BLS LLB 5 Years Sem 7 Company Law 2022-23 - ATKT Question Paper with Solutions

A pre-incorporation contract, also called a preliminary contract, is a contract purported to be made on behalf of a company before the company is incorporated, usually by its promoters.

Because the company does not exist at that date, it has no contractual capacity, it cannot ratify the contract afterwards, and it can neither sue nor be sued on it. The promoter who signed as agent is personally liable, Kelner v. Baxter (1866).

A company licensed under section 8 of the Companies Act, 2013. Section 8(1) allows the Central Government to license a person or association of persons about to be registered as a limited company, which:

1. Has in its objects the promotion of commerce, art, science, sports, education, research, social welfare, religion, charity, protection of environment or any such other object;
2. Intends to apply its profits, if any, or other income in promoting its objects; and
3. Intends to prohibit the payment of any dividend to its members,

to be registered as a limited company without the addition to its name of the word "Limited" or "Private Limited".

Section 32 read with the explanation to it defines a red herring prospectus as a prospectus which does not include complete particulars of the quantum or price of the securities included therein.

A company proposing to make an offer of securities may issue one prior to the issue of a prospectus, and it must be filed with the Registrar at least three days before the opening of the subscription list and the offer.

A share certificate is a document issued by a company under its common seal, or signed as prescribed, specifying the shares held by any person and stating the amount paid up on them.

Section 46(1) provides that a certificate, issued under the common seal, if any, of the company or signed by two directors or by a director and the company secretary, specifying the shares held by any person, shall be prima facie evidence of the title of that person to such shares.

Under section 203(1) of the Companies Act, 2013 read with Rule 8, every listed company and every other public company having a paid-up share capital of ten crore rupees or more must have the following whole-time key managerial personnel:

1. A managing director, or Chief Executive Officer or manager, and in their absence, a whole-time director;
2. A company secretary; and
3. A Chief Financial Officer.

Rule 8A additionally requires every private company having a paid-up share capital of ten crore rupees or more to have a whole-time company secretary.

Subsequent auditor, section 139(1). At the first annual general meeting the company appoints an individual or a firm to hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting, that is a term of five years. Before the appointment the company must obtain the auditor's written consent and a certificate that the appointment, if made, will be in accordance with the prescribed conditions, and must file Form ADT-1 with the Registrar within fifteen days.

For a Government company, the auditor is appointed each year by the CAG within one hundred and eighty days from the commencement of the financial year.

Rotation, section 139(2). Applies to every listed company, every unlisted public company with paid-up capital of ten crore rupees or more, every private company with paid-up capital of fifty crore rupees or more, and every company having public borrowings from banks or financial institutions or public deposits of fifty crore rupees or more. Such a company shall not appoint or re-appoint:

1. An individual for more than one term of five consecutive years; or
2. An audit firm for more than two terms of five consecutive years,

Eligibility and disqualification, section 141. Only a chartered accountant, or a firm whose majority of partners practising in India are chartered accountants, may be appointed; a limited liability partnership may be appointed but no other body corporate. Disqualified are an officer or employee of the company; a partner or employee of an officer or employee; a person or his relative or partner holding any security or interest in the company or its holding, subsidiary or associate company (a relative may hold securities of face value up to one thousand rupees), or indebted to any of them beyond five lakh rupees, or who has given a guarantee for the indebtedness of a third person beyond one lakh rupees; a person having a business relationship with any of them; a person whose relative is a director or key managerial personnel; a person in full-time employment elsewhere or already auditor of more than twenty companies; a person convicted of an offence involving fraud within the last ten years; and a person rendering any of the services prohibited by section 144.

For full marks, cover: the meaning, the three modes, the section 66 procedure with the Tribunal, the protection of creditors, the bar where deposits are in arrear, and the ways capital is reduced without section 66.

Reduction of share capital is the diminution of the issued, subscribed and paid-up share capital of a company. Because capital is the fund on which creditors rely, the general rule is that a company must maintain its capital, and reduction is permitted only under section 66 and with the confirmation of the Tribunal.

