The Companies Act

LEGAL ASPECT OF BUSINESS

The Companies Act, 1956

Incorporation of Companies Memorandum of Association and Articles of Association Membership of a Company

Prospectus
Management

Incorporation of Companies

Birth of Company : Company form of organization took its birth in its first law regulating companies in 1850. Subsequent to that various legislations regulating companies were enacted and amended. Companies Act of 1913 regulated companies till 1956. As the Act of 1913 Proved inadequate, Companies Act of 1956 came into effect from 1st April, 1956. This Act has also been amended in 1999, 2000 and 2002 by two amendments. The object of the Act is to encourage investment, to ensure proper administration, to prevent malpractices and to arrange for investigations. What is a Company : A company registered under the Act or an existing company is a Company. It is a form of business organisation, an association of persons for some common purpose.

Incorporation of Companies

The Characteristic of a Company : 1. It requires compulsory registration. 2. It is a distinct person possessing its own identity and separate legal entity. 3. It has a perpetual succession. 4. It is an artificial person but not a citizen. 5. Its shares are easily transferable, but a private limited company has restrictions on transferability of its shares. 6. The liability of the members is limited. 7. It has separate legal existence under its common seal. 8. The Company is the owner of its property and not the shareholders. 9. Company can sue and be sued.

Incorporation of Companies

Company and Partnership distinguished : Company requires to be registered under the Companies Act while registration of a firm is not compulsory. Company has a separate legal existence of its own while a firm has not separate legal status. The liability of the partners in the firm is unlimited while the liability of the shareholders in a company is generally limited. Shareholder of a company is not an agent of the company while every partner is the agent of the other partner.

Types of Companies : Companies are classified into : 1) Chartered 2) Statutory and 3) Registered Companies.

1) Chartered Companies : They are incorporated under a Special Royal Charter issued by the King or Queen. They are governed by the Charter.

Incorporation of Companies

2) Statutory Companies : They are formed under a Special Statutory Act of the Parliament or State Legislature. They are governed by Parliament or by State Legislature. 3) Companies registered under the Act : Companies registered under the Companies Act, 1956 or under any previous Companies Act fall under this category. These Companies have Memorandum and Articles of Association for external and internal regulation. The registered companies are further classified into companies limited by share, companies limited by guarantee and unlimited companies. Companies limited by shares may be public companies or private companies. Companies limited by guarantee if having a share capital may be public companies or private companies. In unlimited companies, the liability of its members is unlimited as in the partnership firm. If it has a share capital, it may be a public co. or a private company.

Incorporation of Companies

Private Limited Companies : has following restrictions : 1. Restrictions on the right to transfer its shares. 2. Limits the number of its members to 50. 3. Prohibits any invitation to the public to subscribe for any shares or debentures of the company and 4. Prohibits any invitation or acceptance of deposits form persons other than its members, directors or their relatives. Minimum membership is 2 and maximum 50. Words Private limited have to be used at the end of the companys name. Public Limited Companies : A Company which is not a private company is a public company. Its minimum membership is 7 and maximum is unlimited.

Incorporation of Companies

Minimum paid up Capital : For Private Co. minimum paid up capital is Rs. 1 lac. For Public Limited Co. minimum paid up capital is Rs. 5 lac.

Pvt. Ltd. Co. is distinguished from the Public Ltd. Co., for e.g. relating to membership of a company, transfer of shares, number of directors, loans to directors, etc.
Special privileges of a Pvt. Co. over Public Co. : Certain provisions of the Companies Act which do not apply to a private company are the privileges which a private company enjoys over a public company. It loses its privileges when it fails to adopt the three restrictions or when it converts itself into a public company.

Incorporation of Companies

Procedure for converting a pvt. Co. into a public co : By altering its Articles of Association by a special resolution, increasing its minimum members 7 and its directors to minimum 3, a private company stands altered as a public company. The intimation of such alteration is to be filed with the Registrar within 30 days. Procedure for converting a public co. into a pvt. co. : By a special resolution authorizing the conversion and changing its name followed by obtaining the Central Government approval, the public company stands converted into a private company. Intimation of alteration to be filed with the Registrar.

