BLS LLB 5 Years Sem 7 Company Law 2019-20 Question Paper with Solutions

Section 2(45) defines a Government company as any company in which not less than fifty one per cent of the paid-up share capital is held by the Central Government, or by any State Government or Governments, or partly by the Central Government and partly by one or more State Governments, and includes a company which is a subsidiary company of such a Government company.

Section 2(62) of the Companies Act, 2013 defines a One Person Company as a company which has only one person as a member.

Section 3(1)(c) provides that a company may be formed by one person, where the company to be formed is to be a One Person Company that is to say, a private company, so an OPC is a species of private company, and its name must end with "(OPC) Private Limited".

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 provides that without prejudice to the generality of that definition it includes:

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;
2. Payments due as interest on loans and as net income from investments;
3. Remittances for living expenses of parents, spouse and children residing abroad; and
4. Expenses in connection with foreign travel, education and medical care of parents, spouse and children.

Section 2(69) of the Companies Act, 2013 defines a promoter as a person:

1. Who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92;
2. Who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; or
3. In accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act.

The third limb does not apply to a person acting merely in a professional capacity.

Section 141(1) of the Companies Act, 2013 provides that 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 auditor, only the partners who are chartered accountants shall be authorised to act and sign on behalf of the firm; and a firm whereof majority of partners practising in India are qualified for appointment may be appointed by its firm name.

For full marks, cover: the promotional steps, name reservation, the section 7 documents, the certificate and its effect, and section 10A.

Registration is the process by which an association of persons becomes an incorporated company under section 7 of the Companies Act, 2013, culminating in the issue of a certificate of incorporation by the Registrar of Companies.

Step 1: preliminary steps. Obtain Digital Signature Certificates for the subscribers and proposed directors, and Director Identification Numbers under sections 153 and 154 for the proposed directors.

Step 2: reservation of name, section 4(4) and (5). An application is made to the Registrar through SPICe+ Part A or the RUN service. The name must not be identical with or too nearly resemble an existing company's name or a registered trade mark, must not constitute an offence or be undesirable in the opinion of the Central Government, and must not suggest connection with or patronage of the Government without approval. A reserved name is held for twenty days.

6. The particulars of the first directors, their DIN, and their consent in Form DIR-2; and
7. The particulars of the interests of the first directors in other firms or bodies corporate.

Step 4: registration and certificate, section 7(2). The Registrar, on the basis of the documents and information filed, shall register all the documents and issue a certificate of incorporation in Form INC-11, and shall allot a Corporate Identity Number which is a distinct identity for the company and is included in the certificate.

Step 5: post-incorporation. Form INC-22 verifying the registered office within thirty days of incorporation, under section 12(2); and Form INC-20A under section 10A, the declaration of commencement of business, within one hundred and eighty days, confirming that every subscriber has paid the value of the shares agreed to be taken, before the company may commence business or exercise borrowing powers.

The effect, section 9. From the date of incorporation mentioned in the certificate, the subscribers and all persons who from time to time become members shall be a body corporate capable of exercising all the functions of an incorporated company, having perpetual succession and power to acquire, hold and dispose of property, to contract, and to sue and be sued by the said name.

For full marks, cover: section 206 and its four stages, the powers of the Registrar, the search and seizure power in section 209, and how inspection differs from investigation.

Chapter XIV, sections 206 to 229, is headed "Inspection, Inquiry and Investigation". It is a ladder of increasing intrusion, and the answer should present it as one.

Stage 1: calling for information, section 206(1)

Where, on a scrutiny of any document filed by a company or on any information received, the Registrar is of opinion that any further information or explanation, or any further documents relating to the company, is necessary, he may by a written notice require the company to furnish it within such reasonable time as may be specified. It is the duty of the company and of every officer to furnish it to the best of their knowledge and power.

The proviso empowers the Central Government, if satisfied that the circumstances so warrant, to direct the Registrar or an inspector appointed by it to carry out the inquiry, and gives such person all the powers of a Registrar under this section.

Stage 4: report and reference for investigation, sections 207 and 208

Section 207: conduct of inspection and inquiry. Where an inspection or inquiry is made, it is the duty of every director, officer or other employee to produce all such documents to the Registrar or inspector and to furnish him with such statements, information or explanations and to render all assistance as he may reasonably require.

The Registrar or inspector may, during the course of the inspection or inquiry, make or cause to be made copies of books of account and other books and papers, or place or cause to be placed any marks of identification on them in token of the inspection having been made.

Section 207(3): he shall have all the powers of a civil court under the Code of Civil Procedure, 1908 while trying a suit, in respect of the discovery and production of books of account and other documents at such place and time as he may specify, and the summoning and enforcing the attendance of persons and examining them on oath.

1. Enter and search the place or places where the books or papers are kept, with such assistance as may be required; and
2. Seize such books and papers as he considers necessary, after allowing the company to take copies or extracts.

The books and papers so seized shall be returned as soon as may be, and in any case not later than one hundred and eighty days after the seizure, though they may be called for again for a further period of one hundred and eighty days by an order in writing.

