Company Law Solved Paper May' 2019 Semester Exam
Dibrugarh University B.Com 4th Semester
Time: 3 hours
(Company Law)
(NEW COURSE)
Full Marks: 80
Pass Marks: 24
1. Write True or False: 1x4=4
a) A shareholder is necessarily the member of a company. False
b) Only a member of the Institute of Company Secretaries of India can becomes Secretary of a company. True
c) One-member meeting is not valid. True
d) In case of a public company, the minimum number of directors is seven. False, 3
2. Fill in the blanks: 1x4=4
a) Articles of Association of a company contain rules and regulations for the INTERNAL management of a company.
b) Statutory meeting is required to be held within 6 months from the date on which a company is entitled to commence business.
c) A private company cannot issue share warrant.
d) The gap between two annual general meetings must not be more than 15 months.
3. Write briefly on any four of the following: 4x4=16
a) Public company.
Ans: Public company [Sec. 2(71)] - A public company means a company which:
a. is not a private company
b. is a private company which is a subsidiary of a company which is not a private company.
c. has a minimum paid-up capital as may be prescribed by the articles.
Features of Public Company:
a) Minimum number of members is 7 and there is no limit as to maximum numbers.
b) Prospectus or a Statement in lieu of Prospectus must be issued for inviting public to subscribe to its shares or debentures.
c) The shares of a public company are freely transferable.
d) A Public Company must have at least three directors.
e) The word ‘Limited’ must be used as a part of the name.
b) Board meeting.
Ans: Board meeting is divided into two categories:
A. Meeting of the Board of Directors: As the affairs of a company are managed by the board of directors, therefore it is necessary that the directors should often meet to discuss various matters regarding management and administration of affairs of the companies in the best interest of shareholders.
B. Meeting of a Committee of the Board: As per sec. 179(3), the board my, by a resolution passed at a meeting, delegate various powers to a committee of directors, managing directors, manager or any other principle officer of the company.
Provisions of the Companies Act, 2013 for Board Meeting
1. Frequency of Meeting:
a) First Meeting: First Meeting of Board of Directors within 30 (Thirty) days from the date of Incorporation of company.
b) Subsequent Meetings:
One person Company, Small company and Dormant company: At least one meeting of Board of directors in each half of calendar year and minimum gap between two meetings should be at least 90 days.
Other than Companies mentioned above: Minimum No. of 4 meetings of Board of Director in a calendar year and maximum gap between two meetings should not be more the 120 days.
2. Calling of Meeting: Meeting of Board of Director should be called by giving 7 days notice to Directors at his registered address through:
a) By hand delivery
b) By post
c) By Electronic means
Meeting at shorter Notice: A meeting of Board of Directors can be called by shorter notice subject to the conditions:
If the company is require to have independent director:
a) Presence of at least one Independent director is required.
b) In case of absence, decision taken at such meeting shall be circulated to all the directors, and
c) shall be final only on ratification thereof by at least one Independent Director
If the company doesn’t require to have independent director: The meeting can be called at a shorter notice without any conditions to be complied with.
3. Quorum of Board Meeting: 1/3 rd of total strength OR 2 (Two) Directors, whichever is higher. Where meeting of Board could not be held for want of quorum, the meeting shall automatically adjourn to same time, same place at next week (Not being national holiday).
c) Registration of a company.
Ans: Without incorporation a company cannot be formed. It comes into existence only after registration and issue of certificate of incorporation. A promoter for registration takes the following steps:
(1) Preliminary Steps : Following preliminary steps are taken by promoter for registration :
(i) A Promoter decides the type of Company : either private or a public company. (ii) The promoter also decides the place of registered office of the company. (iii) Selecting the Name of the Company. (iv) Drafting Memorandum. (v) Drafting of Articles of Association for private company is essential but for a private company it is optional in place of it, it can use Table-A. etc
(2) Delivery of the Documents to the Registrar : The promoter delivers the following documents to the registrar:
a) Application for availability of name
b) Memorandum of Association
c) Articles of Association
d) Copy of proposed agreement
e) Statement on nominal capital
f) Address of the registered office
g) List of directors and their consent
h) Undertaking to take up qualification shares
i) Statutory declaration
(3) Scrutiny of Documents: When the promoter duly file all the documents relating for incorporation to the registrar, the registrar then will scrutinize these documents from legal point of view. If all the documents found correct, he may issue a certificate of incorporation, but if finds any minor defect in the documents, then he may require for rectification. But if there is no defect, then he may be compelled to register if he denies.
