LLM Group 2 Business Law Corporate Law 2022 Question Paper with Solutions

Section 203 makes the appointment compulsory for every listed company and, under Rule 8 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, every other public company with a paid-up share capital of ten crore rupees or more, which must have a whole-time managing director or Chief Executive Officer or manager and, in their absence, a whole-time director, together with a company secretary and a Chief Financial Officer; the same person may not be both chairperson and managing director or Chief Executive Officer unless the articles otherwise provide or the company carries on multiple businesses; and a vacancy must be filled within six months.

Section 197 caps the pay. The total managerial remuneration payable by a public company to its directors, including the managing director, whole-time director and manager, may not exceed eleven per cent of the net profits computed under section 198; within that, five per cent to one managing or whole-time director or manager and ten per cent to all of them together, and one per cent to other directors where there is a managing or whole-time director and three per cent otherwise. The Companies (Amendment) Act, 2017 replaced Central Government approval for exceeding those limits with a special resolution, with the prior approval of a defaulted lender. Section 197(3) permits minimum remuneration in the absence or inadequacy of profits only in accordance with Schedule V, and sections 197(9) and (10) require the refund of any excess, waivable only by special resolution.

The rights are collective, and that is the first thing to say: no individual director can bind the company. Collectively the Board may exercise every power of the company under section 179(1), appoint additional, alternate and casual vacancy directors under section 161, recommend dividend under section 123(1), make calls, and delegate within section 179(3). Individually a director has the right to notice of every Board meeting under section 173(3), to inspect the books of account under section 128(3), to sitting fees under section 197(5), to participate by video conferencing under section 173(2) except for the matters in Rule 4, and to have his dissent recorded in the minutes under section 118, which is the only reliable protection under section 149(12).

The Board: liabilities

Four kinds. To the company, for breach of fiduciary duty, negligence and misfeasance, enforced by the company, by the Tribunal under section 242, by a class action under section 245, and in winding up under section 340. To outsiders, under section 35 for a misstatement in a prospectus, and personally where the company had no capacity, as in A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185, where directors who paid Rs. 75,000 to a charitable trust outside the memorandum were held personally liable to refund it. Statutory penalties as an officer in default under section 2(60). And criminal liability for fraud under section 447, with imprisonment of six months to ten years, and personal responsibility without any limitation of liability under section 339 for fraudulent trading in a winding up.

Section 149(12) is the qualification: an independent director and a non-executive director who is not a promoter or key managerial personnel is liable only for acts which occurred with his knowledge, attributable through Board processes, and with his consent or connivance, or where he had not acted diligently.

General meetings. Section 96, the annual general meeting: the first within nine months of the close of the first financial year and every other within six months, with not more than fifteen months between two, held between 9 a.m. and 6 p.m., not on a National Holiday, at the registered office or within the same city, with an extension of up to three months available from the Registrar except for the first.

Section 100, the extraordinary general meeting, called by the Board or on the requisition of members holding one tenth of the paid-up capital carrying voting rights, with the requisitionists free to call it themselves within three months if the Board does not proceed within twenty one days. Section 98, a meeting ordered by the Tribunal where it is impracticable to call one, the Tribunal being able to direct that one member present shall constitute a meeting.

Board meetings. Section 173, the first within thirty days of incorporation and thereafter four a year with not more than one hundred and twenty days between two, reduced to two a year for a One Person Company, small company and dormant company; seven days' notice, with a shorter notice meeting valid if an independent director is present or ratifies it; and video conferencing except for the matters in Rule 4. Section 174, quorum of one third of the total strength or two directors, whichever is higher. Section 175, a resolution by circulation except where the matter must be dealt with at a meeting. Section 177 and section 178 add the audit committee and the nomination and remuneration and stakeholders relationship committees, and Schedule IV requires the independent directors to meet once a year without management.

Automatic Self-Cleansing Filter Syndicate Co. Ltd. v. Cuninghame, [1906] 2 Ch 34, settles the relationship between the two organs. The articles vested the management of the business in the directors. The general meeting passed an ordinary resolution directing them to sell the company undertaking, and they refused. The Court of Appeal held the resolution did not bind the directors: where the constitution has vested a power in the board, the members cannot exercise it or dictate its exercise by ordinary resolution, and their remedies are to alter the articles by special resolution under section 14 or to remove the directors under section 169. That is why section 179(1) is expressed as a grant to the Board of everything not reserved to the members, and why section 180 has to name expressly the four decisions the members keep.

Read together the two cases describe the constitutional settlement inside a company: the members control who the directors are and the largest decisions, and may summon a meeting without explaining themselves; the directors control the business and cannot be instructed on it. Everything in the law of meetings, from the notice period in section 101 to the quorum in section 103 and the majority in section 114, is machinery for working that settlement.

For full marks, cover: four limbs, and the last word of the question is the instruction that matters: critically write on constructive notice, which means stating the case against the doctrine and not merely explaining it. Take the types of shares and the six senses of capital first, then the rights of shareholders compactly, then the objectives of the memorandum as Lord Cairns stated them, and then constructive notice with its Indian authority, its counterweight and a genuine criticism.

Preference shares are cumulative or non-cumulative, participating or non-participating, convertible or non-convertible, and necessarily redeemable: section 55 forbids irredeemable preference shares and requires redemption within twenty years, or thirty for infrastructure projects with at least ten per cent redeemed a year from the twenty first at the holder's option, out of profits available for dividend or the proceeds of a fresh issue, with a transfer to the Capital Redemption Reserve where profits are used. Section 47(2) gives them a vote on resolutions directly affecting their rights, on winding up and on the repayment or reduction of capital, and on every resolution if dividend is unpaid for two years or more.

Four further species of issue: sweat equity under section 54, employee stock options under section 62(1)(b), bonus shares under section 63, which may come only from free reserves, the securities premium account or the capital redemption reserve and never from a revaluation reserve, and rights shares under section 62(1)(a), offered to existing equity holders in proportion to their holdings on fifteen to thirty days' notice with a right of renunciation. Section 53 forbids the issue of shares at a discount except sweat equity and, since 2017, conversion of debt under a statutory resolution plan.

Participation rights: notice under section 101, an explanatory statement under section 102, a proxy under section 105, a poll under section 109, electronic voting under section 108, postal ballot under section 110, requisition of a meeting under section 100 and an application to the Tribunal under section 98.

Information rights: financial statements under section 136, the annual return under section 92, and inspection under sections 94, 119 and 189.

Protective rights: sections 241 and 242 with the threshold and waiver in section 244; the class action in section 245 against the company, its directors, its auditors including the audit firm and its advisers; investigation under section 213; rectification under section 59; and the right to petition for winding up as a contributory under section 272(2) even though the shares are fully paid and the company has no assets.

The limit, and it should be stated. Bacha F. Guzdar v. Commissioner of Income Tax, Bombay, AIR 1955 SC 74, holds that a shareholder has no interest, legal or equitable, in the property of the company; and Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, holds that he has no right to be or remain a director and that dissatisfaction with a business decision is not oppression.

Section 4(1) gives effect to those objectives through six clauses: name, the State of the registered office, objects and matters necessary in furtherance of them, liability, capital, and subscription with the nominee in a One Person Company. Section 10(1) binds the company and its members to the memorandum as if each had signed it, and section 6 makes the Act override it. Section 13 makes alteration deliberately difficult, requiring the Central Government's approval for a change of name and for an inter-State shift of the registered office, and requiring, under section 13(8), an exit offer to dissenting shareholders where the objects are changed by a company that has raised money from the public and has an unutilised amount.

Constructive notice, critically

The doctrine. The memorandum and articles are registered public documents, open to inspection by any person under section 399; therefore every person dealing with the company is deemed to have read them and to have understood them properly. The doctrine is a pure consequence of registration.

Three, it punishes honesty. In Kotla Venkataswamy the plaintiff had done nothing wrong. The doctrine defeated a genuine creditor to protect a company whose own officers had executed a defective deed.

Four, the rest of the common law world has abandoned it. Section 9(1) of the European Communities Act, 1972 abolished it in England, and the position is now section 40 of the Companies Act, 2006, under which the power of the directors to bind the company is deemed free of any limitation in the constitution in favour of a person dealing in good faith.

