1

Presented By Presented By

CA Swatantra Singh, CA Swatantra Singh, B.Com , FCA, MBAB.Com , FCA, MBA

Email ID: Email ID: singh.swatantra@gmail.com

New Delhi , 9811322785New Delhi , 9811322785,, www.caindelhiindia.com, www.caindelhiindia.com,

www.carajput.com www.carajput.com

Company Law

What is a company? A Company is a A Company is a voluntary association of voluntary association of

personspersons formed for the purpose of doing formed for the purpose of doing business, having a distinct name and business, having a distinct name and limited liability.limited liability.

They can be incorporated under the They can be incorporated under the Companies Act (it may be any type of Companies Act (it may be any type of company) company)

Corporations Corporations enacted under special enacted under special enactments ( Even those which are enactments ( Even those which are incorporated outside India)incorporated outside India)

Corporate soleCorporate sole Any Any other body corporateother body corporate notified by the notified by the

central governmentcentral government

Features of a company A company is considered as a A company is considered as a separate separate

legal entitylegal entity from its members, which can from its members, which can conduct business with all powers to conduct business with all powers to contract.contract.

Independent corporate entityIndependent corporate entity (Saloman (Saloman V. Saloman) It is independent of its V. Saloman) It is independent of its members and shareholdersmembers and shareholders

Other features

Limited LiabilityLimited Liability ( either by share or guarantee ( either by share or guarantee) ) ItIt can own property, separate from its members can own property, separate from its members. .

The property is vested with the company, as it is a The property is vested with the company, as it is a body corporate.body corporate.

The The income of the members are different from the income of the members are different from the income of the companyincome of the company ( Income received by the ( Income received by the members as dividends cannot be same as that of members as dividends cannot be same as that of the company)the company)

cont….cont….

Features continued..

Perpetual successionPerpetual succession: Death of the members is not : Death of the members is not the death of the company until it is wound upthe death of the company until it is wound up

As it is a legal entity or a As it is a legal entity or a juristic person or juristic person or artificial person it can artificial person it can sue and be suedsue and be sued

The company enjoys The company enjoys rights and liabilitiesrights and liabilities which which are not as that of the members of the companyare not as that of the members of the company

Lifting of Corporate Veil

As the company is As the company is a separate legal entitya separate legal entity , is has , is has been provided with a veil, compared to that of been provided with a veil, compared to that of individuals who are managing the company.individuals who are managing the company.

But if the court feels that such veil has to been But if the court feels that such veil has to been used for any used for any wrongful purposewrongful purpose, the court lifts the , the court lifts the corporate veil and makes the corporate veil and makes the individual liable for individual liable for such acts which they should not have done or such acts which they should not have done or doing in the name of the companydoing in the name of the company

Circumstances to lift the corporate veil…The corporate veil can be lifted eitherThe corporate veil can be lifted eitherunder the under the Statutory provisionsStatutory provisions or or Judicial interpretationsJudicial interpretationsThe statutory provisions areThe statutory provisions areProvided under the CompaniesProvided under the CompaniesAct, 1956Act, 1956The other circumstances are decidedThe other circumstances are decidedthrough Judicial interpretations, whichthrough Judicial interpretations, whichare based on facts of each case as perare based on facts of each case as perthe decisions of the courtthe decisions of the court

Statutory circumstances for lifting the corporate veil Reduction in membership- Reduction in membership- Less than Less than

seven in public company and less than seven in public company and less than two if it is a private company two if it is a private company

Failure to refund application money- Failure to refund application money- After the issue of shares to the pubic, the After the issue of shares to the pubic, the company has to pay back the initial company has to pay back the initial payment to the unsuccessful applicants payment to the unsuccessful applicants (SEBI Guidelines- 130 Days), if they fail (SEBI Guidelines- 130 Days), if they fail to do so, the corporate veil can be lifted.to do so, the corporate veil can be lifted.

Mis-description of companies name- Mis-description of companies name- While signing a contract if the company’s While signing a contract if the company’s name is not properly described, then the name is not properly described, then the corporate veil can be lifted.corporate veil can be lifted.

continued Misrepresentation in the prospectus- Misrepresentation in the prospectus- (Derry Vs (Derry Vs

Peek) In case of misrepresentation, the Peek) In case of misrepresentation, the promoters, directors and every other person promoters, directors and every other person responsible in this matter can be held liable. responsible in this matter can be held liable.

Fraudulent Conduct- Fraudulent Conduct- In case the company is In case the company is carried on with an intent to defraud the carried on with an intent to defraud the creditors, then the court may lift the corporate creditors, then the court may lift the corporate veil.veil.

Holding and subsidiary companies-Holding and subsidiary companies- A A subsidiary has a distinct legal entity from the subsidiary has a distinct legal entity from the holding company other than in a few holding company other than in a few circumstances, so if otherwise shown, the court circumstances, so if otherwise shown, the court may under the Act , lift the corporate veil of the may under the Act , lift the corporate veil of the subsidiary company.subsidiary company.

Circumstances to lift the corporateveil through judicial interpretations

When the court feels that there are no statutory When the court feels that there are no statutory provisions which can pierce the corporate veil, and provisions which can pierce the corporate veil, and the identity of the company is not the one which the identity of the company is not the one which has to exist, and the court has to interfere in order has to exist, and the court has to interfere in order to avoid the activities that are done in the name of to avoid the activities that are done in the name of the company by persons managing themthe company by persons managing them, it has , it has been empowered to do so…… been empowered to do so……

The circumstances are…..The circumstances are…..

Judicial interpretations by the court are as follows: Protection of Revenue-Protection of Revenue- When ever a company uses its When ever a company uses its

name for the purpose of tax evasion or to circumvent tax name for the purpose of tax evasion or to circumvent tax obligationsobligations

Prevention of fraud or Improper conduct- Prevention of fraud or Improper conduct- The The incorporation has been used for fraudulent purpose, like incorporation has been used for fraudulent purpose, like defrauding the creditors, defeating the purpose of law etc..defrauding the creditors, defeating the purpose of law etc..

Determination of the character of the company- Determination of the character of the company- Enemy Enemy company or all the members being the citizens of the company or all the members being the citizens of the enemy country. (Daimler Co. Ltd V. Continental Tyre & enemy country. (Daimler Co. Ltd V. Continental Tyre & Rubber Co. Ltd)Rubber Co. Ltd)

Other circumstances

Where a company is used to avoid welfare Where a company is used to avoid welfare legislation-legislation- If a company is formed in order to If a company is formed in order to avoid the benefits to the workers like bonus, or avoid the benefits to the workers like bonus, or other statutory benefits..other statutory benefits..

For determining the technical competence of the For determining the technical competence of the company- company- To look into the competency of the To look into the competency of the company or the shareholders or promoters company or the shareholders or promoters

(New Horizon’s Ltd and Another V. Union of India (New Horizon’s Ltd and Another V. Union of India (1994)(1994)

Types of Companies

Limited Company ( Limited by share or by Limited Company ( Limited by share or by guarantee)guarantee)

Unlimited companyUnlimited company Government CompanyGovernment Company Foreign CompanyForeign Company Private CompanyPrivate Company Public CompanyPublic Company

Limited Company Limited by Shares-Limited by Shares- In such companies, the In such companies, the

liability is only the amount which remains liability is only the amount which remains unpaid on the shares.unpaid on the shares.

Limited by Guarantee not having share capital-Limited by Guarantee not having share capital-In In this type of companies the memorandum of this type of companies the memorandum of Association limits the members’ liability. It will Association limits the members’ liability. It will be based on the undertaking that has been given be based on the undertaking that has been given in MOA for their contribution in case of a in MOA for their contribution in case of a winding up.winding up.

