LL.B. IV Term
Paper : LB - 4031 - Business
Association – II (Company Law)
Prescribed Legislation: The
Companies Act, 1956 (1 of 1957) 5
Topic 1 : Nature and Kinds of
Companies
(a) ‘Company’ – Definition;
S3. Definitions of “company”, “existing company”,
“private company” and “public company”
(1) In this Act, unless the
context otherwise requires, the expressions “company”, “existing company”,
“private “company” and “public company” shall, subject to the provisions of
subsection (2), have the meanings specified below:
(i) “company” means a company
formed and registered under this Act
or an existing company as
defined in clause (ii);
(ii) “existing company” means
a company formed and registered
under any of the previous companies laws specified below: ……
(iii) “private company” - minimum paid-up capital of 1 lakh rupees or more
(a) restricts the right to
transfer its shares, if any;
(b) limits the number of its members
to fifty not including-
(i) persons who are in the
employment of the company, and
(ii) persons who, having been
formerly in the employment of the company, were members of the company while in
that employment and have continued to be members after the employment ceased;
and
(c) prohibits any invitation to the public to subscribe
for any shares in, or debentures of, the company;
(d) prohibits any
invitation or acceptance of deposits from persons other than its
members, directors or their relatives.
Provided that where two or
more persons hold one or more shares in a company jointly, they shall, for the
purposes of this definition, be treated as a single member;
7[(iv) "public company" means a company
which-
(a) is not a private
company;
(b) has a minimum paid-up
capital of 5 lakh rupees or more(prescribed);
(c) is a private company
which is a subsidiary of a company which is not a private company.]
6[(3) Every private company,
existing - commencement of - Companies (Amendment) Act, 2000, paid-up capital
< 1 lakh à 2years.
(4) Public company, existing-
commencement of - Companies (Amendment)
Act, 2000, paid-up capital < 5 lakh à 2years.
(5) Where a private company
or a public company fails to enhance its paid-up capital in the manner
specified in sub-section (3) or sub-section (4), such company shall be deemed
to be a defunct company within the meaning of section 560 and its name shall be
struck off from the register by the Registrar.
(6) A company registered
under section 25(Charitable Co.) before or after the commencement of Companies
(Amendment) Act, 2000 shall not be required to have minimum paid-up capital
specified in this section.]
Evolution – Comparative
analysis of provisions of Companies Act, 1956 and Companies Bill 2009;
[&
Companies Bill 2012]
Illegal associations
(section 11);
Section 11. Prohibition of
associations and partnerships exceeding certain number.
(1) No company, association
or partnership consisting of more than ten
persons shall be formed for the purpose of carrying on the business of banking, unless it is
registered as a company under this Act, or is formed in pursuance of some other
Indian Law.
(2) No company, association
or partnership consisting of more than twenty
persons shall be formed for the purpose of carrying on any other business
that has for its object the acquisition of gain by the company, association or
partnership or by the individual members thereof, unless it is registered as a
company under this Act, or is formed in pursuance of some other Indian law.
(3) This section shall not
apply to a joint family as such carrying on a business; and where a business is
carried on by two or more joint families, in computing the number of persons
for the purposes of sub-sections (1) and (2), minor members of such families
shall be excluded.
(4) Every member of a
company, association or partnership carrying on business in contravention of
this section shall be personally liable for all liabilities incurred in
such business.
(5) Every person who is a
member of a company, association or partnership formed in contravention of
this section shall be punishable with fine which may extend to 1[ten thousand
rupees].
Comparison
between Company and Partnership and Company and Limited Liability Partnership;
Effects, Advantages and
Disadvantages of Incorporation – Theory of ‘Corporate Personality’/Separate
Legal Entity, Limited
liability of members/shareholders, Holding and disposal of property,
Management divorced from
capital,
Perpetual succession,
Transferable shares,
Power to sue and being sued
(b) Theory of ‘Corporate
Personality’; Company not a citizen of India; Lifting of the Corporate Veil –
Tax Evasion, Enemy Character, Fraud or Improper conduct, Statutory Exceptions
to Limited Liability - Reduction in number of members below minimum (section
45), Mis-description of Company’s Name (section 147), Holding and Subsidiary
Relationship (sections 4 and 212), Personal liability of promoters, directors,
etc. for fraudulent conduct of business (section 542)
Section 45. Members severally
liable for debts where business carried on with fewer than seven, or in the case
of a private company, two members.
If at any time the number of
members of a company is reduced in the case of a public company, below seven,
or in the case of a private company, below two, and the company carries on
business for more than six months while the number is so reduced, every person
who is a member of the company during the time that it so carries on business
after those six months and is cognizant of the fact that it is carrying on
business with fewer than seven members or two members, as the case may be,
shall be severally liable for the payment of the whole debts of the company
contracted during that time, and may be severally sued there for.
Section 147. Publication of
name by company.—
(1) Every company—
(a) shall paint or affix its
name 1[and the address of its registered office], and keep the same painted or
affixed, on the outside of every office or place in which its business is
carried on, in a conspicuous position, in letters easily legible; and if the
characters employed therefor are not those of the language, or of one of the
languages, in general use in that locality, also in the characters of that
language or of one of those languages;
(b) shall have its name engraved
in legible characters on its seal; and
(c) shall have its name 1[and
the address of its registered office] mentioned in legible characters in all
its business letters, in all its bill heads and letter paper, and in all its
notices 2[***] and other official publications; 3[and also have its name so
mentioned in all bills of exchange], hundies, promissory notes, endorsements,
cheques and orders for money or goods purporting to be signed by or on behalf
of the company, and in all bills of parcels, invoices, receipts and letters of
credit of company.
(2) If a company does not
paint or affix its name 2[and the address of its registered office], or keep
the same painted or affixed in the manner directed by clause (a) of sub-section
(1), the company, and every officer of the company who is in default, shall be
punishable with fine which may extend to 4[five hundred rupees] for not so
painting or affixing its name 1[and the address of its registered office], and
for every day during which its name 1[and the address of its registered
office], is not so kept painted or affixed.
(3) If a company fails to
comply with clause (b) or clause (c) of sub-section (1), the company shall be
punishable with fine which may extend to 5[five thousand rupees].
(4) If an officer of a
company or any person on its behalf—
(a) uses, or authorises the
use of any seal purporting to be a seal of the company whereon its name is not
engraven in the manner aforesaid;
(b) issues, or authorises the
issue of any business letter, bill head, letter paper, notice 6[***] or other
official publication of the company wherein 7[its name and the address of its
registered office are] not mentioned in the manner aforesaid;
(c) signs, or authorises to
be signed, on behalf of the company, any bill of exchange, hundi, promissory
note, endorsement, cheque or order for money or goods wherein its name is not
mentioned in the manner aforesaid; or
(d) issues, or authorises the
issue of, any bill of parcels, invoice, receipt or letter of credit of the
company, wherein its name is not mentioned in the manner aforesaid,
such officer or person shall
be punishable with fine which may extend to 8[five thousand rupees], and shall
further be personally liable to the holder of the bill of exchange, hundi,
promissory note, cheque or order for money or goods, for the amount thereof,
unless it is duly paid by the company.
Section 4. Meaning of
“holding company” and “subsidiary”
(1) For the purposes of this
Act, a company shall, subject to the provisions of subsection (3), be deemed to
be a subsidiary of another if, but only if,-
(a) that other controls the
composition of its Board of directors; or
1(b) that other-;
(i) where the first-mentioned
company is an existing company in respect of which the holders of preference
shares issued before the commencement of this Act have the same voting rights
in all respects as the holders of equity shares, exercises or controls more
than half of the total voting power of such company;
(ii) where the
first-mentioned company is any other company, holds more than half in nominal
value of its equity share capital; or]
(c) the first-mentioned
company is a subsidiary of any company which is that other’s subsidiary.
Illustration
Company B is a subsidiary of
Company A, and Company C is a subsidiary of Company B. Company C is a
subsidiary of Company A, by virtue of clause (c) above. If Company D is a
subsidiary of Company C, Company D will be a subsidiary of Company B and
consequently also of Company A, by virtue of clause (c) above; and so on.
(2) For the purposes of
sub-section (1), the composition of a company’s Board of directors shall be
deemed to be controlled by another company if, but only if, that other company
by the exercise of some power exercisable by it at its discretion without the
consent or concurrence of any other person, can appoint or remove the holders
of all or a majority of the directorships; but for the purposes of this
provision that other company shall be deemed to have power to appoint to a
directorship with respect to which any of the following conditions is
satisfied, that is to say:-
(a) that a person cannot be
appointed thereto without the exercise in his favour by that other company of
such a power as aforesaid;
(b) that a person’s
appointment thereto follows necessarily from his appointment as director 2[***]
or manager of, or to any other office or employment in, that other company; or
3[(c) that the directorship
is held by an individual nominated by that other company or a subsidiary
thereof.]
(3) In determining whether
one company is a subsidiary of another,-
(a) any shares held or power
exercisable by that other company in a fiduciary capacity shall be treated as
not held or exercisable by it;
(b) subject to the provisions
of clauses (c) and (d), any shares held or power exercisable-
(i) by any person as a nominee
for that other company (except where that other is concerned only in a
fiduciary capacity); or
(ii) by, or by a nominee for,
a subsidiary of that other company, not being a subsidiary which is concerned
only in a fiduciary capacity, shall be treated as held or exercisable by that
other company;
(c) any shares held or power
exercisable by any person by virtue of the provisions of any debentures of the
first-mentioned company or of a trust deed for securing any issue of such
debentures shall be disregarded;
(d) any shares held or power
exercisable by, or by a nominee for, that other or its subsidiary [not being
held or exercisable as mentioned in clause (c)] shall be treated as not held,
or exercisable by that other, if the ordinary business of that other or its
subsidiary as the case may be, includes the lending of money and the shares are
held or the power is exercisable as aforesaid by way of security only for the
purposes of a transaction entered into in the ordinary course of that business.
(4) For the purposes of this
Act, a company shall be deemed to be the holding company of another if, but
only if, that other is its subsidiary.
(5) In this section, the
expression “company” includes any body corporate, and the expression “equity
share capital” has the same meaning as in sub-section (2) of section 85.
(6) In the case of a body
corporate which is incorporated in a country outside India, a subsidiary or
holding company of the body corporate under the law of such country shall be
deemed to be a subsidiary or holding company of the body corporate within the
meaning and for the purposes of this Act also, whether the requirements of this
section are fulfilled or not.
4[(7) A private company,
being a subsidiary of a body corporate incorporated outside India, which, if
incorporated in India, would be a public company within the meaning of this
Act, shall be deemed for the purposes of this Act to be a subsidiary of a
public company if the entire share capital in that private company is not held
by that body corporate whether alone or together with one or more other bodies
corporate incorporated outside India.]
Section 212. Balance-sheet of
holding company to include certain particulars as to its subsidiaries.—
(1) There shall be attached
to the balance-sheet of a holding company having a subsidiary or subsidiaries
at the end of the financial year as at which the holding company’s
balance-sheet is made out, the following documents in respect of such
subsidiary or of each such subsidiary, as the case may be:—
(a) a copy of the
balance-sheet of the subsidiary;
(b) a copy of its profit and
loss account;
(c) a copy of the report of
its Board of directors;
(d) a copy of the report of
its auditors;
(e) a statement of the
holding company’s interest in the subsidiary as specified in sub-section (3);
(f) the statement referred to
in sub-section (5), if any; and
(g) the report referred to in
sub-section (6), if any.
(2) 1[(a) The balance-sheet
referred to in clause (a) of sub-section (1) shall be made out in accordance
with the requirements of this Act,—
(i) as at the end of the
financial year of the subsidiary, where such financial year coincides with the
financial year of the holding company;
(ii) as at the end of the
financial year of the subsidiary last before that of the holding company where
the financial year of the subsidiary does not coincide with that of the holding
company.]
(b) The profit and loss
account and the reports of the Board of directors and of the auditors, referred
to in clauses (b), (c) and (d) of sub-section (1), shall be made out, in
accordance with the requirements of this Act, for the financial year of the
subsidiary referred to in clause (a).
(c) 2[Where the financial
year of the subsidiary does not coincide with that of the holding company, the
financial year aforesaid] of the subsidiary shall not end on a day which
precedes the day on which the holding company’s financial year ends by more
than six months.
(d) Where the financial year
of a subsidiary is shorter in duration than that of its holding company,
references to the financial year of the subsidiary in clauses (a), (b) and (c)
shall be construed as references to two or more financial years of the
subsidiary the duration of which, in the aggregate, is not less than the
duration of the holding company’s financial year.
(3) The statement referred to
in clause (e) of sub-section (1) shall specify—
(a) the extent of the holding
company’s interest in the subsidiary at the end of the financial year or of the
last of the financial years of the subsidiary referred to in sub-section (2);
(b) the net aggregate amount,
so far as it concerns members of the holding company and is not dealt with in
the company’s accounts, of the subsidiary’s profits after deducting its losses
or vice versa—
(i) for the financial year or
years of the subsidiary aforesaid; and
(ii) for the previous
financial years of the subsidiary since it became the holding company’s
subsidiary;
(c) the net aggregate amount
of the profits of the subsidiary after deducting its losses or vice versa—
(i) for the financial year or
years of the subsidiary aforesaid; and
(ii) for the previous
financial years of the subsidiary since it became the holding company’s
subsidiary,
so far as those profits are
dealt with, or provision is made for those losses, in the company’s accounts.
(4) Clauses (b) and (c) of
sub-section (3) shall apply only to profits and losses of the subsidiary which
may properly be treated in the holding company’s accounts as revenue profits or
losses, and the profits or losses attributable to any shares in a subsidiary
for the time being held by the holding company or any other of its subsidiaries
shall not (for that or any other purpose) be treated as aforesaid so far as
they are profits or losses for the period before the date on or as from which
the shares were acquired by the company or any of its subsidiaries, except that
they may in a proper case be so treated where—
(a) the company is itself the
subsidiary of another body corporate; and
(b) the shares were acquired
from that body corporate or a subsidiary of it,
and for the purpose of
determining whether any profits or losses are to be treated as profits or
losses for the said period, the profit or loss for any financial year of the
subsidiary may, if it is not practicable to apportion it with reasonable
accuracy by reference to the facts, be treated as accruing from day-to-day
during that year and be apportioned accordingly.
(5) Where the financial year
or years of a subsidiary referred to in sub-section (2) do not coincide with
the financial year of the holding company, a statement containing information
on the following matters shall also be attached to the balance-sheet of the
holding company:—
(a) whether there has been
any, and, if so, what change in the holding company’s interest in the
subsidiary between the end of the financial year or of the last of the
financial years of the subsidiary and the end of the holding company’s
financial year;
(b) details of any material
changes which have occurred between the end of the financial year or of the
last of the financial years of the subsidiary and the end of the holding
company’s financial year in respect of—
(i) the subsidiary’s fixed
assets;
(ii) its investments;
(iii) the moneys lent by it;
(iv) the moneys borrowed by
it for any purpose other than that of meeting current liabilities.
(6) If, for any reason, the
Board of directors of the holding company is unable to obtain information on
any of the matters required to be specified by sub-section (4), a report in
writing to that effect shall be attached to the balance-sheet of the holding
company.
(7) The documents referred to
in clauses (e), (f) and (g) of sub-section (1) shall be signed by the persons
by whom the balance-sheet of the holding company is required to be signed.
(8) The Central Government
may, on the application or with the consent of the Board of directors of the
company, direct that in relation to any subsidiary, the provisions of this
section shall not apply, or shall apply only to such extent as may be specified
in the direction.
(9) If any such person as is
referred to in sub-section (6) of section 209 fails to take all reasonable
steps to comply with the provisions of this section, he shall in respect of
each offence, be punishable with imprisonment for a term which may extend to
six months, or with fine which may extend to 3[ten thousand rupees], or with
both:
Provided that in any
proceedings against a person in respect of an offence under this section, it
shall be a defence to prove 4[***] that a competent and reliable person was
charged with the duty of seeing that the provisions of this section were
complied with and was in a position to discharge that duty:
Provided further that no
person shall be sentenced to imprisonment for any such offence unless it was
committed wilfully.
(10) If any person not being
a person referred to in sub-section (6) of section 209, having been, charged by
the 5[***] 6[managing director, manager,] or Board of directors, as the case
may be, with the duty of seeing that the provisions of this section are
complied with, makes default in doing so, he shall, in respect of each offence,
be punishable with imprisonment for a term which may extend to six months, or
with fine which may extend to 3[ten thousand rupees], or with both:
Provided that no person shall
be sentenced to imprisonment for any such offence unless it was committed
wilfully.
Section 542. Liability for
fraudulent conduct of business.—
(1) If in the course of the
winding up of a company, it appears that any business of the company has been
carried on, with intent to defraud creditors of the company or any other
persons or for any fraudulent purpose, the 1[Tribunal], on the application of
the Official Liquidator, or the liquidator or any creditor or contributory of
the company, may, if it thinks it proper so to do, declare that any persons who
were knowingly parties to the carrying on of the business in the manner
aforesaid shall be personally responsible, without any limitation of liability,
for all or any of the debts or other liabilities of the company as the
1[Tribunal] may direct.
On the hearing of an
application under this sub-section, the Official Liquidator or the liquidator,
as the case may be, may himself give evidence or call witnesses.
(2) (a) Where the 1[Tribunal]
makes any such declaration, it may give such further directions as it thinks
proper for the purpose of giving effect to that declaration.
(b) In particular, the
1[Tribunal] may make provision for making the liability of any such person
under the declaration a charge on any debt or obligation due from the company
to him, or on any mortgage or charge or any interest in any mortgage or charge
on any assets of the company held by or vested in him, or any person on his
behalf, or any person claiming as assignee from or through the person liable or
any person acting on his behalf.
(c) The 1[Tribunal] may, from
time to time, make such further order as may be necessary for the purpose of
enforcing any charge imposed under this sub-section.
(d) For the purpose of this
sub-section, the expression “assignee” includes any person to whom or in whose
favour, by the directions of the person liable, the debt, obligation, mortgage
or charge was created, issued or transferred or the interest was created, but
does not include an assignee for valuable consideration (not including
consideration by way of marriage) given in good faith and without notice of any
of the matters on the ground of which the declaration is made.
(3) Where any business of a
company is carried on with such intent or for such purpose as is mentioned in
sub-section (1), every person who was knowingly a party to the carrying on of
the business in the manner aforesaid, shall be punishable with imprisonment for
a term which may extend to two years, or with fine which may extend to 2[fifty
thousand rupees], or with both.
(4) This section shall apply,
notwithstanding that the person concerned may be criminally liable in respect
of the matters on the ground of which the declaration is to be made.
1. Salomon
v. Salomon & Co. , Ltd. (1897) A.C. 22
(H.L.) : (1895-95) All ER Rep. 33
Basic principle of the
separation of a company from its shareholders and directors.
Background
Aron Salomon was a boot maker
and had run the successful business for 30 years as a sole trader. In a point
of time, he decided to give five of his sons the shares of the business. To
make it official, he turned the business into a company under the English
Companies Act. The total shares were 20,007 worth £1 each. Instead of issuing
them to the public, Salomon took 20,001 of the shares and gave the rest to his
wife and sons, each of them received a share. Salomon and his two eldest sons
were then appointed as directors of the company.
The total worth of the company
was £39,000, consisting of shares worth £20,000 and debentures worth £10,000
which were issued to Salomon; £1,000 cash and £8,000 unsecured debts. The court
noted that the value was excessively overestimated.
Financial Difficulty and
Liquidation
After a while, the company
was teetering as a result of strikes in the industry. Salomon injected more
funds, which were apparently not sufficient to put it in stability. He then
borrowed £5,000 from Edmund Broderip by reissuing the debentures in Broderip’s
name.
The injection of funds was
proven insufficient, and the business deteriorated further. Broderip appointed
a receiver to realise his security, and when the company default, the
liquidator was appointed.
The liquidator found that the
company’s assets were worth only £6,000. £5,000 was used to repay Broderip’s
claim, and the remaining £1,000 went into Salomon’s account as a beneficial
owner of the debentures. If these were granted, there would have been nothing
left to repay £8,000 to the unsecured creditors.
The liquidator counterclaimed
Broderip’s claim by stating that the debentures were invalid. The liquidator
also stated that the formation of the company was a fraud by deceiving the
unsecured creditors with the excessive price of the business.
Hearing and Decision [Lord
Halsbury LC ]
The House of Lords
unanimously decided in Salomon’s favour. It was in accordance with Companies
Act 1862 (UK
The House of Lords also
stated that the fact that Salomon owned 20,001 of the total 20,007 made no
difference. A separate entity is created following the incorporation, even if
all the company’s shares are owned by a single person
2. State Trading Corporation v. CTO, AIR 1963 SC 811 (Source:
IndianKanoon.Org)
Facts: The State Trading
Corporation of India is a
private limited company registered under the Indian Companies Act, 1956, with
its head Office at Delhi Bihar sought to assess the
Corporation to sales tax under their respective Sales Tax Acts and issued
notices of demand. The Corporation claiming to be an Indian citizen filed
petitions under Art. 32 of the Constitution for quashing the said proceedings on the ground
that they infringed its fundamental rights under Art. 19(1) (f) and (g) of the
Constitution. Preliminary objections having been taken by the respondents to
the maintainability of the said
petitions, the Constitution Bench hearing the matters referred the two
following questions for decision by the
special bench.
"(1) Whether the State
Trading Corporation, a company registered under the Indian Companies Act, 1956,
is a citizen within the meaning of Art. 19 of the Constitution and can ask for
the enforcement of fundamental rights granted to citizens under the said
article; and
(2) whether the State Trading
Corporation is, notwithstanding the formality of incorporation under the Indian
Companies Act, 1956, in substance, a department -,-id organ of the Government of India with the
entirety of its capital contributed by Government; and can it claim to enforce
fundamental rights under Part III of the Constitution against the State as
defined in Art. 12 thereof.
Chiranjit Lal Chowdhuri v.
Union of India [1950] S.C.R.
869, Dwarkadas Srinivas of Bombay
Nothing in Art19 prohibits
enforcement by the citizen of the fundamental rights vested in it. For the
application of Art19, two conditions are necessary-(1) that the claimant to the
protection of the right must be a citizen and (2) that the right infringed must
be one of the fundamental freedoms mentioned in Art19.
Decision of the questions
above -
(1)
Affirmative
(2)
First part of second
question – negative
(3)
Second part of
second question - even if the State Trading Corporation be regarded as a
department or organ of the Government of India, it will, if it be a citizen
competent to enforce fundamental rights under Part III of the Constitution
against the State as defined in Art. 12 of the Constitution.
3. TELCO v. State of Bihar
The petitioners were ordered
to pay sales-tax on account of certain transactions made by them in the State
of Bihar
Held.- The petitions under
Art. 32 were incompetent although in each of them one or two of the
share-holders of the petitioning companies or corporations had also joined.