Five, the mitigation is incomplete. Royal British Bank v. Turquand, (1856) 6 E and B 327, allows the outsider to assume that the internal proceedings have been regularly carried out, but it does not help him where the defect is on the face of the registered documents, which is exactly the Kotla Venkataswamy situation, and it is itself hedged by six exceptions: knowledge of the irregularity, suspicion putting a person on inquiry as in Anand Bihari Lal v. Dinshaw and Co., AIR 1942 Oudh 417, forgery, which is a nullity, as in Ruben v. Great Fingall Consolidated, [1906] AC 439, an act outside the officer's apparent authority, non-reliance on the articles, and an act ultra vires the company.

Conclusion. Share capital comes in only the two kinds section 43 permits, with preference capital necessarily redeemable within twenty years under section 55, and the word capital itself means six different amounts of which paid-up capital under section 2(64) is the operative one. The shareholder's rights are individual, participatory, informational and protective, and stop where Bacha F. Guzdar stops them, at the door of the company's property. The memorandum's objectives, as Ashbury states them, are to tell the shareholder what his money may be used for and the outsider what the company may do. And constructive notice, enforced in Kotla Venkataswamy and by section 80, is the price of the memorandum being public, a price England has abolished, India retains, and Turquand only partly refunds.

Debt comes in under section 71, with a debenture trustee for an issue to more than five hundred persons and a Debenture Redemption Reserve, under sections 73 to 76 for deposits, with the deposit repayment reserve and the restriction of public deposits to eligible companies, and by borrowing, which beyond the aggregate of paid-up capital, free reserves and securities premium requires a special resolution under section 180(1)(c). Security for the borrowing must be registered under section 77 within thirty days, an unregistered charge being void against the liquidator and other creditors under section 77(3).

Stage two, deployment. Section 179(3) reserves borrowing, investing and lending to a resolution passed at a Board meeting; section 186 caps loans, guarantees, securities and investments at sixty per cent of paid-up capital, free reserves and securities premium or one hundred per cent of free reserves and securities premium, whichever is higher, and forbids investment through more than two layers of investment companies; section 185 restricts loans to directors and to entities in which they are interested; section 188 subjects related party transactions to Board and, above thresholds, member approval.

The importance

One idea carries the whole limb: the money belongs to people who do not manage it, and the people who manage it did not supply it. Every provision named above is an answer to that fact. Capital maintenance, in sections 66, 68 and 123, exists so that what the creditor relied on is not given away to the members. Disclosure, in sections 26, 92, 129 to 137 and the audit, exists so that those who supply capital can price the risk. Fiduciary control, in sections 166, 179, 180, 185, 186 and 188, exists so that someone is answerable for the use of the money. And access to capital itself is the macroeconomic reason the system is worth having: a company that can raise money from strangers can undertake projects no individual could finance, and strangers will supply it only if the legal regime is credible.

Section 24 of the Companies Act divides the field: Chapters III and IV and section 127, so far as they relate to the issue and transfer of securities and non-payment of dividend, are administered by the Board for listed companies and those intending to list and by the Central Government for all others.

The reach of the jurisdiction is shown by Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India, (2013) 1 SCC 1, where two unlisted companies raised about twenty four thousand crore rupees from roughly three crore investors on optionally fully convertible debentures described as a private placement; the Supreme Court held it a public issue, held the Board's jurisdiction to extend to unlisted issuers that had gone to the public, and ordered refund with fifteen per cent interest. And N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152, upheld a penalty on a director for falsified accounts, holding that the Board's powers exist to protect the integrity of the market and not merely to punish.

Section 132 adds the National Financial Reporting Authority, which recommends accounting and auditing standards, monitors compliance and may investigate professional misconduct and debar for six months to ten years; the Delhi High Court upheld its validity on 7 February 2025 while quashing a batch of show cause notices for want of separation between its review and disciplinary functions, and the appeal is pending in the Supreme Court.

The Registrar of Companies

He creates and keeps the record everyone else relies on. He incorporates under section 7 and issues the certificate; registers the prospectus under section 26(4) before publication, with its ninety day validity under section 26(6); receives the return of allotment under section 39(4), the annual return under section 92 and the financial statements under section 137; and registers charges under sections 77 to 79, with section 80 making registration deemed notice to anyone acquiring the property, which is the foundation of secured corporate lending.

The Tribunal's powers over corporate finance are wider than the Board's were: confirmation of a reduction of capital under section 66; sanction of a scheme under sections 230 to 232; oppression and mismanagement under sections 241 and 242 and class actions under section 245; rectification of the register under section 59; redemption of debentures under section 71(10); freezing of assets under section 221 and restrictions on securities under section 222; restoration of a struck-off company under section 252; winding up under section 271; and the whole corporate insolvency resolution process as Adjudicating Authority under section 5(1) of the Insolvency and Bankruptcy Code, 2016.

In Madras Bar Association v. Union of India, decided on 19 November 2025, the Supreme Court struck down the core appointment and tenure provisions of the Tribunals Reforms Act, 2021 and directed a National Tribunals Commission within four months, which is the current position of the forum on which everything in this answer depends.

For full marks, cover: the statutory scheme in two statutes and three rules with the dates, then transfer and transmission with the machinery and the remedies. The plan used here is chronological, that is, how the law arrived at compulsory dematerialisation and what it changed at each step, because Q.P. Code 21997, the second paper in this scan, also asks about transfer and transmission at its second question, and the two answers should not be built alike.

How the law arrived here

Before 1996 every share was a piece of paper. Title depended on a certificate and on the company's register; transfer required a stamped instrument, the physical movement of the certificate and registration by the company; settlement took weeks; forgery, theft and loss were routine; and a bad delivery on a signature mismatch could unwind a chain of transactions. The Depositories Act, 1996 was enacted to end that, and the National Securities Depository Limited began operations in November 1996 and Central Depository Services (India) Limited in February 1999.

Step four, the statutory basis widened, 2019. Section 29(1A) was inserted by the Companies (Amendment) Act, 2019, providing that in prescribed classes of unlisted companies securities shall be held or transferred only in dematerialised form, which is a wider obligation than section 29(1), because it reaches existing holdings and not merely new issues.

Step five, compulsion for private companies, 2023 and 2025. Rule 9B, inserted by notification of 27 October 2023, extends the obligation to private companies other than small companies, and a notification of 12 February 2025 fixed the compliance date at 30 June 2025. A small company for this purpose is one that is not a public company and whose paid-up capital does not exceed four crore rupees and turnover forty crore rupees; a holding or subsidiary company is outside the exemption whatever its size. Default attracts the residuary penalty in section 450.

And in parallel, the stamp duty change. From 1 July 2020 stamp duty on the transfer of securities in dematerialised form has been collected at a uniform rate under the amended Indian Stamp Act, 1899 by the depository or the clearing corporation, ending the State-by-State divergence that had made a paper transfer more expensive in some States than others.

Where the holding is physical, section 56(1) requires a proper instrument in Form SH-4, duly stamped, dated and executed by or on behalf of both transferor and transferee, specifying the transferee's name, address and occupation, delivered to the company within sixty days of execution with the certificate or letter of allotment; the proviso permits registration on indemnity where the instrument is lost or late. Section 56(3) requires notice to the transferee, with two weeks to object, on partly paid shares where the transferor applies alone.

Where both parties are beneficial owners in a depository, section 56(1) does not apply at all and the transfer is a book entry under section 7 of the Depositories Act, settled through the clearing corporation, the company learning of it only when it takes a benefit position.

Transmission

Transmission is the passing of title by operation of law, on death, insolvency, a finding of unsoundness of mind, or the amalgamation or dissolution of a corporate holder. Section 56(2) preserves the company's power to register it on intimation, and no instrument is required, because there is no transferor able to execute one; the claimant produces evidence of title, a succession certificate, probate, letters of administration or a vesting order. Section 56(5) makes a transfer by a legal representative valid though he is not himself a holder, and section 72 permits a nomination, on which the nominee becomes entitled on death to the exclusion of all other persons, subject to rights under any other law.

The two events distinguished in one sentence each. A transfer is voluntary, needs a stamped instrument or a book entry, involves consideration, and passes the liability for calls to the transferee on registration. A transmission operates by law, needs no instrument and no stamp, involves no consideration, and leaves the estate liable for calls, the representative not being personally liable beyond the assets that reach him.

The cost is that the dispute moved rather than ended. Fungibility under section 9 means no claimant can assert title to identified shares; the depository being the registered owner under section 10 means a wrongful debit is corrected through the depository's mechanism and the Securities and Exchange Board rather than by rectification of the company's register; and section 56(7) exists precisely because an electronic transfer can be effected faster and more quietly than a paper one.

