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The Companies Act, 1956

The Companies Act, 1956

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Nature of CompanyKinds of CompaniesFormation of CompanyMemorandum of AssociationArticles of AssociationProspectusSharesBorrowing PowersMeetings and ProceedingsAccounts and AuditorsPrevention of Oppression and MismanagementWinding up

Introduction

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After the end of World War II, the need for a further revision of the company law was felt. Many changes had taken place in the organization and management of joint stock companies. The Government of India, therefore appointed on 25th October, 1950, a committee of 12 members representing various interests under the Chairmanship of Mr. H. C. Bhabha. The committee submitted a comprehensive report on all aspects of company law in April 1956.

The recommendations of the Bhabha Committee culminated in the most comprehensive and the voluminous law in the Companies Act of 1956. The Companies Act of 1956, which is patterned on the lines of English Companies Act of 1948, is a comprehensive piece of legislation covering the entire field of company organization and management. This Act has been amended several times since it was codified.

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Characteristics of a Company

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Separate legal entity – A company is regarded as an entity separate from its members (it has an independent existence). Any of its members can enter into contracts with it in the same manner as any other individual can and he cannot be held liable for the acts of the company even if he holds virtually the entire share capital. The company’s money and property belong to the company and not the shareholders (although the shareholders own the company).

(Contd.)

Characteristics of a Company

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Limited liability – A company may be a company limited by shares, the liability of members is limited to the unpaid value of the shares. For example, if the face value of a share in a company is Rs. 10/- and a member has already paid Rs. 7/- per share, he can called upon to pay not more than Rs. 3/- per share during the life time of the company.

(Contd.)

Characteristics of a Company

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Perpetual succession and a common seal – A company is a juristic person with a perpetual succession and a common seal. As such it never dies; nor does its life depend on the life of its members. It is not any manner affected by insolvency, mental disorder or retirement of any of its members. It is created by a process of Law and can be put an end to only by a process of law. (Contd.)

Characteristics of a Company

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Transferability of shares – The capital of a company is divided into parts, called shares. These shares are, subject to certain conditions freely transferable, so that no shareholder is permanently or necessarily wedded to a company. When the joint stock companies were established the great object was that the shares should be capable of being easily transferred.

(Contd.)

Characteristics of a Company

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Separate property – A company, as already observed, is a legal person distinct from its members. It is, therefore, capable of owning, enjoying and disposing of property in its own name.

Capacity to sue – A company can sue and be sued in its corporate name. It may also inflict or suffer wrongs.

A company is not a citizen – Although a company is regarded as a legal person (though artificial), it is a not a citizen either under the Constitution of India or the Citizenship Act, 1955.

Kinds of Companies

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Classification on the basis of Incorporation

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1. Chartered companies – These are the companies which are incorporated under a special charter granted by the King or Queen (in England) e.g. East India Company. A chartered company is governed by its charter which defines its nature of the company. These companies find no place in India after the country-attained independence in 1947.

2. Statutory companies – These are the companies which are created by a special Act of the Legislature, e.g. the Reserve Bank of India, the Life Insurance Corporation, the Unit Trust of India, the Industrial Finance Corporation. These are mostly concerned with public utilities.

3. Registered companies – These are the companies which are formed and registered under the Companies Act 1956. These are by far the most commonly found companies.

Classification on the basis of Liability

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1. Companies limited by Shares - Where the liability of the members of a company is limited to the amount unpaid on the shares, the company is known as a company limited by shares. The liability can be enforced during the existence of the company as also during the winding up of the company. If the shares are fully paid, the liability of the shareholders holding such shares is nil.

2. Companies limited by guarantee – Where the liability of the members of a company is limited to a fixed amount which the members undertake to contribute to the assets of the company in case of its winding up, the company is called a company limited by guarantee. The Articles of such a company must state the number of members with which the company is to be registered. Companies limited by guarantee are not formed for the purpose of profit but for the promotion of art, science, culture, charity, and sports or for some similar purpose.

