IndianLawNotes.com

COMPANY LAW. Unit- III:

PAPER-V:

COMPANY LAW.

Unit- III:

Q.1. Define a Prospectus under the Companies Act, 2013. What are its essential contents? Discuss the civil and criminal liabilities for misstatements in a prospectus.

I. Meaning and Definition of Prospectus

A prospectus is a legal document issued by a public company inviting the public to subscribe to its shares or debentures. It serves as a tool of communication between the company and prospective investors and must contain true, complete, and accurate information about the company’s business, financial position, and risk factors.

According to Section 2(70) of the Companies Act, 2013,

“A prospectus means any document described or issued as a prospectus and includes any notice, circular, advertisement, or other document inviting offers from the public for the subscription or purchase of any securities of a body corporate.”

II. Types of Prospectus

  1. Red Herring Prospectus (Section 32) – Issued before the determination of the offer price.
  2. Shelf Prospectus (Section 31) – Used by certain financial institutions for multiple issues over a period.
  3. Abridged Prospectus – A summary of the main prospectus to accompany application forms.
  4. Deemed Prospectus (Section 25) – When a company allots shares to an intermediary who then offers them to the public.

III. Essential Contents of a Prospectus

(As per Section 26 of the Companies Act, 2013)

A prospectus must contain the following essential details:

  1. Company details – Name, address, company number, and incorporation details.
  2. Capital structure – Authorized, issued, subscribed, and paid-up capital.
  3. Objects of the issue – Purpose for which funds are being raised.
  4. Details of directors and key managerial personnel (KMP).
  5. Financial information – Audited financial statements, reports of auditors.
  6. Risk factors – Any risk associated with the business or issue.
  7. Statutory and other approvals.
  8. Underwriting and commission details.
  9. Terms of the present issue – Issue price, opening and closing dates, etc.
  10. Minimum subscription and mode of allotment.
  11. Declaration by directors – That all information is true and correct.

IV. Civil Liability for Misstatements in a Prospectus

(Section 35 of the Companies Act, 2013)

If a prospectus contains any untrue or misleading statement or omission of any material fact, then:

  • The company, directors, promoters, and experts involved may be held liable to compensate any person who has suffered loss or damage as a result of relying on such statements.
  • The liability arises even if there is negligence, without requiring proof of intent to deceive.
  • A person can sue for compensation if they subscribed to the securities believing the contents of the prospectus.

V. Criminal Liability for Misstatements in a Prospectus

(Section 34 of the Companies Act, 2013)

  • If a prospectus includes any untrue statement, any person who authorised the issue of the prospectus shall be punishable with:
    • Imprisonment up to 10 years (minimum 6 months), and
    • Fine up to the amount involved in the fraud (minimum amount involved).
  • Criminal liability is attracted only if the misstatement was made knowingly or recklessly with intent to deceive.

VI. Defenses Available

The following defenses can protect a person from liability:

  • The person had reasonable grounds to believe the statement was true.
  • The statement was made by an expert, and the person had reasonable grounds to believe in its accuracy.
  • The person withdrew consent before the issue of the prospectus.
  • The prospectus was issued without their knowledge or consent.

VII. Conclusion

A prospectus is a powerful document that plays a crucial role in capital markets. It must be drafted with utmost care, as both civil and criminal liabilities can arise from untrue or misleading statements. The law imposes strict obligations on companies and their officers to protect the interests of investors and ensure transparency in public offerings.

Q.2. Who is a ‘member’ of a company? How is membership acquired and terminated? Distinguish between a ‘member’ and a ‘shareholder’.

Long Answer

I. Definition of ‘Member’

A member of a company is a person who has agreed in writing to become a part of the company and whose name is entered in the Register of Members maintained by the company.

As per Section 2(55) of the Companies Act, 2013, a person may be considered a member if:

  1. They are subscribers to the Memorandum of Association of the company.
  2. Their name is entered in the Register of Members after acquiring shares.
  3. They hold shares of the company and their name is entered in the register.
  4. In case of a company without share capital, anyone who agrees in writing to become a member and whose name is entered in the register.