(4) Certificate of Incorporation: When the registrar; after scrutiny of document feels satisfaction regarding formation formalities, he may retain all the relevant documents with him and he shall issue a Certificate of Incorporation to the company.
d) Extraordinary general meeting.
Ans: Extraordinary General Meeting: Every general meeting (i.e. meeting of members of the company) other than the statutory meeting and the annual general meeting or any adjournment thereof, is an extraordinary general meeting. Such meeting is usually called by the Board of Directors for some urgent business which cannot wait to be decided till the next AGM. Every business transacted at such a meeting is special business. An explanatory statement of the special business must also accompany the notice calling the meeting. The Articles of Association of a Company may contain provisions for convening an extraordinary general meeting.
e) One-man company.
Ans: According to Sec. 2(62) of the Indian Companies Act, 2013, one person company means a company which has only one person as a member. Sec. 3 of the Companies Act, 2013 classify OPC as private company and all the provisions of a private company is also applicable to this company.
Features of OPC:
1. There is only one director.
2. It can have only one member.
3. The word OPC is mentioned in the bracket with the name of the company.
4. OPC is exempted from conducting annual general meeting and board meeting.
f) Woman director.
Ans: Woman Director: As per Sec. 149(1) of the Companies Act, 2013, the following companies shall appoint atleast one woman director:
1) Every listed company.
2) Every other public companies having a paid share capital of Rs. 100 crores or more or turnover of Rs. 300 crores or more.
A period of six months from the date of company’s incorporation has been provided to enable the companies incorporated under Companies Act, 2013 to comply with this requirement. Therefore, the existing companies has to comply the above requirements within one year and new companies incorporated under the new companies act has to comply within 6 months from the date of its incorporation.
Further if there is any intermittent vacancy of a woman director then it shall be filled up by the board of directors within 3 months from the date of such vacancy or not later than immediate next board meeting, whichever is later. This has been a welcome move.
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Also Read: Company Law Question Papers (Non-CBCS Pattern)
Also Read: Company Law Question Papers (CBCS Pattern)
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Also Read: Company Law Solved Question Papers (CBCS Pattern)
4. (a) What is prospectus? Discuss the various contents of a prospectus. 4+10=14
Ans: Prospectus
Section 2(70) of the Companies Act, 2013 defines a prospectus as ““A prospectus means Any documents described or issued as a prospectus and includes any notices, circular, advertisement, or other documents inviting deposit fro the public or documents inviting offer from the public for the subscription of shares or debentures in a company.” A prospectus also includes shelf prospectus and red herring prospectus. A prospectus is not merely an advertisement. A document shall be called a prospectus if it satisfy two things:
a) It invites subscription to shares or debentures or invites deposits.
b) The aforesaid invitation is made to the public.
Contents of a prospectus:
a) Address of the registered office of the company.
b) Name and address of company secretary, auditors, bankers, underwriters etc.
c) Dates of the opening and closing of the issue.
d) Declaration about the issue of allotment letters and refunds within the prescribed time.
e) A statement by the board of directors about the separate bank account where all monies received out of shares issued are to be transferred.
f) Details about underwriting of the issue.
g) Consent of directors, auditors, bankers to the issue, expert’s opinion if any.
h) The authority for the issue and the details of the resolution passed therefore.
i) Procedure and time schedule for allotment and issue of securities.
j) Capital structure of the company.
k) Main objects and present business of the company and its location.
l) Main object of public offer and terms of the present issue.
m) Minimum subscription, amount payable by way of premium, issue of shares otherwise than on cash.
n) Details of directors including their appointment and remuneration.
o) Disclosure about sources of promoter’s contribution.
p) Particulars relation to management perception of risk factors specific to the project, gestation period of the project, extent of progress made in the project and deadlines for completion of the project.