What the reader should notice about the direction of the change

Every step in that sequence moved in one direction, and none has been reversed. In 1996 the investor chose; by 2018 an unlisted public company could not choose; by 2025 a private company above the small company thresholds could not choose either. The reason is not administrative convenience but evidence: the shift removed an entire class of disputes about forged transfer deeds, lost certificates and bad deliveries, and it made the register of members accurate for the first time, because the register is no longer written up by the company from paper instruments but derived from the depository's own record under section 11 of the Depositories Act, 1996.

The company also becomes dependent on the registrar and transfer agent and the depository participants for the accuracy of its own register, which is why Regulation 76 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018 requires a reconciliation of share capital audit every quarter, comparing the issued capital with the aggregate of the dematerialised and physical holdings. That audit is the practical safeguard against the one risk the electronic system created, which is an unnoticed excess credit.

The three decisions that decide these disputes

Mannalal Khetan v. Kedar Nath Khetan, (1977) 2 SCC 424, decided on 25 November 1976, fixes the character of the requirement. Shares in Lakshmi Devi Sugar Mills were registered without duly stamped and executed instruments of transfer and in breach of an attachment order. The Supreme Court held that section 108 of the Companies Act, 1956, whose successor is section 56(1), is mandatory and not directory: negative and prohibitory words admit of only one form of obedience, and an act done in the teeth of them is void, not merely irregular. Section 56(1) is drafted in the same negative form, so a company that registers a transfer without the instrument has done something it had no power to do.

World Wide Agencies (P) Ltd. v. Margarat T. Desor, (1990) 1 SCC 536, decided on 19 December 1989, does the same work for transmission. The legal representatives of a deceased controlling shareholder petitioned for relief against oppression before being registered as members, and the company objected that only a member may apply. The Supreme Court held that legal representatives may maintain the petition without registration, since title has already devolved on them by operation of law and the company cannot defeat their rights by refusing or delaying registration. It is the practical answer to a board that treats an intimation under section 56(2) as something it can ignore.

And the modern qualification worth stating. Where the holding is dematerialised the company has no gatekeeping role at all: transfer is a book entry under section 7 of the Depositories Act, 1996, the depository is the registered owner under section 10 and the beneficial owner holds the rights, so there is nothing for a board to refuse. Bajaj Auto therefore now bites chiefly on unlisted and private companies, which is precisely the class Rule 9B brought within the demat regime from 30 June 2025.

For full marks, cover: only two of the four, which means twelve and a half marks each, so each note here is longer than an eight mark note on the other papers in this folder. All four are written below.

By statute, and this is where an answer should begin because it is certain. Section 3A: if the membership falls below seven in a public company or two in a private company and business is carried on for more than six months, every member during that time who is cognisant of the fact is severally liable for the whole debts contracted in that period, and may be severally sued. Section 7(7)(b): where incorporation was obtained by false or incorrect information or by fraudulent action, the Tribunal may direct that the liability of the members shall be unlimited. Section 35(3): where a prospectus was issued with intent to defraud, every director, promoter, expert and person who authorised it is personally responsible without any limitation of liability.

Section 75: officers responsible for the acceptance of deposits with intent to defraud depositors are personally responsible without limitation. Section 251: where an application for removal of the name is made with the object of evading liabilities, the persons in charge are jointly and severally liable without limitation. Section 339: any person knowingly party to the carrying on of the business with intent to defraud creditors may be declared personally responsible without any limitation of liability for all or any of the debts. And section 129(3), requiring consolidated financial statements, is the veil lifted for the purpose of reporting.

Tax evasion. Commissioner of Income Tax v. Meenakshi Mills Ltd., AIR 1967 SC 819, where the Supreme Court held that the veil may be lifted to reach a tax evasion device.

Agency or single economic entity, now narrowly confined. Balwant Rai Saluja v. Air India Ltd., (2014) 9 SCC 407, holds that the veil is pierced only where the corporate form is a mere facade concealing the true state of affairs, and refused to treat the workmen of a statutory canteen contractor as employees of Air India merely because of control and supervision.

Three limits that a full note must state. First, the doctrine is not available to the company or its members at their own option: Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40, refused to lift the veil so that a company might assert its shareholders' fundamental rights, and Bacha F. Guzdar v. Commissioner of Income Tax, Bombay, AIR 1955 SC 74, refused to let a shareholder claim the character of the company's income.

The form decides the regulation. An Indian subsidiary is an Indian company subject to the whole Companies Act, 2013 whatever the nationality of its shareholders. A foreign company within section 2(42), a body incorporated outside India with a place of business here, by itself or through an agent, physically or through electronic mode, which conducts business activity here, is governed by Chapter XXII: sections 380 to 386 and 392 and 393 apply by force of section 379(1), and where fifty per cent or more of its paid-up capital is held by Indian citizens or Indian bodies corporate, section 379(2) applies the whole Chapter and such other provisions as may be prescribed as if it were an Indian company. A liaison, branch or project office operates under the Foreign Exchange Management Act, 1999 with the Reserve Bank's approval.

The income tax law, with transfer pricing and the general anti-avoidance rule, and Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613, holding the offshore transfer of a Cayman Islands holding company not taxable in India, an answer reversed retrospectively and then withdrawn by the Taxation Laws (Amendment) Act, 2021. And the Insolvency and Bankruptcy Code, 2016, whose cross-border framework in the new sections 240B and 240C, added by the Amendment Act of 2026, has not been brought into force.

The unsolved problem, and India owns the leading example. In M.C. Mehta v. Union of India, (1987) 1 SCC 395, after the escape of oleum gas from Shriram Foods and Fertiliser Industries in Delhi in December 1985, the Supreme Court laid down absolute liability for an enterprise engaged in a hazardous activity, without the exceptions to Rylands v. Fletcher, (1868) LR 3 HL 330, and held that damages must be correlated to the magnitude and paying capacity of the enterprise, precisely because the ordinary rules of corporate personality would have left the victims with a defendant that had nothing.

Independence. Section 141 disqualifies a body corporate other than a limited liability partnership, an officer or employee, a partner or employee of an officer or employee, a person having a business relationship with the company, a person indebted beyond five lakh rupees or holding any security, a person whose relative is a director or key managerial personnel, a person holding appointment in more than twenty companies, and a person convicted of an offence involving fraud within ten years.

Section 144 forbids accounting and book keeping, internal audit, design and implementation of financial information systems, actuarial services, investment advisory, investment banking, outsourced financial services and management services. Section 140(1) requires a special resolution and the previous approval of the Central Government for removal before the term expires, and section 140(5) permits the Tribunal, suo motu or on the application of the Central Government or any concerned person, to direct a change of auditor who has acted fraudulently or colluded in a fraud, with a five year disqualification and liability under section 447.

Liability and supervision. Section 147, fine, imprisonment up to one year for a knowing and wilful contravention intended to deceive, refund of remuneration, damages, and joint and several liability of the partners of a firm where the fraud was committed with their knowledge; section 245, a class action against the auditor and the audit firm; section 132, the National Financial Reporting Authority, with power to investigate professional misconduct and debar for six months to ten years, upheld by the Delhi High Court on 7 February 2025 subject to a separation of its review and disciplinary functions, with the appeal pending in the Supreme Court. In re Kingston Cotton Mill Co. (No. 2), [1896] 2 Ch 279, supplies the phrase, a watchdog and not a bloodhound; section 143(12) and section 132 have raised the standard well beyond it.

(d) Majority powers and minority rights

The rule is majority rule. Foss v. Harbottle, (1843) 2 Hare 461: where a wrong is done to the company the company is the proper plaintiff, and where the act can be ratified by a majority no individual member may sue. Two shareholders of the Victoria Park Company complaining that directors had sold their own land to it at an inflated price were held to have no standing.

Section 245, a class action against the company, its directors, its auditors including the audit firm and its experts and advisers, with legal expenses recoverable from the Investor Education and Protection Fund under section 125(3)(d). Section 213, investigation. Sections 235 and 236, the acquisition of dissenting shareholders' shares and the buy-out of a minority holding once ninety per cent is held, which also entitles the minority to offer its shares at that price. And section 271(e), winding up on the just and equitable ground.