How inspection differs from investigation

Conclusion. Inspection under section 206 and inquiry under its later subsections are graded steps in a single process that begins with the Registrar calling for information and ends, if the material warrants it, in a reference for investigation under section 210 or 212. The distinction from investigation is one of both power and consequence: an inspector under section 206 cannot arrest and reports to the Central Government, whereas the Serious Fraud Investigation Office reports under section 223 and its report is admissible in evidence and followed by prosecution. The graduated structure exists so that the heaviest powers are used only where the lighter ones have shown cause.

Where the instrument of transfer has been lost or has not been delivered within sixty days, the company may register the transfer on such terms as to indemnity as the Board may think fit.

Time for delivery of certificates, section 56(4)(c): the company shall deliver the certificates of all securities transferred within one month from the date of receipt by the company of the instrument of transfer.

Partly paid shares: where the application is made by the transferor and relates to partly paid shares, the transfer shall not be registered unless the company gives notice of the application to the transferee and the transferee gives no objection within two weeks from the receipt of the notice.

2. Transmission

Transmission is the passing of shares by operation of law, on the death, insolvency or lunacy of a member. It is not a voluntary act and there is no instrument of transfer and no stamp duty.

Section 56(2): nothing in section 56(1) shall prejudice the power of the company 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.

4. Refusal to register, and the remedy

Section 58(1): where a private company refuses to register the transfer or transmission, it shall send notice of the refusal to the transferor and the transferee, or to the person giving intimation of the transmission, within thirty days, giving reasons.

Section 58(3): the transferee may appeal to the Tribunal within thirty days of the receipt of the notice, or, where no notice has been sent, within sixty days from the date on which the instrument or the intimation was delivered.

Conclusion. Transfer and transmission both change who holds the shares, but they differ in every legal particular: a transfer is a voluntary act of the parties requiring a proper instrument in Form SH-4, stamp duty and the act of both sides, while a transmission is the operation of law on death or insolvency and needs no instrument and no stamp. The transferee takes as a purchaser and the transmittee takes subject to all the liabilities of the previous holder. In either case, a refusal to register is answerable to the Tribunal under section 58, which may direct registration, rectification and damages.

1. Name clause, 4(1)(a). The name, with "Limited" as the last word for a public limited company and "Private Limited" for a private limited company; a section 8 company is exempt. The name must not be identical with or too nearly resemble an existing company's name or a registered trade mark, must not constitute an offence or be undesirable, and must not suggest Government connection without approval. Altered by special resolution and the approval of the Central Government, section 13(2);
2. Registered office clause, 4(1)(b). It states only the State in which the registered office is to be situated, and not the address, which is notified separately in Form INC-22 under section 12(2) within thirty days. Altered: within the same city by Board resolution; outside it but within the same Registrar's jurisdiction by special resolution; to another Registrar's jurisdiction in the same State by special resolution and the Regional Director's confirmation, section 12(5); and from one State to another by special resolution and the approval of the Central Government, section 13(4), which must satisfy itself as to the consent of creditors and dispose of the application in sixty days;

5. Capital clause, 4(1)(e). The amount of share capital with which the company is to be registered and its division into shares of a fixed amount, and the number of shares each subscriber agrees to take, which shall not be less than one. This is the authorised capital, section 2(8). There is no longer any minimum, the requirement of one lakh and five lakh rupees having been omitted in 2015. Altered by ordinary resolution under section 61(1) if the articles so authorise, with Form SH-7 within thirty days; and
6. Subscription or association clause, 4(1)(f). The declaration of the subscribers that they desire to be formed into a company and agree to take the shares set opposite their names, signed by each with his particulars in the presence of a witness. Section 3(1): seven or more subscribers for a public company, two or more for a private company, and one for an OPC, which must additionally name the nominee with his consent in Form INC-3.

Forms: the memorandum must be in the form in Tables A to E of Schedule I as applicable.

For full marks, cover: what it is, the four ways it may be called, the requisition machinery with its figures, notice quorum and business, and the contrast with the AGM.

An extraordinary general meeting is any general meeting of a company other than the annual general meeting. It is called to transact urgent special business which cannot conveniently be postponed to the next annual general meeting.

All business transacted at an extraordinary general meeting is SPECIAL BUSINESS, section 102(2), so an explanatory statement under section 102 must be annexed to the notice for every item.

Section 100(1): who may call it.

1. The Board of its own motion. The Board may, whenever it deems fit, call an extraordinary general meeting of the company.

2. The Board on requisition, section 100(2). The Board shall, at the requisition made by:

Section 100(5): a meeting so called shall be conducted in the same manner as if it were called by the Board, and for that purpose the Board shall be bound to give to the requisitionists such information regarding the members entitled to receive notice as is available with the Board.

Section 100(6): where the meeting is called by the requisitionists and the Board fails to call it, the reasonable expenses incurred by them shall be reimbursed by the company to the requisitionists, and the sums so paid shall be deducted from any fee or other remuneration payable to such of the directors who were in default in calling the meeting.