II. Modes of Acquiring Membership

Membership in a company can be acquired in the following ways:

  1. By Subscription to the Memorandum
    • The original signatories of the Memorandum become the first members.
  2. By Application and Allotment of Shares
    • When a person applies for shares and they are allotted, and their name is entered in the register.
  3. By Transfer of Shares
    • A transferee becomes a member when the company registers the transfer and updates the register of members.
  4. By Transmission of Shares
    • Membership can pass by operation of law, such as on the death of a member (to legal heir) or insolvency.
  5. By Beneficial Ownership (Deemed Membership)
    • As per Depositories Act, 1996, the beneficial owner of shares in demat form is deemed to be a member.
  6. By Holding Shares in Own Name
    • A person whose name appears in the register as the holder of shares is treated as a member.

III. Termination of Membership

A person ceases to be a member of a company in the following situations:

  1. Transfer of Shares – Upon registration of transfer in the company’s records.
  2. Forfeiture of Shares – Due to non-payment of calls or dues.
  3. Redemption of Shares – In case of redeemable preference shares.
  4. Buy-back of Shares – As per the procedure under Section 68.
  5. Death of the Member – Membership passes to legal representatives.
  6. Insolvency – Official assignee takes control.
  7. Surrender of Shares – Voluntary return of shares, subject to company approval.
  8. Expulsion (in some special cases) – If the Articles of Association provide for it and it is legally valid.
  9. Winding Up – On dissolution or winding up of the company.

IV. Distinction between ‘Member’ and ‘Shareholder’

Basis Member Shareholder
Definition A person whose name is entered in the register of members. A person who holds shares in a company.
Company without Share Capital A person can be a member even without holding shares. Not applicable in such companies.
Deceased/Insolvent Legal heirs or official receiver may be members until transfer. They may not be shareholders until shares are transferred.
Subscriber to Memorandum Becomes a member automatically. Becomes a shareholder only after shares are allotted.
Register of Members Must have name entered in the register to be a member. Holding shares alone may not be enough without registration.
Scope Wider term in some cases (e.g., companies limited by guarantee). Generally applies only in companies with share capital.

V. Conclusion

The terms ‘member’ and ‘shareholder’ are often used interchangeably in companies with share capital, but they are not always synonymous. Every shareholder is generally a member, but not every member may be a shareholder (especially in companies without share capital). The acquisition and termination of membership are governed by well-defined procedures in the Companies Act, and proper compliance is crucial for maintaining the legal structure of corporate ownership.

Q.3. What is share capital? Explain the various types of share capital under the Companies Act, 2013. What are the legal provisions relating to the alteration of share capital?

Long Answer

I. Meaning of Share Capital

Share capital refers to the amount of capital raised by a company through the issue of shares. It represents the ownership interest of shareholders in the company and forms the primary source of finance for a company with share capital.

In simple terms, share capital = total nominal value of shares issued to shareholders.

For example, if a company issues 1,00,000 equity shares of ₹10 each, the share capital is ₹10,00,000.

II. Types of Share Capital (As per Companies Act, 2013)

Section 43 of the Companies Act, 2013 recognizes the following types of share capital:

1. Authorised Capital (Nominal Capital)

  • The maximum amount of share capital a company is authorised to raise as per its Memorandum of Association (MOA).
  • The company cannot issue shares beyond this amount unless the MOA is altered.

2. Issued Capital

  • The part of the authorised capital that has actually been offered to the public for subscription.

3. Subscribed Capital

  • That portion of the issued capital which has actually been subscribed by the investors.

4. Called-up Capital

  • The part of subscribed capital which the company has called for payment from the shareholders.

5. Paid-up Capital

  • The actual amount paid by the shareholders.
  • Paid-up capital = Called-up capital – Calls in arrears.

6. Uncalled Capital

  • The portion of subscribed capital that the company has not yet called from the shareholders.

7. Reserve Capital

  • A portion of uncalled capital which can only be called up in the event of winding up of the company, as per a special resolution.

III. Classification Based on Share Types (Section 43)

Companies limited by shares can issue the following:

(a) Equity Share Capital

  • With voting rights.
  • Or with differential rights as to dividend, voting, etc.

(b) Preference Share Capital

  • Preferential rights in terms of dividend payment and repayment during winding up.

IV. Legal Provisions for Alteration of Share Capital

The Companies Act, 2013 allows a company to alter its share capital under Section 61, provided the Articles of Association permit such alteration.

