appellate
Tribunal and the Supreme Court of India.

Recent Amendments

SEBI's amendment on October 8, 2020, introduces new requirements in Schedule III of Listing
Obligations and Disclosure Requirements. It enhances the digital database, automates
shareholding disclosures, changes reporting authority for PIT violations, and introduces new
transactional mechanisms as exceptions to trading window restrictions.

Conclusion

SEBI caters to the requirement of parties that operate in the Indian Capital Market. It was
founded to improve the financial market of India, hence to obtain its purpose it takes care of the
most vital financial market participants. The recent developments in the securities market
highlights how SEBI has evolved to be the backbone of the Indian Securities Exchange

21.EXPLAIN THE ROLE OF SEBI IN PROMOTING AND DEVELOPING CAPITAL

MARKET

SEBI

SEBI functioned under the overall administrative control of the Ministry of Finance. The year
1992 led to the establishment of the SEBI which was to be appointed by the Central
Government. The Board would be a body corporate and shall have a common seal and perpetual
succession. Members of the Board could acquire, hold and dispose of property, both movable
and immovable, in the name of the Board. Further, they could contract by the said name, sue or
be sued. The head office of SEBI is at Bombay.

Capital Markets

The capital market serves a very useful purpose by pooling the capital resources of the country
and making them available to the enterprising investors well developed capital markets augment
resources by attracting and lending funds on the global scale. A developed capital market can
solve this problem of paucity of funds.

While the rapid growth of capital markets, the growth of joint stock business has in its turn
encouraged the development of capital markets. A developed capital market provides a number
of profitable investment opportunities for small savers.

Role of SEBI in Promotion and Development

1. Power to make rules for controlling stock exchange: SEBI has the power to make new
rules for controlling stock exchange in India. For example, SEBI fixed the time of trading as
9 AM and 5 PM in the stock market.
2. To provide license to dealers and brokers: SEBI has the power to provide licenses to
dealers and brokers of the capital market. If SEBI sees that any financial product is of a
capital nature, then SEBI can also control that product and its dealers.
3. To Stop fraud in the Capital Market: SEBI has many powers for stopping fraud in capital
market. It can ban on the trading of those brokers who are involved in fraudulent and unfair
trade practices relating to stock market. It can impose the penalties on capital market
intermediaries if they involve in insider trading.
4. To Control Mergers, Acquisitions and Takeovers of companies: Many big companies in
India want to create monopoly in the capital market. These companies buy all other
companies or deals of merging. SEBI sees whether this merger or acquisition is for the
development of business or to harm the capital market.
5. To audit the performance of the stock market: SEBI uses its powers to audit the
performance of different Indian stock exchanges for bringing transparency in the working of
stock exchanges.
6. To make new rules and carry forward transactions: The Share trading transactions carry
forward cannot exceed 25% of a broker's total transactions. The is a 90 day limit for carry
forward.
7. To create relationships with ICAI: ICAI is the authority for making new auditors of
companies. SEBI with ICAI works on bringing more transparency in the auditing work of
company accounts because audited financial statements are a mirror to see the real face of a
company and after this, investors can decide to invest or not to invest.
Moreover, investors can easily trust audited financial reports. After the Satyam Scandal,
SEBI whilst investigating with ICAI can ascertain ethical conduct of duties.
8. Introduction of derivative contracts on Volatility Index: For reducing the risk of
investors, SEBI has now decided to permit Stock Exchanges to introduce derivative
contracts on the Volatility Index, subject to the condition that:
a. The underlying Volatility Index has a track record of at least one year
b. The Exchange has in place the appropriate risk management framework for such
derivative contracts.
9. To Require report of Portfolio Management Activities: SEBI also has the power to
ask for the report of portfolio management to check the capital market performance.
Recently, SEBI sent the letter to all Registered Portfolio Managers of India for
demanding report.
10. To educate the investors: From time to time, SEBI arranges scheduled workshops to
educate investors.

Conclusion

SEBI caters to the requirement of parties that operate in the Indian Capital Market. It was
founded to improve the financial market of India, hence to obtain its purpose it takes care of the
most vital financial market participants. The recent developments in the securities market
highlights how SEBI has evolved to be the backbone of the Indian Securities Exchange.
22.WHAT IS THE ROLE OF AUDITORS UNDER COMPANIES ACT? OR WHAT IS THE
NEED TO APPOINT AUDITORS IN A COMPANY? OR DISCUSS THE POSITION OF

AUDITORS IN A COMPANY

Evaluate the statutory rights and duties of an auditor.

An auditor is rightly referred to as the watchdog of the company as auditors are persons who are
appointed to examine the accounts of the company objectively, identify any discrepancy in the
same and ensure that the accounts reflect the true state of affairs of the company. It is a process
required to ensure transparency in the management of company’s funds and assets and inspires
the confidence of the investors in the fact that accounts reflect the true state of affairs of the
company. Auditors are technically qualified people who independently and objectively perform
the compulsory and indispensable function of evaluating the financial statements and accounts of
the company.

It is pertinent to note that auditors are of two types: (i) internal auditors, who are the employees
of the company appointed to ensure the accuracy of the accounts and (ii) external auditors, an
independent person who is not an employee of the company, indebted to the company or is
otherwise obliged by the company, appointed in the general meeting to ensure objective and
independent examination of the accounts and financial statements of the company. This primary
duty of ensuring transparency and accountability by company officials and management is the
reason why auditors are referred to as watchdogs of the company. The statement is particularly
relevant for external auditors, also known as statutory auditors, who are mandated to be
independent individuals.

Appointment of Auditor

Under Section 139, it’s a vital requirement for every company to appoint an Auditor at the first
annual general meeting. Such appointed auditor may represent an individual or a firm.
Appointment of an Auditor also includes reappointment.
The procedure and tenure of selection will be in accordance to the prescriptions of the company.

The statement can further be analysed with respect to the role, rights, duties and liabilities of an
auditor:

Role of Auditors

Auditors stand between the company and shareholders and protect the interests of the
shareholders and investors. Section 141 of the Companies Act, 2013 provides that only
chartered accountants, who hold a certificate of practice under the Chartered Accountants Act,
1949, and firms whose majority partners practicing in India are chartered accountants are
eligible to be appointed as auditors. Notably, these auditors are referred to as external or
statutory auditors. Further these accountants must be independent and must not be disqualified
under Section 140 (5) (involvement of auditors in fraud) and Section 141 (3). Following are
some of the entities disqualified by Section 141 (3):

(a) A body corporate except a parternship registered under LLP Act, 2008

(b) An officer and employee of the company or a person who is a partner or employee of the
officer and employee of the company

(c) Person whose relative or partner has certain interests in the company by virtue of
holding a security, indebtness or provision of guarantee of a third person to the company.

(d) A person who has business relationship with the company or its subsidiary or holding
company.

(e) One who is convicted a court of an offence involving fraud and a period of ten years has
not elapsed from the date of such conviction.

(f) A person who renders services mentioned in Section 144 to the company or its subsidiary
or holding company.

The aforementioned disqualifications ensure the independence of the auditor to facilitate his role
as a watchdog.
Further, in order to understand the extent of power of an auditor, it is pertinent to examine his
status or position in the company:

Auditor as an agent of the members – It is pertinent to note that auditors have the status of an
agent of the members of company. However, it has been held in Spackman v. Evans that this
status does not bind the shareholders with any information that the auditors may have. Further,
the auditor is an agent of the general body of members and not individual members.

Auditors as an officer of the company – Initially, in Connel v. Himalaya Bank Ltd. (1895) it
was held that the auditors appointed in the general meeting and paid by the company were
officers of the company. However, this position was changed by the Companies Amendment
Act, 2000 and Section 2(59) of Companies Act, 2013, both of which exclude the status of
auditor as an officer.

Therefore, it is evident that auditors are independent individuals or firms (including Limited
Liability Partnerships) which ensure transparency in the accounts of the company and have the
status of the agent of the members,

Rights of Auditors

The rights of the auditors are as follows:

(i) Section 143 (1) provides that auditors have the right of access at all times (normal
business hours) to books, accounts and vouchers of the company, wherever kept.
The auditor can even access the records of its subsidiaries and associated to the extent
that it pertains to the consolidated financial statement.

(ii) Right with respect to branch accounts – According to Section 2 (14), a branch
office refers to an office so described by the company. Section 143(8) provides that
auditors or any person duly appointed under Section 139 have to audit the accounts of the
branch offices. Notably, the company’s auditor is entitled to receive a report from the
branch auditor and deal with the report as he may deem fit. The company’s auditor
further has the right to visit the branch office and access the accounts and records at all
times for performing the duties as an auditor. Furthermore, Rule 12 of the Companies
 (Audit and Accounts) Rules, 2014 provides that all rights under Section 143 (1) to 143(4)
can be exercised by the auditor in respect of such branch.

(iii) Right to sign the report – Section 145 provides that only an auditor entitled to sign
the appointed auditor has the right to sign the auditor’s report or sign or certify any other
document of the company. Section 141 (20) further provides that in case the auditor is a
firm of LLP, only the partners who are chartered accountants are empowered to sign the
auditor’s reports.

(iv) Right to receive notices – Section 146 states that the auditor is entitled to receive all
notices and communications pertaining to the general meeting of the company.

(v) Right to attend general meeting – Section 146 further provides that auditor has the
right to attend a general meeting and be heard at that meeting with respect to matters
which concern him as auditor. An auditor is further entitled to appoint another person,
qualified to be appointed as auditor, to represent him at the meeting. Notably, the auditor
is entitled to make statements with respect to the accounts if he deems fit. Further, the
parts of auditor’s report which have an adverse effect on the functioning are required to
be read in the general meeting (as per Section 145) and are open to inspection by the
members.

(vi) Right to receive remuneration – Auditor has a statutory right to receive

remuneration upon completion of his work. It was held in Newton v. Birmingham Small
Arms Co. that auditor’s right to remuneration is a statutory right and any limitation on
the same by the Articles of company or resolution of the members is ultra vires and void.

(vii) Auditor’s lien – The right of a person to lawfully retain the possession of someone
else’s property, on which he has worked, for non-payment of dues of his work is
referred to as a right of lien. Auditors have the right of lien over books and documents
placed in his possession by the client, for non-payment of fees for work done on those
books and documents. Under Section 128, the books of accounts are with the Registrar
and the auditors can take lawful possession of them in pursuance of a Board resolution
authorising them to do so. In the latter case, they can exercise the right of lien. It is
 pertinent to note that working papers of auditor are his personal property and no question
of lien arises over them.

Duties of Auditors

The auditor has the general duty to prepare a report on the evaluation of books of accounts and
financial statements of the company. They further have certain specific duties.

Section 143 requires the auditor to report to the members at the end of financial year whether to
the best of his information and knowledge the accounts and financial statements give a true and
fair view of the state of company’s affairs The general duty to prepare the auditor’s report
under Section 143 have the following requirements:

(i) Section 143(3) requires the auditor to formulate the report on the basis of all
information received by him to the best of his knowledge and by exercising due care,
diligence and skill. It has also been held in Landon and General Bank case.

(ii) Determine whether proper books of accounts, as specified in Section 128, has been
maintained by the company.

(iii) Ensure and evaluate compliance of company with accounting standards.

(iv) Make comments on matters which are likely to have adverse impact on the
company and present them before the members.

Further, the auditors have the duty to report fraud to the Central Government if in the course of
the performance of his duties as auditor, he has reason to believe that an offence involving fraud
is being or has been committed against the company by officers or employees of the company
involving an amount of rupees one crore or more (Section 143(12)). Other duties of the auditor
include duty to make statement in prospectus (section 26(1)(b)(iii)), duty to produce documents
and evidence (section 217), duty to acquaint themselves with their duties (held in Leeds Estate
Building Investment Co. v. Shepherd) and duty not to render certain services in order to
maintain their independence. Further, no limitations can be imposed on the duties of auditor.

Liabilities of Auditors
Auditors may be held criminally liable or liable to pay damages for contravention of certain
provisions of the Act. These liabilities are enumerated as follows:

(i) Section 147(2) provides that contravention of Section 139 (appointment),

Section 143 (power and duties), Section 144 (prohibited services) or Section 145
(signing of audit report) by the auditor shall be punishable with fine of Rs. 25,000 to
Rs. 5 lakhs or four times the remuneration of auditor, whichever is less.

(ii) If the provisions have been violated purposely to deceive the company or its
shareholders or creditors or tax authorities, the fine shall be a minimum of Rs. 50,000,
which may extend to Rs. 25 lakhs or eight times the auditor’s remuneration
(whichever is less) and imprisonment which may extend up to one year.

(iii) Upon conviction, the auditor is liable to refund the remuneration received from the
company and to pay damages to the company, statutory bodies or authorities or to any
other persons for loss arising out of errors or misleading statements of particulars of
his audit report. Notably, in cases of criminal liability except fine, only the partner(s)
who have acted fraudulently or abetted or colluded in any fraud shall be liable. Other
liabilities of the partners of a firm shall be joint and several.

(iv) An incidental function performed by them includes detection of frauds by or

against the company. However, if the auditors have performed their work with due
care and skill according to the expected professional standards, they would not be
held responsible if they fail to discover a fraud.

Conclusion

It is evident that auditors are independent and qualified persons who play a crucial role in
maintaining fiscal transparency and accountability in a company. They ensure that the financial
statements and books of accounts give a true picture of the state of affairs of the company and
their aforementioned rights, duties and responsibility are in furtherance of the same. It is
therefore concluded that auditors are rightly referred to as watchdogs of the company.
23.EXPLAIN THE POSITION OF STATUTORY/EXTERNAL AUDITORS IN A COMPANY
OR THE ROLE OF AN EXTERNAL AUDITOR IN A COMPANY WITH RESPECT TO
CORPORATE GOVERNANCE.

The company auditor is required to report on the financial statements he has audited and has a
general obligation to ensure that the financial statements provide a true and fair depiction of the
company's state of affairs at the end of the year, as well as its profit and loss and cash flow for
the year. In addition to this basic obligation, the Act imposes additional obligations on the
auditor.

DUTY TO MAKE REPORT UNDER SECTION 143

In accordance with subsections (2) and (3) of section 143, it is the auditor's responsibility to
report to the members of the company on the accounts he has examined and on all financial
statements which are required by or under this Act to be laid before the company in general
meeting. The auditor's report must also confirm the position, as outlined below, regarding how
the requirements are to be met. Subsection (2) specifies that the auditor must report whether, to
the best of his knowledge and information, the accounts and financial statements provide a true
and fair depiction of the company's state of affairs at the end of the fiscal year, as well as its
profit and loss and cash flows for the fiscal year.

(a) Obtaining information and explanation necessary for audit:- The importance of this condition
is that the auditor must be satisfied with the scope of his work and attest that he has adhered to
professional standards of attention and care in the performance of his duties. If the response to
this question is negative, the respondent must offer specifics and also describe the impact of this
information on the financial statements.

(b) Proper books of account as required by law kept by company and proper returns adequate for
the purpose of audit received by the auditor: The term "proper books of account" is defined
indirectly in section 128(1), which states that a company must prepare and keep books of account
and other relevant papers and financial statements that give a true and fair view of the company's
state of affairs, including its branch office or branch offices, as applicable. In addition, Section
129(1) stipulates that the financial statements must adhere to the notified accounting standards.
Therefore, accounting records that do not comply with these rules should not be regarded
"appropriate." In addition, section 338(2) stipulated that a firm in liquidation is presumed not to
have maintained appropriate books of account if it has not kept:

(i) such books of account as are necessary to exhibit and explain the transact tions and financial
position of the business of the including books containing entries made from day to day in
sufficient detail of all cash received and all cash paid; and

(ii) where the business of the company has involved dealing in goods, statement of annual stock-
taking and (except in the case of goods sold by way of ordinary retail trade) of all goods sold and
purchased, showing particulars of goods and those of buyers and sellers in sufficient detail to
enable those goods and those buyers and sellers to be identified. In these situations, the books of
account required by law are those that contain a complete record of all the transactions indicated
in sections 128 and 338(2) and that offer a genuine and fair picture of the company's financial
status and profitability. Responsibility of the auditor on the book of accounts from the branch
office.

(c) Companies balance sheet and profit and loss account in consonance with books of accounts
and returns: The culmination of an auditor's work is the verification of financial statements.
Evidently, he would fail to fulfil his responsibilities in this respect if he failed to check them
upon consulting the books of account prior to preparing a report on them. When the auditor
declares that correct books of account have been kept and that the accounts are in accordance
with them, he affirms that he has fulfilled the specific legal obligation in this respect. If correct
accounting records have not been maintained and there is a difference between the financial
statements and the entries in the books, he should include this in his report.

(d) The balance sheet is in compliance with the accounting standards: As previously stated,
subsection (1) of section 129 stipulates that the financial statements must conform with the
accounting standards specified in section 133. The auditor must verify that the financial
statements adhere to accounting standards.

(e) Comments of the Auditor to create adverse effect on the functioning of the company: It
requires the auditor to disclose the observations and opinions of the auditors "which have a
negative impact on the running of the firm or it." Auditors' remarks or observations are never
meant to have a negative impact on a company's operations. It should pertain to the auditor's
remarks and observations on the negative or improper functioning of the firm. Further, it raises
the question of whether clause (f) is an independent addition to the numerous clauses occurring
in subparagraphs (2) and (3) of section 143, or whether the auditor's assertions on facts and
opinion just added emphasis to the negative nature of subparagraphs (2) and (3). If required to be
reported clause (f) is independent of other dent of clauses, then the observations or comments are
3) and they may be in addition to those already contained in subparagraphs (2) and (3) and
extend beyond accounting matters to the quality of functioning or management of the company,
which is never intended in a normal financial audit. The auditor is to provide a report on the
accounts following a thorough audit. He is not compelled to attend management events. The
performance of is really represented in its financial accounts. If a company's performance is
subpar (for whatever reason), it may have been caused by one or more issues, which may not
necessarily entail poor management. The auditing of management functioning is consequently a
unique and separate branch of operations and management auditing.

(f) To check if any director is disqualified from holding the post under section 164(2): The
auditor of a company will have to report whether any director of the company under audit is
disqualified from being appointed as a director of that company because of section 164(2). Under
Section 164(2) of the Act “no person who is or has been a director of a company which

a. has not filed financial statements or annual returns for any continuous period of three financial
years; or

b. has failed to repay the deposits accepted by it or pay interest thereon or to redeem any
debentures on the due date or pay interest due thereon or pay.”

COMPLIANCE WITH AUDITING STANDARDS

Section 141(9) requires the auditor to adhere to any auditing standards that may be specified for
the audit. The Central Government may impose auditing standards suggested by the Institute of
Chartered Accountants in cooperation with the National Financial Reporting Authority for this
purpose. [Section 141(10) and proviso] Until such auditing standards are notified, the standards
previously set by the ICAI must be observed. The ICAI has issued several auditing, review, and
additional standards. Until auditing standards are published under the Act, these standards will
be considered auditing standards.

DUTY TO REPORT FRAUD

In accordance with Section 143(12) of the Act, the auditor is required to report to the Central
Government if he has reason to believe that an offence involving fraud has been or is being
committed against the company by officers or employees of the company involving an amount of
rupees one crore or more. The auditor must first send his report promptly (within two days) to
the audit committee or the Board, requesting a response within 45 days. Within fifteen days of
receiving a response from the Board or the audit committee, the auditor must transmit to the
Central Government his report, the response or observations of the Board or the audit committee,
and his comments on such response or observations. [Rule 13 of the Companies and Auditors)
Rules, 2014*] The report on the letterhead of the auditor must be sent to the Secretary, Ministry
of Corporate Affairs in a sealed envelope by registered post with acknowledgement due or by
speed post followed by an email as confirmation. In the case of fraud involving a lesser amount,
it would be sufficient for the auditor to immediately (within two days) report the fraud to the
audit committee of the board constituted under section 177 or to the Board, stating clearly the
nature of the fraud, the amount involved, and the parties involved.

DUTY TO ATTEND GENERAL MEETINGS

Unless excused by the firm, section 146 requires the auditor to attend the general meeting in
person or by an authorised agent. The approved representative must be qualified to serve as an
auditor. SCOPE OF DUTIES OF AN AUDITOR The statutory duties of the auditor cannot be
limited in any way by the Articles or by the directors or members, but a company may extend
them by adopting a resolution at the annual meeting or including a provision in the articles
[Newton v. Birmingham Small Arms Co. Ltd. (1875)].

DUTY TO MAKE STATEMENT IN PROSPECTUS

Under section 26(1)(b)(iii) an auditor is required to make a report to be included in the

prospectus of a company. Such a report should be made out on:

(a) the profits and losses of the business of the company for each of the five financial years
immediately preceding the issue; and

(b) assets and liabilities of its business on the last date to which the accounts of the business
were made up (not more than one hundred and eighty days before the issue of the
prospectus). In case of a new company for which five years since incorporation has not
lapsed, the report on the profit and losses should cover the period from the date of
incorporation.

DUTY TO PRODUCE DOCUMENTS AND EVIDENCE

For the purposes of section 217 of the Act, the auditor may be considered an agent of the
company and, as such, is required to preserve and produce to an inspector or any person
authorised by him in this regard, with the prior approval of the Central Government, all
books and papers of or pertaining to the company. In addition, he is required to provide the
inspector with all reasonable help in connection with the inquiry.

DUTY TO ACQUAINT THEMSELVES WITH THEIR DUTIES

Auditors are bound to acquaint themselves with their duties under the Companies Act as
noted in Re. Bolivia Exploration Syndicate [1913]. They are also bound to see what
additional duties, if any, are cast upon them by the Articles of the company whose accounts
they are called upon to audit. As highlighted in Leeds Estate Building Investment Co. v.
Shepherd [1887] Ignorance of the Articles and of additional duties imposed by them would
not afford any legal justification for not observing them.
24.DISCUSS THE IMPORTANCE OF MEETING IN A COMPANY. (/10) OR WHAT IS

THE PURPOSE OF CONDUCTING MEETINGS IN COMPANIES? EXPLAIN THE

VARIOUS KINDS OF MEETINGS CONTEMPLATED UNDER THE INDIAN

COMPANIES ACT

Introduction

The word “meeting” has not been defined in the Companies Act, 2013 (hereinafter referred to as
“the Act”). Its application shall be derived from its various types and the procedure involved in
conducting such meetings. In the case of Sharp v. Dawes, 1971, a meeting is defined as “an
assembly of people for a lawful purpose” or “the coming together of at least two persons for any
lawful purpose.” It is essentially a lawful assembly of members of the company with the required
quorum having certain objectives to be discussed and fulfilled.

