Corporate Governance

Corporate governance is a bunch of rules, practices, policies and

processes through which a company is managed and directed. In
a basic sense, corporate governance is a multi faceted topic and
cannot be limited to a concise definition. However the ultimate
goal of the corporate governance in a company is for, to bring
economic efficiency in the organization in order to achieve two
major goals;
1. Profit maximization
2. Share holder welfare
Basically, the corporate governance balances the interests of the
share holders, customers, suppliers, financiers and senior
management executives etc. It is, in essence, a toolkit that
enables management and the board to deal more effectively with
the challenges of running a company.

PRINCIPLES OF CORPORATE GOVERNANCE

 There should be fair and equal treatment for all
shareholders. Making sure shareholders are aware of their
rights and how to exercise them is a part of this.
 Non-shareholder stakeholders are subject to legal,
contractual, and social obligations that must be upheld.
This includes constantly informing staff, shareholders,
vendors, and community members of relevant information.
  The board of directors must remain committed to upholding
corporate governance's principles of accountability, justice,
diversity, and openness. Board members must also have the
necessary expertise to evaluate management practices

 Companies should establish a code of conduct for their

executives and board members, and only appoint new
people who adhere to that standard.
 Every corporate governance policy and practice should be
open to the public or disclosed to the appropriate
stakeholders.
The emergence of corporate governance in India happened
during the mid 1996 after the economic liberalization and
deregulation of industries and business introduced. In ancient
days the king and his kin used the same method of corporate
governance. Still the principle is same only the characters are
replaced with shareholders. The development of corporate
governance can be traced back to the period of Arthasasthra (an
ancient Indian treatise on politics, policy making, decision
making, and law etc, authored by Chanakya)
 Following independence, businessmen and industrialists
expressed interest in producing a wide range of essential goods
for which the government provided guidance and set fair prices.
At this time, the government established the Bureau of Industrial
Costs and Prices and Tariff Commissions. The corporations Act
and the industries (Development and Regulation) Act entered
the system in 1950. In addition to the already existing routine
activities, the 1960s saw the establishment of large industries.
Cost, volume, and profit analysis was a crucial component of
cost accounting activities from mid-1970 to mid-1980.

Corporate Governance Reformation

India's corporate governance reform's initial phase ran from
1996 to [Link] initial or first stage of India's corporate
governance reform aimed to increase the transparency and
independence of Boards and Audit committees, as well as to
create more powerful and focused supervisors of management. It
also aided shareholders, including both institutional and foreign
investors. The Securities and Exchange Board of India (SEBI)
and Ministry of Corporate Affairs were responsible for this
reform's efforts, which were directed in a variety of directions
(MCA)

Confederation of Indian Industry

In 1996, the CII launched the first industry-wide initiative in
India and took a crucial step toward corporate governance. The
primary goal was to advance and create a code of conduct for
businesses, whether they were in the public or private sectors.
The CII's initiative addressed the public's worries about investor
security, particularly those of small investors, and it promoted
transparency in business and industry. This was necessary
because corporate bodies needed to move toward international
standards for information disclosure. In business and industry,
confidence will grow in this way. In April 1998, the code's final
draft was introduced.

Report of the Corporate Governance Committee

The SEBI appointed renowned industrialist Mr. Kumar
Mangalam Birla to address the issue of insider trading and
protect the rights of our investors. The companies were asked to
submit a separate corporate governance report along with their
annual report, detailing the actions they had taken to abide by
the committee's recommendations. The argument was that
shareholders should be able to see in which company they have
stakes and support measures taken to ensure effective corporate
governance.
Corporate Audit and Governance Committee Report from
December 2002
To make sure that management and companies present a true
and fair statement of the financial affairs of the company, the
committee accepted the responsibility to analyse and
recommend some changes, such as statutory auditor, company
relationship, appointment of auditor, and audit fee measures.

SEBI corporate governance report ( N.R Narayan Murthy) Feb-

2003
SEBI established a Committee to examine the Independent
directors' role, risk management, director compensation, code of
conduct, and financial disclosure in order to enhance governance
standards.
2ND Stage of corporate governance Post-Satyam fraud
After Jan. 2009, damaging revelations about massive fraud and
board failures in Satyam's financials shocked the country's
corporate community.
The Satyam scam may also be seen as having served as a
catalyst for the Indian government's efforts to enhance corporate
accountability, disclosures, and enforcement mechanisms.
Industry reacted quickly after learning of the scandal, and the
CII started looking into any potential corporate governance
problems related to the Satyam scandal. Industry organizations
established corporate governance and ethics committees to
investigate the consequences and takeaways from the scandal.
The Sathyam scam had been an example of poor corporate
governance practices. It is accounting scandal. Various financial
and accounting statements were manipulated and forged by
intentional omissions, inadequate disclosures and by intentional
misapplication of accounting policies. Assets were overstated
than actual, fictitious deposits were shown in the bank and also
interests on it. It is not only an example of bad governance but
also of dishonest governance to siphon of the public funds from
the company by manipulating data and accounts in connivance
with the external auditors.

DIRECTORS
Directors refer to the part of the collective body known as the
Board of Directors, who is responsible for controlling, managing
and directing the affairs of a company. Directors are considered
the trustees of company’s property and money, and they also act
as the agents in transactions which are entered into by them on
behalf of the company.
Directors are expected to perform their duties and obligations as
a rationally diligent person with skill, knowledge, and
experience as the person carrying out functions of a director and
of that himself. Hence, a director plays several roles in a
company, as an agent, as an employee, as an officer and as a
trustee of the company.
According to Sec. 2(34), Companies Act, 2013- Director means
a director appointed to the Board of a company
Position
GE Rly v. Turner 1872 LR 8 Ch. 149
“Directors are mere trustees or agents of the company. They are
trustees of company’s property and money and agents in the
transactions which they enter into on behalf of the company”
Director as Agents
In Ferguson v. Wilson 1866, the court clearly recognised that
directors are in the eyes of law, agents of the company. It was
held that, the company has no person; it can act only through
directors and the case is, as regards those directors, merely the
ordinary case of a principal and agent. When the directors
contract in the name, and on behalf of the company, it is the
company which is liable on it and not the directors.

In Elkington & Co. v. Hurter 1892, where the plaintiff supplied

certain goods to a company through its chairman, who promised
to issue him a debenture for the price, but never did so and
company went into liquidation, he was held not liable to the
plaintiff. Similarly, a director was held to be personally not
liable in a suit against a private chit fund company. Attachment
of the property of the director was held to be not permissible8.
Like agents, directors have to disclose their personal interest, if
any, in any transaction of the company. In Ray Cylinders &
Containers v. Hindustan General Industries Ltd 2001, held that,
the directors are the agents of the institution and not of its
individual members, except when that relationship arises due to
the special facts of the case. Also granted permission to file a
suit against a company was not allowed to be treated as
permission against directors as well.

In Sarathi Leasing Finance Ltd v. B Narayana Shetty 2006, the

articles of association empowered the managing director to
represent the company in legal proceedings. It was held that a
further authorization was not necessary to enable him to file a
complaint for dishonor of cheque under Sec. 138 of Negotiable
Instrument Act. Directors are the agents of a company. They are
acting on behalf of the company. So the directors cannot be held
personally liable for any default of the company. It was held
that, for a loan taken by a company, the directors, who had not
given any personal guarantee to the creditor, could not be made
liable merely because they were directors.
Directors as trustees
A trustee is a person who is vested with the legal ownership of
certain property, which he has to administer for the benefits of
others. Director is treated as a trustee of the company and its
money and property and of the powers entrusted to and vested in
them only as trustee and they have to use these powers for the
benefit of the company.
S.197 of the Companies Act, 2013 expressly regards the director
as a trustee in certain circumstances. It lays down that if a
director receives remuneration in excess of that permitted by the
Act, he must refund the excess amount to the company and until
he does so he holds it in trust for the company.
In Ramaswamy Iyer v. Brahmaya & Co. 1966, it has been
observed that the directors of the company are trustees of the
company and with reference to their power of applying funds of
the company and for misuse of the power they could be rendered
liable as trustees and on their death, the cause of action survives
against their legal representatives.
Directors are in a fiduciary position. Almost all the powers of
the directors are powers in trust. The power to make calls, to
forfeit shares, to issue further capital, general powers of
management are all powers in trust which have to be exercised
in good faith for the benefit of the company.
Directors are organs of corporate body
Board of Directors is the brain and the only brain of the
company which is the body, and the company can does act only
through the board of directors. A director is a person who has
control over the direction, conduct, management, or
superintendence of the affairs of the company. Only an
individual can be appointed as a director. An association or a
firm cannot be appointed as director of a company.
Kinds of directors
1. First directors :- As per s.152 cl 1 of the Act, the first
directors of a company are to be appointed by the
subscribers to the memorandum. They are generally listed
in the articles of the company. If they do not appoint any,
all the subscribers who are individuals become
directors(Deemed directors). The very fact of incorporation
makes them the first directors of the company. The first
directors however hold office only upto the date of the first
annual general meeting of the company.
2. Additional directors :- Any Individual can be appointed as
Additional Directors by a company under section 161(1) of
the 2013 Act. A Company may appoint any person as
Additional Director, other than the person who has failed to
get appointed in the general meeting. There might be a
situation where the Board of Directors of the Company
intends to appoint a person on Board however; it is not
possible to convene general meeting for seeking approval
of the members, then in that case we can appoint a person
as Additional Director in the Company till the next annual
general meeting. Also, any act done by the Additional
Director shall not be null and void, if the same is in
accordance with the Memorandum and Articles of
Association of the Company along with the provisions of
the Companies Act, 2013.
3. Alternative directors :- Alternate director is a personnel
who is appointed by the Board of Directors, as a substitute
to a director who may be absent from India, for a period
which isn’t less than three months (S.161 cl 2). He can be
appointed if the articles authorizes so and by a resolution
passed by the company in general meeting. He must not be
a person holding directorship in the same or in any other
company.
4. Nominee director:- A nominee director is an individual
nominated by an institution, including banks and financial
institutions, on the board of companies where such
institutions have some ‘interest’. The ‘interest’ can either
be in form of financial assistance such as loans or
investment into shares. Such strategic investment may have
a direct bearing on the profitability of a nominator and
therefore appointment of nominee director becomes
essential to facilitate monitoring of operations and business
of the investee company. The main purpose of appointment
of such persons is to safeguard the interest of the
nominator, without conflicting with his/ her fiduciary duty
as a director. Such director plays several roles and
responsibilities, including adequate disclosure of interest,
reporting to the nominator and protection of the interest of
company in its entirety. In case of holding the position in
specialized entities, the person must act in accordance with
the operations of such entities, guided by industry specific
statutory provisions in addition to the general roles and
responsibilities.
 Under Companies Act, 2013, the appointment of a nominee
director is made in accordance with section 161(3), Subject
to the articles of a company, the Board may appoint any
person as a director nominated by any institution in
pursuance of the provisions of any law for the time being in
force or of any agreement or by the Central Government or
the State Government by virtue of its shareholding in a
Government company.”

