BLS LLB 5 Years Sem 7 Company Law 2017-18 Question Paper with Solutions

A Director Identification Number, or DIN, is a unique identification number allotted by the Central Government to an individual intending to be appointed as a director of a company, on an application under section 153 of the Companies Act, 2013, the number being allotted under section 154 within one month of the application.

Section 152(3) provides that no person shall be appointed as a director of a company unless he has been allotted a DIN, so it is a condition precedent to holding office.

Cumulative preference shares are preference shares on which the arrears of dividend accumulate. If in any year the company earns no profit or declares no dividend, the unpaid preference dividend is carried forward as arrears and must be paid in full, together with the current year's dividend, before any dividend is paid on the equity shares.

Preference shares are PRESUMED CUMULATIVE unless the articles or the terms of issue provide otherwise, Webb v. Earle (1875) LR 20 Eq 556.

Section 25 of the Companies Act, 2013 provides that where a company allots or agrees to allot any securities of the company with a view to all or any of those securities being offered for sale to the public, any document by which the offer for sale to the public is made shall, for all purposes, be DEEMED TO BE A PROSPECTUS issued by the company, and all enactments and rules of law as to the contents of prospectuses and as to liability in respect of misstatements in and omissions from prospectuses, or otherwise relating to prospectuses, shall apply.

Section 161(3) of the Companies Act, 2013 provides that, subject to the articles of a company, the Board may appoint any person as a director nominated by any institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or by the Central Government or the State Government by virtue of its shareholding in a Government company.

A nominee director is therefore a director appointed to the Board at the instance of an outside institution which has a right to nominate him, typically a bank or financial institution which has lent to the company, a private equity investor under a shareholders' agreement, or the Government in a Government company.

The Investor Education and Protection Fund is a fund established by the Central Government under section 125(1) of the Companies Act, 2013, to which certain unclaimed and unpaid amounts are credited, and which is applied for the refund of those amounts to the persons entitled and for the promotion of investors' education, awareness and protection.

For full marks, cover: the advantages one by one, each with its section or case, and close with the disadvantages, since a note on "advantages" is stronger for showing the price.

1. Separate legal personality. On incorporation the company becomes, under section 9, a body corporate and a person in law distinct from its members, Salomon v. Salomon & Co. Ltd. [1897] AC 22. Everything else follows from this.

2. Limited liability. The member's liability is limited to the amount unpaid on his shares, section 2(22), or to the amount of his guarantee, section 2(21). Once his shares are fully paid he owes nothing further, however great the company's debts. This is the single greatest attraction of the form: it allows a person to risk a defined sum and not his whole estate.

3. Perpetual succession. The company continues until wound up or struck off, unaffected by the death, insolvency, retirement or insanity of a member. Members may come and go; the company goes on. A partnership, by contrast, is ordinarily dissolved by the death of a partner.

8. Capacity to sue and be sued, and to contract, in its own name, including with its own members, Lee v. Lee's Air Farming Ltd. [1961] AC 12.

9. Suitability for scale. A private company may have up to 200 members and a public company any number, against fifty for a partnership under the Rules made under section 464.

The disadvantages, which a five-mark note should acknowledge:

1. Formalities and cost of incorporation and of continuing compliance: annual returns, financial statements, audit, board and general meetings, and filings;
2. Loss of privacy. The memorandum, articles, annual return, financial statements and charges are all on a public file under section 399, so a competitor may read them;
3. Loss of control. The property is the company's, not the promoter's, and the promoter cannot deal with it as his own; a transfer of his business to the company attracts stamp duty, since it is a conveyance to a different person;

For full marks, cover: the two kinds under section 43, the terminology of capital from authorised to paid-up, differential rights and sweat equity, and the alteration of capital under section 61.

1. The two kinds, section 43

Section 43 provides that the share capital of a company limited by shares shall be of two kinds only:

1. Equity share capital, section 43(a), meaning all share capital which is not preference share capital, and which may be with voting rights, or with differential rights as to dividend, voting or otherwise in accordance with the prescribed rules; and
2. Preference share capital, defined in the explanation, meaning that part of the issued share capital which carries a preferential right as to the payment of dividend, at a fixed amount or a fixed rate, and as to the repayment of capital on a winding up. Both preferences must be present.

Section 43 does not apply to a private company where its memorandum or articles otherwise provide, under the section 462 exemption notification.

The difference between called-up and paid-up is the calls in arrear, and it is the measure of a member's remaining liability. Reserve capital is that part of the uncalled capital which the company has by special resolution determined shall not be called up except in the event of winding up.

There is no longer any minimum paid-up capital, the requirement of one lakh rupees for a private company and five lakh for a public company having been omitted by the Companies (Amendment) Act, 2015.

3. The classes within the two kinds

Preference shares may be cumulative or non-cumulative, presumed cumulative; participating or non-participating, presumed non-participating; convertible or non-convertible; and must all be redeemable under section 55(1), within twenty years, or thirty for infrastructure companies.

4. Alteration of share capital, section 61

A limited company having a share capital may, if so authorised by its articles, by an ORDINARY resolution in general meeting:

1. Increase its authorised share capital;
2. Consolidate and divide all or any of its share capital into shares of a larger amount, though a consolidation which changes the voting percentage of shareholders requires the approval of the Tribunal;
3. Convert fully paid shares into stock and reconvert stock into fully paid shares;
4. Sub-divide its shares into shares of a smaller amount, the proportion between the paid and unpaid amounts remaining the same; and
5. Cancel shares which have not been taken or agreed to be taken by any person, and diminish the amount of its share capital by the amount so cancelled.

A cancellation under section 61(1)(e) is expressly NOT a reduction of share capital, and needs no Tribunal order, because nothing has been paid on those shares. A genuine reduction of capital under section 66 requires a special resolution AND confirmation by the Tribunal after notice to creditors, and cannot be made while the company is in arrears in the repayment of deposits or interest.

For full marks, cover: the obligation and exemption, the timing rules with the first AGM distinguished, time day and place, notice and quorum, ordinary against special business, and the consequences of default.

Section 96(1) requires every company other than a One Person Company to hold, in each year, in addition to any other meetings, a general meeting as its annual general meeting, and to specify the meeting as such in the notices calling it.

1. Timing

3. Notice and quorum

Notice, section 101: not less than clear twenty-one days' notice in writing or by electronic mode, or shorter notice with the consent of not less than ninety-five per cent of the members entitled to vote. Notice goes to every member, the legal representative of a deceased member and the assignee of an insolvent member, the auditor or auditors, and every director. An accidental omission to give notice does not invalidate the proceedings.

Quorum, section 103: two members personally present in a private company; in a public company five if members are up to one thousand, fifteen if up to five thousand, and thirty above. A proxy is not counted.

4. Business

Ordinary business, section 102(2), is a closed list of four items:

1. The consideration of the financial statements and the reports of the Board of Directors and auditors;
2. The declaration of any dividend;
3. The appointment of directors in place of those retiring; and
4. The appointment of, and the fixing of the remuneration of, the auditors.

2. Section 99: the company and every officer in default are punishable with a fine up to one lakh rupees, and for a continuing default a further fine up to five thousand rupees for every day; and
3. Consequential defaults: the financial statements cannot be adopted or filed under section 137; the annual return must still be filed within sixty days of the date on which the AGM should have been held, section 92(4); no dividend can be declared; rotational directors cannot retire and be re-appointed; auditors cannot be appointed; and a run of missed AGMs leads to disqualification of every director under section 164(2) and, after five consecutive financial years, to winding up under section 271(d).

Conclusion. The annual general meeting is the one occasion in the year on which the Board must present itself to the members, and the Act therefore fixes its timing, its hour, its day and its place rather than leaving them to the directors. The consequences of default show how seriously the requirement is taken: fine under section 99, no adoption of accounts, no dividend, no retirement by rotation, no appointment of auditors, disqualification of every director under section 164(2) and, after five consecutive years, winding up under section 271(d).

Conditions, section 68(2):

1. Authorised by the articles;
2. The ratio of the aggregate of secured and unsecured debts after buy-back must not exceed TWICE the paid-up capital and free reserves, that is 2:1;
3. All the shares bought back must be fully paid up;
4. Where listed, in accordance with SEBI regulations; and
5. No offer of buy-back within ONE YEAR reckoned from the closure of the preceding offer.

Section 69, Capital Redemption Reserve. Where the buy-back is out of free reserves or the securities premium account, a sum equal to the NOMINAL VALUE of the shares bought back must be transferred to the Capital Redemption Reserve Account, and the details disclosed in the balance sheet. That account may be applied in paying up unissued shares to be issued as fully paid bonus shares.

Section 70, prohibitions. No company shall directly or indirectly purchase its own shares through any subsidiary company, including its own subsidiaries; through any investment company or group of investment companies; or if a default is subsisting in the repayment of deposits or interest, redemption of debentures or preference shares, payment of dividend, or repayment of a term loan or interest to a financial institution or bank, the bar ceasing three years after the default is remedied. Nor may it buy back if it has not complied with sections 92, 123, 127 and 129.

For full marks, cover: who may be appointed, the numbers, the ten modes with sections and tenure, and the procedural formalities.

Who may be appointed. Section 2(34): a director appointed to the Board. Section 149(3): only an individual, so no body corporate, association or firm. Every director must hold a Director Identification Number under section 152(3) and give his written consent in Form DIR-2 under section 152(5), which the company files in Form DIR-12 within thirty days.

Numbers, section 149(1): minimum three for a public company, two for a private company, one for a One Person Company; maximum fifteen, exceedable by special resolution. At least one director must have stayed in India for not less than 182 days in the financial year, section 149(3).

The modes:

1. First directors, named in the articles; failing that, the individual subscribers to the memorandum are deemed the first directors until directors are duly appointed;

5. Alternate director, section 161(2), appointed by the Board, if authorised by the articles or a general meeting resolution, for a director absent from India for not less than three months; vacates on the original director's return;
6. Nominee director, section 161(3), appointed on the nomination of an institution under any law or agreement, or by the Government in a Government company;
7. Casual vacancy, section 161(4), where the office of a director appointed in general meeting is vacated before the expiry of his term; filled by the Board, subject to approval by members at the immediate next general meeting, the appointee holding office only for the unexpired term;
8. Small shareholders' director, section 151, elected in a listed company by shareholders holding shares of nominal value not exceeding twenty thousand rupees;
9. Proportional representation, section 163, where the articles so provide, not less than two-thirds of the directors being appointed by the single transferable vote or cumulative voting, once in three years; and
10. By the Tribunal, section 242, in oppression and mismanagement proceedings, and by the Central Government under section 241(2).

Procedural formalities:

Conclusion. The appointment of directors is governed by the principle that the members choose the Board, section 152 making appointment by the company in general meeting the rule and the Board's powers under section 161 the exception, each of which is temporary and must be confirmed by the members. The procedural requirements, the Director Identification Number, the consent in Form DIR-2, the deposit under section 160, the disclosure in Form MBP-1 and the declaration in Form DIR-8, are not formalities but the means by which the company and the Registrar know that the person appointed is eligible and willing.