3. Unlimited companies – Any 7 or more persons (2 or more in case of a private company) may form an incorporated company with or without limited liability is known as an unlimited company. In case of such a company every member is liable for the debts of the company, as in an ordinary partnership, in proportion to his interest in the company.

Classification on the basis of number of members

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1. Private company – A private company means a company which by its articles – a. Restricts the right to transfer its shares, if any;b. Limits the number of its members to 50 (not including its employee members) andc. Prohibits any invitation to the public to subscribe for any shares or debenture of the company.3

2. Public company – A public company means a company which is not a private company by its articles –a. Does not restrict the right to transfer its shares, if any;b. Does not limit the number of its members; andc. Does not prohibit any invitation to the public to subscribe for any shares or debentures of the company

Distinction between a Public Company and a Private Company

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Public Company Private CompanyMinimum number Persons required to form a

public company is 7 Persons required to form a private company is 2

Maximum number No restriction of maximum number

Maximum number cannot exceed 50

Number of Directors At least 3 directors At least 2 directors Restriction on appointment of directors

The director must file with Registrar a consent to act as director

Need not do so

Restriction on invitation to subscribe for shares

Invites the general public to subscribe for the shares

Prohibits any such invitation to the public

Transferability of shares Shares are freely transferable Right to transfer shares id restricted

Quorum 5 members personally present 2 members Managerial remuneration

Cannot exceed 11% of the net profit

No such restriction

Foreign company

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Any company incorporated outside India which has a place of business in India. Every foreign company shall file with the Registrar the following documents – A certified copy of the Charter, statutes and

Memorandum and Articles of the company;The full address of registered or principal office;A list of directors and secretary of the company; Name and addresses of any persons resident in

India; andThe full address of the principal place of

business in India.

Formation of Company

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Promoter’s preliminary steps before company is formed – whether it should be a private company or

public company;whether it is worthwhile forming a new

company; andtaking over the business of an already

established concern.

Incorporation of Company

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Any 7 or more persons (2 or more persons in case of a private company) associated for any lawful purpose may form an incorporated company with or without limited liability. The following documents duly stamped together with the necessary fees are to be filed with the Registrar.

(Contd.)

Incorporation of Company

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The Memorandum of Association duly signed by the subscribers;

The Articles of Association, if any, signed by the subscribers to the Memorandum Association;

The agreement, if any, which the company proposes to enter into with any individual for appointment as its managing or whole-time director or manager.

The sanction of the Controller of Capital Issues if the Capital exceeds Rs. 1 crore.

A list of the Directors who have agreed to become the first Directors of the Company. (Contd.)

Incorporation of Company

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A declaration stating that all requirements of the Companies Act and other formalities relating to registration have been compiled with. Such declaration shall be signed by –An Advocate of the Supreme Court or a High

Court; orAn Attorney or a pleader entitled to appear

before a High Court; orA Secretary or a Chartered Accountant in whole

time practice in India; orA person named in the Articles as a Director,

Manager or Secretary of the Company.

Certificate of Incorporation & Effect of Registration

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Certificate of Incorporation – When the requisites documents are filed with the Registrar, he retains and registers the Memorandum, the Articles and other documents filed with him and issue a ‘certificate of incorporation’.

Effect of Registration – The company becomes a distinct legal entity. Its life

commences from the date mentioned in the certificate of incorporation.

It acquires a perpetual succession – The members may come and go but it goes on forever, unless it is wound up.

Its property is not the property of the shareholders – The shareholders have a right to share in the profits of the company when realized and divided. Likewise, any liability of the company is not the liability of the individual shareholders.

Memorandum of Association

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The Memorandum of Association of a company is a fundamental document of the company. It contains ‘the fundamental conditions upon which alone the company is allowed to be incorporated’.It is the charter of the company and defines the

reason for existence.It lays down the area of operation of the company.It also regulates the external affaires of the

company in relation to the outsiders. It not only shows the object of the formation of the

company but also the utmost possible scope of it.