Section 61 – Alteration of Share Capital

A company, if authorised by its Articles, may alter its share capital by:

  1. Increasing Authorised Share Capital
    – Through passing an ordinary resolution in the general meeting and filing Form SH-7 with the Registrar.
  2. Consolidation and Division
    – Existing shares may be consolidated into shares of a larger amount, e.g., 10 shares of ₹10 each into 1 share of ₹100.
  3. Subdivision of Shares
    – A share of ₹100 may be subdivided into 10 shares of ₹10 each.
  4. Conversion of Shares into Stock and Vice-Versa
    – Fully paid-up shares can be converted into stock and stock into fully paid-up shares.
  5. Cancellation of Unissued Capital
    – Company may cancel shares not taken up or agreed to be taken up. This does not amount to reduction of capital.

V. Filing Requirements for Alteration

The company must:

  • Pass the necessary board and shareholders’ resolutions.
  • File Form SH-7 with the Registrar within 30 days of the alteration.
  • Alter the Memorandum of Association, if the authorised capital is changed (Clause V of MOA).

VI. Distinction Between Increase and Reduction of Capital

  • Increase of capital is governed by Section 61 and requires compliance with AOA.
  • Reduction of capital (Section 66) involves approval from the Tribunal and is subject to more stringent checks.

VII. Conclusion

Share capital is the financial backbone of a company and indicates the extent of interest held by shareholders. The Companies Act, 2013 provides a flexible framework for companies to alter their share capital structure, subject to compliance with procedural and legal safeguards. Such alterations enable companies to adjust their capital according to financial needs and business expansion.

Q.4. Define ‘share’. Explain the different kinds of shares a company can issue. What are the rights and obligations attached to each class of shares?

Long Answer

I. Meaning and Definition of ‘Share’

A share is a unit of ownership in a company that entitles the holder to a proportion of the company’s profits, assets, and control through voting rights.

According to Section 2(84) of the Companies Act, 2013:

“Share means a share in the share capital of a company and includes stock.”

As per Justice Farwell in Borland’s Trustee v. Steel Bros. & Co. Ltd.:

“A share is the interest of a shareholder in the company, measured by a sum of money, for the purpose of liability and interest.”

Thus, a share represents:

  • A measure of ownership in the company.
  • A bundle of rights and obligations.
  • A unit of participation in the capital of the company.

II. Kinds of Shares under Companies Act, 2013

As per Section 43, a company limited by shares can issue only two types of shares:

1. Equity Shares

Equity shares are also known as ordinary shares. They do not carry any preferential rights with respect to dividend or repayment.

Types of Equity Shares:
  • With voting rights (default category).
  • With differential rights as to:
    • Dividend,
    • Voting,
    • Or otherwise, as per rules prescribed under Companies (Share Capital and Debentures) Rules, 2014.
Rights of Equity Shareholders:
  • Right to vote in general meetings.
  • Right to receive dividends (if declared).
  • Right to participate in the distribution of surplus assets in case of winding up.
  • Right to inspect statutory registers and receive notices.
  • Right to bonus or right shares when offered.
Obligations:
  • Liable to pay the unpaid portion of shares when called.
  • Bear losses to the extent of shareholding in case of winding up.

2. Preference Shares

Preference shares carry certain preferential rights over equity shares.

Preferential Rights:
  • Preference in dividend payment at a fixed rate before equity shareholders.
  • Preference in repayment of capital in the event of winding up.
Types of Preference Shares:
  • Cumulative or Non-Cumulative:
    Cumulative shareholders carry forward unpaid dividends; non-cumulative do not.
  • Participating or Non-Participating:
    Participating shareholders can share surplus profits after dividend; non-participating cannot.
  • Redeemable or Irredeemable:
    Redeemable shares are repaid after a certain period. Irredeemable shares are not allowed as per Section 55.
Rights of Preference Shareholders:
  • Right to fixed dividend before equity shareholders.
  • Priority in capital repayment.
  • Right to vote only on matters affecting their rights or when dividend is unpaid for 2 or more years (Section 47).
Obligations:
  • Not entitled to participate in management unless voting rights are triggered.
  • Do not have regular voting rights in general meetings (except in special cases).

III. Other Classes of Shares (Based on Practice, Not Explicitly in Section 43)

Some additional categories used in corporate practice include:

  • Sweat Equity Shares (Section 54):
    Issued to employees or directors at a discount or for consideration other than cash for providing know-how, IP, or value addition.
  • Bonus Shares:
    Issued free of cost to existing shareholders from the company’s free reserves.
  • Right Shares (Section 62):
    Offered to existing shareholders in proportion to their holdings, before offering to the public.