Article 19 guarantees rights to
citizens as such and associations cannot lay claim to the fundamental rights
guaranteed by that Article solely on the basis of their being an aggregation of
citizens. Once a company or a corporation is formed, the business which is
carried on by the said company or corporation is the business of the company or
corporation and is not the business of the citizens who got the company or
corporation formed or incorporated and the rights of the incorporated body must
be judged on that footing and cannot be judged on the assumption that they are
the right attributable to the business of individual citizens. The petitioners
cannot be heard to say that their share-holders should be allowed to file the
present petitions on the ground that in substance, the corporations and
companies are nothing more than association of share-holders and members
thereof. If their contention is accepted, it would really mean that what the
corporations or companies cannot achieve directly, they can achieve indirectly
by relying upon the doctrine of lifting the veil. If the corporations and
companies are not citizens, it means that the Constitution intended that they
should not get the benefit of Art. 19.
The position of a corporation
is that it is in law equal to a natural person and has a legal entity of its
own. That entity is entirely separate from that of its shareholders. It bears
its own name and has a seal of its own. Its assets are separate and distinct from
those of its members. It can sue and be sued exclusively for its own purpose.
Its creditors cannot obtain satisfaction from the assets of its members. The liability of the members
or share holders is limited to the capital invested by them. The creditors of
the members have no right to the assets of the corporation. However. There are
some exceptions to the rule that the
corporation or a company has a jurisfic or legal entity and the doctrine of
lifting the veil of a corporation and examining its face in substance has been
applied in many cases but the same does not apply in the present case.
4. R.C. Cooper v. Union of India
Banking Companies
(Acquisition and Transfer of Undertakings) Act 22 of 1969-Sections 4, 5, 6, 15(2) and Schedule II-
Fundamental rights, infringement of- Legislative competence- Constitution of
India, Arts. 14, 19 and 31 (2), Entries 43, 44, 45 List I, Entry 42 List III
Seventh Schedule.
Constitution of India
Constitution of India
Constitution of India
Constitution of India India
Constitution of India
Legislative competence-Entry
45 List I, Entry 42, List III Seventh Schedule-"Banking", meaning
of-"Property" meaning of-Banking Companies (Acquisition and Transfer
of Undertakings-) Act, 1969 Section 4-"Undertaking", meaning
of-Validity of law acquiring undertaking.
Held
(1) A company registered
under the Indian Companies Act is a legal person, separate and distinct from
its individual members. Hence a shareholder, a depositor or a director is not
entitled to move a petition for infringement of the rights of the company
unless by the action impugned his rights are also infringed. But, if the State
action impairs the right of the share-holders as well as of the company the
Court will not, concentrating merely upon the technical operation of the action
deny itself jurisdiction to grant relief. In the -present case the petitioner's
claim was that by the Act and the
Ordinance the rights guaranteed to him under Articles 14, 19 and 31 of the
Constitution were impaired.
He thus challenged the infringement of his own rights and not of the Banks [STO
v CTO & TELCO case held inapplicable in light of present facts]
(2) (i) Exercise of the power
to promulgate an Ordinance under Article 123
is strictly conditioned. The clause relating to the satisfaction is composite;
the satisfaction relates to the
existence of circumstances, as well as to the necessity to take immediate
action on account of those circumstances. Determination by the President of the
existence of circumstances and the necessity to take immediate action on which
the satisfaction depends, is not declared final. [Since the Act was declared
invalid no opinion was expressed on the extent of the jurisdiction of the
court to examine whether the condition
relating to satisfaction of the
President was fulfilled.]
(ii) Act 22 of 1969 was
within the legislative competence of Parliament. The contention that Parliament
was incompetent to legislate for acquisition of the named Banks in so far as it
related to assets of the non-banking business had to fail for two reasons : (a)
there was no evidence that the named Banks held any assets for any distinct
nonbanking business, and (b) the acquisition was not shown to fall within any
entry in List II of Seventh Schedule.
(iii) (a) Articles 19(1)(f)
and 31(2) are not mutually exclusive. Under the Constitution the extent of
protection against impairment of a fundamental right is determined not by the
object of the legislature nor by the form of the action, but by its direct
operation upon the individual's rights. the nature and extent of the protection
of the fundamental rights is measured not by the operation of the State action
upon the rights of the individual but by its object. By s. 15(2) (e) of the Act the Banks were
entitled to engage in business other than banking. But a business organisation
deprived of its entire assets and
undertaking, its managerial and other staff, its premises and its name, even if it had a right to carry on
non-banking business would not be able to do so, specially, when even the
portion of the value of its
undertaking made payable to it as compensation was not made immediately payable. Where restrictions
imposed upon the carrying on of a business are so stringent that the business
cannot, in practice, be carried on,
the Court will regard
imposition of the restrictions
as unreasonable.
(iv) When, after acquiring the assets, undertaking, organisation,
goodwill and the names of the named Banks they are prohibited from carrying on
banking business, whereas, other banks, Indian as well as foreign, are
permitted to carry on banking business, a flagrantly
hostile discri- mination is practised. There is no explanation why the named
Banks are specially selected for being subjected to this disability. Section
15(2) of the Act-which by the clearest
implication prohibited the named Banks from carrying on banking business is,
therefore, liable to be struck down.
The named Banks, though
theoretically competent are, in
substance, prohibited from carrying on non-banking business. For reasons set
out for holding that the restriction
is unreasonable, the guarantee of equality was impaired
by preventing the named Banks from carrying on
nonbanking business. [In the absence of any reliable data the Court did not express any opinion on the question
whether selection of the undertaking of
some out of many banking institutions
for compulsory acquisition
is liable to be struck down as hostile
discrimination.]
5. Daimler Co., Ltd. v. Continental Tyre
and Rubber Co. (Great
Britain
Continental sued Daimler for
money due in respect of goods supplied. Daimler claimed that the Company was
actually owned by German Nationals and paying them was illegal u/ s 1(2) the
Trading with the Enemy Act
The Court lifted the corporate
veil to discover if this was so, and found as a fact that it was the Germans
who were operating the business. D was therefore successful in its defence. (All
except one share were held by German nationals.)
6. Lee v. Lee’s Air Farming, Ltd. (1960) 3 All E.R. 420
Catherine Lee’s husband
Geoffrey Lee formed the company through Christchurch
accountants, which worked in Canterbury ,
New Zealand
The Court of Appeal of New Zealand
The Privy Council advised
that Mrs Lee was entitled to compensation, since it was perfectly possible for
Mr Lee to have a contract with the company he owned. The company was a separate
legal person. Lord Morris of Borth-y-Gest said “It was never suggested (nor in
their Lordships’ view could it reasonably have been suggested) that the company
was a sham or a mere simulacrum. It is well established that the mere fact that
someone is a director of a company is no impediment to his entering into a
contract to serve the company. If, then, it be accepted that the respondent
company was a legal entity their Lordships see no reason to challenge the
validity of any contractual obligations which were created between the company
and the deceased...
It is said that the deceased
could not both be under the duty of giving orders and also be under the duty of
obeying them. But this approach does not give effect to the circumstance that
it would be the company and not the deceased that would be giving the orders.
Control would remain with the company whoever might be the agent of the company
to exercise...
There appears to be no great
difficulty in holding that a man acting in one capacity can make a contract
with himself in another capacity. The company and the deceased were separate
legal entities.”
7. In re Sir Dinshaw Maneckjee Petit, AIR 1927 Bom. 371
“The court has the power to
disregard corporate entity if it is used for tax evasion or to circumvent tax
obligation” – well permissible even in the absence of statutory provisions. (Juggilal
v CIT, 1969 Case)
Assesse was a wealthy man
enjoying huge dividend & interest income – formed 4 pvt companies &
agreed with each to hold a block of investment as an agent for it. Income
received was credited in the accounts of the company but the company handed
back the amount to him as a pretended loan. This way he divided his income into
4 parts in a bid to reduce his tax liability.
Held that the company was
formed by the assessee purely & simply as a means of avoiding super-tax and
the company was nothing more than the assessee himself. It did no business, but
was created simply as a legal entity to ostensibly receive the dividends &
interests & to hand them over to the assessee as pretended loans.”
8. CIT v. Meenakshi Mills Ltd., AIR 1967 SC 819 : (1967) 1 SCR 934
(Source: IndianKanoon.Org)
The assessee-companies,
carried on business in Madurai Madurai Madurai India
HELD: The appeals must be
allowed
The High Court erred in law
in interfering with the findings of the appellate Tribunal. In a reference the
High Court must accept the findings of fact reached by the appellate Tribunal
and it is for the party who applied for a reference to challenge those findings
of fact first by an application under s. 66(1). If the party failed to file an
application, under s. 66(1) expressly raising the question about the validity
of the findings of fact, he is not entitled to urge before the High Court that
the findings are vitiated for any reason.
India Cements Ltd. v.
Commissioner of Income-tax, Madras
In the context of the facts
as found by the Tribunal, the entire transactions formed part of a basic
arrangement or scheme between the
creditor and the debtor that the money should be brought into British
India after it was taken by the borrower outside the taxable
territory. Section 42 requires, in the first place, that money should have been
lent at interest outside the taxable territory, in the second place, income,
profits or gains should accrue or arise directly or indirectly from such money so
lent at interest, and in the third place, that the money should be brought into
the taxable territories in cash or in kind. If all these conditions are
fulfilled, then the section lays down that the interest shall be deemed to be
interest accruing or arising within the taxable territories. The provision in
s. 42(1), which brings within the scope of the charging section interest earned
out of money lent outside, but brought into British India, was not ultra vires
the Indian Legislature on the ground that it was extra- territorial in
operation.
The section contemplates the
bringing of money into British India with the
knowledge of the lender and borrower and this gives rise to a real territorial
connection. This knowledge must be an integral part of the transaction. A. H.
Wadia v. Commissioner of
Income-tax, Bombay 17 I.T.R. 63, approved.
In certain exceptional cases
the Court is entitled to lift the veil of corporate entity and pay regard to
the economic realities behind the legal facade. For example, the Court has
power to disregard the corporate entity if it is used for tax evasion or to
circumvent tax obligation. [941 E] Devid Payne & Co. Ltd. in re, Young v.
David Payne & Co., Ltd. [1904] 2 Ch.
9. Workmen v. Associated Rubber Industries Ltd. (1985) 4 SCC 114 :
(1986) 59 Comp. Cas. 134 (SC)
The company was formed for
the purpose of not giving workmen compensation by dividing number of employees
so that the number goes below the statutory limit. The SC said for such
compensation point of view the new company should be combined with old company.
Here companies are not considered as separate legal entity.
10. Gilford Motor Co., Ltd. v. Horne (1933) 1 Ch.
(Source:
http://vijayhighcourt1.blogspot.in/2008/09/exceptions-to-corporate-personality.html)
Horne was at one time the
Managing Director of Gilford Motors. One of the terms of his employment
contract was that, in the event that he leaves the Company, he will not solicit
the customers of the Company. Eventually Mr. Horne left the Company and setup
his own Company by the name of JM Horne & Co Ltd. through which he had
business dealings with the previous Company’s clients. Gilford Motors sued Mr.
Horne.
Horne’s claimed that it was
not him that was doing the business but the Company and that under Company Law
they were 2 different people. However the Court was not convinced and lifted
the veil of incorporation. In this instance, Mr. Hornes was just trying to hide
behind a Corporate veil to steal business from his former employer. Where a
fraud is perpetrated, the Court will lift the Corporate veil.
11. Subhra Mukherjee v. Bharat Coking Coal Ltd. (2000) 3 SCC 312
On nationalization of the
coal mines of a company, it was found that it had sold an item of its immovable
property to the wife of one of its directors. The Court lifted the corporate
veil to probe into the genuineness of the transaction and discovered that the
transaction was a sham. The property continued to be that of the company and
became vested in the Government.
12. Kapila Hingorani v. State of Bihar
The Government not allowed to
shelter behind the lack of resources in discharging its obligation to pay wages
of the employees of a Govt company.
(c) Kinds of Companies – Public and Private Companies (sections 3, 43);
S43. Consequences of default in complying with
conditions constituting a company a private company.—
Where the articles of a
company include the provisions which, under clause (iii) of sub-section (1) of
section 3, are required to be included in the articles of a company in order to
constitute it a private company, but default is made in complying with any of
those provisions, the company shall cease to be entitled to the privileges and
exemptions conferred on private companies by or under this Act, and this Act
shall apply to the company as if it were not a private company:
Provided that the 1[Central
Government] on being satisfied that the failure to comply with the conditions
was accidental or due to inadvertence or to some other sufficient cause, or
that on other grounds it is just and equitable to grant relief, may, on the
application of the company or any other person interested and on such terms and
conditions as seem to the 1[Central Government] just and expedient, order that
the company be relieved from such consequences as aforesaid.
—————————–
Holding and Subsidiary Companies (section 4);
Section 4. Meaning of
“holding company” and “subsidiary”
(1) For the purposes of this
Act, a company shall, subject to the provisions of subsection (3), be deemed to
be a subsidiary of another if, but only if,-
(a) that other controls the
composition of its Board of directors; or
1(b) that other-;
(i) where the first-mentioned
company is an existing company in respect of which the holders of preference
shares issued before the commencement of this Act have the same voting rights
in all respects as the holders of equity shares, exercises or controls more
than half of the total voting power of such company;
(ii) where the
first-mentioned company is any other company, holds more than half in nominal
value of its equity share capital; or]
(c) the first-mentioned
company is a subsidiary of any company which is that other’s subsidiary.
Illustration
Company B is a subsidiary of
Company A, and Company C is a subsidiary of Company B. Company C is a
subsidiary of Company A, by virtue of clause (c) above. If Company D is a
subsidiary of Company C, Company D will be a subsidiary of Company B and
consequently also of Company A, by virtue of clause (c) above; and so on.
(2) For the purposes of
sub-section (1), the composition of a company’s Board of directors shall be
deemed to be controlled by another company if, but only if, that other company
by the exercise of some power exercisable by it at its discretion without the
consent or concurrence of any other person, can appoint or remove the holders
of all or a majority of the directorships; but for the purposes of this
provision that other company shall be deemed to have power to appoint to a
directorship with respect to which any of the following conditions is
satisfied, that is to say:-
(a) that a person cannot be
appointed thereto without the exercise in his favour by that other company of
such a power as aforesaid;
(b) that a person’s
appointment thereto follows necessarily from his appointment as director 2[***]
or manager of, or to any other office or employment in, that other company; or
3[(c) that the directorship
is held by an individual nominated by that other company or a subsidiary
thereof.]
(3) In determining whether
one company is a subsidiary of another,-
(a) any shares held or power
exercisable by that other company in a fiduciary capacity shall be treated as
not held or exercisable by it;
(b) subject to the provisions
of clauses (c) and (d), any shares held or power exercisable-
(i) by any person as a
nominee for that other company (except where that other is concerned only in a
fiduciary capacity); or
(ii) by, or by a nominee for,
a subsidiary of that other company, not being a subsidiary which is concerned
only in a fiduciary capacity, shall be treated as held or exercisable by that
other company;
(c) any shares held or power
exercisable by any person by virtue of the provisions of any debentures of the
first-mentioned company or of a trust deed for securing any issue of such
debentures shall be disregarded;
(d) any shares held or power
exercisable by, or by a nominee for, that other or its subsidiary [not being
held or exercisable as mentioned in clause (c)] shall be treated as not held,
or exercisable by that other, if the ordinary business of that other or its
subsidiary as the case may be, includes the lending of money and the shares are
held or the power is exercisable as aforesaid by way of security only for the
purposes of a transaction entered into in the ordinary course of that business.
(4) For the purposes of this
Act, a company shall be deemed to be the holding company of another if, but
only if, that other is its subsidiary.
(5) In this section, the
expression “company” includes any body corporate, and the expression “equity
share capital” has the same meaning as in sub-section (2) of section 85.
(6) In the case of a body
corporate which is incorporated in a country outside India, a subsidiary or
holding company of the body corporate under the law of such country shall be
deemed to be a subsidiary or holding company of the body corporate within the
meaning and for the purposes of this Act also, whether the requirements of this
section are fulfilled or not.
4[(7) A private company,
being a subsidiary of a body corporate incorporated outside India, which, if
incorporated in India, would be a public company within the meaning of this
Act, shall be deemed for the purposes of this Act to be a subsidiary of a
public company if the entire share capital in that private company is not held
by that body corporate whether alone or together with one or more other bodies
corporate incorporated outside India.]
Limited and Unlimited Companies (sections 12(2)(c),
27, 32);
Section 12. Mode of forming
incorporated company.
(1) Any seven or more
persons, or where the company to be formed will be a private company, any two
or more persons, associated for any lawful purpose may, by subscribing their
names to a memorandum of association and otherwise complying with the
requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability.
(2) Such a company may be
either—
(a) a company having the
liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them (in this Act termed “a company
limited by shares”);
(b) a company having the
liability of its members limited by the memorandum to such amount as the
members may respectively undertake by the memorandum to contribute to the
assets of the company in the event of its being wound up (in this Act termed “a
company limited by guarantee”); or
(c) a company not having any
limit on the liability of its members in this Act termed “an unlimited
company”).
Section 27. Regulations
required in case of unlimited company, company limited by guarantee or private
company limited by shares.—
(1) In the case of an
unlimited company, the articles shall state the number of members with which
the company is to be registered and, if the company has a share capital the
amount of share capital with which the company is to be registered.
(2) In the case of a company
limited by guarantee, the articles shall state the number of members with which
the company is to be registered.
(3) In the case of a private
company having a share capital, the articles shall contain provisions relating
to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of
sub-section (1) of section 3; and in the case of any other private company, the
articles shall contain provisions relating to the matters specified in the said
sub-clauses (b) and (c).
Section 32. Registration of
unlimited company as limited, etc.—
(1) Subject to the provisions
of this section,—
(a) a company registered as
unlimited may register under this Act as a limited company; and
(b) a company already
registered as a limited company may re-register under this Act.
(2) On registration in
pursuance of this section, the Registrar shall close the former registration of
the company, and may dispense with the delivery to him of copies of any
documents with copies of which he was furnished on the occasion of the original
registration of the company; but, save as aforesaid, the registration shall
take place in the same manner and shall have effect, as if it were the first
registration of the company under this Act.
(3) The registration of an
unlimited company as a limited company under this section shall not affect any
debts, liabilities, obligations or contracts incurred or entered into, by, to,
with or on behalf of, the company before the registration, and those debts,
liabilities, obligations and contracts may be enforced in the manner provided
by Part IX of this Act in the case of a company registered in pursuance of that
Part.
Share-holding and Guarantee Companies (sections 12, 37);
Section 37. Provision as to
companies limited by guarantee.—
(1) In the case of a company
limited by guarantee and not having a share capital, and registered on or after
the first day of April, 1914, every provision in the memorandum or articles or
in any resolution of the company purporting to give any person a right to
participate in the divisible profits of the company otherwise than as a member
shall be void.
(2) For the purpose of the
provisions of this Act relating to the memorandum of a company limited by
guarantee and of this section, every provision in the memorandum or articles,
or in any resolution, of any company limited by guarantee and registered on or
after the first day of April, 1914, purporting to divide the undertaking of the
company into shares or interests, shall be treated as a provision for a share
capital, notwithstanding that the nominal amount or number of the shares or
interests is not specified thereby.
Producer Companies (Part – IXA, sections 581A –
581ZT);
Provisions relating to Un-registered Companies
(sections 582-590);
Foreign Companies (sections 591-608);
Application of the Companies Act, 1956 to Companies
governed by Special Acts e.g. insurance, banking, electricity supply, etc.
(section 616);
[applicable
to the extent provisions are inconsistent with the special act(banking,
insurance) ]
Government Companies (section 617) [Greater than 51% share (State n Central any combo)]
Topic 2 : Company’s
Constitutional Documents
(a) Memorandum of Association
and Articles of Association – Importance, Registration and Its Effect; Binding
Nature; Clauses in Memorandum of Association: Name, Registered Office, Objects,
Liability and Capital; Contents of Articles of Association
(sections 12 - 38)
12. Mode of forming incorporated
company.
(1) Any seven or more
persons, or where the company to be formed will be a private company, any two
or more persons, associated for any lawful purpose may, by subscribing their
names to a memorandum of association and otherwise complying with the
requirements of this Act in respect of registration, form an incorporated
company, with or without limited liability.
(2) Such a company may be
either—
(a) a company having the
liability of its members limited by the memorandum to the amount, if any,
unpaid on the shares respectively held by them (in this Act termed “a company
limited by shares”);
(b) a company having the
liability of its members limited by the memorandum to such amount as the
members may respectively undertake by the memorandum to contribute to the
assets of the company in the event of its being wound up (in this Act termed “a
company limited by guarantee”); or
(c) a company not having any
limit on the liability of its members in this Act termed “an unlimited
company”).
13. Requirements with respect
to memorandum.—
(1) The memorandum of every
company shall state—
(a) the name of the company
with “Limited” as the last word of the name in the case of a public limited
company, and with “Private Limited” as the last word of the name in the case of
a private limited company;
(b) the State in which the
registered office of the company is to be situate; 1[***]
2[(c) in the case of a
company in existence immediately before the commencement of the Companies
(Amendment) Act, 1965, the objects of the company;
(d) in the case of a company
formed after such commencement,—
(i) the main objects of the
company to be pursued by the company on its incorporation and objects
incidental or ancillary to the attainment of the main objects;
(ii) other objects of the
company not included in sub-clause (i); and
(e) in the case of companies
(other than trading corporations), with objects not confined to one State, the
States to whose territories the objects extend.]
(2) The memorandum of a
company limited by shares or by guarantee shall also state that the liability
of its members is limited.
(3) The memorandum of a
company limited by guarantee shall also state that each member undertakes to
contribute to the assets of the company in the event of its being wound up
while he is a member or within one year after he ceases to be a member, for
payment of the debts and liabilities of the company, or of such debts and
liabilities of the company as may have been contracted before he ceases to be a
member, as the case may be, and of the costs, charges and expenses of winding
up, and for adjustment of the rights of the contributories among themselves,
such amount as may be required, not exceeding a specified amount.
(4) In the case of a company
having a share capital—
(a) unless the company is an
unlimited company, the memorandum shall also state the amount of share capital
with which the company is to be registered and the division thereof into shares
of a fixed amount;
(b) no subscriber of the
memorandum shall take less than one share; and
(c) each subscriber of the
memorandum shall write opposite to his name the number of shares he takes.
comments
A private limited company
cannot exceed the powers conferred on it under the Memorandum of Association;
Turner Morrison and Co. Ltd. v. Hungerford Investment Trust Ltd., (1972) 42
Comp. Cas. 512: AIR 1972 SC 1311.
———————————-
1. The word “and” omitted by
Act 31 of 1965, sec. 5 (w.e.f. 15-10-1965).
2. Subs. by Act 31 of 1965,
sec. 5, for clause (c) (w.e.f. 15-10-1965).
14. Form of memorandum.—
The memorandum of association
of a company shall be in such one of the Forms in Tables B, C, D and E in
Schedule I as may applicable to the case of the company, or in a Form as near
thereto as circumstances admit.