Purpose of Memorandum

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The prospective shareholders know the field in, or the purpose for which their money is going to be used by the company and what risk they are undertaking in making investment.

The outsiders dealing with the company knows with certain as to what the objects of the company.

Contents of the Memorandum

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The name clause – The first clause of a memorandum shall state the name of the proposed company, which establishes its identity and is the symbol of its existence. Undesirable name to be avoided –

Too similar to the name of the another company; Misleading;

Prohibition of use of certain names like emblem, Flag, Official seal etc.

The state in which the registered office of the company is situate;

The objects of the company;In the case of a company having a share capital, the

amount of share capital with which the company is to be registered.

Alteration of Memorandum

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Change of Name – By Special resolution (passed by three-fourths majority) –

A Company may change its name by a special resolution and with the approval of the Central Government.

By Ordinary resolution (passed by a simple majority) – If through inadvertence or otherwise, a company is registered by a name which, in the opinion of the central government, is identical with, or too resembles, the name of the existing company.

Change of registered office – A company may by special resolution alter the provisions of its Memorandum so as to change the place of its registered office from one state to another.

(Contd.)

Alteration of Memorandum

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Alteration of objects – The objects clause is the most important clause in the Memorandum and can be altered by a special resolution so as to enable the company – To carry on its business more economically or more efficiently;To attain its main purpose by new or improved means;To enlarge or change the local area of its operations;To carry on some business which under exiting circumstances

may conveniently or advantageously be combined with the objects specified in the memorandum;

To restrict or abandon any of the objects specified in the Memorandum;

To sell or dispose of the whole or a part of the undertaking;To amalgamate with any other company.

Doctrine of Ultra Vires

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A company has the power to do all such things as are –authorized to be done by the Companies Act, 1956;essential to the attainment of its objects specified in the

Memorandum; reasonably and fairly incidental to its objects.

‘Ultra’ means ‘beyond’ and ‘vires’ means ‘power’. The term ultra vires of a company means that the ‘doing of the act, beyond the legal power and authority’ of the company. The purpose of these restrictions are two fold –First, to protect investors in the company so that they may know

the objects in which their money is to be employed; andSecond, to protect creditors by ensuing that the company’s fund,

to which they must look for payment, are not wasted in unauthorized activities.

Articles of Association

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The Articles of Association are the rules, regulations and bye-laws for the internal management of the affairs of the company. They are framed with the object of carrying out the aims and objects as set out in the Memorandum of Association.

Contents of Articles – Articles usually contain provisions relating to the following matters: Share capital, rights of shareholders, variation of these rights, payment of underwriting

commission Lien on shares (Lien means a right to retain possession of some property of another until

some claim attaching to it is settled) Calls on shares Transfer of shares Forfeiture (fine, penalty) of shares General meetings and proceedings thereat Voting rights of members, voting and poll Directors, their appointment, remuneration, qualifications, powers and proceedings of Board

of Directors Manager Secretary Accounts, audit and borrowing powers Capitalization of profits Winding up

In framing the Articles of a company care must be taken to see that regulations framed do not go beyond the powers of the company. If they do, they would be ultra vires the Memorandum or the Act will be null and void.

Articles and Memorandum – Distinction

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Memorandum of Association Articles of Association 1 It is the charter of the company

indication the nature of its business, its nationality, and its capital. It also defines the company’s relationship with outside world

They are the regulations for the internal management of the company and are subsidiary to the Memorandum.

2 It defines the scope of the activities of the company, or the area beyond which the actions of the company cannot go.

They are the rules for carrying out the objects of the company as set out in the Memorandum.

3 It, being the charter of the company, is the supreme document..

They are subordinate to the Memorandum. If there is a conflict between them, the Memorandum prevails.

4 There are strict restrictions on its alterations. Conditions of incorporation contained in it can be altered of the company law board.

They can be altered by a special resolution provided they do not have any conflict with the Memorandum and the Companies Act.

5 Any act of the company, which is ultra vires, the Memorandum is wholly void and cannot be ratified even by the whole body of shareholders.