An Annual General Meeting (hereinafter referred to as “AGM”) is a gathering of a company’s

interested shareholders at a yearly basis. As per Section 96 of the Act, such meeting is
necessitated to take place at least once in a year. The first AGM of the company should be held
within 9 months from the date of closing of the first financial year. Thereafter, one AGM shall be
held every year. The gap between two AGMs cannot be more than 15 months. However, there is
no explicit provision in the Act for deferment of the first AGM.

Importance

AGM is an important institution for the protection of shareholders of a company. The ultimate
control and destiny of a company should be in the hands of its shareholders. It is, therefore,
desirable that the shareholders should come together once in a year to review the working of the
company.

The business to be transacted at the meeting is generally provided for in the articles of the
company and that is known as the ordinary business of the meeting. The meeting may take up
any other business also and that will be known as special business.

Types of Meetings
1. Meetings of Shareholders:
The shareholders are the real owners of the company, but due to certain limitations they cannot
take part in the management of the company. They leave this to their representatives called the
directors. For controlling the board of directors and their activities ‘shareholders’ ‘meetings’ are
held from time to time. Meeting of shareholders can be classified as under.

I. Statutory Meeting:
Every public company having share capital must convene a general meeting of shareholders
within a period of not less than one month and not more than six months after the date on which
it is authorised to commence its business. This is the first meeting of the shareholders of the
company and it is held once in the whole life of the company.

The following companies need not to hold statutory meeting:

(i) Private company.
(ii) Company limited by Guarantee having no share capital.
(iii) Unlimited liability company.
(iv) A public company which was registered as a private company earlier.
(v) A company which has been deemed as a public company under Sec. 43 A.

Notice of the Meeting:

The directors are required to send a notice of the meeting to all the members of the company at
least 21 days before the date of the meeting stating that it is the ‘statutory meeting’ of the
company. If the notice convening this meeting does not name it as the Statutory Meeting it will
not Amount to compliance with the provisions of this section.

Objects of Statutory Meeting:

The statutory meeting is held to inform the shareholders about matters relating to incorporation,
allotment of share, the details of the contracts concluded by the company, etc. According to
Stephenson, Statutory Meeting is convened in order to aord the shareholders an opportunity for
seeing what degree of success has attained the floatation of the company and in order that any
special matters requiring their approval may be laid before them.

Statutory Report:
The directors are required to prepare and send a report called the ‘Statutory Report’ to every
member of the company at least 21 days before the date of the meeting. If the report is sent later
it shall be deemed to have been duly forwarded if it is so agreed to by a unanimous vote of the
members entitled to attend and vote at the meeting [Sec. 165 (2)]. A copy of this report should be
sent to the Registrar.

Certification of Report:
The statutory report must be certified as correct by not less than two directors; one of whom shall
be the managing director, if any The auditors of company then shall certify it as correct
regarding the shares allotted, cash received in respect of such shares and the receipts and
payment of the company. [Sec. 165(4)]
A certified copy of the statutory report shall be filed with the registrar for registration
immediately after the same has been sent to the members of the company.[Sec. 165(5)]

Procedure at the Meeting:

At the commencement of the meeting the Board shall place a list showing the name, addresses
and occupation of the members of the company and the number of the shares held by them.
During the continuance of the meeting the list shall remain open for inspection by members.

The members present at the meeting may discuss any matter relating to the formation of the
company or arising out of statutory report, whether previous notice has been given or not. The
meeting cannot pass a resolution on any item or on a subject unless notice has been given
according to the provisions of the Act.
Effect of Non-compliance:
(i) If default is made in complying with the provisions of Section 165, every director or other
officer of the company who is in default will be liable to a fine which may extend to Rs. 500.
(ii) If the statutory meeting is not held or the statutory report is not filed as per the provisions of
Companies Act, the company may be compulsorily wound up under the orders of court. [Sec.
43(6)]
The court may, however, give direction for the statutory report to be filed or a meeting to be held
as the case may be and refuse to order the winding up of the company. [Sec. 443(3)]

II. Annual General Meeting (AGM):

It is a meeting of shareholders which is held once in a year. The object of holding this meeting is
to review the progress and prospects of the company and elect its office-bearers for the coming
year.

Holding of the Meeting:

The first annual general meeting of the company is held within 18 months of its incorporation.
After holding such meeting it is not necessary to hold any other annual general meeting in the
year of its incorporation and in the next year.

Subsequent annual general meeting must be held by the company each year within six months of
the closing of the financial year. I the interval between any two annual general meetings must not
be more than fifteen months. The registrar is empowered to extend the time upto a period to three
months except in the case of first annual general meeting.

Notice:
The Board of Directors has to call Annual General Meeting giving 21 days notice to all the
members entitled to attend the meeting. However, such a meeting may be called with shorter
notice, if it is agreed to by all the members to vote in the meeting.
Certified copies of Profit and Loss Account and Balance Sheet, Directors’ Report and Auditor’s
Report should also be forwarded to the members at least 21 days before the holding of the
meeting of the company. Considering the importance of annual general meeting to shareholders
it has been held that the directors must call the meeting even though the accounts are not ready or
the company is not functioning.

Effect of Non-Compliance:
(i) If default is made in holding the annual general meeting in accordance with the above
provisions, the Central Government may on the application of any member of the company, call
or direct for the calling of the meeting and give such directions for this purpose as it thinks
proper. The directions may include that one member of the company present in person or by
proxy shall be deemed to constitute the meeting. (Sec. 167)

(ii) If default is made in holding a meeting of the company in accordance with the above
provisions, the company and its every officer who is in default shall be punishable with a fine
which may extend to five hundred and in case of continued defaults, with a further fine which
may extend to Rs. 250 for every day during which such default continues,

(i) Routine Business:

(a) Adoption of Annual Accounts, Directors’ Report and Auditors’ Report.
(b) To declare the dividend.
(c) To elect the directors in place of those retiring by rotation.
(d) To appoint auditors and fix their remuneration.

(ii) Special Business:

(a) To increase Authorised Capital.
(b) To alter the Articles of Association, etc.

III. Extraordinary General Meeting:

Extraordinary meeting is a general meeting which is held between two Annual General
Meetings. Extraordinary General Meeting is Called to discuss any particular matter of urgent
importance to the company. This meeting is called for the consideration of any specific subject,
decision of which cannot be postponed to the next Annual General Meeting.

This meeting may also be called to discuss the following:

(i) Alteration of any clause of Memorandum of Association; or
(ii) Changes in the Articles of Association; or
(iii) Scheme of the reduction of share capital etc.

The Extraordinary General Meeting may be called by the Directors or may be convened by the
Shareholders if the Board of Directors does not arrange for it despite their requisition to call it.

Directors may call the Extraordinary General Meeting in accordance with the procedure laid
down in the Articles of Association of the company.

Shareholders holding at least one-tenth of the paid-up share capital of the company can make a
requisition to the Board of Directors to convince such a meeting.

If due to any reason it is impracticable to hold extraordinary general meeting the Company Law
Board may order to call such meeting either on its own initiative or on the application of any
director or any member of the company who are entitled to vote at the meeting.

Section 186 of the Companies Act empowers the Company Law Board to call only extraordinary
general meeting and not the annual general meeting of the company. If no such meeting is
convened within 21 days of their requisition, shareholders may themselves convene the meeting
within 3 months from the date of their requisition.
A notice of 21 days has to be given to members indicating the nature and particulars of the
resolutions to be discussed. The special resolutions passed at Extraordinary General Meeting
have to be filed with the Registrar within 15 days.

IV. Class Meetings:

When the meeting of a particular class of shareholders takes place such as preference shareholder
meeting, it is known as class meeting. Such a meeting can be attended only by that class of
shareholders. The articles define the procedure for calling such meeting. Such a meeting is called
for the alteration in the rights and privileges of the shareholders and for the purpose of
conversion of one class of shares into another.

2. Meetings of Directors:
I. Meetings of Board of Directors:
At Least One Meeting in Every Three Months:
The directors of a company exercise most of their powers in a joint meeting called the meeting of
the Board.

In the case of every company, a meeting of the Board of Directors must be held:
(i) At least once in every three months, and
(ii) At least four such meetings shall be held in every year. [Sec. 285]

In other words, no three months should pass without directors’ meeting being held, and no year
should expire without at least four directors’ meetings having been held in it.

The object of this section is to ensure that the Board meetings are held at reasonably frequent
intervals so that the directors may be in touch with the management of the affairs of the
company.
However, the Central Government is empowered to relax the rule with regard to any class of
companies (Section 285). The object of this provision is to save smaller companies having
insufficient business to be transacted at Board meetings from unnecessary hardships and
expenditure involved in holding them.

Notice of the Meeting:

Notice Of every meeting of the Board of Directors must be given in writing to every director in
India and at his usual address in India to every other director who is outside India for the time
being (Sec. 286). A director has no power to waive his right of notice. Notice must be given to a
director, even if he has stated that he will be unable to attend the meeting.

There is no need to send notice, if the articles provide for meetings to be held at regular
intervals’ e.g., monthly, the time and place being fixed. Also, if all the directors should meet
casually, and are willing to hold a meeting, the meeting can be held notwithstanding the absence
of notice.

Unless the articles of the company provide a definite period of notice, a reasonable notice must
be given of the Board meeting. What is a reasonable notice will depend on any particular case. If
a proper notice is not given the proceedings are invalid unless all the directors are present at the
meeting.

The notice should mention the place, time and date of the meeting. The day must be a working
day and the time should be during business hours unless agreed otherwise by all the directors. It
is not necessary to state in the notice the business to be transacted, unless the articles of the
company or the Act so require.

Agenda:
The term ‘agenda’ means things to be done. In the present context it is a statement of the
business to be transacted at a meeting. It also sets out the order in which the business is to be
dealt with. Though the Companies Act does not make it obligatory on the secretary to send an
agenda or to incorporate the same in the notice of Board Meeting, yet by convention it
necessarily accompanies the notice calling the meeting.
When the agenda is enclosed with the notice each director gives due consideration to the
proposed business and comes with necessary preparations for discussion in the meeting.

Quorum:
There must be a proper quorum for every meeting. The quorum for Board Meeting should be at
least two directors or one-third of total strength of the Board of Directors, whichever is more
subject to a minimum of two directors. While determining the total strength, the vacancies are
not counted.

Again the directors who are interested in any of the resolutions to be passed at the Board
Meeting shall not be counted for the purpose of quorum of that resolution. If at any time the
number of interested directors exceeds or is equal to two-thirds of the total strength of directors,
then the remaining directors who are not interested will be the quorum for that item, provided
their number is not less than two [Sec. 283].

If the meeting of the Board could not be held for want of quorum then unless the articles
otherwise provide the meeting shall automatically stand adjourned till the same day in the next
week and at the same time and place.
Where that day happens to be a public holiday then the meeting stands adjourned to the next
succeeding day, at the same time and place. If a meeting could not be held for want of a quorum,
it shall all right be counted towards the minimum number of meetings which must be held in
every year under Sec. 285. [Sec. 288]

Board meetings are called for the following business:

(i) To issue shares and debentures.
(ii) To make calls on shares.
(iii) To forfeit the share
(iv) To transfer, the shares.
(v) To fix the rate of dividend.
(vi) To take loan in addition to debentures.
(vii) To invest the wealth of the company.
(viii) To think over the difficulties of the company.
(ix) To determine the policies of the company.

II. Meetings of the Committees of Directors:

The Board of Directors may form certain committees and delegate some of its powers to them.
These committees should consist of only directors. The delegation of powers to such committees
is to be authorised by the Articles of Association and should be subject to the provisions of the
Companies Act.

In a large company routine matters like Allotment, Transfer, Finance are handled by sub-
committees of the Board of Directors. The meetings of such committees are held in the same
way as those of Board Meetings.

3. Meetings of Creditors:
The meetings of creditors are called when the company proposes to make a scheme for
arrangement with its creditors.
Section, 391 to 393 of the Companies Act not only give powers to the company to compromise
with the creditors but also lay down the procedure of doing so.

4. Meetings of Debenture Holders:

Meetings of the debenture holders are held according to the conditions contained in the
debenture trust deed.
These meetings are called from time to time where the interests of debenture holders are
involved at the time of reconstruction, reorganisation, amalgamation or winding up of the
company.
The rules and regulations entered in trust deed relate to the notice of the meeting, appointment of
a Chairman of the meeting, passing the resolutions, quorum of the meeting and the writing and
signing of minutes.

25.WHAT ARE ANNUAL GENERAL MEETINGS? ANNUAL GENERAL MEETINGS

SERVE A VERY IMPORTANT PURPOSE IN A COMPANY. CRITICALLY EVALUATE

THE STATEMENT.

Introduction

The word “meeting” has not been defined in the Companies Act, 2013 (hereinafter referred to as
“the Act”). Its application shall be derived from its various types and the procedure involved in
conducting such meetings. In the case of Sharp v. Dawes, 1971, a meeting is defined as “an
assembly of people for a lawful purpose” or “the coming together of at least two persons for any
lawful purpose.” It is essentially a lawful assembly of members of the company with the required
quorum having certain objectives to be discussed and fulfilled.

An Annual General Meeting ( hereinafter referred to as “AGM”) is a gathering of a

company’s interested shareholders at a yearly basis. As per Section 96 of the Act, such meeting
is necessitated to take place at least once in a year. The first AGM of the company should be held
within 9 months from the date of closing of the first financial year. Thereafter, one AGM shall be
held every year. The gap between two AGMs cannot be more than 15 months. However, there is
no explicit provision in the Act for deferment of the first AGM.

Importance

AGM is an important institution for the protection of shareholders of a company. The ultimate
control and destiny of a company should be in the hands of its shareholders. It is, therefore,
desirable that the shareholders should come together once in a year to review the working of the
company.

The business to be transacted at the meeting is generally provided for in the articles of the
company and that is known as the ordinary business of the meeting. The meeting may take up
any other business also and that will be known as special business.
Requirements

Time- The AGM is to be held during business hours i.e. generally between 9 am to 6 pm and not
on a public holiday.

Venue- The AGM can take place at any location within the town where the registered office of
the Company is located. The same applies to instances where the meeting has been adjourned.

A meeting held at a difference place than the place which has been stated in the notice of the
meeting shall be considered to be illegal. [Sikkim Bank Ltd. v. RS Chowdhari, 2000]

Regardless of the accounts of the company being ready, the AGM necessarily has to be
conducted. In the case of Maddan Gopal Dey v. State of West Bengal, 1969, it was held that
non-functionality of the company is not a valid excuse for the non-conduction of an AGM.

The Registrar of Company has the power to extend the AGM for a maximum period of 3 months
from the scheduled date of conduction in cases of special circumstances. However, the time for
holding the 1st AGM cannot be extended.

Failure to conduct AGM

In the case of Anuradha Mukherjee v. Incab Industries Ltd., 1996, the court clarified that any
member of the company has the right to file an application to the National Company Law
Tribunal (hereinafter referred to as “the Tribunal”) under Section 97 of the Act in case of failure
to hold a meeting. An order by the Tribunal instructing conduction of a meeting shall be deemed
to be an order to conduct the AGM.

The courts do not have an authority to pass such orders for holding meetings even under their
inherent powers and only Tribunals have been entitled of the same as given under Section 98 of
the Act. Where the holding of a meeting, other than an annual general meeting, has for any
reason become impracticable, the proper course for the company to follow is to apply to the
Tribunal. In such cases the Tribunal can on its own motion or on the application of a director or a
member order a meeting to be called and held in accordance with its directions.

In the case of Sree Meenakshi Mills Co. Ltd. v. Registrar of Joint Stock Companies, 1938, it
was held that failure to hold an AGM, either under general circumstance or on order of the
Tribunal, is an offence punishable with fine. Such punishment shall be imposed on the company
as well as every officer of the company ‘who is in default’. The court also iterated upon the
mandate of conducting a minimum of one meeting per year. The company should hold as many
AGMs as there are years.

Section 99 of the Act lays down a penalty of up to 1 lakh rupees on the defaulting officer which
may extend up to 5000 rupees per day if default continues, in case of failure to comply with an
order to conduct an AGM.

In the case, Dinkar Rai D Desai v. P Basin (1982), the Board of Directors of the company failed
to convene the AGM in spite of the directions to conduct the same from the company judge.
Resultantly, a new Board of Directors was elected for further affairs of company.

Officer in Default

If one director is seriously ill due to which the was a failure to conduct an AGM, the court
considered that since there is no wilful default on behalf of the director, he cannot be held liable
for failure of conduction of the meeting. [Kastoor Mal Banthiya v. State, 1951]

If the manager of the company was trying to conduct the AGM but other members of the
company did not pay heed to the same, failure of conducting such meeting shall not render the
manager of the company as an ‘officer in default’. [SS Jhunjhunwala v. State, 1970]

Conclusion

Shareholders who do not attend the meeting in person may usually vote by proxy, which can be
done online or by e-mail. An AGM is a yearly gathering of a company's interested shareholders
whereby activist shareholders may use it as an opportunity to express their concerns.

26.EVALUTATE THE PROVISIONS RELATED TO ANNUAL GENERAL MEETINGS IN

A COMPANIES OR WHAT ARE THE STATUTORY PROVISIONS WITH RESPECT

TO NOTICE OF ANNUAL GENERAL MEETINGS AS TO LENGTH, TIME PLACE,

FORM AND PERSONS ENTITLED THERETO?

Introduction

The word “meeting” has not been defined in the Companies Act, 2013 (hereinafter referred to as
“the Act”). Its application shall be derived from its various types and the procedure involved in
conducting such meetings. In the case of Sharp v. Dawes, 1971, a meeting is defined as “an
assembly of people for a lawful purpose” or “the coming together of at least two persons for any
lawful purpose.” It is essentially a lawful assembly of members of the company with the required
quorum having certain objectives to be discussed and fulfilled.

An Annual General Meeting ( hereinafter referred to as “AGM”) is a gathering of a

company’s interested shareholders at a yearly basis. As per Section 96 of the Act, such meeting
is necessitated to take place at least once in a year. The first AGM of the company should be held
within 9 months from the date of closing of the first financial year. Thereafter, one AGM shall be
held every year. The gap between two AGMs cannot be more than 15 months. However, there is
no explicit provision in the Act for deferment of the first AGM.

Company to hold annual general meeting every year

Every company other than a one person company shall hold a general meeting as its annual
general meeting in each year in addition to any other meetings. As provided in clause (a) of ] of
Section 102(1), four businesses transacted at such meeting are treated as ordinary businesses
while other businesses, if any, are deemed to be special businesses.

Convening annual general meeting is a statutory requirement. A company may have more
than one general meeting but it should name one general meeting as annual general meeting to
transact businesses mandated by the Act and the Board may fix day, date time and place for
conduct of such meeting may delegate authority to its managing director or any other director to
take steps for conduct of annual general meeting.

Exception

As provided in Section 96(1), a one person company is not required to hold Annual General
meeting. The manner of passing resolutions required to be passed is contained in section 122 of
the Act.

Due date for holding annual general meeting

As provided in Section 96(1) gives 3 conditions for holding of annual general meeting:

i. The annual general meeting shall be held every year

ii. Not more than 15 months shall elapse between the two annual general meetings

iii. Annual general meeting shall be held within a period of six months from the date of
closing of the financial year.

The annual general meeting is required to be held within the earlier period of the above
conditions. In case of first annual general meeting of the company, it shall not be necessary for
the company to hold any annual general meeting in the year of its incorporation when the
meeting is held within a period of nine months from the date of closure of the first financial year
of the company.

Time and place for annual general meeting

Every annual general meeting shall be called during business hours on any day that is not a
National Holiday. The business hours are prescribed to mean the time period between 9 a.m. and
6 p.m. The venue of the meeting shall be either the registered office of the company or some
other place in which the registered office of the company is situated. Central Government has
been empowered to exempt any company from the provisions of this sub-section subject to such
conditions as it may be impose.

A meeting held at a difference place than the place which has been stated in the notice of the
meeting shall be considered to be illegal. [Sikkim Bank Ltd. v. RS Chowdhari, 2000]

Exception to Government Company

In case of Government Company, the words “some other place within the city, town or village in
which the registered office of the company is situate” are to be substituted with “such other place
as the Central Government may approve in this behalf”.

Applicability to Section 8 Companies

In case of section 8 companies, the time, date and place of each annual general meeting are to be
decided upon before-hand by the board of directors having regard to the directions, if any, given
in this regard by the company in general meeting.

Power of Registrar to extend the due date

The Registrar is empowered under third proviso to Section 96(1) to extend, upon application by
the company, the time within which any annual general meeting is to be held. Such power can be
extended by a period not exceeding three months. This power cannot be exercised in case of the
first annual general meeting.

Consequences of holding Annual General Meeting after due date

Companies which are not holding their annual general meeting with in stipulated period as laid
done in the act are contravening the requirements of Section 96 of the Act and liable to pay fine
under Section 99 of the Companies Act, 2013. The offence under this section is a continuing
offence till the compliance is made.

Important Precedents

It is well settled that the annual general meeting must be called, whether or not the annual
accounts are ready for consideration at the meeting. [Re. El Sombrero Ltd.]

In Sadhan Kumar Ghosh vs Bengal Brick Field Owners’ Association & Others, it was held
that if the requirement to hold an AGM is an obligation of a company and if such duty can be
enforced by a solitary member complaining of default and carrying an application to the
Company Law Board under Section 167 of the Act, it is difficult to comprehend as to how such
obligation can remain suspended indefinitely upon the mere passing of the statutory hold-by
date.

Though there is considerable force in the view expressed by the trial court in Hungerford
Investment Trust Ltd., since the judgment was set aside in its entirety, it no longer has any more
value than persuasive submission. In any event, the Division Bench view in Ambari Tea
Company Ltd, although prima facie since it was at an interlocutory stage, is unqualified in its
interpretation of law that a company and its directors were precluded from holding an AGM
beyond the period prescribed by statute. It is the same view that is expressed in the unreported
judgment of Shree Hanuman Properties & Finance (P) Ltd. and in Bejoy Kumar Karnani.

In view of the binding precedents, it is not open to hold at this stage that a company has the Suo
motu authority to hold its AGM beyond the time prescribed by statute.