15. Printing and signature of
memorandum.—
The memorandum shall—
(a) be printed,
(b) be divided into
paragraphs numbered consecutively, and
(c) be signed by each
subscriber (who shall add his address, description and occupation, if any,) in
the presence of at least one witness who shall attest the signature and shall
likewise add his address, description and occupation, if any.
Ss 16 to 31 discussed below
in Topic 2(c)
Section 32. Registration of
unlimited company as limited, etc.—
(1) Subject to the provisions
of this section,—
(a) a company registered as
unlimited may register under this Act as a limited company; and
(b) a company already
registered as a limited company may re-register under this Act.
(2) On registration in
pursuance of this section, the Registrar shall close the former registration of
the company, and may dispense with the delivery to him of copies of any
documents with copies of which he was furnished on the occasion of the original
registration of the company; but, save as aforesaid, the registration shall
take place in the same manner and shall have effect, as if it were the first
registration of the company under this Act.
(3) The registration of an
unlimited company as a limited company under this section shall not affect any
debts, liabilities, obligations or contracts incurred or entered into, by, to,
with or on behalf of, the company before the registration, and those debts,
liabilities, obligations and contracts may be enforced in the manner provided
by Part IX of this Act in the case of a company registered in pursuance of that
Part.
33. Registration of
memorandum and articles.—
(1) There shall be presented
for registration, to the Registrar of the State in which the registered office
of the company is stated by the memorandum to be situate—
(a) the memorandum of the
company;
(b) its articles, if any; and
1[(c) the agreement, if any,
which the company proposes to enter into with any individual for appointment as
its managing or whole-time director or manager.]
(2) A declaration by an
advocate of the Supreme Court or of a High Court, an attorney or a pleader
entitled to appear before a High Court, or 2[a Secretary or a chartered
accountant in whole-time practice in India] who is engaged in the formation of
a company, or by a person named in the articles as a director 3[***] manager or
secretary of the company, that all the requirements of this Act and the rules
thereunder have been complied with in respect of registration and matters
precedent and incidental thereto, shall be filed with the Registrar; and the
Registrar may accept such a declaration as sufficient evidence of such
compliance.
4[Explanation.—For the
purposes of this sub-section, “chartered accountant in whole-time practice in
India” means a chartered accountant within the meaning of clause (b) of
sub-section (1) of section 2 of the Chartered Accountants Act, 1949 (38 of
1949) who is practising in India and who is not in full-time employment.]
(3) If the Registrar is
satisfied that all the requirements aforesaid have been complied with by the
company and that it is authorised to be registered under this Act, he shall
retain and register the memorandum, the articles, if any, and the agreement
referred to in clause (c) of sub-section (1), if any.
—————————–
1. Subs. by Act 31 of 1988,
sec. 6, for clause (c) (w.e.f. 15-6-1988).
2. Subs. by Act 31 of 1988,
sec. 6, for “a chartered accountant practising in India
3. The words “managing agent,
secretaries and treasurers,” omitted by Act 31 of 1988, sec. 6 (w.e.f.
15-6-1988).
4. Ins. by Act 31 of 1988,
sec. 6 (w.e.f. 15-6-1988).
34. Effect of registration.—
(1) On the registration of
the memorandum of a company, the Registrar shall certify under his hand that
the company is incorporated and, in the case of a limited company that the
company is limited.
(2) From the date of
incorporation mentioned in the certificate of incorporation, such of the
subscribers of the memorandum and other persons, as may from time to time be
members of the company, shall be a body corporate by the name contained in the
memorandum, capable forthwith of exercising all the functions of an
incorporated company, and having perpetual succession and a common seal, but
with such liability on the part of the members to contribute to the assets of
the company in the event of its being wound up as is mentioned in this Act.
comments
(i) In the expanding horizons
of modern jurisprudence, lifting of corporate veil is permissible and its
frontiers are unlimited; State of Uttar Pardesh v. Renusagar Power Co., AIR
1988 SC 1737.
(ii) The corporate veil may
be lifted where a statute itself contemplates lifting the veil, or fraud or
improper conduct is intended to be prevented, or a taxing statute or a
beneficent statute is sought to be evaded or where associated companies are
inextricably connected as to be, in reality, part of one concern; Life
Insurance Corporation of India v. Escorts Ltd., (1986) 59 Comp. Cas. 548: 1986
(1) Com LJ 91: AIR 1986 SC 1370.
(iii) A company registered under
the Companies Act is a legal person, separate and distinct from its individual
members. Property of the company is not the property of the shareholders.
Director of a company is merely its agent for the purpose of management; Rustom
Cavasjee Cooper v. Union of India, (1970) 40 Comp. Cas. 325: 1970 (1) Comp LJ
244: AIR 1970 SC 564.
(iv) The shareholder of a
company is not the owner of its assets; he has merely an interest in the
company measured by a sum of money for the purpose of liability and a right to
participate in the profits of the company subject to the contract contained in
the articles of association. Director of a company is merely its agent for the
purpose of management; Rustom Cavasjee Cooper v. Union of India, (1970) 40
Comp. Cas. 325: 1970 (1) Com LJ 244: AIR 1970 SC 564.
(v) The Court is entitled to
lift the mask of corporate entity if the conception is used for tax evasion or
to circumvent tax obligation or to perpetrate fraud; Juggilal Kamlapat v.
Commissioner of Income Tax, 1969 (2) Com LJ 188: AIR 1969 SC 932.
(vi) An incorporated company
has a separate existence and the law recognizes it as a legal person separate
and distinct from its members. A new legal personality emerges from the moment
of incorporation but the members who form the incorporated company do not pool
their status or their personality; State Trading Corporation of India
35. Conclusiveness of
certificate of incorporation.—
A certificate of
incorporation given by the Registrar in respect of any association shall be
conclusive evidence that all the requirements of this Act have been complied
with in respect of registration and matters precedent and incidental thereto,
and that the association is a company authorised to be registered and duly
registered under this Act.
36. Effect of memorandum and
articles.—
(1) Subject to the provisions
of this Act, the memorandum and articles shall, when registered, bind the
company and the members thereof to the same extent as if they respectively had
been signed by the company and by each member, and contained covenants on its
and his part to observe all the provisions of the memorandum and of the
articles.
(2) All money payable by any
member to the company under the memorandum or articles shall be a debt due from
him to the company.
37. Provision as to companies
limited by guarantee.—
(1) In the case of a company
limited by guarantee and not having a share capital, and registered on or after
the first day of April, 1914, every provision in the memorandum or articles or
in any resolution of the company purporting to give any person a right to
participate in the divisible profits of the company otherwise than as a member
shall be void.
(2) For the purpose of the
provisions of this Act relating to the memorandum of a company limited by
guarantee and of this section, every provision in the memorandum or articles,
or in any resolution, of any company limited by guarantee and registered on or
after the first day of April, 1914, purporting to divide the undertaking of the
company into shares or interests, shall be treated as a provision for a share
capital, notwithstanding that the nominal amount or number of the shares or
interests is not specified thereby.
38. Effect of alteration in
memorandum or articles.—
Notwithstanding anything in
the memorandum or articles of a company, no member of the company shall be
bound by an alteration made in the memorandum or articles after the date on
which he became a member, if and so far as the alteration requires him to take
or subscribe for more shares than the number held by him at the date on which
the alteration is made, or in any way increases his liability as at that date,
to contribute to the share capital of, or otherwise to pay money to, the
company:
1[Provided that this section
shall not apply—
(a) in any case where the
member agrees in writing either before or after a particular alteration is
made, to be bound by the alteration; or
(b) in any case where the company
is a club or the company is any other association and the alteration requires
the member to pay recurring or periodical subscriptions or charges at a higher
rate although he does not agree in writing to be bound by the alteration.]
———————————–
1. Subs. by Act 65 of 1960,
sec. 12, for the proviso (w.e.f. 28-12-1960).
(b) Doctrine of Ultra vires –
Effect of ultra vires transactions
The object clause of the
memorandum of the company contains the object for which the company is formed.
An act of the company must not be beyond the object clause otherwise it will be
ultra vires and therefore, void and cannot be ratified even if all the member
wish to ratify. This is called the doctrine of ultra vires. The expression
“ultra vires” consists of two words: ‘ultra’ and ‘vires’. ‘Ultra’ means beyond
and ‘Vires’ means powers. Thus, the expression ultra vires means an act beyond
the powers. Here the expression ultra vires is used to indicate an act of the
company, which is beyond the powers conferred on the company by the objects
clause of its memorandum. An ultra vires act is void and cannot be ratified
even if all the directors wish to ratify it.
Protection Of Creditors And
Investors
Doctrine of ultra vires has
been developed to protect the investors and creditors of the company. This
doctrine prevents a company to employ the money of the investors for a purpose
other than those stated in the objects clause of its memorandum. Thus, the
investors and the company may be assured by this rule that their investment will
not be employed for the objects or activities which they did not have in
contemplation at the time of investing their money in the company. It enables
the investors to know the objects in which their money is to be employed. This
doctrine protects the creditors of the company by ensuring them that the funds
of the company to which they must look for payment are not dissipated in
unauthorized activities. The wrongful application of the company’s assets may
result in the insolvency of the company, a situation when the creditors of the
company cannot be paid. This doctrine prevents the wrongful application of the
company’s assets likely to result in the insolvency of the company and thereby
protects creditors. Besides the doctrine of ultra vires prevents directors from
departing the object for which the company has been formed and, thus, puts a
check over the activities of the directions. It enables the directors to know
within what lines of business they are authorized to act .
Source: www.lawteacher.net
13. Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875) L.R.7
H.L. : (1874-80) All ER Rep. 2219 (HL)
(Source:
http://en.wikipedia.org/wiki/Ashbury_Railway_Carriage_and_Iron_Co_Ltd_v_Riche)
Incorporated under the
Companies Act,1869, the Ashbury Railway Carriage and Iron Company Ltd’s
memorandum, clause 3, said its objects were ‘to make and sell, or lend on hire,
railway-carriages…’ and clause 4 said activities beyond needed a special
resolution. But the company agreed to give Riche and his brother a loan to
build a railway in Belgium
The judges of the exchequer
chamber being equally divided, the decision of the court below was affirmed.
Blackburn J said,
“"thought it was at
common law an incident to a corporation that its capacity should be limited by
the instrument creating it, I should agree that the capacity of a company
incorporated under the act of 1862 was limited to the object in the memorandum
of association. But if I am right in the opinion which I have already
expressed, that the general power of contracting is an incident to a
corporation which it requires an indication of intention in the legislature to
take away, I see no such indication here. If the question was whether the
legislature had conferred on a corporation, created under this act, capacity to
enter into contracts beyond the provisions of the deed, there could be only one
answer. The legislature did not confer such capacity. But if the question be,
as I apprehend it is, whether the legislature have indicated an intention to
take away the power of contracting which at common law would be incident to a
body corporate, and not merely to limit the authority of the managing body and
the majority of the shareholders to bind the minority, but also to prohibit and
make illegal contracts made by the body corporate, in such a manner that they
would be binding on the body if incorporated at common law, I think the answer
should be the other way."
House of Lords
The House of Lords, agreeing
with the three dissentient judges in the Exchequer Chamber, pronounced the
effect of the Companies Act to be the opposite of that indicated by Mr Justice
Blackburn. It held that if a company pursues objects beyond the scope of the
memorandum of association, the company's actions are ultra vires. Lord Cairns
LC said, “ It was the intention of the legislature, not implied, but actually
expressed, that the corporations, should not enter, having regard to this
memorandum of association, into a contract of this description. The contract in
my judgment could not have been ratified by the unanimous assent of the whole
corporation.
14. Cotman v. Brougham, (1918-19) All ER Rep. 265 (HL)
(Source:
http://en.wikipedia.org/wiki/Cotman_v_Brougham)
Facts: Essequibo
Rubber and Tobacco Estates Limited was registered on 6 April 1910 under the
Companies (Consolidation) Act 1908, whose section 3 required a company to
register its objects. The company had a huge number of objects and its last
clause said that clauses should be read individually and not as subclauses of
main clauses. The question was whether the company had the capacity to
underwrite (guarantee the value of) an issue of shares in the Anglo-Cuban Oil
Bitumen and Asphalt Company Limited.
Court of Appeal
Warrington LJ was sceptical
that these objects clauses were intelligible to the public and wondered whether
the registrar could refuse.
House of Lords
Lord Finlay LC relied on
subclauses 8 and 12 to say that the company could deal in shares and it was
clearly intra vires. He noted section 17 (now Companies Act 2006 section 15(4))
saying the incorporation certificate is conclusive evidence that everything is
complied with.
Lord Parker noted the argument
that a company should be wound up on the ground that its substratum had failed,
but dismissed it. He said the two purposes of the objects were to show
subscribers what their money was to be used for and show those who dealt with a
company the extent of its powers. The narrower the objects, he opined, the less
the subscriber’s risk but the wider the objects, the greater the security of
those who contract with the company.
“A person who deals with a
company is entitled to assume that a company can do everything which it is
expressly authorised to do by its memorandum of association, and need not
investigate the equities between the company and its shareholders.”
Lord Wrenbury and Lord
Atkinson concurred
15. In re (Jon) Beuforte (London ) Ltd.
(1953) Ch.
The company was authorised by
its memorandum to carry on the business of costumers and gownmakers. The
company then started the business of making veneered panels. This was ultra
vires. Builders built the factory, coke suppliers sold the company coke. The
coke company knew from the correspondence that the company was engaged in
veneer production. They therefore were under constructive notice of the
contents of the memorandum.
HELD: They were unable to sue
for the price of the coal as the transaction was ultra vires
16. Bell Houses, Ltd. v. City Wall Properties, Ltd. (1966) 2 All E.R.674
In this case the first object
was to carry on the business of builders and developers. Further into the
object clause said " to carry on any other trade or business
whatsoever". The company entered into an agreement with another company
and in return for a fee agreed to introduce the other company to some Swiss
bankers. The other company refused to pay the introduction fee on the grounds
that the contract was outside of the objects clause.
HELD: The act of introduction
was held to be within the objects clause and was intra vires and not ultra
vires.
17. Re Introductions, Ltd., Introductions, Ltd. v. National Provincial Bank
Ltd. (1969) 1 All ER 887 (Source: http://www.cwgsy.net/private%2Fsljohn/compcases.html)
The main object of the
company was to provide accommodation for overseas students. The objects clause
included an express right to borrow money and a declaration that each part of
the objects clause was a main object. The company changed its business to pig
breeding and received a bank loan. When the business became insolvent the
liquidator claimed that the bank loan was ultra vires and void.
HELD: The loan was ultra
vires as the power to borrow money must be subordinate to the main objects of
the business. As a result the loan was irrecoverable.
18. Dr. A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India
On July 15, 1955, at an
Extraordinary General Meeting of the shareholders of the United India Life
Assurance Company Ltd., a
resolution was passed, among other matters sanctioning a donation of Rs. 2
lakhs from out of the Share. holders' Dividend Account to a Trust proposed to
be formed with the object inter alia of
promoting technical or business knowledge, including knowledge in insurance. On
July 1, 1956, the Life Insurance Corporation Act came into force by the provisions of which on the
appointed day all the assets and liabilities appertaining to the controlled business of an insurer
vested in the Life Insurance
Corporation. BY s. 15(l)(a) of the Life Insurance Corporation Act power was
given to the Corporation to apply to the Tribunal for relief in respect of
payments made by the insurers, during the five years preceding the date of
vesting, not reasonably necessary for the purpose of the controlled business.
The Corporation applied to
the Tribunal for relief in respect of the payments of Rs. 2 lakhs by the
Company to the appellants on the ground that the said payment was ultra vires the
powers of the company and was not reasonably necessary for the purpose of the controlled business. The
Tribunal ordered the appellants to restore
the sum of Rs. 2 lakhs to the Corporation. On appeal by special leave.
Held, that the Shareholders'
Dividend Account provided for
by the Articles did not confer any proprietary interest on the shareholders,
though if was charged for the purpose of paying dividends
to the shareholders and that the mere
description of the dividend account as the exclusive property of the shareholders did not thereby
create a proprietary interest in the shareholders. The right to dividend
depends upon the recommendation to be made by
the Directors with. out which the shareholders acquire no right to. the fund or
any part thereof.
Bacha P. Guzdar v.
Commissioner of Income-tax, Bombay
Held, further, that the
meeting in which the resolution
was passed was a meeting of the Company & it could not be contended that it
was a meeting of the shareholders in their individual capacity.
Held, further, that the
resolution of the company and
the acceptance by the appellants of the amount did not constitute a contract
there being no consideration to
support it.
Held, further, that the
object of the company viz. to I 'in- vest and deal with funds and assets of the
company upon such securities or investments" could not authorise the
making of the donation and such a power which was not expressly pro- vided for by the memorandum could not
be found by reference to the general clause of the Memorandum giving power to
do incidental things.
Egyptian Salt & Soda
Company v. Port Said Salt Association, (1931) A. C. 677 and Ashbury Railway
Carriages and Iron Company v. Riche, (1875) L. R. 7. HI L. 653, referred to.
Held, further, that the resort to
the Articles of Association for the purpose of construing the Memorandum was
permissible only on matters regarding which the Memorandum was silent or
ambiguous.
Angostura Bitters &
Company Ltd. v. Kerr, [1933] A.C. 550, referred to.
Held, further, that the
making of donations to the Trust which may or may not provide indirect or
remote benefits to the business of insurance was not within the power of the
company.
Tomkinson v. South Eastern
Railway, (1887) 35 Ch, D, 675, referred to,
Held, also, that the action
of the Company being ultra vires, it created no legal effect and could not be
ratified even if all the shareholders agreed and payments made pursuant to such
action created no rights in the appellants and they were rightly directed under
s. 15 of the Life Insurance Corporation Act to personally refund the amount.
(c) Alteration of Memorandum
of Association and Articles of Association - Grounds, Procedure and Effect of
Alteration (sections 16-31)
16. Alteration of
memorandum.—
(1) A company shall not alter
the conditions contained in its memorandum except in the cases, in the mode,
and to the extent for which express provision is made in this Act.
(2) Only those provisions
which are required by section 13 or by any other specific provision contained
in this Act to be stated in the memorandum of the company concerned shall be
deemed to be conditions contained in its memorandum.
(3) Other provisions
contained in the memorandum including those relating to the appointment of a
managing director 1[***] or manager, may be altered in the same manner as the
articles of the company, but if there is any express provision in this Act
permitting of the alteration of such provisions in any other manner, they may
also be altered in such other manner.
(4) All references to the
articles of a company in this Act shall be construed as including references to
the other provisions aforesaid contained in its memorandum.
—————————–
1. The words “, managing
agent, secretaries and treasurers” omitted by Act 53 of 2000, sec. 6 (w.e.f.
13-12-2000).
17. Special resolution and
confirmation by Central Government required for alteration of memorandum
1[17. Special resolution and
confirmation by Central Government required for alteration of memorandum.—
(1) A company may, by special
resolution, alter the provisions of its memorandum so as to change the place of
its registered office from one State to another, or with respect to the objects
of the company so far as may be required to enable it—
(a) to carry on its business
more economically or more efficiently; or
(b) to attain its main
purpose by new or improved means; or
(c) to enlarge or change the
local area of its operations; or
(d) to carry on some business
which under existing circumstances may conveniently or advantageously be
combined with the business of the company; or
(e) to restrict or abandon
any of the objects specified in the memorandum; or
(f) to sell or dispose of the
whole or any part of the undertaking, or of any of the undertakings, of the
company; or
(g) to amalgamate with any
other company or body of persons.
(2) The alteration of the provisions
of memorandum relating to the change of the place of its registered office from
one State to another shall not take effect unless it is confirmed by the
Central Government on petition.
(3) Before confirming the
alteration, the Central Government must be satisfied—
(a) that sufficient notice
has been given to every holder of the debentures of the company, and to every
other person or class of persons whose interests will, in the opinion of the
Central Government be affected by the alteration; and
(b) that, with respect to
every creditor who, in the opinion of the Central Government, is entitled to
object to the alteration, and who signifies his objection in the manner
directed by the Central Government, either his consent to the alteration has been
obtained or his debt or claim has been discharged or has been determined, or
has been secured:
Provided that the Central
Government may, in the case of any person or class of persons, for special
reasons, dispense with the notice required by clause (a).
(4) The Central Government
shall cause notice of the petition for confirmation of the alteration to be
served on the Registrar who shall also be given a reasonable opportunity of
appearing before the Central Government and state his objections and suggestions,
if any, with respect to the confirmation of the alteration.
(5) The Central Government
may make an order confirming the alteration on such terms and conditions, if
any, as it thinks fit and may make such order as to costs as it thinks proper.
(6) The Central Government
shall, in exercising its powers under this section, have regard to the rights
and interests of the members of the company and of every class of them, as well
as to the rights and interests of the creditors of the company and of every class
of them.
(7) The Central Government
may, if it thinks fit, adjourn the proceedings in order that an arrangement may
be made to the satisfaction of the Central Government for the purchase of the
interests of dissentient members; and may give such directions and make such
orders as it thinks fit for facilitating or carrying into effect, any such
arrangement:
Provided that no part of the
capital of the company may be expended for any such purchase.]
—————————–
1. Subs. by Act 11 of 2003,
sec. 7, for section 17.
17A. Change of registered
office within a State.
1[17A. Change of registered
office within a State.—
(1) No company shall change
the place of its registered office from one place to another within a State
unless such change is confirmed by the Regional Director.
(2) The company shall make an
application in the prescribed form to the Regional Director for confirmation
under sub-section (1).
(3) The confirmation referred
to in sub-section (1), shall be communicated to the company within four weeks
from the date of receipt of application for such change.
Explanation.—For the purpose
of this section, it is hereby declared that the provisions of this section
shall apply only to the companies which change the registered office from the
jurisdiction of one Registrar of Companies to the jurisdiction of another
Registrar of Companies within the same State.
(4) The company shall file,
with the Registrar a certified copy of the confirmation by the Regional
Director for change of its registered office under this section, within two
months from the date of confirmation, together with a printed copy of the
memorandum as altered and the Registrar shall register the same and certify the
registration under his hand within one month from the date of filing of such
document.
(5) The certificate shall be
conclusive evidence that all the requirements of this Act with respect to the
alteration and confirmation have been complied with and henceforth the
memorandum as altered shall be the memorandum of the company.]
—————————–
1. Ins. by Act 53 of 2000,
sec. 7 (w.e.f. 1-3-2001).
18. Alteration to be
registered within three months.—
1[(1) A company shall file
with the Registrar—
(a) a special resolution
passed by a company in relation to clauses (a) to (g) of sub-section (1) of
section 17, within one month from the date of such resolution; or
(b) a certified copy of the
order of the 2[Central Government] made under sub-section (5) of that section
confirming the alterations, within three months from the date of order,
as the case may be, together
with a printed copy of the memorandum as altered and the Registrar shall
register the same and certify the registration under his hand within one month
from the date of filing such documents.]
(2) The certificate shall be
conclusive evidence that all the requirements of this Act with respect to the
alteration and the confirmation thereof have been complied with, and
thenceforth the memorandum as so altered shall be the memorandum of the
company.