Limited by guarantee having share capital-Limited by guarantee having share capital- In In such cases , the liability would be based on the such cases , the liability would be based on the MOA towards the guaranteed amount and the MOA towards the guaranteed amount and the remaining would be from the unpaid sums of the remaining would be from the unpaid sums of the shares held by the person concerned.shares held by the person concerned.

Unlimited Company There is There is no limit on the liability of the members.no limit on the liability of the members. The The

liability in such cases would extend to the whole amount liability in such cases would extend to the whole amount of the company’s debts and liabilities.of the company’s debts and liabilities.

Here the Here the members cannot be directly sued by the creditorsmembers cannot be directly sued by the creditors.. When the company is wound up, the official liquidator will When the company is wound up, the official liquidator will

call upon the members to discharge the liability.call upon the members to discharge the liability. The details of the number of members with which the The details of the number of members with which the

company is registered and the amount of share capital has company is registered and the amount of share capital has to be stated in the Articles of Association (AOA).to be stated in the Articles of Association (AOA).

Government Company When When 51%51% of the paid up share capital is held by of the paid up share capital is held by

the government.the government. The share can be held by the The share can be held by the central government central government

or state governmentor state government. Partly by central and partly . Partly by central and partly by two or more governments.by two or more governments.

As the legal status of the company does not As the legal status of the company does not change by being a government company, there are change by being a government company, there are no special privileges given to them.no special privileges given to them.

Foreign Company A company incorporated outside A company incorporated outside

India, but India, but having a place of having a place of business in Indiabusiness in India..

If it does not have a place of If it does not have a place of business in India but only has business in India but only has agents in India it cannot be agents in India it cannot be considered to be foreign company. considered to be foreign company.

Private Company A company which has a A company which has a minimum of two minimum of two

personspersons. They have to subscribe to the MOA . They have to subscribe to the MOA and AOAand AOA

It should be have a It should be have a minimum paid up capital minimum paid up capital of 1 lakh or moreof 1 lakh or more as prescribed by the article. as prescribed by the article.

The maximum number of members to be The maximum number of members to be fiftyfifty ( it does not include members who are ( it does not include members who are employed in the company, persons who were employed in the company, persons who were formerly employed)formerly employed)

The The rights to transfer the shares are restrictedrights to transfer the shares are restricted in the Private companies in the Private companies

continued….continued….

Prohibits any invitation to the public to Prohibits any invitation to the public to subscribesubscribe and therefore it cannot issue a and therefore it cannot issue a prospectus inviting the public to subscribe prospectus inviting the public to subscribe for any shares in, or debentures of the for any shares in, or debentures of the companycompany

It It prohibits acceptance of depositsprohibits acceptance of deposits from from persons other than its members, directors persons other than its members, directors or their relatives.or their relatives.

If If two or more are holding one or more two or more are holding one or more sharesshares in a company in a company jointly,jointly, they shall for they shall for the purpose of this definition, be treated the purpose of this definition, be treated as as a single member.a single member.

As there is As there is no public accountabilityno public accountability like a like a public company, there is public company, there is no rigorous no rigorous surveillance.surveillance.

Exemption and Privileges of a Private company It can have a It can have a minimum of two members.minimum of two members. It can It can commence business immediatelycommence business immediately after after

obtaining certificate of incorporation.obtaining certificate of incorporation. It need It need not issue prospectusnot issue prospectus or statement in lieu of or statement in lieu of

prospectus.prospectus. It can have a It can have a minimum of 2 directors.minimum of 2 directors. It It need not hold statutory meetingneed not hold statutory meeting or file statutory or file statutory

report with the ROC.report with the ROC.

Public Company A Public company means a company-A Public company means a company- > Which is > Which is not a private companynot a private company > Which has a > Which has a minimum paid-up capital minimum paid-up capital

of Rs 5 lakh or such higher paid-upof Rs 5 lakh or such higher paid-up capital, as may be prescribedcapital, as may be prescribed

> Which is > Which is a private company and is a not a private company and is a not a subsidiary ofa subsidiary of a company, which is a company, which is private company. private company.

>It includes- any company which is a >It includes- any company which is a public company with a paid up capital of public company with a paid up capital of less than 5 lakh, then it has to less than 5 lakh, then it has to enhance its enhance its paid up capital as per the statutory paid up capital as per the statutory requirementrequirement

Conversion of Company

The Act provides for The Act provides for conversion of public conversion of public company into a private company and vice versacompany into a private company and vice versa

A private company is converted into a public A private company is converted into a public company either company either by default or by choiceby default or by choice in in compliance with the statutory requirements. compliance with the statutory requirements.

Once the action for conversion takes place then, Once the action for conversion takes place then, a a petition can be filed with the central government petition can be filed with the central government with the necessary documents for its decision on with the necessary documents for its decision on the matter of conversionthe matter of conversion

Registration and Incorporation

Association of persons or partnership or more than Association of persons or partnership or more than 20 20 members ( 10 in case of banking) can register to form a members ( 10 in case of banking) can register to form a company under the Companies Act, 1956company under the Companies Act, 1956

If they do not register they can be considered to be illegal If they do not register they can be considered to be illegal association. The contract entered into by this illegal association. The contract entered into by this illegal association is association is void and cannot be validated. void and cannot be validated. Its illegality Its illegality will will not affect its tax liability or its chargeabilitynot affect its tax liability or its chargeability

The certification of incorporation is the conclusive The certification of incorporation is the conclusive evidence, that all the requirements for the registration have evidence, that all the requirements for the registration have been complied with the been complied with the

Incorporation of a Company

The persons who The persons who conceive an ideaconceive an idea of a of a company decide and do the necessary work for company decide and do the necessary work for formation of a company are called the formation of a company are called the promoterspromoters of the Company. of the Company.

The Promoters are the persons who decide on The Promoters are the persons who decide on the the formation of the company.formation of the company.

The promoters of a company stand undoubtedly The promoters of a company stand undoubtedly in a in a fiduciary positionfiduciary position though they are not the though they are not the agent or a trustee of a company. They are the agent or a trustee of a company. They are the ones “who create and mould the company”. ones “who create and mould the company”.

They may have to enter into They may have to enter into pre-incorporation pre-incorporation contractscontracts , which can be validated after the , which can be validated after the incorporation of the company for obtaining incorporation of the company for obtaining certificate of incorporation.certificate of incorporation.

Promoters They can be They can be remunerated for their remunerated for their

services, but they have to enter into a services, but they have to enter into a contract before the incorporation of the contract before the incorporation of the company through a pre incorporationcompany through a pre incorporation of of the companythe company

They will usually act as They will usually act as nominees or as nominees or as the first directorsthe first directors of the company of the company

They enter into contracts after the They enter into contracts after the incorporation and before the incorporation and before the commencement of business.commencement of business.

But they need But they need not compulsorily participate not compulsorily participate in the formation of the company.in the formation of the company.

Sometimes , a few persons may only act as Sometimes , a few persons may only act as professionals who help the promoters on professionals who help the promoters on behalf of the company.. like the solicitor, behalf of the company.. like the solicitor, chartered accountant etc.. and get paid for chartered accountant etc.. and get paid for their servicestheir services..

The promoters in most of the cases decide The promoters in most of the cases decide as to …What is the type of a companyas to …What is the type of a company to be to be formed? formed?