Or
(b) What do you mean by Memorandum of Association? Discuss the various clauses of Memorandum of Association. 4+10=14
Ans: Memorandum of Association
Memorandum of association is the document which contains the rules regarding constitution and activities and objects of the company. It is fundamental charter of the company. Its relation towards the members and the outsiders are determined by this important document.
Section 2 (56) of the Companies Act, 2013 defines Memorandum as “Memorandum means the Memorandum of association of a company as originally framed or as altered from time to time in pursuance of any previous companies law or of this act”.
One of the essentials for the registration of a company is memorandum of association. It is the first step in the formation of a company. Its importance lies in the fact that it contains the fundamental clauses which have often been described as the conditions of the company’s incorporation.
Memorandum of association is divided into 5 clauses/contents [Sec. 4 of the Companies Act, 2013]:
1. Name clause
2. Situation or Registered office clause
3. Objects clause
4. Liability clause and
5. Capital clause
6. Subscription or Association Clause
1. Name clause: This clause state the name of the company. Name of every company limited by shares or by guarantee must end by the word 'Ltd.' or 'Pvt. Ltd.' except companies exempted u/s 8. The name must not be undesirable or most not resemble the name of any other registered company.
2. Situation or Registered office clause: Must contain the name of state is which registered office is situated. Actual address of registered office is notified to ROC with in 30 days of in corporation.
3. Object clause: It sets out object or vires of the company. The objects must be legal and not be against the provision of the companies Act, 2013. It is divided into two parts:
(a) The main objects and Objects incidental or ancillary to the main objects.
(b) Other objects.
4. Liability clause: States that liability of members is limited to the amount unpaid on their shares and in case of company limited by guarantee the amount which every member undertakes to contribute to the assets of the company in the even of its winding up.
5. Capital clause: Every company having a share capital, the amount of share capital with which the company is proposed to be registered and the division of its shares into a fixed denomination.
6. Subscription clause: This clause shall state the number of shares that each subscriber to member has agreed to subscribe. Every subscriber shall agree to subscribe for at least one share.
5. (a) Explain the various duties and responsibilities of a Company Secretary. 7+7=14
Ans: Duties and Responsibilities of the Company Secretary: The duties and responsibilities of a company secretary are classified under the following heads:
A) General Duties: General duties of a company secretary are given below:
(1) To provide to the directors of the company, collectively and individually, such guidance as they may require, with regard to their duties, responsibilities and powers;
(2) To facilitate the convening of meetings and attend Board, committee and general meetings, and maintain the minutes of these meetings;
(3) To obtain approvals from the Board, general meetings, the Government and such other authorities as required under the provisions of the Act;
(4) To represent before various regulators, Tribunal and other authorities under the Act in connection with discharge of various functions under the Act;
(5) To assist the Board in the conduct of the affairs of the company;
(6) To assist and advise the Board in ensuring good corporate governance and in complying with the corporate governance requirements and best practices; and
(7) To discharge such other duties as may be assigned by the Board from time to time;
(8) Such other duties as have been prescribed under the Act and Rules.
B) Statutory Duties: Apart from general secretarial duties with regards to organizing Board and general meetings, keeping minutes of meeting, recording approved share transfers, corresponding with directors and shareholders, maintaining statutory records, filing necessary returns with Registrar of Companies etc., the Companies Act, 2013 has also prescribed some duties and authorities, which are as follow:
1. Declaration regarding compliance with requirement of registration: In terms of section 7(1)(b) of the Companies Act, 2013, a company gets incorporated by submitting memorandum and articles duly signed along with a declaration in a prescribed form that all requirements of Act and rules have been complied with in respect of registration of company. Such declaration in prescribed form can be signed by an Advocate, a chartered accountant, cost accountant or company secretary in practice who is engaged in the formation of the company and by a person named in the articles as a director, manager or secretary of the company.
2. Authentication of documents, proceedings and contracts: A document or proceeding requiring authentication by a company or contract made by or on behalf of a company must be signed by any key managerial personnel or an officer of the company duly authorized by the Board in this behalf. However, in case of a company does not have a common seal, the requirement of law would be complied with if the authorization is done by two directors or by a director and the Company Secretary, wherever the company has appointed a Company Secretary.
3. Signing share certificate: Share certificates of the company should be signed by two directors (out of which one should be Managing Director or whole time director, if appointed) and Secretary or other person authorized by Board.