(3) Where the alteration
involves a transfer of the registered office from one State to another, a
certified copy of the order confirming the alteration shall be filed by the
company with the Registrar of each of the States, and the Registrar of each
such State shall register the same, and shall certify under his hand the
registration thereof; and the Registrar of the State from which such office is
transferred shall send to the Registrar of the other State all documents
relating to the company registered, recorded or filed in his office.
(4) The 3[Central Government]
may, at any time, by order extend the time for the filing of documents 4[or for
the registration of the alteration] under this section by such period as it
thinks proper.
—————————–
1. Subs. by Act 5 of 1997,
sec. 3, for sub-section (1) (w.e.f. 1-3-1997). Earlier sub-section (1) was
substituted by Act 65 of 1960, sec. 7 (w.e.f. 28-12-1960).
2. Subs. by Act 11 of 2003,
sec. 8, for “Company Law Board”.
3. Subs. by Act 11 of 2003,
sec. 8, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 41 of 1974, sec. 5, for the word “Court” (w.e.f. 1-2-1975).
4. Ins. by Act 65 of 1960,
sec. 7 (w.e.f. 28-12-1960).
19. Effect of failure to
register.—
(1) No such alteration as is
referred to in section 17 shall have any effect until it has been duly
registered in accordance with the provisions of section 18.
1[(2) If the documents,
required to be filed with the Registrar under section 18 are not filed within
the time allowed under that section, such alteration and the order of the
2[Central Government] made under sub-section (5) of section 17 and all
proceedings connected therewith shall, at the expiry of such period, become
void and inoperative:
Provided that the 2[Central
Government] may, on sufficient cause shown, revive the order on application
made within a further period of one month.]
—————————–
1. Subs. by Act 65 of 1960,
sec. 8, for sub-section (2) (w.e.f. 28-12-1960).
2. Subs. by Act 11 of 2003,
sec. 8, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 41 of 1974, sec. 5, for the word “Court” (w.e.f. 1-2-1975).
20. Companies not to be
registered with undesirable names.—
(1) No company shall be
registered by a name which, in the opinion of the Central Government, is
undesirable.
1[(2) Without prejudice to
the generality of the foregoing power, a name which is identical with, or too
nearly resembles,—
(i) the name by which a
company in existence has been previously registered; or
(ii) a registered trade mark,
or a trade mark which is subject of an application for registration, of any
other person under the Trade Marks Act, 1999,
may be deemed to be
undesirable by the Central Government within the meaning of sub-section (1).
(3) The Central Government
may, before deeming a name as undesirable under clause (ii) of sub-section (2),
consult the Registrar of Trade Marks.]
—————————–
1. Subs. by Act 47 of 1999,
sec. 158 and Sch., for sub-section (2) (w.e.f. 15-9-2003).
21. Change of name by company.—
A company may, by special
resolution and with the approval of the Central Government signified in writing
change its name:
1[Provided that no such
approval shall be required where the only change in the name of a company is
the addition thereto or, as the case may be, the deletion therefrom, of the
word “Private”, consequent on the conversion in accordance with the provisions
of this Act of a public company into a private company or of a private company
into a public company.]
—————————–
1. Added by Act 31 of 1965,
sec. 6 (w.e.f. 15-10-1965).
22. Rectification of name of
company.—
1[(1) If, through
inadvertence or otherwise, a company on its first registration or on its
registration by a new name, is registered by a name which,—
(i) in the opinion of the
Central Government, is identical with, or too nearly resembles, the name by
which a company in existence has been previously registered, whether under this
Act or any previous companies law, the first-mentioned company, or
(ii) on an application by a
registered proprietor of a trade mark, is in the opinion of the Central
Government identical with, or too nearly resembles, a registered trade mark of
such proprietor under the Trade Marks Act, 1999, such company,—]
(a) may, by ordinary
resolution and with the previous approval of the Central Government signified
in writing, change its name or new name; and
(b) shall, if the Central
Government so directs within twelve months of its first registration or
registration by its new name, as the case may be, or within twelve months of
the commencement of this Act, whichever is later, by ordinary resolution and
with the previous approval of the Central Government signified in writing
change its name or new name within a period of three months from the date of the
direction or such longer period as the Central Government may think fit to
allow:
2[Provided that no
application under clause (ii) made by a registered proprietor of a trade mark
after five years of coming to notice of registration of the company shall be
considered by the Central Government.]
(2) If a company makes
default in complying with any direction given under clause (b) of sub-section
(1), the company, and every officer who is in default, shall be punishable with
fine which may extend to 3[one thousand rupees] for every day during which the
default continues.
—————————–
1. Subs. by Act 47 of 1999,
sec. 158 and Sch., for certain words (w.e.f. 15-9-2003).
2. Ins. by Act 47 of 1999,
sec. 158 and Sch. (w.e.f. 15-9-2003).
3. Subs. by Act 53 of 2000,
sec. 8, for “one hundred rupees” (w.e.f. 13-12-2000).
23. Registration of change of
name and effect thereof.—
(1) Where a company changes
its name in pursuance of section 21 or 22, the Registrar shall enter the new
name on the register in the place of the former name, and shall issue a fresh
certificate of incorporation with the necessary alterations embodied therein;
and the change of name shall be complete and effective only on the issue of
such a certificate.
(2) The Registrar shall also
make the necessary alteration in the memorandum of association of the company.
(3) The change of name shall
not affect any rights or obligations of the company, or render defective any
legal proceedings by or against it; and any legal proceedings which might have
been continued or commenced by or against the company by its former name may be
continued by or against the company by its new name.
24. Change of name of
existing private limited companies.—
(1) In the case of a company
which was a private limited company immediately before the commencement of this
Act, the Registrar shall enter the word ‘Private’ before the word ‘Limited’ in
the name of the company upon the register and shall also make the necessary
alterations in the certificate of incorporation issued to the company and in
its memorandum of association.
(2) Sub-section (3) of
section 23 shall apply to a change of name under sub-section (1), as it applies
to a change of name under section 21.
25. Power to dispense with
“Limited” in name of charitable or other company.—
(1) Where it is proved to the
satisfaction of the Central Government that an association—
(a) is about to be formed as
a limited company for promoting commerce, art, science, religion, charity or
any other useful object, and
(b) intends to apply its
profits, if any, or other income in promoting its objects, and to prohibit the
payment of any dividend to its members,
The Central Government may by
licence, direct that the association may be registered as a company with
limited liability, without the addition to its name of the word “Limited” or
the words “Private Limited”.
(2) The association may
thereupon be registered accordingly; and on registration shall enjoy all the
privileges, and (subject to the provisions of this section) be subject to all
the obligations, of limited companies.
(3) Where it is proved to the
satisfaction of the Central Government—
(a) that the objects of a
company registered under this Act as a limited company are restricted to those
specified in clause (a) of sub-section (1), and
(b) that by its constitution
the company is required to apply its profits, if any, or other income in
promoting its objects and is prohibited from paying any dividend to its
members,
The Central Government may,
by licence, authorise the company by a special resolution to change its name,
including or consisting of the omission of the word “Limited” or the words
“Private Limited”; and section 23 shall apply to a change of name under this
sub-section as it applies to a change of name under section 21.
(4) A firm may be a member of
any association or company licensed under this section, but on the dissolution
of the firm, its membership of the association or company shall cease.
(5) A licence may be granted
by the Central Government under this section on such conditions and subject to
such regulations as it thinks fit, and those conditions and regulations shall
be binding on the body to which the licence is granted, and where the grant is
under sub-section (1), shall, if the Central Government so directs, be inserted
in the memorandum, or in the articles, or partly in the one and partly in the
other.
1[(6) It shall not be
necessary for a body to which a licence is so granted to use the word “Limited”
or the words “Private Limited” as any part of its name and unless its articles
otherwise provide, such body shall, if the Central Government by general or
special order so directs and to the extent specified in the direction, be
exempt from such of the provisions of this Act as may be specified therein.]
(7) The licence may at any
time be revoked by the Central Government, and upon revocation, the Registrar
shall enter the word “Limited” or the words “Private Limited” at the end of the
name upon the register of the body to which it was granted; and the body shall
cease to enjoy the exemption granted by this section:
Provided that, before a
licence is so revoked, the Central Government shall give notice in writing of
its intention to the body, and shall afford it an opportunity of being heard in
opposition to the revocation.
2[(8) (a) A body in respect
of which a licence under this section is in force shall not alter the
provisions of its memorandum with respect to its objects except with the
previous approval of the Central Government signified in writing.
(b) The Central Government
may revoke the licence of such a body if it contravenes the provisions of
clause (a).
(c) In according the approval
referred to in clause (a), the Central Government may vary the licence by
making it subject to such conditions and regulations as that Government thinks
fit, in lieu of, or in addition to, the conditions and regulations, if any, to
which the licence was formerly subject.
(d) Where the alteration
proposed in the provisions of the memorandum of a body under this sub-section
is with respect to the objects of the body so far as may be required to enable
it to do any of the things specified in clauses (a) to (g) of sub-section (1)
of section 17, the provisions of this sub-section shall be in addition to, and
not in derogation of, the provisions of that section.]
(9) Upon the revocation of a
licence granted under this section to a body the name of which contains the
words “Chamber of Commerce”, that body shall, within a period of three months
from the date of revocation or such longer period as the Central Government may
think fit to allow, change its name to a name which does not contain those
words; and—
(a) the notice to be given
under the proviso to sub-section (7) to that body shall include a statement of
the effect of the foregoing provisions of this sub-section; and
(b) section 23 shall apply to
a change of name under this sub-section as it applies it change of name under
section 21.
(10) If the body makes
default in complying with the requirements of sub-section (9), it shall be
punishable with fine which may extend to 3[five thousand rupees] for every day
during which the default continues.
—————————–
1. Subs. by Act 65 of 1960,
sec. 9, for sub-section (6) (w.e.f. 28-12-1960).
2. Subs. by Act 65 of 1960,
sec. 9, for sub-section (8) (w.e.f. 28-12-1960).
3. Subs. by Act 53 of 2000,
sec. 9, for “five hundred rupees” (w.e.f. 13-12-2000).
26. Articles prescribing
regulations.—
There may in the case of a
public company limited by shares, and there shall in the case of an unlimited
company or a company limited by guarantee or a private company limited by
shares, be registered with the memorandum, articles of association signed by
the subscribers of the memorandum, prescribing regulations for the company.
27. Regulations required in
case of unlimited company, company limited by guarantee or private company
limited by shares.—
(1) In the case of an
unlimited company, the articles shall state the number of members with which
the company is to be registered and, if the company has a share capital the
amount of share capital with which the company is to be registered.
(2) In the case of a company
limited by guarantee, the articles shall state the number of members with which
the company is to be registered.
(3) In the case of a private
company having a share capital, the articles shall contain provisions relating
to the matters specified in sub-clauses (a), (b) and (c) of clause (iii) of
sub-section (1) of section 3; and in the case of any other private company, the
articles shall contain provisions relating to the matters specified in the said
sub-clauses (b) and (c).
28. Adoption and application
of Table A in the case of companies limited by shares.—
(1) The articles of
association of a company limited by shares may adopt all or any of the
regulations contained in Table A in Schedule I.
(2) In the case of any such
company which is registered after the commencement of this Act, if articles are
not registered, or if articles are registered, insofar as the articles do not
exclude or modify the regulations contained in Table A aforesaid, those
regulations shall, so far as applicable, be the regulations of the company in
the same manner and to the same extent as if they were contained in duly
registered articles.
29. Form of articles in the
case of other companies.—
The articles of association
of any company, not being a company limited by shares, shall be in such one of
the Forms in Tables C, D and E in Schedule I as may be applicable, or in a Form
as near thereto as circumstances admit:
1[Provided that nothing in
this section shall be deemed to prevent a company from including any additional
matters in its articles in so far as they are not inconsistent with the
provisions contained in the Form in any of the Tables C, D and E, adopted by
the company.
-----------------------------
1. Ins. by Act 65 of 1960,
sec. 10 (w.e.f. 28-12-1960).
30. Form and signature of
articles.—
Articles shall—
(a) be printed;
(b) be divided into
paragraphs numbered consecutively; and
(c) be signed by each
subscriber of the memorandum of association (who shall add his address,
description and occupation, if any,) in the presence of at least one witness
who shall attest the signature and shall likewise add his address, description
and occupation, if any.
31. Alteration of articles by
special resolution.—
(1) Subject to the provisions
of this Act and to the conditions contained in its memorandum a company may, by
special resolution, alter its articles:
1[Provided that no alteration
made in the articles under this sub-section which has the effect of converting
a public company into a private company, shall have effect unless such
alteration has been approved by the Central Government.]
(2) Any alteration so made
shall, subject to the provisions of this Act, be as valid as if originally
contained in the articles and be subject in like manner to alteration by
special resolution.
1[(2A) Where any alteration
such as is referred to in the proviso to sub-section (1) has been approved by
the Central Government, a printed copy of the articles as altered shall be
filed by the company with the Registrar within one month of the date of receipt
of the order of approval.]
(3) The power of altering
articles under this section shall, in the case of any company formed and
registered under Act No. 19 of 1857 and Act No. 7 of 1860 or either of them,
extend to altering any provisions in Table B annexed to Act 19 of 1857, and
shall also, in the case of an unlimited company formed and registered under the
said Acts or either of them, extend to altering any regulations relating to the
amount of capital or its distribution into shares, notwithstanding that those
regulations are contained in the memorandum.
—————————–
19. In Re Mackinnon Mackenzie & Co. Pvt. Ltd., 71 C.W.N. 340 (1966)
The company desired to shift
its registered office from the State of WB to Bombay
The Calcutta High Court
refused to sustain the contention and allowed the transfer. Court held that there
is no statutory right of the State as a State to intervene in applications
under Section 17 of the Companies Act with regard to change of registered
office. To hold that the possibility of loss of revenue is not only relevant
but of persuasive force in regard to change of office from one State to another
is to rob Section 17 of the Companies Act of the statutory power conferred on a
company to change its registered office and also to impose upon the statute a
limitation with regard to change of office. the question of possibility of loss
of revenue for one State would have to be considered in the total conspectus of
revenue for the Republic of India and it would not be desirable to put the
consideration of revenue of one State as the determinant to turn the scale in
regard to the change of office from one State to another. And parochial
considerations should not enter the arena of administration of justice.
20. Minerva Mills Ltd. v. Govt. of Maharashtra
(1975) 45 Comp. Cas. 1 (Bom.)
The Bombay High Court in
Minerva Mills Limited v. Government of Maharashtra, (1975) 45 Company Cases
page I, has held that shifting of the registered office from one State to the
other can be opposed on the ground of its adverse effect on some specific
pecuniary or proprietary interest of that particular State, and not on regional
considerations, or on the vague ground of the effect of the shifting of the
registered office on the general economy of the State which must necessarily be
involved in every case.
21. Bharat Commerce & Ind. Ltd. v. Registrar of Companies (1973) 43
Comp. Cas. 275 (Cal.
Company resolved and sought
confirmation for removing its office from WB to New Delhi WB
(d) Doctrine of Indoor
Management; Binding Nature of Articles of Association between
members/shareholders inter se and also outsiders; Rule of Constructive Notice;
‘Indoor Management’- Exceptions – knowledge of irregularity, suspicion of
irregularity, forgery, representation through articles
22. Royal British Bank v. Turquand (1856) 119 ER 886 : (1843-60) All ER
Rep. 435
Mr Turquand was the official
manager (liquidator) of the insolvent ‘Cameron’s Coalbrook Steam, Coal, and Swansea
Sir John Jervis CJ, for the
Court of Exchequer Chamber affirmed the Queen’s Bench and said that it was
valid, so the Royal British Bank could enforce the terms of the bond. He said
the bank was deemed to be aware that the directors could borrow only up to the
amount resolutions allowed. Articles of association were registered in
Companies House, so there was constructive notice. But the bank could not be
deemed to know about which ordinary resolutions passed, because these were not
registrable. The bond was valid, because there was no requirement to look into
the company’s internal workings. This is the ‘indoor management rule’, that the
company’s indoor affairs are the company’s problem. Jervis CJ gave the judgment
of the Court.
“ I am of opinion that the
judgment of the Court of Queen's Bench ought to be affirmed. I incline to think
that the question which has been principally argued both here and in that Court
does not necessarily arise, and need not be determined. My impression is
(though I will not state it as a fixed opinion) that the resolution set forth
in the replication [332] goes far enough to satisfy the requisites of the deed
of settlement. The deed allows the directors to borrow on bond such sum or sums
of money as shall from time to time, by a resolution passed at a general meeting
of the Company, be authorized to be borrowed: and the replication shews a
resolution, passed at a general meeting, authorizing the directors to borrow on
bond such sums for such periods and at such rates of interest as they might
deem expedient, in accordance with the deed of settlement and the Act of
Parliament; but the resolution does not otherwise define the amount to be
borrowed. That seems to me enough. If that be so, the other question does not
arise. But whether it be so or not we need not decide; for it seems to us that
the plea, whether we consider it as a confession and avoidance or a special Non
est factum, does not raise any objection to this advance as against the
Company. We may now take for granted that the dealings with these companies are
not like dealings with other partnerships, and that the parties dealing with
them are bound to read the statute and the deed of settlement. But they are not
bound to do more. And the party here, on reading the deed of settlement, would
find, not a prohibition from borrowing, but a permission to do so on certain
conditions. Finding that the authority might be made complete by a resolution,
he would have a right to infer the fact of a resolution authorizing that which
on the face of the document appeared to be legitimately done. ”
Pollock CB, Alderson B,
Cresswell J, Crowder J and Bramwell B concurred.
Doctrine of Indoor Management
The rule in Turquand's case
was not accepted as being firmly entrenched in law until it was endorsed by the
House of Lords. In Mahony v East Holyford Mining Co[1]
Lord Hatherly phrased the law
thus:
“When there are persons
conducting the affairs of the company in a manner which appears to be perfectly
consonant with the articles of association, those so dealing with them externally
are not to be affected by irregularities which may take place in the internal
management of the company. ”
So, in Mahony, where the
company's articles provided that cheques should be signed by any two of the
three named directors and by the secretary, the fact that the directors who had
signed the cheques had never been properly appointed was held to be a matter of
internal management, and the third parties who received those cheques were
entitled to presume that the directors had been properly appointed, and cash
the cheques.
The position in English law
is now superseded by section 40 of the Companies Act 2006, but the Rule in
Turquand's Case is still applied throughout many common law jurisdictions in
the Commonwealth. According to the Turquand rule, each outsider contracting
with a company in good faith is entitled to assume that the internal
requirements and procedures have been complied with. The company will
consequently be bound by the contract even if the internal requirements and
procedures have not been complied with. The exceptions here are: if the
outsider was aware of the fact that the internal requirements and procedures
have not been complied with (acted in bad faith); or if the circumstances under
which the contract was concluded on behalf of the company were suspicious.
However, it is sometimes
possible for an outsider to ascertain whether an internal requirement or
procedure has been complied with. If it is possible to ascertain this fact from
the company's public documents, the doctrine of disclosure and the doctrine of
constructive notice will apply and not the Turquand rule. The Turquand rule was
formulated to keep an outsider's duty to inquire into the affairs of a company
within reasonable bounds, but if the compliance or noncompliance with an
internal requirement can be ascertained from the company's public documents,
the doctrine of disclosure and the doctrine of constructive notice will apply.
If it is an internal requirement that a certain act should be approved by
special resolution, the Turquand rule will therefore not apply in relation to
that specific act, since a special resolution is registered with Companies
House (in the United Kingdom), and is deemed to be public information.
23. Freeman & Lockyer (A Firm) v. Buckhurst Park
Facts: K, who carried on
business as a property developer, entered into a contract to purchase an
estate. He had not enough money to pay for it and obtained financial assistance
from H. They formed a limited company with certain capital subscribed equally
by K & H to buy the estate with a view to selling it for development. K
& H with a nominee of each, comprised the board. The quorum of directors
was, by the articles of association, four. H was at all material times abroad.
There was power under the articles to appoint a managing director, but the
board did not in fact do so. K to the knowledge of the board acted as if he
were managing director of the company in relation to finding a purchaser for
the estate, and again without express authority of the board, employed on
behalf of the company a firm of architects and surveyors for the submission of
an application for planning permission, etc. The firm claimed from the company
their fees for work done.
It was held that the company
was liable for the fees claimed because K throughout acted as MD to the
knowledge of the company and thus was held out by the company as being MD, and
the ostensible authority thus conferred could bind the company since its articles
of association in fact provided for there being a MD of the company. K’s act
employing the plaintiff was within the ordinary ambit of the authority of such
a MD. The fact that the plaintiff had not examined the companies articles and
had not enquired whether K was a
properly appointed MD did not prevent them from establishing their claim
against the company based on their reliance on K’s ostensible authority.
Referring to the authorities Willmer LJ observed: “Though I have no doubt that
Rama case was rightly decided on its own facts, I cannot agree with the view
expressed by Slade J that the previous decisions of this court were
conflicting. I do not think that when properly understood, the Houghton case,
the Kreditbank case and the Rama case are in conflict with the decision in
British Thompson Houston
24. Kotla Venkataswamy v. Chinta Ramamurthy,AIR 1934 Mad.
Facts: Article 15 of the
Company’s AoA provides as follows “ All deeds, hundies, cheques, certificates
and other instruments shall be signed by the MD, the secretary & a working
director on behalf of the company . The plaintiff accepted a deed of mortgage
executed by the secretary & a working director only. It was held that the
plaintiff could not claim it under this deed.
Doctrine of constructive
notice
The Memorandum and articles
of association of every company are registered with the Registrar of Companies.
The office of the registrar is a public office and consequently the memorandum
and articles become public documents. They are open and accessible to all. It
is therefore, the duty of every person transacting with the company to inspect
its public documents and make sure that his contract is in conformity with
their provisions. But whether a person actually reads them or not he is to be
in the same position as if he had read them. He will be presumed to know the
contents of those documents. This presumed notice is called constructive
notice.
Topic 3 : Promoters – Duties and Liabilities
Rights, Powers and Duties as
Trustee; Contract with the company; Liability for Negligence and Personal
Profits
A promoter can neither be
termed as an agent nor a trustee of a company which has not come into
existence. The reason is that there was no principal or trust in existence for
whom or for whose benefit the promoter has acted.
But promoter has wide powers
relating to the formation of the company. Law has put the relationship of the
promoters with the company they bring into existence as well as with those whom
they induce to become shareholders in it, as that of a fiduciary nature, the
relationship based on utmost faith and confidence.
“Those who accept and use
such extensive powers are not entitled to disregard the interests of the
corporation altogether. They must make a reasonable use of the powers which
they accept from the legislature; and consequently they do stand, with regard
to the corporation, when formed, in what is commonly called a fiduciary
relation to some extent.”
This fiduciary relationship
imposes an obligation on the promoters to disclose fully all material facts
relating to the formation of the company. Though the fiduciary relationship
really arises when the company is formed, the fiduciary obligation of a
promoter begins as soon as he sets out to act as promoter of the company.