Any act of the company which is ultra vires the articles can be ratified by the shareholders.

Constructive Notice of Memorandum and Articles

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Every outsider dealing with a company is deemed to have notice of the contents of the Memorandum and the Articles of Association which on registration with the registrar assume the character of public documents. This is known as constructive notice of Memorandum and Articles. The office of the Registrar is public office – The

Memorandum and the Articles are open and accessible to all.

Presumption that the outsider has read Memorandum and Articles.

Doctrine of Indoor Management

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There is one limitation to the doctrine of constructive notice of the memorandum and the Articles of a company. The outsiders dealing with the company are entitled to assume that as far as the internal proceedings of the company are concerned, everything has been regularly done. They are bound to read the registered document therewith, but they are not bound to do more; they need not inquire into the regularity of the internal proceedings as required by the Memorandum and Articles. This limitation of the doctrine of constructive notice is known as the ‘doctrine of indoor management’. The Memorandum and Articles are public documents. They are open to

inspection by everybody. But the details of internal proceedings are not open to public inspection. An outsider presumed to know the constitution of a company, but not what may or may not have taken place within the doors that are closed to him.

Prospectus

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In order to finance its activities, a company needs to have capital. This raised by a public company by the issue of the prospectus inviting deposits or offers for shares and debentures (document which either creates or acknowledges a debt) from the public. The central theme of the prospectus from the money raising point of view, is that it sets out the prospects of the company and the purpose for which the capital is required. The prospectus is the basis on which the prospective investors from their opinion and take decisions as to the worth and prospects of the company.

Section 2 (36) defines a prospectus as “any document described or issued as a prospectus and includes any notice, circular, advertisement or other document inviting deposits from the public or inviting offers from the public from subscription or purchase of shares in, or debentures of a body corporate.”

Contents of Prospectus

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Prospectus is the window through which an investor can look into the soundness of a company’s venture. The investors must therefore be given a complete picture of the company’s intended activities and its position. This is done through prospectus, which must secure the fullest disclosure of all material and essential particulars.

Section 56 lays down that a prospectus issued shall – state the matters specified in Part I of Schedule II, andset out the reports specified in Part II of Schedule II

(Contd.)

Contents of Prospectus - Part I of Schedule II

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General information Name and Address of Registered office. Consent of the Central Government. Names of Regional stock exchange and other stock

exchanges where application made for listing of present issue.

Date of the opening of the issue. Date of closing of the issue.

Name and addresses of trustee, auditors and lead managers.

Capital structure of the company Authorized, issued, subscribed and paid up capital. Size of present issue giving separately reservation for

preferential allotment to promoters and others. Terms of the issue

Terms of payments. Rights of the instrument holders. How to apply – availability of forms, prospectus and

mode of payment. Any tax benefits for company and its shareholders.

Particulars of the issue Objects. Project cost. Means of financing (including contribution of

promoters).

Company, management and project History and main objects and present

business of the company. Subsidiary(ies) of the company, if any. Promoters and their background. Names, addresses and occupation of

manager, managing director and other directors, whole-time directors.

Location of project and details about it. Nature of product. Future prospects.

Particulars in regard to the company and other listed companies under the same management

Outstanding litigation pertaining to operation and finances of the company and criminal prosecution launched against the company and the directors or particular default in statutory due or institutional due if any etc.

Management perception of risk factors e.g. sensitivity to foreign exchange rate fluctuations, difficulty in availability of raw materials or in marketing products etc.

Contents of Prospectus - Part II of Schedule II

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General Information Consent of the Directors,

Auditors, etc., their names and addresses.

Change, if any, in directors and auditors during last 3 years and reasons thereof.

Report of the auditors and accountants.

Statutory and other informationMinimum subscription.Expenses of the issue giving

separately fee payable to Advisors, Registrars, Managers and Trustees.

Commission or brokerage.Details of purchase of the

property.Details of directors, proposed

directors, remuneration.Rights of members regarding

voting.