Section 66(1): a company limited by shares or limited by guarantee and having a share capital may, by a special resolution, subject to confirmation by the Tribunal on a petition, reduce its share capital in any manner, and in particular may:

1. Extinguish or reduce the liability on any of its shares in respect of share capital not paid up, for example by reducing a share of Rs. 100 with Rs. 60 paid up to a share of Rs. 60 fully paid;

6. The Tribunal shall not confirm the reduction unless the accounting treatment proposed is in conformity with the accounting standards specified in section 133, and a certificate to that effect from the company's auditor has been filed; and
7. The Tribunal shall not confirm the reduction unless the consent of every creditor entitled to object is obtained, or his debt has been discharged or determined or secured.

After confirmation: the Tribunal's order is published as it directs, and the company delivers a certified copy of the order and of the minute approved by the Tribunal showing the amount of share capital, the number of shares into which it is divided, the amount of each share and the amount deemed paid up, to the Registrar within thirty days, who registers it and issues a certificate, which is conclusive evidence that the requirements of the Act have been complied with.

Penalty, section 66(10) and (11): a member of the company who conceals the name of a creditor entitled to object, or misrepresents the nature or amount of his debt, is punishable under section 447; and a company failing to comply with the publication direction is punishable with a fine.

For full marks, cover: the definition with its two preferences, the kinds, the twenty-year rule on redemption, the conditions of redemption under section 55, and the circumstances in which preference shareholders vote.

Section 43(b) provides that the share capital of a company limited by shares shall be of two kinds, equity share capital and preference share capital. The explanation defines preference share capital as that part of the issued share capital which carries or would carry a preferential right with respect to:

1. Payment of dividend, either as a fixed amount or an amount calculated at a fixed rate, which may be free of or subject to income tax; and
2. Repayment, in the case of a winding up or repayment of capital, of the amount of the share capital paid up or deemed to have been paid up, whether or not there is a preferential right to payment of any fixed premium or premium on any fixed scale.

Both preferences must be present; a share carrying only one of them is not a preference share.

The kinds:

Section 55(2): a company may, if so authorised by its articles, issue preference shares which are liable to be redeemed within a period not exceeding twenty years from the date of their issue. A company engaged in the setting up and dealing with infrastructural projects may issue preference shares redeemable beyond twenty years but not exceeding thirty years, subject to the redemption of a minimum ten per cent of such shares per year from the twenty-first year onwards, at the option of the holders.

Conditions of redemption, section 55(2) provisos:

1. Shares may be redeemed only if they are fully paid;
2. They shall be redeemed out of the profits of the company which would otherwise be available for dividend, or out of the proceeds of a fresh issue of shares made for the purposes of the redemption;
3. Where they are redeemed out of profits, a sum equal to the nominal amount of the shares redeemed must be transferred to the Capital Redemption Reserve Account, which is then treated as paid-up share capital for the purposes of section 66 and may be applied in paying up unissued shares to be issued as fully paid bonus shares; and
4. Any premium payable on redemption must be provided for out of profits or out of the securities premium account, before the shares are redeemed.

Conclusion. Preference share capital is defined in the Explanation to section 43 by the two preferences it carries, a preferential right to dividend at a fixed rate and a preferential right to repayment of capital on winding up, and both must be present. The price of that priority is the ceiling: the holder is presumed non participating in surplus, and he has no vote except on resolutions directly affecting his rights. If his dividend remains unpaid for two years, section 47(2) revives his vote on every resolution, which is the Act's recognition that a preference share whose preference is not honoured is no longer a passive investment.

The definition, section 149(6). An independent director means a director other than a managing director, a whole-time director or a nominee director, who:

1. In the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
2. Is or was not a promoter of the company or its holding, subsidiary or associate company, and is not related to promoters or directors in the company, its holding, subsidiary or associate company;
3. Has or had no pecuniary relationship, other than remuneration as such director or having transaction not exceeding ten per cent of his total income or such amount as may be prescribed, with the company, its holding, subsidiary or associate company, or their promoters or directors, during the two immediately preceding financial years or during the current financial year;
4. None of whose relatives has or had a pecuniary relationship or transaction with any of them amounting to two per cent or more of the gross turnover or total income, or fifty lakh rupees, or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or the current financial year;
5. Who, neither himself nor any of his relatives:

Declaration, section 149(7). Every independent director shall at the first meeting of the Board in which he participates as a director, and thereafter at the first meeting of the Board in every financial year, or whenever there is any change in the circumstances which may affect his status, give a declaration that he meets the criteria of independence.