2. Explanatory statement, section 102, for every item, disclosing all material facts and the nature of the concern or interest of every director, manager, other key managerial personnel and their relatives;
3. Quorum, section 103: the same as for any general meeting, two members personally present in a private company and five, fifteen or thirty in a public company. If a quorum is not present within half an hour and the meeting was called on the requisition of members, it shall stand CANCELLED, not adjourned; and
4. Place. An extraordinary general meeting is not subject to the section 96(2) restriction that the meeting be held at the registered office or within the same city; it may be held at any place in India. An extraordinary general meeting of a wholly owned subsidiary of a company incorporated outside India may be held outside India.

The contrast with the annual general meeting

Conclusion. An extraordinary general meeting is every general meeting other than the annual general meeting, and its purpose is to allow urgent business to be transacted without waiting for the annual meeting. Two features follow from that purpose: all business transacted at it is special business, so every item needs an explanatory statement under section 102, and it may be held anywhere in India rather than at or near the registered office. There is also no penalty for failing to hold one, because unlike the annual general meeting it is called only when there is something to decide.

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 the company's 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 and that he should indemnify it. 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. This explains the licensing and registration requirements 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 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. Corporate personality is the proposition that on incorporation the company becomes a person in law distinct from the members who compose it, and Salomon v. Salomon & Co. Ltd. established it in terms that one man in complete control does not alter. From it flow limited liability, perpetual succession, the capacity to own property and to contract, and the rule in Foss v. Harbottle. The personality is artificial, so the company takes the rights the law gives to persons but not those it reserves to citizens, State Trading Corporation of India v. Commercial Tax Officer.

For full marks, cover: the remedies, the point that the insolvency bars rescission, section 35 as the surviving remedy, the persons liable and the defences, and the ladder of fault.

(a) The remedies available to A

1. Rescission of the allotment, against the company. Having been induced by a material misrepresentation of fact on which he relied, A may rescind, have his name removed from the register and recover his money with interest.

4. Prosecution under section 34, for a statement untrue or misleading in form or context, punishable as fraud under section 447, and under section 36 for fraudulently inducing persons to invest money.

5. Collective remedies: a suit under section 37, which allows any person, group of persons or association of persons affected to take action under sections 34, 35 or 36; and a class action under section 245 against the company, its directors, its auditors including the audit firm, and any expert or adviser.

6. Proof in the liquidation. A shareholder who cannot rescind remains a contributory, not a creditor, and ranks last in the section 53 waterfall, after preference shareholders. His only valuable claim is the personal one under section 35.

(b) The liability of the company and of the directors

The company's liability:

1. Rescission and repayment, subject to the four bars above, of which winding up is decisive here;

Section 35(3): where it is proved that the prospectus was issued with intent to defraud, every such person is 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). He is not liable if he proves that he withdrew his consent before the issue and it was issued without his authority; or that it was issued without his knowledge or consent and he forthwith gave reasonable public notice on learning of it; or that, as regards a statement purporting to be made by an expert, it was a correct and fair representation and he had reasonable ground to believe and did believe the expert competent and consenting.

Criminal, section 34 read with section 447: imprisonment not less than six months up to ten years and a fine not less than the amount involved up to three times it, the minimum being three years where the fraud involves public interest.

Contribution. A director held liable may recover contribution from any other person who would have been liable to make the same payment, unless that person was guilty of fraudulent misrepresentation and he was not.

For full marks, cover: the definition and the three consequences, the Specific Relief Act cure, Kelner v. Baxter distinguished from Newborne, the promoter's fiduciary position, and novation.

(a) What a pre-incorporation contract is

A pre-incorporation contract, or preliminary contract, is a contract purported to be made on behalf of a company before the company is incorporated, usually by its promoters, for the purposes of the company to be formed. The contract with M/s AB Brothers is exactly that.

Three consequences follow, and all from one fact: at the date of the contract the company did not exist.

1. The company has no contractual capacity, so it cannot be a party;

Distinguish a provisional contract, which under the 1956 Act was made by a public company after incorporation but before it obtained its certificate to commence business and became binding automatically when the certificate issued. That category has effectively disappeared with section 10A.

(b) The liability of the promoters

X and Y are personally liable, because they contracted on behalf of the company.

Kelner v. Baxter (1866) LR 2 CP 174. Promoters bought wine "on behalf of the proposed Gravesend Royal Alexandra Hotel Company". The company was formed, consumed the wine, and failed before paying. The promoters were held personally liable: where a person contracts as agent for a principal who does not exist, and the other party is to have any remedy, the agent must be taken to have contracted personally, since otherwise the agreement would bind nobody and be a nullity.

But the result turns on how they signed, and this distinction is where the marks are.

2. From that flow his duties: not to make a secret profit; to make full disclosure of any interest, to an independent Board or to the whole body of shareholders; and to account for undisclosed profits. Erlanger (island bought for £55,000, resold for £110,000, sale rescinded); Gluckstein v. Barnes [1900] AC 240 (concealed profit of £20,000, promoter made to account);
3. Statutory liabilities: section 35 compensation for a misleading prospectus, and unlimited liability under section 35(3) where issued with intent to defraud; section 34 and section 36 criminal liability; section 7(6) liability for false information at incorporation; and section 340, under which the Tribunal in a winding up may assess damages against a promoter guilty of misfeasance or breach of trust; and
4. He has no right to recover his preliminary expenses or remuneration as of right, the company not having existed when the services were rendered, and any payment must be disclosed in the prospectus under section 26.