5. Director appointed in casual vacancy(S.161 cl 4) : If the

office of any director appointed by the company in general
meeting is vacated before his term of office expires in the
nominal course, the resulting casual vacancy may, in
default of and subject to any regulations in the articles of
the company, be filled by the Board of Directors at a
meeting of the Board which shall be subsequently approved
by members in the immediate next general meeting.
6. Independent director :- Every listed public company shall
have at least one-third of a total number of directors as
independent directors.
Any fraction contained in that one-third shall be rounded off as
one. The Central Government may prescribe the minimum
number of independent directors in case of any classes of public
companies.
As per Rule 4 of the Companies (Appointment and Qualification
of Directors) Rules, 2014, the following classes of companies
shall have at least 2 directors as independent directors.
  Public Companies with paid-up share capital of Rs. 10
crores or more.
 Public Companies with turnover of Rs. 100 crore or more.
 Public Companies with aggregate outstanding loans,
debentures, and deposits, exceeding Rs. 50 crore
An independent director (also sometimes known as an outside
director) is a director (member) of a board of directors who does
not have a material or pecuniary relationship with company or
related persons
Code for Independent directors (Sch.4 of the Companies Act,
2013)
7. Deemed director(Shadow director): For certain purposes an
individual is treated as director as the Board of directors of
the company is accustomed to act in accordance with such
person’s directions.
Appointment of directors
Appointment of independent directors
1) Appointment process of independent directors shall be
independent of the company management; while selecting
independent directors the Board shall ensure that there is an
appropriate balance of skills, experience and knowledge in the
Board so as to enable the Board to discharge its functions and
duties effectively.
2) The appointment of independent director(s) of the company
shall be approved at the meeting of the shareholders.
3) The explanatory statement attached to the notice of the
meeting for approving the appointment of independent director
shall include a statement that in the opinion of the Board, the
independent director proposed to be appointed fulfils the
specified conditions. The explanatory statement shall mention
that the proposed director is independent of the management.
4) The appointment of independent directors shall be formalised
through a letter of appointment,
5) The terms and conditions of appointment of independent
directors shall be open for inspection at the registered office of
the company by any member during normal business hours
6) The terms and conditions of appointment of independent
directors shall also be posted on the company’s website.
Reappointment of independent director shall be on the basis of
report of performance evaluation.

Appointment of directors
Sec.152 of the Companies Act 2013 deals with appointment and
qualifications of directors.
Every director shall be appointed by the company in general
meeting. Appointment possible only after the allotment of DIN
(S.153-158). Director Identification Number or DIN (MCA) is
an 8-digit unique identification number, which is allotted by the
central government to each individual who wants to be a director
of any company or who already is a director of any company.
Once allotted the DIN number has lifetime validity. With the
DIN number government also maintain a database of all the
director. An individual can have only one DIN but he can be the
director of 2 or more companies. The person appointed should
give his consent to act as director and such consent should be
registered with the registrar within 30 days of his appointment.
Small shareholder’s director (S.151): A listed company may
have one director elected by such small shareholders in such
manner and with such terms and conditions as may be
prescribed. Small shareholder means a shareholder holding
shares of nominal value of not more than 20000 rupees or such
other sum as may be prescribed.
Appointment of additional director, alternate director and
dnominee director (S.161) :
If the articles of a company empowers it to appoint these types
of directors, then the Board of Directors can appoint such
directors in a general meeting. In case of additional directors he
shall hold office up to the date of next annual general meeting.
In case of alternative director, Board of directors may appoint
him if the articles of the company empowers him to do so or by
a resolution passed in the general meeting. He can act as the
alternative director until the director comes back. And the
alternative director cannot hold office longer than the term of
original director.
If the articles of a company empowers it to appoint the nominee
director, then the board of directors may appoint any person to
this post nominated by any institution.
Principle of proportional representation
Generally directors are appointed by simple majority or by
special majority. So, in order to enable the minority shareholders
to have a proportionate representation on the Board s.163 of the
2013 Act gives an option to companies to appoint directors
through a system of proportional representation. The articles of a
company may provide for the appointment of not less than 2/3 rd
of the total directors according to the principle of proportional
representation by single transferable vote or some system of
cumulative vote or otherwise.
Single transferable vote: In this a quota of votes is fixed. A
person gets elected if he gets required number of votes fixed as
quota.
Cumulative voting: In this system, the total number of votes cast
would be equal to the total number of shares multiplied by the
same number of directors to be elected. Again each share carries
that many votes as are the vacancies.
Disqualifications for appointment- S.164
A person cannot be appointed as director if :
• He is a person of unsound mind and so declared by
competent court
• If he is an undischarged insolvent
• If he has applied to be adjudicated as insolvent and his
application is pending
• If he has been convicted of any offence
• Order disqualifying him for appointment as director
• Has not paid any calls in respect of any shares
• He has no DIN
• No person shall be re-appointed as director of the company,
which has not filed financial statements or annual returns
for 3 years
• Has failed to repay deposits
• Disqualifications conferred by articles
If there is any defect in the appointment of the director, the acts
done by him cannot be taken as invalid. Those acts will be valid.
But it will not give validity to any act done by him after his
defective appointment has been noticed by the company.
Removal of director
1. Removal by shareholders
Shareholders can remove the directors appointed by them. It
is not even necessary that there should be proof of
mismanagement, breach of trust, misfeasance or misconduct
on the part of directors. Where the shareholders feel the
policies pursued by the directors or any of them are not to
their liking they have the option to remove directors by
passing an ordinary resolution.
Removal by ordinary resolution passed in general meeting
only after giving reasonable opportunity of being heard.
Director appointed by Tribunal cannot be removed by the
members in this way. Special notice of such resolution must
be provided. Director can make representation in writing to
the company. The vacancy caused may filled at the same
meeting and in case if it not filled, it may be filled as a casual
vacancy
Queen Kuries Loans Pvt Ltd v. Sheena Jose 1993
In this case it was held that the notice must disclose the
grounds on which the director is proposed to be removed. The
directors are entitled to make a representation. The disclosure
of ground is a matter of substance. The company is bound to
send a copy of representation to every member of the
company to whom the notice of the meeting has been sent. It
 is only after these steps are taken that the resolution can be
passed.
Compensation for loss of office: Removal of a director would
not deprive the person of any compensation or damage for the
termination of appointment as a director or for an
appointment terminating with that as director.
2. Removal by Company law board (Now Tribunal) (A quasi
judicial agency that adjudicates the issues relating to Indian
Companies)
Sec. 242 cl 2 cl h gives power to remove director in case of
oppression and mismanagement or can terminate the
contract between company and directors. On hearing an
application for prevention of oppression or
mismanagement, the National Company Law Tribunal feels
that a relief ought to be granted; it may set aside, terminate
or modify any agreement of the company with a director.
Such a terminated director cannot get compensation for the
loss of office.
3. Removal by Board of Directors
A Company has the authority to remove a Director by passing
an Ordinary Resolution, given the Director was not appointed by
the Central Government or the Tribunal. A Board Meeting will
be called by giving seven days’ notice to all the directors. A
special notice will go to the directors informing them about the
removal of the director. On the day of the Board Meeting, a
resolution for the holding of an extraordinary general meeting
will be passed along with the resolution for the removal of the
director subject to the approval of the shareholders.
Resignation of director: The Director intending to resign shall
send notice in writing to the Company. The resignation of a
director shall take effect from the date on which the Notice Is
Received by the company or the Date, If any, Specified by The
Director in the notice, whichever is later.
The director who has resigned shall be liable even after his
resignation for the offences which occurred during his tenure.
And the company should inform it to registrar
Retirement of director:
Unless the articles provide for the retirement of all directors at
every AGM, not less than 2/3rd of the total number of directors
(Upper Rounding off) of a public company shall— (i) be
persons whose period of office is liable to determination by
retirement of directors by rotation; and (ii) be appointed by the
company in general meeting.
Powers of Board of Directors S.179
Firstly, it entitles all the Directors to such powers and to do all
such things as the company is authorized to do. However, while
exercising such power and doing such an act or a thing, the
Board should follow all the provisions of this Act, and should
also act as it is mentioned in the memorandum and articles of
association. They should also comply with the regulations made
by the company in the General Meeting. Further, the Board shall
not exercise or do any act, which is directed or required to be
done by the company in the General Meeting. 
Secondly, regulations which are made by the company in a
General Meeting shall not invalidate any prior act of the Board,
which would otherwise have been valid if the regulation was not
passed or made.( unless a new regulation has passed)
Thirdly, the Board of Directors of the company shall exercise
powers on behalf of the company as being decided by the
resolution passed by the Board. These would include:
 To make calls on the shareholders informing them about
the money which is being unpaid on their shares. 
 As mentioned under Section 68, to authorize an
individual to buy-back the shares.
 In the matter of issuing securities, including debentures,
whether in or outside India.
 To borrow money.
 To invest the funds of the company.
 In the matter of granting loans or issuing guarantees or
providing security in respect of loans.
 To approve the Board’s report and the financial
statement. 
 To diversify the business of the company.
 To approve amalgamation, merger, and acquisition.
 In the matter of taking over a company or acquiring a
controlling or substantial stake in another company.
 Any other matter which is to be prescribed.
However, the Board has the power to delegate in cases such as
borrowing monies, in investing the funds of the company or to
grant loans or give a guarantee or provide security in respect of
the loans, and on such conditions as may be specified, to any
committee of Directors, the Managing Directors, the Manager or
any other principal officer of the company. Similarly, in such
other cases of a branch office of the company, such functions are
delegated to the principal officer of the branch office. 
Bod also has powers to Power to contribute to bona fide and
charitable funds (S.181) and it has the power to make
contributions to National Defense Fund, etc
Power to constitute audit committee.
Powers only with special resolution: power to fill casual
vacancies, sanctioning of a contract in which a director is
interested, power to make political contributions, etc.
(Restrictions on powers of Board- s.180) Restrictions on powers
because it can be exercised only by passing special resolution.
To sell, lease or otherwise dispose the undertaking of the
company, to invest in trust securities the amount of
compensation received by it as a result of any merger or
amalgamation, to borrow money, etc. Other powers like
appointment of directors, power to supervise, etc are also vested
with them.
Duties
There are statutory duties and general duties.
Statutory duties:

 To file return of allotments (it is a document filed to the

registrar which contains the name and addresses of the
shareholders)
 To disclose interest – Director has the duty to disclose the
nature of his interest if any at the Board meeting. He may
 give a general notice to that effect also. If a director fails to
fulfil this duty then he will be liable for fine.
 Duty to attend board meetings
 Duty to convene (summon) meetings
 To prepare and place at Annual General Meeting along
with the balance sheet and profit and loss account a report
on the company’s affairs including the report of the BOD
 To authenticate and approve annual financial statement
General duties
• Acting in good faith and in best interest
• Acting with care, skill and independent judgment
• Policy making
• Duty to act in accordance with the articles
• Duty not to gain undue advantage
• Duty not to assign his office
Liabilities of Directors
1. Liability to the company
 Breach of fiduciary duty- Where a director acts
dishonestly to the interest of the company, he will be
held liable for breach of fiduciary duty. Most of the
powers of directors are powers in trust and should be
exercised in the interest of the company
 Ultra vires acts- Directors can act within the boundary
demarcated by companies act, memorandum and
articles. So anything done beyond their authority will
amount to ultra vires acts and will become invalid.
 Negligence- Directors have the duty to act with
reasonable care. If they failed to act so they shall be
 deemed to have acted negligently in discharge of their
duties and consequently shall be liable for any loss or
damage resulting therefrom.
 Mala fide acts- Directors are trustees of money and
property of the company handled by them as well as
for exercise of the powers vested with them. Breach
of it amounts to breach of trust and may be required to
make good the loss or damage suffered by the
company by reason of such mala fide acts.
2. Liability to third parties
 Liability under the provisions of companies act
Failure to make any requirements of prospectus or
misstatement of facts in prospectus renders a director
personally liable for damages or compensation to third
party.
Irregular allotment (allotment before minimum
subscription is received) or allotment without filing
prospectus, etc may put liability upon directors. They
will be liable to pay damages or compensation.
Failure to repay application money will make the
directors jointly or severally liable. But if it is proved
that the default payment was not due to any
misconduct or negligence on their part then they shall
be exempted from the liability
Directors will be made personally liable to third party
where their liability is made unlimited by
memorandum.
Fraudulent trading- in course of winding up of a
company if it appears that any business of the
 company has been carried with intent to defraud
creditors or any other person on the application to
liquidator may declare that they have personal liability
without any limitation.
 Liability for breach of warranty
Directors are supposed to function within the scope of
their authority. If they transact any business ultra vires
the company or the articles they may be proceeded
against personally for any loss sustained by third
parties.
3. Liability for breach of statutory duties
Penal liabilities, fine, compensation and damages
4. Liability for acts of co-directors
Where a director is made liable for the acts of a co-director,
he is entitled to contribution from the other directors or co-
directors who were a party to the wrongful act.
5. Criminal liability