In IndiaIn India promoters generally secure the promoters generally secure the management of the company that is formed management of the company that is formed and have a controlling interest in the and have a controlling interest in the company’s managementcompany’s management

Legal Position of the Promoters They They cannot make profitcannot make profit at the expense of at the expense of

the company, which they have promoted the company, which they have promoted without the knowledge and consent of the without the knowledge and consent of the company.company. In case they do so , they may be In case they do so , they may be compelled to account for it.compelled to account for it.

They They cannot sell their property to the cannot sell their property to the company at a profit unless all the material company at a profit unless all the material factsfacts are disclosed at the independent are disclosed at the independent board of directors or the shareholders of board of directors or the shareholders of the company.the company.

If they do so, the company may repudiate If they do so, the company may repudiate the contract of sale or confirm the sale the contract of sale or confirm the sale after recovering the profit made by the after recovering the profit made by the promoter.promoter.

Promoters have the following liabilities under the Companies Act, 1956

They can be They can be liable for non complianceliable for non compliance of the provisions of the of the provisions of the ActAct

Severe penaltySevere penalty may be imposed may be imposed The court may The court may suspend the promoter from taking part in the suspend the promoter from taking part in the

managementmanagement of the company of the company Liable for any untrue statement in the prospectusLiable for any untrue statement in the prospectus to the person to the person

who has subscribed for any shares or debentures on the faith of who has subscribed for any shares or debentures on the faith of the prospectusthe prospectus

The The liabilities areliabilities are …. …. a) to set aside the allotment of shares, a) to set aside the allotment of shares, b) sued for damages, b) sued for damages, c) sued for compensation c) sued for compensation d) criminal proceedingsd) criminal proceedings

The requirements are as follows

Application for availability of nameApplication for availability of name Preparation of MOA and AOAPreparation of MOA and AOA Selection and finalization of MOA and AOA- Its Selection and finalization of MOA and AOA- Its

printing, stamping and signingprinting, stamping and signing Preparation of other necessary documentsPreparation of other necessary documents Filling of the required documents for RegistrationFilling of the required documents for Registration

to obtain certificate of incorporation and to obtain certificate of incorporation and Certificate of commencement of businessCertificate of commencement of business

Memorandum of Association

It is the It is the chartercharter of the company of the company It contains the It contains the fundamental conditions upon which the fundamental conditions upon which the

company can be incorporatedcompany can be incorporated It contains the It contains the objects objects of the company’s formationof the company’s formation The company has to The company has to act within objects specifiedact within objects specified in the in the

MOAMOA It It defines as well as confinesdefines as well as confines the powers of the company the powers of the company Any thing done beyond the objects specified in the MOA Any thing done beyond the objects specified in the MOA

will be will be ultra vires. Their transactions will be null and voidultra vires. Their transactions will be null and void The outsider have The outsider have to transactto transact looking into the MOA looking into the MOA

Conditions of the MOA It should be It should be printedprinted Divided into Divided into paragraph and numbers paragraph and numbers

consecutivelyconsecutively SignedSigned by at least seven persons or two by at least seven persons or two

in case of public and private company in case of public and private company respectively.respectively.

The signature should be in the The signature should be in the presence presence of a witness, who will have to attestof a witness, who will have to attest the the signaturesignature

Members have to take Members have to take shares and write shares and write the number of sharesthe number of shares taken with full taken with full addressaddress

The MOA of the Limited Company

The name of the company with ‘The name of the company with ‘limited’limited’ as the last as the last wordword

The name of the The name of the state where the registered officestate where the registered office of of the company is to be situatedthe company is to be situated

The objects of the company stating the The objects of the company stating the ‘Main ‘Main objects’ and the ‘other objects’objects’ and the ‘other objects’

The declaration about the The declaration about the liability of the membersliability of the members is is limitedlimited ( limited by shares or guarantee) ( limited by shares or guarantee)

The amount of the The amount of the authorized share capital, divided authorized share capital, divided into shares of fixed amounts.into shares of fixed amounts.

The Compulsory Clausesin MOA

The Name Clause – it decides on the The Name Clause – it decides on the name of the companyname of the company based on the capital involvedbased on the capital involved

The Registered Office Clause- where it has The Registered Office Clause- where it has registered its registered its head officehead office and other branch office ( The registered office and other branch office ( The registered office can be changed with the permission of the ROC)can be changed with the permission of the ROC)

The Object Clause- The Object Clause- Main object, ancillary object and the Main object, ancillary object and the other objectsother objects of the company are clearly specified of the company are clearly specified ( Ashbury Railway Carriage Co V. Riche). The applicable ( Ashbury Railway Carriage Co V. Riche). The applicable doctrine here is the doctrine here is the “ Doctrine of Ultra Vires” beyond the “ Doctrine of Ultra Vires” beyond the powers of the company (opposed to Intra Vires)powers of the company (opposed to Intra Vires)

The Liability Clause-The Liability Clause- What is the liability of its What is the liability of its members.. limited by shares or guarantee or members.. limited by shares or guarantee or unlimited, there can be alteration in the liability unlimited, there can be alteration in the liability clauseclause

The Capital ClauseThe Capital Clause - The amount of the - The amount of the nominal capital of the company, number of nominal capital of the company, number of shares in which it is to be divided… alteration shares in which it is to be divided… alteration of the capital clause etcof the capital clause etc

The Association or Subscription clause- The Association or Subscription clause- Where Where the subscribers to the MOA declare that they the subscribers to the MOA declare that they respectively agree to take the number of the respectively agree to take the number of the shares in the capital. It has to have the shares in the capital. It has to have the following:following:

a) They have to sign in the presence of two a) They have to sign in the presence of two witnesses, who attest the signatures, witnesses, who attest the signatures,

b) The subscriber to take at least one share. b) The subscriber to take at least one share. c) After the name the subscriber has to write the c) After the name the subscriber has to write the

number of shares takennumber of shares taken

“Doctrine of Ultra Vires” The powers exercisable by the company are to be confined to The powers exercisable by the company are to be confined to

the objects the objects specified in the MOA.specified in the MOA.

So it is better to define and include the provisions regarding So it is better to define and include the provisions regarding the the acquiring of business, sharing of profits, promoting acquiring of business, sharing of profits, promoting company and other financial, gifts , political party funds etc.company and other financial, gifts , political party funds etc.

If the company acts beyond the powers or the objects of the If the company acts beyond the powers or the objects of the company that is specified in the MOA, the acts are considered company that is specified in the MOA, the acts are considered to be of to be of ultra viresultra vires. Even if it is ratified by the all the . Even if it is ratified by the all the members, the action is considered to be ineffective.members, the action is considered to be ineffective.

Even the charitable contributions have to be based on the Even the charitable contributions have to be based on the object clause. object clause. ( A Lakshmanaswami Mudaliar V. LIC of India)( A Lakshmanaswami Mudaliar V. LIC of India)

The consequences of the ultra vires transactions are as follows:

a)a) Injunction Injunction b)b) Directors’ personal liability.Directors’ personal liability.c)c) If a property has been purchased and it is an If a property has been purchased and it is an ultra ultra

viresvires act, the company can have a right over that act, the company can have a right over that property.property.

d)d) The doctrine to be used exclusively for the The doctrine to be used exclusively for the companies’ interest.companies’ interest.

e)e) But the others cannot use this doctrine as a tool to But the others cannot use this doctrine as a tool to attack the companyattack the company

Articles of Association It is the companies It is the companies bye- laws or rules to governbye- laws or rules to govern

the management of the company for its the management of the company for its internal internal affairs and the conduct of its businessaffairs and the conduct of its business..