Promoters should not make any secret profits at the cost of the company without
its knowledge and consent.
The disclosure of all
material facts, regarding contracts made and the profits earned by them from
the formation of the company, should be made to an independent and competent
board of directors. If the promoters fail to disclose complete facts, company
may set aside the transaction and recover the benefit earned by them.
25. Erlanger
v. New Sombrero Phosphate Co. (1878) 3 AC 1218 : (1874-80) All ER Rep. 271
(Source: Avtar Singh, Company
Law 14th Ed, Eastern Book Company )
Facts: A group of persons
headed by E purchased an island containing phosphate mines for 55000 Pounds. A
company was then incorporated to take over the island and to work the mines. E
named 5 persons as directors. Two were abroad. Of the three others, two were
persons entirely under E’s control. These three directors purchased the island
for the company at a price of 1,10,000 pounds. A prospectus was then issued.
Many persons took shares. The purchase of the island was adopted by the
shareholders at their first meeting; but the real circumstances were not
disclosed to them. The company failed and the liquidator sued the promoter for
refund of the profit.
The only material contention
urged on behalf of the promoter was that the Board of directors had full
knowledge of the facts. Rejecting this argument Lord Cairns said: “If they (promoters)
sell their property to the company, it is incumbent upon them to take care that
they provide the company with an executive body who shall both be aware that
the property which they are asked to purchase is the promoter’s property and
who shall be competent and impartial judges as to whether the purchase ought or
ought not to be made. They should sell the property to the company through the
medium of a board of directors who can and do exercise an independent and
intelligent judgment on the transaction.”
Lord Cairns explained the
position of promoters in the following words:
“They stand, in my opinion in
a fiduciary position. They have in their hands the creation and moulding of the
company. They have the power of defining how and when, in what shape and under
what supervision the company shall start into existence and begin to act as a
trading corporation.
Topic 5 : Board of Directors
Qualifications, Share
qualifications; Minimum number of directors; Subscribers to memorandum deemed
to be directors; Restriction on number of directorships; Vacation of office by
directors; Managing Director; Number of companies of which one person may be
appointed Managing Director; Powers of Directors/Board; Duties of Directors -
Fiduciary Duties as Trustees; Duty of Care and Skill; To whom duty is owed ?;
Insider Trading; Enforcement of Duties; Liability for Breach of Duties;
Position of Share holders vis-à-vis Board of Directors (sections 252-323, 388B
– 388E)
S2(13) – director” includes any person occupying the
position of director, by whatever name called;
Test for director à Nature of office and its duties.
Share Qualification
Section 270. Time within
which share qualification is to be obtained and maximum amount thereto
(1) Without prejudice to the
restrictions imposed by section 266, it shall be the duty of every director who
is required by the articles of the company to hold a specified share
qualification and who is not already qualified iii that respect, to obtain his
qualification within two months after his appointment as director.
(2) Any provision in the
articles of the company (whether made before or after the commencement of this
Act) shall be void in so far as it requires a person to hold the qualification
shares before his appointment. as a director or to obtain them within a shorter
time than two months after his appointment as such.
(3) The nominal value of the
qualification shares shall not exceed five thousand rupees, or the nominal value
of one share where it exceeds five thousand rupees.
(4) For the purpose of any
provision in the articles requiring a director to hold a specified shall
qualification, the bearer of a share warrant shall not be deemed to be the
holder of the shares specified in the warrant.
Section 272. Penalty
If, after the expiry of the
said period of two months, any person acts as a director of the company when he
does not hold the qualification shares referred to in section 270, he shall be
punishable with fine which may extend to 1[five hundred rupees] for every day
between such expiry and the last day on which he acted as a director.
Section 253. Only individuals
to be directors.—
No body corporate,
association or firm shall be appointed director of a 1[***] company, and only
an individual shall be so appointed:
2[Provided that no company
shall appoint or re-appoint any individual as director of the company unless he
has been allotted a Director Identification Number under section 266B.
Section 274. Disqualifications
of directors
(1) A person shall not be
capable of being appointed director of a company, if-
(a) he has been found to be
of unsound mind by a Court of competent jurisdiction and the finding is in
force;
(b) he is an undischarged
insolvent;
(c) he has applied to be
adjudicated as an insolvent and his application is pending;
(d) he has been convicted by
a Court 1[***] of any offence involving moral turpitude and sentenced in
respect thereof to imprisonment for not less to six months, and a period of five
years has not elapsed from the date of expiry of the sentence;
(e) he has not paid any call
in respect of shares of the company held by him, whether alone or jointly with
others, and six months have elapsed from the last day fixed for the payment of
the call; or
(f) an order disqualifying
him for appointment as director has been passed by a Court in pursuance of
section 203(restraining fraudulent persons from
managing companies) and is in
force, unless the leave of the Court has been obtained for his appointment in
pursuance of that section.
2[(g) such person is already
a director of a public company which,-
(A) has not filed the annual
accounts and annual returns for any continuous three financial years commencing
on and after the first date of April, 1999; or
(B) has failed to repay its
deposit or interest thereon on due date or redeem its debentures on done date
or pay dividend and such failure continues for one year or more :
Provided that such person
shall not be eligible to be appointed as a director of any other public company
for a period of five years from the date on which such public company, in which
he is a director, failed to file annual accounts and annual returns under
sub-clause (a) or has failed to repay its deposit or interest or redeem its
debentures on due date or pay dividend referred to in clause (b).]
(2) The Central Government
may, by notification in the Official Gazette, remove-
(a) the disqualification
incurred by any person in virtue of clause (d) of sub section (1), either generally
or in relation to any company or companies specified in the notification; or
(b) the disqualification
incurred by any person in virtue of clause (e) of subsection (1).
(3) A private company which
is not a subsidiary of a public company may, by its articles, provide that a
Person shall be disqualified for appointment as a director on any grounds in
addition to those specified in subsection (1).
Section 283. Vacation of
office by directors
(1) 1[The office of a
director shall become vacant if-]
(a) he fails to obtain within
the time specified in sub-section (1) of section 270, or at any time thereafter
ceases to hold, the share qualification, if any, required of him by the
articles of the company;
(b) he is found to be of
unsound mind by a Court of competent jurisdiction;
(c) he applies to be
adjudicated an insolvent;
(d) he is adjudged an
insolvent;
2[(e) he is convicted by a
Court of any offence involving moral turpitude and sentenced in respect thereof
to imprisonment for not less than six months;]
(f) he fails to pay any call
in respect of shares of the company held by him, whether alone or jointly with
others, within six months from the last date fixed for the payment of the call
3[unless the Central Government has, by notification in the Official Gazette,
removed the disqualification incurred by such failure;]
(g) he absents himself from
three consecutive meetings of the Board of directors, or from all meetings of
the Board for a continuous period of three months, whichever is longer, without
obtaining leave of absence from the Board;
(h) 4[he (whether by himself
or by any person for his benefit or on his account), or any firm in which] he
is a partner or any private company of which he is a director, accepts a loan,
or any guarantee or security for a loan, from the company in contravention of
section 295;
(i) he acts in contravention
of section 299(which deals with disclosure of interest
by directors);
(j) he becomes disqualified
by an order of Court under section 203; 5[***]
(k) he is removed in pursuance
of section 284(deals with removal of directors);
3[or]
(l) having been appointed a
director by virtue of his holding any office or other employment in the company
6[***] he ceases to hold such office or other employment in the company 7[***]
(2) Notwithstanding anything
in clauses (d), (e) and (i) of sub-section (1), the disqualification referred
to in those clauses shall not take effect-
(a) for thirty days from the
date of the adjudication, sentence or order;
(b) where any appeal or
petition is preferred within the thirty days aforesaid against the
adjudication, sentence or conviction resulting in the sentence, or order until
the expiry of seven days from the date on which such appeal or petition is
disposed of, or
(c) where within the seven
days aforesaid, any further appeal or petition is preferred in respect of the
adjudication, sentence, conviction, or order, and the appeal or petition, if
allowed, would result in the removal of the disqualification, until such
further appeal or petition is disposed of.
8[(2A) Subject to the
provisions of sub-sections (1) and (2), if a person functions as a director
when he knows that the office of director held by him has become vacant on
account of any of the disqualifications, specified in the several clauses of
sub-section (1), he shall be punishable with fine-which may extend to 9[five
thousand rupees] for each day on which he so functions as a director.]
(3) A private company which
is not a subsidiary of a public company may, by its articles, provide, that the
office of director shall be vacated on any grounds in addition to those
specified in sub-section (1).
Section 252. Minimum number
of directors.—(1) Every 1[public company (other than a public company which has
become such by virtue of section 43A)] 2[***] shall have at least three
directors:
3[Provided that a public
company having,—
(a) a paid-up capital of five
crore rupees or more;
(b) one thousand or more
small shareholders,may have a director elected by such small shareholders in
the manner as may be prescribed.
Explanation.—For the purpose
of this sub-section “small shareholders” means a shreholder holding shares of
nominal value of twenty thousand rupees or less in a public company to which
this section applies.]
(2) Every 4[other] company
5[***] shall have at least two directors.
(3) The directors of a
company collectively are referred to in this Act as the “Board of directors” or
“Board”.
Section 254. Subscribers of
memorandum deemed to be directors.—
In default of and subject to
any regulations in the articles of a company, subscribers of the memorandum who
are individuals, shall be deemed to be the directors of the company, until the
directors are duly appointed in accordance with section 255.
comments
The idea behind section 254
is that as the office of a director is to some extent an office of trust, there
should be somebody readily available who can be held responsible for the
failure to carry out the trust and it might be difficult to fix that
responsibility if the director was a corporation or an association of persons;
Oriental Metal Pressing Works (P) Ltd. v. Bhaskar Kashinath Thakoor, 1961 (31)
Comp. Cas. 143: AIR 1961 SC 573.
Section 255. Appointment of
directors and proportion of those who are to retire by rotation.—
(1) 1[Unless the articles
provide for the retirement of all directors at every annual general meeting,
not less than two-thirds] of the total number of directors of a public company,
or of a private company which is a subsidiary of a public company, shall—
(a) be persons whose period
of office is liable to determination by retirement of directors by rotation;
and
(b) save as otherwise
expressly provided in this Act, be appointed by the company in general meeting.
(2) The remaining directors
in the case of any such company, and the directors generally in the case of a
private company which is not a subsidiary of a public company, shall in default
of and subject to any regulations in the articles of the company, also be
appointed by the company in general meeting.
comments
The Act by enacting section
255 shows that it does not disapprove of a person having power to appoint a
succession of directors and in the case of a private company, a succession even
of all the directors. Such a person would have what has been described as
“perpetual management”. It would follow that the Act did not consider this as
an evil which required prevention; Oriental Metal Pressing Works (P) Ltd. v.
Bhaskar Kashinath Thakoor, 1961 (31) Comp. Cas. 143: AIR 1961 SC 573.
Section 275 No person to be a
director of more than 1[fifteen companies] (prior to 2000, 20 companies)
S 276. Choice to be made by
director of more than 15 companies at commencement of Act
S277. Choice by person
becoming director of more than 15 companies after commencement of Act
Section 2(26) “managing
director” means a director who, by virtue of an agreement with the company or
of a resolution passed by the company in general meeting or by its Board of
directors or, by virtue of its memorandum or articles of association, is
entrusted with 17[substantial powers of management] which would not otherwise
be exercisable by him, and includes a director occupying the position of a
managing director, by whatever name called:
Section 284 284. Removal of
directors
(1) A company may, by
ordinary resolution, remove a director (not being a director appointed by the
Central Government in pursuance of section 408) before the expiry of his period
of office :
Provided that this
sub-section shall not, in the case of a private company, authorise the removal
of a director holding office for life on the 1st day of; April, 1952, whether
or not he is subject to retirement under an age limit by virtue of the articles
or otherwise :
Provided further that nothing
contained in this sub-section shall apply where the company has availed itself
of the option given to it under section 265 to appoint not less than two-thirds
of the total number of directors according to the principle of proportional
representation.
(2) Special notice shall be
required of any resolution to remove a director under this section, or to
appoint somebody instead of a director so removed at the meeting at which he is
removed.
(3) On receipt of notice of a
resolution to remove a director under this section, the company shall forthwith
send a copy thereof to the director concerned, and the director (whether or not
he is a member of the company) shall be entitled to be heard on the resolution
at the meeting.
(4) Where notice is given of
a resolution to remove a director under this section and the director concerned
makes with respect thereto representations in writing to the company (not
exceeding a reasonable length) and requests their notification to members of
the company The company-shall unless the representations are received by it too
late for it to do so,-
(a) In any notice of the
resolution given to members of the company, state the fact of the
representations having been made; and
(b) Send a copy of the
representations to every member of the company to whom notice of the meeting is
sent (whether before or after receipt of the representations by the company);
and if a copy of the
representations is not sent as aforesaid because they were received too late or
because of the company’s default, the director may (without prejudice to his
right to be heard orally) require that the representations shall be read out at
the meeting:
Provided that copies of the
representations need not be sent out and the representations need not be read
out at the meeting if, on the application either of the company or of any other
person who claims to be aggrieved, the 1[Central Government] is satisfied that
the rights conferred by this sub-section are being abused to secure needless
publicity for defamatory matter; and the 1[Central Government] may order the
company’s costs on the application to be paid in whole or in part by the
director notwithstanding that he is not a party to it.
(5) A vacancy created by the
removal of a director under this section may, if he had been appointed by the
company in general meeting or by the Board in pursuance of section 262, be
filled by the appointment of another director in his stead by the meeting at
which he is removed, provided special notice of the intended appointment has
been given under sub-section (2).
A director so appointed shall
hold office until the date up to which his predecessor would have held office
if he had not been removed as aforesaid.
(6) If the vacancy is not
filled under sub-section (5), it may be filled as a casual vacancy in accordance
with the provisions, so far as they may be applicable, of section 262, and all
the provisions of that section shall apply accordingly :
Provided that the director
who was removed from office shall not be re-appointed as a director by the
Board of directors.
(7) Nothing in this section
shall be taken-
(a) as depriving a person
removed thereunder of any compensation or damages payable to him in respect of
the termination of his appointment as director or of any appointment
terminating with that as director; or
(b) as derogating from any
power to remove a director which may exist apart from this section.
1. Substituted by Act 31 of
1988, sec. 67, “Court” (w.e.f. 31-5-1991) and again subs. by Act 11 of 2003,
sec. 34, for “Company Law Board”.
Section [388B. Reference to
2[3[4[Tribunal]]] of cases against managerial personnel.—(1) Where in the
opinion of the Central Government there are circumstances suggesting—
(a) that any person concerned
in the conduct and management of the affairs of a company is or has been in
connection therewith guilty of fraud, misfeasance, persistent negligence or
default in carrying out his obligations and functions under the law, or breach
of trust; or
(b) that the business of a
company is not or has not been conducted and managed by such person in
accordance with sound business principles or prudent commercial practices; or
(c) that a company is or has
been conducted and managed by such person in a manner which is likely to cause,
or has caused, serious injury or damage to the interest of the trade industry
or business to which such company pertains; or
(d) that the business of a
company is or has been conducted and managed by such person with intent to
defraud its creditors, members or any other persons or otherwise for a
fraudulent or unlawful purpose or in a manner prejudicial to public interest,
the Central Government may
state a case against the person aforesaid and refer the same to the
2[3[4[Tribunal]]] with a request that the 2[3[4[Tribunal]]] may inquire into
the case and 5[record a decision] as to whether or not such person is a fit and
proper person to hold the office of director or any other office connected with
the conduct and management of any company.
(2) Every case under
sub-section (1) shall be stated in the form of an application which shall be
presented to the 2[3[4[Tribunal]]] or such officer thereof as it may appoint in
this behalf.
(3) The person against whom a
case is referred to the 2[3[4[Tribunal]]] under this section shall be joined as
a respondent to the application.
(4) Every such application—
(a) shall contain a concise
statement of such circumstances and materials as the Central Government may
consider necessary for the purpose of the inquiry, and
(b) shall be signed and
verified in the manner laid down in the Code of Civil Procedure, 1908 (5 of
1908), for the signature and verification of a plaint in a suit by the Central
Government.
(5) The 2[3[4[Tribunal]]] may
at any stage of the proceedings allow the Central Government to alter or amend
the application in such manner and no such terms as may be just, and all such
alterations or amendments shall be made as may be necessary for the purpose of
determining the real questions in the inquiry.]
——————————-
1. Section 388B ins. by Act
53 of 1963, sec. 9 (w.e.f. 1-1-1964).
2. Subs. by Act 17 of 1967,
sec. 4 and Sch., for “Tribunal’ (w.e.f. 1-7-1967).
3. Subs. by Act 31 of 1988,
sec. 67, for “High Court” (w.e.f. 31-5-1991).
4. Subs. by Act 11 of 2003,
sec. 38, for “Company Law Board”.
5. Subs. by Act 17 of 1967,
sec. 4 and Sch. for “record a finding” (w.e.f. 1-7-1967).
388C. Interim order by
Tribunal—
1[388C. Interim order by
2[3[4[Tribunal]]].—(1) Where during the pendency of a case before the
2[3[4[Tribunal]]] it appears necessary to the 2[3[4[Tribunal]]] so to do in the
interest of the members or creditors of the company or in the public interest,
the 2[3[4[Tribunal]]] may on the application of the Central Government or on
its own motion, by an order—
(a) direct that the
respondent shall not discharge any of the duties of his office until further
orders of the 2[3[4[Tribunal]]], and
(b) appoint a suitable person
in pace of the respondent to discharge the duties of the office held by the
respondent subject to such terms and conditions as the 2[3[4[Tribunal]]] may
specify in the order.
(2) Every person appointed
under clause (b) of sub-section (1) shall be deemed to be a public servant
within the meaning of section 21 of the Indian Penal Code (45 of 1860).]
——————————-
1. Section 388C ins. by Act
53 of 1963, sec. 9 (w.e.f. 1-1-1964).
2. Subs. by Act 17 of 1967,
sec. 4 and Sch., for “Tribunal” (w.e.f. 1-7-1967).
3. Subs. by Act 31 of 1988,
sec. 67, for “High Court” (w.e.f. 31-5-1991).
4. Subs. by Act 11 of 2003,
sec. 38, for “Company Law Board”.
388D. Decision of the
Tribunal
1[388D. 2[Decision] of the
3[4[5[Tribunal]]].—At the conclusion of the hearing of the case, the
3[4[5[Tribunal]]] shall record its 2[decision] stating therein specifically as
to whether or not the respondent is a fit and proper person to hold the office
of director or any other office connected with the conduct and management of
any company.]
——————————-
1. Section 388D ins. by Act
53 of 1963, sec. 9 (w.e.f. 1-1-1964).
2. Subs. by Act 17 of 1967,
sec. 4 and Sch., for “Findings” (w.e.f. 1-7-1967).
3. Subs. by Act 17 of 1967,
sec. 4 and Sch., for “Tribunal” (w.e.f. 1-7-1967).
4. Subs. by Act 31 of 1988,
sec. 67, for “High Court” (w.e.f. 31-5-1991).
5. Subs. by Act 11 of 2003,
sec. 38, for “Company Law Board”.
388E. Power of Central
Government to remove managerial personnel on the basis of [Tribunal] decision.—
1[388E. Power of Central
Government to remove managerial personnel on the basis of 2[3[4[Tribunal]]]
decision.—(1) Notwithstanding any other provision contained in this Act, the
5[Central Government shall], by order, remove from office any director, or any
other person concerned in the conduct and management of the affairs, of a
company against whom where is a 6[decision of the 2[3[4Tribunal]]] under this
Chapter]:
7[***]
8[***]
(3) The person against whom
an order of removal from office is made under this section shall not hold the
office of a director or any other office connected with the conduct and
management of the affairs of any company during a period of five years from the
date of the order of removal:
Provided that the Central
Government may, with the previous concurrence of the 2[3[4[Tribunal]]] permit
such person to hold any such office before the expiry of the said period of
five years.
(4) Notwithstanding anything
contained in any other provision of this Act, or any other law or any contract,
memorandum or articles, on the removal of a person from the office of a
director or, as the case may be, any other office connected with the conduct and
management of the affairs of the company, that person shall not be entitled to,
or be paid, any compensation for the loss or termination of office.
(5) On the removal of a
person from the office of a director or, as the case may, be, any other office connected
with the conduct and management of the affairs of the company, the company may,
with the previous approval of the Central Government, appoint another person to
that office in accordance with the provision of this Act.]
Section 292A. Audit Committee
(1) Every public company
having paid-up capital of not less than five crores of rupees shall constitute
a committee of the Board knows as "Audit Committee" which shall
consist of not less than three directors and such number of other directors as
the Board may determine of which two thirds of the total number of members
shall be directors, other than managing or whole-time directors.
(2) Every Audit Committee
constituted under sub-section (1) shall act in accordance with terms of
reference to be specified in writing by the Board.
(3) The members of the Audit
Committee shall elect a chairman from amongst themselves.
(4) The annual report of the
company shall disclose the composition of the Audit Committee.
(5) The auditors, the
internal auditor, if any, and the director-in-charge of finance shall attend
and participate at meetings of the Audit Committee but shall not have the right
to vote.
(6) The Audit Committee
should have discussions with the auditors periodically about internal control
systems, the scope of audit including the observations of the auditors and
review the half-yearly and annual financial statements before submission to the
Board and also ensure compliance of internal control systems.
(7) The Audit Committee shall
have authority to investigate into any matter in relation to the items
specified in this section or referred to it by the Board and for this purpose,
shall have full access to information contained in the records of the company
and external professional advice, if necessary.
(8) The recommendations of
the Audit Committee on any matter relating to financial management, including
the audit report, shall be binding on the Board.
(9) If the Board does not
accept the recommendations of the Audit Committee, it shall record the reasons
therefor and communicate such reasons to the shareholders.
(10) The chairman of the
Audit Committee shall attend the annual general meetings of the company to
provide any clarification on matters relating to audit.
(11) If a default is made in
complying with the provisions of this section, the company, and every officer
who is in default, shall be punishable with imprisonment for a term which may
extend to one year, or with fine which may extend to fifty thousand rupees, or
with both.]
Section 291. GENERAL POWERS
OF BOARD.
(1) subject to the provisions
of this 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 :
Provided that the Board shall
not exercise any power or do any act or thing which is directed or required,
whether by this or any other Act or by the memorandum or articles of the
company or otherwise, to be exercised or done by the company in general
meeting:
Provided further that in
exercising any such power or doing any such act or thing, the Board shall be
subject to the provisions contained in that behalf in this or any other Act, or
in the memorandum or articles of the company, or in any regulations not inconsistent
therewith and duly made thereunder, including regulations made by the company
in general meeting.
(2) No regulation made by the
company in general meeting shall invalidate any prior act of the Board which
would have been valid if that regulation had not been made.