Tenure, section 149(10) and (11). An independent director shall hold office for a term of up to five consecutive years, and shall be eligible for reappointment on the passing of a special resolution and disclosure in the Board's report. He shall not hold office for more than two consecutive terms, and shall be eligible for appointment after the expiry of three years of ceasing to become an independent director, provided that during those three years he is not appointed in or associated with the company in any other capacity, directly or indirectly.

No retirement by rotation, section 149(13). The provisions on retirement of directors by rotation in section 152(6) and (7) do not apply to an independent director.

1. The independent directors shall hold at least one meeting in a financial year without the attendance of non-independent directors and members of management, to review the performance of non-independent directors and of the Board as a whole, to review the performance of the chairperson taking into account the views of executive and non-executive directors, and to assess the quality, quantity and timeliness of flow of information between management and the Board; and
2. The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated, and on that evaluation it shall be determined whether to extend or continue his term.

2. Where two or more persons hold one or more shares jointly, they are treated as a single member; and
3. The minimum is two, section 3(1)(b). Mr. A and Mr. B are therefore sufficient to incorporate.

If the number of members falls below two and the company carries on business for more than six months while so reduced, section 3A makes every member aware of it severally liable for the whole of the debts contracted during that time.

The other two restrictions of section 2(68) go with this one and should be mentioned: the articles must also restrict the right to transfer its shares, and must prohibit any invitation to the public to subscribe for any securities of the company.

(b) Issue of prospectus

A private company cannot issue a prospectus. Section 2(68)(iii) requires its articles to prohibit any invitation to the public to subscribe for any securities of the company, and a prospectus is by definition a document inviting offers from the public for the subscription or purchase of securities, section 2(70).

How a private company raises capital instead:

The conditions of section 42 are strict and worth naming: the offer must be previously approved by a special resolution; the application money must be received by cheque, demand draft or other banking channel and not in cash; it must be kept in a separate bank account and used only for allotment or repayment; the company must allot within sixty days of receipt or repay within fifteen days thereafter, failing which it pays interest at twelve per cent per annum from the expiry of the sixtieth day; the company must file a return of allotment in Form PAS-3 within fifteen days; and no company making a private placement shall release any public advertisement or utilise any media, marketing or distribution channels or agents to inform the public at large about such an offer.

Section 42(10): contravention makes the company, its promoters and directors liable to a penalty which may extend to the amount raised through the private placement or two crore rupees, whichever is lower, and the company must refund all monies to subscribers within thirty days of the order imposing the penalty.

(c) Conversion into a public company

Mr. A and Mr. B may convert later. The procedure is under section 14 read with section 18.

The consequential requirements once it is a public company, which are the practical advice:

1. Minimum seven members and minimum three directors, section 3(1)(a) and 149(1);
2. At least two-thirds of the directors must be liable to retire by rotation, section 152(6);
3. Compliance with section 149(1) on a woman director and, if it crosses the thresholds, with sections 177 and 178 on the Audit Committee and the Nomination and Remuneration Committee;
4. Loss of the exemptions available to private companies under the section 462 notification, including those relating to sections 43, 47, 62, 73, 101 to 107, 141, 160, 162, 180, 184, 185, 188 and 196; and
5. The company's name must be changed to remove the word "Private", which follows automatically from the alteration.

To save the company, Directors used the fund to pay off other liabilities of the Company.

For full marks, cover: that this is Edgington v. Fitzmaurice, the proposition that a statement of intention is a statement of fact, the answer to both limbs, and the statutory remedies under sections 34, 35 and 36.

This problem is Edgington v. Fitzmaurice (1885) 29 Ch D 459 with the names changed, and the answer is the answer given in that case.

(a) Can Mr. John sue?

Yes.