Incorporation of Companies

When a private company becomes a public company : 1. When it fails to adopt the three restrictions. 2. When it is a subsidiary of another public company. 3. By provisions of law under Section 43A : (deemed public Ltd. Co. concept under section 43A is now abolished) : a) If at least 25% of its paid-up share capital is held by one or more bodies corporate. b) Where its average annual turnover is not less than Rs. 10 crores. c) When it holds not less than 25% of the paid-up share capital of a public company. d) Where it accepts, or after invitation renews deposits from the public and e) When it converts itself into a public company. ( may refer the latest book for this heading ).

Tpes of Companies

1. 2. 3.

4.

Holding company and subsidiary company : When one company controls another company in any of the following ways, the company which controls is called the holding company and the other company is called the subsidiary company. It controls the composition of the Board of Directors. It controls more than half of the total voting power of other company. It holds more than half in nominal value of equity share capital of the other company. It is a subsidiary of some other company. Holding company and subsidiary company are separate companies and possess distinct legal entities.

Types of Companies

One-man Company : Where a single person holds almost all the shares of the company, it is called a one-man company. Companies registered for promoting commerce, art, science, etc : Under section 25 of the Act, a company which is formed for promoting, commerce, art, science, religion, charity or any other useful object may be granted a licence by the Central Government to be registered without the use of the words Limited or Private Limited in its name. These companies enjoy certain exemptions under the Act. Government Companies : Any company in which not less than 51% of the paid-up share capital is held by the Central Govt. or by any State Govt. is called a Govt. Co. The auditor of a Govt. Co. is appointed by the Central Govt. on the advice of the Comptroller and Auditor General. On the Notification issued by the Central Govt. such notified provision shall not apply to a Govt. Co.

Types of Companies

Foreign Companies : A company incorporated outside India is a foreign company. If not less than 51% of the paid-up share capital of a company incorporated outside India and having an established place of business in India is held by one or more citizens of India or one or more bodies corporate incorporated in India, such a company shall comply with the prescribed provisions of the Act as if it were a company incorporated in India.

Incorporation of Companies

Illegal Association : Any association carrying on banking business with more than 10 members or any other business with more than 20 members without being registered under the Companies Act, shall be an illegal association. An illegal association suffers from several disabilities. Lifting or piercing the corporate veil : As the company is distinct from its members and is a separate legal entity, there is therefore, a veil between a company and its members, keeping them both separate from each other. In certain instances it becomes necessary to lift this veil and find out the realities of the Company. The court may investigate the real affairs, ownership, etc. of the Company. Registration : The company obtains separate legal existence after it obtains a certificate of incorporation. Certificate of incorporation is a documentary proof and conclusive evidence of the registration of the company for all purposes.

Procedure for Registration of Companies

1. 2.

3.

4.

Any two persons in case of a private company and any seven persons in case of a public company may associate themselves to register a private or a public company, as the case may be. The following procedure is to be observed : Application of availability of name is to be made. Memorandum and Articles of Association along with the agreement, if any, with any individual for appointment as its managing director, whole-time director or manager to be filed with the Registrar of Companies. Particulars of situation of the registered office of the company and particulars of the first directors of the company to be filed. Declaration by an advocate of the Supreme Court or High Court or Secretary or Chartered Accountant or by a person named in the articles as director, manager or secretary of the Co. that all requirement have been complied with.

Registration of Companies

In case of a public co., list of persons who have consented to act as directors, written consent of the directors and undertaking of the directors to take up and pay for the qualification shares to be filed. Upon compliance of the above formalities, a certificate of incorporation is issued.
Effects of Registration : Once the certificate of incorporation is issued, the company obtains a separate legal existence and acquires perpetual succession. Property belongs to the company and not to any other shareholder.

Advantages of incorporation : 1. Liability of the members is limited. 2. Shares are easily transferable. 3. Company obtains a separate legal entity. 4. Company can sue its members. 5. Management of the company can be vested in professionals. 6. The company can enjoy and dispose off property in its own name.

Incorporation of Companies

Duties and Liabilities of the promoter : The promoter stands in the fiduciary position towards the company and cannot make any profits unless the company consents. He is liable to compensate for irregular or misleading statements in the prospectus and may be sued for damages for breach of his fiduciary duties. A promoter has no right to receive remuneration. A promoter, may, however, be remunerated either by commission on the purchase price of the shares or may be paid an aggregate lump sum as remuneration. Preliminary or pre-incorporation contracts: Contracts entered into by promoters of a company before its incorporation are called preliminary or pre-incorporation contracts.