292. Certain powers to he
exercised by Board only at meeting
(1) The Board of directors of
a company shall exercise the following powers on behalf of the company, and it
shall do so only by means of resolutions passed at meetings of the Board :-
(a) the power to make calls
on shareholders in respect of money unpaid on their shares;
1[(aa) The power to authorise
the buy-back referred to in the first proviso to clause (b) of sub-section (2)
of section 77A;] (b) the power to issue debentures;
(c) the power to borrow
moneys otherwise than on debentures;
(d) the power to invest the
funds of the company; and
(e) the power to make loans :
2[Provided that the Board
may, by a resolution passed at a meeting, delegate to any committee of
directors, the managing director, 3[***] the manager or any other principal
officer of the company or in the case of a branch office of the company, a
principal officer of the branch office, the powers specified in clauses (c),
(d) and (e) to the extent specified in sub-sections (2), (3) and (4)
respectively, on such conditions as the Board may prescribe:
Provided further that the
acceptance by a banking company in the ordinary course of its business of
deposits of money from the public repayable on demand or otherwise and
withdrawable by cheque, drafts, order or otherwise, or the placing of moneys on
deposit by a banking company with another banking company on such conditions as
the Board may prescribe, shall not be deemed to be a borrowing of moneys or, as
the case may be, a making of loans by a banking company within the meaning of
this section.
Explanation II.- In respect
of dealings between a company and its bankers, the exercise by the company of
the power specified in clause (c) of sub-section (1) shall mean the arrangement
made by the company with its bankers for the borrowing of money by way of
overdraft or cash credit or otherwise and not the actual day to day operation
on overdraft, cash credit or other accounts by means of which the arrangement
so made is actually availed of.]
(2) Every resolution
delegating the power referred to in clause (c) of subsection (1) shall specify
the total amount 4[outstanding at any one time] up to which money may he
borrowed by the delegate.
(3) Every resolution
delegating the power referred to in clause (d) of sub-section(1) shall specify
the total amount up to which the funds may be invested, and the nature of the
investments which may be made, by the delegate.
(4) Every resolution
delegating the power referred to in clause (e) of sub-section (1) shall specify
the total amount up to which loans may be made by the delegate, the purposes
for which the loans may be made, and the maximum amount of loans which may be
made for each such purpose in individual cases.
(5) Nothing in this section
shall be deemed to affect the right of the company in general meeting to impose
restrictions and conditions on the exercise by the Board of any of the powers
specified in sub-section (1).
Section 293. Restrictions on
powers of Board
(1) The Board of directors of
a public company, or of a private company which is a subsidiary of a public
company, shall not, except with the consent of such public company or
subsidiary in general meeting,-
(a) sell, lease or otherwise
dispose of the whole, or substantially the whole, of the undertaking of the
company, or where the company owns more than one undertaking, of the whole, or
substantially the whole, of any such undertaking;
(b) Remit, or give time for
the repayment of, any debt due by a director 1[except in the case of renewal or
continuance of an advance made by a banking company to its director in the
ordinary course of business;]
(c) invest, otherwise than
in. trust securities, 2[the amount of compensation received by the company in
respect of the compulsory acquisition, after the commencement of this Act], of
any such undertaking as is referred to in clause (a), or of any premises or
properties used for any such undertaking and without which it cannot be carried
on or can be carried on only with difficulty or only after a considerable time;
(d) borrow moneys after the
commencement of this Act, where the moneys to be borrowed, together with the
moneys already borrowed by the company (apart from temporary loans obtained
from the company’s bankers in the ordinary course of business), will exceed the
aggregate of the paid-up capital of the company and its free reserves, that is
to say, reserves not set apart for any specific purpose; or
(e) contribute, after the
commencement of this Act, to charitable and other funds not directly relating
to the business of the company or the welfare of its employees, any amounts the
aggregate of which will, in any financial year, exceed 3[fifty thousand
rupees], or five per cent, of its average net profits as determined in
accordance with the provisions of sections 349 and 350 during the three
financial years immediately preceding, whichever is greater.
4[Explanation I.-Every
resolution passed by the company in general meeting in relation to the exercise
of the power referred to in clause (d) or in clause (e) shall specify the total
amount up to which moneys may be borrowed by the Board of directors under
clause (d) or as the case may be, the total amount which may be contributed to
charitable and other funds in any financial year under clause (e).
Explanation II.-The
expression "temporary loans" in clause (d) means loans repayable on
demand or within six months from the date of the loan such as short term, cash
credit arrangements, the discounting of bills and the issue of other short term
loans of a seasonal character, but does not include loans raised for the
purpose of financing expenditure of a capital nature.]
Explanation 5[III].-Where a
portion of a financial year of the company falls before the commencement of
this Act, and a portion falls after such commencement, the later portion shall
be deemed to be a financial year within the meaning, and for the purposes, of
clause (e).
(2) Nothing contained in
clause (a) of sub-section (1) shall affect-
(a) the title of a buyer or
other person who buys or takes a lease of any such undertaking as is referred
to in that clause, in good faith and after exercising due care and caution; or
(b) the selling or leasing of
any property of the company, where the ordinary business of the company consists
of, or comprises, such selling or leasing.
(3) Any resolution passed by
the company permitting any transaction such as is referred to in clause (a) of
sub-section (1) may attach such conditions to the permission as may be
specified in the resolution, including conditions regarding the use, disposal
or investment of the sale proceeds which may result from the transaction :
Provided that this
sub-section shall not be deemed to authorise the company to effect any
reduction in its capital except in accordance with the provisions contained in
that behalf in this Act.
(4) The acceptance by a
banking company, in the ordinary course of its business, of deposit of money
from the public, repayable on demand or otherwise, and with draft, order or
otherwise, shall not be deemed to be a borrowing of moneys by the banking
company within the meaning of clause (d) of sub-section (1)
(5) No debt incurred by the
company in excess of the limit imposed by clause (d) of sub-section (1) shall
be valid or effectual, unless the lender proves that he advanced the loan in
good faith and without knowledge that the limit imposed by that clause had been
exceeded.
Section 633. Power of Court
to grant relief in certain cases.
(1) If in any proceeding for
negligence, default, breach of duty, misfeasance or breach of trust against an
officer of a company, it appears to the Court hearing the case that he is or
may be liable in respect of the negligence, default, breach of duty,
misfeasance or breach of trust, but that he has acted honestly and reasonably,
and that having regard to all the circumstances of the case, including those
connected with his appointment, he ought fairly to be excused, the Court may
relieve him, either wholly or partly, from his liability on such terms as it may
think fit:
1[Provided that in a criminal
proceeding under this sub-section, the Court shall have no power to grant
relief from any civil liability which may attach to an officer in respect of
such negligence, default, breach of duty, misfeasance or breach of trust.]
2[(2) Where any such officer
has reason to apprehend that any proceeding will or might be brought against
him in respect of any negligence, default, breach of duty, misfeasance or
breach of trust, he may apply to the High Court for relief and the High Court
on such application shall have the same power to relieve him as it would have
had if it had been a Court before which a proceeding against that officer for
negligence, default, breach of duty, misfeasance or breach of trust had been
brought under sub-section (1).
(3) No Court shall grant any
relief to any officer under sub-section (1) or sub-section (2) unless it has,
by notice served in the manner specified by it, required the Registrar and such
other person, if any, as it thinks necessary, to show cause why such relief
should not be granted.]
26. Percival v. Wright (1902) 2 Ch.
Facts
Mr Wright was the chairman of
a company, who with two other directors, agreed to buy shares from Mr Percival
at £12.50 each. Mr Percival then found out the directors had been negotiating
with another person for the sale of the whole company at far more than £12.50 a
share. The directors had not told Percival. Percival claimed breach of
fiduciary duty.
Swinfen Eady J held the
directors owed duties to the company and not shareholders individually. There
is no question of unfair dealing in this case. The directors did not approach
the shareholders with the view of obtaining their shares. The shareholders
approached the directors, and named the price at which they were desirous of
selling. The plaintiffs’ case wholly fails, and must be dismissed with costs.
27. Burland v. Earle (1902) AC 83 : (1900-03) All ER Rep. 1452
In this case Mr. Burland, who
was the President, director and manager of a company, purchased some assets
from the liquidator of an insolvent company and later resold them at a
significant profit to the company of which he was a managing director.
Held: He did not have to
account for the profits - Lord Davey LJ stating - "There is no evidence
whatever of any commission or mandate to Burland to purchase on behalf of the
company, or that he was in any sense a trustee of the purchased property. It
may be that he had an intention in his own mind to resell it to the company;
but it was an intention which he was at liberty to carry out or abandon at his
own will."
Lord Davey LJ also explained
in this case the reasoning behind the rule in Foss v Harbottle, by saying that
the right of shareholders to bring an action in their own names is a "mere
matter of procedure" in order to provide an otherwise unavailable remedy:
"It is obvious that in such an action the plaintiffs cannot have a larger
right to relief than the company itself would have if it were plaintiff, and cannot
complain of acts which are valid if done with the approval of the majority of
the shareholders or are capable of being confirmed by the majority.”
Read more:
http://www.law-essays-uk.com/resources/revision-area/company-law/cases/burland-vs-earle.php#ixzz2QunMN0Ad
28. City Equitable Fire Insurance Co., Re (1925) Ch.
The company lost £1,200,000
in failure of investments and the large scale fraud of the chairman, Mr Bevan,
‘a daring and unprincipled scoundrel’. The liquidator sued the other directors
for negligence. The auditors were sued too, but the Court of Appeal held they
were honest and exonerated by privisions in the company’s articles.
Romer J held that some of the
directors did breach their duty of care. But they were not liable to reimburse,
because an exclusion clause for negligence was valid. And even in absence of
exclusion clauses, in his view, ‘for a director acting honestly himself to be
held legally liable for negligence, in trusting the officers under him not to
conceal from him what they ought to report to him appears to us to be laying
too heavy a burden on honest businessmen.’ Though he felt ‘some difficulty’
with the distinction, negligence would need to be ‘gross’ to visit liability.
The principles he set out as
follows.]
“There are, in addition, one
or two other general propositions that seem to be warranted by the reported
cases: (1.) A director need not exhibit in the performance of his duties a
greater degree of skill than may reasonably be expected from a person of his
knowledge and experience. A director of a life insurance company, for instance,
does not guarantee that he has the skill of an actuary or of a physician. In
the words of Lindley M.R.: "If directors act within their powers, if they
act with such care as is reasonably to be expected from them, having regard to
their knowledge and experience, and if they act honestly for the benefit of the
company they represent, they discharge both their equitable as well as their
legal duty to the company": see Lagunas Nitrate Co. v. Lagunas Syndicate. It
is perhaps only another way of stating the same proposition to say that
directors are not liable for mere errors of judgment. (2.) A director is not
bound to give continuous attention to the affairs of his company. His duties
are of an intermittent nature to be performed at periodical board meetings, and
at meetings of any committee of the board upon which he happens to be placed.
He is not, however, bound to attend all such meetings, though he ought to attend
whenever, in the circumstances, he is reasonably able to do so. (3.) In respect
of all duties that, having regard to the exigencies of business, and the
articles of association, may properly be left to some other official, a
director is, in the absence of grounds for suspicion, justified in trusting
that official to perform such duties honestly. In the judgment of the Court of
Appeal in In re National Bank of Wales, Ld,[3] the following passage occurs in
relation to a director who had been deceived by the manager, and managing
director, as to matters within their own particular sphere of activity:
"Was it his duty to test the accuracy or completeness of what he was told
by the general manager and the managing director? This is a question on which opinions
may differ, but we are not prepared to say that he failed in his legal duty.
Business cannot be carried on upon principles of distrust. Men in responsible
positions must be trusted by those above them, as well as by those below them,
until there is reason to distrust them. We agree that care and prudence do not
involve distrust; but for a director acting honestly himself to be held legally
liable for negligence, in trusting the officers under him not to conceal from
him what they ought to report to him, appears to us to be laying too heavy a
burden on honest business men." That case went to the House of Lords, and
is reported there under the name of Dovey v Cory[4] Lord Davey, in the course
of his speech to the House, made the following observations:
"I think the respondent
was bound to give his attention to and exercise his judgment as a man of
business on the matters which were brought before the board at the meetings
which he attended, and it is not proved that he did not do so. But I think he
was entitled to rely upon the judgment, information and advice, of the chairman
and general manager, as to whose integrity, skill and competence he had no
reason for suspicion. I agree with what was said by Sir George Jessel in
Hallmark's Case,[5] and by Chitty J. in In re Denham & Co. 84, that
directors are not bound to examine entries in the company's books. It was the
duty of the general manager and (possibly) of the chairman to go carefully
through the returns from the branches, and to bring before the board any matter
requiring their consideration; but the respondent was not, in my opinion,
guilty of negligence in not examining them for himself, notwithstanding that
they were laid on the table of the board for reference."
These are the general
principles that I shall endeavour to apply in considering the question whether
the directors of this company have been guilty of negligence. ”
Court of Appeal
Lord Pollock MR Warrington LJ
and Sargant LJ upheld Romer J's decision.
29. Regal (Hastings
Facts: Regal owned a cinema
in Hastings
Decision:
The House of Lords, reversing
the High Court and the Court of Appeal, held that the defendants had made their
profits “by reason of the fact that they were directors of Regal and in the
course of the execution of that office”. They therefore had to account for
their profits to the company. The governing principle was succinctly stated by
Lord Russell of Killowen, “The rule of equity which insists on those who by use
of a fiduciary position make a profit, being liable to account for that profit,
in no way depends on fraud, or absence of bona fides; or upon questions or
considerations as whether the property would or should otherwise have gone to
the plaintiff, or whether he took a risk or acted as he did for the benefit of
the plaintiff, or whether the plaintiff has in fact been damaged or benefited
by his action. The liability arises from the mere fact of a profit having in
the stated circumstances been made.”
Lord Wright said (at 157),
"The Court of Appeal held that, in the absence of any dishonest intention,
or negligence, or breach of a specific duty to acquire the shares for the
appellant company, the respondents as directors were entitled to buy the shares
themselves. Once, it was said, they came to a bona fide decision that the
appellant company could not provide the money to take up the shares, their
obligation to refrain from acquiring those shares for themselves came to an
end. With the greatest respect, I feel bound to regard such a conclusion as
dead in the teeth of the wise and salutary rule so stringently enforced in the
authorities. It is suggested that it would have been mere quixotic folly for
the four respondents to let such an occasion pass when the appellant company
could not avail itself of it; Lord King, L.C., faced that very position when he
accepted that the person in the fiduciary position might be the only person in
the world who could not avail himself of the opportunity."
30. Industrial Development Consultants Ltd. v. Cooley (1972) 1 WLR 443
Facts: Mr. Cooley was an
architect employed as managing director of Industrial Development Consultants
Ltd., part of IDC Group Ltd. The Eastern Gas Board had a lucrative project pending,
to design a depot in Letchworth. Mr. Cooley was told that the gas board did not
want to contract with a firm, but directly with him. Mr. Cooley then told the
board of IDC Group that he was unwell and requested he be allowed to resign
from his job on early notice. They acquiesced and accepted his resignation. He
then undertook the Letchworth design work for the gas board on his own account.
Industrial Development Consultants found out and sued him for breach of his
duty of loyalty.
Roskill J held that even
though there was no chance of IDC getting the contract, if they had been told
they would not have released him. So he was held accountable for the benefits
he received. He rejected the argument that because he made it clear in his
discussions with the Gas Board that he was speaking in a private capacity, Mr.
Cooley was under no fiduciary duty. He had ‘one capacity and one capacity only
in which he was carrying on business at that time. That capacity was as
managing director of the plaintiffs.’ All information which came to him should
have been passed on.
Roskill J, quoted, Parker v.
MacKenna (1874) 10 Ch.App. 96, James L.J. said, at p. 124:
“I do not think it is
necessary, but it appears to me very important, that we should concur in laying
down again and again the general principle that in this court no agent in the
course of his agency, in the matter of his agency, can be allowed to make any
profit without the knowledge and consent of his principal; that that rule is an
inflexible rule, and must be applied inexorably by this court, which is not
entitled, in my judgment, to receive evidence, or suggestion, or argument as to
whether the principal did or did not suffer any injury in fact by reason of the
dealing of the agent; for the safety of mankind requires that no agent shall be
able to put his principal to the danger of such an inquiry as that.”
31. Standard Chartered Bank v. Pakistan
(Source: www.lawteacher.net)
Liability of a bank in case
of contributory negligence, where false documents are delivered by the
beneficiary in support of an application to get payment under a letter of
credit.
In the proceedings before the
English Court, Standard Chartered Bank had established a good cause of action
against the defendant, Pakistan National Shipping Corporation. Pakistan
Shipping Corporation issued a Bill of lading which to its knowledge contained a
false shipment date. The Bill of Lading was presented to Standard Chartered
Bank under a letter of credit which was issued by Incobank of Vietnam and was
confirmed by the Standard Chartered Bank. In fact the shipping documents were
presented to Standard Chartered Bank late. However Standard Chartered Bank made
the payment without the authority of Incobank, and hence claimed reimbursement
on the basis of a false statement that the documents had been presented on
time. Incobank refused to make payment because of discrepancies. Pakistan
Shipping Corporation argued that the damages caused due to Standard Chartered Bank's
negligence in failing to find out the discrepancies in the documents presented
before the bank, and the Court should reduce the amount payable under the
provisions of Section 1 of the Law Reform (Contributory Negligence) Act 1945.
The Court of Appeal held that
under section 4 of the 1945 Act, for a defence of contributory negligence,
negligence should be actionable. In this case Pakistan Shipping Corporation's
claim for reduction of the damages payable depends upon its establishing that
the act of Standard Chartered Bank has given rise to an action for contributory
negligence. However, it was unbelievable that the deceitful conduct of Standard
Chartered Bank would have afforded Pakistan Shipping a defence, as in any
event, a Defendant, liable in a deceit could not establish a defence based upon
the contributory fault of a Claimant. Therefore, there were no grounds for
reducing the damages recoverable on the basis of contributory negligence.
The Court of Appeal
criticised the role played by Standard Chartered Bank in this case. Lord
Justice Ward referred to Standard Chartered Bank, “scandalous attempts to
deceive the issuing bank on the basis of a false statement that the documents
were presented to them in time.” (page 948). Later he referred to his “…..distaste
for the bank's conduct. They have brought dishonour upon themselves and upon
the City. It is quite another question whether the dishonest ship owners can
benefit from the attempted fraud”. (page 958).
Topic 6: Prevention of Oppression and Mismanagement
Protection of Minority
Shareholders; Powers of Tribunal and Central Government; Prevention of
Oppression and Mismanagement; Foss v. Harbottle Rule - Exceptions – acts ultra
vires, fraud on minority, acts requiring special majority, wrongdoers in control,
etc. (sections 397 – 409)
Foss v Harbottle Rule (Source: Wikipedia)
Foss v Harbottle (1843) 67 ER
189 is a leading English precedent in corporate law. In any action in which a
wrong is alleged to have been done to a company, the proper claimant is the
company itself. This is known as "the rule in Foss v Harbottle", and
the several important exceptions that have been developed are often described
as "exceptions to the rule in Foss v Harbottle". Amongst these is the
'derivative action', which allows a minority shareholder to bring a claim on
behalf of the company. This applies in situations of 'wrongdoer control' and
is, in reality, the only true exception to the rule. The rule in Foss v
Harbottle is best seen as the starting point for minority shareholder remedie
Facts
Richard Foss and Edward
Starkie Turton were two minority shareholders in the "Victoria Park
Company". The company had been set up in September 1835 to buy 180 acres
(0.73 km2) of land near Manchester
"enclosing and planting
the same in an ornamental and park-like manner, and erecting houses thereon
with attached gardens and pleasure-grounds, and selling, letting or otherwise
disposing thereof".
This became Victoria Park, Manchester
The defendants were the five
company directors (Thomas Harbottle, Joseph Adshead, Henry Byrom, John
Westhead, Richard Bealey) and the solicitors and architect (Joseph Denison,
Thomas Bunting and Richard Lane); and also H Rotton, E Lloyd, T Peet, J Biggs
and S Brooks, the several assignees of Byrom, Adshead and Westhead, who had
become bankrupts.
Judgment
The court dismissed the claim
and held that when a company is wronged by its directors it is only the company
that has standing to sue. In effect the court established two rules. Firstly,
the "proper plaintiff rule" is that a wrong done to the company may
be vindicated by the company alone. Secondly, the "majority rule
principle" states that if the alleged wrong can be confirmed or ratified
by a simple majority[disambiguation needed] of members in a general meeting,
then the court will not interfere, cadit quaestio.
“ The Victoria Park Company is an incorporated body, and
the conduct with which the Defendants are charged in this suit is an injury not
to the Plaintiffs exclusively; it is an injury to the whole corporation by
individuals whom the corporation entrusted with powers to be exercised only for
the good of the corporation. And from the case of The Attorney-General v Wilson
(1840) Cr & Ph 1 (without going further) it may be stated as undoubted law
that a bill or information by a corporation will lie to be relieved in respect
of injuries which the corporation has suffered at the hands of persons standing
in the situation of the directors upon this record. This bill, however, differs
from that in The Attorney-General v Wilson in this—that, instead of the
corporation being formally represented as Plaintiffs, the bill in this case is
brought by two individual corporators, professedly on behalf of themselves and
all the other members of the corporation, except those who committed the
injuries complained of—the Plaintiffs assuming to themselves the right and
power in that manner to sue on behalf of and represent the corporation itself.
It was not, nor could it
successfully be, argued that it was a matter of course for any individual
members of a corporation thus to assume to themselves the right of suing in the
name of the corporation. In law the corporation and the aggregate members of
the corporation are not the same thing for purposes like this; and the only
question can be whether the facts alleged in this case justify a departure from
the rule which, primâ facie , would require that the corporation should sue in
its own name and in its corporate character, or in the name of someone whom the
law has appointed to be its representative...
The first objection taken in
the argument for the Defendants was that the individual members of the
corporation cannot in any case sue in the form in which this bill is framed.
During the argument I intimated an opinion, to which, upon further
consideration, I fully adhere, that the rule was much too broadly stated on the
part of the Defendants. I think there are cases in which a suit might properly
be so framed. Corporations like this, of a private nature, are in truth little
more than private partnerships; and in cases which may easily be suggested it
would be too much to hold that a society of private persons associated together
in undertakings, which, though certainly beneficial to the public, are
nevertheless matters of private property, are to be deprived of their civil
rights, inter se , because, in order to make their common objects more
attainable, the Crown or the Legislature may have conferred upon them the
benefit of a corporate character. If a case should arise of injury to a
corporation by some of its members, for which no adequate remedy remained,
except that of a suit by individual corporators in their private characters,
and asking in such character the protection of those rights to which in their
corporate character they were entitled, I cannot but think that the principle
so forcibly laid down by
Lord Cottenham in Wallworth v
Holt (4 Myl & Cr 635; see also 17 Ves 320, per Lord Eldon) and other cases
would apply, and the claims of justice would be found superior to any
difficulties arising out of technical rules respecting the mode in which
corporations are required to sue.