For full marks, cover: the four cases and the requirement for each, the full inter-State procedure under section 13(4) and (5), and then the penalties under sections 12(8) and 172.

(a) The procedure

The answer depends entirely on how far the office is moving, and identifying the four cases is the first mark.

Case 4: from one State to another. This requires an alteration of the memorandum and is the most demanding:

1. Board meeting to approve and to call a general meeting;
2. Special resolution altering the registered office clause; file Form MGT-14 within thirty days;
3. Application to the Central Government, whose power is delegated to the Regional Director, in Form INC-23, with the altered memorandum, the minutes, the special resolution, a list of creditors and debenture-holders, and a verifying affidavit;
4. Advertisement and notice. The company must advertise in a vernacular newspaper in the principal vernacular language of the district and in an English newspaper with wide circulation in the State, and serve individual notice on every creditor and debenture-holder, and notice on the Registrar and the Chief Secretary of the State and any sectoral regulator;

(b) The penalty for non-compliance

1. Section 12(8), failure to comply with section 12. If any default is made in complying with the requirements of section 12, that is, in having a registered office from the thirtieth day of incorporation, in verifying it in Form INC-22, in painting or affixing the name and address outside every office, in printing the name, address, CIN, telephone and email on all business letters, billheads, letter papers, notices and other official publications, or in notifying a change within thirty days, then:

1. The company and every officer who is in default shall be liable to a penalty of one thousand rupees for every day during which the default continues, subject to a maximum of one lakh rupees.

2. Section 12(9), removal of the name. If the Registrar has reasonable cause to believe that the company is not carrying on any business or operations, he may cause a physical verification of the registered office in the prescribed manner, and if any default is found, he may initiate action for the removal of the name of the company from the register of companies under section 248.

Conclusion. On these facts the answer to (a) is that the procedure depends on how far the office is moving: a change within the same city needs only a Board resolution, a change outside it but within the same Registrar's jurisdiction needs a special resolution, a change from one Registrar's jurisdiction to another needs the confirmation of the Regional Director, and a change from one State to another needs a special resolution, alteration of the memorandum and the Regional Director's approval. The answer to (b) is that non-compliance attracts a penalty on the company and every officer in default under section 12(8), and, more seriously, no alteration takes effect until it is registered, so a company which does not complete the filings has not moved at all.

For full marks, cover: who he is and how the office has changed since the IBC, appointment, his powers with the Tribunal's sanction, his duties in sequence, his professional obligations and removal, and the order of distribution.

1. Who he is

Begin by dating the office, because it has changed. 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.

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 it to make its representations, unless for special reasons 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;
4. Section 275(4): on appointment as provisional liquidator or Company Liquidator, he shall file a declaration within seven days disclosing conflict of interest or lack of independence, and shall do so whenever it arises during his term; and
5. Section 276: removal. The Tribunal may remove him on the ground of misconduct, fraud or misfeasance, professional incompetence or failure to exercise due care and diligence, inability to act, or conflict of interest or lack of independence, after giving him a reasonable opportunity of being heard.

3. His powers, section 290

The Company Liquidator shall, subject to the directions of the Tribunal, have the power:

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;
11. To take out, in his official name, letters of administration to any deceased contributory, and to do any other act necessary for obtaining payment of money due from a contributory or his estate;
12. To obtain any professional assistance from any person or appoint any professional, in discharge of his duties and functions, and for the protection of the assets of the company, and to appoint an agent to do any business which he is unable to do himself;
13. To apply to the Tribunal for orders or directions as may be necessary; and
14. To take all such actions, steps, or to sign, execute and verify any paper, deed, document, application, petition, affidavit, bond or instrument as may be necessary.

Section 290(2): the exercise of powers by the Company Liquidator shall be subject to the overall control of the Tribunal, and any creditor or contributory may apply to the Tribunal with respect to any exercise or proposed exercise of any of these powers.

Section 294: audit. He shall maintain proper and regular books of account, present to the Tribunal the accounts of receipts and payments twice in each year, and those accounts shall be audited in such manner as the Tribunal directs, the liquidator furnishing vouchers and information; and he shall cause the accounts, when audited, to be printed and send a printed copy to every creditor and contributory.

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 and measures as may be necessary to protect and preserve them. All the property and effects of the company 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 and settle claims of creditors, and admit or reject them;
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(4) and (5): furnish accounts, get them audited, and file a copy with the Registrar for public inspection;

4. Financial debts owed to unsecured creditors;
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 the Tribunal thinks just.

For full marks, cover: the facts, the two limbs, the four justifications, the five exceptions each with a case, the derivative action, and the statutory remedies that have overtaken it.