IV. Legal Requirements for Issuing Shares

  • Must be authorized by the Articles of Association.
  • Issuance must comply with Companies Act provisions, SEBI regulations (if listed), and prescribed procedural requirements.
  • Issue of shares with differential voting rights requires compliance with Rule 4 of Companies (Share Capital and Debentures) Rules, 2014.

V. Conclusion

Shares represent a person’s ownership stake in a company and come with a set of economic and governance rights. The Companies Act, 2013 restricts the types of shares to equity and preference shares but allows flexibility within these classes to suit the company’s financing and control requirements. While equity shareholders enjoy voting and residual benefits, preference shareholders are compensated with fixed returns and priority but limited governance rights.

Q.5. What is meant by dividend? Discuss the legal provisions regarding the declaration and distribution of dividends under the Companies Act, 2013. What are the rules relating to unpaid dividends?

Long Answer

I. Meaning of Dividend

The term “dividend” refers to the portion of profits of a company that is distributed to its shareholders. It is a return on the investment made by the shareholders and is usually paid in proportion to the number of shares held by them.

As per Section 2(35) of the Companies Act, 2013:

“Dividend includes any interim dividend.”

Dividends may be paid:

  • In cash,
  • By issue of fully paid bonus shares, or
  • By distribution of assets, subject to legal provisions.

II. Types of Dividends

  1. Final Dividend
    • Declared at the Annual General Meeting (AGM) on the recommendation of the Board of Directors.
    • Paid after approval by shareholders.
  2. Interim Dividend
    • Declared by the Board of Directors between two AGMs.
    • Can be paid out of current or surplus profits.

III. Legal Provisions for Declaration and Distribution of Dividends

(Under Sections 123 to 127 of the Companies Act, 2013)

1. Section 123 – Declaration of Dividend

Dividend can be declared or paid by a company only:

  • Out of current profits, or
  • Out of previous years’ profits (transferred to reserves), or
  • Out of both, after providing for depreciation.
Conditions for Declaration:
  • Must be recommended by the Board and approved by shareholders at the AGM.
  • Depreciation must be provided as per Schedule II.
  • Transfer to reserves is optional (unlike earlier provisions).
  • Cannot be paid from capital.
  • Dividend should be paid only to registered shareholders on record date.

2. Section 124 – Unpaid Dividend Account

  • If dividend declared is not claimed or paid within 30 days, the company must transfer the unpaid amount to a separate Unpaid Dividend Account within 7 days.
  • A statement of unpaid dividend must be placed on the company’s website and filed with the Registrar.
  • If the amount remains unpaid in the account for 7 years, it is transferred to the Investor Education and Protection Fund (IEPF).

3. Section 125 – Investor Education and Protection Fund (IEPF)

The amount transferred to IEPF includes:

  • Unpaid dividends for 7 years,
  • Matured deposits and debentures unclaimed for 7 years,
  • Application money due for refund.

Shareholders can claim the amount from IEPF by applying in the prescribed manner.

4. Section 127 – Punishment for Failure to Pay Dividend

If a company fails to pay dividend within 30 days of its declaration:

  • Every director who knowingly permitted the default shall be:
    • Liable for imprisonment up to 2 years, and
    • Fine up to ₹1,000 for every day the default continues.

However, no liability arises if:

  • The dividend could not be paid due to operation of law.
  • Shareholder has given directions that cannot be complied with.
  • Dispute regarding right to receive the dividend.
  • Lawful adjustment of the dividend against dues from the shareholder.

IV. Procedure for Declaration and Payment of Dividend

  1. Hold Board Meeting to recommend the dividend.
  2. Prepare Financial Statements and provide for depreciation.
  3. Hold AGM and pass an ordinary resolution to approve the dividend.
  4. Open a separate bank account and deposit the dividend amount within 5 days of declaration.
  5. Pay dividend within 30 days to shareholders.
  6. Transfer unclaimed dividend to Unpaid Dividend Account after 30 days.
  7. Transfer unclaimed amount to IEPF after 7 years.

V. Other Important Points

  • Dividend cannot be paid in advance.
  • Dividend must be paid in cash, cheque, warrant, or electronic mode.
  • In the case of preference shares, dividend is paid as per the agreed rate before equity shareholders.
  • Listed companies must comply with SEBI (LODR) Regulations in addition to the Companies Act.