4. Signing annual return: Annual return to be filed with Registrar of Companies has to be signed by a director and Company Secretary. If Company does not have Company Secretary, the return can be signed by company secretary in practice.
5. Signing of financial statements: The financial statement, including consolidated financial statement is to be signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed.
6. Appear before NCLT: A Company Secretary can appear before National Company Law Tribunal (NCLT) on behalf of the company.
7. Secretary as Compliance Officer of listed company: As per clause (1) of Regulation 6 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, a listed company is required to appoint the company secretary to act as ‘Compliance Officer’, who will be responsible for the following:
(a) ensuring conformity with the regulatory provisions applicable to the listed entity in letter and spirit.
(b) co-ordination with and reporting to the Board, recognised stock exchange(s) and depositories with respect to compliance with rules, regulations and other directives of these authorities.
(c) ensuring that the correct procedures have been followed that would result in the correctness, authenticity and comprehensiveness of the information, statements and reports filed by the listed entity.
(d) monitoring email address of grievance redressal division as designated by the listed entity for the purpose of registering complaints by investors.
8. Demat shares: Secretary has to coordinate between depository and stock exchange in case of demat shares.
9. Additional duties: In addition to statutory duties of company secretary, he is often entrusted with additional duties like looking after legal matters, personnel matters, finance and sometime even general administration.
10. Nodal Officer: Company secretary has to perform duty of nodal officer under IEPF Rules. He shall verify all applications filed to reclaim shares from IEPF.
Or
(b) Who can be a member of a company? How can the membership of a company be terminated? Discuss. 4+10=14
Ans: Who can be a member in a company or Capacity of parties to become a member of a company:
Any person who is competent to contract may become the member of the company as per the provision of Memorandum and Articles of Association of the company. Provisions of the Companies Act, 2013 for various categories of person are given below:
1. Minor: If the company allots shares to a minor in ignorance of minority, following consequences shall follow:
a) The minor shall not be liable to pay any calls remaining unpaid on the shares held by him.
b) The guardian cannot be compelled to pay the calls due on the shares held by a minor.
c) The minor can repudiate the allotment made to him. The company can repudiate the allotment made to the minor. The minor shall be entitled to receive back the money paid by him.
d) On attaining majority, the minor does not automatically become a member in a company.
e) If on attaining majority, the minor does anything which shows that he has accepted the membership, the minor shall be henceforth deemed to be a member.
2. Company: A company can become a member of any other company only if it is specifically authorized by the memorandum to purchase shares of any other company. A subsidiary company cannot become a member of its holding company (Sec. 19 of the Companies Act, 2013)
3. Co-operative Society and Society: A cooperative society is a legal person, and so it has power to hold property. Therefore, a cooperative society can become a member in a company. A society when registered under the Societies Registration Act, 1860 is a legal person, and so it can become a member in a company.
4. Trade union: A Trade Union registered under the Trade Unions Act, 1926 is legal person (i.e. a body corporate) capable of holding property. Therefore, a trade union can become a member in a company.
5. Partnership firm: A firm is not a legal person. It cannot hold property in its own name; the property is held in the name of the partners on behalf of the firm. Therefore, a firm cannot become a member in a company. However, a partnership firm may become a member in a company licensed u/s 8 of the Companies Act, 2013.
6. HUF: Hindu Undivided Family (HUF) is not a separate legal person. Therefore, an HUF cannot become a member in a company in its own name.
7. Trust: A trust is not a separate legal person. Therefore, the shares cannot be allotted or transferred in the name of a trust.
8. Joint holders: Two or more persons may hold the shares in a company in their joint names.
9. Foreigner: A foreigner can become a member in a company by complying with the requirements of Foreign Exchange Management Act, 1999. In case a war breaks out with foreign country, the foreigner cannot enforce any right available to the members.
10. Government: CG or SG can become a member in a body corporate.
11. Insolvent: The shares of the insolvent vest in the official assignee or the official receiver, as the case may be. However, an insolvent continues as a member until his shares are sold by the official assignee or the official receiver, as the case may be. Until an insolvent discharged, he cannot become a member.
How is Membership terminated?