1. The case

Foss v. Harbottle (1843) 2 Hare 461. Two shareholders of the Victoria Park Company, incorporated to lay out and sell land as an ornamental park, sued five directors and a solicitor, alleging that they had sold their own land to the company at an inflated price and had otherwise misapplied the company's property, and prayed that the defendants make good the losses.

Sir James Wigram V-C dismissed the suit. The company was still in existence, was capable of suing in its own name, and the acts complained of were capable of being confirmed by a majority of the members.

2. The two limbs

1. The proper plaintiff rule. Where a wrong is alleged to have been done to a company, the company is prima facie the only proper plaintiff to sue for it; and

4. The exceptions

1. Ultra vires or illegal acts. No majority, however large, can ratify an act which the company has no power to do. Any member may sue or obtain an injunction. Bharat Insurance Co. Ltd. v. Kanhaiya Lal AIR 1935 Lah 792, where a member complained that the company's funds were being invested contrary to its memorandum, and the suit was held maintainable.

2. Acts requiring a special majority. Where the Act or the articles require a special resolution and the thing is purported to be done by an ordinary one, an individual member may sue, because the majority was not competent to do it in that way. Edwards v. Halliwell [1950] 2 All ER 1064, where a trade union's rules required a two-thirds ballot to increase subscriptions and the increase was made without one.

Cook v. Deeks [1916] 1 AC 554: three of four directors negotiated a railway construction contract for themselves, excluding the company, and then used their majority shareholding to pass a resolution declaring that the company had no interest in it. The Privy Council held the contract belonged in equity to the company, and that the majority could not ratify their own wrong, since to do so would be to make a present of the company's property to themselves.

Contrast Pavlides v. Jensen [1956] Ch 565, where an asset was sold at a gross undervalue but no fraud was alleged and the action failed; and Daniels v. Daniels [1978] Ch 406, where directors who sold company land to one of themselves at an undervalue and profited were held answerable although fraud was not pleaded, so that negligence from which the directors benefit may suffice.

5. Oppression and mismanagement, now the statutory remedy under sections 241 and 242.

6. Some writers add wrongdoer control as an independent head, and cases suggesting an action where the interests of justice require it, though Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2) [1982] Ch 204 doubted so open-ended an exception.

6. The statutory remedies which have overtaken it

1. Sections 241 and 242, oppression and mismanagement. A member may apply to the Tribunal where the affairs of the company have been or are being conducted in a manner prejudicial or oppressive to any member, or prejudicial to the public interest or to the interests of the company, or where a material change in management or control makes it likely that they will be.

Eligibility, section 244: 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. The Tribunal may waive any of these requirements.

Powers, section 242: to regulate the conduct of the company's affairs in future; to order the purchase of the shares of any members by other members or by the company; to impose restrictions on the transfer or allotment of shares; to terminate, set aside or modify any agreement with the managing director, manager or director; to set aside a fraudulent preference; to order the removal of the managing director, manager or directors; to order the recovery of undue gains; and to appoint directors.

The rule in Foss v. Harbottle has never been overruled, and the proposition that the company is the proper plaintiff for a wrong to the company remains the starting point in India. What has changed is that the exceptions have largely been absorbed into statute. A minority shareholder today will almost always proceed under sections 241 and 242, which give a direct remedy, a Tribunal with very wide powers, and a threshold the Tribunal can waive, rather than attempt a common law derivative action. The rule survives as the doctrinal explanation of why he needs a statutory remedy at all.

Conclusion. The rule in Foss v. Harbottle rests on two propositions, that the proper plaintiff for a wrong done to the company is the company itself, and that the court will not interfere with an irregularity a majority can ratify. The exceptions, ultra vires or illegal acts, acts requiring a special majority, invasion of individual membership rights, and fraud on the minority, mark the cases where those propositions break down. In India the rule has been largely overtaken in practice, because a member with a grievance will proceed under sections 241 and 242, which give a direct remedy and a Tribunal with very wide powers; the rule survives as the explanation of why he needs a statutory remedy at all.

2. The circumstances: the grounds under section 271

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

(a) Special resolution. The company has, by special resolution, resolved that it be wound up by the Tribunal. 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.

(b) Acts against the State. The company has acted against the interests of the sovereignty and integrity of India, the security of the State, friendly relations with foreign States, public order, decency or morality. Only the Central or State Government may petition on this ground.

(c) Fraud, misfeasance or misconduct. On an application by the Registrar or any other person authorised by the Central Government, the Tribunal is of opinion that the affairs of the company have been conducted in a fraudulent manner, or that the company was formed for a fraudulent or unlawful purpose, or that the persons concerned in its formation or management have been guilty of fraud, misfeasance or misconduct in relation to it, and that it is proper that the company be wound up.

1. Deadlock in management. Re Yenidje Tobacco Co. Ltd. [1916] 2 Ch 426: two equal shareholder-directors of a private company quarrelled so completely that they communicated only through the office boy; the company was wound up although it was making a profit;
2. Loss of substratum, where the main object for which the company was formed has failed or become impossible. Re German Date Coffee Co. (1882) 20 Ch D 169: a company formed to work a German patent for making coffee from dates, which was never granted;
3. The company is a bubble, having no real business or property;
4. Oppression of the minority, or a fraudulent or illegal purpose; and
5. Breakdown of a quasi-partnership, where the company was in substance a partnership founded on mutual confidence which has been destroyed. Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360.