VI. Conclusion

The Companies Act, 2013 ensures that dividend distribution is fair, transparent, and regulated. It mandates timely declaration and payment, protection of shareholder interests, and prevents misuse of profits. Provisions relating to unpaid dividend and IEPF ensure that shareholders’ rights are preserved even in the case of delayed claims.

Q.6. Define ‘debenture’. What are its characteristics? Discuss the types of debentures and the legal provisions governing their issue, redemption, and the role of debenture trustees.

Long Answer

I. Meaning and Definition of Debenture

A debenture is a debt instrument used by companies to raise long-term capital. It is essentially an acknowledgment of debt under the company’s seal, wherein the company agrees to repay the principal amount along with interest after a specified period.

According to Section 2(30) of the Companies Act, 2013:

“Debenture includes debenture stock, bonds, and any other instrument of a company evidencing a debt, whether constituting a charge on the assets of the company or not.”

Debentures do not include:

  • Instruments such as bills of exchange, promissory notes, or other negotiable instruments.

II. Characteristics of a Debenture

  1. Acknowledgment of Debt – It is a written instrument recognizing the company’s liability to pay a fixed amount with interest.
  2. Fixed Return – Debenture-holders earn a fixed interest irrespective of company profits.
  3. No Ownership Rights – Debenture-holders are creditors, not owners, and do not have voting rights.
  4. Security – Debentures may be secured (by charge on assets) or unsecured.
  5. Redeemable or Convertible – They may be redeemed after a period or converted into equity shares, subject to terms.
  6. Transferable – Debentures are freely transferable, unless otherwise restricted.
  7. Priority in Liquidation – Debenture-holders get priority over shareholders in case of winding up.

III. Types of Debentures

Debentures may be classified based on various criteria:

1. On the Basis of Security

  • Secured Debentures – Backed by a charge (fixed or floating) on company assets.
  • Unsecured (Naked) Debentures – No specific security, rely solely on the company’s creditworthiness.

2. On the Basis of Tenure

  • Redeemable Debentures – Repaid after a fixed period.
  • Irredeemable (Perpetual) Debentures – No fixed date of repayment (not allowed under Indian law now).

3. On the Basis of Convertibility

  • Convertible Debentures – Can be converted into equity shares after a specific period.
    • Fully Convertible
    • Partly Convertible
  • Non-Convertible Debentures – Cannot be converted into shares.

4. On the Basis of Registration

  • Registered Debentures – Name and details recorded in company’s register; transferable via instrument of transfer.
  • Bearer Debentures – Transferable by delivery; not registered in the company’s records (no longer commonly used in India).

IV. Legal Provisions Governing Debentures

1. Section 71 – Issue of Debentures

  • A company may issue debentures with an option to convert into shares, either wholly or partly, at the time of redemption.
  • No company shall issue debentures carrying voting rights.
  • Secured debentures may be issued subject to compliance with Companies (Share Capital and Debentures) Rules, 2014.
Conditions for Secured Debentures:
  • Creation of a charge on assets.
  • Appointment of a Debenture Trustee (if issue is more than ₹50 lakhs or if public issue).
  • Execution of a Debenture Trust Deed.

2. Redemption of Debentures

  • Debentures must be redeemed in accordance with the terms of issue.
  • Company may create a Debenture Redemption Reserve (DRR) out of profits (no longer mandatory for listed companies).
  • Redemption can be done through:
    • Lump sum payment,
    • Instalments,
    • Purchase in open market,
    • Conversion into equity (if permitted).

V. Debenture Trustee – Role and Legal Position

Who is a Debenture Trustee?

A Debenture Trustee is a person or institution appointed to protect the interests of debenture-holders, especially in case of secured debentures.

Appointment – Mandatory when:
  • A company issues secured debentures of ₹50 lakhs or more, or
  • Makes a public offer of debentures.
Duties and Powers of Debenture Trustee (Section 71(6) and SEBI Regulations):
  • Ensure that terms of issue and security creation are complied with.
  • Take steps to protect debenture-holders’ rights in case of default.
  • Call meetings of debenture-holders.
  • Initiate legal proceedings if necessary.
  • Maintain records and provide reports to SEBI (if listed).