Termination of the membership: it can take place in two ways:-
a) Voluntary termination (by act of the parties)
b) Compulsory termination (by operation of law)
a) Voluntary/by act of the parties termination: A person ceases to be a member of a company by doing the following act:
Ø By transfer of shares
Ø By forfeiture of shares
Ø By surrender of shares
Ø By exercising lien by the company.
Ø By issue of share warrants
Ø By redemption of shares
Ø By the buy back of shares by the company
Ø By irregularity in allotment
Ø By repudiating the contract on the ground of false or misleading statement in the prospectus of the company.
b) Compulsory/By operation of law termination: A person ceases to be a member by operation of law in the following cases:
Ø By termination of shares
Ø By insolvency of the person
Ø By the order of court on acquiring shares
Ø On winding up of a company
Ø On the death of the person
6. (a) What are the objectives of holding annual general meeting? Discuss the legal provisions relating to the annual general meeting. 4+10=14
Ans: Annual General Meeting: Every company must in each year hold an annual general meeting. Not more than 15 months must elapse between two annual general meetings. However, a company may hold its first annual general meeting within 9 months from the close of 1st financial year. In such a case, it need not hold any annual general meeting in the year of its incorporation as well as in the following year only. A notice of at least 21 days before the meeting must be given to members unless consent is accorded to a shorter notice by members, holding not less than 95% of voting rights in the company. The notice must state that the meeting is an annual general meeting. The time, date and place of the meeting must be mentioned in the notice.
The AGM must be held on a working day during business hours at the registered office of the company or at some other place within the city, town or village in which the registered office of the company is situated. The Central Government may, however, exempt any class of companies from the above provisions.
The main purpose (Objectives) to hold these meetings are:
1. To submit the annual account, balance sheet, director’s report and auditor’s report.
2. To declare the dividend.
3. Special business- any other business to be transacted will be deemed special business likes:
4. To increase share capital
5. To alter Article of Association
6. To appoint auditors and fix their remuneration.
7. To elect directors are that liable to retire by rotation.
Legal Provisions Relating to Annual General Meeting
Every company is required to hold this meeting. But, there are certain legal provisions which have to be followed, relating to the annual general meeting as contained in sections 96 and 97. There are:
a. First Annual general meeting: A company may hold its first annual general meeting within a period of 9 months from the date of incorporation. However this should not be more than 9 months from close of financial years.
b. Subsequent meeting: There must be one meeting held in each year. The gap between two annual general meetings must not be more than 15 months. Meeting must be held not later than 6 months from close of financial year.
c. Extension of time: the registrar has the power to extend the time of 15 months by 3 more months in special cases.
d. Day, hour and place of meeting: The meeting can be held at any working place, on any working day and working hours. If the day scheduled for meeting is declared by the Central Government to be a public holiday after the issue of the notice, it shall not be deemed as a holiday.
e. Notice of the meeting: 21 clear days notice or any shorter notice if agreed by all shareholders must be given.
f. Business to be transected: At every AGM, the following matters must be discussed and decided. Since such matters are discussed at every AGM, they are known as ordinary business. All other matters and business to be discussed at the AGM are special business.
The following matters constitute ordinary business at an AGM :
a. Consideration of annual accounts, director’s report and the auditor’s report
b. Declaration of dividend
c. Appointment of directors in the place of those retiring
d. Appointment of and the fixing of the remuneration of the statutory auditors.
Ordinary business is transacted by passing ordinary resolution.
Special Business: All matters other than ordinary business are treated as special business at an annual general meeting. For transacting special business at a meeting, there shall be annexed to the notice of meeting an explanatory statement setting out:
a) All material facts concerning each item of such business, and
b) In particular, nature of the concern or interest, if any, of every director or manager in each item.
c) Statement must also state time and place where document, if any, proposed for approval at the meeting can be inspected by members.
d) The items constituting special business are transacted either by an ordinary resolution or by a special resolution depending on the requirements of the Companies Act 2013 or articles of the company in respect of each particular item.
g. Default in holding Annual general meeting: As mentioned earlier, every company is required to hold this meeting according to the provision of the Companies Act. If any company fails to hold the annual general meeting the consequences are as follows:
A. As mentioned above, the annual general meeting provides the opportunity to the members to express views on the management of the company. Any member can apply to the Central Government for the failure of the company to call the meeting. The Central Government may give direction to the company for calling the meeting.