Section 273(2): where a petition is presented on the just and equitable ground, the Tribunal may refuse to make the order 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.

3. Appoint a provisional liquidator of the company till the making of a winding up order, after giving notice to the company and a reasonable opportunity to it to make its representations, unless for special reasons to be recorded in writing the Tribunal dispenses with the notice;
4. Make an order for the winding up of the company with or without costs; or
5. Make any other order as it thinks fit.

Section 273(2) proviso: the Tribunal shall not refuse to make a winding up order on the ground only that the assets of the company have been mortgaged for an amount equal to or in excess of those assets, or that the company has no assets.

B. On the winding up order, sections 275 to 279.

1. Appoint the Company Liquidator from the panel maintained by the Central Government, fix his terms and fee, and remove him under section 276 for misconduct, fraud, professional incompetence, inability to act or conflict of interest;
2. Section 277: the order operates in favour of all the creditors and all the contributories as if made on the joint petition of all of them, and a copy is filed with the Registrar within thirty days;

1. Section 283: all the property and effects are deemed to be in the custody of the Tribunal from the date of the winding up order;
2. Section 285: the Tribunal shall settle a list of contributories, distinguishing those who are contributories in their own right from those who are representatives of others, and shall cause the assets to be applied in discharge of the company's liabilities;
3. Section 295: the Tribunal may, at any time after passing the order, make calls on all or any of the contributories for such amount as it deems necessary; and
4. Section 296: the Tribunal may order any contributory, purchaser or other person to pay, deliver, surrender or transfer money, property, books or papers to the Company Liquidator.

E. Investigative and punitive powers.

1. Section 300: public examination. Where the Company Liquidator's report states that a fraud has been committed by any person in the promotion, formation, business or conduct of affairs of the company, the Tribunal may, after considering the report, direct that such person or officer shall attend before the Tribunal and be publicly examined as to the promotion or formation or the conduct of the business of the company;

4. Section 340: misfeasance proceedings. If in the course of winding up it appears that any promoter, director, manager, Company Liquidator or officer has misapplied or retained, or become liable or accountable for, any money or property of the company, or been guilty of any misfeasance or breach of trust, the Tribunal may examine his conduct and compel him to repay or restore the money or property with interest, or to contribute such sum to the assets by way of compensation as the Tribunal thinks just; and
5. Section 302: dissolution. When the affairs have been completely wound up, the Tribunal shall make an order that the company be dissolved from the date of the order.

Section 289: power to stay the winding up. The Tribunal may, at any time after making a winding up order, on the application of the Company Liquidator, a creditor or a contributory, make an order staying the proceedings, either altogether or for a limited time, on such terms as it thinks fit.

For full marks, cover: the definition of a debenture with its features and types, the section 71 machinery, the definition of a charge, fixed and floating with Romer LJ's indicia and the comparison, crystallisation, priority, and registration under section 77.

1. Debenture

Section 2(30): "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. Palmer's definition adds that it is an instrument under seal evidencing a deed, the essence being the admission of indebtedness.

Features:

1. It is usually one of a series of like instruments, issued under the company's seal or signed as prescribed;

4. By registration and transferability: registered debentures, payable to the person named in the register of debenture-holders under section 88 and transferable only by a proper instrument; and bearer debentures, transferable by mere delivery with interest coupons attached; and
5. By priority: first and second debentures.

The section 71 machinery:

1. Debenture trustee, section 71(5) and (6). No company shall issue a prospectus or make an offer to the public or to more than five hundred persons without appointing one or more debenture trustees before the issue. It is the trustee's duty to protect the interests of the debenture-holders and to redress their grievances, and he may apply to the Tribunal if satisfied that the assets are insufficient or likely to become insufficient to discharge the principal when due, and the Tribunal may impose restrictions on the incurring of further liabilities by the company;
2. Debenture redemption reserve, section 71(4): to be created out of the profits available for payment of dividend and applied only to redemption;

1. It attaches to that property at the moment it is created;
2. The company cannot sell, dispose of or deal with the property free of the charge without the consent of the charge-holder; and
3. It ranks first on that property, ahead of any floating charge over the same assets.

4. Floating charge

A floating charge is a charge on a class of assets, present and future, which in the ordinary course of the company's business changes from time to time, such as stock in trade, book debts or raw materials, and under which the company remains free to deal with those assets in the ordinary course until crystallisation.

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 in Re Yorkshire Woolcombers Association [1903] 2 Ch 284 are the working test:

6. Crystallisation

Crystallisation is the process by which a floating 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.

It occurs on:

1. The winding up of the company, whether compulsory or voluntary;
2. The appointment of a receiver, by the debenture-holders under the deed or by the court;

The Registrar may, on an application, allow registration within a further period of sixty days on payment of additional fees. On registration he issues a certificate of registration in Form CHG-2, which is conclusive evidence that the requirements have been complied with, section 77(2).