AOA defines the AOA defines the powers of its officers and also powers of its officers and also establishes a contract between the company and establishes a contract between the company and the members and between the members the members and between the members inter seinter se

It can be originally framed and altered by the It can be originally framed and altered by the company under previous or existing provisions company under previous or existing provisions of law.of law.

AOA

AOA plays a AOA plays a subsidiary partsubsidiary part to the MOA to the MOA Any thing Any thing done beyond the AOA will be considered to be done beyond the AOA will be considered to be

irregular and may be ratified by the shareholdersirregular and may be ratified by the shareholders.. The content of the AOA may differ from company to company The content of the AOA may differ from company to company

as the Act has not specified any specific provisionsas the Act has not specified any specific provisions Flexibility is allowed to the persons who form the company to Flexibility is allowed to the persons who form the company to

adopt the AOA within the requirements of the company lawadopt the AOA within the requirements of the company law The AOA will have to be conversant with the MOA, as they The AOA will have to be conversant with the MOA, as they

are contemporaneous documents to be read together.are contemporaneous documents to be read together. Any Any ambiguity and uncertainty in one of them may be ambiguity and uncertainty in one of them may be

removed by reference to the other.removed by reference to the other.

Contents of the AOA may be as follows:

Share capitalShare capital Lien on sharesLien on shares Calls on sharesCalls on shares Transfer and transmission of sharesTransfer and transmission of shares Forfeiture of the sharesForfeiture of the shares Surrender of the sharesSurrender of the shares General meetingsGeneral meetings Alteration of the capitalAlteration of the capital Directors etc..Directors etc.. Dividends and reservesDividends and reserves Account and auditAccount and audit Borrowing powersBorrowing powers Winding upWinding up Adoption of the preliminary contracts etc….Adoption of the preliminary contracts etc….

DRAFTING OF ARTICLES & MEMORANDUM OF

ASSOCIATION

MEANING &LEGAL EFFECT

INTERNAL REGULATIONS OF THE INTERNAL REGULATIONS OF THE CO.& CHARTER OF INCORPORATIONCO.& CHARTER OF INCORPORATION

BINDS THE COMPANY VIS-A-VIS BINDS THE COMPANY VIS-A-VIS MEMBERSMEMBERS

BINDS MEMBERS VIS-A-VIS BINDS MEMBERS VIS-A-VIS COMPANYCOMPANY

BINDS MEMBERS INTER SE.BINDS MEMBERS INTER SE.

Shareholders/Joint venture Agreements AGREEMENT AMONGST AGREEMENT AMONGST

SHAREHOLDERSSHAREHOLDERS PRIVATE DOCUMENTPRIVATE DOCUMENT CONTACTUAL FREEDOMCONTACTUAL FREEDOM NO AUTOMATIC APPLICABLITYNO AUTOMATIC APPLICABLITY

MEMORANDUM-BASIC STRUCTURE NAME CLAUSENAME CLAUSE OBJECT CLAUSEOBJECT CLAUSE REGISTERED OFFICE CLAUSEREGISTERED OFFICE CLAUSE CAPITAL CLAUSECAPITAL CLAUSE LIABLITY CLAUSELIABLITY CLAUSE SUBSCRIPTION CLAUSESUBSCRIPTION CLAUSE

ARTICLES -SCHEDULE-1 TABLE A-FOR A COMPANY LIMITED BY TABLE A-FOR A COMPANY LIMITED BY

SHARESSHARES TABLE C-COMPANYLIMITED BY TABLE C-COMPANYLIMITED BY

GUARANTEE & NOT HAVING A SHARE GUARANTEE & NOT HAVING A SHARE CAPITALCAPITAL

TABLE D-COMPANY LIMITED BY TABLE D-COMPANY LIMITED BY GUARANTEE & HAVING A SHARE GUARANTEE & HAVING A SHARE CAPITALCAPITAL

TABLE E- UNLIMITED COMPANY.TABLE E- UNLIMITED COMPANY.

TABLE A

INTERPRETATIONINTERPRETATION SHARE CAPITALSHARE CAPITAL GENERAL MEETINGSGENERAL MEETINGS BOARD MEETINGSBOARD MEETINGS MANAGER/SECRETARYMANAGER/SECRETARY SEALSEAL DIVIDEND/RESERVESDIVIDEND/RESERVES

TABLE A-CONTD.

ACCOUNTSACCOUNTS CAPITALISATION OF PROFITSCAPITALISATION OF PROFITS WINDING UPWINDING UP INDEMNITYINDEMNITY

IMPORTANT CLAUSES

SHAREHOLDING RATIOSHAREHOLDING RATIO BOARD OF DIRECTORSBOARD OF DIRECTORS SHAREHOLDERS MEETINGSSHAREHOLDERS MEETINGS SHARE TRANSFER RESTRICTIONSSHARE TRANSFER RESTRICTIONS DEADLOCK RESOLUTIONDEADLOCK RESOLUTION ARBITRATIONARBITRATION

BOARD CONTROL

STRENGTH OF THE BOARDSTRENGTH OF THE BOARD QUORUMQUORUM RIGHT TO NOMINATE DIRECTORSRIGHT TO NOMINATE DIRECTORS CHAIRMANCHAIRMAN CASTING VOTECASTING VOTE RESERVE MATTERSRESERVE MATTERS

SHAREHOLDERS MEETING

QUORUMQUORUM RESERVE MATTERSRESERVE MATTERS CHAIRMANCHAIRMAN

SHARE TRANSFER

RESTRICTIONSRESTRICTIONS PRE EMPTIVE RIGHTSPRE EMPTIVE RIGHTS VALUATIONVALUATION

DEADLOCK RESOLUTION

DEFINE DEADLOCKDEFINE DEADLOCK RESOLUTION MECHANISMRESOLUTION MECHANISM CONSEQUENCES OF NON CONSEQUENCES OF NON

RESOLUTIONRESOLUTION

ARBITRATION

EVENT OF DISPUTE/DIFFERENCEEVENT OF DISPUTE/DIFFERENCE WHO TO BE THE ARBITRATORWHO TO BE THE ARBITRATOR LAW APPLICABLELAW APPLICABLE VENUE & LANGUAGEVENUE & LANGUAGE COSTSCOSTS RIGHT TO CLAIM INTERIM RELIEFRIGHT TO CLAIM INTERIM RELIEF

CERTAIN IMPORTANT PROVISIONS GUARANTEESGUARANTEES BORROWINGSBORROWINGS DIVIDENDSDIVIDENDS AUDITAUDIT TRADE NAMES/MARKSTRADE NAMES/MARKS KEY APPOINTMENTSKEY APPOINTMENTS

Doctrine of Constructive notice and Indoor Management

Persons dealing with the company have to satisfy Persons dealing with the company have to satisfy themselves. But need not know the internal irregularity. themselves. But need not know the internal irregularity. Royal British Bank V. Turquand (Turquand Rule) Royal British Bank V. Turquand (Turquand Rule) Directors issuing a bond. Directors issuing a bond.

The doctrine of Constructive notice can be invoked by the The doctrine of Constructive notice can be invoked by the company to operate against the persons dealing with the company to operate against the persons dealing with the company.company.

The outsider cannot embark, but only can acquaint upon The outsider cannot embark, but only can acquaint upon the MOA and AOA. (Official Liquidator, Manasube &Co the MOA and AOA. (Official Liquidator, Manasube &Co Pvt Lid V. Commissioner of Police)Pvt Lid V. Commissioner of Police)

Exceptions to the Doctrine of Where the outsider cannot claim the relief on the grounds of “Indoor management”

Knowledge of irregularityKnowledge of irregularity No knowledge of articlesNo knowledge of articles NegligenceNegligence ForgeryForgery Non- Existent authority of the Non- Existent authority of the

companycompany

Raising of Capital From Public

The companies can raise money by The companies can raise money by offering offering securitiessecurities for sale to the public. for sale to the public.