Salomon v. Salomon & Co. Ltd. [1897] AC 22 established it. Salomon sold his boot business to a company he formed, taking 20,000 fully paid shares and debentures of £10,000 secured by a floating charge; his wife and five children held one share each. On failure the assets sufficed to pay the debentures but left nothing for the unsecured creditors, who argued that the company was a sham, an alias or an agent for Salomon. The House of Lords held unanimously that the company was duly incorporated in accordance with the statute, that the motives of the promoters were irrelevant, that it was neither the agent nor the trustee of Salomon, and that his secured debentures ranked first. Lord Macnaghten: the company "is at law a different person altogether from the subscribers to the memorandum".

The consequences, each with its case:

1. Separate property. Macaura v. Northern Assurance Co. Ltd. [1925] AC 619: the holder of practically all the shares insured the company's timber in his own name and recovered nothing, having no insurable interest, since "no shareholder has any right to any item of property owned by the company". Bacha F. Guzdar v. CIT AIR 1955 SC 74: a dividend from a tea company is not agricultural income in the shareholder's hands;

2. The CONCESSION theory, closely allied: juristic personality is a concession of the sovereign, so a corporation exists only because the State permits it, which explains registration and the power to strike a company off;
3. The REALIST or ORGANISM theory, associated with Gierke and Maitland: a corporation is a real entity, a social organism with a group will of its own, which the law recognises rather than creates;
4. The BRACKET or SYMBOLIST theory, associated with Ihering: only the members are real, and the corporate name is merely a bracket placed around them for convenience, which is removed when the veil is lifted; and
5. The PURPOSE theory, associated with Brinz: the corporation is a subjectless property held for a purpose.

Why the theory matters practically. The alter ego or organic doctrine, drawn from the realist theory, attributes the acts and the state of mind of the directing mind and will to the company, which is how a company can be convicted of an offence requiring mens rea: Standard Chartered Bank v. Directorate of Enforcement (2005) 4 SCC 530; Iridium India Telecom Ltd. v. Motorola Inc. (2011) 1 SCC 74.

The limits:

Conclusion. The theory of corporate personality is the foundation on which the whole of company law rests, and Salomon v. Salomon & Co. Ltd. remains its clearest statement: once the company is registered, it is a person in law distinct from the subscribers, however few they are and however completely one of them controls it. The personality is real for the purposes of property, contract, suit and liability, but it is an artificial personality, so the company takes the rights the law gives a person and not those it reserves to a citizen, State Trading Corporation of India v. Commercial Tax Officer.

For full marks, cover: the automatic adjournment in section 174(4), what the continuing directors may and may not do, and then the quorum rule with the interested-directors exception.

(a) The subsequent procedure

Section 174(4) supplies the answer directly: if a meeting of the Board could not be held for want of quorum, then, unless the articles of the company otherwise provide, the meeting shall automatically stand adjourned to the SAME DAY at the SAME TIME AND PLACE IN THE NEXT WEEK, or, if that day is a NATIONAL HOLIDAY, till the next succeeding day which is not a national holiday, at the same time and place.

Three features of the rule are worth stating:

1. The adjournment is AUTOMATIC. No resolution is needed, and no fresh notice is required, since the adjourned meeting is a continuation of the same meeting, held at a time and place fixed by the statute itself;

So where the shortfall is not a mere failure to attend but a shortage of directors in office, the remedy is either to fill the vacancies, by appointing an additional director under section 161(1) or filling a casual vacancy under section 161(4), or to call a general meeting so that the members may appoint directors.

Two further routes if the deadlock persists:

1. Section 167(3): where all the directors of a company vacate their offices under section 167, the promoter or, in his absence, the Central Government shall appoint the required number of directors to hold office until directors are appointed by the company in general meeting; and
2. Section 175: matters other than those which section 179(3) requires to be decided at a Board meeting may be passed by circular resolution, by circulating the draft with the necessary papers to all the directors and obtaining the approval of a majority of the directors entitled to vote, such a resolution being noted at the next Board meeting. This is not available for the section 179(3) matters, which include making calls, borrowing, investing funds, granting loans, issuing securities, and approving the financial statements.

For a One Person Company having only one director, section 174 does not apply.

Contrast the quorum for a GENERAL meeting, section 103: two members personally present in a private company, and in a public company five where members are up to one thousand, fifteen where up to five thousand, and thirty above.

Conclusion. On these facts the meeting could not proceed, and the answer to (a) is that under section 174(4) it stands adjourned to the same day in the next week at the same time and place, or if that day is a national holiday to the next succeeding day which is not a national holiday, and at the adjourned meeting the directors present, whatever their number, are the quorum. The answer to (b) is that the quorum for a Board meeting is one third of the total strength or two directors, whichever is higher, section 174(1), the fraction being rounded up to the next whole number.

2. Through a private placement under section 42; or
3. Through a rights issue or a bonus issue in accordance with the Act, and in the case of a listed company or a company intending to get its securities listed, also in accordance with the SEBI Act, 1992 and the regulations made thereunder.

Section 23(2): a PRIVATE company may issue securities ONLY by way of a rights issue or a bonus issue, or through a private placement under section 42. It cannot make a public issue at all, because section 2(68)(iii) requires its articles to prohibit any invitation to the public to subscribe for any securities.

The essential features of a public issue:

1. A PROSPECTUS, defined in section 2(70) as any document described or issued as a prospectus, including a red herring or shelf prospectus, and any notice, circular, advertisement or other document inviting offers from the public for the subscription or purchase of securities. Its contents are prescribed by section 26 and it must be delivered to the Registrar for registration on or before publication, and is valid for ninety days;

(b) What the agreement is called

The agreement is an UNDERWRITING AGREEMENT, and the financial institution is the UNDERWRITER.

Underwriting is an agreement by which a person, in consideration of a commission, undertakes to subscribe for such of the shares or debentures offered to the public as are NOT TAKEN UP by the public. Its effect is to guarantee the company that the issue will be subscribed, so that the company is assured of its capital and the minimum subscription requirement in section 39 is satisfied.

Underwriting commission is the consideration paid for that guarantee, and the critical point is that it is payable on the WHOLE AMOUNT UNDERWRITTEN, whether or not the underwriter is in fact called upon to take up a single share. What is bought is the guarantee, not the subscription.

Section 40(6) permits a company to pay commission to any person in connection with the subscription to its securities, subject to the conditions in Rule 13 of the Companies (Prospectus and Allotment of Securities) Rules, 2014:

1. The payment must be authorised by the articles;

Sub-underwriting is an arrangement by which the underwriter in turn spreads his risk among sub-underwriters. It is a contract between the underwriter and the sub-underwriters, and the company is not a party to it.

For a listed issue, underwriting is regulated by the SEBI (Underwriters) Regulations, 1993 and by the ICDR Regulations, which require the underwriter to be registered with SEBI and prescribe his obligations.

For full marks, cover: that the removal is valid, section 169 with its full procedure, the compensation saving, and then the two exceptions, of which the Tribunal-appointed director is one.

(a) Is the removal valid, and what are the prerequisites?

Yes, the removal is valid. Section 169(1) of the Companies Act, 2013 provides that a company may, by ORDINARY RESOLUTION, remove a director, not being a director appointed by the Tribunal under section 242, BEFORE THE EXPIRY OF THE PERIOD OF HIS OFFICE after giving him a reasonable opportunity of being heard.

3. The right to be heard. The director is entitled to be heard on the resolution at the meeting, WHETHER OR NOT HE IS A MEMBER of the company. This is the substantive safeguard, and a removal without it is bad.

4. The written representation. Where notice has been given of a resolution to remove a director and the director makes a representation in writing to the company of reasonable length and requests its notification to members, the company shall, unless the representation is received by it too late:

1. State the fact of the representation having been made in any notice of the resolution given to members; and
2. Send a copy of the representation to every member to whom notice of the meeting is sent, whether before or after receipt of the representation.

If a copy is not sent because it was received too late or because of the company's default, the director may require that the representation be READ OUT at the meeting, without prejudice to his right to be heard orally.

1. As depriving a person removed of any compensation or damages payable to him in respect of the termination of his appointment as director or of any other appointment terminating with that as director, in accordance with the terms of any contract or of any agreement; or
2. As derogating from any power to remove a director which may exist apart from this section.

Southern Foundries (1926) Ltd. v. Shirlaw [1940] AC 701 is the principle: a company may alter its articles and remove a managing director, but if in doing so it breaks a service contract, it is liable in DAMAGES. The statutory power to end the OFFICE is not a licence to break a CONTRACT.

(b) Can a director appointed by the Tribunal be removed so?

NO. A director appointed by the Tribunal under section 242 CANNOT be removed under section 169.

The words of section 169(1) exclude him in terms: a company may remove a director "not being a director appointed by the Tribunal under section 242".

How, then, may such a director be removed?

1. A Tribunal-appointed director may be removed or replaced by the Tribunal itself, which retains control of its own order and may modify it; and
2. A proportional representation director goes at the end of the three-year period, appointments under section 163 being made once in three years, or on vacation of office under section 167 or resignation under section 168, both of which apply to him like any other director.

Conclusion. On these facts the removal is valid, and the answer to (a) is that section 169 permits a company to remove any director before the expiry of his term by ordinary resolution, provided special notice is given under section 115, the director is given a reasonable opportunity of being heard, and his representation in writing is circulated or read out at the meeting. The answer to (b) is that a director appointed by the Tribunal under section 242 cannot be removed in this way, because his appointment is the Tribunal's own order and only the Tribunal may modify it.

For full marks, cover: the problem the statement identifies, the rule of majority with Foss v. Harbottle, its exceptions with cases, the statutory remedies, the other minority protections, and a reasoned conclusion on whether the balance is properly struck.

1. The problem

A company acts by resolutions of its members, and resolutions are carried by majorities. Two dangers follow, and the statement in the question identifies the need to hold them apart.

If every decision could be reopened at the suit of a dissatisfied member, no company could function: management would be paralysed by litigation and the majority's investment would be held hostage by a single objector.

If, on the other hand, the majority were answerable to nobody, the minority's investment would be at the mercy of those who control the votes, and in a country where most companies have a concentrated promoter shareholding that is not a theoretical risk.

3. The exceptions, where minority protection begins

1. Ultra vires or illegal acts, which no majority can ratify. Bharat Insurance Co. Ltd. v. Kanhaiya Lal AIR 1935 Lah 792;
2. Acts requiring a special majority but done by an ordinary one. Edwards v. Halliwell [1950] 2 All ER 1064;
3. Invasion of individual membership rights: the right to vote and have the vote counted (Pender v. Lushington (1877) 6 Ch D 70), to a declared dividend, to have his name on the register, to notice of meetings, to enforce the articles under section 10, and to a proportionate offer under section 62;
4. Fraud on the minority, where those in control use their votes to benefit themselves at the company's or the minority's expense and are themselves the wrongdoers. Menier v. Hooper's Telegraph Works (1874) LR 9 Ch App 350; Cook v. Deeks [1916] 1 AC 554, where three of four directors took a railway contract for themselves and used their majority shareholding to resolve that the company had no interest in it, and the Privy Council held they could not ratify their own wrong; and
5. Oppression and mismanagement, now statutory.