Punishment and Compoundability

For default in compliance of a provision, penal provisions are contained in section 99 of the Act.
Section 99 seeks to provide punishment for default in compliance of sections 96, 97 and 98.
Section 96 deals with the provisions of annual general meeting while section 97 and 98 empower
the Tribunal to call annual general meeting and general meeting of the company respectively.
The company and every officer of the company who is in default shall be punishable with fine
which may extend to one lakh rupees and in the case of a continuing default, with a further fine
which may extend to five thousand rupees for every day during which such default continues.

The offence under this section continues till meeting is held. The object of the section was
explained in Sadhan Kumar Ghosh vs Bengal Brick Field Owners’ Association & Others. A
puny member in a large company has been conferred a right by Section 167 of the Act to
approach the Company Law Board for a direction on the company to hold its AGM. That would
demonstrate that there is a duty on the company’s part to hold its AGM.

The object of Sections 166, 167 and 168 of the Act is to ensure that a company holds its AGMs
and holds the same within time. It was held in Dineker Rai D. Desai And Others vs R.P. Bhasin
And Others that subsequent appointees cannot be made liable for default committed by the
previous board. The offenses committed by company and officer, being punishable only with
fine, are compoundable under section 441 of the Act.

Conclusion

Shareholders who do not attend the meeting in person may usually vote by proxy, which can be
done online or by e-mail. An AGM is a yearly gathering of a company's interested shareholders
whereby activist shareholders may use it as an opportunity to express their concerns.

27.MEETINGS HAVE TO BE PROPERLY CONVENED AND CONDUCTED. DISCUSS OR

"MEETINGS IN A COMPANY MUST BE DULY CONVENED, PROPERLY

CONSTITUTED AND CONDUCTED OTHERWISE IT WILL NOT BE VALID."

DISCUSS OR MEETINGS HAVE TO BE PROPERLY CONVENED. WHAT ARE THE

PROVISIONS RELATED TO THE PROPER CONVENING OF MEETINGS IN A

COMPANY?
Introduction

The word “meeting” has not been defined in the Companies Act, 2013 (hereinafter referred to as
“the Act”). Its application shall be derived from its various types and the procedure involved in
conducting such meetings. In the case of Sharp v. Dawes, 1971, a meeting is defined as “an
assembly of people for a lawful purpose” or “the coming together of at least two persons for any
lawful purpose.” It is essentially a lawful assembly of members of the company with the required
quorum having certain objectives to be discussed and fulfilled.

Meeting should be called by a proper authority

The first pre-requisite for a valid meeting is for it to be called by a proper authority. The proper
authority includes the Board of Directors of the company, except when the meeting has been
called by the requisitionists or by the Tribunal.

It is for the Directors of the company to exercise their discretion and decide if the meeting should
be conducted or not. Similarly, it is upon them to decide and fix the time and place of the
meeting.

Notice

The second requirement of a valid meeting is that a proper notice shall be given to the members
of the company stipulating the details of the meeting. As per Section 101(3) of the Act, the
notice should be given to

· every member of the company,

· legal representative of deceased member

· assignee of insolvent member

· auditor

· every director of the company.

Where company has received the notice of death of the member then the notice shall be sent to
the nominee in case of a single holder and where securities have been held jointly by more than
one person and all joint holders die, it shall be served to the nominee.
A notice must be clear and unconditional. In the case of Symth v. Darley, 1849, it was held that a
deliberate omission to not give notice to a specific member of the company may invalidate the
meeting in its entirety. However, an honest mistake of forgetting to give a notice is not fatal.

Length of Notice

The notice for the meeting shall be in writing and is to be given 21 days before the scheduled
date of the meeting. 21 days are to be computed from the date of receipt of notice by the
members. In the case of NVR Nagappa Chettiar v. Madras Race Club, 1949, it was held that a
notice is deemed to have been received at 48 hours from the time of its delivery. However, in
case of any strike or unforeseen evidence, the service of the notice would not be effective (21
days).

The members of the company may decide for a shorter time period notice either before or after
the meeting. In the case of any other meeting the consent of the holders of 95 per cent of the
paid-up share capital, or the consent of 95 per cent of the total strength of members, would be
necessary. [Self Help Private Industrial Estates Ltd. re, 1972]

The requirement of length of a notice is merely directory and not mandatory in nature. Where the
notice being short by a day does not affect the complainant substantially, the court may refuse to
invalidate the meeting on the mere basis of time inefficiency.

When there is a specific request has been made on payment of cost that notice of Board meeting
be sent by registered post, service through postal certificate could not be taken to be a conclusive
proof of service. [Sanjiv Kothari v. Vasant Kumar Chordia, 2005]

Effective Service of Notice

A notice may take a reasonable form and should sufficiently convey the relevant information
enabling the members of the company to attend the meeting and participate in deliberations.

A notice can be sent by hand, speed post or registered post bur not by ordinary post. If the
company has a website, the notice shall be posted on the same.

Where a member does not have registered address or has not updated their address to the
company, in such case, the company shall publish notice in newspaper. A notice sent by fax is
considered to be a good service. [PNC Telecom v. Thomas, 2004]
Contents of Notice

As stipulated in Section 101 and Section 102 of the Act, the notice should specify the place, day
and hour of the meeting along with the type of business to be transacted during the meeting. For
the meeting to be valid, it is necessary that the meeting take place at the exact time and place as
has been mentioned in the notice.

Business to be decided in a meeting, as mentioned in Section 102, can be categorised as follows:

General Business Special Business

At the annual meeting the business of considering Any other business at an annual
accounts and directors report, the declaration of meeting and all business at
dividends, the appointment of directors and auditors extraordinary general meetings are
and fixing their remuneration are regarded as general regarded as special business.
business.

Furthermore, the notice should attach an explanatory statement alongside. It is a statement

annexed with the notice explaining any special business to be transacted during the meeting. The
explanatory statement must mention-

1. The nature of concern or interest, financial or otherwise, if any, in respect of each items of

a. every director and manager, if any;

b. every other key managerial personnel; and

c. relatives of the persons mentioned in the above two clauses;

2. Any other information and facts that may enable members to understand the meaning, scope
and implications of the items of business and to take decisions on them.

There should be complete disclosure of the abovementioned material in the notice annexed with
the explanatory statement. In a case where the notice did not disclose the new set of Articles
which were to be brought in during the meeting, the court invalidated the resolutions passed in
that meeting. [Narayanlal Bansilal v. Manekji Petit Mfg. Co. Ltd., 1931]
Moreover, a shareholder whose conduct reflects that he is aware of the real effect of work to be
transacted at the meeting, cannot complain about the insufficiency of the notice. [Parsuram v.
Tata Industrial Bank Ltd., 1928] Non-disclosure of material facts in the notice calling the
meeting vitiate the resolutions passed at the meeting.

Benefits of non-disclosure

Section 102(4) lays down that where as a result of non- disclosure or insufficient disclosure in
any statement being made by a promoter, director or other key managerial personnel, leads to
any benefit to him or his relatives, such personnel shall be liable to compensate the company to
the extent of the benefit received by him.

Quorum

The third requirement of a valid meeting is the presence of a sufficient quorum. Quorum refers to
the minimum number of members that must be present at the meeting. Generally, the Articles of
Association of a company provide what number of members will constitute a quorum. But
Section 103 of the Act provides that unless the articles provide for a large number, in the case of
a public company

· 5 members personally present in case the number of members as on the date of the
meeting is not more than 1000.

· 15 members personally present in case the number of members as on the date of the
meeting is more than 1000 but up to 5000.

· 30 members in case the number of members as on the date of the meeting exceeds
5000.

If within half an hour from the time appointed for holding the meeting, the quorum is not
present, the meeting if called upon the requisition of members, shall stand dissolved. In other
cases, the meeting shall stand adjourned to the same day in the next week at the same time and
place or to such other day, time and place as the Board of Directors may determine.

In case of adjournment of the meeting, the company shall give a minimum of three days’ notice
individually or by publishing advertisement in the newspaper in both English and vernacular
languages.
Merely one person coming for a meeting cannot form a quorum and such meeting shall not hold
good because the word meeting means coming together of more than one person. The members
actually present can form a quorum and not all in terms of proxy. [Sharp v. Dawes, 1876]

However, where proxies may be allowed in the Articles of Association of the company,
physical/actual presence is not necessary. If there are two or more corporate bodies who are
members and are represented by a single individual, each of such bodies corporates will be
treated as personally present.

A meeting called by Tribunal is valid even though it is attended by one person but not when such
meeting is called by the company. [Shankar Sundaram v. Amalgamation Ltd., 2002]

One man Meetings

In cases where one person holds all the equity shares or all the preference shares of the company,
his presence shall be a valid quorum and the meeting shall be valid in the eyes of law. [L Opera
Photographic Ltd. In Re, 1989]

Chairman

For the proper conduct of business at a meeting, Section 103 of the Act stipulates that a
chairman is necessary. His appointment is usually regulated by the Articles of Association but if
there is nothing in the articles the members personally present at the meeting shall elect one of
themselves to be the Chairman.

In the case Narayana Chettiar v. Kaleeswara Mills, 1952, the court laid down the position and
powers of a chairman. It also stated that if the chairperson unjustly, without the consent of
members stops the meeting, the members can elect a new chairperson to conduct business.

Powers of the Chairman include:

· To maintain order and decorum.

· To adjourn a meeting- the intention of the chairman for adjournment is to be taken into
account while deciding the validity of such adjournment. [United Bank of India v.
United Credit and Development Co. Ltd., 1977]

· To supervise the casting vote.

· To decide priority of speakers.

 · To maintain relevancy and order in debate.

· To ascertain the sense of a meeting and declare the result of voting.

A chairman cannot unjustly stop the meeting or postpone the same at his own convenience. The
duties of a chairman are a mixture of judicial and ministerial duties. He should act in a bona fide
way and pursue tasks in the best interests of the company [Ram Narain v. Ram Kishan, 1911].
The duties of the chairman include:

· to see that the meeting is properly convened and duly constituted.

· to see that the proceedings of the meeting are conducted according to the rules.

· to ensure that the business is discussed in the order set out in the agenda.

· to see that all members get an equal chance to express their opinion.

· to maintain order and decorum.

Conclusion

For a meeting to be properly convened, properly constituted and properly conducted, the
abovementioned procedure and pre-requisites are to be taken into account. Since conducting
meetings is an essential element of smooth functioning of any business, it is imperative to
conduct such meetings with proper diligence.

28.WHAT ARE THE PROVISIONS RELATING TO EXTRAORDINARY GENERAL

MEETINGS UNDER COMPANIES ACT, 2013?

Introduction

All meetings other than the ones which are annual general meetings shall be classified as
extraordinary general meetings. The Board of directors of the company have the power to call an
extraordinary general meeting whenever, in its opinion, it deems fit. The reason for the existence
of an extraordinary general meeting is that the annual general meeting is conducted within a gap
of about 18 months between two consecutive meetings.
This gap is mandatory and shall be maintained, however, if an urgent matter arises between the
two annual general meetings then it can be handled by the way of extraordinary general meeting.
The matters if requires the shareholder’s approval, then an extraordinary meeting may be called.

Calling an EGM

Extraordinary general meeting may be called if the business which has to be transacted is of
urgent nature and cannot be put on hold till the next annual general meeting. Usually, an EGM
may be called in the following circumstances:

1. By the board ‐ an extraordinary general meeting may be called by the board on its own
motion.

2. By a director ‐ An EGM may be called by a director and if at a time they are called and are
not in India, then the director capable of acting and who are sufficient in number shall be
called to form the quorum.

3. An EGM may be called by the board at the requisition made by the members as per Section
100.

4. It may be called by the requisitionists themselves

5. Tribunal ‐ An EGM may be called by the Tribunal or the NCLT.

Matters to be Dealt with

1. It has been provided in the Companies Act, 2013 that any business that is considered in the
extraordinary general meeting shall be considered as special business.

2. EGM has various functions attached to it. EGM is used to help the Board to know about
certain matters which are important in nature. It also places a duty on the company to provide
to the shareholders more information about the business to be transacted in the form of an
explanatory statement.

3. The explanatory statement shall have attached to itself a notice to the EGM which shall
include the relevant information such as the nature of concern or interest which may be
financial or otherwise.
4. It shall also include the information and facts that may enable members to understand the
meaning and the implications of the business and the scope of transactions of business and to
take decisions.

Procedure to call for an EGM

The meeting shall be called at any day other than the national holiday and the procedure for
calling an extraordinary general meeting shall be given in the articles of association of the
company.

Requisition

Section 100(2) of the Companies Act, 2013 makes it clear that an extraordinary general meeting
can be held via requisition which has been made by a member who at the time of making a
requisition holds at least one‐tenth of the share capital. This can be done only in the companies
which have share capital. In the case of companies, which do not have share capital, the
members who have a minimum of a total of one‐tenth of the total voting power of all the member
who have the right to vote, such members on the date of requisition shall have the power to call
an extraordinary general meeting.
The board has a duty to call proceed to call the meeting within 21 days from the receipt of the
said requisition and the meeting has to held within 45 days. If the board fails to do so, then the
meeting can be called and held by the requisitionists within 3 months.
Important Precedents

1. Requisitions shall set out the matter for considerations and no other business can be done
apart from it. This principle was laid out in the case of Malvika Apparels v. Union of India.
2. In the case of Ball v. Metal Industries where the meeting was conducted by the
requisitionists for inducting three new directors and subsequently the agenda for removal of a
director was also added, the matter was restrained to be considered.
3. The calling of the meeting cannot be refused only on the ground that the resolution which
shall be discussed will go against the act. The directors do not have the power to refuse for
the abovementioned reason as the court has the power to take action if at all that is the case.
Cricket Club of India v Madhav Lal Apte.
4. In the case of Queens Kuries and loans (p) Ltd v. Sheena Jose, it was held that where a
notice was not given to the director who was concerned to the resolution, the proceedings had
to be declared invalid.

5. The requisitionists, according to the case of B Mohandas v. AKMN cylinders P(ltd), cannot
go to the tribunals directly if they have first not exhausted the remedy of applying for an
extraordinary general meeting themselves.

Conclusion
There has been an amendment to Section 100 of the Companies Act which states that unless the
company is a wholly owned subsidiary of a company registers outside India, the extraordinary
meeting of all the companies which are remaining shall be conducted a place in the territory of
India.
Another modification which has been made into the Act is that there is a proviso inserted into the
subsection 1 of section 100, which states that in case of Specified IFSC companies, the board can
if the shareholders have given their consent, conduct their Extraordinary general meeting at any
place. This shall include places within the territory or outside the territory of India.

29.WHAT ARE THE PROVISIONS RELATING TO BOARD MEETINGS?

Introduction

The word “meeting” has not been defined in the Companies Act, 2013 (hereinafter referred to as
“the Act”). Its application shall be derived from its various types and the procedure involved in
conducting such meetings. In the case of Sharp vs. Dawes, 1971, a meeting is defined as “an
assembly of people for a lawful purpose” or “the coming together of at least two persons for any
lawful purpose.” It is essentially a lawful assembly of members of the company with the required
quorum having certain objectives to be discussed and fulfilled.

A board meeting is essentially a meeting of the Board of Directors of a company during the
course of which the policy of the company and major decisions as to its future actions are
deliberated upon. The Act requires every company to hold its first meeting within 30 days of the
date of its incorporation.
Section 173 of the Act stipulates that every company shall have a Board meeting at least once in
every 3 calendar months and at least 4 times in a year. It is imperative to serve a notice in writing
to all the directors in India giving not less than 7 days of notice in writing to every director at his
address registered with the company. It may be sent by hand delivery or by post or by electronic
means.

In Khemka v. Deccan Enterprises (P) Ltd., 1998, it was held that telephonic invitations/oral
invitations cannot amount to a valid notice. The court in the case Young v. Ladies Imperial
Club, 1920, held that failure to give notice to any director shall lead to the meeting being
declared invalid.

The participation of directors in a meeting may be either in person or through video conferencing
or other audio visual means as may be prescribed. The means should be capable of recording and
recognising the participation of directors.

A meeting has to be called by a meeting may be called by shorter notice to transact some urgent
business. It is necessary in such a case that at least one independent director should be present.

It is not necessary to specify the agenda for the meeting. The agenda may be set out as a matter
of prudence, but it is not required. Even where agenda is specified, the directors need not confine
themselves to it. Any other business conducted at the meeting would be equally valid.

Quorum

Quorum refers to the minimum number of members that must be present at the meeting. Section
174 of the Act states that one-third of the total strength or two directors, whichever is the highest,
shall form the quorum of a Board meeting. The Articles of Association can however, fix a higher
quorum.

It is mandatory for the company to maintain a register containing names of directors present in
such board meetings.

Minutes of the Meeting

As per Section 178 of the Act, minutes of the meeting have to be recorded within 7 days of the
conduction of the meeting. The same shall be circulated to the members and the directors shall
pass their comments within 15 days of such submission.
Section 193 of the Act enables the shareholders to access the minutes of Board meetings for
them to understand the functioning of company.

Conclusion

The resolutions of the Board, even if passed by a majority, are binding on all the directors and all
of them are bound to help others in carrying them out whether they voted with or against the
majority.

30.DISCUSS THE LEGAL POSITION AND POWERS OF THE BOARD OF DIRECTORS

IN A COMPANY. CAN THE MEMBERS IN A GENERAL MEETING CHANGE THE

DECISION TAKEN BY THE BOARD OF DIRECTORS?

Section 179 declares that "subject to the provisions of the Act, the Board of directors of a
company shall be entitled to exercise all such powers and to do all such acts and things as the
company is authorised to exercise and do"."'' The effect of this section is that subject to the
restrictions contained in the Act, and in the memorandum and articles of the company, or in any
regulations not inconsistent with them including regulations made by the company in general
meeting,"

The powers of directors are co-extensive with those of the company itself. Once elected and in
control, the directors have almost total power over the operations of the company, until they are
removed. The share market crash highlighted the problem inherent in directors' autonomy over
all company affairs. There is no restriction on the appointment of directors.

There are, however, two important limitations upon their powers. Firstly, the Board is not
competent to do what the Act, memorandum and articles require to be done by the shareholders
in general meeting and, secondly, in the exercise of their powers the directors are subject to the
provisions of the Act, memorandum and articles and other regulations not inconsistent therewith,
made by the company in general meeting. "Individual directors have such powers only as are
vested in them by the memorandum and articles. It is true that ordinarily the courts do not unsuit
a person on account of technicalities. But the question of authority to institute a suit on behalf of
a company is not a technical matter. It has far reaching effects. It often affects policy and
finances of the company.

Thus, unless the power to institute a suit is specifically conferred on a particular director, he has
no authority to institute a suit on behalf of the company ... such power can be conferred by the
Board of directors only by passing a resolution in that regard." "The Act thus tries to demarcate
the area of proper management control and proper shareholder control."^®" But however precise
the demarcation may be, there will always be a scope for clash between the two basic organs of
the company, namely, shareholders and directors, as to their respective powers. A prototype of
the clash which they are likely to pick up is Automatic Self-Cleansing Filter Syndicate Co Ltd v
Cuninghame

Shareholders' intervention in exceptional cases. —"But the fact should not be overlooked that
the company is an institution owned and controlled by its shareholders. According to the legal
theory the shareholder is the ultimate and final authority within the corporate enterprise." The
Act itself provides in the second Proviso to Section 179(1) that the Board is not to exercise any
power or do any act or thing which is directed or required, whether under this Act, or by the
memorandum or articles of the company or otherwise, to be exercised or done by the company in
general meeting. The inherent, residuary and ultimate powers of a company lie with the general
meeting of shareholders. Thus the shareholders can interfere in management by replacing the
existing management with a new one which would be more responsive to their and the
company's interests. This aspect of the relationship between the directorate and shareholders has
been highlighted in the decision of the Supreme Court in LIC v Escorts Ltd.

In the following exceptional situations the general meeting is competent to act even in a matter
delegated to the Board.

1. Mala fide—In the words of Fazl Ali J of the Supreme Court: Ordinarily the directors of a
company are the only persons who can conduct litigation in the name of the company, but
when they are themselves the wrongdoers, and have acted malafide ... and their personal
interest is in conflict with their duty in such a way that they cannot or will not take steps
to seek redress for the wrong done to the company, the majority of the shareholders may
take steps to redress the wrong]." "The duty of supervision on the part of this court will
 thus be confined to the honesty, integrity and fairness with which the deliberation has
been conducted, and will not be extended to the accuracy of the conclusion arrived at.
2. Board incompetent—Secondly, majority of the shareholders may exercise a power vested
in the Board when the directors have, for some valid reason, become incompetent to act.
One situation would be when all the directors are interested in a transaction of the
company. Another illustration is BN Viswanathan v Tiffins Baryt Asbestos (P) Ltd,^^^
where the power to fill casual vacancies was delegated to the Board, but the appointments
made by shareholders in general meeting were held to be valid as at the material time no
director was validly in office. Where the circumstances were such that a valid Board
could not be constituted, it was held that the majority shareholders could act to protect the
interests of the company and they could conduct the company's defence in a suit pending
against it.

3. Deadlock. —A third occasion for shareholders to intervene would be when the directors
are unwilling to act, or, on account of a deadlock, unable to act. The leading case in line
is Barron v Potter

4. Residuary powers—The residuary powers of a company reside in the general meeting of

shareholders. ^® Thus it has been held that "where a power to allot shares is conferred by
the articles of a company on its directors and they act in excess of that power a residuary
inherent power remains in the company to validate the allotment by an ordinary
resolution in general meeting".

Restrictions on powers under statutory provisions

Powers exercisable by resolution at Board meetings [S. 179(3)].—The Act also makes a careful
effort to lay down the manner in which certain powers of the company are to be exercised.
Section179 provides that following powers of the company can be exercised only by means of
resolutions passed at meetings of the Board: The power (a) to make calls; (b) to authorise buy-
back referred to in the first proviso to clause (b) of Section 68(2); (c) to issue securities including
debentures; (d) to borrow money; (e) to invest the funds of the company;(/) to grant loans or give
guarantees or provide security in respect of loans; (g) to approve financial statements and the
Board's report; Qi) to diversify the business of the company; (f) to approve amalgamation,
merger or reconstruction; (/) to take over a company or to acquire a controlling or substantial
interest in another company; (fc) any other matter which may be prescribed. The Board may by
its resolution at a meeting delegate the powers to borrow moneys and to grant loans, etc [(d), (e)
and (/)] to a committee of directors, the managing director, the manager or any other principal
officer of the company, or in the case of branch office, principal officer of the branch.