They can invite the public to buy shares, which is They can invite the public to buy shares, which is known as known as public issue.public issue.

For this purpose the company may issue a For this purpose the company may issue a prospectus, which may include a notice circular, prospectus, which may include a notice circular, advertisement or other documentsadvertisement or other documents which are which are issued to invite public deposits.issued to invite public deposits.

Prospectus It is an It is an invitation invitation issued to the public issued to the public to to

purchase or subscribe shares or debenturespurchase or subscribe shares or debentures of of the company.the company.

Every Every prospectus must be datedprospectus must be dated. The date of . The date of publication and the date of issue must be publication and the date of issue must be specifically stated in the prospectus.specifically stated in the prospectus.

The The golden rulegolden rule of the prospectus is that every of the prospectus is that every detail has to be given in strict and scrupulous detail has to be given in strict and scrupulous accuracy. The material facts given in the accuracy. The material facts given in the prospectus are presumed to be true.( New prospectus are presumed to be true.( New Brunswick and Canada Railway. Land & Co. Brunswick and Canada Railway. Land & Co. Vs. Muggerridge).Vs. Muggerridge).

Various forms in which the prospectus can be issued. Shelf ProspectusShelf Prospectus: Prospectus is normally issued by : Prospectus is normally issued by

financial institution or bank for one or more issues of the financial institution or bank for one or more issues of the securities or class of securities mentioned in the securities or class of securities mentioned in the prospectus. prospectus.

There can be There can be deemed prospectusdeemed prospectus also if it is issued by the also if it is issued by the issue houseissue house

‘‘Information MemorandumInformation Memorandum’: It means a process, which is ’: It means a process, which is undertaken prior to the filing of prospectus. undertaken prior to the filing of prospectus.

Even anEven an Advertisement Advertisement , that the shares are available is , that the shares are available is considered to be prospectusconsidered to be prospectus

Contents of the prospectus General informationGeneral information Capital structureCapital structure Terms of present issueTerms of present issue Management and projectsManagement and projects Management and perception of risk Management and perception of risk

factorfactor

It is compulsory to register the It is compulsory to register the prospectus with the Registrarprospectus with the Registrar

Civil Liability for MisstatementsIn case of any untrue statement in the prospectus The liability will be on the director of the The liability will be on the director of the

company , whose name was written during the company , whose name was written during the time of issuetime of issue

The persons who have authorized their names to The persons who have authorized their names to be theirs in the prospectus to be named as be theirs in the prospectus to be named as directorsdirectors

PromoterPromoter Every person including the person who is an Every person including the person who is an

expert and has authorized his name to be issued expert and has authorized his name to be issued with the prospectus with the prospectus

Remedies for misstatements in the prospectus Relying on the prospectus if any person buys Relying on the prospectus if any person buys

shares, the person mayshares, the person may Rescind the contract ( only when there is Rescind the contract ( only when there is

misrepresentation relating to the material facts.misrepresentation relating to the material facts. The rescission has to be done within a reasonable The rescission has to be done within a reasonable

timetime Claim damages- it can be claimed from the Claim damages- it can be claimed from the

directors, promoters or other persons who has directors, promoters or other persons who has authorized their name to be written during the authorized their name to be written during the issue of the prospectusissue of the prospectus

Share Capital Share: Share: Share is defined as “an interest having a Share is defined as “an interest having a

money value and made up of diverse rights money value and made up of diverse rights specified under the articles of association”. specified under the articles of association”.

Share capital: Share capital: Share capital means the capital Share capital means the capital raised by the company by issue of sharesraised by the company by issue of shares. .

A share is a share in the share capital of the A share is a share in the share capital of the company including the stock.company including the stock.

Share gives a right to participate in the profits Share gives a right to participate in the profits of the company, or a share in the assets when of the company, or a share in the assets when the company is going to be wound up.the company is going to be wound up.

Other features of a share A share is not a negotiable instrument, but it is a movable A share is not a negotiable instrument, but it is a movable

property. property. It is also considered to be goods under the Sale of Goods Act, It is also considered to be goods under the Sale of Goods Act,

1930.1930. The company has to issue the share certificate.The company has to issue the share certificate. It is subject to stamp duty.It is subject to stamp duty. The ‘Call’ on Shares is a demand made for payment of price of The ‘Call’ on Shares is a demand made for payment of price of

the shares allotted to the members by the Board of Directors in the shares allotted to the members by the Board of Directors in accordance with the Articles of Association.accordance with the Articles of Association.

The call may be for full amount or part of it.The call may be for full amount or part of it.

Share Certificate and Share Warrant Share CertificateShare Certificate:: The Share Certificate is a The Share Certificate is a document issued by the document issued by the

companycompany and is prima facie evidence to show that the person named and is prima facie evidence to show that the person named therein is the holder ( title) of the specified number of shares stated therein is the holder ( title) of the specified number of shares stated therein.therein.

Share certificate is issued by the company to the ( share holder) Share certificate is issued by the company to the ( share holder) allottee of shares.allottee of shares.

The company has to issue within 3 months from the date of allotment. The company has to issue within 3 months from the date of allotment. In case of default the allottee may approach the central governmentIn case of default the allottee may approach the central government

Share WarrantShare Warrant: : The share warrant is a The share warrant is a bearer documentbearer document issued by the issued by the company under its common seal. As share warrant is a negotiable company under its common seal. As share warrant is a negotiable instrument, it is transferred by endorsement and by mere delivery like instrument, it is transferred by endorsement and by mere delivery like any other negotiable instrumentany other negotiable instrument. .

Kinds of shares>Preference shares->Preference shares- It can be further It can be further

classified as classified as Participating preferential shares.Participating preferential shares. Cumulative preferential sharesCumulative preferential shares Non Cumulative preferential sharesNon Cumulative preferential shares>Redeemable Shares>Redeemable Shares and and>Irredeemable Shares>Irredeemable Shares>Equity or ordinary shares>Equity or ordinary shares>Shares at premium>Shares at premium>Shares at discount>Shares at discount>Bonus shares>Bonus shares>Right shares>Right shares

Transfer and Transmission of shares AOA provides for the procedure of transfer of shares. It is AOA provides for the procedure of transfer of shares. It is

a voluntary action of the shareholder.a voluntary action of the shareholder. It can be made even by a blank transfer –In such cases It can be made even by a blank transfer –In such cases the the

transferor only signs the transfer form without making any transferor only signs the transfer form without making any other entries. other entries.

In case it is a forged transfer, the transferor’s signature is In case it is a forged transfer, the transferor’s signature is forged on the share transfer instrument. forged on the share transfer instrument.

Transmission of sharesTransmission of shares is by operation of law, e.g. by is by operation of law, e.g. by death, insolvency of the shareholder etc.death, insolvency of the shareholder etc.

Buy-Back of Securities The company may purchase its securities back The company may purchase its securities back

and it is popularly known as buy back of sharesand it is popularly known as buy back of shares To do so , the company has to be authorized To do so , the company has to be authorized

under the AOA.under the AOA. The company has to comply with the The company has to comply with the

provisions of the Company law to buy back its provisions of the Company law to buy back its securities.securities.