MEETINGS AND RESOLUTIONS

A meeting may be generally defined as a gathering or assembly,
getting together of a number of persons for transacting any
lawful business. Such gatherings of the members of companies
are known as company meetings.
Requisites of a valid meeting
Every meeting in order to be valid, must be duly convened,
properly constituted and conducted.
1. Meeting must have been convened by the proper authority
The proper authority to call the meetings are:
Board of Directors: Articles of a company generally
empower the BOD to convene general meetings.
Shareholders: The members of a company have in certain
circumstances the right to insist on the calling of an extra
ordinary general meeting.
Tribunal / Central government (Earlier Company Law
Board): If for any reason there occurs a default in holding
the annual general meeting, then the tribunal or where it is
impracticable for the company to call, hold or conduct a
general meeting other than an annual general meeting, then
the tribunal may either on its own motion or on the
application of the director of any company or of any
member entitled to vote at the meeting.
2. Proper and adequate notice
A notice of a company meeting in order to be valid must
comply with:
 General rules in relation to notice and
 Rules laid down in the AOA and the Companies Act
General rules:
 It may take any reasonable form
 It must specify date, time and place of the meeting
 It must state the nature of the business to be transacted,
which means the complete agenda of the meeting
 It must be served in the manner specified in the articles
read with the act
 It must be served to all members at their registered
addresses
 It must be clear, explicit and unconditional
Rules under the Act
 (S.101) 21 days notice must be given to members. A
general meeting may be called after giving a shorter
notice if consent is given in writing or by electronic
mode by not less than ninety-five per cent of the
members entitled to vote at such meeting.
 Every notice of a meeting shall specify the place, date,
day and the hour of the meeting and shall contain a
statement of the business to be transacted at such
meeting.
 The notice of every meeting of the company shall be
given to— (a) every member of the company, legal
representative of any deceased member or the assignee
of an insolvent member (b) the auditor or auditors of the
company; and (c) every director of the company.
 Any accidental omission to give notice to, or the non-
receipt of such notice by, any member or other person
who is entitled to such notice for any meeting shall not
invalidate the proceedings of the meeting.
  S.102 deals with statement to be annexed with notice,
which may state the interest of director or any other key
managerial person in the business which is going to be
transacted
3. Quorum for meeting (S.103)
By quorum we mean the minimum number of the members
who must be present at a meeting as required by the rules.
In the absence of quorum the proceedings of the company
cannot be started.
Articles may decide the quorum for meeting. If there is no
provision in the articles then as per this section in case of a
public company,—
(i) five members personally present if the number of
members as on the date of meeting is not more than one
thousand;
(ii) fifteen members personally present if the number of
members as on the date of meeting is more than one
thousand but up to five thousand;
(iii) thirty members personally present if the number of
members as on the date of the meeting exceeds five
thousand;
In case of a private company two members personally
present, shall be the quorum for a meeting of the company.
If the quorum is not present within half-an-hour from the
time appointed for holding a meeting of the company—
(a) the meeting shall stand adjourned to the same day in the
next week at the same time and place, or to such other date
 and such other time and place as the Board may determine;
or
(b) the meeting, if called by requisitionists under section
100, shall stand cancelled:
Provided that in case of an adjourned meeting or of a
change of day, time or place of meeting under clause (a),
the company shall give not less than three days notice to
the members either individually or by publishing an
advertisement in the newspapers (one in English and one in
vernacular language) which is in circulation at the place
where the registered office of the company is situated.
(3) If at the adjourned meeting also, a quorum is not present
within half-an-hour from the time appointed for holding
meeting, the members present shall be the quorum.
4. 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
usually a member of the body over which he is to preside.
Unless the articles of the company otherwise provide, the
members personally present at the meeting shall elect one of
themselves to be the Chairman thereof on a show of hands.
KINDS OF MEETINGS
Company meetings may be classified as :
1. Shareholder’s meeting
• Statutory meeting
• Annual general meeting
• Extra ordinary general meetings
• Class meetings
2. Board meetings
3. Other meetings
• Meetings of committees of Board
• Meetings of Debenture holders
• Meetings of creditors
• Meetings of contributories
 1. Shareholder’s meeting
a. Statutory meeting- S.173
This is the first meeting of the shareholders conducted
after the commencement of the business of a public company.
Companies Act provides that every public company limited by
shares or limited by guarantee and having a share capital should
hold a meeting of the shareholders within 6 months but not
earlier than one month from the date of commencement of
business of the company.

Usually, the statutory meeting is the first general meeting of the

company. It is conducted only once in the lifetime of the
company. A private company or a public company having no
share capital need not conduct a statutory meeting.
b. Annual General Meeting- S.96
The Annual General Meeting is one of the important
meetings of a company. It is usually held once in a year. AGM
should be conducted by both private and public ltd companies
whether limited by shares or by guarantee; having or not having
a share capital. As the name suggests, the meeting is to be held
annually to transact the ordinary business of the company.
In case of failure to hold meeting in required time under section
96, the Act provides power to the Tribunal (which is a quasi-
judicial body made to adjudicate disputes arising out of
company law) on submission by any member might call or
provide directions for calling the meeting.
Punishment for default – section 99 of the companies Act 2013
provides that whosoever is liable for defaulting would be
penalised with a fine extending up to one lakh depending on the
circumstances.
It has to be scheduled in the course of business hours (9 am to 6
pm) of the company on a working day and cannot be on a
national holiday.
Generally, it has to be the registered office of the company
where the meeting has to take place.
It could also be some other place in the city where the main
office is registered (Unlisted companies).
The gap between two AGMs must not be more than 15 months.
The business to be transacted at an AGM may comprised of
(s.102 cl 2)-
(ii the consideration of financial statements and the reports of
the Board of Directors and auditors;
(ii) the declaration of any dividend;
(iii) the appointment of directors in place of those retiring;
(iv) the appointment of, and the fixing of the remuneration of,
the auditors; and in the case of any other meeting, all business
shall be deemed to be special
In case of AGM any other business other than mentioned here
will be deemed to be special business.
c. Extra ordinary general meeting- S.100
Statutory Meeting and Annual General Meetings are called the
ordinary meetings of a company. All other general meetings
other than these two are called Extraordinary General Meetings.
As the very name suggests, these meetings are convened to deal
with all the extraordinary matters, which fall outside the usual
business of the Annual General Meetings.
EOGMs are generally called for transacting some urgent or
special business, which cannot be postponed till the next Annual
General Meeting. Every business transacted at these meetings is
called Special Business.
It may be convened. (1) By the Board of directors On its own or
on the requisition of the members; or (2) by the requisitionists
themselves on the failure of the Board of directors to call the
meeting.
The following persons are authorized to convene an
extraordinary general meeting.
The Board of Directors.
The Requisitionists.
The National Company Law Tribunal.
Any Director or any two Members.
Extraordinary General Meeting upon request or requisition made
for it, under the following conditions:

(a) The requisition must be signed by members holding at least

1/10th of the paid- up capital of the company, in the case of
companies having a share-capital; and by members holding at
least 1/10th of the total voting power in other cases.
(b) The requisition must set out the matters which will be
considered at the meeting.
(c) The requisition must be deposited at the Registered Office of
the company.
The Board must, within 21 days of the receipt of a valid
requisition, issue a notice for the holding of the meeting on a
date fixed within 45 days of the receipt of the requisition. If the
Board does not hold the meeting as aforesaid, the requisitionists
can call a meeting to be held on a date fixed within 3 months of
the date of requisition.
Resolutions, properly passed at a meeting called by the
requisitionists, are binding on the company.
d. Class meetings
Class meetings are those meetings, which are held by the
shareholders of a particular class of shares.
Class meetings are generally conducted when it is proposed to
alter, vary or affect the rights of a particular class of
shareholders. Thus, for effecting such changes it is necessary
that a separate meeting of the holders of those shares is to be
held and the matter is to be approved at the meeting by a special
resolution.
For example, for cancelling the arrears of dividends on
cumulative preference shares, it is necessary to call for a
meeting of such shareholders and pass a resolution as required
by Companies Act. In case of such a class meeting, the holders
of other class of shares have no right to attend and vote.
2. Board Meetings- S.173
Meetings of directors are called Board Meetings. These are the
most important as well as the most frequently held meetings of
the company. It is only at these meetings that all important
matters relating to the company and its policies are discussed
and decided upon.
Since the administration of the company lies in the hands of the
Board, it should meet frequently for the proper conduct of the
business of the company. The Companies Act therefore gives
wide discretion to the directors to frame rules and regulations
regarding the holding and conduct of Board meetings.
The directors of most companies frame rules concerning how,
where and when they shall meet and how their meetings would
be regulated. These rules are commonly known as Standing
Orders.
First board meeting – The first meeting should be held within 30
days of the incorporation of the company. The board of directors
use their expertise and knowledge and discuss strategies to run
the company.
Time and due date – In a year not less than 4 meetings are to be
held and not more than 4 months should pass between two
meetings. In other words, every board meeting has to be held
within 3 months to complete the required provision.
Presence of directors – The directors are not required to
physically present in every meeting, they can be present through
other video or audio means. But there may be certain matters
which cannot be discussed through video conferencing or audio
visual means and in such cases central government may prohibit
the use of the same. Also a director can only remain absent if
granted permission by the chairman.
Notice- Every director has to be pre notified about the meeting
at his registered address and notice should be given in not less
than 7 days. Moreover the decisions of the meetings are to be
notified to directors who were absent from it. If the person
responsible for notifying defaults from his duty, he is liable to be
penalised. Compliance with the law is ascertained when
directors are notified.
Quorum – A definite number of members or directors have to be
present in the meeting according to section 174. The board
meeting is to comprise of 1/3 of total members or two directors
(whatever is feasible).
3. Other meetings
a. Meetings of committees of Board/ Audit committee
meeting
Section 177 of companies Act provides that companies can
have audit committee comprising of directors of companies
similar to the main company. These auditors have their own
meeting to deliberate upon various issues in meetings of
audit committee.
b. Meetings of debenture holders
Companies are entitled to issues debentures and to
implement the same it calls meeting of debenture holders. It
is between the board of directors and debenture holders to
discuss the rights and responsibilities related to debentures.
Rules and Regulations regarding the holding of the
meetings of the debenture holders are either entered in the
Trust Deed or endorsed on the Debenture Bond so that they
are binding upon the holders of debentures and upon the
company.
c. Meetings of creditors
Under section 230 of the Act, companies can make
arrangements with creditors.
Strictly speaking, these are not meetings of a company.
They are held when the company proposes to make a
 scheme of arrangements with its creditors. Companies like
individuals may sometimes find it necessary to compromise
or make some arrangements with their creditors. In these
circumstances, a meeting of the creditors is necessary.
d. Meetings of contributories
It can be held at the time of winding up.
Procedures of meetings
• Issuance of notice
• Quorum
• Chairman
• Resolutions - These are the decisions taken in every
meeting. When these are put to consideration and voting
there are certain procedures and rules to be followed. These
are provided in various sections
• Voting- There might be matters on which there is no
general consensus and voting has to be done. After detailed
discussion, the chairperson may call the matters (if
undecided) for voting. There have been specified
requirements for voting in different meetings in the
companies Act, 2013. The process of voting is supervised
by the chairman.
• Adjournment and minutes- After careful consideration and
discussion, the meeting is concluded which is called as
adjournment and subsequently dissolution where members
disperse. These deliberations have to be documented in an
official document of the company providing gist of every
meeting which are called minutes of meeting. Every
 important detail of the meeting has to be included as said in
companies’ act 2013.
• Report- companies are required to prepare report of the
meeting as in case of AGM detailing the conduct of the
meeting. The copy of the same has to be filed with the
registrar.