Short Notes:

31.QUORUM OF A MEETING

Introduction

The Companies Act, 2013 requires that a company established under the Act has to hold General
meetings as well as Board meetings periodically. To ensure that the companies follow this
regulation and that such meetings are held properly, it requires a quorum to be met for it to be
deemed as a valid meeting.

A ‘Quorum’ in simple words means the minimum number of members that have to be present in
a meeting. Under the Act, the quorum for a General Meeting, a Board Meeting and an
Extraordinary General Meeting is enumerated within its provisions.

Quorum for General Meetings

Section 103 of the Act states the quorum required for a General Meeting. Under this Section,
unless the Articles of Association of the company provide for a larger quorum, the minimum
quorum must be:

1. For Public Companies:

 a. 5 members to be present if as on the date of the meeting being held, the number of
members in the company does not exceed one thousand.

b. 15 members to be present if as on the date of the meeting there are more that one
thousand members but less than five thousand members.

c. 30 members to be present if as on the date of the meeting there are more than five
thousand members.

2. For private companies

a. In the case of a private company regardless of the number of members, two members
must be present for the quorum to be met for a meeting.

Non-Fulfilment of Quorum Requirement

Sub-clause (2) and (3) of Section 103 of the Act provides for when the quorum has not been
met. If the quorum is not present within half an hour of the time set for the meeting to begin, then
the following options will be applicable:

1. The meeting will be adjourned, and it shall be held on the same day and at the same time next
week, or any other date and time as the Board may determine.

2. If the meeting is adjourned then the date, time and place of the meeting will be notified
personally or via advertisement.

3. The advertisement must be published in both English as well as the vernacular language in a
newspaper which is in circulation at a place where the registered office of the company is
situated.

4. The meeting, if called by requisitions under Section 100, shall stand cancelled.

5. Under sub-clause (3), if the quorum is not present at the adjourned meeting, then the
members present shall be the quorum.

Quorum for a Board Meeting

A board meeting is a meeting that is held between the directors of a company. Such meetings are
held usually to take important decisions about the company. To make sure that such decisions are
not taken arbitrarily, the Act requires a quorum for the meeting and the decisions taken in the
meeting to be valid. Section 174 of the Act provides the quorum for a board meeting.

As seen in Hood Sailmakers Ltd. v. Axford BCLC, it’s pertinent to note that a “meeting” where
one director is present irrespective of the number of the people present is not a valid meeting. A
quorum of the meeting has to be maintained throughout the meeting.

1. Section 174 (1) of the Act: The quorum for a board meeting must be 1/3rd of the total
number of directors or 2 directors whichever is the higher number. Therefore in case, there
are only three directors in a company, then at least two must be present even though 1/3rd
would entail that only one director needs to be present. If the directors are not physically
present but take part in the meeting via any audio/visual means, they too shall be considered
part of the quorum.

2. Section 174(2) of the Act: In the case where the quorum for a board meeting is not present,
the directors may only take two courses of action:

a. They may act for the purpose of increasing the number of directors to that fixed for
the quorum

b. They may act to summon a general meeting.

3. Section 174(3) of the Act: Where the number of interested directors ,i.e. directors who have
invested in the company, exceeds or is equal to 2/3rd of the board of directors, the number of
not interested directors present at the meeting has to be at least 2 for the quorum.

4. Section 174(4) of the Act: In the case where the board meeting could not take place due to
the lack of the quorum, the board meeting shall be adjourned. This is subject to the Articles
of Association of the company. Therefore as long as the articles of the company states
otherwise the meeting will be adjourned.

Exceptions and Conclusion

1. If the meeting is an annual general meeting which was called by, or on the direction of the
registrar pursuant to S.131(2). In such a case, the section empowers the registrar to direct
“that one member of the company present in person or by proxy shall be deemed to constitute
a meeting”.
2. If the meeting is one which has been called pursuant to a court order under S.135(1). The
section empowers the court to direct that “one member of the company present in person or
by proxy shall be deemed to constitute a meeting”. This is illustrated by Re: El Sombren Ltd
(88).

3. If the meeting is a class meeting held pursuant to the provisions of the articles for the purpose
of authorizing a variation of a right to those shares and all the shares are held by one
member, as in East v Bennett Brothers Ltd..

4. If the meeting is an adjourned meeting and the articles provide that “the member or members
present shall be a quorum”.

32.APPOINTMENT OF PROXIES FOR MEETINGS (5)

Introduction

The term ‘proxy’ is used in two ways under the Companies Act, 2013. The first refers to the
individual appointed by a member to attend and vote in the meeting on his behalf as a
representative. The other refers to the instrument/document by which such an individual is
appointed as a proxy. The facility of proxy allows a member to vote in a meeting which he
personally cannot attend due to any reason. The concept of proxy is dealt with under Section 105
of the Companies Act, 2013.

Appointment of Proxy

Under Section 105(1), any member who is entitled to attend and vote in a company meeting can
appoint a proxy. However, a proxy cannot be appointed by a member of a company not having a
share capital unless the Articles provide for it. The government can also prescribe a class or
classes of companies that may not allow its members to appoint a proxy. A proxy can represent
not more than 50 members whose aggregate shareholding carrying voting rights must not exceed
10%.

Notice of the Meeting

Under Section 105(2) of the Companies Act, the notice of the meeting must contain a statement
that a member who is entitled to attend and vote in the concerned meeting may appoint a proxy,
and that the proxy need not be a member of the company. The statement must appear with
reasonable prominence in the notice.

Any violation in complying with the requirements of the statement in the notice of the meeting
[Section 105(2)] would attract a penalty of INR 5000 each on the defaulting officers of the
company.

Instrument of Proxy

According to Section 105(6) of CA, this instrument must be in writing and has to be signed by
the appointer or his duly authorised attorney. In case a body corporate is the appointer, then the
form must be under its seal, or signed either by its officer or duly authorized attorney.

In the case of Virender Kumar Goel v. Raghu Raj, a question arose whether the proxies that
have been executed last by the members would prevail over those executed earlier regardless of
the date on the instruments. It is already a settled position of law that in case of multiple proxies
given by the same member, the proxy bearing the latest date would supersede earlier.

In another case of B. Ramachandra Adityan v. Tamilnad Mercantile Bank Shareholders’

Welfare Association, it was held that when two proxy holders stake rival claims, the Chairman
of the meeting has only two options, either to contact the concerned member and get his
confirmation, or take a decision on the spot on the basis of the forms, if unable to contact that
member.

According to Section 105(7), this instrument cannot be questioned for not complying with any
special requirements made in the Articles of the company.

Prohibition on Invitation

An invitation issued at the company’s expense to any member, who is entitled to notice of the
meeting and vote therein through a proxy, to appoint a person or one of the persons enlisted as a
proxy is prohibited under Section 105(5).

Deposit and Authorization

The proxy form has to be deposited either in person or through the post with the company. This
has to be done at least 48 hours before the commencement of the meeting. If the Articles of a
company require more than 48 hours before the meeting to deposit a proxy, then it would have
the effect as if a period of 48 hours has been specified. This is according to Section 105(4).

Inspection and record of proxies

This is given under Section 105(8). The request to inspect proxies has to be given in writing by a
member entitled to vote at least three days before the meeting. On acceptance of the request,
such members can inspect the lodged proxies from 24 hours before the start of the meeting till its
conclusion.

Revocation

A relationship of principal and agent exists between the member and his proxy. Such a member
can revoke the proxy (agency) as and when he wants before it binds him. if the Articles are silent
on the issue of revocation, then Section 203 of the Indian Contract Act, 1872 provides for the
Right of Revocation to prevail, S.T. Narayan Chettiar and Anr v. The Kaleeswarar Mills Ltd.
and Ors.

The right of a member to attend and vote in person is paramount to the right of the proxy. So, if a
member attends the meeting despite there being a proxy appointed by him, then the proxy gets
revoked if such member votes before his proxy. This was laid down in Knight v. Bulkeley.

Rights and Restrictions

There are very limited rights bestowed upon a proxy. He can attend the meeting for which he has
been appointed. He can vote in the meeting only on a poll as per proviso to Section 105(1) and if
he fulfils the eligibility under Section 109, then the proxy may even demand a poll as a matter of
right.

Conclusion

The concept of proxy was introduced to facilitate the participation of the shareholders in the
affairs of the company even if they cannot attend personally. However, the restrictions placed on
the proxy by not allowing them to speak, or not entitled to vote by show of hands renders this
motive of participation fruitless. Certain rules and penalties can be included to keep a check on
such unruly behaviour.
33.POWERS OF THE CHAIRMAN OF THE MEETING (5)

A member of the Committee appointed by the Board or elected by the Committee acts as
Chairman of the Committee, in accordance with the Act or any other law or the Articles, who
shall conduct the Meetings of the Committee. However, if no Chairman has been so elected
or if the elected Chairman is unable to attend the Meeting, the Committee shall elect one of
its members present to chair and conduct the Meeting of the Committee, unless otherwise
provided in the Articles. Further, if no such Chairperson is elected, or if at any meeting the
Chairperson is not present within five minutes after the time appointed for holding the
meeting, the members present may choose one of their members to be Chairperson of the
meeting. The Listing Regulations specifically provides the eligibility for appointment of
chairman in specific committees

WHO CAN BE A CHAIRMAN?

Considering the aforesaid provisions, it is clear that designating one person as the permanent
Chairman of the company is not mandatory. However, the same needs to be elected in every
meeting. Therefore, the company has two options: • Designate a person or a position as the
one to be the chairperson [for ex: the company may state that the MD shall always be the
chairperson of the company]; • Appoint the chairperson in every meeting.

APPOINTMENT OF A CHAIRMAN

‘Chairman’ of a company is generally named in the Articles, which provide that the
Chairman of the BOD will preside over the general meetings of the company in addition to
presiding over the Board meetings. However, this does not mean that the same person will
remain chairman of the Board will preside over the meetings of the company from year to
year. The Board may decide to elect a new chairman every year at the Board Meetings held
immediately after the Annual General meetings.
Regulations 46 and 47 of Table F of the Companies Act, which are incorporated in the
Articles of Most Companies provide that if no chairman is designated beforehand OR if he is
not present within 15 minutes of the appointed time of the meeting or he is unwilling to act as
a chairman of the meeting, the directors present shall elect one amongst themselves to be
chairman of the meeting, the directors present shall elect one amongst themselves to be the
chairman of the meeting. If, however, no director is willing to act as chairman or if no
director is present within 15 mins after the appointed time, the members present shall elect
among themselves to be chairman of the meeting. Sec 104(1) of the Companies Act provides
that unless the Articles otherwise provide, the members personally present at the meeting
shall elect one amongst themselves to be chairman of the meeting on a show of hands. Sec
104(2) provides that, if a ‘poll’ is demanded on the election of chairman, it must be taken
forthwith in accordance with the provisions of this Act, and the chairman elected on show of
hands shall exercise all powers of the chairman till the poll is taken.

ROLE AND POWERS OF THE CHAIRMAN

1. To maintain order and decorum: The chairman has the power to maintain order and
decorum, prevent the usage of improper language and disorderly behaviour.

2. To give ruling on the points of order: Sometimes members raise points of order, questions
relating to rules and regulations governing the meeting. The chairmen has the power to give a
ruling on his interpretation of the rules and such ruling will be binding on all members.

3. To decide the priority of speakers: When more than one member expresses their desire to
speak upon a motion, the chairman has the power to decide the priority in which the
members will be allowed to speak.

4. To maintain relevancy and order in debate: the chairman has the power to stop discussion
on a motion when it has continued for a sufficiently long time and discussion seems to be
endless or when the discussion becomes irrelevant, i.e when it is not within the scope of the
meeting or the motion under discussion.

5. To explain the objective and implications of the Resolutions before they are put to vote at
the Meeting: the chairman shall not provide a fair opportunity to Members who are entitled
to vote or seek clarifications and/ or offer comments related to any items of business and
address the same, as warranted.

6. In the case of public companies, the Chairman shall not propose any resolution in which he
is deemed to be concerned or interested nor shall he conduct the proceedings for that item of
business

7. To adjourn a meeting: the Chairperson, with the consent of any meeting at which the
quorum is present and shall, if so directed, with the consent of the members present, and
resume the Chair after that item of business is transacted

8. To exercise a casting vote: Ordinarily, the chairman only has deliberative vote ; the right to
cast a vote as a member. However, if the rules expressly allow, the chairman can cast a
second vote, known as the casting vote to break the tie i.e. the equality of affirmative and
negative votes.

DUTIES OF A CHAIRMAN:

• To see that the meeting is properly convened and duly constituted

• To see that the proceedings of the meeting are conducted according to rules and the
business is discussed in order to set out the agenda

• The chairman must see that no discussion is allowed unless and until there is specific
motion before the meeting, properly moved and seconded and that the motion is within the
scope of the meeting

• To maintain order and decorum in the meeting

• To see that all the members have an equal opportunity to express themselves. If necessary
he should affix a time limit for the speakers

• He should see that the sense of the meeting is properly ascertained on each and every
motion. He should put all the motions and amendments to vote in the manner provided in the
 rules, supervise the counting of votes to ensure correct assessment of the opinion and declare
the result of voting

• If poll is demanded, to see that the poll is taken according to the provisions of the act

• To exercise his casting vote bona fide in the interest of the company

• To exercise judicially his power of adjournment

34.STATUTORY MEETINGS (5)

Introduction

The word “meeting” has not been defined in the Companies Act, 2013 (hereinafter referred to as
“the Act”). Its application shall be derived from its various types and the procedure involved in
conducting such meetings. In the case of Sharp v. Dawes, 1971, a meeting is defined as “an
assembly of people for a lawful purpose” or “the coming together of at least two persons for any
lawful purpose.” It is essentially a lawful assembly of members of the company with the required
quorum having certain objectives to be discussed and fulfilled.

Meeting should be called by a proper authority

The first pre-requisite for a valid meeting is for it to be called by a proper authority. The proper
authority includes the Board of Directors of the company, except when the meeting has been
called by the requisitionists or by the Tribunal.

It is for the Directors of the company to exercise their discretion and decide if the meeting should
be conducted or not. Similarly, it is upon them to decide and fix the time and place of the
meeting.

Notice

The second requirement of a valid meeting is that a proper notice shall be given to the members
of the company stipulating the details of the meeting. As per Section 101(3) of the Act, the
notice should be given to

· every member of the company,

 · legal representative of deceased member

· assignee of insolvent member

· auditor

· every director of the company.

Where company has received the notice of death of the member then the notice shall be sent to
the nominee in case of a single holder and where securities have been held jointly by more than
one person and all joint holders die, it shall be served to the nominee.

A notice must be clear and unconditional. In the case of Symth v. Darley, 1849, it was held that a
deliberate omission to not give notice to a specific member of the company may invalidate the
meeting in its entirety. However, an honest mistake of forgetting to give a notice is not fatal.

Length of Notice

The notice for the meeting shall be in writing and is to be given 21 days before the scheduled
date of the meeting. 21 days are to be computed from the date of receipt of notice by the
members. In the case of NVR Nagappa Chettiar v. Madras Race Club, 1949, it was held that a
notice is deemed to have been received at 48 hours from the time of its delivery. However, in
case of any strike or unforeseen evidence, the service of the notice would not be effective (21
days).

The members of the company may decide for a shorter time period notice either before or after
the meeting. In the case of any other meeting the consent of the holders of 95 per cent of the
paid-up share capital, or the consent of 95 per cent of the total strength of members, would be
necessary. [Self Help Private Industrial Estates Ltd. re, 1972]

The requirement of length of a notice is merely directory and not mandatory in nature. Where the
notice being short by a day does not affect the complainant substantially, the court may refuse to
invalidate the meeting on the mere basis of time inefficiency.

When there is a specific request has been made on payment of cost that notice of Board meeting
be sent by registered post, service through postal certificate could not be taken to be a conclusive
proof of service. [Sanjiv Kothari v. Vasant Kumar Chordia, 2005]

Effective Service of Notice

A notice may take a reasonable form and should sufficiently convey the relevant information
enabling the members of the company to attend the meeting and participate in deliberations.

A notice can be sent by hand, speed post or registered post bur not by ordinary post. If the
company has a website, the notice shall be posted on the same.

Where a member does not have registered address or has not updated their address to the
company, in such case, the company shall publish notice in newspaper. A notice sent by fax is
considered to be a good service. [PNC Telecom v. Thomas, 2004]

Contents of Notice

As stipulated in Section 101 and Section 102 of the Act, the notice should specify the place, day
and hour of the meeting along with the type of business to be transacted during the meeting. For
the meeting to be valid, it is necessary that the meeting take place at the exact time and place as
has been mentioned in the notice.

Business to be decided in a meeting, as mentioned in Section 102, can be categorised as follows:

General Business Special Business

At the annual meeting the business of considering Any other business at an annual
accounts and directors report, the declaration of meeting and all business at
dividends, the appointment of directors and auditors extraordinary general meetings are
and fixing their remuneration are regarded as general regarded as special business.
business.

Furthermore, the notice should attach an explanatory statement alongside. It is a statement

annexed with the notice explaining any special business to be transacted during the meeting. The
explanatory statement must mention-

1. The nature of concern or interest, financial or otherwise, if any, in respect of each items of

a. every director and manager, if any;

b. every other key managerial personnel; and

 c. relatives of the persons mentioned in the above two clauses;

2. Any other information and facts that may enable members to understand the meaning, scope
and implications of the items of business and to take decisions on them.

There should be complete disclosure of the abovementioned material in the notice annexed with
the explanatory statement. In a case where the notice did not disclose the new set of Articles
which were to be brought in during the meeting, the court invalidated the resolutions passed in
that meeting. [Narayanlal Bansilal v. Manekji Petit Mfg. Co. Ltd., 1931]

Moreover, a shareholder whose conduct reflects that he is aware of the real effect of work to be
transacted at the meeting, cannot complain about the insufficiency of the notice. [Parsuram v.
Tata Industrial Bank Ltd., 1928] Non-disclosure of material facts in the notice calling the
meeting vitiate the resolutions passed at the meeting.

Benefits of non-disclosure

Section 102(4) lays down that where as a result of non- disclosure or insufficient disclosure in
any statement being made by a promoter, director or other key managerial personnel, leads to
any benefit to him or his relatives, such personnel shall be liable to compensate the company to
the extent of the benefit received by him.

Quorum

The third requirement of a valid meeting is the presence of a sufficient quorum. Quorum refers to
the minimum number of members that must be present at the meeting. Generally, the Articles of
Association of a company provide what number of members will constitute a quorum. But
Section 103 of the Act provides that unless the articles provide for a large number, in the case of
a public company

· 5 members personally present in case the number of members as on the date of the
meeting is not more than 1000.

· 15 members personally present in case the number of members as on the date of the
meeting is more than 1000 but up to 5000.

· 30 members in case the number of members as on the date of the meeting exceeds
5000.
If within half an hour from the time appointed for holding the meeting, the quorum is not
present, the meeting if called upon the requisition of members, shall stand dissolved. In other
cases, the meeting shall stand adjourned to the same day in the next week at the same time and
place or to such other day, time and place as the Board of Directors may determine.

In case of adjournment of the meeting, the company shall give a minimum of three days’ notice
individually or by publishing advertisement in the newspaper in both English and vernacular
languages.

Merely one person coming for a meeting cannot form a quorum and such meeting shall not hold
good because the word meeting means coming together of more than one person. The members
actually present can form a quorum and not all in terms of proxy. [Sharp v. Dawes, 1876]

However, where proxies may be allowed in the Articles of Association of the company,
physical/actual presence is not necessary. If there are two or more corporate bodies who are
members and are represented by a single individual, each of such bodies corporates will be
treated as personally present.

A meeting called by Tribunal is valid even though it is attended by one person but not when such
meeting is called by the company. [Shankar Sundaram v. Amalgamation Ltd., 2002]

One man Meetings

In cases where one person holds all the equity shares or all the preference shares of the company,
his presence shall be a valid quorum and the meeting shall be valid in the eyes of law. [L Opera
Photographic Ltd. In Re, 1989]

Chairman

For the proper conduct of business at a meeting, Section 103 of the Act stipulates that a
chairman is necessary. His appointment is usually regulated by the Articles of Association but if
there is nothing in the articles the members personally present at the meeting shall elect one of
themselves to be the Chairman.

In the case Narayana Chettiar v. Kaleeswara Mills, 1952, the court laid down the position and
powers of a chairman. It also stated that if the chairperson unjustly, without the consent of
members stops the meeting, the members can elect a new chairperson to conduct business.
Powers of the Chairman include:

· To maintain order and decorum.

· To adjourn a meeting- the intention of the chairman for adjournment is to be taken into
account while deciding the validity of such adjournment. [United Bank of India v.
United Credit and Development Co. Ltd., 1977]

· To supervise the casting vote.

· To decide priority of speakers.

· To maintain relevancy and order in debate.

· To ascertain the sense of a meeting and declare the result of voting.

A chairman cannot unjustly stop the meeting or postpone the same at his own convenience. The
duties of a chairman are a mixture of judicial and ministerial duties. He should act in a bona fide
way and pursue tasks in the best interests of the company [Ram Narain v. Ram Kishan, 1911].
The duties of the chairman include:

· to see that the meeting is properly convened and duly constituted.

· to see that the proceedings of the meeting are conducted according to the rules.

· to ensure that the business is discussed in the order set out in the agenda.

· to see that all members get an equal chance to express their opinion.

· to maintain order and decorum.

Conclusion

For a meeting to be properly convened, properly constituted and properly conducted, the
abovementioned procedure and pre-requisites are to be taken into account. Since conducting
meetings is an essential element of smooth functioning of any business, it is imperative to
conduct such meetings with proper diligence.

35.COMPANY SECRETARY- 4 DIFFERENT SHORT NOTES

Introduction
Company Secretary is an important managerial and administrative part of a company. He is
one of the legal representatives of a company who performs and manages various regulatory
functions like carrying incorporation of the firm; sufficing preparation and audit of
business reports; filing annual returns; dealing with amended regulations on a steady basis,
etc.

He also plays a definite role as a Business Advisory to the board of directors of the company
guiding them incorporate laws; corporate governance; strategic management; project planning;
capital markets & securities laws. In short; a Company Secretary works as an in-house legal
expert and compliance officer with the company.

Section 2(24) provides that the expression “secretary” means a company secretary within the
meaning of Section 2(1)(c), Company Secretaries Act, 1980 and includes any other individual
possessing the prescribed qualification and appointed to perform the duties which may be
performed by a secretary under this Act and any other ministerial or administrative duties.