1. A false statement of fact. The stated object of the issue, being a statement of the directors' present intention, was false;
2. Knowledge of falsity. The directors knew what they actually intended, so the statement was made knowingly, which is fraud within Derry v. Peek (1889) 14 App Cas 337;
3. Intention that he should act on it. A prospectus is issued precisely so that investors will act on it; and
4. Reliance and loss. He advanced money on the faith of it. On reliance, Edgington decides a further point in his favour: the plaintiff there also believed, mistakenly, that he was getting a charge on the property, and it was argued that this, and not the prospectus, was his real reason. The Court held that it is enough that the misstatement was one of the inducing causes; it need not be the sole or even the decisive one.

His remedies:

1. Rescission of the contract against the company, with repayment of his money and interest, provided he acts promptly and the company has not gone into liquidation;
2. Damages for deceit against the directors and the company, the misrepresentation being fraudulent;

Fraud in the civil sense, as defined in Derry v. Peek, is a false representation made (i) knowingly, or (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false. The directors' statement of their intention was false to their own knowledge. Motive is irrelevant to the question whether a representation was fraudulent.

The reason is not merely technical. Mr. John's money was raised for one risk and applied to another. A lender who advances money to fund improvements to a building and the development of a trade is lending against an enterprise that is expanding. A lender whose money is used to pay off existing creditors is lending to a company already in difficulty, and is in substance funding somebody else's exit. That is a materially different transaction, and it is precisely the difference the prospectus concealed.

Note that the directors may well have acted in good faith towards the company, and a court may accept that they believed they were saving it. That is a plea in mitigation, not a defence. Their duty under section 166(2) is to act in good faith for the benefit of the members as a whole, but a duty owed to the company cannot justify a misstatement to an outsider.

For full marks, cover: that section 169 overrides the articles, the two exceptions that do not apply, the section 10 four-limb contract and why Mr. B's claim fails on limb four, Eley's case, and the damages that may nevertheless survive.

(a) Advice to the company

The company is entitled to succeed. Mr. B's action to be restored to the board must fail.

Second, the articles are not a contract with him in this capacity. Section 10(1) makes the memorandum and articles bind the company and its members as if signed by each of them, but the contract so created is enforceable only in respect of the rights of a member as a member. It creates no contract between the company and an outsider, and none with a member in a capacity other than that of member.

Eley v. Positive Government Security Life Assurance Co. Ltd. (1876) 1 Ex D 88 is the case exactly in point. The articles provided that Eley should be the company's solicitor for life and should not be removed except for misconduct. He acted as solicitor and later became a member. When the company ceased to employ him he sued on the articles and failed: he was seeking to enforce a right conferred on him in the character of solicitor, not of member, and in that character he was an outsider to the section 10 contract. See also Beattie v. E. & F. Beattie Ltd. [1938] Ch 708, where a director could not rely on an arbitration clause in the articles in a dispute about his conduct as director.

What the company should do to make the removal unimpeachable. If the procedural steps were not taken, the company should repeat the exercise properly, because the substantive power is not in doubt but the procedure is mandatory:

What Mr. B may still have is money, not office. Section 169(8)(b) expressly provides that nothing in the section shall be taken as depriving a person removed of compensation or damages payable to him in respect of the termination of his appointment as director or of any appointment terminating with that as director, in accordance with the terms of any contract. Southern Foundries (1926) Ltd. v. Shirlaw [1940] AC 701 is the authority: 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 for the breach. The statutory power to end the office is not a licence to break a contract.

So the advice is: the removal stands, Mr. B cannot be restored, but if he held a service agreement running to 2026 the company should expect a claim in damages for the unexpired term.

(b) Who is an outsider?

An outsider, for the purposes of the articles, is any person who is not a member of the company, and also a member who is suing in a capacity other than that of a member.

The second half is the important half. A person may be both a member and an outsider at the same time, depending on the right he is asserting:

Note the practical answer for an outsider who wants a right secured by the articles: he must obtain a separate contract with the company, and the article may then be incorporated into that contract as one of its terms. That is how a managing director's tenure is protected in practice, and it is why Southern Foundries v. Shirlaw succeeded where Eley failed. Shirlaw had a service agreement; Eley had only the article.

White incorporates rival company in which Mr. Black is one of the Directors.