PROXY- SEC.105
Any member, entitled to attend and vote in a meeting, can
appoint another person to attend and vote on his behalf. The
person appointed is called the Proxy. The appointment of a
Proxy must be made by a written instruction signed by the
appointer and deposited with the company, not more than 48
hours before the meeting.
A Proxy is not entitled to speak in the meeting and vote only in a
poll unless the articles provide otherwise. A Proxy need not be a
member of the company. A member of a private company
cannot appoint more than one Proxy to attend on the same
occasion, unless the articles otherwise provide.
A body corporate which is a member of a company can appoint
a representative or proxy, by resolution of the Board. The
President of India or the Governor of a State, if he is a member
of a company, may appoint any person to act as his
representative in a meeting.
The proxy can be revoked by the member at any time, and is
automatically revoked by the death or insolvency of the
member. The member may revoke the proxy by voting himself
before the proxy has voted, but once the proxy has exercised the
vote, the member cannot retract his vote. Where two proxy
forms by the same shareholder are lodged in respect of the same
votes, the last proxy form will be treated as the correct proxy
form.
A proxy is not entitled to vote except on a poll. Therefore, a
proxy cannot vote on show of hands.

RESOLUTIONS

A Company being an artificial person, any decision taken by it

shall be in the form of a Resolution. Accordingly, a resolution
may be defined as an agreement or decision made by the
directors or members (or a class of members) of a company. A
proposed resolution is a motion. When a resolution is passed a
company is bound by it. The resolutions could be on just about
any subject in case of Board meetings since they are ultimately
responsible for running the Company.
In simple words, resolution means the decision taken at the
meeting.
The Companies Act provides for three types of resolutions that
may be passed at the general meeting of a company-(i) Ordinary
resolution; (ii) Special resolution; and (iii) Resolution requiring
special notice.

Ordinary resolution (s.114): An ordinary resolution is one which

can be passed by a simple majority. I.e. if the votes (including
the casting vote, if any, of the chairman), at a general meeting
cast by members entitled to vote in its favour are more than
votes cast against it. Voting may be by way of a show of hands
or by a poll provided 21 days notice has been given for the
meeting.
Special resolution (S.114): A special resolution is one in regard
to which is passed by a 75 % majority only i.e. the number of
votes cast in favour of the resolution is at least three times the
number of votes cast against it, either by a show of hands or on a
poll in person or by proxy. The intention to propose a resolution
as a special resolution must be specifically mentioned in the
notice of the general meeting. Special resolutions are needed to
decide on important matters of the company.
A resolution shall be a special resolution when—
(a) the intention to propose the resolution as a special resolution
has been duly specified in the notice calling the general meeting
or other intimation given to the members of the resolution;
(b) the notice required under this Act has been duly given; and
(c) the votes cast in favour of the resolution, whether on a show
of hands, or electronically or on a poll, as the case may be, by
members who, being entitled so to do, vote in person or by
proxy or by postal ballot, are required to be not less than three
times the number of the votes, if any, cast against the resolution
by members so entitled and voting
Resolutions requiring special notice (s.115): A resolution
requiring special notice is, in fact, not a type of resolution, but is
a kind of ordinary resolution for which a prior notice of
intention to move the resolution has to be given to the company.
With regard to certain matters, a special notice is required to be
given of a resolution to be moved at a meeting of the company.
The object is to give members sufficient time to consider the
proposed resolution. Where special notice of a resolution is
required by the Act or the articles, the notice of the intention to
move the resolution must be given to be company at least 14full
days before the date of the meeting. On receipt of such a notice
the company must give notice of the resolution to the members
at least seven days before the meeting either individually or
through an advertisement in a newspaper having an appropriate
circulation or in any other mode allowed by the articles.
According to the Companies Act, a resolution requiring special
notice is required to transact the following business: .
i) to remove a director 'before the expiry of his term;
ii) to appoint an auditor in place of the retiring auditor;.
iii) to appoint a new director i!, place of the removed director;
iv) to pa ss a resolution that retiring auditors shall not be
reappointed.
S.116- Resolutions passed at adjourned meetings
Where a resolution is passed at an adjourned
meeting of—
(a) a company; or
(b) the holders of any class of shares in a company; or
(c) the Board of Directors of a company,
the resolution shall, for all purposes, be treated as having been
passed on the date on which it was in fact passed, and shall not
be deemed to have been passed on any earlier date.

Minutes of Meetings

Meeting minutes are notes taken of discussions and decisions

made during meetings.
 
In informal settings, meeting notes are taken to provide a record
of the discussion for future reference. In more formal settings,
for example, for board meetings, minutes are taken and kept on
file as legal documents.
 