Section 203 makes it obligatory for such class or classes of companies as may be prescribed to
have a whole-time secretary. No firm or body corporate can hold the office of a secretary, and no
individual can be a secretary in more than one company at the same time.

A Company Secretary is:

a. An approved member of Institute of Company Secretaries of India (ICSI)

b. Performs functions defined by the Institution and follows rules and regulations defined under
the Companies Act in operation.

The Companies Act also abides and confers special status to every company secretary to work as
a Key Managerial Personnel (KMP) to deliver his expertise as an employee in every:

a. Private Company having paid-up capital of Rs. 5 Crore or more.

b. Public Company having paid-up capital from Rs. 5 Crore to Rs. 10 Crore.

Being characterized by numerous roles and duties; a company secretary holds a multi-
disciplinary background.
Role – Section 205

The functions of the company secretary are to include:

 Ensuring the delivery of allotment and registration information to the registrar

 Applying for an increase in share capital, monitoring the delivery of share certificates of
allocation
 Keeping track of share warrant holders
 Complying with the law and filing annual returns
 Releasing the statutory declaration to receive the commencement certificate
 Managing the statutory books
 Giving all members meeting updates and notices of general meetings; at non-banking
financial companies
 Authenticating and signing financial statements and reports (Balance Sheet and Profit &
Loss Statements)
 Filing resolution with the registrar within 30 days
 Preparing minutes of all board and general meetings
 To deliver additional Act-mandated obligations, including informing the Board of the
Act’s compliance
 Ensuring that the company complies with all applicable secretarial requirements
 To perform other duties as provided by the Companies Act
 As per Income Tax Return
 To confirm and submit attested returns and forms; to supervise the authentication and
filing process of TDS (Tax Deducted at Source); to ensure that the correct amount of
TDS is being deducted from employees’ salaries; to ensure that TDS reports are kept up
to date, and to ensure that TDS is duly submitted to the government
 As per other acts
 Obtaining government approvals; adhering to regulatory requirements for industrial
disputes; the State Insurance Act; the Depositories Act 1996; and the Foreign Exchange
Management Act; and monitoring and adhering to numerous legal regulations such as
labor and competition laws, environmental regulations, etc. Ordinarily the functions of
the secretary of the corporation would be ministerial and administrative. As a secretary
 only, he would have no authority to bind the corporation by entering into contracts or
other commitments on its behalf.

Duties

The duties to initiate and carry incorporation procedures like authenticating documents and
proceedings used in registration, managing statutory books, giving meeting updates and notices
of general meetings to every member, signing and authenticating financial reports and
statements, filing resolution with registrar and preparing minutes of all General and Board
Meetings within 30 days, etc., are all duties of a Company Secretary under the Companies Act.

The duties of a company secretary can be divided into sections. They are mentioned below.

Statutory Duties

The statutory duties of a company secretary include the duties imposed on him via the
Companies Act. Only a few are carried out by him, the rest are an amalgamation of tasks carried
out between the director and the company secretary. These include the following.

 Signing the annual return

 Ensuring that the requirements of the Companies Act are complied with
 Signing and completing a form of application to register a business name of the company
 Writing down the statement of affairs

Duty of Disclosure

The company secretary is under the obligation to disclose certain information for the purpose of
inclusion in the register of the director and secretaries’ interests.

Duty to exercise skill, care and diligence

One of the most important duties of the company secretary includes practicing extreme care, skill
and diligence in the performance of his duties. If there is any negligence on his part, he will be
held liable for any loss incurred.
Administrative Duties

The company secretary has several administrative duties to perform. They are listed below.

 Communicating with the company shareholders

 Maintaining the statutory registers
 Preparing and issuing the notice board and general meetings
 Making sure that the decisions taken by the board are communicated properly and
complied with
 Keeping safe custody of the company seal

Corporate Governance and Secretarial Duties

A Company Secretary plays a crucial role in advising upon good governance practices and
compliance with corporate governance norms. These standards and guidelines are mentioned
under various corporate, business and security laws. Other than this, mentioned below is a list of
secretarial responsibilities that are undertaken by a Company Secretary:

 Formation, incorporation and promotion of matters related to the company.

 Filing and registering any document or form on behalf of the company as an authorized
representative.
 Maintaining and preserving secretarial records, statutory registers and books.
 Arranging a general or board meeting and preparing the minutes of the meeting.
 Tasks related to shares including transfer and transmission.

Maintaining the Company’s Statutory Registers

One of the most important duties of a company secretary involves being familiar with the various
registers of the company he/she is employed in. Any company needs to maintain and keep a
record of several registers which include the following:

 Register of people with control

 Register of members
 Register of charges
  Register of Directors residential address
 Register of interests in shares
 Records of shareholder and director meetings

If the company secretary fails to update and maintain these registers with precision, it can lead to
disastrous consequences.

Position

A CS is not a mere clerk. He regularly makes representations on behalf of the company and
enters into contracts on its behalf which come within the day-to-day running of the company’s
business. So much so that he may be regarded as held out as having authority to do many things
on behalf of the company.

He is certainly entitled to sign contracts connected with the administrative side of a company’s
affairs, such as employing staff, and ordering cars, and so forth. All such matters now come
within the ostensible authority of a company’s secretary. As regards matters concerned with
administration, the secretary has ostensible authority to sign contracts on behalf of the company.

Secretary is included in the list of officers as given in Section 2(59). Thus, he is an officer for all
the purposes of the Act and suffers from the same disabilities as do the directors. The provisions
relating to loans to directors, contracts with directors, register of directors, etc, will apply. In a
case where the Board of directors delegated to the managing director their power of appointing
and removing all officers, and a question arose whether the secretary of the company, being an
“officer” would fall within the spell of the mentioned power of removal.

On the footing of an officer, the secretary would be accountable for any secret profit he might
derive from his office. To the extent to which his position or authority permits him to deal with
the company’s money, property or transactions, he would also be regarded as a constructive
trustee of the company in those respects.

From the above summary it is quite clear that the secretary cannot usurp the functions and
powers of the Board or the company, but due to the enormous growth of company activities he
has been empowered to discharge various ministerial and administrative duties on behalf of the
company which generally can be performed by an authorised agent. In due course of time the
secretary has been given certain statutory powers, like signing the annual returns, etc. But under
no circumstances can he discharge the functions of the Board or act on behalf of the company in
matters of policy or substantive steps which is not administrative or ministerial in nature.

Liability

Statutory Liabilities

 Default in Complying with name requirements – Fine of Rs. 1000 every day during
which the default continues that cannot exceed Rs. 1 Lakh.
 Default is filing the return on the allotment – Fine Rs. 1000 every day during which the
default continues or Rs. 1 lakh whichever is less
 Default in delivering Share Certificates /Debenture Certificates on time – Fine up to Rs. 5
lakh
 Default in filing annual return – Fine ranging from Rs. 50,000 to Rs. 5 lakh
 Default in holding Annual General Meeting – Fine up to Rs. 5000/- during which the
default continues extending to Rs. 1 lakh
 Failure to record minutes of the meeting – Fine upto Rs. 500/-
 Default in providing the P/L and B/S at AGM – Fine of Rs. 25,00 extending up to Rs. 1
lakh or imprisonment up to 6 months or both
 Failure to provide notice about Board meeting – Fine upto Rs. 1000
 Failure to maintain the register of members – Fine Ranging from Rs. 50,000 to Rs. 3
Lakh

Contractual Liabilities

 He is liable for any negligence on part of his duty. He may be dismissed.

 He must not do anything beyond his authority, if he does he will be personally liable for
the loss
 He is under the obligation to not disclose any secret information about the company to
outsiders
 He is liable for any secret profits made by him on account of his position
 If the Company Secretary commits any fraud, he must indemnify to the company for any
loss that occurred.
 He derives his power from BoD therefore he should carry orders from BoD.
36.PURCHASE OF MINORITY SHAREHOLDING

Introduction

Drawing on the legislative objectives, Section 395 of the Companies Act, 1956 provided a
transferee company with a limited mechanism for a minority squeeze-out, in situations where a
scheme or contract involving a transfer of shares between two companies receives approval of at-
least 90% of the shareholders, whose shares are being purchased. Section 235 of the Companies
Act, 2013 broadly corresponds to Section 395 of the 1956 Act.

In addition to the limited mechanism provided under Section 235, companies have also adopted
other methods like selective capital reduction (in accordance with Section 66 of the Act), for a
minority squeeze-out. Along with Section 235, the Act has also added Section 236, which is a
new provision dealing with “purchase of minority shareholding”.

Evaluation of Section 236

 Section 236(1) of the Act provides that in the event of an acquirer, or a person acting in
concert with such acquirer, becomes a registered holder of 90% or more of the issued equity
share capital of a company, or in the event of any person or group of persons becoming 90%
majority or holding 90% of the issued equity share capital of a company, by virtue of an
amalgamation, share exchange, conversion of securities or for any other reason, such
acquirer, person or group of persons, as the case may be, shall notify the company of their
intention to buy the remaining equity shares.
 Section 236(2) provides that the acquirer/person/group of persons under Section 236(1) shall
offer to the minority shareholders of the company for buying the equity shares held by such
shareholders at a price determined on the basis of valuation by a registered valuer in
accordance with such rules as may be prescribed.
 Section 236(3) provides that without prejudice to the provisions of Sections 236(1) and
236(2), the minority shareholders of the company may offer to the majority shareholders to
purchase the minority equity shareholding of the company at the price determined in
accordance with such rules as may be prescribed under Section 236(2).
 Sections 236(4) to 236(9) provide certain additional compliance requirements that must be
fulfilled, once the majority shareholder(s) have exercised the rights conferred by Sections
236(1) and 236(2). Rule 27 of the Companies Rules, 2016, provides the method for arriving
at the fair value of the shares, in case of both listed and unlisted companies.

It is also pertinent to note that for the purposes of Section 236(2), valuation should be undertaken
by a registered valuer, in accordance with Section 247 of the Act, and the Companies
(Registered Valuers and Valuation) Rules, 2017.

Observations of the NCLAT

For evaluating the scope of Sections 236(1) and 236(2), it is instructive to refer to the decision of
the NCLAT in S. Gopakumar Nair v. OBO Bettermann India Private Limited. The NCLAT
held that Section 236 can be invoked by the majority shareholder(s) only if either of the ‘events’
specified under Section 236(1) have taken place – which implies that the majority shareholder
should hold or acquire a minimum of 90% of the shareholding “by virtue of an amalgamation,
share exchange, conversion of securities or for any other reason”.

The NCLAT had also observed that while Section 235 deals with the acquisition of shares from
dissenting shareholders in certain specified situations, Section 236 deals with the acquisition of
shares from assenting shareholders, if either of the ‘events’ specified in Section 236(1) have
taken place.

Whether Section 236(3) is independent from Sections 236(1) and 236(2)

The king-puzzle of the Act is in the form of Section 236(3), which provides that without
prejudice to the provisions of Sections 236(1) and 236(2), the minority shareholders of the
company may offer to the majority shareholders to purchase the minority equity shareholding of
the company at the price determined in accordance with the rules under Section 236(2).

The PSC Report notes the MCA’s view that Section 236(2) and 236(3) are different, but
“interlinked” provisions, and the valuation requirements prescribed under Section 236(2) are also
application for Section 236(3).
In this context, indicative guidance can also be taken from the decision of the Supreme Court in
A.P. State Financial Corporation. v. Gar Re-Rolling Mills, where it was observed that the use
the words “without prejudice to” in a statute implies that the applicability of the other provisions
is not excluded, and this expression should not be used to make the other provisions redundant.

Conclusion

As Section 236 does not make it mandatory for the minority shareholders to sell their shares at
fair value, Section 236 only provides a half-baked remedy for a minority buyout. Keeping in
mind the recommendations made in the Irani Committee Report, the wording of Section 236
could have expressly stated that the minority shareholders have a corresponding obligation to sell
their shares to the majority at fair value, once the conditions prescribed under Section 236 are
satisfied.

As the Act still does not confer an effective remedy for buying out the minority, majority
shareholders are forced to resort to other methods such as selective capital reduction. Listed
companies have the additional option of undertaking a delisting of equity shares in accordance
with the Delisting Regulations, where the ‘reverse book building process’ poses many practical
challenges to do a successful delisting.
37.DISCUSS THE DUTIES AND POWERS OF TRIBUNALS IN SANCTIONING SCHEMES
IN CASE OF COMPANIES WITH THE HELP OF RELEVANT CASE LAWS.

Compliance with Statutory Provisions

The first condition enables the Tribunal to decline its sanction to a scheme which is ultra vires or
is otherwise not in compliance with the Act. Thus, where a scheme involved reduction of capital,
the court refused to uphold it and allowed the application to stand over to enable the company to
comply with the normal procedure of capital reduction. But the Tribunal has the power to grant
such sanction in the same proceedings. Section 230(12) clearly provides for removal of doubts
that Section 66 is not to apply to reduction of share capital effected in an order under the section-
Maneckchowk and Ahmedabad Manufacturing Co, re

An order of the Tribunal sanctioning a scheme has to provide for all or any of the following
matters:

a. where the scheme provides for conversion of preference shares into equity shares, preference
shareholders have to be given the option to either obtain arrears of dividend in cash or to
accept equity shares equal to the value of dividend payable;
b. protection of any class of creditors;
c. if the compromise or arrangement results in variation of shareholders’ rights. it has to be
given effect to under Section 48 (this section deals with variation of shareholders' rights):
d. applications under Sick Industrial Companies (Special Provisions) Act, 1985 are to abate;
e. such other matters, including exit offer to dissenting shareholders, if any, as are in Tribunal's
opinion necessary to effectively implement the terms of the scheme.
A scheme is not to be sanctioned by the Tribunal unless the company auditor’s certificate has
been filed which has to be to the effect that accounting treatment as used in the scheme is in
conformity with the accounting standards prescribed under Section 139. [S. 230(7)]

Within 30 days the order of the Tribunal has to be filed with the Registrar. The Tribunal may
dispense with a meeting of creditors where the creditors having at least 90 per cent value agree
and confirm by way of affidavit to the proposed scheme. [S. 230(9)]
A scheme of buy-back of securities is not to be confirmed by the Tribunal unless it is in
accordance with the provisions of Section 68. [S. 230(10)]

A scheme of compromise or arrangement may include a takeover offer made in the prescribed
manner. [S. 230(11)]

In the case of a listed company, the scheme of takeover would have to comply with SEBI
Takeover Regulations. In the case of unlisted companies, any person aggrieved may make an
application to the Tribunal about aggrievement with the takeover bid and the Tribunal may pass
appropriate orders. The provisions of Section 66 are not to apply to any reduction of share capital
effected in pursuance to the order of the Tribunal under the section. [S. 230(12)]

Bona fide exercise of majority power

As observed in the case of Allen v. Gold Reefs of West Africa Ltd., the second condition enables
the Tribunal to see that the majority power has been exercised in good faith for the benefit of the
class as a whole. If it appears that “the majority was composed of persons who had not really the
interest of that class at stake”, the scheme may not be sanctioned. Thus, majority approval
obtained by improper inducements will be ineffective. It is not, however, necessary that the
meeting should be attended by a majority of the total number of 609 members or creditors. It is
enough that the requisite majority is obtained at the meeting, as observed in the case of
Bessemer Steel Co, re.

Reasonableness of scheme

The last condition enables the Tribunal to examine the reasonableness of the scheme. The
scheme should be fair and equitable. The approval of the scheme by the statutory majority is
strong evidence of its reasonableness. If the scheme is otherwise fair. the Tribunal will not go
into its commercial merits. But if the scheme is illusory, the court may refuse its sanction, even if
it has been approved by the requisite majority. A scheme of this kind was before the Allahabad
High Court in Premier Motors (P) Ltd v Ashok Tandon.

Illustration- Two companies had taken deposits from the public on 12 per cent interest. Most of
the depositors were women and aged, of lower middle classes who had invested their life-long
savings to make provision for their dependants. When the deposits began to mature, the
depositors were told that the companies were running at a loss, one of them remaining out of
business for two years. A scheme was drawn up which envisaged full payment to depositors at
less interest but gave no date by which they would be fully repaid. At a meeting of depositors
held under the court's order the scheme was approved by the statutory majority and the company
petitioned for the court's sanction.

Burden of proving unfairness

Once a scheme is approved by a class, the burden of proving its unfairness lies with those who
oppose it. In the case of Dena Bank Ltd., a scheme offered shareholders the choice of accepting
shares in the transferee company or receiving cash, which was 24% less than the value of the
shares. The court ruled that while receiving spot cash, even if less, could still be considered fair,
it should not be that much less. A reduction of 15-20% would have been fair. In the case of AW
Figgis & Co (P) Ltd., the Calcutta High Court affirmed that a company has the legal right to
divide its undertaking, and no one can be deprived of their legal rights solely due to the
incidental consequences of exercising those rights.

Disclosure of material facts

The Act now requires the Tribunal to receive full disclosure of material facts before approving
any scheme. In the case of Jaypee Cement Ltd., this included information such as the company's
latest financial position, auditors' report, and ongoing investigation proceedings. Schemes that
involve cancelling accumulated preference dividends or replacing debentures with shares or
transferring assets to another company have been approved under this section.

Interest of creditors

Even where notice to creditors is not required there is no special cause of concern because the
Tribunal can, in the exercise of its discretionary power, refuse to sanction a scheme unless the
interest of creditors is taken care of. The Tribunal may even call a meeting of the creditors for
this purpose. Furthermore, as observed in the case of LG Electronics System India Ltd., re, the
Tribunal does not have the power to prevent a secured creditor from enforcing his security.
No power to stay criminal proceedings

As observed in the case of Sharp Industries Ltd., re, there is no power in the court under these
provisions to stay a criminal prosecution against the company and its directors and guarantors.
38.WHAT IS THE SIGNIFICANCE OF MAINTAINING PROPER ACCOUNTS IN THE

COMPANIES? OR WHAT IS THE RELEVANCE OF PREPARATION OF PROPER

ACCOUNTS IN A COMPANY?

Introduction

Proper and accurate compilation of financial information of a company, and its proper disclosure
is of paramount importance to ensure the credibility of the company, maintain transparency in its
management and to inspire confidence of the investors in the company. The same must be done
through the mechanisms specified by law and standardised and understood by all the
stakeholders. Accordingly, Chapter IX, Sections 128 to 138, along with Schedules II and III
deals with accounts and accounting standards.

Maintenance of Accounts under Companies Act, 2013

Section 128 provides that every company is required to maintain its books of accounts, other
relevant books and papers and financial statements to be kept at the registered office of the
company. Section 338(2) further provides that proper books of accounts refer to those records
and books which signify and explain the financial position of the business of the company and
include detailed records of transactions, cash receipts and payments. Although this section
pertains to winding up, the aforesaid need for maintenance of accounts is a general requirement.
Furthermore, Section 2(13) provides that books of account include the records of the following
transactions and liabilities:

(a) Receipt and expenditure of money by the company and the matters in respect of which
they take place;
(b) Sales and purchases of goods by the company;
(c) All the assets and liabilities of the company;
(d) In case the company belongs to a class of companies specified in Section 148, the items
of cost prescribed under that section are also required to be included.
A conjoint reading of the aforementioned provisions highlights a need to maintain proper books
of accounts. The same should be maintained on an accrual basis according to the double entry
system, in the absence of which the accounting records will only reflect a partial view of the
company affairs.

Inspection of books of Accounts

Section 128(3) states that any director is entitled to inspect the books of account and other books
and papers during business hours. The books of accounts may be maintained at the registered
office of the company or any other office decided by the Board. In the latter case, a notice is
required to be sent to the Registrar, informing the same, within 7 days. It is pertinent to note that
the Act is silent with regard to the issue of appointment of an agent by the director for inspection
of accounts. However, it has been held in N.V. Vakharia v. Supreme General Film Exchange
Co. Ltd. (1948) that a director can inspect the accounts either personally or through an agent if
there is no reasonable objection to the person selected as an agent. It was further held that the
agent is required to undertake that the information obtained by him shall not be utilised for a
purpose other than the purpose of his principal.

Section 128 further provides that inspection of a subsidiary company can only be done by a
person duly authorised by a resolution of the Board of the directors to do so. Furthermore,
Section 206 (1) entitles the registrar to call, by a written notice, the company to produce the
books of account and other records and explanations as required. It is further pertinent to note
that it has been held in Lalitha Rajya Lakshmi v. Indian Motor Co. Ltd. that shareholders do
not have a right to inspect the books of accounts, unless such right has been provided by the
articles of the company.

FINANCIAL STATEMENTS

Section 129(1) requires every company to prepare its financial statements at the end of financial
year so as to give a true and fair view of the state of affairs of the company. Such statements
prepared are required to comply with the accounting standards notified under Section 133 of
the Act in the format prescribed in Schedule III. Section 2 (40) defines financial statements to
include the following:

(i) The balance sheet as at the end of the financial year;

(ii) The profit and loss / income and expenditure account;
(iii) Cash flow statement for the financial year;
(iv) Statement pertaining to changes in equity, if applicable;
(v) Any explanatory note annexed to or attached to the aforementioned documents.
The balance sheet and statement of profit and loss shall be in form prescribed in Part I and Part
II of Schedule III respectively. However, it must be noted that the Central Government is
empowered to grant conditional or unconditional exemptions in public interest, by notification,
to any class or classes of companies from compliance with any of the requirements of Section
129. It is pertinent to that that the officers responsible for the compliance of Section 129 are the
managing director, the whole-time director in charge of finance, the Chief Financial Officer or
any other person authorised by the Board. In case of any contravention of Section 129, these
persons shall be punishable with imprisonment up to one year or with fine (Rs. 50,000 to Rs. 5
laks), or with both.

Section 129(2) requires the financial statements to be presented before the Board of directors and
the AGM. In consonance with Section 96, it implies that the financial statements must be
presented within 6 months of the close of the financial year. Section 134(3) provides that
Board’s report should be attached to the financial statements when it is laid in the AGM.
Further, Section 134 requires authentication of financial statements by the Board of Directors,
Section 136 requires its circulation, and adoption of financial statements by the Board and their
filing with the Registrar is also required.