Incorporation of Companies

No company before being registered can be a party to a contract. Company is not liable for acts done by promoters before its incorporation. Such a contract is only provisional. The promoters remain personally liable on such contracts. Ratification of preliminary contracts : The company can neither ratify preliminary contracts nor can it by adoption or ratification obtain the benefit of a contract made on its behalf before the company came into existence. It can enter into a new contract after its incorporation.

Memorandum of Association and Articles of Association

Memorandum of Association is a document originally framed by a company . Amongst other documents the company is required to file two documents with the Registrar of Companies. i.e. the MOA and AOA. MOA contains the rules regarding the constitution and activities or objects of the company. It is a fundamental charter of the company. The Co. is governed by the MOA. It is to work within the framework of the MOA as otherwise its acts would be ultra vires and void.

Contents of MOA : 1. Name of the Company. 2. Registered office of the company. 3. Objects of the company divided into : a) Main objects, b) objects incidental to the main objects, c) other objects.

Memorandum of Association and Articles of Association

4. Liability of the members. 5. Share capital of the company. 6. Subscription or Association clause.

Tables B,C,D, and E of schedule I to the Act as applicable may be adopted by the company limited by shares or limited by guarantee or limited by guarantee and having a share capital or an unlimited company.

Articles of Association : Is a document originally framed by a company. The Article contain rules and regulations for the internal management of the company subject to provisions of the Companies Act.

Contents Articles of Association

The Articles shall state the number of members with which the company is to be registered. It shall state the share capital in case the company is to be registered with a share capital. The Pvt. Ltd. Co. shall specifically provide for restrictions under section 3(1) (iii) of the Act. The company may adopt all or any of the regulations contained in Table A in schedule I of the Act. The Articles of Association of the Company not limited by shares shall be in any one of such forms as in Table C, D and E in Schedule I as may be applicable. AOA shall also contain particulars regarding the alteration of capital, transfer, lien, transmission, forfeiture, etc, of shares, right of shareholders, meetings of the companies, appointment, remuneration, qualifications, powers, etc. of the Board of Directors, accounts and audit, dividends, indemnity, winding-up.

Alteration of Memorandum of Association

1. Change of name : The company shall effect the change in its name by passing a special resolution at the general meeting and after obtaining Central Government approval thereto. The change of name shall not affect any rights or obligations of the company. The alteration effected is only in the name and not in the identity of the company. 2. Change in the registered office of the company : The company may change its registered office from one place to another in the same city or from one city to another in the same State. In case of change in the registered office of the company from one city to another city in the same State, Companies (Amendment) Act, 2002 requires confirmation from Central Government instead of Company Law Board. In case of change in the registered office of the company from one State to another State in India, a special resolution is required besides confirmation of the change shall be obtained from the Company Law Board.

Memorandum of Association

3. Alteration of objects clause : Alteration in the objects clause shall be approved by a special resolution of the members in general meeting. 4. Alteration in capital clause : The alteration of share capital may involve : (1) increase of share capital (2) reduction of share capital and (3) conversion of shares into stock. Increase of share capital : The share capital of the company may be increased by further issue of capital or by consolidating and dividing all or any of its share capital into shares of larger amount. Reduction of share capital : The share capital of the company may be reduced by sub-dividing shares into a smaller amount or by cancelling the shares and diminishing the amount of share capital.

Memorandum of Association

Conversion of share into stock : Fully paid-up shares can be only converted into stock. A sum total of fully paid-up shares is stock. Full paid-up shares can be converted into stock and stock can be reconverted into fully paid-up shares.

5) Change in liability clause : The liability of the members cannot be altered so as to increase their liability. The alteration can be effected only with the consent of the members in writing. Doctrine of Ultra vires : Any act done by the company which is neither authorised by its objects nor by the Companies Act is called an ultra vires act. Such an act cannot bind the company.

Memorandum of Association and Articles of Association

The act may be ultra vires the articles, but intra vires Memorandum. It can be ratified by the shareholders. An act ultra vires the articles but within the powers of Memorandum, can be ratified by altering the articles. But an act ultra vires the Memorandum is ultra vires company and, therefore, void and as such cannot ratified. The aggrieved party has a relief against directors of the company for ultra vires acts.

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the be the

Alteration of articles and limitations thereto : The articles subject to the Companies Act and the Memorandum may be altered by a special resolution. The alteration of articles shall not violate the provisions of the Memorandum. Clauses in the articles which are ultra vires the Memorandum, shall be null and void.