It’s important that the right person take notes because the note-
taker must be able to quickly determine which information is
pertinent, and what can be left out. This article provides some
tips on taking effective minutes and a template for easy and
thorough note-taking.
Section 118 (1): Every company shall cause minutes of the
proceedings of every general meeting of any class of
shareholders or creditors, and every resolution passed by postal
ballot and every meeting of its Board of Directors or of every
committee of the Board, to be prepared and signed in such
manner as may be prescribed and kept within 30 days of the
conclusion of every such meeting concerned, or passing of
resolution by postal ballot in books kept for that purpose with
their pages consecutively numbered. A distinct minute book
shall be maintained for each type of meeting namely
1. General Meetings of the Members
2. Board Meeting of the Directors
3. Meetings of each Committee of the Board
4. Meetings of the Creditors
 AUDIT AND AUDITORS
AUDITORS
Auditor
An auditor is a person authorized to review and verify the
accuracy of financial records and ensure that companies comply
with tax laws. They protect businesses from fraud, point out
discrepancies in accounting methods and, on occasion, work on
a consultancy basis, helping organizations to spot ways to boost
operational efficiency. Auditors work in various capacities
within different industries.
A person who oversee the financial part of company are
auditors. As per The Companies Act, 2013 a person shall be
eligible for appointment as an auditor of a company only if he is
a chartered accountant and a member of Institute of Chartered
Accountant of India.
Provided that a firm whereof majority of partners practising in
India are qualified for appointment as aforesaid may be
appointed by its firm name to be auditor of a company.
The following person/(s) or firm shall not be eligible for
appointment as an auditor of a company, namely:—
1. a body corporate other than a limited liability partnership
registered under the Limited Liability Partnership Act, 2008;
2. an officer or employee of the company;
3. a person who is a partner, or who is in the employment, of an
officer or employee of the company;
4. a person who, or his relative or partner—
5. is not holding any security of or interest in the company or its
subsidiary, or of its holding or associate company or a
subsidiary of such holding company of face value not exceeding
rupees one lakh
6. is indebted to the company, or its subsidiary, or its holding or
associate company or a subsidiary of such holding company, in
excess of rupees five lakh
7. has given a guarantee or provided any security in connection
with the indebtedness of any third person to the company, or its
subsidiary, or its holding or associate company or a subsidiary
of such holding company, of one lakh rupees
8. person or a firm who, whether directly or indirectly, has
business relationship with the company, or its subsidiary, or its
holding or associate company or subsidiary of such holding
company or associate company.
9. a person whose relative is a director or is in the employment
of the company as a director or key managerial personnel
10. a person who is in full time employment elsewhere or a
person or a partner of a firm holding appointment as its auditor,
if such persons or partner is at the date of such appointment or
reappointment holding appointment as auditor of more than
twenty companies.
11. a person who has been convicted by a court of an offence
involving fraud and a period of ten years has not elapsed from
the date of such conviction
Appointment of auditor:
The provisions with regard to the appointment of an auditor can
be divided into three categories:
First Auditor:
The first auditors can be validly appointed only by a resolution
or Board of directors or that of the company in the general
meeting. Section 139(6) lays down that the first auditor or
auditors of a company shall be appointed by the Board of
directors within thirty days of the date of registration of the
Company. The auditor so appointed shall hold office until the
exercise its power, till the conclusion of the first annual general
meeting. If the Board of directors fails to exercise its power, it
shall inform the members of the company. In such cases, the
first auditors are appointed by the members in an extraordinary
general meeting within ninety days.
Sometimes, the first auditors of a company are named in the
Articles of Association. However, such appointment of auditors
cannot be held valid since the Act grants it no recognition. In
case of a Government company or a company owned or
controlled by the Central Government, State Government or in
part, the first auditors shall be appointed by the Comptroller and
Auditor-General of India within sixty days from the date of
registration of the company. If the CAG fails to exercise his
power, the Board is authorized to appoint the first auditors
within the next thirty days. In case of a failure by the Board, the
members must be informed who shall appoint the first auditor in
an extraordinary general meeting within sixty days.
Subsequent auditor:
Every company shall, at the first annual general meeting,
appoint an individual or a firm as an auditor who shall hold
office from the conclusion of that meeting till the conclusion of
its sixth annual general meeting and thereafter till the conclusion
of every sixth meeting[vii]. The matter relating to such
appointment shall be placed for ratification by members at every
annual general meeting. The subsequent auditor or auditors are
appointed by the members in annual general meeting by passing
an ordinary resolution.
Sometimes, in certain cases, an audit committee has to be
constituted under Section 177 of the Act and all appointments of
auditors shall be made based upon the recommendation of the
Audit Committee[viii].To give effect to the requirements of
Section 139(11), the Companies (Audit and Auditors) Rules
2014 lay down the manner and procedure of selection and
appointment of auditors.
The Audit Committee recommends the name of the auditor to
the Board. If the Board agrees with the recommendations of the
Audit Committee, it shall further recommend the name proposed
to the members to be appointed in the annual general meeting.
Within fifteen days of the meeting in which the auditor is
appointed, the company shall inform the auditor concerned and
also file a notice of such appointment with the Registrar.
Rights and powers of auditor:
Right of access to books and account:
Every auditor of company has a right of access at all times to the
‘books’, ‘accounts’ and ‘vouchers’ of the company. The term
‘vouchers’ includes all documents, correspondence, agreements,
etc., which support any of the transactions or data disclosed in
the financial statements, directly or indirectly. The term ‘books’
includes the fiscal and statistical books. The phrase ‘all times’,
however, implies only to the normal business hours. In case of a
holding company the auditor also is entitled to access to records
of all its subsidiaries and associates insofar it relates to the
consolidation of its financial statements with that of its
subsidiaries and associates.
Right to obtain Information or Explanation:
The auditor of a company has the right to require from the
officers of the company such information and explanations as
the auditor may think necessary for the performance of his
duties as [Link] addition, the auditor has a right to
specifically enquire about the following matters:
Whether loans and advances made by the company on the basis
of security have been properly secured and whether the terms on
which they have been made are prejudicial to the company or its
members;
whether transactions of the company which are represented
merely by book entries are prejudicial to the interests of the
company;
where the company not being an investment company or a
banking company, whether so much of the assets of the
company as consist of shares, debentures and other securities
has been sold at a lower price that what they were purchased by
the company;
whether loans and advances made by the company have been
shown as deposits;
whether personal expenses have been charged to revenue
account;
Rights with respect to Branch Accounts:
A ‘branch office‘ of a company means any establishment or
office described by the company as its branch office. Being a
part of the company, it also needs to audit. Thus, accounts of the
branch office of the company are required to be audited cither
by the company’s auditor or by any other person qualified for
appointment as an auditor[xxi]. In case the branch office is
situated outside India, the accounts of the branch office are
required to be audited either by the company’s auditor or by an
accountant or by any other person duly qualified to act as an
auditor of the accounts of the branch office in accordance with
the laws of the country where the branch office is located.
Where the accounts of any branch office are audited by a person
other than the company’s auditor, the branch auditor shall
submit a report to the company’s auditor.
Right to sign the report:
An auditor has the right to sign the auditor’s report or sign or
certify any other document of the company. Correspondingly a
firm of limited liability partnership is appointed as the auditor,
only those partners that are chartered accountants are authorized
to act and sign on behalf of the firm. Thus, if a firm or LLP has
partners who are not chartered accountants, they are not
authorized to sign the auditor’s report.
Right to receive notices:
All notices and such other communications shared between
members regarding the general meeting of a company, shall also
be forwarded to the auditor of the company.
Right to Attend General Meeting:
The auditor has the right to attend any general meeting and be
heard, at any general meeting which he attends, on any part of
the business which concerns him as auditor[xxvi]. The auditor
may make any statement or explanation with regard to the
accounts as he may deem fit. The auditor also has right to send
his authorized representative to attend the meeting instead of
attending the meeting himself personally. Further, it is
obligatory that any qualifications, observations or comments on
the financial transactions or matters which have any adverse
effect on the function of the company mentioned in the auditor’s
report be read at the general meeting and also shall be open to
inspection by any member of the company.
Right to Remuneration:
An auditor is entitled to his remuneration on the completion of
his work.
Duties of an Auditor
Every right available to an individual has a corresponding duty.
An auditor under the Companies Act is no exception. They have
a general duty to oversee that the company’s financial
statements are in order and present a true picture of the state of
affairs of the company. Apart from this, the Act also prescribes
certain mandatory duties within its domain.
Duty to make a Report of Financial Transactions :
It is the duty of the auditor to report to the members of the
company on the accounts examined by him and on every
financial statement which are laid before the company in general
meeting. The auditor should report whether to the best of his
information and knowledge the said accounts and financial
statements which give a true and fair view of the state of
company’s affairs at the end of financial year and the profit and
loss and cash flows for the financial year.
Lindley J, in London and General Bank, held that an auditor, is
not bound to do more than exercise reasonable care and skill in
making enquiries and investigations. He is not an insurer, he
does not guarantee that the books do correctly show the true
position of the company’s affairs; he does not guarantee that his
balance sheet is accurate according to the books of the company,
if he did, he would be responsible for an error on his part, even
if he were himself deceived due without any want of reasonable
care on his part say, by the fraudulent concealment of a book
from him.
The report should answer questions on whether, proper books of
account as required by law have been kept by the company,
whether the balance sheet is drawn according to the reported
profits and losses, observations on financial transactions,
remarks on maintenance of records etc.
Duty to Attend General Meeting:
The auditor has a duty to attend the general meeting either
himself or through his authorised representative unless
exempted by the company[xxix].The authorised representative
shall be person who is qualified to be an auditor[xxx].
Duty to Report Fraud:
The auditor has an obligation to report to the Central
Government if in the course of the performance of his duties as
auditor, he has reason to believe that an offence involving fraud
is being or has been committed against the company by officers
or employees of the company involving an amount of rupees one
crore or more. The auditor first needs to forward his report
immediately (not later than two days) to the audit committee or
the Board seeking their reply within forty five days. On receipt
of reply from the Board of the audit committee, the auditors are
required to forward his report, reply or observations to the
Central Government within fifteen days.
Duty to make statement in Prospectus:
An auditor is required to make a report which is included in the
prospectus of a company. Such a report should be made out on
the profits and losses of the business of the company for each of
the five financial years immediately preceding the issue; and of
the assets and liabilities of the company on the last date to which
the accounts of the business were made up.
Duty to produce documents and evidence:
The auditor is duty bound for reserving and producing all books
and paper or relating to the company to an inspector or any
person authorised by him in this behalf with the previous
approval of the Central Government. Further he is under a duty
to give to the inspector all assistance in connection with the
investigation which he is reasonably able to give.
Duty to acquaint themselves with their duties:
This duty has primarily gained foothold due the judicial
interpretations. The courts have often equated that auditors are
bound to acquaint themselves with their duties under the
Companies Act. If any additional duty is imposed on them
through the Articles of the company, they are obliged to follow
them. Ignorance of the Articles and of additional duties imposed
by them would not afford any legal justification for not
observing them.

Is an auditor an investigator?
No
Question has arisen as to
whether the auditor is an
investigator. As appointed at
general meeting or
by directors or the registrar
he is not an investigator.
His primary duty is to
examine the company’s
books, accounts, vouchers
other documents and
considers any other
necessary information for the
purpose of making a report
for submission to
members at a General
Meeting.
The auditor must approach
his task with an enquiring
mind.
It has been observed that he
is a watchdog but not a
bloodhound.
His standards of care and
skill are that of a reasonably
competent careful and
cautious auditor. He
is not bound to do more.
He does not guarantee the
discovery of all fraud, nor
does he guarantee that the
company’s
business has been prudently
or imprudently carried on.
However he must satisfy
himself the company’s
securities exist and are in
safe custody.
However an auditor may be
deemed to be an investigator
in certain circumstances.
 If appointed to
investigate the affairs of a
company.
 If there is anything
calculated to excite his
suspicion he must probe it to
the bottom
Is an auditor an investigator?
No
Question has arisen as to
whether the auditor is an
investigator. As appointed at
general meeting or
by directors or the registrar
he is not an investigator.
His primary duty is to
examine the company’s
books, accounts, vouchers
other documents and
considers any other
necessary information for the
purpose of making a report
for submission to
members at a General
Meeting.
The auditor must approach
his task with an enquiring
mind.
It has been observed that he
is a watchdog but not a
bloodhound.
His standards of care and
skill are that of a reasonably
competent careful and
cautious auditor. He
is not bound to do more.
He does not guarantee the
discovery of all fraud, nor
does he guarantee that the
company’s
business has been prudently
or imprudently carried on.
However he must satisfy
himself the company’s
securities exist and are in
safe custody.
However an auditor may be
deemed to be an investigator
in certain circumstances.
 If appointed to
investigate the affairs of a
company.
 If there is anything
calculated to excite his
suspicion he must probe it to
the bottom

Is an auditor an
investigator? No
Question has arisen as to
whether the auditor is an
investigator. As appointed
at general meeting or
by directors or the
registrar he is not an
investigator.
His primary duty is to
examine the company’s
books, accounts, vouchers
other documents and
considers any other
necessary information for
the purpose of making a
report for submission to
members at a General
Meeting.
The auditor must approach
his task with an enquiring
mind.
It has been observed that
he is a watchdog but not a
bloodhound.
His standards of care and
skill are that of a
reasonably competent
careful and cautious
auditor. He
is not bound to do more.
He does not guarantee the
discovery of all fraud, nor
does he guarantee that the
company’s
business has been
prudently or imprudently
carried on.
However he must satisfy
himself the company’s
securities exist and are in
safe custody.
However an auditor may
be deemed to be an
investigator in certain
circumstances.
 If appointed to
investigate the affairs of a
company.
 If there is anything
calculated to excite his
suspicion he must probe it
to the bottom
Is an auditor an
investigator? No
Question has arisen as to
whether the auditor is an
investigator. As appointed
at general meeting or
by directors or the
registrar he is not an
investigator.
His primary duty is to
examine the company’s
books, accounts, vouchers
other documents and
considers any other
necessary information for
the purpose of making a
report for submission to
members at a General
Meeting.
The auditor must approach
his task with an enquiring
mind.
It has been observed that
he is a watchdog but not a
bloodhound.
His standards of care and
skill are that of a
reasonably competent
careful and cautious
auditor. He
is not bound to do more.
He does not guarantee the
discovery of all fraud, nor
does he guarantee that the
company’s
business has been
prudently or imprudently
carried on.
However he must satisfy
himself the company’s
securities exist and are in
safe custody.
However an auditor may
be deemed to be an
investigator in certain
circumstances.
 If appointed to
investigate the affairs of a
company.
 If there is anything
calculated to excite his
suspicion he must probe it
to the bottom
Is an auditor an investigator? No Question has arisen as to
whether the auditor is an investigator. As appointed at general
meeting or by directors or the registrar he is not an investigator.
His primary duty is to examine the company’s books, accounts,
vouchers other documents and considers any other necessary
information for the purpose of making a report for submission
to members at a General Meeting. The auditor must approach
his task with an enquiring mind. It has been observed that he is
a watchdog but not a bloodhound. His standards of care and
skill are that of a reasonably competent careful and cautious
auditor. He is not bound to do more. He does not guarantee the
discovery of all fraud, nor does he guarantee that the company’s
business has been prudently or imprudently carried on.
However he must satisfy himself the company’s securities exist
and are in safe custody. However an auditor may be deemed to
be an investigator in certain circumstances.
 If appointed to investigate the affairs of a company.
 If there is anything calculated to excite his suspicion he
must probe it to the bottom

INSPECTION, INQUIRY AND INVESTIGATION

Sec.206 to 229 of the Companies Act, 2013 deals with

‘Inspection, Inquiry and Investigation’.
 The Shareholders of a Company have several rights, including
those of the right to vote and elect their directors, right to
convene board meetings, right to receive dividends and so on.
Although, sometimes these shareholders are ill-equipped to
exercise all their powers, and this is abused by those who
control the majority of the affairs of the company. Thus, with
the introduction of the Companies Act, 2013, the Central
Government through these provisions of the Act, vested the
shareholders with the powers to inspect, inquire and
investigate the affairs of the company in appropriate situations
where it could be believed that the business of the company
was being done in a fraudulent or unfair manner.
Conduct of Inspection and Inquiry
Section 207, of the Companies Act, 2013 states on Inspection
and Inquiry. It states that every director of a company has the
duty to provide any and all information and details that is
required by the Registrar of Companies. The Registrar has the
power to make copies of such information provided. The
Registrar or Inspector conducting inspection or inquiry shall
have the powers of a civil court as provided in the Civil
Procedure Code.
Section 207(4) is in relation to penalties. It states that any
disobedience of orders could make the directors or employees
liable to imprisonment or fines of not less than Rs. 25000
extending till Rs. 1, 00,000. If there is a conviction of offence,
then the person has to vacate their position.
Grounds for conduct of inquiry
On the basis of the information available or furnished or
representations made by any person, the Registrar is satisfied
that:
(a) The business of the company is being carried on for a
fraudulent or unlawful purpose, or not in compliance with the
provisions of this Act; or
(b) Investor’s grievances are not being addressed,

The Registrar may after informing the company of the

allegations made against it, require through a written order to
furnish in writing any information or explanation within the
specified time. Thereupon, the Registrar may conduct such
inquiry as he deems fit after giving the company a reasonable
opportunity of being heard.
Central Government’s powers to direct the Registrar or an
Inspector to conduct inquiry
If the Central Government is satisfied that the circumstances so
warrant, it may direct the Registrar, or an Inspector appointed
for the purpose to conduct an inquiry under this sub-section.
Liability of Officers for fraud
Where the business of a company has been or is being carried on
for a fraudulent or unlawful purpose, every officer of the
company who is in default shall be punishable for fraud in the
manner provided in Section 447.
Power of the Central Government to direct inspection of
books etc
(i) It may direct an Inspector to inspect books and papers of a
company;
(ii) It may, by a general or special order, authorize any statutory
authority to carry out inspection of books of accounts of a
company or class of companies.