The listed company has to seek permission The listed company has to seek permission from the SEBI (SERA 1998). Specifically for from the SEBI (SERA 1998). Specifically for the private company etc, the Buy Back the private company etc, the Buy Back Securities Rules1999 will be applicable.Securities Rules1999 will be applicable.

Dividends The The sharing of profitssharing of profits in the going concerns and in the going concerns and

the distribution of the assets after the winding the distribution of the assets after the winding up can be called as dividendsup can be called as dividends

It will be distributed among the shares holdersIt will be distributed among the shares holders The dividends can be The dividends can be declared and paid out of:declared and paid out of: Current profitsCurrent profits ReservesReserves Monies provided by the government and the Monies provided by the government and the

depreciation as provided by the companies.depreciation as provided by the companies. It can be paid after presenting the balance sheet It can be paid after presenting the balance sheet

and profit and loss account in the AGMand profit and loss account in the AGM

Dividend Other than the equity shareholders, even Other than the equity shareholders, even

the preferential shareholders can get the the preferential shareholders can get the dividends. Rather they are the first ones dividends. Rather they are the first ones to get the dividends.to get the dividends.

Dividends are to be only in cash, if Dividends are to be only in cash, if otherwise specified in the AOA.otherwise specified in the AOA.

In exceptional cases, even the central In exceptional cases, even the central government may permit the payment of government may permit the payment of interest to shareholders , even though interest to shareholders , even though there is no profit.there is no profit.

DirectorsThe Legal Status of the directorThe director occupies the position of a: As a Trustee- In relation to the company As Agents- When they act o n behalf of the company As Managing Partner-As they are entrusted with the

responsibility of the company Qualification Shares In case there is requirement as per the AOA for the

director is bound to buy qualification shares If acts are done by the director prior to he or she being

disqualified, the acts are considered to be valid.

DisqualificationsAs per the company law, the followingAs per the company law, the followingpersons are persons are disqualified disqualified from been appointedfrom been appointedas a director:as a director: Unsound mindUnsound mind An undischarged insolventAn undischarged insolvent A person who is convicted by the courtA person who is convicted by the court Who has applied for being adjudged insolventWho has applied for being adjudged insolvent Not paid for the call on sharesNot paid for the call on shares Persons who are already directors in maximum number of Persons who are already directors in maximum number of

companies as per the provisions of the Act orcompanies as per the provisions of the Act or Any other person who has been disqualified by the court for Any other person who has been disqualified by the court for

any other reasonany other reason

Appointment of Directors

The appointment can sometimes be by based on the proportional representation like minority shareholders.

There can be alternate directors, additional directors, casual directors.

The third parties can appoint the directors Other than the shareholders and the first directors ,the central government and NCLT may also appoint directors.

Duties and Liabilities of the DirectorsFiduciary Duties To act honestly and with good faith Not to use confidential information of the

company for their own purpose Duty of Care and to act reasonably while acting

for the companyStatutory Duties Not to contract with company, where he/she or

his relative has an interest in the contract where he/she has a interest, they need to inform

the board or seek prior approval while entering into contract, otherwise the contract is voidable

Duty to attend and convene meetings Duty not to delegate

The directors liabilities The liability of the directors can be either civil or The liability of the directors can be either civil or

criminal. criminal. If provided in the MOA, the liability may be unlimited, If provided in the MOA, the liability may be unlimited,

for a limited company, otherwise it may be altered. for a limited company, otherwise it may be altered. Liability may be for breach of fiduciary dutiesLiability may be for breach of fiduciary duties The directors are personally liable for the following:The directors are personally liable for the following: a) Ultra vires actsa) Ultra vires acts b) malafide actsb) malafide acts c) negligent actsc) negligent acts d) liability for the acts of third parties d) liability for the acts of third parties

Criminal Liability Liability of the director for any untrue statement in the Liability of the director for any untrue statement in the

prospectusprospectus Inviting any deposits in contravention of the lawInviting any deposits in contravention of the law Liability for false advertisementLiability for false advertisement Failure to repay the application money, which was Failure to repay the application money, which was

excessexcess Concealing the names of the creditorsConcealing the names of the creditors Failure to lay the balance sheet.Failure to lay the balance sheet. Failure to provide information to the auditor etcFailure to provide information to the auditor etc

Company Meetings A meeting may be convened by the A meeting may be convened by the

director, requisitionist, or the NCLTdirector, requisitionist, or the NCLT Notice to be given by the secretary after Notice to be given by the secretary after

the time and place have been fixed by the time and place have been fixed by the directorsthe directors

Even the shareholders can call a meeting Even the shareholders can call a meeting as an extraordinary general meeting as an extraordinary general meeting (EGM)(EGM)

The NCLT can call an Annual General The NCLT can call an Annual General Meeting (AGM)Meeting (AGM)

Classification of Meetings

Shareholders meetingsShareholders meetings a) a) Statutory meetingsStatutory meetings ( which happens only once in ( which happens only once in

the lifetime of the company)the lifetime of the company) b)b) EGM EGM- Convened to transact some special or - Convened to transact some special or

important decision to be takenimportant decision to be taken c) c) Class meetings-Class meetings- This is the meeting of the This is the meeting of the

shareholders- which is convened by the class of shareholders- which is convened by the class of shareholders based on the kind of shares they hold. shareholders based on the kind of shares they hold.

continued…..continued…..

Other meetings

AGMAGM-it can be conducted based on the provisions -it can be conducted based on the provisions given in the Articles or by passing a resolution in given in the Articles or by passing a resolution in one AGM for the subsequent AGM’sone AGM for the subsequent AGM’s

Board Meetings-Board Meetings- This is conducted for the smooth This is conducted for the smooth running of the company and for collectively running of the company and for collectively taking the decisions. The meetings may be taking the decisions. The meetings may be conducted to conducted to call on shares, issue debentures, call on shares, issue debentures, borrow money, to make loans, To invest the fundsborrow money, to make loans, To invest the funds etcetc

How to conduct meeting? Written notice to be givenWritten notice to be given Notice to be issued under the Notice to be issued under the

authority of the companyauthority of the company In case of failure to give a notice, In case of failure to give a notice,

the persons concerned may be the persons concerned may be punished with fine and the punished with fine and the proceedings of the meeting will be proceedings of the meeting will be rendered invalid.rendered invalid.

Resolution A motion when passed is called a resolution.A motion when passed is called a resolution. The resolution in the General body meetings The resolution in the General body meetings

can be an can be an ordinary resolution ordinary resolution ( Simple majority) ( Simple majority) andand special resolution. special resolution. Special resolution- ( notice of 21 days to be Special resolution- ( notice of 21 days to be

given) the notice has to specify the purpose. given) the notice has to specify the purpose. The The number of votes to be cast in favour of thenumber of votes to be cast in favour of the resolution is to beresolution is to be three times three times the number vote the number vote cast against. cast against.

Quorum and proxy The minimum members to be present must be according to the The minimum members to be present must be according to the

provisions of the law.provisions of the law. Public company ( minimum Five) and private company Public company ( minimum Five) and private company

(minimum of 2)(minimum of 2) The quorum must be those members who are eligible to vote The quorum must be those members who are eligible to vote

in respect of the agenda of the meeting.in respect of the agenda of the meeting. If the quorum is not present within half an hour from the If the quorum is not present within half an hour from the

appointed time, either the meeting stands dissolved or may be appointed time, either the meeting stands dissolved or may be adjourned in the same day next week or any other as may be adjourned in the same day next week or any other as may be determined by the directorsdetermined by the directors

A person in case of being incapable to attend a meeting and A person in case of being incapable to attend a meeting and who is eligible to vote may appoint a proxy in writing to attend who is eligible to vote may appoint a proxy in writing to attend the meeting of the member and vote on his or her behalf. The the meeting of the member and vote on his or her behalf. The proxy can only vote and cannot participate in the discussions.proxy can only vote and cannot participate in the discussions.