Section 244, who may apply: in a company having a share capital, not less than one hundred members or one-tenth of the total number of members, whichever is less, or members holding not less than one-tenth of the issued share capital, all calls being paid; in a company without share capital, one-fifth of the total number of members. The Tribunal may WAIVE any of these requirements, which answers the old complaint that the threshold was itself a barrier.

Section 242, the Tribunal's powers, are deliberately wide: the regulation of the conduct of the company's affairs in future; the purchase of the shares of any members by other members or by the company, with a consequent reduction of capital; restrictions on the transfer or allotment of shares; the termination, setting aside or modification of any agreement with the managing director, manager or director; the setting aside of a fraudulent preference; the removal of the managing director, manager or directors; the recovery of undue gains; and the appointment of directors.

5. Class action, section 245

A genuinely new remedy, and the Indian answer to the Satyam scandal. Members or depositors, or any class of them, may apply to the Tribunal to restrain the company from acting ultra vires, from committing a breach of the memorandum or articles, or from acting on a resolution obtained by suppression of material facts, and may claim damages or compensation against the company, its directors, its AUDITORS INCLUDING THE AUDIT FIRM, and any expert, adviser or consultant. The requisite number is one hundred members or such percentage as prescribed, whichever is less.

6. The other minority protections

1. Section 47: one vote per equity share, so voting power tracks capital;
2. Section 48: a variation of class rights requires the consent of three-fourths of that class, and the holders of not less than ten per cent who did not consent may apply to the Tribunal to have it cancelled;
3. Section 62: the rights issue, so that a member's proportion cannot be diluted without an offer to him;
4. Section 151: a small shareholders' director on a listed company's board;

The modern position is therefore that the majority governs, but governs subject to a standard of fair dealing that the Tribunal will enforce, and that is the balance the statement in the question describes. Whether it is properly struck is a fair question: the buy-out order under section 242(2)(b) has become the workhorse remedy, and it gives the minority an exit at a fair value rather than a share in control, which some regard as an admission that in a closely held Indian company the minority's realistic remedy is money, not voice.

Conclusion. The balance the question speaks of is struck by allowing the majority to govern while denying it the power to oppress. The rule in Foss v. Harbottle gives the company its own voice and prevents a multiplicity of suits, and the exceptions to it, together with sections 241, 242 and 245, give the minority a remedy where the majority acts in a manner burdensome, harsh and wrongful, or prejudicial to the public interest. Whether the balance is properly struck is a fair question, because the buy out order under section 242(2)(b) has become the workhorse remedy and it gives the minority money rather than voice.

2. The procedure, section 56

Step 1: the instrument of transfer. Section 56(1): a company shall not register a transfer of securities unless a proper instrument of transfer, in the prescribed FORM SH-4, DULY STAMPED, DATED AND EXECUTED by or on behalf of the transferor and the transferee, and specifying the name, address and occupation, if any, of the transferee, has been delivered to the company by the transferor or the transferee within a period of SIXTY DAYS from the date of execution, along with:

1. The certificate relating to the securities; or
2. If no such certificate is in existence, the letter of allotment.

Step 2: stamping. The instrument must be duly stamped under the Indian Stamp Act, 1899, and the stamps cancelled at or before the time of execution. An unstamped or insufficiently stamped instrument is not a proper instrument of transfer.

Step 3: delivery within sixty days. Where the instrument of transfer has been LOST, or has not been delivered within the sixty days, the company may register the transfer on such terms as to indemnity as the Board may think fit. So the sixty-day rule is not absolute; it is subject to the Board's power to accept an indemnity.

Section 56(5): the transfer of any security made by a legal representative of a deceased person shall be VALID as if he had been the holder at the time of the execution of the instrument of transfer. So a legal representative may transfer without first being registered himself.

Section 56(6): default in complying with sections 56(1) to (5) makes the company liable to a penalty and every officer in default liable to a penalty. Section 56(7): where a depository or depository participant transfers securities with an intention to defraud, they are liable under section 447.

For dematerialised securities held with a depository under the Depositories Act, 1996, the transfer is effected by book entry and section 56 does not apply; the depository's record is the evidence of title. For listed companies, transfer of securities in physical form is no longer permitted except for transmission and transposition, under the SEBI Listing Regulations.

1. In the case of a private company, the transferee may appeal to the Tribunal within THIRTY DAYS from the date of receipt of the notice of refusal, or, where no notice has been sent by the company, within SIXTY DAYS from the date on which the instrument of transfer or the intimation of transmission was delivered to the company; and
2. In the case of a public company, if it without sufficient cause refuses to register the transfer within thirty days of the date on which the instrument was delivered, the transferee may appeal to the Tribunal within sixty days of that refusal, or, where no intimation has been received, within ninety days of the delivery of the instrument.

2. The Tribunal's powers, section 58(5). The Tribunal, while dealing with such an appeal, may, after hearing the parties:

1. Dismiss the appeal; or
2. By order DIRECT that the transfer or transmission shall be REGISTERED by the company, and the company shall comply within TEN DAYS of the receipt of the order; or
3. Direct rectification of the register and also direct the company to pay DAMAGES, if any, sustained by any party aggrieved.

4. Other remedies:

1. A refusal which is part of a course of conduct may found an application under sections 241 and 242 for oppression and mismanagement, the Tribunal having power under section 242(2)(c) to impose restrictions on the transfer or allotment of shares;
2. Section 56(6) penalties against the company and every officer in default; and
3. Where the company is listed, a complaint to SEBI and to the stock exchange, and to the Stakeholders Relationship Committee under section 178(5), whose function is to consider and resolve the grievances of security holders.

4. May a company ever refuse?

A private company may, since its articles must restrict the right to transfer, section 2(68)(i), and refusal is the mechanism of that restriction. But the power must be exercised:

1. Within the four corners of the articles;
2. Bona fide and in the interests of the company, and not for a collateral purpose; and
3. Within thirty days, with reasons given.

For full marks, cover: the golden rule quoted with its three limbs and Kylsant, the statutory contents in section 26, then the remedies under four heads with the defences, who may sue, and the ladder of fault.

1. The golden rule

The golden rule for framing a prospectus was stated by Kindersley V-C in New Brunswick and Canada Railway and Land Co. v. Muggeridge (1860) 1 Dr & Sm 363:

R. v. Kylsant [1932] 1 KB 442 illustrates the third and must be given. The prospectus of the Royal Mail Steam Packet Company stated that dividends had been paid regularly over a long period, which was literally true. It omitted that they had been paid out of abnormal wartime reserves while the company had been trading at a substantial loss throughout. The statement was held false in a material particular and the chairman was convicted.

The rule applies to a statement of intention as much as to a statement of past fact. Edgington v. Fitzmaurice (1885) 29 Ch D 459, Bowen LJ: "the state of a man's mind is as much a fact as the state of his digestion", so a statement of the purpose of an issue which the directors never held is a misstatement of existing fact.

A copy must be delivered to the Registrar for registration on or before the date of publication, and the prospectus is valid for ninety days from that delivery. Section 26(9) penalises the issue of a prospectus in contravention.

3. The remedies

Keep them under four heads.

A. Against the COMPANY

1. Rescission of the contract of allotment. An allottee induced by a material misrepresentation of fact on which he relied may rescind, have his name removed from the register and recover his money with interest.

The requirements: a statement of fact, not of law or of mere opinion; materiality; reliance; and prompt action.

The right is lost in four ways:

1. By affirmation, express or implied, such as attending meetings, accepting dividends or attempting to sell the shares;
2. By unreasonable delay or laches, Re Christineville Rubber Estates Ltd.;

2. Every person who has authorised himself to be named and is named in the prospectus as a director, or as having agreed to become one;
3. Every promoter;
4. Every person who has authorised the issue of the prospectus; and
5. Every expert referred to in section 26(5).

Section 35(3): where it is proved that the prospectus was issued with INTENT TO DEFRAUD the applicants or any other person, or for any fraudulent purpose, every such person shall be personally responsible, WITHOUT ANY LIMITATION OF LIABILITY, for all or any of the losses incurred by any person who subscribed on the faith of it.

The defences, section 35(2). A person is not liable if he proves:

1. That, having consented to become a director, he withdrew his consent before the issue and it was issued without his authority or consent;

C. CRIMINAL

Section 34: where a prospectus includes any statement which is untrue or misleading in form or context, or where any inclusion or omission is likely to mislead, every person who authorises the issue is liable under section 447, unless he proves that the statement or omission was immaterial, or that he had reasonable grounds to believe and did believe it to be true or the inclusion or omission necessary.

Section 447, fraud: imprisonment for not less than six months, extending to ten years, and a fine not less than the amount involved and up to three times it; where the fraud involves public interest, the minimum term is three years.

Section 36: punishment for fraudulently inducing persons to invest money, again under section 447.

D. COLLECTIVE and REGULATORY

1. Section 37: a suit or any other action under sections 34, 35 or 36 may be taken by any person, group of persons or association of persons affected;
2. Section 245, class action, reaching the company, its directors, its auditors including the audit firm, and any expert, adviser or consultant;

Conclusion. The golden rule of framing a prospectus, laid down in New Brunswick and Canada Railway Co. v. Muggeridge, is that nothing may be stated as a fact which is not so, and nothing may be omitted the omission of which makes what is stated misleading, the standard being one of scrupulous accuracy rather than mere literal truth. Section 26 gives that rule statutory form, and the remedies for its breach run in two directions: against the company, rescission and damages for deceit; and against the directors, promoters and experts, compensation under section 35, criminal liability under section 34 and liability for fraudulently inducing investment under section 36. The right belongs only to the person who subscribed on the faith of the prospectus, Peek v. Gurney.

"described sometimes as agents, sometimes as trustees, sometimes as managing partners; but each of these expressions is used not as exhaustive of their powers and responsibilities, but as indicating useful points of view from which they may for the moment and for the particular purpose be considered."

The right approach is not to choose between the descriptions but to see which one answers the question in hand.

3. Directors as AGENTS

In relation to contracts made on the company's behalf, directors are agents of the company, and the ordinary law of agency applies.

Ferguson v. Wilson (1866) LR 2 Ch App 77, Cairns LJ: "the company itself cannot act in its own person, for it has no person; it can only act through directors, and the case is, as regards those directors, merely the ordinary case of principal and agent."

2. Of the POWERS entrusted to them, which must be exercised bona fide and for the purposes for which they were conferred, and not for a collateral purpose. Piercy v. S. Mills & Co. Ltd. [1920] 1 Ch 77, where shares were issued to defeat a change of control and the allotment was set aside; Nanalal Zaver v. Bombay Life Assurance Co. Ltd. AIR 1950 SC 172, holding the power to issue further shares to be in the nature of a trust.