Section 207: Conduct of Inspection and Inquiry

(i) Duty of every director and officer of the company to render
assistance to the Registrar or Inspector
(ii) Right of Registrar or Inspector to take copies of books of
account.
(iii) Registrar or Inspector to have the powers of civil court as
provided in the Civil Procedure Code, 1908 whole trying a suit.

Section 208: Reporting by the Registrar on Inspection or

Inquiry
After the inspection of books of account or inquiry under
Section 206 and other books and papers under section 207, the
Registrar shall submit a written report to the Central
Government. The report may recommend the need for further
investigation along with reasons in support.
Section 209: Search & Seizure
If the Registrar or Inspector has reasonable ground to believe
that the books and papers of a company, or relating to key
managerial personnel or any director or auditor or company
secretary in practice of company has not appointed a company
secretary, are likely to be destroyed, mutilated, altered, falsified
or secreted he may, after obtaining an order from the special
court
(a) Enter with such assistance as may be required and search the
place where such books or papers are kept; and
(b) Seize such books and papers as he considers necessary after
allowing the company to take copies or extracts there from.
The seized books and papers shall be returned to the company
within a period which is not later than 180 days of the date of
seizure.
However, the books and papers may be again called for by the
Registrar or Inspector for a further period of 180 days. Before
returning the books and papers, the Registrar or Inspector may
take copies or extracts from them or place identification marks
thereon or deal with them in such manner as he considers
necessary.

INVESTIGATION
In the commercial parlance the term “investigation” means
investigation of the company’s affairs, which includes all
business activities pertaining to the profits and losses, goodwill,
contracts, investment and other transactions. It is a fact that a
company is formed on the basis of capital investment by the
members or shareholders, thus though the share holders are
investors but its capital is managed by the Board of directors to
the total exclusion of the share holders. To detect the corporate
abuses the present Companies Act makes provision for
investigation in the affairs of the companies.
The investigation of the affairs of the company is generally
conducted by the inspection and they are fact-finding
commission. On the basis of Inspector’s report the Central
Government may prosecute the officer in default.
Section 210: Appointment of Investigators by Central
Government
On the basis of the following, the Central Government may
appoint one or more inspectors to investigate the affairs of the
company and to report, thereon:
(a) On the receipt of report of the Registrar or Inspectors under
Section 208;
(b) On intimation of a special resolution passed by a company
that the affairs of the company ought to be investigated
(c) In public interest
Where an order is passed by a court or the Tribunal in any
proceedings before it that the affairs of a company ought to be
investigated, the Central Government shall order an
investigation into the affairs of that company
Investigation into Affairs of the Company
As per Section 210 of the Companies Act, 2013 the Central
Government may appoint some inspectors or investigators to
investigate the affairs of the company and report to on the basis
of the report submitted by the Registrar under Section 208 or on
basis of a special resolution passed by a company or in public
interest. An investigation may also be ordered by the Central
Government by any company on the recommendation of any
tribunal.
In Barium Chemicals Ltd. v. Company Law Board [AIR (1967)
SC 295], the Supreme Court quashed an order of investigation
based upon “delay, bungling and faulty planning project that
caused double expenditure and many losses, which resulted in
more than one-third of the company’s capital being wiped out.
SERIOUS FRAUD INVESTIGATION OFFICE
An Office called the Serious Fraud Investigation Office was
established under the Companies Act, 2013 in Section 211, as
per the Naresh Chandra Committee Report on Corporate Audit
and Governance. The aim of this office is to identify any and all
serious frauds that take place in companies. The report of this
committee stated the need for such an office in these words – “a
multi-disciplinary team that not only uncovers the fraud, but is
able to direct and supervise prosecutions under various
economic legislations through appropriate agencies.” Scams
such as the Satyam Scam was uncovered through this office.
Serious Frauds Investigation Office (SFIO) is a multi-
disciplinary organization under the Ministry of Corporate
Affairs consisting of experts in the field of accounting, forensic
auditing, law, information technology, law, capital markets, and
taxation concerned with detection and prosecuting or
recommending for prosecution white collar frauds.

The SFIO takes up for investigation the following types of cases

for investigation which are characterized by:

(i) complexity coupled with inter-departmental and

multidisciplinary ramifications; ( complex activities in inter
departments)
(ii) substantial involvement of public interest to be judged by
size in terms of monetary misappropriation or in terms of the
number of persons affected;

(iii) Possibility of investigation leading to contribution to or

clear improvement in systems, laws or procedures.

A quick unravelling of the fraud or scam, the persons who

committed the offence or were involved in the conspiracy with a
view to bring them to justice quickly;

maximum recovery of the gains from the fraud and the

restoration of such assets or moneys to the rightful owners;
identification of weaknesses in law or monitoring and reporting
systems because of which the fraud had occurred so as to enable
the government to take corrective action.

Section 211: Establishment of SFIO

The SFIO shall be headed by a Director. It shall consist of such

number of experts from the following field to be appointed by
the Central Government from amongst persons of ability,
experience and experience in:
(i) banking;
(ii) corporate affairs;
(iii) taxation;
(iv) forensic audit;(an examination and evaluation of firm’s
financial records or information for use as evidence in the court
of law)
(v) capital market;
(vi) information technology;
(vii) law; or
(viii) persons having expertise in the fields of investigations,
cyber forensic, financial accounting, management accounting,
cost accounting and any other fields as may be necessary for the
efficient discharge of Serious Fraud Investigation Office (SFIO)
functions under this Act.

The appointment of Director in the SFIO shall be done by the

Central Government by a notification in the Official Gazette.
The person to be appointed Director shall not be below the rank
of a Joint Secretary having knowledge and experience in dealing
with matters relating to corporate affairs.
Section 212: Investigation by SFIO into the affairs of Company

The Central Government may assign the investigation into

affairs of a company to the SFIO on the basis of an opinion
formed from the following:

(a) on receipt of report of the Registrar or Inspector under

section 208;

(b) on intimation of a special resolution passed by a company

requesting an investigation into its affairs;

(c) in public interest;

(d) on the request of any Department of Central Government or

a State Government.

On receipt of Central Government order, the Director may

designate such number of inspectors as he may consider
necessary for the purpose of such investigation. Investigating
officer to exercise powers of Inspector the Investigating Officer,
to whom the Director has assigned the task of investigating the
affairs of the company shall have the powers of an Inspector
under section 217.

Responsibility of company and its officers to provide

information to the Investigating Officer
It shall be the responsibility of the company, its officers and
employees, who are or have been in the employment of the
company to provide all information, explanation, documents and
assistance to the Investigating Officer as he may require for
conduct of business.

Manner of investigation and submission of report

The investigation into the affairs of a company shall be
conducted in the manner and by following the procedure
specified in this Chapter. The SFIO shall submit its report to the
Central Government within the period specified in the order.

Restrictions on other investigating agencies

Where any case has been assigned by the Central Government to

the Serious Fraud Investigation Office for investigation under
this Act, no other investigating agency of Central Government
or any State Government shall proceed with investigation in
such case in respect of any offence under this Act and in case
any such investigation has already been initiated, it shall not be
proceeded further with and the concerned agency shall transfer
the relevant documents and records in respect of such offences
under this Act to Serious Fraud Investigation Office.

Submission of Interim Report and also the Investigation

Report to the Central Government

If the Central Government so directs, the Serious Frauds

Investigation Office shall submit an interim report to the Central
Government. On completion of investigation, the SFIO shall
submit the Investigation Report to the Central Government.

Right of any person to obtain a copy of the investigation report

Notwithstanding anything contained in this Act or in any other

law, any person may obtain a copy of the investigation report by
making an application in this regard to the court.

Central Government’s to direct SFIO to initiate prosecution

After receipt and examination of the investigation report and
taking the legal advice, the Central Government may direct the
SFIO to initiate prosecution against the company, its officers,
employees (past and present) or any other person directly or
indirectly connected with the affairs of the company.

Investigation Report to be reckoned as report by police officer

The investigation report filed with the Special Court for framing
of charges shall be deemed to be a report filed by a police
officer under section 173 of the Code of Criminal Procedure.
Investigation into company’s affairs in other cases- S.213
S.217-Procedures, powers, etc of inspectors.
• Power to carry investigation into related companies
• Power to compel production of documents
• Power to examine on oath
• Power to take down notes of examination of persons in
writing
• Power of seizure of documents
Differences between inspection and investigation
Inspection Investigation
 • It may lead to • Investigation done by
investigation inspectors appointed by
• Inspection done by central govt.
Registrar or any • Into the affairs of the
officer appointed by company
central govt or SEBI
• Upon books of
account or other
books or papers

CORPORATE FRAUD
The White Collar Crimes are the types of crimes perpetrated,
whether public or private, by respectable individuals with ideal
situations. For bureaucratic entities, the surveillance and
detection of fraud are practically very difficult as these activities
are carried out in very much secrecy due to which these actions
are neglected. Today, white-collar crime has shifted from people
to an organization where individuals execute illegal actions
either alone or in partnership with others. Corporate fraud has
become the greatest risk facing organizations and is increasingly
a major concern. Fraud incidents are becoming more and more
severe as they destroy investors’ trust in stock markets, results in
massive loss of investment wealth and damage the reputation,
ma nagement and board of directors of the firm. Corporate fraud
is one of these white-collar crimes. Scandals and scams are as
ancient as mountains in India. The 1950s saw the infamous
LIC/Mundhra scam that marked independent India’s first big
financial fraud. The famed Harshad Mehta scam, Satyam scam,
DHFL scam, Bhushan steel scam are only a handful of many,
with the fraud continuing with an alarming frequency following
every decade. These scams were examined in the Indian Penal
Code of 1860 by the law enforcement authorities (IPC). There
was no specific definition of ‘fraud’ in the Companies Act 1956.
Legally, a new crime was not needed as all such offences were
properly dealt with by Lord Macaulay’s IPC.