CONCLUSION

Maintaining accurate books of accounts is crucial for transparency in financial management. It

provides a clear picture of the company's financial status, instilling confidence in shareholders
and investors that their funds are used fairly and effectively. Proper bookkeeping aligns with
corporate governance, which involves managing and regulating the company in accordance with
laws, fairness, transparency, and harmony between internal and external aspects. Account
preparation serves the objective of corporate governance by ensuring transparency and accuracy,
reflecting the company's true state of affairs.
39.EXAMINE THE APPOINTMENT, POWERS, ROLE AND DISQUALIFICATION OF AN
AUDITOR

An auditor is rightly referred to as the watchdog of the company as auditors are persons who are
appointed to examine the accounts of the company objectively, identify any discrepancy in the
same and ensure that the accounts reflect the true state of affairs of the company. It is a process
required to ensure transparency in the management of company’s funds and assets and inspires
the confidence of the investors in the fact that accounts reflect the true state of affairs of the
company. Auditors are technically qualified people who independently and objectively perform
the compulsory and indispensable function of evaluating the financial statements and accounts of
the company.

Appointment of Auditor

Under Section 139, it’s a vital requirement for every company to appoint an Auditor at the first
annual general meeting. Such appointed auditor may represent an individual or a firm.
Appointment of an Auditor also includes reappointment. The procedure and tenure of selection
will be in accordance to the prescriptions of the company.

Disqualifications of Auditors

Auditors stand between the company and shareholders and protect the interests of the
shareholders and investors. Section 141 of the Companies Act, 2013 provides that only
chartered accountants, who hold a certificate of practice under the Chartered Accountants Act,
1949, and firms whose majority partners practicing in India are chartered accountants are
eligible to be appointed as auditors. Notably, these auditors are referred to as external or
statutory auditors. Further these accountants must be independent and must not be disqualified
under Section 140 (5) (involvement of auditors in fraud) and Section 141 (3). Following are
some of the entities disqualified by Section 141 (3):

(a) A body corporate except a parternship registered under LLP Act, 2008
(b) An officer and employee of the company or a person who is a partner or employee of the
officer and employee of the company
 (c) Person whose relative or partner has certain interests in the company by virtue of holding
a security, indebtedness or provision of guarantee of a third person to the company.
(d) A person who has business relationship with the company or its subsidiary or holding
company.
(e) One who is convicted a court of an offence involving fraud and a period of ten years has
not elapsed from the date of such conviction.
(f) A person who renders services mentioned in Section 144 to the company or its subsidiary
or holding company.
The aforementioned disqualifications ensure the independence of the auditor to facilitate his role
as a watchdog.

Role/Power

Auditor as an agent of the members – It is pertinent to note that auditors have the status of an
agent of the members of company. However, it has been held in Spackman v. Evans that this
status does not bind the shareholders with any information that the auditors may have. Further,
the auditor is an agent of the general body of members and not individual members.

Auditors as an officer of the company – Initially, in Connel v. Himalaya Bank Ltd. (1895) it
was held that the auditors appointed in the general meeting and paid by the company were
officers of the company. However, this position was changed by the Companies Amendment
Act, 2000 and Section 2(59) of Companies Act, 2013, both of which exclude the status of
auditor as an officer.

Therefore, it is evident that auditors are independent individuals or firms (including Limited
Liability Partnerships) which ensure transparency in the accounts of the company and have the
status of the agent of the members.

Conclusion

It is evident that auditors are independent and qualified persons who play a crucial role in
maintaining fiscal transparency and accountability in a company. They ensure that the financial
statements and books of accounts give a true picture of the state of affairs of the company and
their aforementioned rights, duties and responsibility are in furtherance of the same. It is
therefore concluded that auditors are rightly referred to as watchdogs of the company.
40.INTERESTED DIRECTOR

Introduction

An interested director is a director who has an interest in a transaction of the company. A

director can also be considered interested if his personal interest conflict with the interest of the
company and even if his relatives are interested.

The Companies Act does not prevent a company to enter into a contract in which a director is
interested. However, Section 184 of the Act requires such director to disclose his interest in the
first meeting of the Board in which he participates as a director and thereafter at the first meeting
of the Board in every financial year.

Further, whenever there is either a change in the disclosures already made or creation of new
interest (if the director previously had no interest), there is a duty on the director to make
relevant disclosures in the first Board meeting held after such change or creation of interest. The
disclosure has to be made in the manner prescribed by the rules of the Act.

Disclosure of interest with respect to a contract or arrangement

Section 184 (2) mandates every director to disclose the nature of his interest /concern in the
Board meeting if he has an interest, direct or indirect, in a contract or arrangement or proposed
contract or arrangement entered into or to be entered into:

(a) With a body corporate wherein the director holds more than two percent of shareholding
of that body corporate, or is a Chief Executive Officer, manager or promoter of the body
corporate. The provision will be applicable even if such shares are held in association
with any other director.
(b) with a firm or other entity in which, such director is a partner, owner or member, as the
case may be.

Notably, the director shall not be allowed to participate in such a meeting. Furthermore,
according to Section 184 (3), non-disclosure of interest by a director or his participation in the
meeting renders the contract or arrangement voidable and not void.
Exception to Disclosure of interest

However, there exists an exception to this provision as the aforementioned requirement of

disclosure. If in a contract or arrangement between two companies or body corporates is such
that any of the directors of the one company or the body corporate or two or more of them
together holds or hold not more than two per cent of the paid-up share capital in the other
company or the body corporate.

Punishment for failure of disclosure

According to Section 184, in case a director fails to disclose his interest, as mentioned before, he
shall be punishable with imprisonment for a term which may extend to one year or with fine
which shall not be less than fifty thousand rupees but which may extend to one lakh rupees, or
with both. It has been held in Personal Performance Consultants India (P.) Ltd., In re, that a
director was in non-compliance of Section 184 when he failed to disclose interest after receiving
the notice of disclosure, even though the Board meeting was not conducted.

Conclusion

It is evident that the Companies Act provides a comprehensive framework with respect to
interested directors. It does not prohibit the appointment of interested directors but merely
mandates disclosure of interest to ensure transparency and accountability, in furtherance of the
goals of corporate governance.
41.FILING ANNUAL ACCOUNTS (5)

Sub-section (1) of section 137 provides that one copy of the financial statements, including
consolidated financial statement, if any, together with all the documents which are required to be
or attached to such financial statements shall be filed with the Registrar after they are duly
adopted at the annual general meeting of the company. Such statements are required to be filed
within 30 days of the date of annual general meeting. Rule 12 prescribes Form AOC-4 (for
standalone statements) and AOC-4 CFS (for consolidated statements). It should be noted that
separate forms are prescribed for filing in Extensible Business Reporting Language (XBRL)
format. If the same are not filed within 30 days, they can be filed within further 270 days as
specified under first proviso to sub-section (1) of section 403 with such additional fees as are
prescribed in Rule 12 read with the Table of Fees annexed to the Companies (Registration
Offices and Fees) Rules, 2014.

Filing Unadopted Financial Statements

First proviso to sub-section (1) of section 137 provides that when financial statements are not
adopted in annual general meeting or at an adjourned annual general meeting, such unadopted
financial statements together with documents which are required to be annexed to the financial
statement shall be filed with the Registrar within 30 days from the date of annual general
meeting. Such filings will be taken on record as provisional till the filing of the adopted financial
statements. This gives rise to the interpretation that till the financial statements are adopted by
the annual general meeting, the said meeting does not conclude and merely stands adjourned.
However, it should be noted that this provision is applicable when the annual general meeting
was held by the company.

Filing of financial statements where annual general meeting is not held

The situation where the annual general meeting is not held is dealt with by subsection (2) of
section 137. It seeks to provide that the financial statements along with the documents required
to be attached under sub-section (1), duly signed along with the statement of facts and reasons
for not holding the annual general meeting are required be filed with the Registrar within 30 days
from the last date before which the Annual General Meeting should have been held. The manner
of filing and fees are same as for the adopted financial statements. It should be noted that this
provision in applicable where the financial statements, duly signed and audited are available but
no meeting is held within the due date.

Filing of financial statements by One Person Company

Third proviso to sub-section (1) of section 137 deals with the filing of financial statements by
OPC. The OPC shall file a copy of financial statements adopted by member, duly attaching all
documents, within 180 days from the closure of financial year. As there need not be an annual
general meeting of an OPC by virtue of section 96, the requirement of filing the financial
statements is linked with closure of financial year.

Financial statements of subsidiary or subsidiaries incorporated outside India but have not
established business in India

Fourth proviso to sub-section (1) of section 137 requires every company having a subsidiary or
subsidiaries which are incorporated outside India and which have not established their place of
business in India to attach the financial statements of such subsidiary or subsidiaries along with
its financial statements. From the analysis of this proviso, it may be construed that even where
the company consolidates the financials of the foreign subsidiary, it is still required to attach the
financials of the foreign subsidiary.
42.AUDIT COMMITTEE (5)

Introduction

The audit committee is a fundamental element of the corporate governance system in public
companies. It aims to boost public confidence in the reliability of the company’s internal control
procedures, financial reporting, and announcements. Its main responsibilities are disclosure and
financial reporting. It evaluates and records the auditor’s objectivity, effectiveness, and
performance. It also examines the financial statement and the audit report.

Chapter XII (Sections 173–195) of the Companies Act, 2013 contains the provisions governing
Board of Director meetings and the powers of the board, and Section 177 of the Companies Act,
2013 specifically mentions the audit committee. Every listed company, as well as the other
specified classes of companies, must have an audit committee of the board, in accordance with
Section 177 of the Companies Act, 2013, read with Rule 6 of the Companies (Meetings of the
Board and its Powers) Rules, 2014.

Section 177 of Companies Act

The following classes of companies and every listed company are required to have an audit
committee of the board, in accordance with Section 177 of the Act and Rule 6 of the Companies
(Meetings of the Board and Powers) Rules, 2014:

1. All public companies having a minimum paid-up capital of ten crore rupees.
2. All public companies with turnover of at least one hundred crore rupees.
3. All public companies with aggregate outstanding loans, borrowings, debentures, or
deposits exceeding fifty crore rupees.
The paid-up share capital, turnover, outstanding loans, borrowings, debentures, or deposits as
appropriate as they existed on the date of the most recent audited financial statements shall be
taken into consideration for the purpose of this rule.

Composition of Audit Committee

Section 177(2) of the Companies Act of 2013 states that the audit committee must have a
minimum of three directors, with independent directors constituting a majority. The chairperson
and the majority of the members of the audit committee shall be capable of reading and
understanding financial statements.

Functions- Section 177(4)

1. The recommendation for the appointment, remuneration, and terms of appointment of the
company’s auditors.

2. Examine and monitor the auditor’s independence and performance, as well as the
efficiency of the auditing process.

3. Examination of the audit report and the financial statements;

4. Approval or any subsequent modification of the company’s transactions with related

parties.

5. Examination of inter-corporate investments and loans.

6. Valuation of the company’s undertakings or assets, as necessary.

7. Valuation of the internal financial controls and risk management systems.

8. Monitoring the end use of funds raised through open offers and related matters.

Powers- Section 177(5) and 177(6)

1. The audit committee, before the financial statements are presented to the board, has the
power to ask the auditors for their opinions on internal control mechanisms, the scope of
the audit, including their observations, and a review of the financial statements.

2. The audit committee may also speak with the management of the company, external and
internal auditors, and auditors regarding any pertinent issues.

3. The audit committee has the power to look into any matter related to the matters listed in
its terms of reference or those that the board has referred to, and the committee for this
purpose may seek professional advice from external sources.
 4. To have complete access to the information contained in the records of the company.

Non-Compliance

The company shall be fined between Rs. 1 lakh and Rs. 5 lakhs and any company officer in
default shall be punished with imprisonment for up to one year and a fine between Rs. 25,000
and Rs. 1 lakh, or both.

43.WHAT IS MEANT BY ROTATION OF AUDITORS? WHAT ARE THE PROVISIONS

RELATING TO APPOINTMENT AND ROTATION OF AUDITORS?

Introduction

The Companies Act, 2013 is being enacted in phases. As many as 98 Sections were notified
w.e.f. 12th September 2013 and 183 Sections were notified w.e.f. 1st April, 2014. Section 139(2)
of the Companies Act, 2013 provides the mandatory rotation of statutory auditors for listed as
well as certain class of the companies as prescribed. The provisions rotation of statutory auditors
are not applicable to one person companies and small companies and shall be applicable to all
companies having borrowings from financial institutions, banks or public deposits of R50 crore
or more irrespective of the threshold limit as mentioned. It is also provided in the Act that the
cooling period for the outgoing auditor shall be for five consecutive years.

Legal Provisions

Appointment of Auditors
Sub-section (6) of section 139 of the Act states that, notwithstanding anything contained in sub-
section (1), the first auditor of a company, other than a government company, shall be appointed
by the board of directors within 30 days from the date of registration of the company and in the
case of failure of the Board to appoint such auditor, it shall inform the members of the company,
who shall within 90 days at an extraordinary general meeting appoint such auditor and such
auditor shall hold office till the conclusion of the first annual general meeting.

As per this sub-section, the board has to appoint auditor within 30 days or if the Board fails to
appoint, then on 31st day onwards the board’s duty to inform the members about such failure of
the board for appointment of first auditor triggers. The members, shall within 90 days from the
date of information being sent to them, appoint auditor and such auditor shall hold office till the
conclusion of the first annual general meeting. As stated above, the duty of the Board to inform
members about their failure to appoint first auditor, triggers immediately on expiry of the 30
days period whereas the duty of the members of the company to appoint first auditor, triggers
immediately on receipt of information of non – appointment by the Board.

The members of the company cannot be presumed to be aware of the fact that the first auditor
has not been appointed by the Board and in absence of receipt of any information or notice of
Extra-ordinary general meeting in this regard, it cannot be said that the shareholders are required
to appoint first auditor before expiry of 120 days from the date of registration/ of the company.
The duty or the power of members of the company to appoint first auditor triggers from the date
of being informed about such non –appointment by the Board of Directors.

Rotation of Auditors

The mandatory rotation of the statutory auditors has been provided under Section 139(2) of
Companies Act, 2013 which provides that no listed company or the company belonging to such
class or classes of companies as may be prescribed shall appoint or reappoint:

a) An individual as auditor for more than one term of five consecutive years, and
b) An audit firm has auditor for more than two terms of five consecutive years.
Therefore, the rotation of the statutory auditor is applicable to all listed companies and any other
company or class of the company as may be prescribed.
The Central Government has notified the Companies (Audit and Auditors) Rules, 2014 and
prescribed that these provisions shall be applicable to following class of the companies excluding
one person companies and small companies.

a. All unlisted public companies having paid up capital of R10 crore or more.
b. All private limited companies having paid up capital of R20 crore or more.
c. All companies having paid up share capital of below threshold limit mentioned in
(a) & (b) above and having borrowing from financial institutions, banks or public
deposits of R50 crore or more.
It means the provisions rotation of statutory auditors are not applicable to one person companies
and small companies and shall be applicable to all companies having borrowings from financial
institutions, banks or public deposits of R50 crore or more irrespective of threshold limit
mentioned hereinabove.

It is also provided in the Act that the cooling period for the outgoing auditor shall be for five
consecutive years which means:

i) An individual auditor who has completed his term under clause (a) above shall not be eligible
for reappointment as an auditor in the same company for five years from the completion of such
term.

ii) The audit firm which has completed its term under clause (b) shall not be eligible for
reappointment as auditor in the same company for five years from the completion of such term.

For the purpose of rotation of the auditor, it is also provided that an incoming auditor or audit
firm shall not be eligible if such audit or audit firm is associated with the outgoing auditor or
audit firm under the same network of audit firm. For this purpose the term ‘Same network’
means the firm operating or initiating hitherto or in future under the same brand name, trade
name or common control.
44.DISCUSS THE PROVISION UNDER COMPANIES ACT RELATING TO

AUTHENTICATION, CIRCULATION, ADOPTION AND FILING OF ANNUAL

ACCOUNTS IN A PUBLIC COMPANY OR WHAT ARE THE PROVISIONS UNDER

THE COMPANIES ACT FOR PREPARATION OF ACCOUNTS IN A COMPANY?

Introduction

The Companies Act, 2013(the Act or New Act) brought in many changes which directly impact
preparation of financial statements and require understanding of the new definitions and
provisions relating to related party disclosures, deposits inter corporate loans, dividends etc.,
These changes thrust huge responsibility on the CEO/MD/WTD/CFO/ independent directors to
ensure their compliance. Changes in the New Act have also increased the accountability and
duties of auditors. To ensure their independence and accountability, New Act imposes
restrictions on providing services and huge penalties.

Sections 128 to 138 under Chapter IX deal with Accounts of companies in the new Act. New
definitions such as “financial year, financial statements, associate company etc have given a new
dimension to the compliances.

Compliance

Section 129(1) mandates that the financial statements be prepared in prescribed form (New
Schedule III) and they shall give a true and fair view and comply with accounting standards. Any
deviations from accounting standards must be disclosed with reasons for such deviation and
impact on profit in the financial statements {Section 129(5)}.

Inspection

The books of account and other books and papers maintained by the company within India shall
be open for inspection by any director during business hours, and in the case of financial
information, if any, maintained outside the country, copies of such financial information shall be
maintained and produced for inspection by any director as per conditions in Rule no. 9.2.
Inspection of books of account of subsidiary company can be done only a person authorised in
this behalf by a resolution of the board.

Adoption

The Board of directors of the company must ensure that at every annual general meeting of a
company financial statements for the year are laid before the shareholders for adoption of
financial statements. (Section 129(2}.

Authentication

The financial statement, including consolidated financial statement, if any, shall be approved by
the Board of Directors before they are signed and submitted to the auditors for their report. The
authentication has to be done by the chairperson of the company where he is authorised by the
Board or by two directors out of which one shall be managing director and the Chief Executive
Officer, if he is a director in the company, the Chief Financial Officer and the company secretary
of the company, wherever they are appointed.

One has to read Section 203 which deals with appointment of Key managerial persons. As per
this section, every company belonging to such class or class of companies as may be specified
shall have:

- MD or CEO or Manager and in their absence whole time director

- Company secretary and Chief Financial officer.

A company may or may not appoint Secretary or CFO but it shall have MD or CEO or Manager
or whole-time director. Therefore, manner in which authentication is done as per old act can be
applied. Any two directors (one has to be MD/CEO/Manager/WTD) and company secretary and
CFO if appointed. In the case of One Person Company, authentication can be done only by one
director, for submission to the auditor for his report thereon. The auditors’ report shall be
attached to every financial statement.

Filing
From answer 7- Short Note

45. DISCUSS THE "MAJORITY RULE". DELIBERATE UPON THE CASE OF FOSS
V. HARBOTTLE AND CITE THE EXCEPTIONS TO THE RULE LAID DOWN IN

FOSS V HARBOTTLE. OR EXPLAIN THE RULE OF MAJORITY IN THE LIGHT OF

FOSS V HARBOTTLE. HOW FAR IS THE RULE OF MAJORITY RELEVANT IN

INDIA (923 WORDS)

Foss v. Harbottle (1843) 2 Hare 461

Facts of the case

Two shareholders of a company brought an action against the directors of the company accusing
them of fraudulent actions resulting in loss to the company. They claimed misuse of assets of the
company by the directors and requested the court to ask such directors to pay damages to the
company for the loss caused to it.

The company, by majority, had already resolved the issue and decided not to bring up any action
in furtherance of the same. The court dismissed the suit on the ground that the damages caused
were not to the plaintiffs exclusively. Rather, the court considered it to be an injury to the
company as a whole. In such a case, the suit must have been brought by the company itself and
not by its minority shareholders. Also, the alleged fraudulent acts of the directors were such as
could be confirmed by the majority members of the company.

Effect of the ruling: Rule of Majority

The case laid down the rule of majority which implies that the will of the majority of members of
a company shall prevail over that of minority shareholders when it comes to the management of
affairs of the company. Every question pertaining to the management of the company is to be
decided by either a simple majority or by a special majority of votes. When a resolution is
passed, it is binding on every member of the company, whether he votes for or against the
resolution or absents himself from voting.
Where an alleged wrong is a transaction which has been made binding on the company by a
resolution passed by a simple majority, no individual shareholder shall have a right to bring a
suit against such resolution in a court of law.

The majority rule laid down in Foss v. Harbottle has been followed in numerous cases in India.

In the case of Rajahmundry Electric Supply Corporation v. A Nageshwara Rao, 1956, it was
held that courts are not supposed to interfere with the matters of internal administration and
management by its directors so long as they act within the Articles of Association of the
company.

Minority shareholders cannot make a court intervene in matters involving appointment of

managing agents of a company since it qualifies as a matter of internal deliberation. [VN
Bhajekar v. KM Shinkar, 1934]

Exceptions to the Rule of Majority

The rule of majority does not apply in the following exceptional circumstances:

1. Acts ultra vires company: Cases where the act done is ultra vires Memorandum of
Associations of the company is not an internal matter therefore, the majority rule laid in Foss v.
Harbottle does not apply. Ultra vires acts cannot be ratified by any majority.

2. Acts ultra vires statutes: Where the act done is inconsistent with any law of the land
including the Companies Act, 2013 (hereinafter referred to as “the Act”) it is illegal and the
majority rule does not apply. Such resolutions can be challenged even by a single member
because these are against the provisions of Companies Act. [Bharat Insurance Co. Ltd. v.
Kanhaiya Lal, 1935]

3. Acts requiring special majority: Certain acts can be done by passing a special resolution at a
general meeting of the company. If any such act is done without passing special resolution (i.e.,
by a resolution with less than three-fourth majority) any member can bring an action to restrain
the majority. [Dhakeshwari Cotton Mills LTD. v. Nilkamal Chakravarti, 1937; Nagappa
Chettiar v. Madras Race Club, 1949]
4. Wrongful doers in control: Sometimes, the wrongful doers are themselves in control of the
affairs of the company. In cases where the wrongdoers are themselves in control of the affairs of
company, the rule of majority is relaxed in favour of the aggrieved minority shareholders.
Whereby, any member, many be allowed to bring an action in the name of the company [Charan
Lal v. Rameshwar Prasad AIR, 1950].

5. Infringement of individual membership rights: Every individual shareholder has certain

rights against the company. For instance, a shareholder has a right to receive notice of general
meeting, to vote at the meeting, to contest for directorship, to claim payment of declared
dividend etc.