Misstatements in Prospectus and their Consequences

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A prospectus is a document which holds out to the public as to what a company is what it proposes to do and what its prospects are. It invites deposits from the public or invites offers from the public to subscribe to the share capital and debentures of the company. It is therefore but reasonable that there must be full frank and honest disclosure of all material facts scrupulous accuracy in a prospectus and no material fact should be misstated or withheld. This is the golden rule as to framing of prospectus.

If there is any misstatement of a material fact in a prospectus or if the omits any material fact, there may arise:

Civil liability – If there is a misstatement of a material information in a prospectus and if it has induced any shareholder to purchase shares he can – •Rescind (withdraw, cancel) the contract.•Claim damages from the company whether the statement is fraudulent or an innocent one.

Criminal liability - Where a prospectus contains any untrue statement, every person who authorized the issue of the prospectus is punishable with imprisonment, which may extend to 2 years or with fine, which may extend to Rs.5000/- or with both.

Shares

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The capital of a company is divided into certain invisible units of a fixed amount. These units are called shares. Share means a definite portion of the share capital of a company. It carries certain rights and liabilities while the company is a going concern or while the company is wound up.

Types of Shares

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Preference shares – Preference shares with reference to any company limited by shares are those which have both the following two characteristics They have a preferential

right to be paid dividend during the lifetime of the company; and

They have a preferential right to the return of capital when the company goes into liquidation (insolvency).

Equity shares – Equity shares, with reference to any company limited by shares are those which are not preference shares. Equity share capital is the sum total of equity shares. In other words, equity share capital is one which does not carry preference as toPayment of dividend; andRepayment of capital.

Application and Allotment of Shares

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An application for shares is an offer by a prospective shareholder to a company to take shares; allotment is the acceptance by the company of the offer. Allotment results in a binding contract between the company and the shareholders.

Rules of Allotment

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The competent authority (Board of Directors) shall allot the shares.

The allotment must be absolute and unconditional. Minimum subscription – No allotment shall be made of any share

capital of a company offered to the public for subscription unless The amount stated in the prospectus as the minimum amount has been

subscribed, and The sum payable on application for such amount has been paid to and

received by the company. Application money – The amount payable on application on each

share shall be at least 5% of nominal amount of the share. Statement of lieu of prospectus – The allotment should be made

after atleast 3 days from the date of filing a statement of lieu of prospectus with the Registrar.

Shares and debentures to be dealt in on stock exchange – Every company intending to offer shares or debentures to the public for subscription by the issue of a prospectus shall, before such issue, make an application to one or more recognized stock exchanges for permission for the shares indented to offer

Share Certificate

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Every person whose name is entered as a member in the register of members of a company has a right to receive a certificate of shares and shall be under the seal signed by at least 2 directors and the secretary of the company and shall specify the shares to which it relates,the amount paid up thereon, andThe name, address and occupation of the holder

of the shares.

Forfeiture (fine, penalty) of Shares

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If a shareholder, having been called upon to any and call on his shares, fails to pay the call, the company has two remedies against the shareholder, namely –It may sue him for the amount due.It may forfeit (surrender, give up) his shares.

Borrowing Powers

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A company needs money to finance its activities. A part of this requirement is met by the issue of shares, for the rest the company has to resort to public borrowing.

Every trading company, unless prohibited by the Memorandum or the Articles, has implied power to borrow money for the purpose of its business. It has also the power to give security for the loan by creating a mortgage or charge on its property.

Debentures

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The most usual form of borrowing by a company is by the issue of debentures. Debenture means a document, which either creates a debt or acknowledges it.

The characteristics are – It is issued by the company and is usually in the form of a

certificate which is an acknowledgment of indebtedness.It is issued under the company seal.It is usually specifies a particular period or date as the

date of repayment and specified principal and interest at the specified date.

A debenture holder does not have any right to vote in the company meetings.

Kinds of debentures

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Bearer or unregistered debentures – which are payable to bearer and are regarded as negotiable instruments.

Registered documents – are payable to registered holders and his name appears both on the debenture certificate and in the company’s register of debentures.