The limits: a trustee's duty is to preserve the trust property, whereas directors are appointed to employ the company's property in commercial risk.

5. Directors as MANAGING PARTNERS

Described so in relation to the general body of shareholders, since they were historically both members and managers. Weak under the 2013 Act: a director need hold no shares at all, there being no share qualification unless the articles impose one, and the members have no power to manage.

2. Act in GOOD FAITH in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its EMPLOYEES, the shareholders, the COMMUNITY and for the PROTECTION OF THE ENVIRONMENT;
3. Exercise his duties with DUE AND REASONABLE CARE, SKILL AND DILIGENCE and exercise INDEPENDENT JUDGMENT;
4. Not involve himself in a situation in which he may have a direct or indirect interest that CONFLICTS, or possibly may conflict, with the interest of the company;
5. Not achieve or attempt to achieve any UNDUE GAIN or advantage either to himself or to his relatives, partners or associates, and if found guilty of making any undue gain, he shall be liable to PAY AN AMOUNT EQUAL TO THAT GAIN to the company; and
6. Not ASSIGN his office, and any assignment so made shall be VOID.

Section 166(7): contravention attracts a fine of not less than one lakh rupees extending to five lakh rupees.

9. The fiduciary duties in detail

5. To disclose interest, section 184. Disclosure in Form MBP-1 at the first Board meeting in which he participates, at the first Board meeting of every financial year, and on any change; and disclosure of the nature of his interest in any contract at the Board meeting at which it is discussed, with a duty not to participate in that meeting. A contract in contravention is voidable at the company's option. Section 189 requires a register in Form MBP-4; and
6. Related party transactions, section 188; and the limits in sections 179(3), 180, 182, 185 and 186.

10. The duty of care, skill and diligence

Historically indulgent. Re City Equitable Fire Insurance Co. [1925] Ch 407 laid down that a director need exhibit no greater degree of skill than may reasonably be expected from a person of his knowledge and experience, a subjective test; that he is not bound to give continuous attention, his duties being intermittent; and that in the absence of grounds for suspicion he may trust officials to perform their duties honestly.

12. Consequences of breach

Liability to account and to restore property; damages and rescission; section 166(5) payment of an amount equal to any undue gain; section 166(7) fine; section 340, under which in a winding up the Tribunal may examine his conduct and compel him to repay or restore money or property with interest or to contribute compensation; section 339, personal responsibility without limitation for fraudulent conduct of business; vacation of office under section 167 and disqualification under section 164; and removal under section 169 or by the Tribunal under section 242.

Conclusion. A director is not comprehensively described by any single analogy, and the older cases which called him an agent, a trustee or a managing partner were each capturing one aspect of an office the common law had no exact name for. The modern position is that he is a fiduciary exercising original statutory powers, and section 166 now states the duties expressly, to act in accordance with the articles, in good faith to promote the objects of the company, with due and reasonable care, without a conflict of interest, without undue gain and without assignment of office. The consequences of breach, under sections 166(7), 167, 164, 169, 242, 340 and 339, are what give the duties their force.

The common law developed the derivative action for a fraud on the minority, but it was procedurally difficult, required proof of fraud and wrongdoer control, and produced a decree in the company's favour rather than relief for the complainant. Sections 241 to 246 of the Companies Act, 2013, corresponding to sections 397 to 409 of the 1956 Act, supply a direct statutory remedy before the Tribunal, with powers wide enough to reshape the company's management.

2. Application to the Tribunal, section 241

Section 241(1): any member of a company who complains that:

1. The affairs of the company have been or are being conducted in a manner PREJUDICIAL to public interest, or in a manner PREJUDICIAL OR OPPRESSIVE to him or any other member or members, or in a manner PREJUDICIAL TO THE INTERESTS OF THE COMPANY; or

Section 241(3) and (4), inserted by the Companies (Amendment) Act, 2017 and 2019, empower the Central Government to apply to the Tribunal for an order that a person is not a fit and proper person to hold the office of director or any other office connected with the conduct and management of any company, where in its opinion there are circumstances suggesting fraud, misfeasance, persistent negligence or default in carrying out obligations, or breach of trust. Section 242(4A) provides that on such an order the person shall cease to hold office and shall not hold any such office for five years.

3. Who may apply, section 244

the Tribunal may, with a view to bringing to an end the matters complained of, make such order as it thinks fit.

Section 242(2): without prejudice to that generality, an order may provide for:

1. The regulation of the conduct of the affairs of the company in future;
2. The purchase of shares or interests of any members of the company by other members thereof or by the company;
3. In the case of a purchase of its shares by the company, the consequent reduction of its share capital;
4. Restrictions on the transfer or allotment of the shares of the company;
5. The termination, setting aside or modification of any agreement, howsoever arrived at, between the company and the managing director, any other director or the manager, upon such terms and conditions as may, in the opinion of the Tribunal, be just and equitable;
6. The termination, setting aside or modification of any agreement between the company and any person other than those referred to above, provided that no such agreement shall be terminated, set aside or modified except after due notice and after obtaining the consent of the party concerned;

Section 242(3): a certified copy of the order shall be filed by the company with the Registrar within thirty days. Section 242(4): the Tribunal may, pending the making of a final order, make any interim order which it thinks fit for regulating the conduct of the company's affairs. Section 242(5): where an order provides for an alteration of the memorandum or articles, the company shall not thereafter make any alteration inconsistent with it except with the leave of the Tribunal, and section 242(6) gives such an alteration the same effect as if duly made by resolution. Section 242(8): contravention makes the company punishable with a fine and every officer in default liable to imprisonment or fine or both.

5. What amounts to oppression

Scottish Co-operative Wholesale Society Ltd. v. Meyer [1959] AC 324: conduct which is burdensome, harsh and wrongful, a visible departure from the standards of fair dealing and a violation of the conditions of fair play on which every shareholder is entitled to rely.

Shanti Prasad Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535 is the leading Indian authority, and lays down that:

1. The conduct must be CONTINUOUS, and must relate to the manner in which the affairs are being conducted; an isolated act is not enough;

6. What amounts to mismanagement

Conduct prejudicial to the interests of the company rather than to a member as such: serious infighting among directors, misapplication of funds, continuing losses through the manner in which the affairs are conducted, failure to maintain accounts, sale of assets at an undervalue, appointment of persons of doubtful integrity to key posts, and a material change in management likely to be prejudicial.

7. The consequential provisions

1. Section 243: consequence of the termination or modification of certain agreements. Where an order under section 242 terminates or modifies an agreement, it shall not give rise to any claim for damages against the company; and the person removed as managing director, manager or director shall not, for five years from the date of the order, without the leave of the Tribunal, be appointed to any of those offices. A person who knowingly acts in contravention is punishable with imprisonment up to six months or a fine or both;
2. Section 245: class action, described below;

3. Declare a resolution VOID if it was passed by suppression of material facts or obtained by misstatement, and restrain the company and its directors from acting on it;
4. Restrain the company from doing an act contrary to the Act or any other law, or from taking action contrary to a resolution passed by the members; and
5. Claim DAMAGES or COMPENSATION or demand any other suitable action from or against the company or its directors for any fraudulent, unlawful or wrongful act or omission; from the AUDITOR INCLUDING THE AUDIT FIRM for any improper or misleading statement made in the audit report or for any fraudulent, unlawful or wrongful act or conduct; and where the audit is by a firm, the liability shall be of the firm as well as of each partner who was involved in making any improper or misleading statement or who acted in a fraudulent, unlawful or wrongful manner; and from any expert, adviser, consultant or any other person for any incorrect or misleading statement made to the company or for any fraudulent, unlawful or wrongful act or conduct.

For full marks, cover: who he is and how the office has changed, appointment and status, the powers in section 290, the duties in sequence with their time limits, the professional obligations, the order of distribution, and his legal position.

1. Who he is

Begin by dating the office. Under the Companies Act, 1956, the Official Liquidator was a whole-time officer appointed by the Central Government and attached to each High Court, who became the liquidator in every compulsory winding up. Under the Companies Act, 2013, the corresponding officer in a Tribunal winding up is the Company Liquidator.

1. Section 275(1): the Tribunal shall, at the time of passing the order of winding up, appoint an Official Liquidator or a liquidator from the panel as the Company Liquidator;
2. Section 273(1)(c): the Tribunal may appoint a PROVISIONAL LIQUIDATOR at any time after the presentation of the petition and before the winding up order, after giving notice to the company and a reasonable opportunity to make its representations, unless for special reasons recorded in writing it dispenses with the notice;
3. Section 275(3): the terms and conditions of appointment and the fee payable shall be specified by the Tribunal on the basis of the task involved, experience, qualification and size of the company;

3. To sell the immovable and movable property and actionable claims of the company by public auction or private contract, with power to transfer the whole of the undertaking to a person or company or to sell it in parcels;
4. To sell the whole of the undertaking of the company AS A GOING CONCERN;
5. To raise any money required on the security of the assets of the company;
6. To institute or defend any suit, prosecution or other legal proceeding, civil or criminal, in the name and on behalf of the company;
7. To invite and settle claims of creditors, employees or any other claimant and distribute the sale proceeds in accordance with priorities established under this Act;
8. To inspect the records and returns of the company on the files of the Registrar or any other authority;
9. To prove, rank and claim in the insolvency of any contributory for any balance against his estate, and to receive dividends in the insolvency;
10. To draw, accept, make and endorse any negotiable instrument in the name and on behalf of the company;

Section 291: professional assistance. He may, with the sanction of the Tribunal, appoint one or more chartered accountants, company secretaries, cost accountants, legal practitioners or such other professionals as may be necessary, and shall disclose to the Tribunal any conflict of interest or lack of independence in respect of them.

Section 292: exercise and control of powers. He shall, in the administration of the assets and the distribution among the creditors, have regard to any directions given by resolution of the creditors or contributories at any general meeting or by the advisory committee, and directions given by the CREDITORS shall OVERRIDE those given by the contributories.

4. His duties, in sequence

2. Custody, section 283. On the order, or on the appointment of a provisional liquidator, take into his custody or control all the property, effects and actionable claims to which the company is or appears to be entitled, and take such steps as may be necessary to protect and preserve them. All the property and effects shall be deemed to be IN THE CUSTODY OF THE TRIBUNAL from the date of the order;
3. Settle the list of contributories and, with the sanction of the Tribunal, make calls, sections 285 and 295;
4. Invite, verify, admit or reject and settle claims of creditors;
5. Realise the assets and apply the proceeds in the statutory order;
6. Convene meetings of creditors and contributories as directed, and give effect to their directions under section 292;
7. Section 294: books and audit. Maintain proper and regular books of account; present to the Tribunal the accounts of receipts and payments TWICE IN EACH YEAR; have those accounts AUDITED in such manner as the Tribunal directs, furnishing vouchers and information; print the audited accounts and send a printed copy to every creditor and contributory; and file a copy with the Registrar for public inspection;

5. Government dues for two years, and any amount unpaid to a secured creditor after enforcing his security, ranking equally;
6. Any remaining debts and dues;
7. Preference shareholders; and
8. Equity shareholders.