These are the individual membership rights conferred by the Articles of Association of the
company. In such cases, the majority rule does not operate and no majority can take away the
individual rights of a member. If any individual member is denied of any such right, he is
entitled to sue the company. [Nagappa Chettiar v. Madras Race Club, 1949]

6. Fraud on Minority: The majority rule does not apply the majority of the shareholders attempt
to benefit themselves at the expense of minority. Where the majority of members use their power
to defraud the minority or to take a discriminatory action, the court will allow an action by
minority shareholders. [Menier v. Hooper’s Telegraph Works, 1874]

7. Oppression and Mismanagement: The majority rule does not apply where the majority uses
its power in a manner which is oppressive to some of the members of the company, or which
results in mismanagement of the company. [Kanika Mukherji v. Rameshwar Dayal Bubey,
1966]

Conclusion

Even though the Indian courts follow the Rule of Majority laid down in Foss v. Harbottle, the
protection of interests of minority shareholders in corporate activities remains one of the most
complex problems. There is always a problem to strike a balance between effective management
of the company and the interest of minority shareholders.
46.'MAJORITY HAS ITS WAY BUT MINORITY HAS ITS SAY'. COMMENT ON THE

STATEMENT (980 WORDS)

INTRODUCTION

Chapter XVI, Companies Act, 2013 is to safeguard the interest of investors in companies and
also to protect the public interest. The rights conferred on shareholders by this chapter are also
known as qualified minority rights.

Oppression

In case there has been some unfair abuse of power by the person in-charge of the management of
the company, it shall constitute as oppression and the minority shareholder shall have the right to
bring an action against the same as stipulated under Section 241(1)(a) of the Act. An unwise and
inefficient management does not amount to oppression, though it may amount to
mismanagement under Section 241 of the Act.

In the case of Shanti Prasad Jain v. Kalinga Tube, 1965, it was held that the term oppression
can be defined as a low fair dealing and violation of fair play on every shareholder. A persistent
and persisting course of unjust conduct must be shown.

Oppression of Majority

In an appropriate case, if the court is satisfied about the acts of oppression or mismanagement,
relief can be granted even if the application is made by a majority, who have been rendered
completely ineffective by the wrongful acts of a minority group. A petition is not liable to be
struck out as showing no reasonable cause of action just only because it is filed by a majority
shareholder. [Sindri Iron Foundry (P) Ltd, re, 1963]

Oppression should be continuous in nature

The facts alleged must reveal an oppression of a continuing nature. Isolated acts of oppression
will not constitute as an offence. This is apparent from the words of the section itself which says
that the affairs of the company must be conducted in an oppressive manner. [Raghunath
Swarup Mathur v. Har Swarup Mathur, 1970]

Mismanagement
Section 241(1)(b) of the Act provides for relief in cases of mismanagement. The term
‘mismanagement’ has not been defined in the Act.

Where the vice-chairman grossly mismanaged affairs of the company and had drawn
considerable amounts for his personal purposes, that large amounts were owing to the
Government towards charge for supply of electricity, that the machinery was in a state of
disrepair. Such acts are sufficient evidences of mismanagement. [Rajahmundry Electric
Supply Corporation Ltd. v. A Nageshwara Rao, 1956]

MAJORITY RULE: FOSS V. HARBOTTLE (1843) 2 HARE 461

In the case of Foss v. Harbottle (1843), two shareholders of a company brought an action
against the directors of the company accusing them of fraudulent actions resulting in loss to the
company. The case laid down the rule of majority which implies that the will of the majority of
members of a company shall prevail over that of minority shareholders when it comes to the
management of affairs of the company.

The principle was re-affirmed in Rajahmundry Electric Supply Corporation v. A

Nageshwara Rao, 1956, where it was held that courts are not supposed to interfere with the
matters of internal administration and management by its directors so long as they act within the
Articles of Association of the company.

EXCEPTIONS TO THE RULE OF MAJORITY

The rule of majority does not apply in the following exceptional circumstances:

1. Acts Ultra Vires Company: Cases where the act done is ultra vires Memorandum of
Associations of the company is not an internal matter therefore, the majority rule laid in
Foss v. Harbottle does not apply. Ultra vires acts cannot be ratified by any majority.
2. Acts Ultra Vires Statutes: Where the act done is inconsistent with any law of the land
including the Companies Act, 2013 (hereinafter referred to as “the Act”) it is illegal and
the majority rule does not apply. Such resolutions can be challenged even by a single
member because these are against the provisions of Companies Act. [Bharat Insurance
Co. Ltd. v. Kanhaiya Lal, 1935]
 3. Acts Requiring Special Majority: Certain acts can be done by passing a special
resolution at a general meeting of the company. If any such act is done without passing
special resolution any member can bring an action to restrain the majority.
[Dhakeshwari Cotton Mills LTD. v. Nilkamal Chakravarti, 1937]
4. Wrongful Doers In Control: Sometimes, the wrongful doers are themselves in control
of the affairs of the company. In cases where the wrongdoers are themselves in control of
the affairs of company, the rule of majority is relaxed in favour of the aggrieved minority
shareholders. Whereby, any member, many be allowed to bring an action in the name of
the company [Charan Lal v. Rameshwar Prasad AIR, 1950].
5. Infringement of Individual Membership Rights: Every individual shareholder has
rights against the company. These are the individual membership rights conferred by the
Articles of Association of the company. In such cases, the majority rule does not operate
and no majority can take away the individual rights of a member. If any individual
member is denied of any such right, he is entitled to sue the company. [Nagappa
Chettiar v. Madras Race Club, 1949]
6. Fraud on Minority: The majority rule does not apply the majority of the shareholders
attempt to benefit themselves at the expense of minority. Where the majority of members
use their power to defraud the minority or to take a discriminatory action, the court will
allow an action by minority shareholders. [Menier v. Hooper’s Telegraph Works,
1874]
7. Oppression and Mismanagement: The majority rule does not apply where the majority
uses its power in a manner which is oppressive to some of the members of the company,
or which results in mismanagement of the company. [Kanika Mukherji v. Rameshwar
Dayal Bubey, 1966]

CONCLUSION

Even though the Indian courts follow the Rule of Majority laid down in Foss v. Harbottle, the
protection of interests of minority shareholders in corporate activities remains one of the most
complex problems. There is always a problem to strike a balance between effective management
of the company and the interest of minority shareholders.
47.'A MERE DISSATISFACTION OF THE MINORITY DOES NOT CONSTITUTE

OPPRESSION. DISCUSS

Under Company Law, the concept of oppression is defined as any conduct or act that is
detrimental to the interests of minority shareholders or goes against their interests. Typically,
oppression occurs when the majority shareholders, management, or directors of a company
misuse their powers to cause harm to the minority shareholders and deprive them of their rights.
In India, Section 241 of the Companies Act, 2013 provides a remedy against oppression and
mismanagement by allowing an aggrieved member of a company to approach the National
Company Law Tribunal (NCLT). A complaint is required to be filed in this regard, which sets
forth detailed allegations regarding the acts of oppression and mismanagement.

However, it is important to note that a mere disagreement or dissatisfaction by the minority

shareholders with the company's policies or management does not amount to oppression. The
law requires complainants to provide evidence that the actions of the majority shareholders,
directors, or management of the company have caused prejudice to their interests.’

48.ROLE OF CENTRAL GOVERNMENT

49.PROVISIONS RELATED TO MISMANAGEMENT- WITH RELEVANT CASE LAWS

The term mismanagement has not been defined in the Companies Act 2013. However, by
analysing section 241 of the Act it can be defined as:

 Some unfair abuse of power by the person(s) in-charge of the management of the company.
 An unwise and inefficient management does not amount to oppression, though it may amount
to mismanagement under section 241.
 Where the company is run overriding the wishes and interest of the majority of shareholders
involving the company into costly litigations, the management can be said to be prejudicial to
interest of the company.
MISMANAGEMENT OR PREJUDICE TO PUBLIC INTEREST

Section 241 may be invoked in either of the following two circumstances:

 a. That the affairs of the company are being conducted in a manner which is-
 Prejudicial to public interest: or
 Prejudicial to the interests of the company.
b. That due to a ‘material change’ that has taken place in the management or control of the
company, it is likely that the affairs of the company will be conducted in a manner-
 The company’s Board of directors; or
 Manager; or
 The ownership of the company’s shares; or
 The membership of the company, if the company has no share capital; or any other
manner whatsoever (but not including a change brought about by, or in the interests of,
any creditors, debenture holders, or any class of shareholders).
CONTINUITY OF MISMANAGEMENT REQUIRED

Where the wrongs contemplated were against a past director, the application was not
maintainable under section 241. Charges of mismanagement even if proved in the past are not
enough to establish an existing injury to the company or public interest. The mismanagement
should be present and continuous (R.S. Mathur v H.S Mathur (1970) 1 Comp LJ 35). If a
director responsible for mismanagement is removed, mismanagement ends, and therefore
application under section 241 is not maintainable.

ILLUSTRATIONS OF MISMANAGEMENT THROUGH CASE LAWS

Section 241(1)(b) of the Act provides for relief in cases of mismanagement. The term
‘mismanagement’ has not been defined in the Act.

Where the vice-chairman grossly mismanaged affairs of the company and had drawn
considerable amounts for his personal purposes, that large amounts were owing to the
Government towards charge for supply of electricity, that the machinery was in a state of
disrepair. Such acts are sufficient evidences of mismanagement. [Rajahmundry Electric Supply
Corporation Ltd. v. A Nageshwara Rao, 1956]

The court in the case of S.M Ramakrishna Rao v. Bangalore Race Club Ltd. 1970, held that
violation of the conditions of the memorandum by the person-in-charge of the management of
affairs of the company would amount to mismanagement.
Relief against mismanagement runs in favour of the company and not to any particular member
or members. It is not necessary for the Tribunal to find cause for winding up in cases of
mismanagement in order to grant relief. Proof of prejudice to the public interest or to the
interests of the company is enough. The section enables the Tribunal to take into consideration
outside interests affected by corporate operations.

Serious disputes among the directors resulting in serious prejudice to the interest of the company
also amounts to mismanagement [Suresh Kumar Sangai v. Supreme Motors Ltd., 1983].

50.PROVISIONS RELATED TO OPPRESSION- WITH RELEVANT CASE LAWS

Chapter XVI, Companies Act, 2013 (hereinafter referred to as “the Act”), is to safeguard the
interest of investors in companies and also to protect the public interest. The rights conferred on
shareholders by this chapter are also known as qualified minority rights.

Oppression

In case there has been some unfair abuse of power by the person in-charge of the management of
the company, it shall constitute as oppression and the minority shareholder shall have the right to
bring an action against the same as stipulated under Section 241(1)(a) of the Act. An unwise and
inefficient management does not amount to oppression, though it may amount to
mismanagement under Section 241 of the Act.

Where the company is run overriding the wishes and interest of the majority of shareholders
involving the company into costly litigations, the management can be said to be prejudicial to
interest of the company.

In the case of Shanti Prasad Jain v. Kalinga Tube, 1965, it was held that the term oppression
can be defined as a low fair dealing and violation of fair play on every shareholder. A persistent
and persisting course of unjust conduct must be shown. It also includes oppression in conduct of
affairs, making private agreements among member and prejudice to a specific member of the
company.

In the case of Hindustan Coop Insurance Society Ltd, re., 1961, the court held that an attempt
to force new and riskier objects upon an unwilling minority may in circumstances amount to
oppression. The court in the case Mohan Lal Chandumall v. Punjab Co Ltd., 1959, held that an
attempt to deprive a member of his ordinary membership rights is an “oppression”.

It does not include mere domestic disputes between directors and members or lack of confidence
between one section of members and another section in the matter of policy or administration.
[Kalinga Tubes Ltd v. Shanti Prasad Jain, 1965]

Oppression of Majority

In an appropriate case, if the court is satisfied about the acts of oppression or mismanagement,
relief can be granted even if the application is made by a majority, who have been rendered
completely ineffective by the wrongful acts of a minority group. A petition is not liable to be
struck out as showing no reasonable cause of action just only because it is filed by a majority
shareholder. [Sindri Iron Foundry (P) Ltd, re, 1963]

Oppression should be continuous in nature

The facts alleged must reveal an oppression of a continuing nature. Isolated acts of oppression
will not constitute as an offence. This is apparent from the words of the section itself which says
that the affairs of the company must be conducted in an oppressive manner. [Raghunath
Swarup Mathur v. Har Swarup Mathur, 1970]

51.OPPRESSION OF MEMBERS IN A COMPANY (5)

Oppression- Meaning
The meaning of oppression can be understood by the analysis of Lord Cooper in the precedent of
Elder v. Watson Ltd, whereby. the Hon'ble Court defined the term 'oppression' as, "Oppression is
a misdemeanour committed by majority shareholders who under the colour of their majority
power, wrongfully inflict upon the minority shareholder or minority shareholders any harm of
injury.

Oppression is specifically dealt in the Section 241 of The Companies Act, 2013. It covers
continuing acts and the acts which have been concluded. Moreover, 'mismanagement indicates
the working of a company in a manner which is prejudicial to the public interest or the interest of
a company.
The principle of prevention of oppression and mismanagement was unveiled in the landmark
precedent of Foss v. Harbottle. In the impugned case, the Hon'ble court for the first time
enumerated upon the aspect of Rule of Majority. It pointed towards a resolution being binding
upon the company whenever it is passed by the 3/4th majority of the members of the company.
Initially, the decision of the majority members (shareholders) was given primacy over the will of
the minority members/shareholders. However, there was a paradigm shift in this view through
the provisions of the Companies Act, 2013. The provisions of the mandate are encompassed so
as to favor the ultimate development of the company and to even protect the minority
shareholders of the company. The case of Foss was rebutted by the Hon'ble Court on the ground
of wrongdoers in control, in the case of Daniels v Daniels as well as Greenhalgh v. Arderne
Cinemas Ltd on the ground of fraud on minority.

What constitutes an act of Oppression in a Company?

An act of oppression generally constitutes an act which is against the principle of fair dealing or
partaking any act which deprives the members of their rights as well as performing any act which
is derogatory to the acts as well as objectives of the company or undertakes to make a highly
risky decision. Additionally, the acts of mismanagement are rather wide and cannot be
designated into air-tight compartments but any act which is against the public at large or the
objectives of the company then such an act can be encompassed under the ambit of
mismanagement. Furthermore, the act of improper appoint of director or breach of duty by the
director can also be constituted as mismanagement. Mismanagement would also be constituted
under any intention to defraud the public.

Case Laws
The Hon'ble Court has taken an active role in defining the premise of oppression and
mismanagement. The same is apparent through the case of Rajahmundary Electric Corporation
v. Nageshwara Rao. In the impugned case, the vice chairman of the company made the misdeed
of drawing the money for his personal use from the company and also did several acts which
could not be constituted as anything buy mismanagement. The Hon'ble Court was in favour of
the view that the Chairman and the vice-chairman of the company were in fact liable for
mismanagement.
Furthermore, in the case of Cyrus Investments (P) Ltd. v. Tata Sons Ltd., the case was with
regard to the reinstatement of Mr. Cyrus Pallonji Mistry as Executive Chairman of Tata Sons
Limited as he was involved in the conversion of company illegally from a 'Public Company' to a
'Private Company. National Company Law Appellate Tribunal assented to the reinstatement of
Mistry for the remaining of his term first as an 'Executive Chairman' and consequently as the
'Director' of Tata Group of companies.

52.PROVISIONS RELATED TO ARRANGEMENT AND ROLE OF THE

TRIBUNAL/COURTS

The matters which the Tribunal has to consider in giving its sanction were thus explained by
Astubury J. in Anglo Continental Supply Co, re:

“First, that the provisions of the statute have been complied with. Secondly, that the class was
fairly represented by those who attended the meeting and that the statutory majority are acting
bona fide and are not coercing the minority in order to promote interests adverse to those of the
class whom they purport to represent; and, thirdly, that the arrangement is such as a man of
business would reasonably approve.”

COMPLIANCE WITH STATUTORY PROVISIONS

The first condition enables the Tribunal to decline its sanction to a scheme which is ultra vires or
is otherwise not in compliance with the Act. Thus, where a scheme involved reduction of capital,
the court refused to uphold it and allowed the application to stand over to enable the company to
comply with the normal procedure of capital reduction. But the Tribunal has the power to grant
such sanction in the same proceedings. Section 230(12) clearly provides for removal of doubts
that Section 66 is not to apply to reduction of share capital effected in an order under the section.
Thus, in Maneckchowk and Ahmedabad Manufacturing Co, re, the Gujarat High Court
accorded a separate sanction for reduction of capital and said:

“Section 230 provides a complete code of putting through a scheme of compromise and
arrangement, which may even include reorganisation of share capital subject to the well-
recognised exception that if reorganisation includes reduction, the proper procedure for effecting
the same may be gone through.”

As observed in the case of Compact Power Sources, re, for a listed company, consent of the
stock exchange has to be obtained before presenting the scheme for sanction. One month before
this, the scheme has to be filed before the stock exchange for its consent. Such filing is enough,
because its approval is not a mandatory requirement.

An order of the Tribunal sanctioning a scheme has to provide for all or any of the following
matters:

a. where the scheme provides for conversion of preference shares into equity shares,
preference shareholders have to be given the option to either obtain arrears of dividend in
cash or to accept equity shares equal to the value of dividend payable;
b. protection of any class of creditors;
c. if the compromise or arrangement results in variation of shareholders’ rights. it has to be
given effect to under Section 48 (this section deals with variation of shareholders'
rights):
d. applications under Sick Industrial Companies (Special Provisions) Act, 1985 are to
abate;
e. such other matters, including exit offer to dissenting shareholders, if any, as are in
Tribunal's opinion necessary to effectively implement the terms of the scheme.
A scheme is not to be sanctioned by the Tribunal unless the company auditor’s certificate has
been filed which has to be to the effect that accounting treatment as used in the scheme is in
conformity with the accounting standards prescribed under Section 139. [S. 230(7)]

Within 30 days the order of the Tribunal has to be filed with the Registrar. The Tribunal may
dispense with a meeting of creditors where the creditors having at least 90 per cent value agree
and confirm by way of affidavit to the proposed scheme. [S. 230(9)]

A scheme of buy-back of securities is not to be confirmed by the Tribunal unless it is in

accordance with the provisions of Section 68. [S. 230(10)]

A scheme of compromise or arrangement may include a takeover offer made in the prescribed
manner. [S. 230(11)]
In the case of a listed company, the scheme of takeover would have to comply with SEBI
Takeover Regulations. In the case of unlisted companies, any person aggrieved may make an
application to the Tribunal about aggrievement with the takeover bid and the Tribunal may pass
appropriate orders. The provisions of Section 66 are not to apply to any reduction of share capital
effected in pursuance to the order of the Tribunal under the section. [S. 230(12)]

BONA FIDE EXERCISE OF MAJORITY POWER

As observed in the case of Allen v. Gold Reefs of West Africa Ltd., the second condition enables
the Tribunal to see that the majority power has been exercised in good faith for the benefit of the
class as a whole. If it appears that “the majority was composed of persons who had not really the
interest of that class at stake”, the scheme may not be sanctioned. Thus, majority approval
obtained by improper inducements will be ineffective. It is not, however, necessary that the
meeting should be attended by a majority of the total number of 609 members or creditors. It is
enough that the requisite majority is obtained at the meeting, as observed in the case of
Bessemer Steel Co, re.

REASONABLENESS OF SCHEME

The last condition enables the Tribunal to examine the reasonableness of the scheme. The
scheme should be fair and equitable. The approval of the scheme by the statutory majority is
strong evidence of its reasonableness. If the scheme is otherwise fair. the Tribunal will not go
into its commercial merits. But if the scheme is illusory, the court may refuse its sanction, even if
it has been approved by the requisite majority. A scheme of this kind was before the Allahabad
High Court in Premier Motors (P) Ltd v Ashok Tandon.

Illustration- Two companies had taken deposits from the public on 12 per cent interest. Most of
the depositors were women and aged, of lower middle classes who had invested their life-long
savings to make provision for their dependants. When the deposits began to mature, the
depositors were told that the companies were running at a loss, one of them remaining out of
business for two years. A scheme was drawn up which envisaged full payment to depositors at
less interest but gave no date by which they would be fully repaid. At a meeting of depositors
held under the court's order the scheme was approved by the statutory majority and the company
petitioned for the court's sanction.
BURDEN OF PROVING UNFAIRNESS

Once a scheme has been approved of by a class, the burden of proving that it is unfair is on those
who oppose it. For example, as observed in the case of Dena Bank Ltd., re, where a scheme
offered an option to the transferor company's shareholders either to accept shares in the
transferee company, or in case of dissent, cash and the cash was less by about 24 per cent than
the value of the shares offered, the court held that spot cash, though less, may still be fair, but it
should not be less to that extent. Anything between 15 and 20 per cent less would have been fair.
The Calcutta High Court in the case of AW Figgis & Co (P) Ltd., re, held that the company had
the legal right to split its undertaking and nobody can be deprived of his legal rights merely
because the exercise of it involves certain incidental consequences.

DISCLOSURE OF MATERIAL FACTS

The Act now specifically provides that the Tribunal shall not sanction any scheme unless it is
satisfied that the company or the applicant has disclosed to it by affidavit or otherwise, all
material facts relating to the company, as observed in the case of Jaypee Cement Ltd., re, such
as its latest financial position, the latest auditors’ report, the pendency of any investigation
proceedings, etc, and the like. Schemes involving cancellation of arrears of accumulated
preference dividends, or requiring debenture holders to accept shares in place of debentures or to
accept as their debtor a company to which the assets of their company are transferred, have been
approved under the section.

INTEREST OF CREDITORS

Even where notice to creditors is not required there is no special cause of concern because the
Tribunal can, in the exercise of its discretionary power, refuse to sanction a scheme unless the
interest of creditors is taken care of. The Tribunal may even call a meeting of the creditors for
this purpose. Furthermore, as observed in the case of LG Electronics System India Ltd., re, the
Tribunal does not have the power to prevent a secured creditor from enforcing his security.

NO POWER TO STAY CRIMINAL PROCEEDINGS

As observed in the case of Sharp Industries Ltd., re, there is no power in the court under these
provisions to stay a criminal prosecution against the company and its directors and guarantors.
53.PROCEDURE FOLLOWED BY COMPANY TO EFFECT AN ARRANGEMENT

CLASSIFICATION

The company, or any member or creditor may make an application to the Tribunal. An
application can be made only by a member or creditor of the class which is affected by the
compromise or arrangement proposed by the company. The company has to place different
interests in separate classes. Thus, where in a scheme of arrangement, persons with dissimilar
interests were put in a single class the court refused to sanction the scheme10.