For full marks, cover: the split of the covenant into its two halves, section 27 of the Contract Act on the post-employment half, what remedies survive, and Gilford Motor v. Horne on the rival company with the Indian qualification.

(a) Remedies available to FICO Company

The covenant must be split in two, because Indian law treats the two halves differently. This is the heart of the answer.

Indian law, unlike English law, has no test of reasonableness for post-employment restraints. In Superintendence Company of India (P) Ltd. v. Krishan Murgai AIR 1980 SC 1717 the Supreme Court struck down a covenant restraining an employee from a similar business for two years after his employment ended, holding that once the employment comes to an end the employee's future obligations end with it and he must remain free to pursue any lawful profession, trade or business. It makes no difference whether the restraint is for six months or six years, or covers one city or the whole country. See also Percept D'Mark (India) (P) Ltd. v. Zaheer Khan (2006) 4 SCC 227.

Mr. Black's employment has been determined. The covenant is therefore operating in its post-employment phase, and in that phase it is void under section 27. FICO cannot obtain an injunction to enforce it as such.

What FICO can still do, and this is where the marks lie, because the answer must not stop at "no remedy":

2. Breach of fiduciary duty as a director. While Mr. Black was managing director he owed the duties in section 166: to act in good faith to promote the objects of the company for the benefit of its members as a whole, to avoid situations in which he has a conflicting interest, and not to achieve any undue gain or advantage for himself or his associates. If, while still in office, he prepared the ground for the rival company, canvassed FICO's customers, or diverted an opportunity belonging to FICO, he is liable to account for the profit and, under section 166(5), to pay to the company an amount equal to that gain. Cook v. Deeks [1916] 1 AC 554 and Industrial Development Consultants Ltd. v. Cooley [1972] 1 WLR 443 are the authorities on the corporate opportunity doctrine, and the fiduciary duty survives resignation as regards opportunities that matured during office;
3. Damages for breach of the valid, in-term half of the covenant, if any solicitation took place before his employment ended; and
4. Passing off or an action under the trade marks law if the rival company is using FICO's name, get-up or goodwill.

The Indian qualification matters and must be stated. Gilford Motor proceeds on the footing that the underlying covenant was valid and enforceable under English law, which applies a test of reasonableness to post-employment restraints. In India the post-employment restraint is void under section 27, so there is nothing for the company to be a cloak for. Lifting the veil cannot manufacture an obligation that never bound the man behind it.

The veil argument therefore succeeds in India only if the underlying wrong is one that Indian law recognises, namely:

1. Misuse of confidential information or trade secrets, in which case the company through which the information is exploited may be restrained along with the individual;
2. Breach of fiduciary duty committed while in office, in which case the company that received the diverted opportunity or profit may be made to account as a constructive trustee, having received it with notice; or
3. Passing off or misuse of FICO's goodwill.

1. The requisitionists, section 100(4). Members holding not less than one-tenth of the paid-up share capital carrying voting rights, or one-tenth of the total voting power in a company without share capital, may requisition an extraordinary general meeting. The Board must proceed within twenty-one days to call it for a day not later than forty-five days from receipt of the requisition; if it does not, the requisitionists may call it themselves within three months of the date of the requisition, and the reasonable expenses are reimbursed by the company and recovered from the fees of the defaulting directors;
2. The Tribunal, section 97, on the application of any member, where default is made in holding an annual general meeting; and
3. The Tribunal, section 98, of its own motion or on the application of a director or member entitled to vote, where it is impracticable to call a meeting other than an annual general meeting.

2. Proper notice

Section 101(1): not less than clear twenty-one days' notice, in writing or by electronic mode.

4. Contents, section 101(2): the place, date, day and hour of the meeting and a statement of the business to be transacted; and
5. Explanatory statement, section 102. For every item of special business, a statement must be annexed setting out all material facts, including the nature of the concern or interest, financial or otherwise, of every director, manager, other key managerial personnel and their relatives, and, where an item relates to another company, the shareholding interest in that company of any of them if it is not less than two per cent. Where any benefit accrues to a promoter, director, manager or key managerial person as a result of the non-disclosure or insufficient disclosure, he must compensate the company to the extent of the benefit.