6. His legal position

The Company Liquidator is not merely an agent of the company. He is:

1. An OFFICER OF THE TRIBUNAL, appointed by it, subject to its control and removable by it;
2. A TRUSTEE for the creditors and contributories, bound to act impartially between them; and
3. In some respects an AGENT of the company, contracting in its name, so that he is not personally liable on contracts properly made in that capacity.

He is therefore held to a fiduciary standard, and is liable for misfeasance under section 340, under which the Tribunal may examine his conduct and compel him to repay or restore money or property with interest, or to contribute such sum to the assets by way of compensation as it thinks just.

Transmission of shares takes place by OPERATION OF LAW, on the death, insolvency or lunacy of a member, and in the case of a body corporate member, on its amalgamation, merger or winding up. It is not a voluntary act of the parties.

Section 56(2) preserves the company's power to register, on receipt of an intimation of transmission of any right to securities by operation of law from any person to whom such right has been transmitted.

Section 2(30) of the Companies Act, 2013 provides that "debenture" includes debenture stock, bonds or any other instrument of a company evidencing a debt, WHETHER CONSTITUTING A CHARGE ON THE ASSETS OF THE COMPANY OR NOT.

Chitty J in Levy v. Abercorris Slate and Slab Co. (1887) 37 Ch D 260: a debenture means a document which either creates a debt or acknowledges it, and any document which fulfils either of those conditions is a debenture.

A joint venture is an arrangement by which two or more parties combine their resources to carry on a particular business or project, sharing the control, profits, losses and risks, while remaining otherwise independent of each other.

Under the Companies Act, 2013 a joint venture company is expressly brought within the definition of an ASSOCIATE COMPANY in section 2(6), and the explanation defines a joint venture as a joint arrangement whereby the parties that have JOINT CONTROL of the arrangement have rights to the NET ASSETS of the arrangement.

Section 2(c) of the Foreign Exchange Management Act, 1999 defines an "authorised person" as an authorised dealer, money changer, offshore banking unit or any other person for the time being authorised under sub-section (1) of section 10 to deal in foreign exchange or foreign securities.

Section 10(1) empowers the Reserve Bank of India, on application, to authorise any person to be known as an authorised person to deal in foreign exchange or foreign securities, as an authorised dealer, money changer or offshore banking unit or in any other manner as it deems fit.

Section 2(j) of the Foreign Exchange Management Act, 1999 defines a current account transaction as a transaction other than a capital account transaction, and, without prejudice to the generality of that definition, includes the following, of which two are:

1. Payments due in connection with FOREIGN TRADE, other current business, services, and short-term banking and credit facilities in the ordinary course of business; and
2. Expenses in connection with FOREIGN TRAVEL, EDUCATION AND MEDICAL CARE of parents, spouse and children.

For full marks, cover: both definitions with sections, the comparison table with figures, and the exemptions a private company enjoys.

Private company, section 2(68): a company which by its ARTICLES:

1. Restricts the right to transfer its shares;
2. Limits the number of its members to TWO HUNDRED, not counting present or former employees who were and continue to be members, and treating joint holders as a single member; and
3. Prohibits any invitation to the PUBLIC to subscribe for any securities of the company.

Public company, section 2(71): a company which is not a private company and has such minimum paid-up share capital as may be prescribed. A subsidiary of a public company is DEEMED to be a public company even where it continues to be a private company in its own articles.

The distinctions

Conclusion. The distinction between a private and a public company turns on the three restrictions in section 2(68), on transfer, on membership and on the invitation to the public, and everything else follows from them. Because a private company does not take the public's money, the Act relieves it of a long list of requirements that exist to protect outside investors, and that is the reason for the exemptions rather than any lesser standard of conduct. A private company which is a subsidiary of a public company is treated as a public company, so the form cannot be used to escape the consequences of public ownership.

Appointment. Section 275(1) and (2): the Tribunal shall, at the time of passing the order of winding up, appoint an Official Liquidator or a liquidator from a PANEL maintained by the Central Government consisting of chartered accountants, advocates, company secretaries, cost accountants or such other professionals as may be notified, having at least ten years' experience. His terms and fee are fixed by the Tribunal, and he must file a declaration of conflict of interest or lack of independence within seven days. Section 276 allows the Tribunal to remove him for misconduct, fraud or misfeasance, professional incompetence, inability to act, or conflict of interest.

His principal powers, section 290, all subject to the directions of the Tribunal: to carry on the business so far as necessary for a beneficial winding up; to sell the property by public auction or private contract, including the whole undertaking as a going concern; to raise money on the security of the assets; to institute or defend suits and prosecutions in the company's name; to invite and settle claims and distribute the proceeds according to statutory priorities; to inspect the company's records with the Registrar; to prove in the insolvency of a contributory; to draw and endorse negotiable instruments; to appoint professionals with the Tribunal's sanction under section 291; and to apply to the Tribunal for directions.

4. Section 294: maintain proper books of account; present accounts of receipts and payments TWICE IN EACH YEAR; have them AUDITED as the Tribunal directs; print the audited accounts and send a copy to every creditor and contributory; and file a copy with the Registrar; and
5. Section 302: on the affairs being completely wound up, apply for DISSOLUTION, and forward a copy of the order to the Registrar within THIRTY DAYS.

Distribution follows section 53 of the Insolvency and Bankruptcy Code: liquidation costs; workmen's dues for twenty-four months and secured creditors who relinquish security, equally; employees' wages for twelve months; unsecured financial creditors; Government dues for two years and secured creditors' unpaid balance; remaining debts; preference shareholders; and equity shareholders.

For full marks, cover: what preference shares are, the two kinds with the presumption, the point that arears are not a debt, the two-year voting right, and the other classifications with their opposite presumption.

Section 43 provides that the share capital of a company limited by shares shall be of two kinds, equity and preference. The explanation defines preference share capital as that part of the issued share capital which carries a preferential right as to the payment of dividend, at a fixed amount or a fixed rate, and as to the repayment of capital on a winding up. Both preferences must be present.

Cumulative preference shares

Cumulative preference shares are those on which the ARREARS of dividend ACCUMULATE. If in any year the company earns no profit or declares no dividend, the unpaid preference dividend is carried forward as arrears and must be paid in full, together with the current year's dividend, BEFORE any dividend is paid on the equity shares.

2. Section 47(2) proviso: the two-year rule. Where the dividend in respect of a class of preference shares has NOT BEEN PAID FOR A PERIOD OF TWO YEARS OR MORE, whether or not declared, such class of preference shareholders shall have a RIGHT TO VOTE ON ALL THE RESOLUTIONS placed before the company. This applies whether the shares are cumulative or not, and it is the real sanction for non-payment: the preference shareholder, who ordinarily votes only on resolutions directly affecting his rights and on winding up or the reduction of capital, acquires the full voice of an equity shareholder.

The other classifications, and the opposite presumption

Preference shares are presumed NON-PARTICIPATING, which is the opposite direction from the cumulative presumption, and noticing that is the sharpest point available. Will v. United Lankat Plantations Co. Ltd. [1914] AC 11: a stated preferential dividend is exhaustive of the rights of the class as to dividend; Re Isle of Thanet Electric Supply Co. Ltd. [1950] Ch 161: the same as to surplus assets.

Conclusion. The difference between cumulative and non-cumulative preference shares is simply whether an unpaid dividend survives the year in which it was not paid, and the practical importance of the distinction appears only on winding up or when arrears are being cleared. The presumption is the point most often missed: preference shares are presumed cumulative unless the articles or the terms of issue provide otherwise, which is the opposite of the presumption applied to participation in surplus. Since section 55, no company limited by shares may issue irredeemable preference shares at all.

A surrender in ANY OTHER circumstance is VOID.

Why it is otherwise void

Two independent reasons, and both should be given:

1. It would amount to a PURCHASE BY THE COMPANY OF ITS OWN SHARES, which is prohibited except in accordance with section 68, with its conditions as to sources of funds, the 10 per cent and 25 per cent limits, the 2:1 debt ratio, the declaration of solvency and the rest; and
2. It would amount to a REDUCTION OF CAPITAL without complying with section 66, which requires a special resolution AND the confirmation of the Tribunal after notice to the Central Government, the Registrar, SEBI where listed, and the creditors.

The first circumstance is permitted because the company was in any event entitled to take the shares back by forfeiture; the surrender merely saves the formalities and reaches the same result. The second is permitted because there is no reduction of capital at all: shares of the same nominal value are issued in place of those surrendered.

The effect of a valid surrender

The practical difference is the procedure. Forfeiture requires a notice giving not less than fourteen days and stating that the shares will be liable to be forfeited, and then a positive resolution of the Board, and any defect makes it void. A surrender, where permitted, dispenses with all of that, which is precisely why it is confined to cases where forfeiture was in any event available.

For full marks, cover: the doctrine and its statutory basis, the cases with their facts, the criticism, and the relationship with indoor management.

The doctrine of constructive notice is that the memorandum and articles of a company, on registration, become PUBLIC DOCUMENTS open to inspection by any person, and every person dealing with the company is therefore DEEMED TO HAVE READ THEM and to have understood their contents properly, whether or not he in fact did.

Section 399 of the Companies Act, 2013 is the statutory basis: any person may inspect, make a record of or get a copy or extract of any document kept by the Registrar on payment of the prescribed fee.

The consequence. A person dealing with a company deals AT HIS PERIL with a transaction which the registered documents forbid, or which they permit only on conditions apparent on their face. He cannot plead ignorance of what is on the public file.

1. It is a FICTION. Nobody in ordinary commercial life searches the file at the Registrar before every transaction, and the doctrine treats a person as knowing what he almost certainly does not;
2. It operates against the OUTSIDER and in favour of the COMPANY, which is the party better able to look after itself, and the party whose own irregularity caused the problem; and
3. English law has effectively ABOLISHED it by statute for third parties dealing in good faith. In INDIA it SURVIVES, and it survives alongside the objects clause in section 4(1)(c), which is why the doctrine of ultra vires also survives here while it has withered in England.

The relationship with indoor management

The two doctrines are COMPLEMENTARY, and the second exists BECAUSE of the first.

Constructive notice standing alone would be intolerable. It would require an outsider to satisfy himself not only that the articles permit the act, but that every internal condition had actually been complied with: that the resolution was passed, the meeting held, the consent given, the quorum present. He has NO MEANS of doing so, because the minute books and registers are not open to him.

Indoor management does not apply where the outsider knows of the irregularity (Howard v. Patent Ivory Manufacturing Co.), where the circumstances are suspicious (Anand Bihari Lal v. Dinshaw & Co.), where there is FORGERY (Ruben v. Great Fingall Consolidated), where he has not read the articles at all (Rama Corporation v. Proved Tin), where the act is ultra vires the company, or where he has been negligent.