But, on the other hand, it
must not be without reasons of a very urgent character that established rules
of law and practice are to be departed from, rules which, though in a sense
technical, are founded on general principles of justice and convenience; and
the question is whether a case is stated in this bill entitling the Plaintiffs
to sue in their private characters...
Now, that my opinion upon
this case may be clearly understood, I will consider separately the two
principal grounds of complaint to which I have adverted, with reference to a
very marked distinction between them. The first ground of complaint is one
which, though it might primâ facie entitle the corporation to rescind the
transactions complained of, does not absolutely and of necessity fall under the
description of a void transaction. The corporation might elect to adopt those
transactions, and hold the directors bound by them. In other words, the
transactions admit of confirmation at the option of the corporation. The second
ground of complaint may stand in a different position; I allude to the
mortgaging in a manner not authorized by the powers of the Act. This, being
beyond the powers of the corporation, may admit of no confirmation whilst any
one dissenting voice is raised against it. This distinction is found in the
case of Preston v The Grand Collier Dock
Company (1840) 11 Sim 327, SC; 2 Railway Cases 335.
On the first point it is only
necessary to refer to the clauses of the Act to shew that, whilst the supreme
governing body, the proprietors at a special general meeting assembled, retain
the power of exercising the functions conferred upon them by the Act of
Incorporation, it cannot be competent to individual corporators to sue in the
manner proposed by the Plaintiffs on the present record. This in effect
purports to be a suit by cestui que trusts complaining of a fraud committed or
alleged to have been committed by persons in a fiduciary character. The
complaint is that those trustees have sold lands to themselves, ostensibly for
the benefit of the cestui que trusts. The proposition I have advanced is that,
although the Act should prove to be voidable, the cestui que trusts may elect
to confirm it. Now, who are the cestui que trusts in this case? The
corporation, in a sense, is undoubtedly the cestui que trust; but the majority of
the proprietors at a special general meeting assembled, independently of any
general rules of law upon the subject, by the very terms of the incorporation
in the present case, has power to bind the whole body, and every individual
corporator must be taken to have come into the corporation upon the terms of
being liable to be so bound. How then can this Court act in a suit constituted
as this is, if it is to be assumed, for the purposes of the argument, that the
powers of the body of the proprietors are still in existence, and may lawfully
be exercised for a purpose like that I have suggested? Whilst the Court may be
declaring the acts complained of to be void at the suit of the present
Plaintiffs, who in fact may be the only proprietors who disapprove of them, the
governing body of proprietors may defeat the decree by lawfully resolving upon
the confirmation of the very acts which are the subject of the suit. The very
fact that the governing body of proprietors assembled at the special general
meeting may so bind even a reluctant minority is decisive to shew that the
frame of this suit cannot be sustained whilst that body retains its
functions...
...
The second point which
relates to the charges and incumbrances alleged to have been illegally made on
the property of the company is open to the reasoning which I have applied to
the first point, upon the question whether, in the present case, individual
members are at liberty to complain in the form adopted by this bill; for why
should this anomalous form of suit be resorted to, if the powers of the
corporation may be called into exercise? But this part of the case is of
greater difficulty upon the merits. I follow, with entire assent, the opinion
expressed by the Vice-Chancellor in Preston v
The Grand Collier Dock Company, that if a transaction be void, and not merely
voidable, the corporation cannot confirm it, so as to bind a dissenting
minority of its members. But that will not dispose of this question. The case
made with regard to these mortgages or incumbrances is, that they were executed
in violation of the provisions of the Act. The mortgagees are not Defendants to
the bill, nor does the bill seek to avoid the security itself, if it could be
avoided, on which I give no opinion. The bill prays inquiries with a view to
proceedings being taken aliunde to set aside these transactions against the
mortgagees. The object of this bill against the Defendants is to make them
individually and personally responsible to the extent of the injury alleged to
have been received by the corporation from the making of the mortgages.
Whatever the case might be, if the object of the suit was to rescind these
transactions, and the allegations in the bill shewed that justice could not be
done to the shareholders without allowing two to sue on behalf of themselves
and others, very different considerations arise in a case like the present, in
which the consequences only of the alleged illegal Acts are sought to be
visited personally upon the directors. The money forming the consideration for
the mortgages was received, and was expended in, or partly in, the transactions
which are the subject of the first ground of complaint. Upon this, one question
appears to me to be, whether the company could confirm the former transactions,
take the benefit of the money that has been raised, and yet, as against the
directors personally, complain of the acts which they have done, by means
whereof the company obtains that benefit which I suppose to have been admitted
and adopted by such confirmation. I think it would not be open to the company
to do this; and my opinion already expressed on the first point is that the
transactions which constitute the first ground of complaint may possibly be
beneficial to the company, and may be so regarded by the proprietors, and admit
of confirmation. I am of opinion that this question—the question of
confirmation or avoidance—cannot properly be litigated upon this record, regard
being had to the existing state and powers of the corporation, and that
therefore that part of the bill which seeks to visit the directors personally
with the consequences of the impeached mortgages and charges, the benefit of
which the company enjoys, is in the same predicament as that which relates to
the other subjects of complaint. Both questions stand on the same ground, and,
for the reasons which I stated in considering the former point, these demurrers
must be allowed.
”
Developments
The rule was later extended
to cover cases where what is complained of is some internal irregularity in the
operation of the company. However, the internal irregularity must be capable of
being confirmed/sanctioned by the majority.
The rule in Foss v Harbottle
has another important implication. A shareholder cannot generally bring a claim
to recover any reflective loss - a diminution in the value of his or her shares
in circumstances where the diminution arises because the company has suffered
an actionable loss. The proper course is for the company to bring the action
and recoup the loss with the consequence that the value of the shares will be
restored.
Because Foss v Harbottle
leaves the minority in an unprotected position, exceptions have arisen and
statutory provisions have come into being which provide some protection for the
minority. By far and away the most important protection is the unfair prejudice
action in ss. 994-6 of the Companies Act 2006 (UK )
(s 232 Corporations Act 2001 in Australia Australia
Exceptions to the rule
There are certain exceptions
to the rule in Foss v. Harbottle, where litigation will be allowed. The
following exceptions protect basic minority rights, which are necessary to
protect regardless of the majority's vote.
1. Ultra vires and illegality
The directors of a company,
or a shareholding majority may not use their control of the company to paper
over actions which would be ultra vires the company, or illegal.
Smith v Croft (No 2) and
Cockburn v. Newbridge Sanitary Steam Laundry Co. [1915] 1 IR 237, 252-59 (per
O'Brien LC and Holmes LJ) for the illegality point
2. Actions requiring a
special majority
If some special voting
procedure would be necessary under the company's constitution or under the Companies
Act, it would defeat both if that could be sidestepped by ordinary resolutions
of a simple majority, and no redress for aggrieved minorities to be allowed.
Edwards v Halliwell [1950] 2
All ER 1064
3. Invasion of individual
rights
Pender v Lushington (1877) 6
Ch D 70, per Jessel MR ...and see again, Edwards v Halliwell [1950] 2 All ER
1064
4. "Frauds on the
minority"
Atwool v Merryweather (1867)
LR 5 EQ 464n, per Page Wood VC
Gambotto v WCP Limited (1995)
182 CLR 432 (Aus)
...and see Greenhalgh v Arderne
Cinemas Ltd for an example of what was not a fraud on the minority
Sections 397 - 409
397. Application to
1[Tribunal] for relief in cases of oppression.—(1) Any member of a company who
complain that the affairs of the company 2[are being conducted in a manner
prejudicial to public interest or] in a manner oppressive to any member or
members (including any one or more of themselves) may apply to the 1[Tribunal]
for an order under this section, provided such members have a right so to apply
in virtue of section 399.
(2) If, on any application
under sub-section (1), the Court is of opinion—
(a) that the company’s
affairs 2[are being conducted in a manner prejudicial to public interest or] in
a manner oppressive to any member or members; and
(b) that to wind up the
company would unfairly prejudice such member or members, but that otherwise the
facts would justify the making of a winding-up order on the ground that it was
just and equitable that the company should be wound up,
the 1[Tribunal] may, with a
view to bringing to an end the matters complained of, make such order as it
thinks fit.
comments
(i) The legal representatives
of a deceased member whose name is still on the register of members are
entitled to petition under sections 397 and 398 of the Companies Act; Worldwide
Agencies Pvt. Ltd. v. Mrs. Margarat T. Desor, AIR 1990 SC 737.
(ii) The law has not defined
what is ‘oppression’ for purposes of section 397 and it is left to Courts to
decide on the facts of each case whether there is such oppression as calls for
action under this section; Shanti Prasad Jain v. Kalinga Tubes Ltd., 1965 (35)
Comp. Cas. 351: 1965 (1) Com LJ 193: AIR 1965 SC 1535.
(iii) The conduct of the
majority shareholders should not only be oppressive to the minority but must
also be burdensome, harsh and wrongful and continuing up to the date of
petition. The lack of confidence between the majority and minority shareholders
should also spring from oppression of minority in the management of the
company’s affairs; Shanti Prasad Jain v. Kalinga Tubes Ltd., 1965 (35) Comp.
Cas. 351: 1965 (1) Com LJ 193: AIR 1965 SC 1535.
———————————–
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
2. Subs. by Act 53 of 1963,
sec. 10, for “are being conducted” (w.e.f. 1-1-1964).
398. Application to Tribunal
for relief in cases of mismanage-ment.—
398. Application to
1[Tribunal] for relief in cases of mismanage-ment.—(1) Any members of a company
who complain—
(a) that the affairs of the
company 2[are being conducted in a manner prejudicial to public interest or] in
a manner prejudicial to the interests of the company; or
(b) that a material change
not being a change brought about by, or in the interests of, any creditors
including debenture holders, or any class of shareholders, of the company) has
taken place in the management or control of the company, whether by an
alteration in its Board of directors, 3[***] 4[or manager], 5[***] or in the
ownership of the company’s shares, or if it has no share capital, in its
membership, or in any other manner whatsoever, and that by reason of such
change, it is likely that the affairs of the company 6[will be conducted in a
manner prejudicial to public interest or] in a manner prejudicial to the
interests of the company,
may apply to the 1[Tribunal]
for an order under this section, provided such members have a right so to apply
in virtue of section 399.
(2) If, on any application
under sub-section (1), the 1[Tribunal] is of opinion that the affairs of the
company are being conducted as aforesaid or that by reason of any material
change as aforesaid in the management or control of the company, it is likely
that the affairs of the company will be conducted as aforesaid, the 1[Tribunal]
may, with a view to bringing to an end or preventing the matters complained of
or apprehended, make such order as it thinks fit.
comments
(i) The holder of a General
Power of Attorney for and on behalf of a shareholder can validly give consent
to a petition under sections 397 and 398 of the Act; P. Punnaiah v. Jeypore
Sugar Co. Ltd., AIR 1994 SC 2258: 1994 (81) Comp. Cas. 1: 1994 (2) Com LJ 13.
(ii) Section 398 comes into
play when there is actual mismanagement or apprehension of mismanagement of the
affairs of the company. It may be contrasted with section 397 which deals with
oppression to the minority shareholders, whether there is prejudice to the
company or not; Shanti Prasad v. Kalinga Tubes Ltd., 1965 (35) Comp. Cas. 351:
1965 (1) Com LJ 193: AIR 1965 SC 1535.
—————————–
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
2. Subs. by Act 53 of 1963,
sec. 11, for “are being conducted” (w.e.f. 1-1-1964).
3. The words “or of its
managing agent or secretaries and treasurers,” omitted by Act 53 of 2000, sec.
178 (w.e.f. 13-12-2000).
4. Ins. by Act 65 of 1960,
sec. 153 (w.e.f. 28-12-1960).
5. Certain words omitted by
Act 53 of 2000, sec. 178 (w.e.f. 13-12-2000).
6. Subs. by Act 53 of 1963,
sec. 11, for “will be conducted” (w.e.f. 1-1-1964).
399. Right to apply under
sections 397 and 398.——
(1) The following members of
a company shall have the right to apply under section 397 or 398:—
(a) in the case of a company
having a share capital, not less than one hundred members of the company or not
less than one-tenth of the total number of its members, whichever is less or
any members or members holding not less than one-tenth of the issued share
capital of the company, provided that the applicant or applicants have paid all
calls and other sums due on their shares;
(b) in the case of a company
not having a share capital, not less than one-fifth of the total number of its
members.
(2) For the purposes of
sub-section (1), where any share or shares are held by two or more persons
jointly, they shall be counted only as one member.
(3) Where any members of a company
are entitled to make an application in virtue of sub-section (1), any one or
more of them having obtained the consent in writing of the rest, may make the
application on behalf and for the benefit of all of them.
(4) The Central Government
may, if in its opinion circumstances exist which make it just and equitable so
to do, authorise any member or members of the company to apply to the
1[Tribunal] under section 397 or 398, notwithstanding that the requirements of
clause (a) or clause (b), as the case may be, of sub-section (1) are not
fulfilled.
(5) The Central Government
may, before authorising any member or members as aforesaid, require such member
or members to give security for such amount as the Central Government may deem
reasonable, for the payment of any costs which the 1[Tribunal] dealing with the
application may order such member or members to pay to any other person or
persons who are parties to the application.
comments
Sections 399 does not either
expressly or by implication indicate that the consent to be accorded thereunder
should be given by the member personally alone; P. Punnaiah v. Jeypore Sugar
Co. Ltd., AIR 1994 SC 2258.
——————————-
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
400. Notice to be given to
Central Government of applications under sections 397 and 398.—
The 1[Tribunal] shall give
notice of every application made to it under section 397 or 398 to the Central
Government, and shall take into consideration the representation, if any, made
to it by that Government before passing a final order under that section.
comments
Section 400 of the Act does
not envisage a fresh notice to be issued to the Central Government at the
appellate stage; Cosmo Steels Pvt. Ltd. v. Jairam Das Gupta, 1978 (48) Comp.
Cas. 312: AIR 1978 SC 375.
——————————-
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
401. Right of Central
Government to apply under sections 397 and 398.—
The Central Government may
itself apply to the 1[Tribunal] for an order under section 397 or 398, or cause
an application to be made to the 1[Tribunal] for such an order by any person
authorised by it in this behalf.
——————————-
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
Section 402. Powers of
1[Tribunal] on application under section section 397 or 398,.—Without prejudice
to the generality of the powers of the 1[Tribunal] under section 397 or 398,
any order under either section may provide for—
(a) the regulation of the
conduct of the company’s affairs in future;
(b) the purchase of the
shares or interests of any members of the company by other members thereof or
by the company;
(c) in the case of a purchase
of its shares by the company as aforesaid, the consequent reduction of its
share capital;
(d) the termination, setting
aside or modification of any agreement,
howsoever arrived at, between
the company on the one hand; and any of the following persons, on the other,
namely:—
(i) the managing director,
(ii) any other director,
2[***]
(v) the manager,
upon such terms and
conditions as may, in the opinion of the 1[Tribunal], be just and equitable in
all the circumstances of the case;
(e) the termination, setting
aside or modification of any agreement between the company and any person not
referred to in clause (d), provided that no such agreement shall be terminated,
set aside or modified except after due notice to the party concerned and provided
further that no such agreement shall be modified except after obtaining the
consent of the party concerned;
(f) the setting aside of any
transfer, delivery of goods, payment, execution or other act relating to
property made or done by or against the company within three months before the
date of the application under section 397 or 398, which would, if made or done
by or against an individual, be deemed in his insolvency to be a fraudulent
preference;
(g) any other matter for
which in the opinion of the 1[Tribunal] it is just and equitable that provision
should be made.
comments
When a direction for purchase
of shares is given by the Court under section 402 and consequent reduction in
share capital is to be effected, the procedure prescribed for reduction of
share capital in sections 100 to 104 is not required to be followed; Cosmo
Steels Pvt. Ltd. v. Jairam Das Gupta, 1978 (48) Comp. Cas. 312: AIR 1978 SC
375.
———————————-
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
2. Sub-clauses (iii) and (iv)
omitted by Act 53 of 2000, sec. 179 (w.e.f. 13-12-2000).
403. Interim order by
[Tribunal].
403. Interim order by 1[Tribunal].—Pending
the making by it of a final order under section 397 or 398, as the case may be,
the 1[Tribunal] may, on the application of any party to the proceeding, make
any interim order which it thinks fit for regulating the conduct of the company’s
affairs, upon such terms and conditions as appear to it to be just and
equitable.
——————————-
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
404. Effect of alteration of
memorandum or articles of company by order under section 397 or 398.—
(1) Where an order under
section 397 or 398 makes any alteration in the memorandum or articles of a
company, then, notwithstanding any other provision of this Act, the company
shall not have power except to the extent, if any, permitted in the order to
make without the leave of the 1[Tribunal] any alteration whatever which is
inconsistent with the order, either in the memorandum or in the articles.
(2) Subject to the provisions
of sub-section (1), the alterations made by the order shall in all respects
have the same effect as if they had been duly made by the company in accordance
with the provisions of this Act; and the said provisions shall apply
accordingly to the memorandum or articles as so altered.
(3) A certified copy of every
order altering, or giving leave to alter, a company’s memorandum or articles,
shall within 2[thirty] days after the making thereof, be filed by the company
with the Registrar who shall register the same.
(4) If default is made in
complying with the provisions of sub-section (3), the company, and every
officer of the company who is in default, shall be punishable with fine which
may extend to 3[fifty thousand rupees].
——————————-
1. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
2. Subs. by Act 31 of 1965,
sec. 62 and Sch., for “fifteen” (w.e.f. 15-10-1965).
3. Subs. by Act 53 of 2000,
sec. 180, for “five thousand rupees” (w.e.f. 13-12-2000).
405. Addition of respondents
to application under section 397 or 398.—
If the managing director or
any other director 1[***] or the manager, of a company, or any other person,
who has not been impleaded as a respondent to any application under section 397
or 398 applies to be added as a respondent thereto, the 2[Tribunal] shall, if
it is satisfied that there is sufficient cause for doing so, direct that he may
be added as a respondent accordingly.
——————————-
1. The words “, the managing
agent, secretaries and treasurers” omitted by Act 53 of 2000, sec. 181 (w.e.f.
13-12-2000).
2. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
406. Application of sections
539 to 544 to proceedings under sections 397 and 398.—
In relation to an application
under section 397 or 398, sections 539 to 544, both inclusive, shall apply in
the form set forth in Schedule XI.
407. Consequences of
termination or modification of certain agreements.—
(1) Where an order 1[***]
made under section 397 or 398 terminates, sets aside, or modifies an agreement
such as is referred to in clause (d) or (c) of section 402,—
(a) the order shall not give
rise to any claims whatever against the company by any person for damages or
for compensation for loss of office or in any other respect either in pursuance
of the agreement or otherwise;
(b) no managing or other
director 2[***] or manager whose agreement is so terminated or set aside 3[***]
shall, for a period of five years from the date of 4[the order terminating or
setting aside the agreement] without the leave of the 5[Tribunal] be appointed,
or act, as the managing or other director 2[***] or manager of the company.
(2) (a) Any person who
knowingly acts as a managing or other director 2[***] or manager of a company
in contravention of clause (b) of sub-section (1);
6[***]
(c) every other director or
every director, as the case may be, of the company, who is knowingly a party to
such contravention,
shall be punishable with
imprisonment for a term which may extent to one year, or with fine which may
extend to 7[fifty thousand rupees] or with both.
(3) 8[No leave shall be
granted] under clause (b) of sub-section (1) unless notice of the intention to
apply for leave has been served on the Central Government and that Government
has been given an opportunity of being heard in the matter.
——————————-
1. The words “of a Court”
omitted by Act 31 of 1988, sec. 67 (w.e.f. 31-5-1991).
2. The words “, managing
agent, secretaries and treasurers,” omitted by Act 53 of 2000, sec. 182 (w.e.f.
13-12-2000).
3. The words “managing agent
or secretaries and treasurers” omitted by Act 53 of 2000, sec. 182 (w.e.f.
13-12-2000).
4. Subs. by Act 65 of 1960,
sec. 154 for “the order terminating the agreement” (w.e.f. 28-12-1960).
5. Subs. by Act 11 of 2003,
sec. 44, for “Company Law Board”. Earlier the words “Company Law Board” were
substituted by Act 31 of 1988, sec. 67, for the word “Court” (w.e.f.
31-5-1991).
6. Clause (b) omitted by Act
53 of 2000, sec. 182 (w.e.f. 13-12-2000).
7. Subs. by Act 53 of 2000,
sec. 182, for “five hundred rupees” (w.e.f. 13-12-2000).
8. Subs. by Act 31 of 1988,
sec. 67, for “No Court
408. Powers of Government to
prevent oppression or mismanage-ment.—
1[(1) Notwithstanding anything
contained in this Act, the Central Government may appoint such number of
persons as the 2[Tribunal] may, by order in writing, specify as being necessary
to effectively safeguard the interests of the company, or its shareholders or
the public interests to hold office as directors thereof for such period, not
exceeding three years on any one occasion, as it may think fit, if the
2[Tribunal], on a reference made to it by the Central Government or on an
application of not less than one hundred members of the company or of the
members of the company holding not less than one-tenth of the total voting
power therein, is satisfied, after such inquiry as it deems fit to make, that
it is necessary to make the appointment or appointments in order to prevent the
affairs of the company being conducted either in a manner which is oppressive
to any members of the company or in a manner which is prejudicial to the
interests of the company or to public interest:
Provided that in lieu of
passing an order as aforesaid, the 2[Tribunal] may, if the company has not
availed itself of the option given to it under section 265, direct the company
to amend its articles in the manner provided in that section and make afresh
appointments of directors in pursuance of the articles as so amended, within
such time as may be specified in that behalf by the 2[Tribunal].
(2) In case the 2[Tribunal]
passes an order under the proviso to sub-section (1), it may, if it thinks fit,
direct that until new directors are appointed in pursuance of the order
aforesaid, such number of persons as the 2[Tribunal] may, by order, specify as
being necessary to effectively safeguard the interests of the company, or its
shareholders or the public interest, shall hold office as additional directors
of the company and on such directions, the Central Government shall appoint
such additional directors.]
(3) For the purpose of
reckoning two-thirds or any other proportion of the total number of directors
of the company, any director or directors appointed by the Central Government
under sub-section (1) or (2) shall not be taken into account.
3[(4) A person appointed
under sub-section (1) to hold office as a director or a person directed under
sub-section (2) to hold office as an additional director, shall not be required
to hold any qualification shares nor his period of office shall be liable to
determination by retirement of directors by rotation; but any such director or
additional director may be removed by the Central Government from his office at
any time and another person may be appointed by that Government in this place
to held office as a director or, as the case may be, an additional director.
(5) No change in the Board of
directors made after a person is appointed or directed to hold office as a
director or additional director under this section shall, so long as such
director or additional director holds office, have effect unless confirmed by
the 4[Tribunal].]