Ordinary business, which needs no explanatory statement, is limited by section 102(2) to four items at an annual general meeting: consideration of the financial statements and the reports of the Board and auditors, declaration of dividend, appointment of directors in place of those retiring, and the appointment and remuneration of auditors. Everything else, and all business at an extraordinary general meeting, is special business.

If a quorum is not present, section 103(2): unless the articles otherwise provide, if a quorum is not present within half an hour the meeting shall stand adjourned to the same day in the next week at the same time and place, or to such other day, time and place as the Board may determine, but if the meeting was called on the requisition of members it stands cancelled. At the adjourned meeting, if a quorum is not present within half an hour, the members present shall be the quorum. Not less than three days' notice of the adjourned meeting must be given.

A meeting held without a quorum is a nullity and its resolutions are void.

4. A proper chairman

Section 104: unless the articles otherwise provide, the members personally present at the meeting shall elect one of themselves to be the chairman on a show of hands. If a poll is demanded on the election of the chairman, it shall be taken forthwith, and the chairman elected on the show of hands shall continue to preside until a new chairman is elected on the poll.

3. Proxies, section 105. A member entitled to attend and vote may appoint a proxy, who need not be a member and, unless the articles provide otherwise, cannot speak and can vote only on a poll. The instrument must be deposited not less than forty-eight hours before the meeting. A person may act as proxy for not more than fifty members and for members holding in the aggregate not more than ten per cent of the total share capital carrying voting rights;
4. Postal ballot, section 110, for items prescribed, and electronic voting, section 108 and Rule 20, compulsory for every listed company and every company having not less than one thousand members; and
5. Resolutions, section 114: ordinary by simple majority of votes cast; special where the intention was stated in the notice and the votes in favour are not less than three times the votes against.

Section 119: the minute books of general meetings shall be kept at the registered office and be open to inspection by any member without charge for not less than two hours in each business day, and any member is entitled to a copy within seven working days of his request.

Conclusion. A meeting is valid only if every one of its requisites is satisfied, and the reason the law is exacting is that a resolution binds members who voted against it and members who did not attend at all. It must be convened by the proper authority, on notice of at least twenty one clear days giving the place, date, hour and business, with an explanatory statement for special business; a quorum must be present at the commencement; there must be a proper chairman; the business must be conducted by motion, amendment and resolution with the right to demand a poll; and the proceedings must be minuted within thirty days under section 118. A defect in any of these makes the resolution liable to be set aside.

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. An individual member has suffered no legal injury of his own, and cannot sue.

2. The majority rule, or the rule of internal management. Where the alleged wrong is a transaction which the majority of the members is competent to make binding on the company by ratification or confirmation, no individual member may bring an action, because the ultimate decision belongs to the majority, and the courts will not interfere with the internal management of a company acting within its powers.

3. The justifications

Each should be given, because the exceptions are shaped by them.

1. It follows from separate legal personality. If the company is a person distinct from its members, Salomon v. Salomon & Co. Ltd., then a loss to the company is the company's loss, not the members'. A member's shares may fall in value, but that is a reflective loss and not an independent injury;

2. Acts requiring a special majority. Where the Act or the articles require a special resolution and the thing is done by an ordinary one, an individual member may sue, because the majority was not in fact 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; two members were held entitled to sue.

3. Invasion of individual or personal rights. A member may always sue in his own name to enforce a right belonging to him as a member. Such rights include the right to vote and to have his vote counted, to receive a dividend once declared, to have his name on the register, to receive notice of meetings, to enforce the articles as a contract under section 10, to be offered his proportionate share of a further issue under section 62, and to inspect the statutory registers and the minutes of general meetings. Nagappa Chettiar v. Madras Race Club AIR 1949 Mad 809; Pender v. Lushington (1877) 6 Ch D 70, where the chairman refused to record votes and the member sued successfully in his own name.

Contrast Pavlides v. Jensen [1956] Ch 565, where an asset was sold at a gross undervalue but there was no allegation of fraud, 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, without fraud being pleaded, were nevertheless held answerable, so that negligence from which the directors benefit may suffice.

5. Oppression and mismanagement, now the statutory remedy under sections 241 and 242, on which see below.

6. Wrongdoer control is treated by some writers as an independent head, and some cases add that the court will allow 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.