B. The company as well as every officer will become liable if they fail to held the meeting and shall be punishable with fine upto Rs. 50,000, and if the default continues , with a further fine of Rs. 2,500 for every day after the first day of default during which the default continues.
Or
(b) Discuss the various essentials and legal rules for a valid meeting. 14
Ans: Requisites of a Valid Meeting
If the business transacted at a meeting is to be valid and legally binding, the meeting itself must be validly held. A meeting will be considered to be validly held, if:
a) It is properly convened by proper authority.
b) Proper notice must be served. (Sec. 101 and Sec. 102 of the Companies Act, 2013)
c) Proper quorum must be present in the meeting. (Sec. 103 of the Companies Act, 2013)
d) Proper chairman must preside the meeting. (Sec. 104 of the Companies Act, 2013)
e) Business must be validly transacted at the meeting.
f) Proper minutes of the meeting must be prepared. (Sec. 118 and 119 of the Companies Act, 2013)
Proper Authority to Convene Meeting: A meeting must be convened or called by a proper authority. Otherwise it will not be a valid meeting. The proper authority to convene general meetings of a company is the Board of Directors. The decision to convene a general meeting and issue notice for the same must be taken by a resolution passed at a validly held Board meeting.
Notice of Meetings: A meeting in order to be valid must be convened by a proper notice issued by the proper authority. It means that the notice convening the meeting be properly drafted according to the Act and the rules, and must be served on all members who are entitled to attend and vote at the meeting. For general meeting of any kind at least 21days notice must be given to members. A shorter notice for Annual General Meeting will be valid, if all members entitled to vote give their consent. The number of days in each case shall be clear days, i.e. the days must be calculated excluding the day on which the notice is issued, a day or so for postal transit, and the day on which the meeting is to he held. Every notice of meeting of a company must specify the place and the day and hour of the meeting, and shall contain a statement of the business to be transacted thereat.
Quorum of Meetings: Quorum is the minimum number of members who must be present at a meeting as required by the rules. Any business transacted at a meeting without a quorum is invalid. The main purpose of having a quorum is to avoid decisions being taken at a meeting by a small minority which may be found to be unacceptable to the vast majority of members. The number constituting a quorum at any company meeting is usually laid down in the Articles of Association. In the absence of any provision in the Articles, the provisions as to quorum laid down in the Companies Act, 2013 (under Sec.103) will apply. Sec. 103 of Companies Act provides that the quorum for general meetings of shareholders shall be five members personally present in case of a public company if the number of members as on the date of meeting is upto 1000, 15 quorum if number of members as on the date of meeting is more than 1000 but upto 5000 and if number of member exceeds 5000 than 30 quorum is required; and two members personally present for any private company or articles may provide otherwise.
Chairman of a Meeting: ‘Chairman’ is the person who has been designated or elected to preside over and conduct the proceedings of a meeting. He is the chief authority in the conduct and control of the meeting.
Agenda of Meetings: The word ‘agenda’ literally means ‘things to be done’. It refers to the programme of business to be transacted at a meeting. Agenda is essential for the systematic transaction of the business of a meeting in the proper order of importance. It is customary for all organisations to send an agenda along with the notice of a meeting to all members. The business of the meeting must be conducted in the same order in which the items are placed in the agenda and the order can be varied only with the consent of the meeting.
Minute: Minute of a meeting contains a fair and correct summary of the proceedings of a meeting. Minutes must be prepared and signed within 30 days of the conclusion of the meeting. The minute books of meetings must be kept at the registered office of the company or at such other place as may be approved by the board.
Proxy: The term ‘proxy’ is used to refer to the person who is nominated by a shareholder to represent him at a general meeting of the company. It also refers to the instrument through which such a nominee is named and authorised to attend the meeting.