The three cases that fix the limits. Shanti Prasad Jain v. Kalinga Tubes Ltd., AIR 1965 SC 1535, requires conduct burdensome, harsh and wrongful and continuing, directed at the member as a member. Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333, makes the relief equitable and discretionary, requires clean hands, and shows the court refusing to unscramble an irregular rights issue and ordering a purchase at fair value instead.

For full marks, cover: the definition first, which is thin in the Act and must be filled out from section 2(60) and section 2(59); then the legal position as four characterisations each with its case and each with the point at which it breaks down; then appointment and removal, and here the discipline is to give every route in each direction, because the question says "the manner".

Who is a director

Section 2(34) says only that a director means a director appointed to the Board of a company, and section 2(10) defines the Board as the collective body of the directors. The Act deliberately looks at function rather than title, and three other definitions complete the picture.

The numbers. A public company needs three directors, a private company two and a One Person Company one, with a maximum of fifteen beyond which a special resolution is needed, section 149(1); at least one director must have stayed in India for one hundred and eighty two days in the financial year, section 149(3); prescribed classes must have at least one woman director; and a listed public company must have at least one third independent directors, section 149(4).

The legal position

Agents of the company. Ferguson v. Wilson, (1866) LR 2 Ch App 77: the company has no person and no hands, it acts only through directors, and the case is the ordinary one of principal and agent. A contract made within authority binds the company and not the director; the company is bound by acts within his ostensible authority, which is why Royal British Bank v. Turquand, (1856) 6 E and B 327, protects an outsider; and a director who contracts for a company not yet incorporated contracts personally, subject to sections 15(h) and 19(e) of the Specific Relief Act, 1963. Where it breaks down: he is not the agent of the shareholders individually, and no principal may direct him how to exercise his own discretion.

Organs, the directing mind and will. Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., [1915] AC 705: a corporation has no mind of its own any more than it has a body, and its active and directing will must be sought in the person who is really the directing mind, whose state of mind is the company's. Applied in Iridium India Telecom Ltd. v. Motorola Incorporated, (2011) 1 SCC 74, holding that a corporation may be prosecuted for an offence requiring mens rea, and in Standard Chartered Bank v. Directorate of Enforcement, (2005) 4 SCC 530, where a Constitution Bench of five judges held on 5 May 2005 that a company may be convicted and fined even where imprisonment is mandatory, overruling Assistant Commissioner v. Velliappa Textiles Ltd., (2003) 11 SCC 405.

Employees, only where there is a contract of service. A director as such is not an employee; a managing or whole-time director under a service contract is both.

Section 162 requires each appointment to be voted on individually unless the meeting first agrees without a vote against that a single resolution may be moved. Section 160 allows a candidate other than a retiring director to stand on fourteen days' notice with a deposit of one lakh rupees, refundable if he is elected or secures twenty five per cent of the votes, and not required of an independent director or one recommended by the Board or the Nomination and Remuneration Committee.

Section 161 supplies three Board appointments: an additional director, holding office to the next annual general meeting; an alternate director for one absent from India for at least three months, vacating on the original's return; and a casual vacancy filled in a public company, the appointee holding office only for the unexpired term, subject to approval at the next general meeting. Section 161(3) permits a nominee director appointed by an institution under a law or an agreement or by a Government by virtue of its shareholding.

Resignation, section 168. By notice in writing to the company; the Board takes note and intimates the Registrar within thirty days; the director may himself forward a copy with his reasons; and the resignation takes effect from the date the company receives the notice or the date specified in it, whichever is later. Section 168(2) preserves his liability for offences that occurred during his tenure. Section 168(3) provides that where all the directors resign or vacate office, the promoter, or in his absence the Central Government, shall appoint the required number until new directors are appointed in general meeting.

Vacation of office by operation of law, section 167. On incurring a disqualification under section 164; on absence from all Board meetings held during twelve months, with or without leave; on contravening section 184; on disqualification by an order of a court or Tribunal; on conviction with a sentence of six months or more, though not for thirty days from conviction and, if an appeal is preferred, until it is disposed of; on removal; and where the office was held by virtue of an employment, on ceasing to hold it. Section 167(2) makes it an offence to function as a director after the office has been vacated.

Disqualification, section 164, which prevents appointment and, through section 167(1)(a), ends an existing tenure: unsound mind so declared; undischarged insolvency; a pending insolvency application; conviction with a sentence of not less than six months where five years have not elapsed, and permanent disqualification on a sentence of seven years or more; an order of disqualification; calls unpaid for six months; conviction under section 188 within five years; and non-compliance with section 152(3). Section 164(2) disqualifies for five years a person who is or has been a director of a company that has not filed financial statements or annual returns for three continuous financial years, or has defaulted for a year in repaying deposits, redeeming debentures or paying declared dividend.

Conclusion. A director is an individual appointed to the Board, and the Act reaches beyond the title through sections 2(59), 2(60) and 2(69) to the person on whose instructions the Board is accustomed to act. His legal position is that of agent for binding the company, trustee for its money and its powers, the directing mind for attributing knowledge and intention, and employee only under a contract of service, with section 166 now supplying the duties the characterisations used to imply.

He may be appointed by seven routes, from the deemed first directors in section 152(1) to an order of the Tribunal under section 242(2)(k), and removed by six, retirement by rotation, resignation under section 168, removal by ordinary resolution with the safeguards of section 169, automatic vacation under section 167, disqualification under section 164, and removal by the Tribunal under sections 242(2)(h) and 242(4A).

The modes

Mode one, winding up by the Tribunal, section 271, on five grounds: a special resolution; acting 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; fraudulent conduct or a fraudulent purpose, on the application of the Registrar or a person authorised by the Central Government; default in filing financial statements or annual returns for five consecutive financial years; and the just and equitable ground.

Inability to pay debts is not among them. The Insolvency and Bankruptcy Code, 2016, by section 255 read with the Eleventh Schedule, substituted section 271 on 15 November 2016 and removed that ground, which had been the commonest of all. A creditor of an insolvent company now applies under section 7 or section 9 of the Code.

Who may petition, section 272: the company; any contributory; both together; the Registrar, on any ground except the special resolution ground and with the previous sanction of the Central Government after the company has been heard; any person authorised by the Central Government; and the Central or a State Government on the sovereignty ground. Section 272(2) preserves the contributory's standing even where his shares are fully paid and the company has no assets. Section 273 gives the Tribunal a wide threshold discretion, requires an order within ninety days, forbids refusal merely because the assets are fully mortgaged or the company has none, and permits refusal on the just and equitable ground where another remedy exists and the petitioner is acting unreasonably.

Section 336 punishes offences by officers of a company in liquidation, including concealment of property, falsification of books and fraudulent removal of property; section 338 makes officers liable for failure to keep proper books in the two years preceding; section 339 allows the Tribunal to declare any person knowingly party to the carrying on of business with intent to defraud creditors personally responsible without any limitation of liability; and section 340 allows the liquidator, a creditor or a contributory to have the conduct of a promoter, director, manager or officer examined and to obtain an order to repay or contribute for misapplication or misfeasance.

The effect: on the members

They become contributories. Section 2(26) defines a contributory as a person liable to contribute towards the assets in the event of winding up, and includes the holder of fully paid shares, because the word describes a status and not only a liability. Section 285 requires the Tribunal to settle the list in the A class of present members and the B class of those who were members within the year before the commencement, the B list being liable only for debts contracted before they ceased to be members, only to the extent unpaid on their shares, and only if the A list cannot satisfy the contributions.

Then the unsecured creditors rateably, then preference shareholders, then equity shareholders. Section 327(7) provides that neither section applies to a liquidation under the Insolvency and Bankruptcy Code, where section 53 of the Code supplies a different waterfall in which insolvency costs come first, then workmen's dues for twenty four months together with a secured creditor who has relinquished his security, then employees for twelve months, then unsecured financial creditors, then Government dues for two years with unpaid secured debt, then the rest.

A secured creditor stands outside the winding up at his election: he may realise his security and prove for the balance, relinquish it and prove for the whole, or value it and prove for the difference. Section 326 modifies that in favour of workmen.

The effect: on earlier transactions

Section 328 allows the Tribunal to set aside a fraudulent preference given within six months before the commencement of the winding up. Section 329 avoids a transfer of property, otherwise than in the ordinary course of business or in favour of a purchaser in good faith for valuable consideration, made within one year before the presentation of the petition. Section 330 avoids a transfer or assignment of all the company's property to trustees for the benefit of creditors, and section 331 deals with the liabilities and rights of persons who have received a fraudulent preference.