Conclusion. The doctrine of constructive notice deems every person dealing with a company to have read its memorandum and articles, because those documents are public and registered under section 399, and it therefore protects the company against an outsider who did not read them. The doctrine has been much criticised as unreal, and its practical importance has fallen a long way, because the doctrine of indoor management protects the outsider as to everything internal. The two must be read together: the outsider is bound by what is public and open to him, and protected as to what is internal and closed to him.

2. Forfeiture only for non-payment of a call. The power may be exercised only for the purpose for which it was given. A forfeiture for any other cause, such as to punish a member or to prevent a transfer, is void as an exercise for a collateral purpose. The call itself must be valid: made by a resolution of the Board at a duly convened meeting under section 179(3)(a), on a uniform basis on all shares of the same class under section 49, and in accordance with the articles.

3. A proper notice, Table F regulation 29. The notice must:

1. Require payment of so much of the call as is unpaid, together with any interest accrued;
2. Name a further day, NOT BEING EARLIER THAN THE EXPIRY OF FOURTEEN DAYS from the date of service, on or before which the payment is to be made; and
3. State that in the event of non-payment on or before the day so named, the shares in respect of which the call was made will be LIABLE TO BE FORFEITED.

All three are mandatory. A notice giving less than fourteen days, or failing to warn of forfeiture, or demanding more than is actually due, is bad, and a forfeiture founded on it is void.

4. The shares become the property of the company and may be sold or re-allotted on such terms as the Board thinks fit; and
5. The Board may cancel the forfeiture at any time before a sale or disposal.

Table F regulation 33: a duly verified declaration in writing by a director, manager or secretary that a share has been duly forfeited on a stated date is conclusive evidence of the facts against all persons claiming to be entitled to the share.

Re-issue

A forfeited share may be re-issued AT A DISCOUNT, and this is NOT a contravention of section 53, which makes the issue of shares at a discount void. The reason is that a re-issue of forfeited shares is a SALE, not an ALLOTMENT: the company is disposing of shares already issued on which part of the price has been received and forfeited. The discount must not exceed the amount already paid up and forfeited, so that the company receives, in total, at least the full nominal value.

Its foundation is that a member who takes shares undertakes to pay their full nominal value as and when the company requires it. Section 2(64) defines paid-up share capital as the amount credited as paid up as is equivalent to the amount received as paid up, and the difference between the nominal value and what has been paid is the uncalled capital, which is also the measure of the member's liability in a winding up.

A call is to be distinguished from:

1. Application and allotment money, which is payable under the terms of the issue and is not a call;
2. A call in advance, under section 50, where a company, if authorised by its articles, may accept from any member the whole or part of the amount remaining unpaid on any shares held by him, although no part has been called up. A member paying calls in advance is not entitled to any voting rights in respect of that amount until it is called; and
3. Reserve capital, which is that part of the uncalled capital which the company has by special resolution determined shall not be called up except in the event of and for the purposes of winding up.

(b) Is this call valid?

No. The call is INVALID, on two independent grounds.

None of those requirements can be tested against a resolution with the figures left blank. One cannot know whether the call exceeds one-fourth of the nominal value, or whether a month has elapsed since the last call, if the amount and the date are not stated. The resolution was therefore incomplete and inoperative.

Table F, regulation 14 confirms that a call shall be deemed to have been made at the time when the RESOLUTION OF THE BOARD authorising the call was passed. So the moment of the call is the moment of the resolution, and a resolution which fixed nothing made nothing.

Ground 2: the power to make a call is NON-DELEGABLE, and the secretary could not supply the blanks

Section 179(3)(a) provides that the Board of Directors shall exercise the power to MAKE CALLS on shareholders in respect of money unpaid on their shares ONLY BY MEANS OF RESOLUTIONS PASSED AT MEETINGS OF THE BOARD.

The proviso to section 179(3) permits the Board to delegate to any committee of directors, the managing director, the manager or any other principal officer only the powers specified in clauses (d) to (f), that is, the powers to borrow monies, to invest the funds of the company, and to grant loans or give guarantees or provide security. The power to make calls in clause (a) is NOT among the delegable powers.

2. Pass a fresh resolution making the call, specifying the amount per share and the date, time and place of payment, and the person to whom it is to be paid;
3. Satisfy the conditions in the articles: not more than one-fourth of the nominal value, at least one month since the last call, and fourteen days' notice to each member; and
4. Ensure the call is made on a UNIFORM BASIS. Section 49: where any calls for further share capital are made on the shares of a class, such calls shall be made on a UNIFORM BASIS on all shares falling under the same class, and shares of the same nominal value on which different amounts have been paid up shall not be deemed to fall under the same class.

Conclusion. On these facts the call is not valid. Section 49 requires that where any calls for further share capital are made on the shares of a class, such calls shall be made on a uniform basis on all shares falling under that class, and a call which demands different amounts from shareholders of the same class offends that requirement directly. Shares of the same nominal value on which different amounts have been paid up do not fall under the same class, so the only way the Board could lawfully make different demands would be to treat those shares as a separate class.

Lord Macnaghten in Illingworth v. Houldsworth [1904] AC 355: a floating charge "is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to SETTLE AND FASTEN on the subject of the charge within its reach and grasp."

Romer LJ's three indicia, Re Yorkshire Woolcombers Association [1903] 2 Ch 284: a charge on a class of assets present and future; that class changes from time to time in the ordinary course of business; and until some step is taken, the company may carry on business in the ordinary way as regards that class.

CRYSTALLISATION is the process by which the charge ceases to float and fastens on the assets then comprised in the class, becoming in effect a fixed charge. From that moment the company loses its authority to deal with them.

The circumstances in which it occurs:

1. On the WINDING UP of the company, whether by the Tribunal or voluntary, and whether or not the business is continued for a beneficial winding up. Winding up ends the company's authority to carry on business in the ordinary way;

3. The holder acquires the rights of a fixed charge-holder; and
4. Priority is fixed at CRYSTALLISATION, not at creation. Before crystallisation a subsequent FIXED charge on the same property, taken by a person without notice of a restriction, RANKS AHEAD of the earlier floating charge, precisely because the company was left free to deal. Lenders answer this with a NEGATIVE PLEDGE CLAUSE in the deed, and register it, so that later lenders have notice of the restriction.

(b) The debenture-holder's remedies on default

1. Statutory remedy: section 71(10). Where a company fails to redeem the debentures on the date of their maturity or fails to pay interest on the debentures when it is due, the Tribunal may, on the application of any or all of the debenture-holders, or of the debenture trustee, and after hearing the parties concerned, direct, by order, the company to REDEEM THE DEBENTURES FORTHWITH on payment of principal and interest due thereon.

Section 71(11): if any default is made in complying with the order, every officer of the company who is in default is punishable with imprisonment up to three years or a fine of not less than two lakh rupees extending to five lakh rupees, or both.

3. FORECLOSURE, where the debenture is by way of mortgage, in a suit to which all the debenture-holders are parties; and
4. Taking POSSESSION of the charged assets, where the deed so provides.

4. Ordinary civil remedies:

1. A suit for the recovery of the principal and interest as a DEBT. A debenture-holder is a CREDITOR, and his interest is payable whether or not the company has profits, so the debt is not conditional on profitability;
2. A suit for sale of the charged property, or to enforce the security; and
3. A DEBENTURE-HOLDER'S ACTION on behalf of himself and all other holders of the same class, in which the court may appoint a receiver and order a sale.

6. One condition governs the whole security: REGISTRATION. Under section 77 every charge must be registered with the Registrar within THIRTY DAYS of creation, extendable on additional fees. Section 77(3): an unregistered charge shall not be taken into account by the liquidator or by any other creditor, that is, it is VOID against them, although section 77(4) preserves the debt, which becomes immediately payable. An unregistered floating charge therefore leaves the holder an UNSECURED creditor, which is the single most important practical point in the answer.

Conclusion. On these facts the answer to (a) is that the floating charge created by Godavari Transport Co. crystallises and becomes a fixed charge on the commencement of winding up, on the appointment of a receiver, on the company ceasing to carry on business, or on the happening of any event the debenture deed specifies for that purpose. The answer to (b) is that the debenture holder on default may sue for the money, present a winding up petition, appoint a receiver or enforce the security by sale. The practical warning is that if the charge was not registered under section 77 it is void against the liquidator and every other creditor, and the holder ranks as an unsecured creditor.

The reason. Section 103(1) provides that the prescribed number of members personally present "shall be the quorum FOR A MEETING of the company", and section 103(2) fixes the consequence of a quorum not being present WITHIN HALF AN HOUR FROM THE TIME APPOINTED for holding the meeting. The Act therefore directs its attention to the COMMENCEMENT of the meeting. It nowhere provides that a quorum must REMAIN present throughout, and it prescribes no consequence for a member leaving.

Re Hartley Baird Ltd. [1955] Ch 143 is the authority. The articles required a quorum of ten members present in person; ten were present when the meeting began; one left during the proceedings. It was held that the business transacted thereafter was VALID, the article being construed as requiring the quorum only at the outset.

The contrary view must be acknowledged, because the question asks whether the meeting is invalidated and a complete answer shows both sides. Some writers take the view that a quorum should continue throughout, on the footing that a meeting is a coming together of the requisite number and that a decision taken by fewer is not a decision of the company. The point is ultimately one of CONSTRUCTION OF THE ARTICLES:

1. If the articles say nothing, the Hartley Baird rule applies and the meeting remains valid;

(b) Quorum, and the prescribed numbers

Quorum means the minimum number of persons whose presence is necessary for the valid transaction of business at a meeting. A meeting held without a quorum is a NULLITY, and any resolution purportedly passed at it is VOID.

Section 103(1) applies "unless the articles of the company provide for a larger number", which is exactly the case the question posits, the articles having no provision:

Three points on the counting:

1. The words are "PERSONALLY PRESENT". A member represented by PROXY is NOT counted towards the quorum, although a proxy may vote on a poll;

For a BOARD meeting, section 174(1) fixes the quorum at one-third of the total strength or two directors, whichever is higher, fractions rounded up, with video participation counted; and section 174(3) provides that where the interested directors are two-thirds or more of the total strength, the non-interested directors present, being not less than two, form the quorum.

Conclusion. On these facts the meeting is not invalidated. Under section 103 the quorum for a general meeting must be present at the commencement of the meeting, and the departure of some members afterwards does not affect the validity of the business transacted, unless the articles expressly require the quorum to be present throughout. The reason the law fixes the quorum at the commencement is that any other rule would let a dissenting minority destroy a meeting by walking out of it. The prescribed numbers are two members personally present in a private company, and in a public company five, fifteen or thirty according as the members are up to one thousand, up to five thousand, or more.

For full marks, cover: the rule with Turquand's facts, why it exists as the counterweight to constructive notice, the justifications, the six exceptions each with a case, the Indian application, and how the two doctrines are applied together in a problem.