Memorandum of Association and Articles of Association

Effects of Memorandum and Articles : The Memorandum and Articles of the company shall bind the company and the members to the same extent as if they had been respectively signed by the company and by each member. Articles constitute a binding contract. They also bind the members between themselves. No member can act in his individual capacity. All outsiders dealing with the company are assumed to have read the AOA of the company and are bound by the same. The MOA is a charter of the company, while the AOA contain rules and regulations regarding the internal management of the company. Constructive notice of Memorandum and AOA : Memorandum and AOA are public documents. They are prerequisite for registration of a company. These documents are open for inspection. Every person shall be presumed to know the contents of these documents..

Doctrine of Indoor Management

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Though every person is bound to read the Articles and Memorandum of the company, it is not bound to enquire into the internal management of the company whether they are being conducted according to the Articles of the company or not. An outsider is entitled to presume that the directors are acting lawfully in all respects. This is called doctrine of indoor management. However the following exceptions must be noted: Where the act is ultra vires the Memorandum it is void abinitio. Where the third person has actual or constructive notice regarding non-compliance and irregularity of internal procedure. Where the act of an agent falls outside his authority. Where an act of an official of the company is apparently outside his authority. Where there is irregularity in the affairs of the company which could be discovered. In these case, the doctrine of indoor management cannot be applied.

Membership of a Company

Who is a Member : 1. Subscribers to the Memorandum of the Company. 2. Every other person who agrees in writing to become a member. 3. Every person holding equity share capital and whose name is entered as beneficial owner in the records of the depository. Member and Shareholder : The term member and shareholder are synonymous. Only in case of a company limited by guarantee and in case of an unlimited company not having a share capital, the two terms differ. In these types of companies they are not shareholders but members. A shareholder is a member, but a member may not be a shareholder.

Membership of a Company

How is a membership acquired : Membership in a company is acquired by subscribing to the Memorandum by agreeing in writing to become a member, by purchase of shares, by succession, by estoppels, by entry as beneficial owner in the records of the depository. How membership ceases : Membership ceases in the following events : By transfer, forfeiture, surrender, sale of shares, insolvency, death rescission of the contract, when company redeems its redeemable preference shares on issue of share warrants and on winding-up of the company.

Membership of a Company

Who can be a member : Any person competent to contract or a body corporate can be a member. A minor cannot be a member, but a guardian can hold shares on behalf of a minor. Company can be a shareholder. Trust cannot be a shareholder. Partnership firm cannot hold shares. A non-resident can be a shareholder only with permission of the Reserve Bank. A registered society can hold shares in a company. Rights, Duties and Liabilities : The members of the company enjoy various rights and also have various liabilities, duties and obligations to be discharged. The member becomes a contributory to the extent of the unpaid amount on the shares when the company is being wound up.

Membership of a Company

Depositories : The depositories came into effect from 20.09.1995. They were established to record ownership details of every person holding equity shares in the share capital of the company in the book entry form. A depository is a company formed and registered under the act and under the Securities and Exchange Board of India Act, 1992. The participant avails services of the depository relating to allotment or transfer of securities. The issuer substitutes the name of the depository as its registered owner. The depository enters the name of the person in its record as the beneficiary owner. Register of members : Every company must keep a register of members. The register shall record the particulars of each member with share holdings except where such shares are held with a depository.

Membership of a Company

Index of members : every company having more than fifty members, shall keep an index in the form of a Card Index. Any alteration in the register of members must be carried out in the index of members within 14 days. Register and index of debenture holders : Every company shall keep a register of the holders of its debenture. The register shall record the particulars of each debenture holder, debentures held except where such debentures are held with a depository. Foreign registers : A company which has a share capital, if authorised by its articles keep in any State or Country outside India a branch register of members resident in that State or Country and such register is called a foreign register.

Membership of a Company

The Co. may close the register of members by giving not less than 7 days notice by advertisement for period not exceeding 45 days in each year, but not exceeding 30 days at any one time. The register of members and the index of members shall be kept at the registered office of the Co.

Annual returns : Every Co. has to file every year with the Registrar annual returns containing certain particulars, Failure to file annual return attracts penalty.

Service of documents : A document may be served on a company or an officer thereof by sending it to the company or officer at the registered office of the company by post under certificate of posting or by a registered post or by leaving it at its registered office.