5. The derivative action

Exception four works through a distinct procedural device which should be explained.

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. The eligibility threshold in section 244, one hundred members or one-tenth of the members or one-tenth of the issued share capital, may now be waived by the Tribunal. The powers in section 242 include regulating the conduct of the company's affairs, the purchase of a member's shares by the company or other members, restrictions on transfer or allotment, setting aside agreements with managerial personnel, the removal of directors, and the recovery of undue gains.

Note the widening: the 1956 Act, section 397, required conduct to be "oppressive"; section 241 says "prejudicial or oppressive" and adds prejudice to the company's own interests. The threshold is lower than under Shanti Prasad Jain v. Kalinga Tubes Ltd. AIR 1965 SC 1535, which required the conduct to be continuous and held that an isolated act would not do.

Conclusion. The rule in Foss v. Harbottle is the procedural consequence of separate legal personality: a wrong done to the company is a wrong to the company alone, and the court will not interfere at the suit of a member with an irregularity the majority is competent to ratify. The four recognised exceptions, ultra vires or illegal acts, acts requiring a special majority, invasion of individual membership rights and fraud on the minority, are the cases in which those reasons cease to apply. In India the rule now matters chiefly as doctrine, because a member with a real grievance proceeds under sections 241 and 242 rather than by a derivative action.

Section 2(94A) defines winding up as winding up under the Companies Act, 2013 or liquidation under the Insolvency and Bankruptcy Code, 2016, as applicable, which is itself the modern position in one line.

2. The modes

Under the Companies Act, 1956 there were three modes: compulsory winding up by the Court, voluntary winding up (members' or creditors'), and voluntary winding up under the supervision of the Court. The Companies Act, 2013 as enacted had two, but sections 304 to 323, 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.

The just and equitable ground has been applied to deadlock (Re Yenidje Tobacco Co. Ltd. [1916] 2 Ch 426), loss of substratum where the main object has failed or become impossible (Re German Date Coffee Co.), the company being a bubble with no real business, oppression of a minority, and the breakdown of a quasi-partnership (Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360).

Step 2: the petition, section 272, by the company, any contributory, the Registrar, any person authorised by the Central Government, or the Central or State Government under ground (b). It must be accompanied by a statement of affairs. The Registrar may petition only with the previous sanction of the Central Government and after giving the company a reasonable opportunity of making representations.

Step 3: the Tribunal's order, section 273. Within ninety days of presentation, the Tribunal may dismiss the petition with or without costs, make an interim order, appoint a provisional liquidator after notice to the company, make an order for winding up, or any other order it thinks fit. It shall not refuse to make an order merely because the assets have been mortgaged for an amount equal to or in excess of those assets, or because the company has no assets.

Step 7: the liquidator's report, section 281. Within sixty days of the order, he submits a report on the assets, capital issued and paid up, existing and contingent liabilities, debts due, guarantees, list of contributories, intellectual property, held-for-sale property, his opinion whether any fraud has been committed, and a report on the viability of the business and any proposal for revival.

Step 8: custody and realisation, sections 283 and 290. He takes into his custody all the property, effects and actionable claims, which are deemed to be in the custody of the Tribunal from the date of the order. With the Tribunal's sanction he may carry on the business so far as necessary, sell the property by public auction or private contract including the whole undertaking as a going concern, institute or defend suits in the company's name, raise money on the security of the assets, and invite and settle claims.

Step 9: contributories and calls, sections 285 and 295. The Tribunal settles the list of contributories, distinguishing those liable in their own right from representatives, and may make calls for money due on shares.

Step 10: distribution under section 53 of the IBC.

4. Voluntary liquidation, section 59 of the IBC

Available to a corporate person which intends to liquidate itself voluntarily and has not committed any default. It requires:

1. A declaration by a majority of the directors, verified by affidavit, that they have made a full inquiry and formed the opinion that the company has no debt or will be able to pay its debts in full from the proceeds of the assets, and that it is not being liquidated to defraud any person, accompanied by the audited financial statements and record of business operations for the previous two years and a valuation report;
2. Within four weeks, a special resolution appointing an insolvency professional as liquidator, and, where the company owes debt, the approval of creditors representing two-thirds in value within seven days; and
3. Notice to the Registrar and the Board within seven days.