7. (a) Explain in detail the various positions of a director in a company. 14
Ans: Position of Directors
It is very difficult to define precisely the position of directors in a company. The Companies Act, 2013, is also silent on this issue. Directors have been described sometimes as trustees, sometimes as agents or sometimes as managing partners. They have some attributes of all of them, but they are neither trustees nor managing partner in full sense of the term. The legal position can be discussed as under:
1. Directors as Agent: Directors are, in the eyes of law, agents of the company for which they act. The company itself cannot act, it can act only through directors and by the reason of which a relation of principal and agent is established between the company and the directors. Wherever as agent is liable those directors would be liable; where the liability would attach to the principal and principal only, the liability is the liability of the company.
Where the directors make contracts on behalf of the company, they incur no personal liability provided they act within the scope of their authority. In such a case, the company alone would be liable. Directors incur a personal liability in the following circumstances:
a) Where the contract in their own names.
b) Where they use the company’s name incorrectly.
c) Where director’s exceeds their powers.
But the position of directors differ from that of the agents because an agent can enter into a contract in his own name but a director cannot. Again an agent may not disclose the name of his principal but a director must disclose the name of his principal. Hence, the directors are not agents in the true sense.
2) Directors as trustees: The directors have also been described as trustees of the company. They are trustees of the company’s money or property which comes into their hands or which is actually under their control and of the powers entrusted to them. But in real sense, the position of directors is differ from that of the trustees because a trustee can’t be an employee of the trust but a director can be an employee of the company. Again, an artificial person can become a trustee but an artificial person cannot become a director. As, only individual can be a director. Hence, directors may better be considered as quasi trustee.
3) Directors as officers: Under sec. 2(59) of the Companies Act, they are liable to certain penalties if the provisions of the Companies Act are not complied with. Moreover whether or not a director is in the employment of the company, he shall be treated as an officer of the company.
4) Directors as employees: Although directors are agents of the company, they are not employees or servants of the company. Hence they cannot claim their remuneration as a preferential creditor in the event of winding up of a company under sec. 327 of the Companies Act, 2013. But where any director, besides being a director, is also in the service or employment of the company, such as secretary, manager, accountant or otherwise, he will be treated as an employee. As such he will be entitled to the remuneration and other benefits admissible to his as an employee in addition to his rights as a director to sitting fee, etc.
5) Directors as managing partners: The directors are also sometimes described as managing partners because like a partner of a firm, they manage the affairs of the company and they are also usually important shareholders of the company. They do all proprietorial functions like allotting shares, making calls, forfeiting shares etc.
However, all the partners of a firm act on the principal of mutual agency. But it is not so in the case of directors. A director has no authority to bind the other directors and shareholders. Moreover, directors are subject to retirement by rotation whereas partners of a firm are not. Hence, the directors are not managing partners in the full sense.
Thus, directors are described as trustees, agents or managing partners. The board of directors are the brain and the only brain of the company which is the body and the company can act only through them.
Or
(b) Who is Managing Director? How is he appointed? What are the disqualifications of a Managing Director? 3+6+5-14
Ans: Managing Director: According to Sec.2 (54) of the Indian Companies Act “managing director” means a director who, by virtue of the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director, by whatever name called.
Appointment of Directors
Section 149 of the Companies Act, 2013, makes it obligatory on every public company to have at least three directors and on every other company to have at least two directors. The directors may be appointed in the following ways:
1. Appointment of First Directors (Sec. 152): First directors mean the director of the company who assumes office from the date of incorporation of the company. The first directors of a company may be named in its articles of association and if it is not mentioned, then the subscribers of the memorandum of association who are individual, shall be deemed to be the first directors of the company, until the directors are not appointed in accordance with Section 152.
In case of public company, if the article provides any share qualification, only such subscribers as possess the necessary share qualification shall be deemed to be directors. The articles at the time of registration may contain the names of the first directors until directors are appointed in the first general meeting.