Prospectus

Prospectus : Any invitation to the public to subscribe for shares or debentures of the company is a prospectus. A public co. inviting public to subscribe towards its share capital shall do so through a prospectus. This is done in order that the prospective investor shall know the financial background of the company. Provisions of prospectus do not apply to a private company since it is governed by three restrictions under section 3(1) of the Act. Any document containing offer of shares or debentures for sale shall be deemed to be prospectus.

Contents of the prospectus : Prospectus must state the matters specified in Part I of Schedule II and reports specified in Part II of Schedule II subject to the provisions contained in Part III of Schedule II. The prospectus shall be dated and that date shall be taken as the date of the publication. Copy of the prospectus shall be registered with the Registrar of Companies.

Prospectus

The prospectus shall be attached with a consent to the issue of the prospectus from any person as an expert. It shall also have the required documents when it is delivered for registration. It shall be issued with 90 days of the delivery of the copy for registration. Mis-statements in the prospectus : The prospectus shall make full and honest declaration of material facts without concealing or omitting any relevant facts. This is known as the Golden Rule for framing the prospectus. Misstatements may be either untrue statements or statements which produce wrong impression or statements which are misleading or those which conceal material facts or omit facts. A prospectus which contains misleading statements is called Misleading Prospectus

Prospectus

Every person who is a director of the company, or who has authorised himself to be named in the prospectus or who is a promoter of the company, or every other person who has authorised the issue of the prospectus shall be liable for mis-statements in the prospectus. The liability may be civil or criminal.

Statement in lieu of prospectus : A co. having a share capital and not issuing a prospectus or a co. which has issued a prospectus but has not proceeded to allot any of its shares shall not allot its shares unless at least three days before the allotment of shares or debentures it has filed with the Registrar of Companies, a statement in lieu of prospectus. The statement in lieu of prospectus shall contain particulars as set out in Part I, II & III of various schedules.

Prospectus

Minimum Subscription : No allotment of shares shall be made by any public company unless the minimum amount is raised. The minimum amount is called the minimum subscription. The minimum subscription shall take into account : (1) Purchase price of any property purchase, (2) Any preliminary expenses, (3) Any commission payable, (4) Repayment of any money borrowed, (5) Working capital, and (6) Any other expenditure. Shelf Prospectus : A prospectus issued by any financial institution or bank for one or more issues of the securities is Shelf Prospectus. A financial institution or bank whose main object is financing shall file a shelf prospectus with information memorandum. Such prospectus shall be valid for a period of one year from the date of opening of the first issue of securities.

Prospectus

Information Memorandum and Red-Herring Prospectus : By information memorandum a demand for the securities proposed to be issued by a company is elicited, price and terms of issue for such securities is assessed. Information Memorandum is issued by means of a notice, circular, advertisement or document. Red-herring prospectus means a prospectus which does not have complete particulars on the price and quantum of the securities offered. Any variation between information memorandum and redherring prospects shall be highlighted. Initial offer of securities to be dematerialised : Initial public offer of any security for a sum of Rs. 10 crores or more shall be issued by every listed public company in dematerialsed form.

Prospectus

Certificate of Commencement of business : A private company can commence business immediately on its incorporation. A public company has to however comply with certain additional formalities before it commence business. The Registrar issues a certificate of commencement of business after the applicable formalities are complied with. Registration of prospectus of a company incorporated outside India : Where a company incorporated outside India issues for subscription shares or debentures of a company, a certified copy of a prospectus approved by a Resolution shall be delivered for registration to the Registrar with prescribed documents.

Prospectus

Inspection of documents kept by Registrar : Any person may inspect any document kept by the Registrar. Any person may take a record of any fact registered on payment of a fee for each inspection. Any person may require a certificate of incorporation certified by the Registrar on payment of a fee. A certified copy issued under the hands of Registrar shall be admissible in evidence in all legal procedures.

Management

Constitution of Board of Directors : The company carries on its business through individuals called directors. Collectively they are called Board of Directors. Every public company shall have at least three directors. Every other company shall have at least two directors. A public co. having a paid up capital of five corers rupees or more, one thousand or more small shareholders shall have at least one director elected by such small shareholders. The maximum number of directors shall be twelve. Any increase beyond twelve requires the Central Government approval. Subscribers to the memorandum of the company shall be deemed to be the first directors of the company. Every director shall obtain Director Identification Number (DIN) and intimate the same to the company.