In a case before the Allahabad High Court, Premier Motors (P) Ltd v Ashok Tandon, a scheme
of compromise with the company's depositors placed all the depositors in one class, although the
deposits of some of them had, and those of others had not, matured. M.H. BEG J found nothing
wrong with the classification.

All the unsecured creditors do not always constitute a single class. Where fixed deposit holders,
lenders of money, holders of hundis and suppliers of material were all herded in a single class
without ascertaining what representation of these categories was there at the meeting, it was held
that the requirements of the section were not satisfied and that a fresh attempt should be made to
reclassify creditors and their consent obtained at separate meetings,

The applicant has to disclose to the Tribunal on affidavit the following:

a. all material facts relating to the company such as the latest financial position, auditor's
report, pendency of any investigation proceedings;
b. reduction of share capital, if any, included in the scheme;
c. any scheme of corporate debt restructuring consented to by not less than 75 per cent of
the secured creditors in value, including:
i. a creditor's responsibility statement;
ii. safeguards for U6503 protection of secured or unsecured creditors;
iii. report by the auditor that the fund requirements of the company after the corporate debt
restructuring as approved shall conform to the liquidity test;
iv. where the company proposes to adopt corporate debt restructuring guidelines specified by
RBI, a statement to that effect;
 v. a valuation report in respect of shares and property and all assets by a registered valuer.
[S. 230(2)]
MEETINGS

If an application is properly made, the Tribunal may order a meeting of the class of creditors or
members to be called, which shall be held and conducted in the manner directed by the Tribunal
A single joint application by all companies involved in a scheme for convening of meetings and
for sanction has been held to be permissible There were objections by the workmen. The court
said that Rule 67 of the Companies (Court) Rules. 1959, that summons is to be served ex parte,
except where Rule 68 applies, that is, where the company itself did not propound the scheme. a
copy of the summons has to be served on the company, or upon the liquidator if the company is
in winding up. The court can then issue directions and no party is entitled to be heard, as
observed in the case of Garti Cargo Management Services v. SBL Industries Ltd. (No. 1).

NOTICE OF MEETING AND DISCLOSURES

A statement of the terms of the compromise or arrangement and its effects has to be sent with
every notice calling the meeting. The power of the Tribunal being of judicial nature, it is
necessary for its proper exercise that notice should be given to all the interested parties including
the shareholders. As observed in the case of Hind Auto Industries Ltd. v. Premier Motors (P)
Ltd., the statement should explain in particular any material interest of the directors, managing
director, or manager of the company and the effect of the compromise on their interests insofar
as that effect is different from the effect on like interests of other persons Notice of the meeting
has to be given to creditors. Such notice and other documents have also to be placed on the
website of the company, if any, and, in the case of a listed company, sent to SEBI and stock
exchange where the company is listed for placing on their website and also published in
newspapers in such manner as may be prescribed. Where notice of the meeting is advertised, it
has to include the time within which copies of the compromise, etc may be made available to
concerned persons free of charge from the registered office of the company. [S. 230(3)]

The notice has also to inform that voting can be through presence at the meeting or by proxy or
by postal ballot, within one month from the date of receipt of notice. Any objection to the
compromise or arrangement can be made only by persons holding not less than 10 per cent of the
shareholding or having an outstanding debt amounting to not less than 5 per cent of the total
outstanding debt as per the latest audited financial statement. [S. 230(4)] Such notice has also to
be sent to the Central Government and other sectoral regulators or authorities which are likely to
be affected by the compromise or arrangement. They have to be told that representation, if any,
should be made within 30 days from the date of receipt of notice. Failing that, it will be
presumed that they have no representation to make. [S. 230(5)]

As observed in the case of Pharmaceutical Products of India Ltd., re, if the notice calling the
meeting is given by advertisement, the statement should be included in the advertisement or the
advertisement should indicate the place at which or the manner in which copies of such a
statement may be obtained.

APPROVAL BY THREE-FOURTH

If the scheme is approved by a majority representing three-fourths in value of the creditors or

members, as the case may be, it may then be sanctioned by the Tribunal.28 This requirement has
been held to be directory, not mandatory.

For example, as observed in the case of SM Holding and Finance Ltd. v. Mysore Machinery
Manufacturers Ltd., where a scheme was not approved by the appropriate majority of creditors
at their meeting, but subsequently the creditors to the extent of requisite majority filed individual
affidavits before the court, that was held to be a sufficient compliance with the statutory
requirements.

54.PRE-MERGER STEPS AND SCHEME FOR ARRANGEMENT

Introduction

The term ‘merger’ is not defined under the Companies Act, 2013 or under Income Tax Act, 1961
(“ITA”). As a concept, a ‘merger’ is a combination of two or more entities into one; the desired
effect being not just the accumulation of assets and liabilities of the distinct entities, but
organization of such entity into one business.

The ITA goes on to specify certain other conditions that must be satisfied for an ‘amalgamation’
to be eligible for benefits accruing from beneficial tax. Sections 230-234 of Companies Act,
2013 deal with the schemes of arrangement or compromise between a company, its shareholders
and/or its creditors.
Merger Provisions

The Merger Provisions govern schemes of arrangements between a company, its shareholders
and creditors. The Merger Provisions are in fact worded so widely that they provide for and
regulate all kinds of corporate restructuring that a company can possibly undertake, such as
mergers, amalgamations, demergers, hive off, and every other compromise, settlement,
agreement or arrangement between a company and its members and/or its creditors.

Application for Order of a Meeting

An application for compromise or agreements under section 230 of the Act may be brought to
the National Company Law Tribunal (Tribunal) for holding a creditors' or shareholders' meeting
in the required format (Form No. NCLT-1). The application must include a notice of admission
(NCLT Form No. 2), an affidavit (NCLT Form No. 6), and a copy of the scheme of compromise
or arrangement.

Hearing of Application

At the hearing, the Tribunal determines the class or classes of creditors who will attend the
meeting to discuss the proposed compromises and arrangements, fixes the date, time, and
meeting of such meetings, appoints a chairperson for such meetings, and establishes the quorum
and procedure to be followed at such meetings. In addition, the Tribunal issues directives
concerning the notices that must be sent to creditors and the relevant sectoral agencies, as well as
the publication of such notices. The Tribunal has the authority to waive the holding of any
meeting of creditors.

Notices for Meetings

The notices of the meeting (Form No. CAA.2) must be sent to each creditor or member via the
prescribed method by the chairperson of the meeting. The notice must include a copy of the
scheme of compromise or arrangements, as well as any additional material information not
included in the scheme. The notice must be given to creditors and members prior to the meeting
to accompany a copy of the arrangement or compromise scheme.

Additionally, the notice of the meeting must be published (using Form No. CAA.2) in at least
one English and one vernacular publication that is widely circulated throughout the State where
the company's registered office is located. It must also be posted on the company's website at
least 30 days in meeting.

Voting and Proxies

The proposed compromise or agreement will be considered during the meeting. Voting at the
meeting will take conducted via poll or technological means. Voting by proxy shall also be
permitted. Within three days following the conclusion of the meeting, the chairperson shall
submit a report to the Tribunal (Form No. CAA.4) detailing the meeting.

Filling and Hearing of Petition

If the suggested compromise or arrangement was adopted during the meeting, the company must
submit a petition (Form No. CAA.5) within seven days of the meeting's chairperson submitting
the report. The hearing date for the petition will be set by the Tribunal. On the given date, the
Tribunal shall hear the petition. By means of an order, the Tribunal would approve the scheme
(Form. No. CAA 6). The Tribunal may provide any additional instructions or amendments it
deems appropriate. Within thirty days of receiving the order, a certified copy must be filed with
the relevant RoC within 30 days.

Application for Directions in lieu of Section 232

1. When the scheme involves the restructuring or merger of companies, and the simple sanction
of the scheme by the Tribunal is insufficient for its implementation, a request may be made
to the Tribunal for directives about the scheme.
2. The application must be accompanied by an admission notice and an affidavit requesting the
Tribunal's directives. The Tribunal may direct how admission notices are to be delivered.
Upon hearing, the Tribunal may make such order (Form No. CAA.7) or issue such directions
as it deems appropriate regarding the processes to be conducted for the purposes of
reconstruction or amalgamation. The Tribunal may direct an investigation into the transferor
company's creditors and the securing of the debts and claims of any dissident creditors.
3. Once the order in support of the scheme has been granted and until the completion of the
scheme for restructuring or amalgamation, a statement (Form No. CAA.8) must be filed
within 210 days of the end of the financial year with the RoC.
4. The Tribunal may, at any time following the issuance of the order sanctioning the scheme,
request a report on the scheme's operation and request that it be submitted within a set
timeframe. Any creditor or member, company or liquidator may petition to the Tribunal to
determine any question concerning the operation of a compromise or arrangement.

Fast Track Merger

The Fast Track merger covered under Section 233 of CA 2013 requires approval from
shareholders, creditors, the Registrar of Companies, the Official Liquidator and the Regional
Director. Under the fast track merger, scheme of merger shall be entered into between the
following companies:

i. Two or more small companies (private companies having paid-up capital of less than
INR 100 million and turnover of less than INR 1 billion per last audited financial
statements);
ii. A holding company with its wholly owned subsidiary; or
iii. iii. such other class of companies as may be prescribed.

The scheme, after incorporating any suggestions made by the Registrar of Companies and the
Official Liquidator, must be approved by shareholders holding at least 90% of the total number
of shares, and creditors representing 9/10th in value, before it is presented to the Regional
Director and the Official Liquidator for approval.

Thereafter, if the Regional Director/ Official Liquidator has any objections, they should convey
the same to the central government. The central government upon receipt of comments can either
direct NCLT to take up the scheme under Section 232 (general process) or pass the final order
confirming the scheme under the Fast Track process.

Cross Border Mergers

Section 234 of the CA 2013 permits mergers between Indian and foreign companies with prior
approval of the Reserve Bank of India (“RBI”). A foreign company means any company or body
corporate incorporated outside India, whether having a place of business in India or not. The
following conditions must be fulfilled for a cross border merger:

i. The foreign company should be incorporated in a permitted jurisdiction which meets

certain conditions.
 ii. ii. The transferee company is to ensure that the valuation is done by a recognized
professional body in its jurisdiction and is in accordance with internationally accepted
principles of accounting and valuation.
iii. iii. The procedure prescribed under CA 2013 for undertaking mergers must be followed.

The RBI also issued the Foreign Exchange Management (Cross Border Merger) Regulations,
2018 (“Merger Regulations”) on March 20, 2018 which provide that any transaction undertaken
in relation to a cross-border merger in accordance with the FEMA Regulations shall be deemed
to have been approved by the RBI.

Conclusion

In the globalized world Mergers and Amalgamation through foreign direct investment are
growing more day by day to the top of companies discussing deals of two small companies to
form a new company together, as every company wishes to deal and enter into all the aspects of
the marketing chain. It is witnessed by the Indian Market a new development for the next
generation through merging and amalgamation with other companies to form new entities.

55.COMPROMISE AND THE PROCEDURE FOLLOWED

56.POWER OF TRIBUNAL TO ENFORCE ITS ORDERS RELATING TO COMPROMISE

AND ARRANGEMENT

Introduction
Before the establishment of the National Company Law Tribunal and National Company Law
Appellate Tribunal the powers and functions of the Companies were discharged by the Company
law board and Board for Industrial and Financial Corporation. The Central government
constituted NCLT under Section 408 of Companies Act, 2013.

National Company Law Tribunal (NCLT) is a quasi-judicial body which was set up to resolve
the disputes which are arising in Indian Companies. It is the successor to the Company Law
Board. It is governed by the rules framed by the Central Government. NCLT is a special court
where cases relating to civil court have been barred from the jurisdiction.

Legal Provisions

SECTION 245- CLASS ACTION

An application may be filed to the tribunal by either the members of the company or by the
depositors or on the behalf of the members stating that affairs have been conducted in the manner
which is prejudicial to the interest of the company and seeking all or any of the ground:

The company may be restrained:

 from doing any act which is outside the scope of MOA and AOA,
 from committing any breach of the provision of MOA and AOA,
 and its directors from acting on such resolutions,
 doing any act which is either contrary to this act or any other act which is in force for
time being,
 declaring any resolution which in turn alters the MOA and AOA and it becomes void if
such resolution is passed.

If the company fails to comply with the order which is passed by the tribunal the company shall
be punished with a fine of INR 5 lakhs which may extend to INR 25 lakhs and every officer of
default shall be punished with fine INR 25 thousand and which may extend to INR 1 lakh and
with the imprisonment of three years.

SECTION 7(7) OF COMPANIES ACT- DEREGISTRATION

Section 7(7) of Companies Act, 2013 states if tribunal comes to the notice that the company at
the time of incorporation of the company furnished false or incorrect information or by
suppressing any material facts, information or any declarations is filed by the company the
tribunal may pass any one of the orders as mentioned below:

 Pass such orders as it thinks fit.

 Pass orders for winding of the company.
 Direct the liability of members shall be unlimited.
 SECTION 241- OPPRESSION AND MISMANAGEMENT

Section 241 of Companies Act, 2013 states that any member of the company who has the right to
complain to tribunal as per section 244 of the Act, 2013 shall file a complaint to tribunal stating
that:

 Affairs of the company are conducted in such a manner which is prejudicial to public
interest or oppressive to him or to any member of the company or which is prejudicial
to the company.
 A material change which has been brought by the company which is against the
interest of creditors of the company, debenture holders, shareholders of the company
and it has brought significant change in the management or control of the company
either in:
1. alteration in the board of directors,
2. alteration of managers,
3. alteration of the member, or
4. any other reason.

SECTION 13-18- CONVERSION OF COMPANY

Section 13 to 18 of Companies Act, 2013 read with the Rule 41 of Companies (Incorporation)
rule 2014 states when a company converts from a public company into private company an
approval of NCLT tribunal is required for such conversion. The tribunal may impose such terms
and conditions as in section 459 of Companies Act, 2013.

SECTION 97 AND 98- ANNUAL GENERAL MEETING

If the members of the company fail to convene the meeting within a particular time and the
member of the company may give an application to the tribunal to convene such meeting, the
tribunal has such as the power to convene those meetings.

SECTION 242- WINDING UP OF COMPANY

Section 242 of Companies Act, 2013 a company may be wound by the tribunal when the affairs
of the company have been conducted in any one of below manner, set under section 242 of the
companies act, 2013 and by that tribunal comes to the conclusion that the company has been
prejudicial to public interest or in an oppressive manner.

SECTION 58- REFUSAL TO TRANSFER SHARES

A private company which is limited by the shares or the public company which refuses to
register the transfer of shares of the transferor, the company shall within thirty days of transfer
shall send a notice to the transferor and transferee of such refusal.

The transferee in return shall file the appeal to the tribunal within thirty days from the date of
receipt of the notice and in case no notice is sent by the company to the transferee, the transferee
shall file an appeal to the tribunal within sixty days from the instrument of the transfer.

The tribunal shall hear the orders and after hearing such order shall either reject the appeal or
order the company.

SECTION 213- INVESTIGATION POWERS

Section 213 of the Companies Act 2013 allows the government to order an investigation by the
SFIO into a company's affairs if there are reasonable grounds to suspect fraudulent or prejudicial
conduct. The section grants the SFIO extensive powers to summon individuals, obtain
documents, and inspect records. It aims to protect stakeholders and the public by investigating
and taking action against fraudulent practices. The tribunal has the power to punish the defaulter
for fraud.

ADDITIONAL POWERS

 Section 221 of Companies Act, 2013 power of the tribunal to freeze the assets of the
company.
 Section 2(41) of Companies Act, 2013 power to change the financial years of the
company registered.

57.DIFFERENCE BETWEEN COMPROMISE AND ARRANGEMENT

The term arrangement has been given a wide scope under the Companies Act 2013. According to
section 230 of the Companies Act 2013, an arrangement includes a reorganization of the
company’s share capital by the consolidation of shares of different classes or by the division of
shares into shares of different classes, or by both the methods.

The Act enunciates two possibilities of scheme of arrangement. They are

(a) between a company and its creditors; and

(b) between a company and its members.

Despite the tenuous difference, a scheme of arrangement with members (for amalgamation and
mergers) is clearly distinguishable from a mere scheme of compromise with creditors. The
primary difference between a compromise and an arrangement is that whereas an arrangement is
between a company and its members or class of members, a compromise is between a company
and its creditors or class of creditors. Another distinguishable feature is that in case of a
compromise, there is an element of dispute present as it is done between a company and its
creditors. But in case of an arrangement, there is no such element of dispute present.

CLASSIFICATION

The company, or its liquidator (if it is in winding up), or any member or creditor may make an
application to the Tribunal. An application can be made only by a member or creditor of the class
which is affected by the compromise or arrangement proposed by the company. The company
has to place different interests in separate classes. Classification of members or creditors in a
scheme is necessary only when different members or creditors are affected differently under the
scheme. Thus, where in a scheme of arrangement, persons with dissimilar interests were put in a
single class the court [now Tribunal] refused to sanction the scheme10.

In a case before the Allahabad High Court, Premier Motors (P) Ltd v Ashok Tandon, a scheme
of compromise with the company's depositors placed all the depositors in one class, although the
deposits of some of them had, and those of others had not, matured. M.H. BEG J found nothing
wrong with the classification.

All the unsecured creditors do not always constitute a single class. Where fixed deposit holders,
lenders of money, holders of hundis and suppliers of material were all herded in a single class
without ascertaining what representation of these categories was there at the meeting, it was held
that the requirements of the section were not satisfied and that a fresh attempt should be made to
reclassify creditors and their consent obtained at separate meetings,

It has been held that a wholly owned subsidiary is also a "class" for the purpose of a scheme of
arrangement. A subsidiary company was a creditor. It could not be included in the class of other
unsecured creditors. Its interest in supporting the scheme proposed by its holding company was
not the same as that of other creditors. Where a meeting of only the affected class is called,
others' meeting must also be held because even otherwise they can ask for a meeting. Creditors
of a public institution, like UTI, holding public monies are not a separate class.

The applicant has to disclose to the Tribunal on affidavit the following:

d. all material facts relating to the company such as the latest financial position, auditor's report,
pendency of any investigation proceedings;
d. reduction of share capital, if any, included in the scheme;
d. any scheme of corporate debt restructuring consented to by not less than 75 per cent of the
secured creditors in value, including:
vi. a creditor's responsibility statement;
vi. safeguards for U6503 protection of secured or unsecured creditors;
vi. report by the auditor that the fund requirements of the company after the corporate debt
restructuring as approved shall conform to the liquidity test;
vi. where the company proposes to adopt corporate debt restructuring guidelines specified by
RBI, a statement to that effect;
vi. a valuation report in respect of shares and property and all assets by a registered valuer.
[S. 230(2)]
MEETINGS

If an application is properly made, the Tribunal may order a meeting of the class of creditors or
members to be called, which shall be held and conducted in the manner directed by the Tribunal
A single joint application by all companies involved in a scheme for convening of meetings and
for sanction has been held to be permissible. While the company was in winding up, a scheme
was propounded by a director of the company. There were objections by the workmen. The court
said that Rule 67 of the Companies (Court) Rules. 1959, that summons is to be served ex parte,
except where Rule 68 applies, that is, where the company itself did not propound the scheme. a
copy of the summons has to be served on the company, or upon the liquidator if the company is
in winding up. The court can then issue directions and no party is entitled to be heard, as
observed in the case of Garti Cargo Management Services v. SBL Industries Ltd. (No. 1).

NOTICE OF MEETING AND DISCLOSURES

A statement of the terms of the compromise or arrangement and its effects has to be sent with
every notice calling the meeting. The power of the Tribunal being of judicial nature, it is
necessary for its proper exercise that notice should be given to all the interested parties including
the shareholders. As observed in the case of Hind Auto Industries Ltd. v. Premier Motors (P)
Ltd., the statement should explain in particular any material interest of the directors, managing
director, or manager of the company and the effect of the compromise on their interests insofar
as that effect is different from the effect on like interests of other persons Notice of the meeting
has to be given to creditors and members of all classes accompanied by a statement disclosing
details of the compromise or arrangement, and a copy of the valuation report explaining the
effect of the scheme on creditors, directors, key managerial personnel, promoters, non-promoter
members, debenture holders, debenture trustees. Such notice and other documents have also to
be placed on the website of the company, if any, and, in the case of a listed company, sent to
SEBI and stock exchange where the company is listed for placing on their website and also
published in newspapers in such manner as may be prescribed. Where notice of the meeting is
advertised, it has to include the time within which copies of the compromise, etc may be made
available to concerned persons free of charge from the registered office of the company. [S.
230(3)]

The notice has also to inform that voting can be through presence at the meeting or by proxy or
by postal ballot, within one month from the date of receipt of notice. Any objection to the
compromise or arrangement can be made only by persons holding not less than 10 per cent of the
shareholding or having an outstanding debt amounting to not less than 5 per cent of the total
outstanding debt as per the latest audited financial statement. [S. 230(4)] Such notice has also to
be sent to the Central Government, Income-tax Authorities, RBI, SEBI, the Registrar, the
respecting Stock Exchange, the Official Liquidator, Competition Commission of India, if
necessary, and such other sectoral regulators or authorities which are likely to be affected by the
compromise or arrangement. They have to be told that representation, if any, should be made
within 30 days from the date of receipt of notice. Failing that, it will be presumed that they have
no representation to make. [S. 230(5)]

As observed in the case of Pharmaceutical Products of India Ltd., re, if the notice calling the
meeting is given by advertisement, the statement should be included in the advertisement or the
advertisement should indicate the place at which or the manner in which copies of such a
statement may be obtained. When a member or creditor entitled to receive a copy applies for it,
the company shall be bound to supply him one free of charge. Every officer of the company is
required to give notice to the company of such matters relating to himself as may be necessary
for the purposes of the scheme.

APPROVAL BY THREE-FOURTH

If the scheme is approved by a majority representing three-fourths in value of the creditors or

members, as the case may be, it may then be sanctioned by the Tribunal.28 This requirement has
been held to be directory, not mandatory.

For example, as observed in the case of SM Holding and Finance Ltd. v. Mysore Machinery
Manufacturers Ltd., where a scheme was not approved by the appropriate majority of creditors
at their meeting, but subsequently the creditors to the extent of requisite majority filed individual
affidavits before the court, that was held to be a sufficient compliance with the statutory
requirements.