And the end

Section 302 requires the Tribunal, when the affairs have been completely wound up, to make an order that the company be dissolved from the date of the order, with a copy to the Registrar within thirty days, who records the dissolution in the register. From that moment the person created by section 9 ceases to exist.

The case law on the ground and on the process

Since inability to pay debts left section 271 on 15 November 2016, almost all the modern case law on winding up under the Companies Act is about the just and equitable ground, and two decisions fix its two ends.

Hind Overseas (P) Ltd. v. Raghunath Prasad Jhunjhunwalla, (1976) 3 SCC 259, is the case against him, and it is the Indian control. The Supreme Court held that where more than one family or several friends and relations form a company, and no right of active participation has been agreed for those excluded from management, the principles of dissolution of partnership cannot be liberally invoked. The ground is made out only where the shareholding is more or less equal, there is a complete deadlock, there is a want of probity in the management and no hope of the company continuing smoothly. The Court also treated the remedy as one of last resort, to be refused where another remedy exists, which section 273(2) now states expressly.

Read together the two decisions state the modern test: exclusion from management is a ground for winding up only in a company that is in substance a partnership, and even then only if nothing less drastic will serve. That is also why Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, holds that winding up cannot be the substantive prayer in a petition under section 241: a petitioner who really wants the company dissolved must come under section 271(e) and meet the Hind Overseas standard, not obtain it as an incident of an oppression petition.

(A) The need for lifting the veil

The need arises from a single fact: incorporation creates a person who can be made to bear consequences that a human being intends. Salomon v. A. Salomon and Co. Ltd., [1897] AC 22, decided that once the memorandum is duly signed and registered the company is at law a different person altogether from the subscribers and that the motives of those who form it are irrelevant. That rule is indispensable to commerce and it is also an invitation: a person who wishes to escape a covenant, defeat a decree, evade a tax or trade at the creditors' risk need only interpose a company.

Three specific needs follow, and stating them as needs rather than as categories is what the question asks for.

The need to reach the person who is really acting. Where a company is formed or used to do what its controller may not lawfully do himself, the law must be able to look at the controller. Gilford Motor Co. Ltd. v. Horne, [1933] Ch 935: an employee bound by a covenant not to solicit his former employer's customers formed a company to solicit them, and the injunction went against both. Jones v. Lipman, [1962] 1 WLR 832: a vendor transferred land to a company he controlled to defeat a decree of specific performance, and the decree was made against the company as well.

The statute has met the same need in six places, and they are more certain than the case law: section 3A, several liability for the whole debts where membership falls below the minimum and business is carried on for more than six months with the member's knowledge; section 7(7)(b), the Tribunal's power to make the members' liability unlimited where incorporation was procured by fraud; section 35(3), unlimited personal liability where a prospectus was issued with intent to defraud; section 75, the same for officers responsible for deposits accepted with intent to defraud; section 251, the same where a strike-off application is made to evade liabilities; and section 339, the same for any person knowingly party to fraudulent trading.

And the limit, which the answer should state. Balwant Rai Saluja v. Air India Ltd., (2014) 9 SCC 407: the veil is pierced only where the corporate form is a mere facade concealing the true state of affairs, not merely because of common control. Tata Engineering and Locomotive Co. Ltd. v. State of Bihar, AIR 1965 SC 40: the doctrine is not available to the company at its own option.

Four, separate property. Bacha F. Guzdar v. Commissioner of Income Tax, Bombay, AIR 1955 SC 74: a shareholder has no interest, legal or equitable, in the property of the company. Macaura v. Northern Assurance Co. Ltd., [1925] AC 619: the transferor of timber to his own company had no insurable interest in it. And Weavers Mills Ltd. v. Balkis Ammal, AIR 1969 Mad 462, decided by the Madras High Court on 1 September 1967, where two promoters had bought land in their own names by registered sale deeds of June 1945, before the company existed, and the company took possession after incorporation and built on it: the title was upheld although no conveyance was ever executed in the company's favour, because the promoters held the property in trust for the company it was bought for, and the vesting on incorporation required no writing.

Five, capacity to sue and be sued in its own name, from which follows the rule in Foss v. Harbottle, (1843) 2 Hare 461, that a wrong to the company is actionable by the company.

Six, transferable shares, section 44 making them movable property transferable in the manner provided by the articles and section 58(2) declaring the securities of a public company freely transferable.

Name. Section 4(4) permits an application to the Registrar for reservation, valid twenty days under section 4(5)(i); section 4(2) forbids a name identical with or too nearly resembling that of an existing company or one the Central Government considers undesirable; section 4(5)(ii) cancels a reservation obtained by wrong or false information with a penalty of up to one lakh rupees.

Documents. The memorandum under section 4 with its six clauses, in the form of the appropriate Table in Schedule I under section 4(6); the articles under section 5, which may contain entrenchment provisions under section 5(3); both signed by every subscriber and witnessed.

Declarations, section 7(1). One by an advocate, chartered accountant, cost accountant or company secretary engaged in the formation, and by a person named as a director, that all requirements have been complied with; and one by every subscriber and first director that he has not been convicted of any offence in connection with the promotion, formation or management of any company and has not been found guilty of fraud or breach of duty in the preceding five years. With them go the address for correspondence, proof of identity of the subscribers, and the particulars, Director Identification Numbers and consents of the first directors.

The two steps that follow, each with a period. Section 12(1), a registered office capable of receiving communications within thirty days, verified under section 12(2), with a power of physical verification in the Registrar under section 12(9) and removal of the name if the office is not found capable. Section 10A, a declaration of commencement of business within one hundred and eighty days, by a director, that every subscriber has paid the value of the shares he agreed to take, with a prohibition on commencing business or exercising borrowing powers until it and the section 12(2) verification are filed, a penalty of fifty thousand rupees on the company and one thousand rupees a day on each officer, and a power in the Registrar to initiate removal of the name.

One correction that current knowledge requires. The old certificate of commencement of business no longer exists: it was section 149 of the Companies Act, 1956, became section 11 of the 2013 Act, was omitted with effect from 29 May 2015, and was replaced from 2 November 2018 by the section 10A declaration, which is filed by the company and certified by nobody.

The characteristics themselves are separate personality, limited liability, perpetual succession, separate property, capacity to sue, transferable shares, an optional seal, a capacity bounded by the objects, and the absence of citizenship. And the procedure that produces all of it runs from a name reserved for twenty days, through the memorandum, articles and declarations of section 7(1), to the certificate of incorporation under section 7(2), and is not complete until the office is verified within thirty days and the declaration of commencement is filed within one hundred and eighty.

(a) The three events, by the document each requires

Transfer requires an instrument, or nothing at all if the holding is electronic. Section 44 makes shares, debentures and other interests movable property transferable in the manner provided by the articles. Section 56(1) requires, for a physical holding, a proper instrument in Form SH-4, duly stamped, dated and executed by or on behalf of both transferor and transferee, specifying the transferee's name, address and occupation, delivered to the company within sixty days of execution with the certificate or letter of allotment, the proviso permitting registration on indemnity where it is lost or late.

The requirement does not apply where both parties are beneficial owners in a depository; there the transfer is a book entry under section 7 of the Depositories Act, 1996. Section 56(3) requires notice and two weeks to object where partly paid shares are transferred on the transferor's application alone.

Section 29(1) of the Companies Act requires every company making a public offer to issue securities only in dematerialised form; section 29(1A) requires prescribed classes of unlisted companies to hold or transfer only in that form; Rule 9A applied the obligation to every unlisted public company from 2 October 2018; and Rule 9B, inserted on 27 October 2023, applied it to private companies other than small companies from 30 June 2025. Section 9 of the Depositories Act makes such securities fungible, so there are no distinctive numbers, and section 10 makes the depository the registered owner while the beneficial owner has all the rights and bears all the liabilities.

(b) Members and shareholders, and their rights

Section 2(55) defines a member as a subscriber to the memorandum deemed to have agreed to become a member and entered on the register; every other person who agrees in writing and is so entered; and every person holding shares whose name is entered as a beneficial owner in the records of a depository. A shareholder is the holder of shares; a company limited by guarantee has members and no shareholders, and a transferee whose instrument has not been registered is a shareholder in equity and not yet a member.