Liquidation is deemed to commence from the date of the resolution, and on completion the liquidator applies to the NCLT for an order of dissolution.

Conclusion. Winding up under the Companies Act, 2013 is now a narrower process than the name suggests, because only winding up by the Tribunal on the five grounds in section 271 survives; voluntary winding up has moved to section 59 of the Insolvency and Bankruptcy Code, 2016 and is available only to a solvent company. The steps run from petition and admission through the appointment of the liquidator, the taking over of assets, the settling of the list of contributories, the calls, the realisation and the distribution in the section 53 waterfall, to dissolution under section 302. A company that cannot pay its debts today goes into the corporate insolvency resolution process, not into winding up.

1. Separate legal personality

The first and the foundation of all the rest. On incorporation the company becomes a person in law distinct from the persons who compose it.

Salomon v. Salomon & Co. Ltd. [1897] AC 22. Salomon sold his boot business to a company he formed, taking 20,000 shares and £10,000 of debentures secured by a floating charge, his wife and five children holding one share each. On the company's failure the unsecured creditors argued that it was a sham, an alias or an agent for Salomon. The House of Lords held the company duly incorporated, not the agent or trustee of Salomon, and his secured debentures entitled to be paid first. Lord Macnaghten: the company "is at law a different person altogether from the subscribers".

2. Artificial legal person

The company is a person created by law, not by nature. It has no body, no mind and no soul, and therefore acts only through human agency: through its members in general meeting and its Board of Directors, and through its officers and agents.

Two consequences:

4. Limited liability

The liability of a member 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 the company nothing further, however great its debts.

An unlimited company under section 2(92) has full corporate personality but no limited liability, which shows that the two are distinct attributes and that limited liability is a consequence of separate personality rather than the same thing.

5. Separate property

The company's property is its own, and a member has no legal or equitable interest in any item of it.

Macaura v. Northern Assurance Co. Ltd. [1925] AC 619: the owner of practically all the shares in a company insured the company's timber in his own name. It was destroyed by fire and he recovered nothing, having no insurable interest in property that belonged to the company. Bacha F. Guzdar v. Commissioner of Income Tax AIR 1955 SC 74 is the Indian authority: a dividend from a tea company is not agricultural income in the shareholder's hands, because he has no interest in the company's assets or income as such.

A private company must by its articles restrict the right to transfer its shares, section 2(68)(i), which is one of the three features that define it.

9. Common seal, now optional

The seal was traditionally the company's official signature, since an artificial person cannot sign. The Companies (Amendment) Act, 2015 made it optional: where a company does not have a common seal, documents may be signed by two directors, or by a director and the company secretary where one has been appointed. The traditional textbook definition, which lists the common seal as an essential characteristic, therefore needs qualifying.

10. Separate management, and the company as a body corporate

The members do not manage. Management is vested in the Board of Directors under section 179(1), which may exercise all such powers as the company is authorised to exercise, subject to the Act, the memorandum and the articles, and to the matters reserved to the members. The separation of ownership from management is a defining feature of the company as against a partnership, where every partner is both an agent of the firm and entitled to take part in management.

2. A company is not a citizen. State Trading Corporation of India v. Commercial Tax Officer AIR 1963 SC 1811: a company, though a legal person, is not a citizen for the purposes of Part III of the Constitution and cannot claim the rights conferred on citizens alone, such as those in Article 19. It may claim rights conferred on "persons", such as Article 14 and Article 300A, and its shareholders may assert their own rights where State action against the company affects them, Bennett Coleman & Co. v. Union of India AIR 1973 SC 106.

Conclusion. The characteristics of a company are not a list of unrelated features but a set of consequences flowing from one fact, that on registration the company becomes a person in law distinct from its members. Separate property, perpetual succession, the capacity to contract and to sue in its own name, the transferability of shares and limited liability are all corollaries of that personality, and Salomon v. Salomon & Co. Ltd. is the case in which each of them was worked out. Because the personality is artificial the company acts only through human agents and takes only those rights the law gives to persons rather than to citizens.