5[(6) Notwithstanding
anything contained in this Act or in any other law for the time being in force,
where any person is appointed by the Central Government to hold office as
director or additional director of a company in pursuance of sub-section (1) or
sub-section (2), the Central Government may issue such directions to the
company as it may consider necessary or appropriate in regard to its affairs
6[and such directions may include directions to remove an auditor already
appointed and to appoint another auditor in his place or to alter the articles
of the company, and upon such directions being given, the appointment, removal
or alteration, as the case may be, shall be deemed to have come into effect as
if the provisions of this Act in this behalf have been complied with without
requiring any further act or thing to be done].
(7) The Central Government
may require the persons appointed as directors or additional directors in
pursuance of sub-section (1) or sub-section (2) to report to the Central
Government from time to time with regard to the affairs of the company.]
——————————-
409. Power of 1[Tribunal] to
prevent change in Board of directors likely to affect company
prejudicially.—(1) Where a complaint is made to the 1[Tribunal] by the managing
director or any other director 2[3[***] or the manager], or a company that as a
result of a change which has taken place or is likely to take place in the
ownership of any shares held in the company, a change in the Board of directors
is likely to take place which (if allowed) would affect prejudicially the
affairs of the company, the 1[Tribunal] may, if satisfied, after such inquiry
as it thinks fit to make that it is just and proper so to do by order, direct
that 4[no resolution passed or that may be passed or no action taken or that
may be taken] to effect a change in the Board of directors after the date of
the complaint shall have effect unless confirmed by the 5[Tribunal]; and any
such order shall have effect notwithstanding anything to the contrary contained
in any other provision of this Act or in the memorandum or articles of the
company, or in any agreement with, or any resolution passed in general meeting
by, or by the Board of directors of the company.
(2) The 5[Tribunal] shall
have power when any such complaint is received by it, to make an interim order
to the effect set out in sub-section (1), before making or completing the
inquiry aforesaid.
(3) Nothing contained in
sub-sections (1) and (2) shall apply to a private company, unless it is a
subsidiary of a public company.
32. Foss v. Harbottle (1843) 2 Hare 461 : (1843) 67 ER 189
Foss was a shareholder in a
company formed to buy land for use as a pleasure park. Foss alleged that the
defendants had defrauded the company. Foss and others in the minority attempted
to sue the defendants
HELD : Since the members of
the company had not been consulted and since it was possible that the company
in membership could resolve to allow the defendants to retain their alleged
profit, the court would not permit the minority to proceed with their action.
35. Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535
Facts: - Share of one pvt
company was held equally by two groups. The petitioner was introduced to
provide financial and administrative help. He was allotted shares equal to both
the groups and was made the chairman of the board of directors. There was an agreement between them to
maintain the equilibrium but nothing was mentioned in the article of
association. The company’s business flourished. In order to avail the loan
facilities provided by the Orissa Government the company was converted into a
public company. A substantial increase of capital was proposed. The two groups
having majority both in the board and general meeting resolved to offer and
allotted the new issue to outsiders selected by them.
The petitioner contended that
the allottees were friends of the majority group and that allotment had been
made purposely to them with the mala fide intention to increase their voting
strength and to squeeze out the petitioner. This he contended was oppression
within the meaning of S397 of the Companies Act, 1956. He relied upon an
observation in Piercy v S Mills & Co Ltd to the effect that if the shares
were issued to the public with the immediate object of controlling the greater
number of shares in the company and of obtaining the necessary statutory
majority for passing a special resolution then it will not be a valid bona fide
exercise of the powers.
The question was whether the
majority power was exercised in good faith in the interest of the company or
only to deprive the petitioner of his right u/S 81.
Barman J held that the
control of the majority amounted to an act of oppression of the minority. But
on appeal the judgment was reversed by Misra J of the Orissa HC who delivered
the leading judgment was of the opinion that “private agreement between the
parties to maintain the equilibrium was not binding on the company”. “The fact
that the affairs of the company were managed with holding of shares in equal
proportion amongst the three groups for a period of 4 yrs by itself cannot
create a right in favour of the petitioner that it must continue in the same
manner even when the company becomes public. To compel the majority
shareholders in these circumstances to offer the new shares only to the
existing shareholders would far from being an oppression of the minority,
amount to depriving the majority of a right conferred upon them by S81
entitling them to direct free issue of shares. It would also not be compatible
with dynamic concept of industrial expansion. The balance is bound to be disturbed
and equilibrium lost even if the affairs of the company would be conducted bona
fide. [S81 was amended in 1960 – to exclude the rights of pre-emption of the
existing shareholders, a special resolution is necessary and if only an
ordinary resolution has been passed a prior approval of the Central Government
is necessary]
If voting power of the new
allottees was utilized by the majority group, 75% of the votes would
concentrate in their hands. But that the court held was not sufficient to show
that there was a combination to squeeze out the petitioner.
Wanchoo J. said that the
seven persons to whom the new shares were issued respectable persons of
independent means and there was nothing to show that they were stooges of the
majority group.
36. Rajahmundry Electric Supply Corporation Ltd. v. A. Nageshwara Rao,
AIR 1956 SC 213
An application was filed by
the first respondent under s. 162 clauses (v) and (vi) of the Indian Companies
Act for the winding up of
the Company on the grounds, inter-alia, that
the affairs of the Company were being mismanaged and that the directors had misappropriated the funds of the Company. In
the alternative it was prayed that action might be taken under s. 153-C and
appropriate orders be passed to protect the interests of the shareholders. The
High Court held (i) that
the charges set out in the application bad been substantially proved and that it was a fit case for an order
for winding up being made under s. 162(vi) and (ii) that under the circumstances action could be taken under s. 153-C
and accordingly it appointed two administrators with all the powers of
directors to look after the affairs of
the Company. On appeal by special leave to the Supreme Court by the Company it
was contended that the application under s. 153-C was not maintainable inasmuch
as there was no proof that the
applicant had obtained the consent of
requisite number of shareholders as provided in sub-clause (3)(a)(i) to s.
153-C, that clause providing that a member applying for relief must obtain the
consent in writing of not less than one hundred members of the Company or not less than one-tenth of the members of the
Company whichever is less. It was alleged that thirteen members who had given
their consent to the filing of the application had subsequently withdrawn their
consent.
Held that the validity of a
petition must be judged on
the facts as they were at the time of its presentation, and a petition which was valid when presented
cannot, in the absence of a provision to that effect in the statute, cease to
be maintainable by reason of events
subsequent to its presentation. The withdrawal of consent by thirteen of the
members, even if true, could not affect either the right of the applicant to
proceed with the application or the juris- diction of the court to dispose of
it on its own merits. Held further that before taking action under s. 153-C the court must be satisfied
that circumstances exist on which an order for winding up could be made under
s. 162 and where therefore the facts
proved do not make out a case for winding up under s. 162, no order can be passed under s. 153-C.
The words "just and
equitable" in s. 162(vi) are not to be construed ejusdem generis with the
matters mentioned in clauses (i) to (v) of the section.
If there is merely a
misconduct of the directors in misappropriating the funds of the Company an
order for winding up would not be just and equitable but if in addition to such
misconduct, circumstances exist which
render it desirable in the
interests of the shareholders
that the Company should be wound up, s. 162(vi) would be no bar to the
jurisdiction of the court to make such an order. The order for winding up was
just and equitable in the cir-
cumstances of the present case.
Topic 7 : Winding up of Companies
Modes of Winding up –
Voluntary/shareholders winding up; Compulsory winding up; Winding up under the
supervision of the Tribunal – Grounds, Procedure (Part VII - sections 425 -
560)
Modes of Winding Up
There are three modes of winding up of a
company. These are:
(a) Compulsory winding up by the court
(Tribunal).
(b) Voluntary winding up, which is
itself of two kinds:
i. Members’ voluntary winding up.
ii. Creditors’ voluntary winding up.
(c) Winding up under the supervision of
the court.
COMPULSORY WINDING UP THE COURT (TRIBUNAL)
Section [433. Circumstances
in which company may be wound up by Tribunal.—A company may be wound up by the
Tribunal,—
(a) if the company has, by special resolution, resolved
that the company be wound up by the Tribunal;
(b) if default is made in delivering
the statutory report to the Registrar or in holding the statutory meeting;
(c) if the company does not commence its business within a
year from its incorporation, or suspends
its business for a whole year;
(d) if the number of members is reduced, in the
case of a public company, below seven, and in the case of a private company, below two;
(e) if the company is unable to pay its debts;
(f) if the Tribunal is of the
opinion that it is just and equitable* that the company should be wound up;
(g) if the company has made a
default in filing with the Registrar
its balance sheet and profit and loss
account or annual return
for any five consecutive financial
years;
(h) if the company has acted
against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public
order, decency or morality;
(i) if the Tribunal is of the
opinion that the company should be wound up under the circumstances specified
in section 424G(winding up of sick industrial company):
Provided
that the Tribunal shall make an order for winding up of a company under clause (h) on application made by the Central Government or a State Government.
When
the court is of the opinion that it is just
and equitable that the company should be wound up. This clause gives the
court a very wide power to order winding up wherever the court considers it
just and equitable to do. The court will consider such grounds to wind up a
company for just and equitable reasons as are not covered by the preceding
clauses.
The
following are the instances where the courts have exercised their discretion
under this clause:
i)
Where there is a deadlock in the management.
ii)
Where it is impossible to carry on the business of the company except at a
loss.
iii)
Where the company has ceased to carry on its authorized business and is engaged
in an illegal business.
iv)
Where the object for which the company is formed is impossible of further
pursuit.
v)
Where the minority is being disregarded or oppressed.
vi)
Where there is lack of confidence in directors.
vii)
Where a company has been conceived and brought forth in fraud.
Section 434.
Company when deemed unable to
pay its debts. —
(1) A company shall be deemed
to be unable to pay its debts—
(a) if a creditor, by
assignment or otherwise, to whom the company is indebted in a sum exceeding 1[one lakh rupees] then due, has served
on the company, by causing it to be delivered at its registered office, by
registered post or otherwise, a demand under his hand requiring the company
to pay the sum so due and the company has for three weeks thereafter neglected
to pay the sum, or to secure or compound for it to the reasonable satisfaction
of the creditor;
(b) if execution or other
process issued on a decree
or order of 2 [any Court or
Tribunal] in favour of a creditor of the company is returned unsatisfied in whole
or in part; or
(c) if it is proved to the satisfaction of the
3[Tribunal] that the company is
unable to pay its debts, and, in determining whether a company is unable
to pay its debts, the 3[Tribunal]
shall take into account the contingent and prospective liabilities
of the company.
(2) The demand referred to in
clause (a) of sub-section (1) shall be deemed to have been duly given under the
hand of the creditor if it is signed by any agent or legal adviser duly
authorised on his behalf, or in the case of a firm, if it is signed by any
such agent or legal adviser or by any member of the firm.
COMMENTS
A Court Receiver is a
creditor within the meaning of clause (a) of section 434 (1) of the Indian
Companies Act; Harinagar Sugar Mills Co. Ltd. v. M.W. Pradhan (now G.V. Dalvi)
Court Receiver, High Court, Bombay , 1966 (36) Comp. Cas. 426: 1966 (2) Com LJ
17: AIR 1966 SC 1707.
Following persons can apply
to the court, for petition for winding up:
o The company itself
o The creditor
o Any Contributory
o Registrar
O Any person authorised by central govt, in
case of oppression or mismanagement (397)
WHAT ORDERS, THE COURT MAY
PASS? (SEC 443)
The court may pass any one of
the following orders on hearing the winding up petition.
i.
Dismiss it, with or without costs
ii.
Make any interim order, as it thinks fit, or
iii.
Pass an order for winding up of the company with or without costs.
Consequences of court passing
an order for winding up:
If the court is satisfied,
that sufficient reasons exist in the petition for winding up, then it will pass
a winding up order. Once the winding up order is passed, following consequences
follow:
i. Court will send notice to an official
liquidator, to take change of the company. He shall carry out the process of
winding up, ( sec. 444)
ii. The winding up order, shall be applicable
on all the creditors and contributories, whether they have filed the winding up
petition or not.
iii. The official liquidator is appointed by
central Government ( sec. 448)
iv. The company shall relevant particulars,
relating to, assets, cash in hand, bank balance, liabilities, particulars of
creditors etc, to the official liquidator. ( sec. 454)
v. The official liquidator shall within six
months, from the date of winding up order, submit a preliminary report to the
court regarding :
o Particulars of Capital
o Cash and negotiable securities
o Liabilities
o Movable and immovable properties
o Unpaid calls, and
o An opinion, whether further inquiry is
required or not ( 455)
The Central Govt. shall keep
a cognizance over the functioning of official liquidator, and may require him
to answer any inquiry. (463)
STAY ORDER:
Where, the court has passed a
winding up order, it may stay the proceedings of winding up , on an application
filed by official liquidator, or creditor or any contributory. (466)
DISSOLUTION OF COMPANY (481)
Finally the court will order
for dissolution of the company, when:
o the affairs of the company are
completely wound up, or
o the official liquidator is unable to
carry on the winding up procedure for want of funds.
APPEAL: 483
An appeal from the decision
of court will lie before that court, before whom, appeals lie from any order or
decision of the former court in cases within its ordinary jurisdiction.
VOLUNTARY WINDING UP
A company may, voluntary wind
up its affairs, if it is unable to carry on its business, or if it was formed
only for a limited purpose, or if it is unable to meet its financial
obligation, and etc. A company may voluntary wind up itself, under any of the
two modes:
Members voluntarily winding up.
Creditors voluntarily winding up.
A company may voluntarily
wind up itself, either by passing:
- An ordinary resolution, where the purpose for which the company was formed has completed, or the time
limit for which the company was formed, has expired.
- Or By way of special resolution
Both types of resolution
shall be passed in the general meeting of the company. (S484)
Once the resolution of
voluntarily winding up is passed, and then the company may be wound up, either
through: Members voluntarily winding up, or Creditors voluntarily winding up
The only difference between
the above two, is that in case of members voluntarily winding up, Board
of Directors have to make a declaration to the effect, that company has no debts. (S488)
MEMBERS VOLUNTARILY WINDING UP
Directors of the company shall
call for a Board of Directors Meeting, and make a declaration of
winding up, accompanied by an Affidavit, stating that;
The company has no debts
to pay, or
The company will repay
it's debts; if any, within 3 years from the commencement of winding up,
as specified in declaration (S488)
WHO SHALL CARRY OUT THE
WINDING UP PROCEDURE? & WHAT SHALL BE THE PROCEDURE?
The Company shall appoint
one or more liquidators, in a
general meeting, who shall look after the affair of winding up
procedure, and distribution of assets. [S490 (1)]
The liquidator so appointed, shall be paid remuneration for his services, which shall also be fixed in
general meeting [S490 (2)]
The Company shall also give notice of appointment of liquidator to the registrar within ten days of appointment (S493)
Once the company has
appointed liquidator, the powers of Board of Directors,
Managing Director, and Manager, shall cease
to exist. (491)
The liquidator is generally given a free hand, to carry out
the winding up procedure, in such a manner, as he thinks best in the
interest of creditors, and company.
In case, the winding up
procedure, takes more than one year, then liquidator will have to call a
general meeting, at the end of each year, and he shall present, a complete
account of the procedure, and position of liquidator (S496)
WHEN AFFAIRS OF THE COMPANY ARE FULLY WOUND UP
The liquidator shall take the
following steps, when affairs of the company are fully wound up: (S497)
Call a general meeting of the members of the company, a lay before it,
complete picture of accounts, winding up procedure and how the
properties of company are disposed of.
The meeting shall be
called by advertisement, specifying the time, place and object of the
meeting.
The liquidator shall send
to, the Registrar and official Liquidator copy
of account, within one week of the meeting.
If from the report, official
liquidator comes to the conclusion, that affairs of the company are not
being carried in manner prejudicial to the interest of it's members, or
public, then the company shall be deemed to be dissolved from the date
of report to the court.
However, if official
liquidator comes to a finding, that affair have been carried in a manner
prejudicial to interest of member or public, then court may direct the
liquidator to investigate further.
ii. CREDITORS VOLUNTARILY WINDING UP
Where the resolution for
winding up has been passed, but the Board of Directors are not in a
position to give a declaration on the liability of company, they may call
a meeting of creditors, for the purpose of winding up. (S500)
It is the duty of Board of
Directors, to present a full statement of company’s affairs, and list
of creditors along with their dues, before the meeting of creditors.
[S500 (3)]
Whatever resolution, the
company passes in creditor's meeting,
shall be given to the Registrar within ten days of its passing. (S501)
WHO SHALL CARRY OUT THE
WINDING UP PROCEDURE ? & WHAT SHALL BE THE PROCEDURE?
Company in the general
meeting in which resolution for winding up is passed, and the creditors
in their meeting, appoint liquidator. They may either agree on one
liquidator, or if two names are suggested, then liquidator
appointed by creditor shall act. (S502)
Any director, member or
creditor may approach the court,
for direction that:
1. Liquidator appointed in
general meeting shall act, or
2. He shall act jointly
with liquidator appointed by creditor, or
3. Appointing official
liquidator, or
4. Some other person to be
appointed as liquidator. [S502 (2)]
The remuneration of
liquidator shall be fixed by the creditors, or by the court. (S504)
On appointment of
liquidator, all the power of Board of Directors shall cease. (S505)
In case, the winding up
procedure, takes more than one year, then he will have to call a general
meeting, and meeting of creditors, at the end of each year,
and he shall present, a complete account of the procedure, and the status
/ position of liquidation (S505).
WHEN AFFAIRS OF THE COMPANY
ARE FULLY WOUND UP ( S509)
The liquidator shall take the
following steps, when affair of the company are fully wound up:
Call a general meeting, and meeting of creditors, and lay before
it, complete picture of accounts, winding up procedure and how
the properties of company are disposed of.
The meeting shall be
called by advertisement, specifying the time, place and object of the
meeting.
The liquidator shall send
to the Registrar and official liquidator copy of account, within
one week after the meeting.
If from the report, official
liquidator comes to the conclusion, that affairs of the company are not
being carried in manner prejudicial to the interest of it’s members or public,
then the company shall be deemed to be dissolved, from the date of
report to the court.
However, if official
liquidator comes to a finding, that affairs have been carried in a
manner prejudicial to interest of members or public, and then court may
direct the liquidator to investigate further.
The Central Govt. shall
keep a cognizance over the functioning of official liquidator, and may
require him to answer any inquiry. (S463)
DISTRIBUTION OF PROPERTY OF
COMPANY ON VOLUNTARILY WINDING UP [BOTH MEMBERS AND CREDITORS VOLUNTARILY
WINDING UP]
Once the company is fully
wound up, and assets of the company sold or distributed, the proceedings
collected are utilised to pay off the liabilities. The proceedings so collected
shall be utilised to pay off the creditors in equal proportion. Thereafter any
money or property left may be distributed among members according to their
rights and interests in the company.
WINDING UP SUBJECT TO SUPERVISION OF COURT.
Winding up subject to
supervision of court, is different from "Winding up by court."
Here the court only
supervises the winding up procedure. Resolution for winding up is passed by
members in the general meeting. It is only for some specific reasons, that
court may supervise the winding up proceedings. The court may put up some
special terms and conditions also.
However, liberty is granted
to creditors, contributories or other to apply to court for some relief. (522)
· The court may also appoint
liquidators, in addition to already appointed, or remove any such liquidator.
The court may also appoint the official liquidator, as a liquidator to fill up
the vacancy.
· Liquidator is entitled to
do all such things and acts, as he thinks best in the interest of company. He
shall enjoy the same powers, as if the company is being wound-up voluntarily.
· The court also may exercise
powers to enforce calls made by the liquidators, and such other powers, as if
an order has been made for winding up the company altogether by court. ( 526)
PRIORITY IN DISPOSING
LIABILITIES [529 A & 530]
When the company is wound up,
by any mode, the liabilities shall be discharged in following priority.
1. Workman's dues.
2. Debts due to secured creditors, in case of
insolvency.
3. All ---------, taxes, cesses and rates due
from the company to the central government or a state govt.
4. All wages and salary of any employee due
within four months.
5. All -------- holiday remuneration becoming
payable to any employee.
· All such debts shall be
paid in full. If assets are insufficient to meet them, they shall abate in
equal proportions.
MONEY RECEIVED BY LIQUIDATOR:
(553)
Apart from an official
liquidator, every liquidator appointed by company or court to carry on the
winding up procedure, shall deposit the money received by him in a scheduled
bank, to the credit of a special banking account opened by him.
Apart from a normal company,
registered under the companies Act, 1956 there are other companies as well
winding up procedure for these companies are bit different from a company
registered under companies Act.
These companies are:
1. UNREGISTERED COMPANIES: (583)
In simple words, an
unregistered company is a company which is not registered or covered under
provisions of companies Act. 1956 (582)
· An unregistered company
cannot be wound up voluntarily, or, subject to super vision of court.
· However, the circumstances,
in which unregistered company may be wound up, are as follows:
o If the company, is dissolved, or has
ceased to carry on business, or is carrying on business only for the purposes
of winding up, it's affairs,
o If the company is unable to pay it's
debt
o If the court is of opinion, that it is
just and equitable, that the company should be wound up.
· A creditor, contributory,
or company itself by filing a petition, or any person authorised by central
government may institute winding up proceedings.
· In respect to other
aspects, the same provisions and procedure shall follow, as in winding up of
registered company.
· A foreign company, carrying
on business in India
1. FOREIGN COMPANY (S584)
A foreign company is a
company which is incorporated outside India ,
and having a place of business in India
Winding up of such companies
is only limited to the extent of it's assets in India India
· Winding up of a foreign
company can only be made through court.
· Even if the company had
been dissolved or ceased to exist in the country of its incorporation, winding
up order in this country can be made.
· Even if a foreign company
has been wound up according to foreign law, the courts in India
· Pendency of a foreign
liquidation does not affect the jurisdiction to make winding up order. The
Assets can be of any nature and do not take to be in the ownership of the
company and can come from any Source.
· As, for persons claiming to
be creditors, their presence, itself is sufficient. It is not required to be
shown, that company carried on business operations from any place of business
in India
2. GOVERNMENT COMPANY
A Govt. company, means a company, in which 51%
or more of, shares are held by a govt. company
Winding up procedure for a
government company registered under the companies Act, 1956, is nearly similar
to normal winding up procedure.
However, courts, take
interest of public into consideration, and priority is given to them, as a govt.
company is main function is to provide services to public.
40. German Date Coffee Co., In Re (1882) 20 Ch.
The objects of the company
were specific in that it was to make coffee from dates using a German patent.
The patent was never granted and coffee was made with a Swedish patent. The
company was solvent and the majority of shareholders wanted it to continue.
However two shareholders petitioned for a winding up on the grounds that its
objects had failed.
HELD: The substratum had
failed as it was impossible to carry out the objects for which the company was
formed.
43. Yenidje Tobacco Co. Ltd., Re (1916) 2 Ch.
A and B were the only
shareholders and directors of a company with equal rights of management and
voting power. After a time they became bitterly hostile to each other and
disagreed about the appointment of important servants of the company. All
communications between them were made through the secretary as they were not on
speaking terms with each other. The company made large profits in spite of the
disagreement.
Held, there was a complete
deadlock in the management and the company was ordered to be wound up.
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