Individual rights, which no majority can remove: the vote under section 47, in proportion to the paid-up equity capital, preference shareholders voting in the cases in section 47(2) and on every resolution where dividend is unpaid for two years or more; registration of a transfer and appeal under section 58; a certificate within the periods in section 56(4); dividend once declared, payable within thirty days under section 123(5); and the pre-emptive right to a further issue under section 62(1)(a).

(b) Duties

They are few and are owed to the company, not to the other members. To pay the amount unpaid on his shares when called, section 49 requiring calls on a uniform basis on all shares of the same class. To be bound by the memorandum and articles as if he had signed them, section 10(1), so a restriction on transfer in the articles of a private company binds him.

Not to commit a fraud on the minority in the exercise of his vote, one of the exceptions to Foss v. Harbottle, (1843) 2 Hare 461, and, if the alteration of the articles is in question, to exercise the power bona fide for the benefit of the company as a whole, Allen v. Gold Reefs of West Africa Ltd., [1900] 1 Ch 656. Not to vote on a resolution approving a contract in which he is a related party, section 188. And, where he is a promoter within section 2(69), to observe the fiduciary duties of disclosure and of not making a secret profit, Erlanger v. New Sombrero Phosphate Co., (1878) 3 App Cas 1218.

Five statutory exceptions make the liability unlimited, and they are the sharp end of the answer: section 3A, several liability for the whole debts where membership falls below seven or two and business is carried on for more than six months with the member's knowledge; section 7(7)(b), the Tribunal's power to make the members' liability unlimited where incorporation was procured by fraud; section 35(3), unlimited personal liability of those responsible for a prospectus issued with intent to defraud; section 251, unlimited joint and several liability where a strike-off application is made to evade liabilities; and section 339, personal responsibility without any limitation for a person knowingly party to fraudulent trading.

And the judicial exception, where the veil is lifted because the corporate form is a mere facade concealing the true state of affairs, Balwant Rai Saluja v. Air India Ltd., (2014) 9 SCC 407, applied in Gilford Motor Co. Ltd. v. Horne, [1933] Ch 935, Jones v. Lipman, [1962] 1 WLR 832, and Delhi Development Authority v. Skipper Construction Co. (P) Ltd., (1996) 4 SCC 622.

The two events measured against each other in practice

A worked comparison is the best test of whether the distinction has been understood, and three situations settle it.

One rule applies to all three and should close the point. Whichever event has occurred, section 56(4)(c) gives the company one month from the receipt of the instrument or the intimation to deliver the certificate, section 56(6) imposes a penalty of fifty thousand rupees for default, and sections 58 and 59 give the person entitled an appeal against refusal and an application for rectification. The company's obligations are therefore identical once title has passed; what differs is only the document by which the passing is proved.

Conclusion. The three events differ by the document each requires: a transfer needs a stamped instrument in Form SH-4 within sixty days under section 56(1), or a book entry under section 7 of the Depositories Act if both parties are beneficial owners; a transmission needs no instrument at all, only proof of title, under section 56(2); and dematerialisation needs the surrender of the certificate under section 6 of that Act, and is now compulsory for every public offer, for unlisted public companies since 2 October 2018 and for private companies other than small companies from 30 June 2025.

For full marks, cover: three limbs, and the first word of the question, "elaborately", is directed at the first. Give the need as a distinct limb before the scope, because the question separates them: the need is why a company must raise money from people who will not manage it, and the scope is what the law does about that. Then the definition in section 2(70) with the two elements and the deeming provision, and then the five types with the section and the filing requirement for each.

The need for corporate finance

The company form exists because some enterprises are larger than any individual's capital. A railway, a steel plant or a network cannot be financed out of a family fortune, and the corporate form solves that by allowing a large number of people to contribute small amounts and to leave the management to others. Three consequences create the entire subject.

The scope of corporate finance

Raising. Section 23 lists the routes: public offer, private placement, rights issue and bonus issue, with a private company confined to the last three. Section 62 governs a further issue and gives existing equity shareholders a pre-emptive right on fifteen to thirty days' notice, with a special resolution and a registered valuer's price for a preferential allotment. Section 42 confines a private placement to two hundred persons in a financial year, excluding qualified institutional buyers and employees under a stock option scheme, requires an offer letter in Form PAS-4, money received only through banking channels into a separate bank account and not used before allotment, allotment within sixty days or repayment with twelve per cent interest, and no public advertisement.

Reporting. Sections 128 to 137, requiring books on accrual and double entry with an audit trail, a true and fair view, the accounting standards and Schedule III, consolidation, Board approval with the Directors' Responsibility Statement, circulation and filing; and sections 139 to 148, the audit that makes those statements believable, with section 143(12), read with Rule 13 of the Companies (Audit and Auditors) Rules, 2014, requiring a fraud of one crore rupees or more to be reported to the Central Government.

Returning. Section 123 for dividend, out of profits after depreciation or accumulated profits, deposited in a separate account within five days and paid within thirty; section 68 for buy-back within the twenty five per cent and two to one limits; section 66 for a reduction of capital with the Tribunal's confirmation after hearing the creditors; and sections 124 and 125, sending unclaimed dividend and, after seven years, the shares themselves to the Investor Education and Protection Fund.

Two elements must be present: an invitation to the public, and an offer of securities. The name of the document is irrelevant; a circular, an advertisement or a letter is a prospectus if it does that work, and a document called a prospectus is not one if it does not. Section 42 supplies the boundary of the word "public": an offer to more than two hundred persons in a financial year, excluding qualified institutional buyers and employees under a stock option scheme, is deemed an offer to the public, a threshold that is the direct legacy of Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India, (2013) 1 SCC 1, where about twenty four thousand crore rupees raised from roughly three crore investors under the name of a private placement was held to be a public issue and refund with fifteen per cent interest was ordered.

Section 25 is the anti-avoidance provision: where a company allots or agrees to allot securities with a view to their being offered for sale to the public, the document by which the offer is made is deemed to be a prospectus issued by the company, and it is evidence of that intention if the offer was made within six months of the allotment or if the consideration had not been fully received at the date of the offer.

A shelf prospectus, section 31. May be filed by such class of companies as the Securities and Exchange Board provides by regulations, at the stage of the first offer, indicating a validity of not more than one year from the opening of the first offer, during which no further prospectus is required for a second or subsequent offer of those securities.

Section 31(2) requires an information memorandum of new charges created and changes in the financial position to be filed before each subsequent offer, with a refund to an applicant who withdraws; section 31(3) provides that the memorandum together with the shelf prospectus constitutes the prospectus. Under the Companies Act, 1956 the shelf prospectus was confined by section 60A to public financial institutions and banks; the 2013 Act delegates eligibility to the Board, and in practice it is used for public issues of debt under the Issue and Listing of Non-Convertible Securities Regulations, 2021.

An abridged prospectus, section 33. A memorandum containing the salient features specified by the Board, which must accompany every application form, with exceptions for an invitation to enter into an underwriting agreement and for an offer not made to the public, and a penalty of fifty thousand rupees for each default.

A deemed prospectus, section 25, as described above.

The three cases every prospectus answer needs

Derry v. Peek, (1889) 14 App Cas 337, is where the law of liability for a false prospectus begins, and it begins with a defeat for the investor. The directors of a tramway company stated in their prospectus that the company had the right to use steam power, believing that the Board of Trade's consent would follow as a matter of course. Consent was refused, the company failed, and a subscriber sued in deceit.

The House of Lords held that deceit requires proof that the statement was made knowingly, or without belief in its truth, or recklessly, careless whether it be true or false, and that an honest belief, however unreasonable, is a defence. The directors were held not liable. The decision made the common law remedy almost worthless to an ordinary subscriber, and Parliament answered within a year with the Directors Liability Act, 1890, whose Indian descendant is section 35, which imposes liability to compensate without requiring proof of fraud and puts the burden of the statutory defences on the defendant.

Peek v. Gurney, (1873) LR 6 HL 377, fixes who may complain. The plaintiff had bought shares in the market on the faith of a prospectus rather than subscribing on it. The House of Lords held that a prospectus is addressed to the original allottees and is exhausted when the shares are allotted, so a market purchaser had no claim on it. Section 35 is framed in the same way, in terms of a person who has "subscribed", which is why a secondary market investor's remedy today lies not in the Companies Act but in the Securities and Exchange Board's Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003 and in its powers under sections 11(4), 11B and 15HA of the Act of 1992.