Section 77(3), the consequence of non-registration: no charge created by a company shall be taken into account by the liquidator appointed under this Act or the Insolvency and Bankruptcy Code, 2016, or any other creditor, unless it is duly registered and a certificate of registration has been given. The charge is therefore void against the liquidator and against other creditors.

Section 77(4) preserves the debt: nothing in section 77(3) shall prejudice any contract or obligation for the repayment of the money secured, and when a charge becomes void the money secured shall immediately become payable.

For full marks, cover: who a director is, the four descriptions of his legal position each with authority, then the statutory duties in section 166 clause by clause, the fiduciary duties with cases, the duty of care, to whom the duties are owed, and the consequences of breach.

1. Who a director is

Section 2(34): a director means a director appointed to the Board of a company. Section 2(10): the Board is the collective body of the directors. Section 149(3): only an individual may be appointed, so no body corporate, association or firm can be a director.

The Board's authority is general: section 179(1) provides that the Board shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorised to exercise and do, subject to the Act, the memorandum and the articles.

2. A director contracting properly on the company's behalf incurs no personal liability; but
3. He is personally liable where he contracts in his own name, where he exceeds his authority (breach of warranty of authority), where he fails to disclose the agency, or where he acts for a company not yet in existence, Kelner v. Baxter.

But the analogy is imperfect: an agent acts on his principal's instructions, whereas the Board's powers under section 179(1) are original and not delegated by the members, so the general meeting cannot direct the Board how to exercise a power the articles have vested in it.

B. Directors as TRUSTEES. They are not trustees in the strict sense, because the company's property is vested in the company and not in them, and there is no trust deed. But they are treated as trustees:

1. Of the company's money and property which comes into their hands or under their control; and

E. Directors as EMPLOYEES. A director as such is not an employee, but he may additionally hold a contract of service, as a managing or whole-time director, in which case he wears both capacities and is entitled to the protections of that contract, Southern Foundries (1926) Ltd. v. Shirlaw [1940] AC 701.

Section 2(59) makes a director an "officer" of the company, and section 2(60) an "officer who is in default" for a wide range of contraventions.

3. Duties: the codified duties, section 166

Codified for the first time by the Companies Act, 2013. Before it, the duties of an Indian director were found in English case law. A director of a company shall:

1. Act in accordance with the articles of the company;
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;

C. Not to make a secret profit, and to account for it. Regal (Hastings) Ltd. v. Gulliver [1967] 2 AC 134: the directors of a company which could not itself afford to subscribe for shares in a subsidiary subscribed personally and made a profit on the sale of the whole undertaking. They were held liable to account, although the company had suffered no loss, could not itself have taken the opportunity, and the directors had acted honestly. Liability is strict and does not depend on bad faith or on loss to the company.

D. Not to divert a corporate opportunity. Cook v. Deeks [1916] 1 AC 554; Industrial Development Consultants Ltd. v. Cooley [1972] 1 WLR 443, where a managing director resigned on a false plea of ill health in order to take a contract for himself and was made to account for the whole profit.

5. The duty of care, skill and diligence

Historically the standard was indulgent. Re City Equitable Fire Insurance Co. [1925] Ch 407 laid down three propositions: a director need exhibit in the performance of his duties no greater degree of skill than may reasonably be expected from a person of his knowledge and experience, a subjective test; he is not bound to give continuous attention to the affairs of the company, his duties being of an intermittent nature performed at periodical Board meetings; and in the absence of grounds for suspicion he is justified in trusting an official to perform duties honestly which can properly be left to him.

Section 166(3) has raised the standard. By requiring "due and reasonable care, skill and diligence" and "independent judgment", it imports an objective element. A director may no longer say that he did his incompetent best, and section 149(12), which limits an independent director's liability to acts occurring with his knowledge, attributable through Board processes, and with his consent or connivance "or where he had not acted diligently", presupposes a real duty of diligence.

6. To whom the duties are owed

5. Section 340: 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 such sum by way of compensation as it thinks just, on the application of the Company Liquidator, a creditor or a contributory;
6. Section 339: personal responsibility without limitation for the company's debts where the business was carried on with intent to defraud creditors;
7. Vacation of office under section 167 and disqualification under section 164; and
8. Removal by ordinary resolution under section 169, and by the Tribunal under section 242.

Conclusion. A director occupies an office the common law had no name for, and the analogies of agent and trustee explain parts of it without capturing the whole; the accurate modern statement is that he is a fiduciary exercising original statutory powers. Section 166 codifies the duties that follow, and the sanctions behind them, sections 166(7), 164, 167, 169, 242, 339 and 340, are what make them more than exhortation. The duties are owed to the company as a whole and not to individual shareholders, though section 166(2) requires the director to have regard to employees, the community and the environment as well.

1. Damages for breach;
2. Specific performance and injunction;
3. Rescission, restitution and a claim for money had and received;
4. Suit for a debt, and enforcement of a decree against its assets; and
5. Attachment and execution.