Secured debentures – which create some charge on the property of the company.

Unsecured or naked debentures – which do not have any charge on the assets of the company.

Redeemed debentures – usually issued on the condition that they shall be re-issued after certain period.

Convertible debentures – give an option to the holders to convert them into equity shares at stated rates of exchange after a certain period. If the holders exercise the right of conversion, they cease to be lenders to the company and become members instead.

Meetings and Proceedings

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Meetings – The meetings of a company may classified as:

Meetings of shareholders - General meetings of shareholders -

Statutory meeting,Annual general meetings, andExtraordinary meetings.

Class meetings.Meetings of creditors and debenture holders -

During the lifetime of the company, andAt the time of winding up of the company.

Meetings of directors.

Statutory Meeting (sec. 165)

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This is the first meeting of the shareholders of a company. It must be held within a period of not less than 1 month nor more than 6 months from the date at which the company is entitled to commence business. The Board of Directors must at least 21 days before the day on

which the meeting is to be held, forward a report, called the ‘statutory report’ to every member of the company. This report contains all the necessary information relating to formational aspects of the company for the information of the members like – Total shares allotted, Cash received, Abstract of receipts and payments, Directors and auditors, Contract, Arrears, Commission and brokerage.

Annual General Meeting (Sec. 166 & 167)

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Every company must in each year hold, in addition to ant other meetings, a general meeting as its annual general meeting and must specify the meeting as such in the notices calling it. A period of not more than 15 months should pass between the date of one annual general meeting of a company and that of next.

It is only at the annual general meeting of a company that the shareholders can exercise can exercise any control over its affairs,discuss the affairs and review the working of the company,

andtake necessary steps for the protection of their interests.

Extraordinary General Meeting (Sec. 169)

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Any general meeting other than an annual general meeting is called an extraordinary general meeting. It is called for the transacting some urgent or special business which cannot be postponed for till the next annual general meeting.

Class Meetings (Sec. 106)

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Under the Companies Act, class meetings of various kinds of shareholders and creditors are required to be held under different circumstances. Class meetings of the holders of different classes of shares are to be held if the rights attaching of these shares are to be varied.

Meetings of Directors

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Directors of a company exercise most of their powers at the meetings of the Board. The companies Act contains the following provisions relating to Board meetings – Number of meetings – A meeting of its Board of

directors must be held at least once in every 3 months and at least 4 such meetings must be held in every year.

Notice of the meetings- Notice of every meeting must be given in writing to every director.

Quorum for meetings – The quorum for a meeting of the Board is 1/3 rd of its total strength.

Requisites of a valid meeting

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Proper authority – The proper authority to convene a general meeting of a company is BoD who should pass a resolution to call the meeting, at a duly convened Board meeting.

Notice of meeting – Proper notice of the meeting should be given to the members by giving at least 21 days notice in writing to the members.

Quorum of meeting – The quorum is generally fixed by the Articles. Quorum means the minimum number of members who must be present in order to constitute a meeting and transact business thereat. If the quorum is not present there is no meeting and the proceedings held thereat are invalid.

Chairman of meeting – A chairman is necessary to conduct a meeting.

Minutes of meeting – Every company must keep a record of all proceedings of every meetings

Accounts and Auditors

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Books of Account – (Sec 209) – Every Company must keep at its office proper books of account with respect to - all receipts and payments of money and the

matters in respect which the receipt and expenditure take place;

all sales and purchases of goods by the company;the assets and liabilities of the company; and in case of company engaged in production,

processing, manufacturing or mining activities, such particulars relating to utilization of material or labour or to other items of cost.

(Contd.)

Accounts and Auditors

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Where the company has a branch office, whether in or out of India, books of account relating to the transactions effected at branch office must be kept at the branch. But at intervals of not more than 3 months, summarised account should be sent to the company at its registered office. The books of account must give a true and fair view of

the state of affairs of the company;The location of books ordinarily be kept at the registered

office of the company;The books of account with the relevant vouchers must be

preserved for a period of atleast 8 years;The books of account and other books are open for

inspection during business hours by any director or any government authorized officer.