VI. SEBI Guidelines (for Listed Companies)

  • SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 govern listed debentures.
  • Listed companies must comply with detailed disclosures, credit rating, and listing requirements.

VII. Conclusion

Debentures are a key source of long-term finance for companies, especially when they want to avoid equity dilution. They provide fixed returns to investors and can be tailored through various types. The Companies Act, 2013, along with SEBI regulations, ensures that the issuance, redemption, and administration of debentures are carried out in a structured, transparent, and investor-friendly manner, especially through the role of debenture trustees in protecting investors’ interests.

Q.7. Who are Directors? Discuss their appointment, qualification, disqualification, and vacation of office as per the Companies Act, 2013.

Long Answer

I. Meaning and Definition of Directors

A Director is a person appointed to the Board of a company to manage its affairs and act on behalf of the company. They are collectively referred to as the Board of Directors and are responsible for framing company policies, making strategic decisions, and ensuring compliance with the law.

According to Section 2(34) of the Companies Act, 2013:

“Director means a director appointed to the Board of a company.”

Directors act as:

  • Agents of the company,
  • Trustees of company assets,
  • Managing partners in operations.

II. Legal Status of Directors

  • They are officers of the company (Section 2(59)),
  • Fiduciaries responsible for acting in good faith,
  • Accountable to shareholders and regulators.

III. Appointment of Directors (Sections 149 to 152)

1. First Directors

  • Named in the Articles of Association (AOA).
  • If not named, the subscribers to the Memorandum shall be deemed as first directors.

2. Appointment at General Meeting (Section 152)

  • Every director is appointed by shareholders in the general meeting through an ordinary resolution.

3. Appointment by Board (Section 161)

  • Additional Directors: Appointed by the Board to hold office until the next AGM.
  • Casual Vacancy: If a director vacates office before tenure, the Board may fill the vacancy.
  • Alternate Directors: Appointed if a director is absent for more than 3 months.

4. Appointment of Independent Directors (Section 149(6))

  • Listed public companies must have at least one-third independent directors.
  • Independent directors are not promoters and have no material relationship with the company.

5. Appointment of Women Director (Section 149(1))

  • Prescribed classes of companies (like listed or large public companies) must appoint at least one woman director.

6. Director Identification Number (DIN)

  • As per Section 152(3), no person shall be appointed as a director unless they have been allotted a DIN.

IV. Qualification of Directors

The Companies Act, 2013 does not prescribe specific educational or professional qualifications for directors.

However, to be appointed, a person must:

  • Be a natural person (not a company or body),
  • Have a valid DIN,
  • Not be disqualified under the Act.

The Articles of Association may prescribe additional qualifications, such as shareholding requirements.

V. Disqualifications of Directors (Section 164)

A person shall not be eligible to be appointed as a director if:

1. Personal Disqualifications (Section 164(1))

  • Declared of unsound mind,
  • Undischarged insolvent,
  • Has applied to be adjudicated as an insolvent,
  • Convicted of an offence involving moral turpitude and sentenced to imprisonment for 6 months or more (and 5 years bar if sentence exceeds 7 years),
  • Disqualified by court or Tribunal,
  • Failed to pay calls on shares held,
  • Convicted under Section 188 (related party transactions).

2. Company-Related Disqualifications (Section 164(2))

If a person is or has been a director in a company that:

  • Has not filed financial statements or annual returns for 3 consecutive years, or
  • Has failed to repay deposits, interest, dividends, or debentures for over 1 year.

Effect: Disqualified for appointment in any company for 5 years from the date of default.

VI. Vacation of Office of Director (Section 167)

A director shall vacate his office if:

  1. He incurs any of the disqualifications under Section 164.
  2. He absents himself from all Board meetings for 12 months without leave.
  3. He acts in contravention of Section 184 (disclosure of interest).
  4. He fails to disclose interest in contracts or arrangements.
  5. He is removed under Section 169.
  6. He is convicted by a court and sentenced to imprisonment for not less than 6 months.
  7. In case of a private company, if the Articles provide for additional grounds.

If the office is vacated under Section 167(1), any acts done after that date are invalid.

VII. Removal of Directors (Section 169)

  • A company may remove a director by ordinary resolution before the expiry of their term.
  • The concerned director must be given an opportunity to be heard.
  • Special procedures apply to independent and small shareholder directors.