Conclusion. Corporate finance exists because large enterprises need capital from people who will not manage it, cannot ordinarily have it returned, and lend or invest against a balance sheet they cannot verify; and the law answers with honest disclosure at the raising, control at the deployment, an audited account at the reporting and restriction at the return, under sections 23 to 42 and 62 to 77, 179 to 188, 128 to 148 and 66, 68, 123 and 125.

For full marks, cover: the first limb by taking the three classes separately, because the Act protects them by different techniques, the creditor by capital maintenance and publicity, the investor by disclosure and liability, and the shareholder by participation and remedy; then the second limb as prevention rather than only relief, because the question says preventing, which brings in section 244's waiver, the interim orders in section 242(4), the freezing powers in sections 221 and 222, and the Central Government's own standing in section 241(2).

Protecting the creditor

The creditor has no vote, so his protection is structural.

Participation where his rights are altered: section 230 requires a meeting of each class of creditors on a scheme of compromise or arrangement, with approval by a majority in number representing three fourths in value, and section 230(5) requires notice to the regulators; section 66 requires his objection to be heard on a reduction; and section 71(9) and (10) give the debenture trustee and the holders access to the Tribunal.

Priority and process on default: sections 326 and 327 in a winding up under the Act; and, since 2016, the Insolvency and Bankruptcy Code, section 7 for a financial creditor, section 9 for an operational creditor after a demand notice, a moratorium under section 14, a committee of creditors under section 21 whose commercial wisdom is not justiciable, Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, and the waterfall in section 53.

Protecting the investor

The investor's protection is disclosure backed by liability.

Protection of the money itself: section 42 for private placement, with the money in a separate account and no utilisation before allotment; sections 73 to 76 for deposits, with the deposit repayment reserve and section 75 making officers responsible for a fraudulent acceptance personally liable without limitation; and sections 124 and 125, sending unpaid dividend, matured deposits and debentures, refundable application money and, after seven years, the shares themselves to the Investor Education and Protection Fund, from which the owner may claim under section 125(9).

And the market regulator, whose powers under sections 11, 11A, 11B, 11C and 15A to 15Z of the Securities and Exchange Board of India Act, 1992 are, for a listed company, more useful to a small investor than anything in the Companies Act; Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India, (2013) 1 SCC 1, shows those powers reaching an unlisted issuer that had gone to the public.

Preventing oppression and mismanagement

The question says preventing, and the Act does provide for prevention and not only for cure.

Prevention by access. Section 244 fixes the threshold at one hundred members, or one tenth of the total number of members, whichever is less, or holders of one tenth of the issued share capital who have paid all calls, and, critically, gives the Tribunal a power to waive those requirements, so that a single small shareholder with a serious complaint is not shut out. That waiver is what turns a remedy for organised blocks into one available to an individual.

Prevention by interim relief. Section 242(4) permits the Tribunal to make interim orders for the regulation of the conduct of the company's affairs on such terms as it thinks just and equitable. A remedy that arrives only at the end of a contested petition is no protection at all, and the interim jurisdiction is what stops the wrong being completed while the case is heard.

Prevention by the regulator's own standing. Section 241(2) allows the Central Government itself to apply where the affairs are being conducted in a manner prejudicial to public interest, with no threshold at all; and sections 241(3) to (5) allow it to refer to the Tribunal the question whether a person is a fit and proper person to hold the office of director, with removal under section 242(4A) and a five year disqualification under section 243(1A). The Infrastructure Leasing and Financial Services matter of October 2018, in which the Tribunal superseded the Board on the Union Government's application, is the working illustration.

Needle Industries (India) Ltd. v. Needle Industries Newey (India) Holding Ltd., (1981) 3 SCC 333, makes the jurisdiction equitable and discretionary and requires clean hands. And Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, fixes the outer limit: removal from an office is not oppression, the Tribunal cannot reinstate, and winding up cannot be the substantive prayer in a section 241 petition.

Conclusion. The Act protects the creditor by capital maintenance under sections 53, 66, 68 and 123 and by publicity under sections 77 to 85, with priority under sections 326 and 327 and, since 2016, a resolution process under the Insolvency and Bankruptcy Code; it protects the investor by compulsory disclosure under sections 25, 26 and 31 to 33 backed by liability under sections 34 to 37, by the segregation of his money under sections 40 and 42, and by the Investor Education and Protection Fund under sections 124 and 125; and it protects the shareholder by participation, information, property in his shares and remedy.

For full marks, cover: three of the five at roughly eight marks each. All five are written below. Items (a) and (c) are close neighbours and the discipline is to keep them apart: (a) is about what a director may do, must do and must answer for, and (c) is about how he gets the office and how he loses it.

Duties are now statutory, section 166: to act in accordance with the articles; to act in good faith to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of the environment; to exercise due and reasonable care, skill and diligence and independent judgment; to avoid a situation of conflict; not to achieve any undue gain, and to pay an equal amount to the company if he does; and not to assign his office. Section 184 requires disclosure of interest, section 188 regulates related party transactions, and sections 185 and 186 restrict loans and cap investments.

Liabilities are of four kinds. To the company, for breach of fiduciary duty, negligence and misfeasance, enforced by the company, by the Tribunal under section 242, by a class action under section 245, and in winding up under section 340. To outsiders, under section 35 for a misstatement in a prospectus, personally on a pre-incorporation contract, and personally where the company lacked capacity, as in A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185.

The modes are now one under the Act and two under the Code. Section 271, winding up by the Tribunal on five grounds: a special resolution; acting against the sovereignty and integrity of India; fraudulent conduct or purpose on the application of the Registrar or an authorised person; five consecutive years' default in filing financial statements or annual returns; and the just and equitable ground. Section 59 of the Insolvency and Bankruptcy Code, 2016, voluntary liquidation, sections 304 to 323 of the Companies Act having been omitted. And section 33 of that Code, liquidation after a failed resolution process. Inability to pay debts ceased to be a ground on 15 November 2016, when the Code substituted section 271.

Petitioners, section 272: the company; a contributory, even on fully paid shares and even where there are no assets, section 272(2); both together; the Registrar, with the Central Government's previous sanction after hearing the company; a person authorised by the Central Government; and a Government on the sovereignty ground.

(c) Appointment, disqualification and removal of directors

Appointment. Only an individual, section 149(1), with a Director Identification Number under section 152(3) and written consent under section 152(5). The routes: deemed first directors under section 152(1); appointment in general meeting under section 152(2) with rotation under section 152(6) and individual voting under section 162, an outside candidate standing on fourteen days' notice with a one lakh rupee deposit under section 160; additional, alternate and casual vacancy directors under section 161; a nominee director under section 161(3); proportional representation under section 163; independent directors under section 149(4) with the term rules in section 149(10); and appointment by the Tribunal under section 242(2)(k).

Disqualification, section 164(1): unsound mind so declared by a competent court; undischarged insolvency; a pending insolvency application; conviction with a sentence of not less than six months where five years have not elapsed, and a permanent bar on a sentence of seven years or more; an order of disqualification by a court or Tribunal; calls unpaid for six months; conviction under section 188 within five years; and non-compliance with section 152(3).

(d) Kinds of companies

By liability, section 3(2): limited by shares, limited by guarantee, and unlimited, section 2(92).

By membership and constitution: a private company, section 2(68), restricting transfer, limiting members to two hundred excluding present and former employee members and prohibiting any public invitation, and therefore barred by section 23(2) from issuing a prospectus; a public company, section 2(71), which is not private and which includes a private company that is a subsidiary of a public company; and a One Person Company, section 2(62), with one member and a nominee named under section 4(1)(f), exempt from the annual general meeting under section 96(1) and from most of the meeting machinery under section 122.

By control: a holding company, section 2(46); a subsidiary, section 2(87), by control of the Board's composition or of more than half the voting power, with a prescribed limit on layers; and an associate company, section 2(6), by significant influence, meaning at least twenty per cent of the voting power or control of business decisions under an agreement. Section 129(3) requires consolidation and section 19 forbids a subsidiary from holding shares in its holding company.

(e) Nature, issue and class of debentures

Nature. Section 2(30) defines a debenture as including debenture stock, bonds or any other instrument of a company evidencing a debt, whether constituting a charge on the assets or not, excluding since 2017 instruments referred to in Chapter III-D of the Reserve Bank of India Act, 1934. Its nature is debt: the holder is a creditor, interest is payable whether or not there are profits and is a charge against them, section 71(2) forbids voting rights, and on a winding up he ranks before the members and, if secured, ahead of unsecured creditors to the extent of his security.