CORPORATE FRAUDS IN INDIA

A corporation or entity fraud takes place when it alters and
disguises important information purposefully, which then seems
to make it look healthy. Companies employ several modes of
operation to engage in such corporate frauds, including
misinformation, manipulation of financial records, concealment
of debt, etc. Fake accountancy, false profit inflation trading,
disclosure of price-sensitive information (that affect the price of
securities of a company)that is subject to insiders, and false
transactions that lead to an increase in investors and lenders
being attracted to finance are part of the falsification of financial
information. There are several reasons why corporations engage
in such frauds as the creation of additional cash, building the
company’s fake image for the market environment and
misleading governments on tax evasion. Advances in
technological and scientific development also contributed to
corporate fraud in India as mentioned in the report of the
Committee on Prevention of Corruption.

AMALGAMATION AND RECONSTRUCTION

Mergers, amalgamations, acquisitions, compromises,

arrangement or reconstruction are all different forms of
corporate restructuring exercises in the corporate world. All
these activities are governed by regulations in different
countries. In the words of Justice Dhananjaya Y. Chandrachud,
"Corporate restructuring is one of the means that can be
employed to meet the challenges and problems which confront
business.
The Companies Act, 2013 contains provisions relating to
various methods of reorganization of companies under Sections
230 to 240 of the Act. i.e, Compromise, Arrangements,
Reconstruction, Amalgamation & Mergers.
Arrangements and compromises may take place for the purpose
of reconstruction and amalgamation of companies
Meaning of Compromise and Arrangement
The term ‘compromise’ implies the existence of a dispute such
as relating to rights. It indicates the settlement of claims in
disputes by mutual concession. When a company has a dispute
with a member or a class of members or with a creditors or a
class of them a scheme of compromise may be drawn up.
The term arrangement is wide in scope than the word
compromise. A re-arrangement of rights or of liabilities is
possible without the existence of any dispute. Thus, the term
‘arrangement’ includes all modes of reorganising the share
capital including interference with preferential and other special
rights attached to shares.
Where there is no dispute but even so there is need for re-
adjusting the rights or liabilities of a member or a class of them
or of a creditor or a class of them, the company may resort to a
scheme of arrangement with them.
As per Section 230 a compromise or arrangement can be
proposed between a company and its creditors or between a
company and its members. Such a compromise would also cover
any scheme of amalgamation or merger of one company with
another and reconstruction.
Sec.230-Power to compromise or make arrangements with
creditors and members
The power to compromise or make arrangements with creditors
and members provided under section 230 of the Companies Act
2013 is a statutory power of the company conferred by the
Companies Act. The section empowers the Tribunal to order a
meeting of the creditors or members or their classes thereof, if
an application has been filed by the company. The application
can also be filed by the liquidator if the company is being wound
up. The meeting is required to be called, held or conducted in
such manner as the Tribunal directs. As the companies Act 2013
focuses on the principles of transparency, corporate democracy
and accountability, there are certain procedural requirements to
be followed by the company for this purpose. The company is
required to disclose the following information to the Tribunal:
(a) all material facts relating to the company, such as the latest
financial position of the company, the latest auditor’s report on
the accounts of the company and the pendency of any
investigation or proceedings against the company; (b) reduction
of share capital of the company, if any, included in the
compromise or arrangement; (c) any scheme of corporate debt
restructuring consented to by not less than seventy-five per cent
of the secured creditors in value Another important requirement
is that the notice of such meeting as proposed to be called under
this section shall be sent individually to all the creditors or and
the members and their classes thereof and also to the debenture-
holders of the company. These notices are required to be
accompanied by a statement disclosing the details of the
compromise or arrangement, a copy of the valuation report, if
any, and explaining their effect on creditors, key managerial
personnel, promoters and non-promoter members, and the
debenture-holders and the effect of the compromise or
arrangement on any material interests of the directors of the
company or the debenture trustees. This requirement of sending
individual notice is ensure more transparency and better
corporate governance in the entire procedure. Another step
which has been mandated by the Companies Act 2013 is that
such notice and other documents should be placed on the
website of the company. If the company is a listed company,
these documents shall also be notified to the Securities and
Exchange Board and stock exchange where the securities of the
companies are listed and shall also be published in newspapers
in the prescribed manner. The Companies Act 2013 allows
voting to be done in person, through proxies as well as through
postal ballot. Another important feature of the section is that any
objection to the compromise or arrangement can be made only
by persons holding not less than ten per cent of the shareholding
or five percent of the outstanding debt as per the latest audited
financial statement. Another step towards strengthening
transparency and accountability under the Companies Act 2013
which was not present in the previous Act is that notice along
with all the documents is required to be sent all the regulatory
authorities including the Central Government, the income-tax
authorities, the Reserve Bank of India, the Securities and
Exchange Board, the Registrar, the respective stock exchanges,
the Official Liquidator, the Competition Commission of India
and such other sectoral regulators or authorities which are likely
to be affected by the compromise or arrangement. The purpose
of this requirement is that merger or amalgamation of two or
more companies affects the economy at large and therefore all
the authorities and regulators must be given an opportunity to
make representation. The time period of making a representation
is within a period of thirty days from the date of receipt of such
notice, failing which, it shall be presumed that they have no
representations to make on the proposals.
The Tribunal has to consider the scheme of compromise or
arrangement on various grounds such as whether it is just, fair,
reasonable, not against public interest or against the interest of
the minority. The Tribunal before sanctioning the scheme must
ensure that majority of persons representing three-fourths in
value of the creditors, or members or their classes thereof,
voting in person or by proxy or by postal ballot have agreed to
the scheme of compromise or arrangement. If such compromise
or arrangement is sanctioned by the Tribunal by an order, the
same shall be binding on the company, all the creditors, or
members or their classes, or, in case of a company being wound
up, on the liquidator and the contributories of the company. It
shall have the same binding effect as the order of a High Court.
Sec.231- Power of Tribunal to enforce Compromise or
Arrangement
Section 231 is a distinct provision and is similar to section 392
of the Companies Act 1956. The role of the Tribunal (earlier the
High Court) is not only inquisitorial or supervisory role but also
a pragmatic role which required forming of an independent
judgement so as to ensure proper working of the scheme. The
legislative purpose behind conferring power of the widest
amplitude on the High Court under sec 392 of the previous Act
was not only to give directions but to make such modification in
the compromise and/or arrangement as the court may consider
necessary, the only limit on the power of the court being that
such directions can be given and modifications can be made for
the proper working of the compromise and/or arrangement. The
purpose underlying this is to provide for the effective working of
the compromise and/or arrangement. The Tribunal similar to the
High Court has the power to implement the order of compromise
or arrangement. It may, at the time of making such order or at
any time thereafter, give such directions in regard to any matter
or make such modifications in the compromise or arrangement
as it may consider necessary for the proper implementation of
the compromise or arrangement. The Tribunal has also been
given power to order winding up of the company if it is satisfied
that the compromise or arrangement sanctioned under section
230 cannot be implemented satisfactorily with or without
modifications, and the company is unable to pay its debts as per
the scheme. Such an order shall be deemed to be an order made
under section 273.
Amalgamation, Reconstruction and Mergers
The word ‘Amalgamation’ has not been defined in the Act.
Amalgamation occurs when two or more companies are joined
to form a third entity or one is absorbed into or blended with
another.
Amalgamation occurs when two or more companies are joined
to form a third entity or one is absorbed into or blended with
another”. So, Amalgamation includes absorptions. Absorption
means one powerful company takes control over the weaker
company. The new company comes into existence having all the
property, rights and powers and subject to all the duties and
obligations, of both the constituent companies.
Eg: Vodafone and Idea- Vi, Maruti motors and Suzuki- Maruti
Suzuki
Mergers : A merger is a combination of two or more businesses
into one business. Laws in India use the term ‘amalgamation’
for merger. Merger is a form of amalgamation. All the
amalgamations are part of merger but all the mergers are not
amalgamation.
The I T Act, 1961 Sec. 2(1A) defines amalgamation as the
merger of one or more companies with another or the merger of
two or more companies to form a new co., in such a way that all
the assets & liabilities of the amalgamating companies become
assets and liabilities of the amalgamated co. & shareholders not
less than nine tenths in value of the shares in the amalgamating
company or companies become shareholders of the
amalgamated company.
Mergers or amalgamations may take two forms:
1. Merger through Absorption: Takeover An absorption is a
combination of two or more companies into an ‘existing
company’. All companies except one lose their identity in
such a merger.
2. Merger through Consolidation (Amalgamation) : A
consolidation is a combination of two or more companies
into a ‘new company’. In this form of merger, all
companies are legally dissolved and a new entity is created.
Here the acquired company transfers its assets, liabilities
and shares to the acquiring company for cash or exchange
of shares.

Reconstruction
Reconstruction is the transfer company’s business to a new
company. Reconstruction is an exercise of restating assets &
liabilities by company whose financial position as reflected by
its balance sheet is not healthy but future is promising. This
exercise is done to gain the confidence of different stakeholders
(creditors, lenders, customers, share holders etc) whose support
is required for revival of the operations.
It includes internal reconstruction and external reconstruction.
 1. Internal reconstruction
Internal reconstruction is carried when the company faces
consistent financial pressure and is incurring loss since
long. Here, there might be some alterations in share capital
and waiver of some debts. The company is neither
liquidated nor any new company is formed.
It is an arrangement made by the companies whereby the
claims of shareholders, debenture holders, creditors and
other liabilities are altered/ reduced, so that the
accumulated loss are written off, asset are valued at its fair
value and the balance sheet shows the true and fair view of
the financial statement
Forms of internal reconstruction
i. Re-organization or alteration of share capital
ii. Reduction of share capital and other liabilities
Objectives of internal reconstruction
i. To resolve the problem of over-capitalization/ huge
accumulated losses/ over valuation of assets
ii. When the capital structure of a company is complex
and is required to make it simple
iii. When change is required in the face value of shares of
the company
2. External reconstruction
External reconstruction takes place when an existing company
goes into liquidation for the express purpose of selling its assets
and liabilities to a newly formed company which is generally
owned and named alike. It is similar to amalgamation though
not exactly the same. In external reconstruction a new company
is formed for the purpose of taking over the business of an
existing sick company which has incurred huge losses and is
facing financial difficulties. Existing company is wound up by
selling its business to the newly formed company which is
generally similarly named and owned by the same shareholders
to a great extent.
The term ‘External Reconstruction’ means the winding up of an
existing company and registering itself into a new one after a
rearrangement of its financial position. Such arrangement shall
be approved by its shareholders and creditors and shall be
sanctioned by the National Company Law Tribunal (NCLT).
Here, the new company is formed with the deliberate purpose of
taking over the assets and liabilities of old company and
therefore changes its external structure.
Eg: Gold-star = LG

Forms of Reconstruction and Amalgamation :

A reconstruction or amalgamation may take any of the
following forms.
1. By sale of shares
Sale of shares is the simplest process of amalgamation or
takeover. Shares are sold and registered in the name of the
purchasing company. The selling shareholders receive either
compensation or shares in the acquiring company. The
expression “arrangement” under these provisions would include
the transfer of assets by a company without consideration by
way of a gift. If nine-tenths of the holders of a class have
approved the terms, shares of the rest can be acquired under
Sections 235 to 236.
2. By sale of undertaking
The second method involves a sale of the whole of the
undertaking of the transferor company as a going concern.
Section 232 applies to every scheme which involves transfer of
the whole or any party of the undertaking or liability of a
company to another company. An application may be made to
the Tribunal for sanctioning the scheme of compromise and
arrangements for reconstruction and amalgamation.
3. By a scheme of arrangement
A company enters into scheme under the provisions of this
chapter of the companies Act which gives power to the
companies to apply for sanction of the Tribunal for arrangement,
compromise of amalgamation. Every company in relation to
which the order is made has to file within thirty days a copy of
the order with the Registrar for registration.
PREVENTION OF OPPRESSION AND MISMANAGEMENT