VIII. Conclusion

Directors play a central role in the governance and functioning of a company. The Companies Act, 2013 lays down clear provisions for their appointment, disqualification, and removal to ensure that only capable and trustworthy individuals manage corporate affairs. Regular compliance with these provisions is essential to maintain transparency, accountability, and stakeholder confidence in the company’s management.

Q.8. Explain the powers of the Board of Directors under the Companies Act. What restrictions are imposed on their powers? Discuss the liabilities of directors in case of breach of duties.

Long Answer

I. Introduction: Board of Directors and Their Role

The Board of Directors is the apex decision-making body of a company. Directors act as agents, trustees, and representatives of the company. The Companies Act, 2013 empowers them to manage the company’s business and affairs, subject to the provisions of the Act and the company’s Articles of Association (AOA).

II. Powers of the Board of Directors

(Section 179 of the Companies Act, 2013)

As per Section 179(1), the Board of Directors is entitled to exercise all powers and do all such acts and things as the company is authorised to do, except those required to be exercised by the company in a general meeting.

A. Powers Exercisable by Board through Board Resolutions (Section 179(3))

The following powers can be exercised only by passing a resolution at a Board meeting:

  1. To make calls on shareholders in respect of unpaid money on shares.
  2. To authorize buy-back of securities.
  3. To issue securities (debentures or shares) in or outside India.
  4. To borrow money.
  5. To invest the company’s funds.
  6. To grant loans or provide guarantees/security.
  7. To approve financial statements and the Board’s report.
  8. To approve mergers/amalgamations, if delegated.
  9. To take over a company or acquire a controlling stake.

B. Additional Powers and Functions

  • Appointment of Key Managerial Personnel (KMP).
  • Declaration of interim dividend.
  • Decide strategic policy of the company.
  • Recommend final dividend.
  • Open and operate bank accounts.
  • Authorise legal proceedings.
  • Enter into contracts and agreements.

III. Restrictions on the Powers of the Board

Though directors have wide powers, the Companies Act, 2013 and AOA impose certain restrictions to protect shareholder and stakeholder interests.

A. Powers Requiring Shareholders’ Approval by Special Resolution (Section 180)

The Board can exercise the following powers only with the consent of shareholders through a special resolution:

  1. To sell, lease, or otherwise dispose of the whole or substantial part of the company’s undertaking.
  2. To invest in trust securities beyond limits.
  3. To borrow money beyond the aggregate of paid-up capital and free reserves and securities premium.
  4. To remit or give time for repayment of any debt due from a director.

B. Other Statutory Restrictions

  • Related party transactions must be approved by shareholders (Section 188).
  • Loans to directors or related parties are restricted under Section 185.
  • Political contributions are capped (Section 182).
  • Cannot act ultra vires to the company’s object clause.

IV. Liabilities of Directors in Case of Breach of Duties

Directors owe fiduciary and statutory duties to the company. In case of breach, they may be held liable civilly and criminally.

A. Statutory Duties under Section 166

Every director must:

  1. Act in good faith in the best interests of the company and its stakeholders.
  2. Exercise duties with due and reasonable care, skill, and diligence.
  3. Not get involved in conflicts of interest.
  4. Not achieve or attempt to achieve any undue gain.
  5. Not assign his office.

Penalty for contravention of Section 166:

  • Fine up to ₹5 lakhs.

B. Civil Liability

  • Liable to compensate the company for losses caused by breach of fiduciary duty, negligence, or misfeasance.
  • Liable to repay any undue gain made from inside information or misuse of power.
  • Liable for unauthorised acts beyond powers conferred.

C. Criminal Liability

  • Misstatement in prospectus (Section 34, 35): Imprisonment up to 10 years.
  • Fraudulent conduct of business (Section 447): Imprisonment up to 10 years and fine.
  • Failure to repay deposits or dividends: Imprisonment and fine under Sections 73, 127.
  • Insider trading and unfair practices (for listed companies): SEBI penalties and prosecution.

V. Judicial Interpretations

  • In Re City Equitable Fire Insurance Co. Ltd., it was held that directors must act honestly but are not required to exhibit a greater degree of skill than may reasonably be expected.
  • In Regal (Hastings) Ltd. v. Gulliver, directors were held liable to account for profits made using their position.