Compromise, Reconstruction and Arrangement Reconstruction includes Reconstruction includes reorganization, reorganization,

arrangement and amalgamationarrangement and amalgamation.. Arrangement includes all forms of Arrangement includes all forms of

reconstructing.reconstructing. It has been broadly defined as all It has been broadly defined as all forms of forms of

capital reorganizations either by consolidation capital reorganizations either by consolidation of shares or division of shares or bothof shares or division of shares or both

Reorganization and arrangement are done when Reorganization and arrangement are done when there is only one company is involvedthere is only one company is involved

continuedcontinued….….

Reconstruction can be effectively done through Reconstruction can be effectively done through a compromise or arrangement.a compromise or arrangement.

To do so the meeting or the members or the To do so the meeting or the members or the separate class of the shareholders has to be separate class of the shareholders has to be conducted or in case of winding up the meeting conducted or in case of winding up the meeting to be called by the liquidatorto be called by the liquidator

Even a banking company (sick bank) may be Even a banking company (sick bank) may be reconstructed or amalgamated by the central reconstructed or amalgamated by the central government on the basis of the Reserve Bank’s government on the basis of the Reserve Bank’s application for a fixed period of time.application for a fixed period of time.

The reconstruction or amalgamation can be The reconstruction or amalgamation can be done with any other banking institution.done with any other banking institution.

Scheme to be approved Any kind of scheme to be accepted, it Any kind of scheme to be accepted, it

has to get approval from the members or has to get approval from the members or the members may reject the scheme.the members may reject the scheme.

After the scheme is approved by voting, After the scheme is approved by voting, the court has to sanction the scheme or the court has to sanction the scheme or reject, if it is against the public interest reject, if it is against the public interest or if it feels that the scheme is not or if it feels that the scheme is not beneficial.beneficial.

The legal provisions vary based the The legal provisions vary based the mode of scheme adopted by the mode of scheme adopted by the company.company.

Modes of Reconstruction or Amalgamation

By sale of undertaking- it can be the whole or part of sale By sale of undertaking- it can be the whole or part of sale ( the court will decide)( the court will decide)

By sale of shares ( Maximum number of companies adopt By sale of shares ( Maximum number of companies adopt this scheme- In such schemes the shares are sold and this scheme- In such schemes the shares are sold and registered in the name of the purchasing company or on its registered in the name of the purchasing company or on its behalf. The shareholders selling the shares are compensated behalf. The shareholders selling the shares are compensated either by cash or with the shares of the acquiring company.either by cash or with the shares of the acquiring company.

Amalgamation can take place even for the sake of Public Amalgamation can take place even for the sake of Public interest by the central government. In such cases, it will be interest by the central government. In such cases, it will be notified in the official gazette.notified in the official gazette.

Mergers, Acquisitions and Take over of companies Merger connotes union of two or more Merger connotes union of two or more

commercial interests, corporations, undertakings, commercial interests, corporations, undertakings, bodies or any other entities.bodies or any other entities.

Fusion of two or more corporations by the transfer Fusion of two or more corporations by the transfer of all property to a single corporation. It is used as of all property to a single corporation. It is used as a synonym for amalgamation. Even the Act makes a synonym for amalgamation. Even the Act makes no distinction between merger and amalgamation.no distinction between merger and amalgamation.

The changing of legal entity after mergers and acquisitions In a merger- one of the company loses its In a merger- one of the company loses its

corporate existence and the survivor company corporate existence and the survivor company acquires the assets as well as the liabilities of the acquires the assets as well as the liabilities of the merger company.merger company.

In acquisition, it is acquiring the ownership in the In acquisition, it is acquiring the ownership in the property is the purchase of a controlling interest in property is the purchase of a controlling interest in the share capital of another existing company. It the share capital of another existing company. It is an act of acquiring asset and management of the is an act of acquiring asset and management of the company.company.

Winding up It is the process whereby the life of the company is ended and It is the process whereby the life of the company is ended and

its property is administered for the benefit of its creditors and its property is administered for the benefit of its creditors and members.members.

During this process a liquidator is appointed to take control of During this process a liquidator is appointed to take control of the company. The liquidator will be responsible for the assets, the company. The liquidator will be responsible for the assets, debts and final distribution of the surplus to the members.debts and final distribution of the surplus to the members.

It is the process for discharge of liabilities and returning the It is the process for discharge of liabilities and returning the surplus to those who are entitled for it.surplus to those who are entitled for it.

But even a company which is making profit can be wound up But even a company which is making profit can be wound up is the special feature of winding up , which is different from is the special feature of winding up , which is different from that of the process of insolvency.that of the process of insolvency.

How can be company be wound up? By passing a special resolutionBy passing a special resolution If there is a default in holding the statutory If there is a default in holding the statutory

meetingmeeting Failure to commence the business Failure to commence the business If there is reduction in the membership of the If there is reduction in the membership of the

minimum number of members as per the statutory minimum number of members as per the statutory requirementrequirement

If it not able to pay its debtsIf it not able to pay its debts

Modes of winding up Compulsory winding up under the Compulsory winding up under the supervision supervision

of the courtof the court (Reasons as stated in the previous slide)(Reasons as stated in the previous slide) Compulsory windingCompulsory winding up may happen for up may happen for just just

and equitableand equitable reasons also. reasons also. The just and equitable grounds can be like loss The just and equitable grounds can be like loss

of substratum , where there is dead lock in the of substratum , where there is dead lock in the management, etcmanagement, etc

Voluntary winding upVoluntary winding up ( Members voluntary ( Members voluntary winding up and creditors voluntary winding up)winding up and creditors voluntary winding up)

Voluntary winding up subject to the Voluntary winding up subject to the supervision of the court.supervision of the court.

Winding up procedure

A petition for winding up has to be filed by the A petition for winding up has to be filed by the concerned person to the prescribed authorityconcerned person to the prescribed authority

Liquidator to be appointed to safeguard the Liquidator to be appointed to safeguard the property of the companyproperty of the company

Then the court will hear the matter and pass Then the court will hear the matter and pass necessary orders. It can dismiss the petition or necessary orders. It can dismiss the petition or pass an order of winding up pass an order of winding up

Dissolution of the company When the company ceases to exist as a corporate entity When the company ceases to exist as a corporate entity

for all practical purposes it is said to have been for all practical purposes it is said to have been dissolved. dissolved.

Dissolution has to be declared by the court.Dissolution has to be declared by the court.

It will not be extinct and will be kept under suspension It will not be extinct and will be kept under suspension for 2 Years.for 2 Years.

The order has to be forwarded by the liquidator to the The order has to be forwarded by the liquidator to the Registrar of the Companies within 30 days from the date Registrar of the Companies within 30 days from the date of the order of dissolution.of the order of dissolution.

Statutory Role & Responsibility of Independent Directors and Familiarity with Legal Aspects associated with discharging

their Duties

The genesis of SOX: A Corporate Tsunami

Corporate America was rocked by scandal Corporate America was rocked by scandal after scandal in a very short span of time.after scandal in a very short span of time.