Annual Accounts and Balance Sheet

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The annual accounts of a company consist of a balance sheet as at the end of a financial year and profit and loss account for the financial year. At every annual general meeting of a company, the board of directors must lay before the meeting – a balance sheet for the year; a profit and loss account for the period; anddirector’s report.

Auditors

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The audit of a joint stock company is intended for the protection of the shareholders and the auditor is expected to examine the accounts maintained by the directors with view to informing the shareholders of the true financial position.

Qualifications – A person is qualified for appointment as auditor of a company only if he is a chartered accountant within the meaning of the Chartered Accountants Act 1949.

Rights and Powers of Auditors Duties of Auditors Right of access to books, accounts and

vouchers; Right to obtain information and

explanation; Right to visit branch office and access to

books; Right to receive notice of general meeting

and attend them; and Right to receive remuneration

Acquaintance with the Articles; Report to members; Statutory report (certify the

report); and Assistance in investigation

Prevention of Oppression and Mismanagement

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The management of companies is based on the majority rule. Like any democratic set-up, the majority has its way in the company though due provision must also be made for the minority to have its say.

The oppression of mismanagement of companies by majority calls for remedial action. In such case the minority shareholders may apply to the Court for the winding up of the company on the ground

that it is just and equitable to do so;the Company Law Board for appropriate relief’ andthe Central Government for appropriate relief

Powers of the Company Law Board

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Under section 397 and 398 the Company Law Board has all the necessary powers to end oppression of minority as well as to prevent mismanagement. It has the power to provide for – the regulation of the conduct of the company’s affairs in

future; the purchase of the shares or interests of any members of

the company by other members thereof or by the company; in the case of purchase of shares by the company as

aforesaid, the consequent reduction of its share capital;the termination setting aside or modification of any

agreement between the company and its management upon just and equitable terms.

Powers of the Central Government

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Power to prevent oppression or mismanagement (Sec 408) – members of a company may apply to the Central Government for relief or even the Central Government may also move into the matter by itself.

Power to remove managerial personnel.

Winding up

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Winding up or liquidation of a company represents the last stage in its life. It means a proceeding by which a company is dissolved. The assets of the company are disposed of, the debts are paid off out of the realized assets. According to Prof. Gower, winding up of company is the process whereby its life is ended and its property administrated for the benefit of its creditors and members.

Modes of Winding Up

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Winding up by the Court; or Voluntary winding up;

Members voluntary winding up, orCreditor’s voluntary winding up.

Winding up subject to the supervision of the Court.

Winding up by the Court

© Anant D. C. 201061

Winding up of a company under the order of a Court is also known as compulsory winding up.

Grounds for winding up by the Court (Sec. 433) Special resolution for the winding up of the company by the Court; Default in holding statutory meeting or in delivering statutory report to the Registrar; Failure to commence business within a year from the date of incorporation; Reduction in membership below the statutory minimum; Inability to pay its debts; and Just and equitable.

When the substratum of the company is gone; The object for which it was incorporated has substantially failed; It is impossible to carry on the business; The existing and probable assets are insufficient.

When the majority of the shareholders are using their powers unfairly or have adopted an oppressive policy toward the minority;

Where there is a deadlock in the management of the company; Where public interest is likely to be prejudiced (unfair, biased); When the business of the company becomes illegal; When the company is a mere bubble and it does not carry on any business or

does not have any property.

Voluntary winding up

© Anant D. C. 201062

Voluntary winding up of a company means winding up by the members of creditors of the company without interference by the Court. The object of this is that the members and creditors are left free to settle their affairs without going to the Court of law. They may however apply to the Court for any directions, if any, when necessary. (sec. 518).

Winding up subject to supervision of Court

© Anant D. C. 201063

Winding up subject to the supervision of the Court presupposes a voluntary winding up of a company. At any time after a company has passed a resolution for voluntary winding up, the Court make an order that the voluntary winding up shall continue, but subject to the supervision of the Court.