Management

Appointment of directors in general meeting : The directors shall be appointed by election by the members in the general meeting. A person who is a retiring director shall be eligible for reappointment to the office of a director at any general meeting. Right of person to stand for directorship : A person, not being a retiring director shall be eligible for appointment to the office of a director at any general meeting. Not less than 14 days notice by a member intending to propose him shall be given to the company along with a deposit of Rs. 500. The company shall inform its members of the candidature of a person by individual seven days notice before the date of the meeting.

Management

Appointment of directors in board meeting : The Board of Directors may appoint a director in case of a casual vacancy. They may also appoint additional directors who shall hold office up to the date of the next annual general meeting of the company. The B.O.D. s may appoint alternate director to act for the original director during his absence for a period of not less than three months form the State in which the meetings of the Board are ordinarily held. Such a director shall hold office as long as the original director would have held the office, and shall vacate office if the original director returns. Appointment by Central Government : The Central Government may appoint such number of persons as it may by order in writing specify for a period not exceeding three years on any one occasion. The directors so appointed shall not be required to hold any qualification shares.

Management

Appointment by proportional representation : The articles may provide for appointment of not less than 2/3rd of the total number of directors of a public company according to the principle of proportional representation once in every 3 years whether by single transferable vote or by a system of cumulative voting. Consent of directorship : Every person proposed as a candidate for directorship shall sign and file with the company his consent in writing to act as a director. However, in certain cases such a consent is not required. Share qualification of a director : Share qualification means the shares to be taken by a director to qualify as a director of the company. The director shall obtain his qualification shares within two months after his appointment as a director. He shall vacate the office if he fails to acquire the qualification shares within the prescribed time.

Management

Restriction on appointment of directors : Before being appointed as director the person shall file his consent and obtain qualification share.

Number of directorships : The maximum number of directorships which a person can hold is 15.

Removal of directors : The company may, by an ordinary resolution, remove a director before expiry of his period of office : 1. By shareholders : A company may by ordinary resolution remove a director by a special notice of any such resolution and by sending the copy thereof to the director concerned. If the director concerned makes representations in writing to the company, such representations shall be sent to every member of the company.

Management

If the representations are not sent then they may be read out at the meeting. Such a vacancy created may be filled by appointment of another director in his place.

2.

By Central Government : The Central Govt. may state a case against any person referring the same to the Co. Law Board. The Co. Law Board may inquired into the case and record a decision thereon. The Co. Law Board may make such directions as necessary. The Central Govt. shall remove the director against whom there is a decision of the Co. Law Board. Another person may be appointed to that office by the company with the previous approval of the Central Govt.

Management

3. By Company Law Board : Any member of the co. can make an application to the Co. Law Board on the grounds of oppression or mismanagement. The CO. Law Board may accordingly terminate, set aside or modify any agreement between the company and the director. By Companies (amendment) Act 2002, power of removal is now conferred upon the Central Govt. instead of the Co. Law Board. Vacation of office of directors : The office of the directors shall become vacant on any of the grounds mentioned in section 283 of the Act. Retirement of directors by rotation : Only 1/3rd of the directors of the public co. can be given permanent appoint.

Management

Not less than 2/3rds of the total number of directors shall retire by rotation. At an annual general meeting, 1/3rd of such 2/3rd directors shall be liable to retire by rotation and if the number is not three or multiple of three, then the number nearest one-third shall retire from office. The directors who have been longest in the office since last appointment shall retire by rotation at every annual general meeting. The retiring director may be reappointed or the company may fill up the vacancy by a new appointment.

Disqualifications of directors : A person shall not be capable of being appointed as a director if he possesses any of the disqualification enumerated in section 274 of the Act.

Management

Managing and whole-time director : A managing director is a person who is whole-time director and is entrusted with special powers of management. He drives his powers from, 1. Articles of the company. 2. Agreements with the company and 3. Resolutions passed in the annual general meetings or the Board of Directors meetings from time to time. The appointment of managing or whole-time director shall be made only with the approval of the Central Government. The re-appointment shall also be approved by the Central Government. He shall be appointed for a term of five years which may be extended by further periods not exceeding five years on each occasion.

Management

Powers of managing director or whole time director : A M.D. shall exercise his powers subject to the control of its B.O.D.s. He is invested with substantial powers of management and administration of the company. Appointment of M.D. or whole time Director : Every public Co. having a paid-up share capital of Rs. 5 crores or more shall have a M.D. or whole time director or a Manager. Such appointment shall have the approval of the Central Govt. Any appointment made in contravention of the requirements shall be referred to the Co. law Board. No appointment shall be made for a term exceeding five years at a time. By Companies (Amendment) Act, 2002, powers are vested in the tribunal instead of Company Law Board.