1. The rule

The doctrine of indoor management, or the rule in Royal British Bank v. Turquand (1856) 6 E&B 327, is that a person dealing with a company, having read the public documents and found the proposed transaction to be within the company's powers and within the powers the articles confer on its officers, is ENTITLED TO ASSUME THAT THE INTERNAL PROCEEDINGS OF THE COMPANY HAVE BEEN REGULARLY AND DULY CARRIED OUT. He is not bound to enquire into the regularity of the indoor management.

The facts of Turquand. The company's deed of settlement provided that the directors might borrow such sums as should from time to time be authorised by a RESOLUTION passed at a GENERAL MEETING. The directors gave a bond to the bank without any such resolution having been passed. The company argued it was not bound.

1. Business could not be carried on if every person dealing with a company had to satisfy himself that all its internal machinery had worked correctly. Commercial convenience requires the presumption;
2. The company is better placed than the outsider to ensure its own internal regularity, and should bear the loss of its own irregularity; and
3. The rule presumes REGULARITY, not AUTHORITY. An outsider may assume that a power the articles CONFER has been properly exercised; he may NOT assume that a power the articles do NOT confer nevertheless exists.

3. The exceptions

1. Knowledge of the irregularity. A person who actually knows of the irregularity cannot rely on the rule, for he cannot claim the benefit of a presumption when he knows the truth.

Howard v. Patent Ivory Manufacturing Co. (1888) 38 Ch D 156: the articles allowed the directors to borrow up to £1,000 without the consent of the general meeting, and beyond that with consent. They issued debentures to themselves for £3,500 without obtaining consent. Being directors themselves they KNEW of the irregularity, and the debentures were held good only to the extent of £1,000.

4. Representation through the articles, or no knowledge of the articles. A person who has NOT actually read the articles cannot rely on a representation contained in them, since he cannot say he was induced by something he never saw.

Rama Corporation v. Proved Tin and General Investment Co. [1952] 2 QB 147: the articles contained a delegation clause empowering the directors to delegate their powers to a single director. The plaintiff dealt with one director but had NOT read the articles. He could not rely on the clause, having not known of it.

5. Acts void ab initio, or ultra vires the company. The rule can never validate an act which is ultra vires the company or otherwise void, because no amount of internal regularity could have made it good, and because the outsider is fixed with constructive notice of the MEMORANDUM, which is the very document showing the company had no power to do it.

6. Negligence. Where the outsider fails to make the enquiries a reasonable person would make, he cannot rely on the rule. In particular, where an officer purports to act outside the ordinary scope of his authority, the outsider must enquire: a company's accountant does not ordinarily sell its property, and a branch manager does not ordinarily give a corporate guarantee.

2. If it IS within the company's powers but the directors exceeded the authority given by the Act or the articles, the act is merely IRREGULAR, the company MAY RATIFY it, and the outsider IS PROTECTED by Turquand.

For full marks, cover: the first auditor, the subsequent appointment and term, rotation, casual vacancies, the Government company rules, eligibility and disqualification, section 144 prohibited services, remuneration, and the rationale of independence.

1. The first auditor, section 139(6) and (7)

Ordinary company: the first auditor shall be appointed by the BOARD within THIRTY DAYS from the date of registration of the company. In case of failure by the Board, it shall inform the members, who shall within ninety days at an EXTRAORDINARY GENERAL MEETING appoint the first auditor. He holds office till the conclusion of the FIRST annual general meeting.

Government company, section 139(7): the first auditor shall be appointed by the Comptroller and Auditor-General of India within SIXTY DAYS from the date of registration; failing which the BOARD within the next thirty days; and failing that, the MEMBERS within sixty days at an extraordinary general meeting.

3. Rotation of auditors, section 139(2)

Which companies: every LISTED company, and the following classes:

1. Every unlisted PUBLIC company having paid-up share capital of TEN CRORE rupees or more;
2. Every PRIVATE company having paid-up share capital of FIFTY CRORE rupees or more; and
3. Every company having public borrowings from financial institutions, banks or public deposits of FIFTY CRORE rupees or more.

Such a company shall NOT appoint or re-appoint:

1. An INDIVIDUAL as auditor for more than ONE TERM of five consecutive years; or
2. An AUDIT FIRM as auditor for more than TWO TERMS of five consecutive years.

An individual or firm which has completed its term shall not be eligible for re-appointment in the SAME company for FIVE YEARS from the completion of that term. The cooling-off extends to a firm having a COMMON PARTNER with the outgoing firm whose tenure has expired in the company immediately preceding the financial year.

5. Eligibility and qualification, section 141(1) and (2)

A person shall be eligible for appointment as auditor of a company ONLY IF HE IS A CHARTERED ACCOUNTANT within the meaning of the Chartered Accountants Act, 1949.

Section 141(2): where a FIRM including a LIMITED LIABILITY PARTNERSHIP is appointed as an auditor, ONLY THE PARTNERS WHO ARE CHARTERED ACCOUNTANTS shall be authorised to act and sign on behalf of the firm; and a firm whereof the majority of partners practising in India are qualified for appointment may be appointed by its firm name.

6. Disqualifications, section 141(3)

The following shall not be eligible for appointment as auditor:

1. A BODY CORPORATE, other than a limited liability partnership registered under the LLP Act, 2008;
2. An officer or employee of the company;
3. A person who is a partner, or who is in the employment, of an officer or employee of the company;
4. A person who, or his RELATIVE OR PARTNER, is:

11. A person who has been CONVICTED by a court of an offence involving FRAUD and a period of TEN YEARS has not elapsed from the date of conviction; and
12. Any person whose subsidiary or associate company or any other form of entity is engaged, as on the date of appointment, in consulting and specialised services as provided in section 144.

Section 141(4): where a person appointed as an auditor incurs any of these disqualifications AFTER his appointment, he shall VACATE his office, and such vacation shall be deemed to be a CASUAL VACANCY.

7. Prohibited services, section 144

An auditor shall not render, directly or indirectly, to the company or its holding or subsidiary company, any of the following services: accounting and book keeping services; internal audit; design and implementation of any financial information system; actuarial services; investment advisory services; investment banking services; rendering of outsourced financial services; management services; and any other kind of services as may be prescribed.

Conclusion. The scheme of section 139 is that the members appoint the auditor and the Board does so only where the Act allows, the first auditor within thirty days by the Board and failing that by the members, and every subsequent auditor at the annual general meeting for five years. Rotation under section 139(2), the eligibility conditions in section 141 and the restrictions on other services in section 144 exist to secure the auditor's independence, which is the reason the office is regulated at all. Removal before the term expires needs a special resolution and the previous approval of the Central Government, so that an auditor who is doing his duty cannot be removed for doing it.

Note the structure of the second limb: BOTH elements are necessary. An agreement in writing alone does not make a person a member until his name is entered in the register; and an entry in the register without an agreement does not make him one either, though he may be estopped from denying it.

2. Member and shareholder distinguished

The two usually coincide but are not the same, and this is the most examinable part of the definition:

1. A subscriber to the memorandum is a MEMBER BEFORE ANY SHARE IS ALLOTTED to him, by operation of law, so he is a member without being a shareholder;
2. A transferee is a shareholder IN EQUITY before his name is registered, but is NOT YET A MEMBER;
3. A company limited by GUARANTEE without a share capital has members but no shareholders at all; and
4. The holder of a share warrant under the old law was a shareholder but not a member.

4. By transmission. The shares vest in him by operation of law on the death, insolvency or lunacy of a member. No instrument and no stamp duty is required; he produces the succession certificate, probate or letters of administration and is registered under section 56(2), or he may transfer the shares without first being registered, section 56(5).

5. As a beneficial owner in a depository, under the third limb, for dematerialised holdings under the Depositories Act, 1996.

6. By ESTOPPEL. Where a person allows his name to appear on the register of members and holds himself out as a member, or knows of the entry and does not have it rectified, he is estopped from denying his membership, and is liable as a member to the company's creditors.

4. Who may be a member

1. Any person competent to contract;
2. A MINOR cannot be a member, an agreement by a minor being void ab initio, Mohori Bibee v. Dharmodas Ghose; but shares may be held in his name through a guardian, and he may take by transmission;

4. To TRANSFER his shares, section 44;
5. To a SHARE CERTIFICATE, section 46, and to have his name on the register;
6. To NOTICE of, and to attend and vote at, general meetings, and to appoint a proxy;
7. To INSPECT the register of members and the annual return under section 94, and the minutes of general meetings under section 119, and to a copy within seven working days;
8. To apply to the TRIBUNAL for relief against oppression and mismanagement under sections 241 and 242, for a class action under section 245, and for rectification of the register under section 59; and
9. To share in the SURPLUS on a winding up, after all creditors and preference shareholders.

6. How membership is terminated

Membership comes to an end:

1. By TRANSFER of his shares and the registration of the transferee;
2. By TRANSMISSION on his death or insolvency, the shares vesting in his legal representative or the official assignee;

Insolvency does not by itself end membership: the member's name remains on the register until the official assignee either transfers the shares or has himself registered. Death likewise vests the shares in the legal representative but the deceased's name is removed only on registration of the transmission.

7. The register of members

Section 88 requires every company to keep a register of members, a register of debenture-holders and a register of any other security holders, in the prescribed form, at the registered office or, with the approval of a special resolution, at any other place in India where more than one-tenth of the members reside.

Section 95: the registers, returns and other documents maintained under section 88 shall be PRIMA FACIE EVIDENCE of any matter directed or authorised to be inserted therein.

Section 94 makes the register open to inspection by members without fee and by any other person on payment, and section 59 allows the Tribunal to rectify it and to award damages.

For full marks, cover: what the memorandum is, the six clauses each with its section, content, purpose and mode of alteration, the model tables, and the doctrine of ultra vires which the objects clause generates.

1. What the memorandum is

Section 2(56) defines the memorandum as the memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous company law or of this Act.

It is the company's CHARTER. Lord Cairns in Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875) described it as the document which contains the FUNDAMENTAL CONDITIONS UPON WHICH ALONE THE COMPANY IS ALLOWED TO BE INCORPORATED, and which states affirmatively the ambit and extent of the company's vital forces and activities, and negatively, that nothing shall be done beyond that ambit.

It regulates the company's relations with the OUTSIDE WORLD, and it is a PUBLIC DOCUMENT open to inspection under section 399, from which the doctrine of constructive notice follows.

Restrictions, section 4(2) and (3). The name shall not: be identical with or too nearly resemble the name of an existing company or a registered trade mark; be such that its use would constitute an offence under any law or be undesirable in the opinion of the Central Government; contain any word or expression likely to give the impression that the company is connected with or has the patronage of the Government or of any local authority or statutory body, without the previous approval of the Central Government; or include a word or expression specified in the rules without such approval.

Reservation, section 4(4) and (5): a name may be reserved for twenty days from approval, or sixty days for an existing company applying for a change. Where the name was applied for by furnishing wrong or incorrect information, the reservation may be cancelled and a penalty imposed, and where the company is already incorporated the Registrar may direct a change of name within three months, take action for striking off, or petition for winding up.