2. Appointment of Directors by Members in the General Meeting (Sec. 152(2): Except for the first director, the subsequent directors are appointed by the company in the general meeting. Sec. 152(2) provides that not less than 2/3 of the total number of directors of a public company, or of a private company which is subsidiary of a public company must be appointed by the company in general meeting. These directors must be subject to retirement by rotation. The remaining directors of such a company and a purely private company are appointed by the company in general meeting
3. Appointment by Board of Directors: The directors are appointed in the general meeting by the members. But, the Board of Directors may also appoint the directors, in the following way:
a. Additional Directors: Section 161, of the Act, lays down that the Board may appoint additional directors if the article of association of a company empower the Board of Directors to do so. Such additional directors shall hold office only up to the date of the next annual general meeting. If the annual general meeting is not held, then such additional director vacates his office on the last day on which the annual general meeting should have been held in terms of Section 166. The additional directors are exempted from the requirement of filing consent to act as directors.
b. Casual Vacancies: Section 161 empowers the Board of Directors to appoint the directors in the casual vacancy which may occur due to any reasons like, death, resignation, insanity, insolvency etc of the directors. Such casual vacancy may be filled according to the regulations and procedure prescribed by the articles of association. A person appointed to fill a casual vacancy will hold office only till the date up to which the directors in whose place, he is appointed would have held office.
c. Alternate Directors: The Board Meeting may be held at a time when a director is, absent for a period of more than three months from the state and in such a situation, an ‘alternate director’ is appointed. The Board of Directors can appoint the additional director in the absence of a director if so authorized by articles or by a resolution passed by the company in general meeting. The alternate director shall work until the original director return or up to the period permitted to the original director. The provision of the Act not applicable to the alternate director is as:
A. The appointment of an alternate director is not considered as an increase in the strength of the Board of Directors.
B. Alternate Directorship held by a person cannot be counted for the maximum number of directorship, which a person can hold.
C. An alternate director is not required to hold any qualification shares.
4. Appointment of Directors by Central Government: At least 100 members of the company or the members of the company who hold at least one-tenth of the total voting power, approach the Central Government for appointing a director to safeguard the interest of the company or its members or the public or to curb the oppressive and mismanagement of company’s affairs.
The term of appointment of the directors by the Central Government should not exceed 3 years and he may be removed by the Central Government for appointing another person to hold the office.
5. Appointment of Directors by Third-Parties if the Article provides (Sec. 152): A company may have ‘nominee directors’ which is permissible in a company if the articles of association gives power to such third parties to appoint their nominee on company’s board. Here the third party may be debenture holders, financial corporation, banking companies who have advanced loan to the company to safeguard their interests that the money is only used for the purpose for which it was borrowed.
6. Appointment of Directors By small shareholders if the article provides: The Small Shareholders, in case of a public company having:
i) A paid-up capital of five cores rupees or more, and
ii) one thousand or more small shareholders.
may have a director elected by such small shareholders in the manner as may be prescribed.
The directors are appointed by ordinary resolution i.e. through the majority of the shareholders. The minority of the shareholders does not get the opportunity to send representative in the Board of Directors. But, through proportional representative voting, the shareholders can get that opportunity.
The directors are appointed by ordinary resolution i.e. through the majority of the shareholders. The minority of the shareholders does not get the opportunity to send representative in the Board of Directors. But, through proportional representative voting, the shareholders can get that opportunity.
7. Appointment of directors by professional representation (Sec. 163): The Directors of a company are generally appointed by simple majority. As a result majority shareholders controlling 51% or more votes may elect all directors and a substantial minority of 49% may not find any representation on the board. This section give power to the minority shareholders to elect directors through single transferable vote and cumulative voting.
Disqualifications of a director:
Section 164 of Companies Act, 2013, has mentioned the disqualification as mentioned below:
1) A person shall not be capable of being appointed director of a company, if the director is
(a) Of unsound mind by a court of competent jurisdiction and the finding is in force;
(b) An undischarged insolvent;
(c) Has applied to be adjudicated as an insolvent and his application is pending;
(d) Has been convicted by a court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months and a period of five years has not elapsed from the date of expiry of the sentence;
(e) Has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or
(f) An order disqualifying him for appointment as director has been passed by a court in pursuance of section 203 and is in force, unless the leave of the court has been obtained for his appointment in pursuance of that section;
2) Such person is already a director of a public company which:
(a) Has not filed the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April, 1999; or
(b) Has failed to repay its deposits or interest thereon on due date or redeem its debentures on due date or pay dividend and such failure continues for one year or more:
Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such public company, in which he is a director, failed to file annual accounts and annual returns under sub-clause (A) or has failed to repay its deposit or interest or redeem its debentures on due date or paid dividend referred to in clause (B).
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