VI. Conclusion

Directors are entrusted with vast powers to manage the affairs of a company, but such powers come with legal responsibilities and limitations. The Companies Act, 2013 ensures that while the Board has operational freedom, there are adequate checks and balances through statutory restrictions and accountability mechanisms. In case of breach of their fiduciary or statutory duties, directors may face civil or criminal liability, emphasizing the need for honest, diligent, and responsible conduct.

Q.9. What is Corporate Social Responsibility (CSR)? Explain the statutory provisions under Section 135 of the Companies Act, 2013.

Long Answer

I. Introduction to Corporate Social Responsibility (CSR)

Corporate Social Responsibility (CSR) refers to a company’s ethical obligation to contribute to the economic, environmental, and social well-being of the community in which it operates. CSR represents the company’s commitment to operate in a socially responsible and sustainable manner, beyond profit-making.

In India, CSR was given statutory recognition under the Companies Act, 2013, making it mandatory for certain companies to spend a portion of their profits on social development activities.

II. Statutory Framework: Section 135 of the Companies Act, 2013

The provisions of Section 135 along with the Companies (CSR Policy) Rules, 2014, lay down the legal obligations for CSR.

III. Applicability of CSR Provisions (Section 135(1))

CSR provisions apply to every company (including a foreign company) having:

  • Net worth of ₹500 crore or more,
  • OR Turnover of ₹1,000 crore or more,
  • OR Net profit of ₹5 crore or more
    during the immediately preceding financial year.

IV. Constitution of CSR Committee (Section 135(1))

Every qualifying company must constitute a CSR Committee of the Board consisting of:

  • Three or more directors, out of which at least one director shall be an independent director.

However, for private companies with only two directors, or for unlisted companies with no requirement for independent directors, this requirement is relaxed.

V. Functions of CSR Committee (Section 135(3))

The CSR Committee shall:

  1. Formulate and recommend a CSR Policy to the Board.
  2. Recommend the CSR expenditure to be incurred.
  3. Monitor the implementation of the CSR projects and programs.

VI. CSR Expenditure Requirement (Section 135(5))

The Board of every company to which CSR applies must:

  • Ensure that the company spends at least 2% of the average net profits of the company made during the three immediately preceding financial years, in every financial year on CSR activities.

If the company fails to spend the amount:

  • The Board shall, in its report, specify the reasons for not spending.
  • Unspent amount:
    • If related to an ongoing project, it must be transferred to a special account within 30 days of the end of the financial year and spent within 3 years.
    • If not related to an ongoing project, it must be transferred to a fund specified in Schedule VII (such as PM CARES Fund) within 6 months.

VII. CSR Policy and Disclosure (Section 135(4))

  • The CSR policy must be disclosed in the Board’s report and also posted on the company’s website.
  • The policy must include:
    • CSR projects to be undertaken,
    • Monitoring mechanism,
    • Details of the implementation schedule.

VIII. CSR Activities (Schedule VII)

CSR activities must be in line with those specified in Schedule VII, which include:

  1. Eradicating hunger, poverty, and malnutrition.
  2. Promoting education and skill development.
  3. Promoting gender equality and empowering women.
  4. Ensuring environmental sustainability.
  5. Protection of national heritage and culture.
  6. Measures for the benefit of armed forces veterans and war widows.
  7. Contribution to government funds like PM CARES Fund.
  8. Rural development projects.
  9. Slum area development.
  10. Disaster management, including COVID-19 relief.

CSR should not include activities undertaken in the normal course of business (with some exceptions) or contributions made for political purposes.

IX. Penalty and Enforcement (As per Companies (Amendment) Act, 2020)

If a company fails to comply with the CSR provisions:

  • It shall be liable to a penalty of twice the amount required to be transferred, or ₹1 crore, whichever is less.
  • Every officer in default is punishable with a penalty of 1/10th of the required amount or ₹2 lakh, whichever is less.

X. Exemptions and Clarifications

  • Companies that cease to meet the CSR thresholds in any subsequent year are not required to comply with CSR provisions until they meet the criteria again.
  • One-person companies and small companies are exempt.

XI. Conclusion

CSR under the Companies Act, 2013 reflects a shift in Indian corporate governance by embedding social responsibility into legal obligation. Section 135 ensures that large and profitable companies contribute meaningfully to social development, thereby bridging the gap between business and society. The law ensures transparency, accountability, and structured implementation of CSR, promoting inclusive growth and sustainability.