Section 13(5): the Central Government shall dispose of the application within SIXTY DAYS, and before passing its order may satisfy itself that the alteration has the CONSENT OF THE CREDITORS, debenture-holders and other persons concerned, or that sufficient provision has been made for the discharge of all debts and obligations, or that adequate security has been provided.

(c) The OBJECTS clause, section 4(1)(c)

The memorandum shall state the OBJECTS for which the company is proposed to be incorporated and any matter considered necessary in furtherance thereof.

(d) The LIABILITY clause, section 4(1)(d)

The memorandum shall state the liability of the members of the company, whether LIMITED or UNLIMITED, and also state:

1. In the case of a company limited by SHARES, that the liability of its members is limited to the amount unpaid, if any, on the shares held by them; and
2. In the case of a company limited by GUARANTEE, the amount up to which 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 contracted before he ceased to be a member, and of the costs, charges and expenses of winding up, and for the adjustment of the rights of the contributories among themselves.

There is NO LONGER ANY MINIMUM: the requirement of one lakh rupees for a private company and five lakh for a public company was omitted by the Companies (Amendment) Act, 2015.

Alteration, section 61(1): by ORDINARY RESOLUTION if the articles so authorise, to increase the authorised capital, to consolidate and divide, to convert shares into stock and reconvert, to sub-divide, and to cancel shares not taken or agreed to be taken by any person. A cancellation under section 61(1)(e) is expressly NOT a reduction of share capital and needs no Tribunal order. A genuine reduction under section 66 requires a special resolution AND the confirmation of the Tribunal. Form SH-7 within thirty days, section 64.

(f) The SUBSCRIPTION or ASSOCIATION clause, section 4(1)(f)

A declaration by the subscribers that they DESIRE TO BE FORMED INTO A COMPANY and AGREE TO TAKE the number of shares stated opposite their respective names.

1. Each subscriber must take at least one share where the company has a share capital;

Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875) LR 7 HL 653: the company's objects were to make and sell railway carriages; its directors contracted to finance a railway in Belgium; the contract was held VOID, and incapable of ratification EVEN BY THE UNANIMOUS ASSENT of all the shareholders.

Its effects: the contract is void ab initio and unenforceable by either party; any member may obtain an INJUNCTION; the directors are personally liable to RESTORE the funds, Lakshmanaswami Mudaliar v. Life Insurance Corporation of India AIR 1963 SC 1185; and ultra vires borrowing is void, subject to the lender's equitable remedies of TRACING and SUBROGATION.

The doctrine SURVIVES IN INDIA precisely because section 4(1)(c) keeps the objects clause COMPULSORY, whereas in England it has effectively been abolished.

4. The memorandum and the articles

For full marks, cover: the meaning and the distinction from dissolution, the modes as they now stand, the five grounds of section 271 in full, the two that were removed, the just and equitable ground illustrated, who may petition, and the procedure in outline.

1. What winding up is

Winding up, or liquidation, is the process by which the LIFE OF A COMPANY IS BROUGHT TO AN END and its PROPERTY ADMINISTERED for the benefit of its CREDITORS and MEMBERS. A liquidator is appointed, takes control of the assets, realises them, pays the debts in the statutory order and distributes any surplus among the members.

Sections 304 to 323 of the Companies Act, on voluntary winding up, were OMITTED by the Eleventh Schedule to the Insolvency and Bankruptcy Code, 2016 with effect from 15 November 2016, and voluntary liquidation moved to section 59 of the Code, notified on 30 March 2017.

Under the Companies Act, 1956 there were THREE modes: compulsory winding up by the Court; voluntary winding up, itself of two kinds, a members' voluntary winding up where a declaration of solvency was made and a creditors' voluntary winding up where it was not; and voluntary winding up under the supervision of the Court. The creditors' voluntary winding up has NO equivalent today: an insolvent company cannot liquidate voluntarily and must go into corporate insolvency resolution.

3. The grounds, section 271

A company may, on a petition under section 272, be wound up by the Tribunal if:

(a) SPECIAL RESOLUTION. The company has, by special resolution, resolved that it be wound up by the Tribunal. Even here the Tribunal retains a discretion, and will not order winding up if it would be contrary to the public interest or to the interests of the company as a whole.

(e) JUST AND EQUITABLE. The Tribunal is of the opinion that it is JUST AND EQUITABLE that the company should be wound up.

4. The two grounds that were removed

These are the commonest wrong answers and must be dealt with expressly.

1. INABILITY TO PAY DEBTS. It was section 271(1)(a) as originally enacted, together with section 271(2) defining when a company is deemed unable to pay its debts, and both were REMOVED by the Insolvency and Bankruptcy Code, 2016 with effect from 15 November 2016. An unpaid creditor's remedy is now an application for a CORPORATE INSOLVENCY RESOLUTION PROCESS: section 7 of the Code for a financial creditor, section 9 for an operational creditor, on a default of ONE CRORE RUPEES or more; and
2. REDUCTION OF MEMBERS below the statutory minimum, which was a ground under the 1956 Act. Its only surviving consequence is section 3A, under which members who carry on business for more than six months while the number is below seven (public) or two (private), knowing the fact, become severally liable for the debts contracted thereafter.

The proviso to section 273(2) limits this ground: where a petition is presented on the just and equitable ground, the Tribunal MAY REFUSE to make an order of winding up if it is of the opinion that SOME OTHER REMEDY IS AVAILABLE to the petitioners and that they are ACTING UNREASONABLY in seeking to have the company wound up instead of pursuing that other remedy. In practice that other remedy is sections 241 and 242, and the most useful order is a BUY-OUT of one party's shares under section 242(2)(b), which lets the business survive.

Conversely, the Tribunal shall NOT REFUSE to make a winding up order merely because the assets of the company have been MORTGAGED for an amount equal to or in excess of those assets, or because the company has NO ASSETS. Poverty is no answer to a petition.

6. Who may petition, section 272

1. The COMPANY itself;
2. Any CONTRIBUTORY or contributories, notwithstanding that he is the holder of fully paid-up shares, or that the company may have no assets at all or no surplus for distribution among the shareholders;

7. The procedure in outline

Section 273: within NINETY DAYS of presentation the Tribunal may dismiss the petition, make an interim order, appoint a provisional liquidator after notice to the company, order winding up, or make any other order. Section 275: it appoints a Company Liquidator from a panel of insolvency professionals. Sections 277 to 279: the order operates in favour of all creditors and contributories; a copy goes to the Registrar within thirty days; and no suit or proceeding shall be commenced or continued except with the LEAVE of the Tribunal. Section 281: the liquidator reports within SIXTY DAYS. Sections 283 and 290: he takes custody of the property, deemed to be in the custody of the Tribunal, and realises it. Sections 285 and 295: the Tribunal settles the list of contributories and makes calls. Distribution follows the section 53 waterfall of the Code. Section 302: when the affairs are completely wound up, the Tribunal orders that the company be DISSOLVED from the date of the order.

For full marks, cover: why the question is difficult, Bowen LJ's framing, the five descriptions each with authority and its limits, what the position produces by way of duties and liabilities, and a modern summary.

1. Why the question is difficult

A director is not any one thing, and the difficulty is real rather than academic. Section 2(34) defines a director only as a director appointed to the Board of a company, which says nothing about his legal character; section 2(10) says the Board is the collective body of the directors; and section 179(1) gives the Board all such powers as the company is authorised to exercise. Nowhere does the Act say what a director IS.

The courts have therefore described him by analogy, and the classic warning against choosing between the analogies is Bowen LJ's in Imperial Hydropathic Hotel Co. v. Hampson: directors are

2. A director contracting properly on the company's behalf incurs NO PERSONAL LIABILITY; and
3. He IS personally liable where he contracts in his own name; where he exceeds his authority, for breach of WARRANTY OF AUTHORITY; where he fails to disclose the agency; and where he acts for a company not yet in existence, Kelner v. Baxter (1866).

The limits of the analogy, which a full answer must state:

1. An ordinary agent acts on his principal's INSTRUCTIONS, but the Board's powers under section 179(1) are ORIGINAL, conferred by the Act and the articles, and NOT delegated by the members. It follows that the general meeting CANNOT DIRECT the Board how to exercise a power the articles have vested in it; the members' remedies are to alter the articles or to remove the directors;
2. A director is subject to STATUTORY DUTIES an ordinary agent does not owe, enforceable by the company and by the Tribunal; and
3. He is an "officer" under section 2(59) and an "officer in default" under section 2(60), attracting personal criminal liability for the company's contraventions, which no ordinary agent bears.

The limits: a trustee's duty is to PRESERVE the trust property, whereas directors are appointed to EMPLOY the company's property in COMMERCIAL RISK. A director who takes a business risk that fails is not in the position of a trustee who has lost the trust fund. That is why the standard of care historically applied to directors was far more indulgent than that applied to trustees.

4. Directors as MANAGING PARTNERS

In relation to the general body of shareholders directors have been described as managing partners, since historically they were both members and the managers of the concern, and the company was regarded as a large partnership in which the managing partners acted for the rest.

The analogy is weak under the 2013 Act: a director need hold NO SHARES at all, there being no share qualification unless the articles impose one; the members have NO POWER TO MANAGE; and a partner is an agent of his co-partners whereas a director is an agent of the company and not of the members.

Southern Foundries (1926) Ltd. v. Shirlaw [1940] AC 701: a company may alter its articles and remove a managing director, but if in doing so it breaks a service contract, it is liable in DAMAGES. Section 169(8)(b) preserves the position: nothing in the removal provisions deprives a person removed of compensation or damages payable in respect of the termination of his appointment, in accordance with the terms of any contract.

7. What the position produces

Because he is a FIDUCIARY, the following follow, and are now codified in section 166. A director shall:

1. Act in accordance with the ARTICLES;
2. Act in GOOD FAITH to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its EMPLOYEES, the shareholders, the COMMUNITY and for the PROTECTION OF THE ENVIRONMENT;
3. Exercise his duties with DUE AND REASONABLE CARE, SKILL AND DILIGENCE and exercise INDEPENDENT JUDGMENT;
4. Not involve himself in a situation of CONFLICTING INTEREST;

Consequences of breach: liability to account and restore; damages; section 166(5) payment of an amount equal to the undue gain; section 166(7) fine of one to five lakh rupees; section 340, under which in a winding up the Tribunal may compel him to repay or restore money or property with interest or to contribute compensation; section 339, personal responsibility WITHOUT LIMITATION where the business was carried on with intent to defraud creditors; vacation of office under section 167; disqualification under section 164; and removal under section 169 or by the Tribunal under section 242.

8. A modern summary

The best short answer is that a director is a FIDUCIARY EXERCISING ORIGINAL STATUTORY POWERS.

He is more than an agent, because his powers are not delegated by the members, he owes duties the members cannot waive in advance, and he bears personal statutory liability as an officer in default. He is less than a trustee, because he is appointed to take commercial risk and not to preserve a fund. He is not a partner, because he need not be a member and the members cannot manage. And he is not an employee unless he separately contracts to be one.