Class, on four axes: secured or unsecured, according to whether a fixed or floating charge is created and registered under section 77, an unregistered charge being void against the liquidator under section 77(3); redeemable or perpetual; convertible, non-convertible or partly convertible; and registered or bearer, the latter now extinct. The floating charge deserves its own line: it hovers over a changing class of assets and crystallises into a fixed charge on default, on winding up, on the appointment of a receiver or on the cessation of business.

The authorities the five notes rest on

On the directors' note, the governing decision is A. Lakshmanaswami Mudaliar v. Life Insurance Corporation of India, AIR 1963 SC 1185, already used above, and to it should be added Tata Consultancy Services Ltd. v. Cyrus Investments (P) Ltd., (2021) 9 SCC 449, which holds that no one has a right to be or to remain a director, that removal from an office is not by itself oppression of the person as a member, and that the Tribunal has no power to reinstate. A director's protection is the procedure of section 169, which requires special notice and a hearing, and the record of his dissent in the minutes under section 118, not any security of tenure.

On the kinds of companies note, Salomon v. A. Salomon and Co. Ltd., [1897] AC 22, is the foundation, and Delhi Development Authority v. Skipper Construction Co. (P) Ltd., (1996) 4 SCC 622, the limit: the separate person is real, and the courts will look behind it where the form has been used to evade an obligation or perpetrate a fraud.

And on the debentures note, the modern authority is statutory: a debenture holder is a financial creditor under section 5(7) of the Insolvency and Bankruptcy Code, 2016, and Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, explains why that classification matters, the financial creditor being the person able to assess viability and restructure. It is why the trustee, and not the individual holder, carries the powers in sections 71(9) and 71(10).

For full marks, cover: part (i) as the Board's role, which means its duty, its powers grouped as legislative, executive and quasi-judicial, its appellate structure and two decisions showing how far it reaches; part (ii) as a procedure with steps, and then the promoter's liability specifically, because the question names the promoter and not the director, and the promoter's position has an extra dimension, his fiduciary duty, that a director's has not.

(i) The role of the Securities and Exchange Board of India

The duty, section 11(1) of the Act of 1992: to protect the interests of investors in securities and to promote the development of, and to regulate, the securities market, by such measures as it thinks fit. Three objects therefore sit in one sentence, and they are not always in harmony.

Legislative role. Section 30 empowers the Board to make regulations, and the substantive law of the securities market is in them: the Issue of Capital and Disclosure Requirements Regulations, 2018; the Listing Obligations and Disclosure Requirements Regulations, 2015; the Substantial Acquisition of Shares and Takeovers Regulations, 2011, with the open offer trigger at twenty five per cent, an offer for at least twenty six per cent and creeping acquisition of five per cent a year; the Prohibition of Insider Trading Regulations, 2015; the Prohibition of Fraudulent and Unfair Trade Practices Regulations, 2003; the Mutual Funds Regulations, 1996; the Alternative Investment Funds Regulations, 2012; the Infrastructure Investment Trusts and Real Estate Investment Trusts Regulations, 2014; and the Issue and Listing of Non-Convertible Securities Regulations, 2021.

Executive and investigative role. Section 11(2) lists the measures, including registering and regulating intermediaries and collective investment schemes, prohibiting fraudulent and unfair trade practices and insider trading, and regulating substantial acquisitions. Section 11A empowers it to regulate the issue of capital and the transfer of securities and to specify the matters to be disclosed. Section 11(3) gives it the powers of a civil court as to discovery, production, attendance and examination on oath.

Appellate structure. Section 15K establishes the Securities Appellate Tribunal, section 15T gives an appeal to it within forty five days, and section 15Z an appeal to the Supreme Court on a question of law within sixty days. Section 24 makes contravention punishable with imprisonment up to ten years or a fine up to twenty five crore rupees or both.

Two decisions show the role in operation. Sahara India Real Estate Corporation Ltd. v. Securities and Exchange Board of India, (2013) 1 SCC 1: two unlisted companies raised about twenty four thousand crore rupees from roughly three crore investors on optionally fully convertible debentures described as a private placement; the Supreme Court held it a public issue, held the Board's jurisdiction to extend to an unlisted issuer that had approached the public, and ordered refund with fifteen per cent interest. N. Narayanan v. Adjudicating Officer, SEBI, (2013) 12 SCC 152: a penalty on a director for the publication of falsified accounts was upheld, the Court holding that the Board's duty is to protect the integrity of the securities market and that directors owe a duty to the market not to falsify accounts.

Step two, contents. Section 26(1) requires the prospectus to be dated and signed and to state the specified information and set out the specified reports, including the names and addresses of the registered office, the company secretary, the Chief Financial Officer, the auditors, the bankers, the trustees, the underwriters and the experts; the dates of the opening and closing of the issue; a declaration about the allotment letter and refunds; a statement by the Board about the separate bank account; details of underwriting; the consents of the directors, auditors, bankers, experts and others; the authority for the issue and the details of the resolution; the procedure and time schedule for allotment; the capital structure; the main objects of the public offer and the objects of the present issue; particulars of the management perception of risk factors, gestation period, deadlines and pending litigation or default; the minimum subscription and the premium; and the auditor's reports on profits, losses, assets and liabilities.

Step three, the expert's consent, section 26(3): no prospectus may include a statement purporting to be made by an expert unless he is not and has not been engaged or interested in the formation, promotion or management of the company, and has given his written consent which he has not withdrawn before delivery to the Registrar, with a statement to that effect in the prospectus.

And the related filings: section 40(1), stock exchange permission before the offer with the money in a separate bank account under section 40(3); section 39(4), the return of allotment; section 32, a red herring prospectus filed three days before the offer opens with the final prospectus on closing; section 31, a shelf prospectus at the first offer, valid one year, with an information memorandum before each later offer; section 33, an abridged prospectus with every application form. For a listed issue the Board's Issue of Capital and Disclosure Requirements Regulations, 2018 add the draft offer document, the merchant banker's due diligence certificate, the Board's observations, and filing with the Board and the exchanges.

(ii) The liability of promoters for a misstatement

Who a promoter is. Section 2(69) defines him as a person named as such in a prospectus or identified by the company in its annual return; or who has control over the affairs of the company, directly or indirectly, as shareholder, director or otherwise; or in accordance with whose advice, directions or instructions the Board is accustomed to act, excluding a person acting merely in a professional capacity.

Section 35(2) gives three defences: that the person withdrew his consent before the issue and it was issued without his authority or consent; that it was issued without his knowledge or consent and on becoming aware he forthwith gave reasonable public notice; or that he had reasonable ground to believe and did believe that a statement by an expert or in an official document was true and fairly represented. Section 35(3) is the sting: where the prospectus was issued with intent to defraud the applicants or any other person or for any fraudulent purpose, every person referred to in sub-section (1) 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.

Criminal liability, sections 34 and 447. Where a prospectus includes an untrue or misleading statement, or an inclusion or omission likely to mislead, every person who authorises the issue is liable under section 447, punishable with imprisonment of six months to ten years and a fine of one to three times the amount involved, with a minimum of three years where the fraud involves the public interest; the proviso saves a person who proves the statement was immaterial or that he had reasonable grounds to believe it true. Section 36 punishes fraudulently inducing persons to invest.

Conclusion. The Board's role is legislative under section 30, executive and investigative under sections 11(2), 11(3), 11(4), 11A and 11C, and quasi-judicial under sections 11B, 15A to 15HB and 15I, subject to appeal under sections 15T and 15Z, with its duty fixed by section 11(1) and its boundary with the Central Government by section 24 of the Companies Act; Sahara shows it following the public's money into an unlisted company and N. Narayanan shows it protecting the integrity of the market.

A prospectus is registered by delivering a signed copy to the Registrar on or before publication under section 26(4), stating that fact on its face under section 26(5), and it is valid for only ninety days under section 26(6). And a promoter who misstates is liable to compensate under section 35 with the three defences in section 35(2) and without limitation under section 35(3) where there was intent to defraud, is liable to prosecution under sections 34 and 447, is liable in deceit and to rescission at common law, and owes, in addition and from before the company existed, the fiduciary duties Erlanger and Gluckstein enforce.