Management

Disqualification of M.D. : An undischarged insolvent or a person who has suspended payments to his creditors or a person who has been convicted by a Court of an offence involving moral turpitude shall be disqualified from being appointed as a Managing Director. A person can be the M.D. to only one public company. He may be appointed as a MD. To one or more company, if it is so approved by all the directors. He may be appointed as a M.D. of more than two companies, if the Central Government permits so.

Manager : The affairs of the company are administered by the B.O.D.s and managed either by M.D. or manager or both. Only an individual can be appointed as a manager for a term not exceeding five years at a time. Manager receives remuneration by a monthly payment or by way of a specific percentage of the net profits of the Company.

Management

Remuneration of directors : The overall maximum remuneration payable to the directors and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year. In case a company has no profits or profits are inadequate no director shall be paid any remuneration except with the previous approval of the Central Govt. The director may be paid remuneration either by way of monthly payment or by way of specified percentage of the net profits of the company. Such remuneration shall not exceed 5% of the net profits for one director and if there is more than one such director, 10% for all of them together. The director who is not a whole time director or a M.D. may be paid remuneration not exceeding 1% of the net profits of the company where the company has a managing or a whole time director and in other cases, the directors may be paid remuneration not exceeding 3% of the net profits. The directors may be paid sitting fees of attending board meetings as may be prescribed.

Management

Loans to Director and his relative : Without the approval of the Central Govt., no company shall make any loan to, or give any guarantee or provide any security in connection with a loan made by or to the persons listed in section 295 of the Act. The restrictions shall not apply to a private company, to a holding company in relation to its subsidiary company and to a Govt. Co. Contracts in which Directors are interested : Any contract, for sale or purchase of any goods and for underwriting subscription of any shares or debentures in which any Director is interested by virtue of relationship in the company or a firm, shall be disclosed by such Director. Consent of the B.O.D.s on each contract shall be accorded by a resolution. Where a company has a share capital of Rs. 1 crore or more, prior Central Govt. approval shall be required. This restriction shall not apply to purchase or sale of goods for cash at prevalent market prices, or in regular trade or business.

Management

Disclosure of interests by Directors : every director shall disclose the nature of his concern or interest in a contract or arrangement entered into or to be entered into on behalf of the company, at the meeting of the Board. Disclosure is not required where any of the Directors of one company or two or more of them together hold 2% or less than 2% of the paid up share capital in the other company. This provision applies to all private and public companies. Audit Committee : Every public company having a paid up capital of not less than five crores of rupees shall constitute a committee of the Board known as Audit Committee . Audit Committee shall act in accordance with the references specified by the Board. The recommendations of the Audit Committee shall be binding on the Board. This provisions is inserted by Companies (Amendment) Act, 2000.

Management

Powers, rights, restriction, duties, liabilities and disabilities of directors : The B.O.D.s derive their powers from the Companies Act, Articles, Board resolutions, resolutions in general meetings and agreements, or contracts with the company. The Board shall exercise the power of making calls on the shareholders, power of issuing debentures, power to borrow moneys, power to invest the funds of the company and power to make loans, by means of resolutions passed at the meetings of the Board. However, certain powers of the B.O.D.s cannot be exercised except with the consent of the company in a general meeting. The directors also enjoy certain rights and have certain duties to be performed towards the company. They may be held liable to pay compensation for damages suffered by the company in case of breach of their duties. They suffer also from certain disabilities. The memorandum of the company may provide for unlimited liability of any director in a Ltd. Co.

Management

Position of directors : The directors are referred to in various capacities. Sometimes as agents, as trustees, as managing persons and as employees. He is a person who controls the Cos affairs and stands in a fiduciary position towards the Co. It is, however, not easy to explain the position which the director occupies, but he is a professional man who manages the affairs of the company to the best possible interests of the shareholders. They are commercial men and manage the Co. for the benefit of themselves and of other shareholders in it. Secretary : Means a Co. Secretary and includes any individual possessing the prescribed qualifications and appointed to perform the duties under the Act and any other ministerial or administrative duties. Every company having Pd-up sh. Cap. Of Rs. 50 lacs and above shall have a whole time secretary. Co. having pd-up sh. Cap. of Rs. 10 lacs or more shall file with the Registrar, a certificate from a secretary as to whether the Co. has complied with all the provisions of the Act.

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