According to Lord Keith,” Oppression means, lack of morality

and fair dealings in the affairs of the company which may be
prejudicial to some members of the company
The term mismanagement refers to the process or practice of
managing ineptly, incompetently, or dishonestly.
However it is to be noted that the terms are not defined under
the companies act and is left to the discretion of the court to
decide on the facts of the case whether there is oppression or
mismanagement of minority or not.
Majority Rule and minority protection
The principle of rule by majority has been made applicable to
the management of the affairs of the companies. The members
pass resolutions on various subjects either by simple majority or
by special majority. Once a resolution is passed by the requisite
majority then it is binding on all the members of the company.
As a resultant corollary, the court will not ordinarily intervene to
protect the minority interest affected by resolution. Thus, if
wrong is done to the company, it is the company which is the
legal entity having its own personality and that can only file a
suit against the wrongdoer and members individually do not
have a right to do so.
This rule was laid down in the leading case Foss v Harbottle
1843. It is also known as Foss v Harbottle Rule. The principle
that the will of the majority should prevail over the will of the
minority in matters of internal administration of the company
was founded in this case.
Foss v Harbottle
An action was bought by two shareholders Foss and Turton of a
company, on behalf of themselves and all other shareholders
against the directors and solicitor of the company, alleging that
by concerted and illegal transactions they had caused the
company’s property to be lost. It was alleged that the directors
were acting in concert and effecting various fraudulent and
illegal transactions whereby the property of the company was
misapplied and wasted. It was prayed that the defendant might
be decreed to make good to the company the losses. The
question was as to the maintainability of the suit.
The court held that the action could not be brought by the
minority shareholders. The wrong done to the company was one
which could be ratified by the majority of the members. The
company was the proper plaintiff for wrongs done to the
company and the company can act only through its majority
shareholders. The majority of the members should be left to
decide whether to commence proceedings against the directors.
Advantages of the Rule in Foss v. Harbottle
The following are the advantages of the rule in Foss v.
Harbottle:-
(i) Recognition of the separate legal personality of the Company
(ii) Preservation of the Right of Majority to decide
(iii) Multiplicity of futile suits avoided
The same rule has been followed in Rajahmundry Electric
Supply Co v. Nageswara Rao AIR 1956 SC 213. It was held
that the courts will not in general, intervene at the instance of
shareholders in matters of internal administration and will not
interfere with the management of the company by its directors
so long as they are acting within powers conferred upon them
under articles of the company.
Exceptions to the Rule in Foss v. Harbottle
For protecting the rights of minority, certain exceptions to the
above rule are recognized and applied. These exceptions are as
follows:-
(i) Ultra vires acts
(ii) Fraud on the minority
(iii) Act requiring special majority
(iv) Wrongdoers in control
(v) Infringement of Individual rights
(vi) Oppression and Mismanagement
Oppression and mismanagement
Oppression is the exercising of authority or power in a
burdensome, merciless, or unjust manner. Whereas the term
“Mismanagement” means a situation in which something such
as a company or an economy is organized or controlled badly.
In addition to the protection afforded to the minority by the
exception to the majority rule, the Companies Act contains
special provisions for prevention of oppression and
mismanagement.
Chapter 16, Sec. 241 to 246 of the Companies Act, deals with
prevention of oppression and mismanagement.
Acts held as Oppressive
Looking to the various judicial pronouncements, some of the
acts amounting to oppression may be summarised as under:-
· Not calling a general meeting and keeping shareholders in
dark.
· Non-maintenance of statutory records and not conducting
affairs of the company in accordance with the Companies Act.
· Depriving a member of the right to dividend.
· Refusal to register transmission under will.
· Issue of further shares benefiting a section of shareholders.
· Failure to distribute the amount of compensation received on
nationalisation of business of company among members, where
required to be so distributed.
Acts held as not Oppressive
The following acts have been held as not oppressive:-
· An unwise, inefficient or careless conduct of director.
· Non-holding of the meeting of the directors.
· Not declaring dividends when company is making losses
· Denial of inspection of books to a shareholder.
· Lack of details in notice of a meeting.
· Non-maintenance/Non-filing of records.
· Increasing the voting rights of the shares held by the
management.
Prevention of oppression
Application to Company Law Board (now Tribunal)
The first remedy available to oppressed minority is to move the
Company Law Board (now Tribunal). Whenever the affairs of a
company are being conducted in a manner pre-judicial to public
interest or in a manner oppressive to any member or members,
an application can be made to the Company Law Board (now
Tribunal) under sec.241(s.397, 1956 Act). The Central
government can also apply to Tribunal on the same ground. Any
material change not in the interest of creditors, debenture
holders, or any class of shareholders of the company has taken
place in the management and control of the company can apply
for relief under s.241.
Who can apply- S.244
Any members of a company who complain that the affairs of the
company are being conducted in a manner oppressive to any
member or members (including any one or more of themselves)
may apply to the Court for an order under this section, provided
such members have a right so to apply in virtue of section
[Link] section comes into force only when the aggrieved
member is able to show that he suffered an injustice in his
capacity as a shareholder and not in any other capacity.
In the case of a company having a share capital, not less than
one hundred members of the company or not less than one tenth
of the total number of its members, whichever is less, or any
member or members holding not less than one-tenth of the
issued share capital of the company, provided that the applicant
or applicants have paid all calls and other sums due on their
shares.
· In the case of a company not having a share capital, not less
than one-fifth of the total number of its members.
And this provision can be waived by Tribunal.

Powers of Tribunal regarding the case of oppression- S.242

If order to windup the company is unfair then the
Tribunal may give an order providing
 Regulation of conduct f affairs of the company
 The purchase of shares or interests of members of the
company by other members thereof or by the company
  In case of purchase of its shares by the company the
consequent reduction of its share capital
 Restrictions on the transfer or allotment of the shares of the
company
 Termination, setting aside or modification of any
agreement howsoever arrived at between the company and
manager, managing director or other director or any other
person. But such action only after giving a notice
 Removal of md, manager or other directors
 Recovery of undue gains
 Appointment of directors
 Imposition of costs or any other methods.
Mismanagement

NATIONAL COMPANY LAW TRIBUNAL

Under section 408, the Central Government shall constitute a
National Company Law Tribunal.
National Company Law Tribunal is the outcome of the Eradi
Committee. NCLT was intended to be introduced in the Indian
legal system in 2002 under the framework of Companies Act,
1956 however, due to the litigation with respect to the
constitutional validity of NCLT which went for over 10 years,
therefore, it was notified under the Companies Act, 2013.

It is a quasi-judicial authority incorporated for dealing with

corporate disputes that are of civil nature arising under the
Companies Act. However, a difference could be witnessed in the
powers and functions of NCLT under the previous Companies
Act and the 2013 Act. The constitutional validity of the NCLT
and specified allied provisions contained in the Act were re-
challenged. Supreme Court had preserved the constitutional
validity of the NCLT; however, specific provisions were
rendered as a violation of the constitutional principles. NCLT
works on the lines of a normal Court of law in the country and is
obliged to fairly and without any biases determine the facts of
each case and decide with matters in accordance with principles
of natural justice and in the continuance of such decisions, offer
conclusions from decisions in the form of orders. The orders so
formed by NCLT could assist in resolving a situation, rectifying
a wrong done by any corporate or levying penalties and costs
and might alter the rights, obligations, duties or privileges of the
concerned parties. The Tribunal isn’t required to adhere to the
severe rules with respect to appreciation of any evidence or
procedural law.
Benches of the Tribunal – the Central Government by
notification shall also constitute benches of tribunal. The
Principal bench of the tribunal shall be in New Delhi. The
powers of the tribunal shall be exercised by Benches consisting
of two members out of whom one shall be a judicial member
and other shall be a Technical member. The NCLT started
functioning with eleven benches – two at New Delhi and one
each at Ahmedabad, Allahabad, Bengaluru, Chandigarh,
Chennai, Kolkota, Mumbai, Guwahati, Hyderabad.

Major Functions of NCLT

Registration of Companies
The new Companies Act, 2013 has enabled questioning the
legitimacy of companies because of specific procedural errors
during incorporation and registration. NCLT has been
empowered in taking several steps, from cancelling the
registration of a company to dissolving any company. The
Tribunal could even render the liability or charge of members to
unlimited. With this approach, NCLT can de-register any
company in specific situations when the registration certificate
has been obtained by wrongful manner or illegal means under
section 7(7) of the Companies Act, 2013.

Transfer of shares
NCLT is also empowered to hear grievances of rejection of
companies in transferring shares and securities and under section
58- 59 of the Act which were at the outset were under the
purview of the Company Law Board. Going back to Companies
Act, 1956 the solution available for rejection of transmission or
transfer were limited only to the shares and debentures of a
company but as of now the prospect has been raised under the
Companies Act, 2013 and the now covers all the securities
which are issued by any company.

Deposits
The Chapter V of the Act deals with deposits and was notified
several times in 2014 and Company Law Board was the prime
authority for taking up the cases under said chapter. Now, such
powers under the chapter V of the Act have been vested with
NCLT. The provisions with respect to the deposits under the
Companies Act, 2013 were notified prior to the inception of the
NCLT. Unhappy depositors now have a remedy of class actions
suits for seeking remedy for the omissions and acts on part of
the company that impacts their rights as depositors.

Power to investigate
As per the provision of the Companies Act, 2013 investigation
about the affairs of the company could be ordered with the help
of an application of 100 members whereas previously the
application of 200 members was needed for the same. Moreover,
if a person who isn’t related to a company and is able to
persuade NCLT about the presence of conditions for ordering an
investigation then NCLT has the power for ordering an
investigation. An investigation which is ordered by the NCLT
could be conducted within India or anywhere in the world. The
provisions are drafted for offering and seeking help from the
courts and investigation agencies and of foreign countries.

Freezing assets of a company

The NCLT isn’t just empowered to freezing the assets of a
company for using them at a later stage when such company
comes under investigation or scrutiny, such investigation could
also be ordered on the request of others in specific conditions.

Converting a public limited company into a private limited

company
Sections 13-18 of the Companies Act, 2013 read with rules
control the conversion of a Public limited company into the
Private limited company; such conversion needs an erstwhile
confirmation from the NCLT. NCLT has the power under
section 459 of the Act, for imposing specific conditions or
restrictions and might subject granting approvals to such
conditions
NATIONAL COMPANY LAW APPELLATE TRIBUNAL

National Company Law Appellate Tribunal (NCLAT) was

constituted under Section 410 of the Companies Act, 2013 for
hearing appeals against the orders of National Company Law
Tribunal(s) (NCLT), with effect from 1st June, 2016.

Objectives
 Hear appeals against the orders passed by NCLT(s) under
Section 61 of the Insolvency and Bankruptcy Code, 2016
(IBC), with effect from 1st December, 2016.

 Hear appeals against the orders passed by Insolvency and

Bankruptcy Board of India under Section 202 and Section
211 of IBC.

 Hear and dispose of appeals against any direction issued or

decision made or order passed by the Competition
Commission of India (CCI) – as per the amendment
brought to Section 410 of the Companies Act, 2013 by
Section 172 of the Finance Act, 2017, with effect from
26th May, 2017.