Two company-law qualifications apply to contractual claims:

1. Ultra vires contracts are void and unenforceable by either party, Ashbury Railway Carriage and Iron Co. Ltd. v. Riche (1875), the outsider being fixed with constructive notice of the memorandum. His only remedies are tracing and subrogation; and
2. Where the act was merely beyond the directors' authority and not beyond the company's, the outsider is protected by the doctrine of indoor management, Royal British Bank v. Turquand (1856), and the contract binds the company.

B. Statutory civil remedies under the Companies Act. These are the ones a Company Law paper is asking about:

5. Section 119(4): an order for inspection of minute books and for a copy;
6. Section 73(4): an order on the Tribunal's application by a depositor where the company fails to repay a deposit;
7. Section 71(10): an order directing the company to redeem debentures forthwith on default;
8. Section 37: a suit by any person, group of persons or association of persons affected by a misleading prospectus; and
9. Section 340: in a winding up, an order compelling a promoter, director, manager or officer guilty of misfeasance or breach of trust to repay or restore money or property or to contribute compensation.

C. Where the claim lies against those behind the company. Statutory lifting of the veil gives the claimant a remedy against the members or officers personally: section 3A (members below the minimum for more than six months, severally liable); section 7(7) (incorporation by false information, unlimited liability); section 251(1) (striking off to evade liabilities); section 339 (fraudulent conduct of business, personal responsibility without limitation); and section 464 (unregistered association exceeding the prescribed number).

2. Standard Chartered Bank v. Directorate of Enforcement (2005) 4 SCC 530: a company can be prosecuted and punished for an offence carrying a mandatory sentence of imprisonment and fine, the court imposing the fine and not the imprisonment. The earlier view, that a company must be excluded from prosecution wherever imprisonment was mandatory, was overruled.

B. Under the Companies Act. The Act creates a long list of offences, most of which are committed by the company and every officer who is in default, an expression defined in section 2(60) to include the whole-time director, key managerial personnel, any person charged by the Board with compliance, any director aware of the contravention or who did not object, and any person in accordance with whose advice, directions or instructions the Board is accustomed to act, otherwise than in a professional capacity.

The principal offences:

1. Section 447, fraud: imprisonment for not less than six months up to ten years and a fine not less than the amount involved up to three times it; where the fraud involves public interest, the minimum is three years;
2. Section 34: untrue or misleading statements in a prospectus, punishable under section 447;

Investigation by the Serious Fraud Investigation Office under sections 211 and 212, whose Director has a power of arrest under section 212(8), and whose report is deemed a police report under section 173 of the Code of Criminal Procedure.

D. Under other laws. A company may be prosecuted under the Indian Penal Code and the Bharatiya Nyaya Sanhita, under section 138 of the Negotiable Instruments Act, 1881 for dishonour of a cheque, where section 141 makes the company and every person in charge of and responsible to it for the conduct of its business liable, under the Prevention of Money Laundering Act, 2002, the Consumer Protection Act, 2019, and the environmental and labour statutes.

Aneeta Hada v. Godfather Travels and Tours (P) Ltd. (2012) 5 SCC 661 is worth naming: where a statute makes the company the principal offender and the officers vicariously liable, prosecution of the company is a sine qua non for prosecuting the directors under section 141 of the Negotiable Instruments Act.

C. The ultra vires question. Students often assume that because an ultra vires contract is void, an ultra vires tort cannot bind the company. That is wrong, and saying so is worth a mark. The better view, and the practical rule, is that a company is liable for torts committed in the course of activities that are intra vires, however the act was performed; and that it cannot escape liability merely by showing that the servant's act was beyond the company's objects, since the doctrine of ultra vires protects shareholders and creditors against the misapplication of funds, not victims of wrongdoing. The company remains liable where the tort was committed by a servant acting within the scope of his employment in a business the company was in fact carrying on.

D. The director's personal liability. A director is personally liable for a tort he himself commits or expressly directs or procures, and cannot shelter behind the company. Gilford Motor Co. Ltd. v. Horne [1933] Ch 935, where an injunction was granted against both the individual and the company; and the principle in Rainham Chemical Works Ltd. v. Belvedere Fish Guano Co. [1921] 2 AC 465.

E. Special heads.

1. Deceit, where a prospectus contains a fraudulent misstatement, Derry v. Peek (1889) 14 App Cas 337, the statutory counterpart being section 35;

The law's answers are three, and they should be named:

1. Statutory personal liability, above, under sections 3A, 7(7), 35(3), 251(1), 339 and 464, and under section 2(60) making officers in default personally punishable;
2. Judicial lifting of the veil, for fraud (Gilford Motor v. Horne), evasion of an obligation (Jones v. Lipman), tax evasion (Sir Dinshaw Maneckjee Petit, Re) and the single economic entity (State of U.P. v. Renusagar Power Co.); and
3. Insolvency, where an unpaid creditor's real remedy today is an application under section 7 or 9 of the Insolvency and Bankruptcy Code, 2016 on a default of one crore rupees, which brings in a moratorium, an insolvency professional and a committee of creditors, rather than a suit.