EnronKMartTycoWorldComGlobal Crossing

Andersen collapsed…

An Angered Response …

Loss of confidence in regulatorsLoss of confidence in regulators Political nexusPolitical nexus Investor confidence takes a dipInvestor confidence takes a dip 401(k) retirement savings wiped 401(k) retirement savings wiped

outout

Sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley, the Act was passed to re-emphasize the

importance of ethical standards in the preparation of financial information reported to investors, restore investor confidence

and strengthen corporate governance.

Types of Directors

Nominee-Nominee- Director whose function is passive in nature. Nominee Director whose function is passive in nature. Nominee director are subject to directors responsibilities. Nominee director director are subject to directors responsibilities. Nominee director appointed by an institution which has invested in or lent to the appointed by an institution which has invested in or lent to the company shall be deemed to be independent directors.company shall be deemed to be independent directors.

Whole Time-Whole Time- is executive director who is in whole time employment is executive director who is in whole time employment of the company.of the company.

Independent-Independent- is a non executive director who has no material is a non executive director who has no material

pecuniary relationship or transactions with the companypecuniary relationship or transactions with the company..

Responsibility of Directors

Meaning thereofMeaning thereof Statutory ResponsibilityStatutory Responsibility Fiduciary ResponsibilityFiduciary Responsibility Statutory Role and ResponsibilityStatutory Role and Responsibility

Need for familiarisation with legal aspectsNeed for familiarisation with legal aspects Relationship with duty discharge Relationship with duty discharge

obligationsobligations

Key Issues

ResponsibilityResponsibility Duty Duty StatutoryStatutory

What is “Duty” Generally speaking, duty is what we expect of othersGenerally speaking, duty is what we expect of others Duty is a task we look forward to with distaste, perform with Duty is a task we look forward to with distaste, perform with

reluctance, and brag about afterwardsreluctance, and brag about afterwards The trouble with the world is that so many people who stand up for The trouble with the world is that so many people who stand up for

their rights fall down miserably on their dutiestheir rights fall down miserably on their duties The best way to get rid of your duties is to discharge themThe best way to get rid of your duties is to discharge them ““Next to doing the right thing, the most important thing is to let people Next to doing the right thing, the most important thing is to let people

know you are doing the right thing” – John D. Rockfellerknow you are doing the right thing” – John D. Rockfeller ““It is not enough to be ready to go where duty calls. A man should It is not enough to be ready to go where duty calls. A man should

stand around where he can hear the call” – Robert Louis Stevensonstand around where he can hear the call” – Robert Louis Stevenson

Responsibility

Responsibility walks hand in hand with capacity and Responsibility walks hand in hand with capacity and powerpower

Responsibility also is directly linked to one’s dutiesResponsibility also is directly linked to one’s duties It is easy to dodge our responsibilities, but we cannot It is easy to dodge our responsibilities, but we cannot

dodge the consequences of dodging our responsibilitiesdodge the consequences of dodging our responsibilities

You cannot evade the responsibilities of tomorrow by evading it You cannot evade the responsibilities of tomorrow by evading it todaytoday

- Abraham Lincoln- Abraham Lincoln

Responsibility

The price of greatness is responsibilityThe price of greatness is responsibility

- Sir Winston Churchill- Sir Winston Churchill

Drivers of Change

Democratisation of ownershipDemocratisation of ownership LiberalisationLiberalisation Globalisation of marketsGlobalisation of markets TechnologyTechnology Corporate GovernanceCorporate Governance ESOPsESOPs Other influences – lenders, regulators, tax Other influences – lenders, regulators, tax

authoritiesauthorities

The environment in which we work in

Changing Economic TimesChanging Economic Times Pressures to PerformPressures to Perform

- Wall Street expectations- Wall Street expectations- Shareholder and Board of Director expectations- Shareholder and Board of Director expectations

Complexity and sophistication of Business Complexity and sophistication of Business Structures and TransactionsStructures and Transactions- Numerous risks and challenges of reporting transactions - Numerous risks and challenges of reporting transactions in an easily understood mannerin an easily understood manner

Complex and Voluminous StandardsComplex and Voluminous Standards

The Role of a Director

A Director is part of a collective body of A Director is part of a collective body of Directors called the Board responsible for Directors called the Board responsible for the superintendence, control and direction the superintendence, control and direction of the affairs of the Companyof the affairs of the Company

The Role of a Director

Is an individual Director as a member of Is an individual Director as a member of the Company Board equally responsible as the Company Board equally responsible as the Company Board ?the Company Board ?

No, unless he, the individual director, is charged with a No, unless he, the individual director, is charged with a specific responsibilityspecific responsibility

The Role of a Director

Is the Company Board responsible for Is the Company Board responsible for management of the Company or for the management of the Company or for the supervisory oversight of the Company ?supervisory oversight of the Company ?

This depends on whether the Company has a CEO to manage This depends on whether the Company has a CEO to manage the affairs of the Company on a day-to-day basis.the affairs of the Company on a day-to-day basis.

Director’s duties

Act in the best interests of the companyAct in the best interests of the company Safeguard the interests of the stakeholdersSafeguard the interests of the stakeholders Attend Board Meetings and participate in decisionsAttend Board Meetings and participate in decisions Exercise due care and skillExercise due care and skill Avoid conflict situationsAvoid conflict situations Not seek personal gains Not seek personal gains Maintain confidentialityMaintain confidentiality Fiduciary dutyFiduciary duty Seek opinion of experts when necessarySeek opinion of experts when necessary Discharge duties required in specific committees of the Discharge duties required in specific committees of the

BoardBoard

Directors’ duties

● Directors are subject to various duties, both common law Directors are subject to various duties, both common law and statutory. At a very fundamental level, these duties and statutory. At a very fundamental level, these duties are directed at four well-defined objectives : are directed at four well-defined objectives :

● to compel directors to act in accordance with the strict to compel directors to act in accordance with the strict terms of their mandate;terms of their mandate;

● to compel them to exercise care and skill in carrying out to compel them to exercise care and skill in carrying out their various functions;their various functions;

Directors’ duties

● to compel them to use their wide discretionary powers in to compel them to use their wide discretionary powers in good faith and proper purposegood faith and proper purpose

● and finally, to compel them to act loyally in advancing the and finally, to compel them to act loyally in advancing the interest of their company.”interest of their company.”

Sarah Worthington, Corporate Governance - Remedying Sarah Worthington, Corporate Governance - Remedying and Ratifying Directors’ Breachesand Ratifying Directors’ Breaches

Directors’ Duties

What is a director’s duty of skill ?What is a director’s duty of skill ? Directors are not required to bring any special Directors are not required to bring any special

qualifications into their office.qualifications into their office.

Major Law Reform required in this areaMajor Law Reform required in this area

Directors’ Duties What is the duty of care required for a Director ?What is the duty of care required for a Director ? The Supreme Court of India has held in The Supreme Court of India has held in Official Liquidator v Official Liquidator v

P.A. Tendolkar (1973) 43 Comp Cases 382 P.A. Tendolkar (1973) 43 Comp Cases 382 as follows: as follows: A director may be shown to be so placed and to have been so A director may be shown to be so placed and to have been so

closely and so long associated personally with the management closely and so long associated personally with the management of the Company that he will be deemed to be not merely of the Company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of the business cognizant of but liable for fraud in the conduct of the business of the Company even though no specific act of dishonesty is of the Company even though no specific act of dishonesty is proved against him personally. He cannot shut his eyes to what proved against him personally. He cannot shut his eyes to what must be obvious to every one who examines the affairs of the must be obvious to every one who examines the affairs of the Company even superficiallyCompany even superficially

Directors’ Duties What is the non-executive director’s duty of skill and care ?What is the non-executive director’s duty of skill and care ? The English Court after reviewing many cases in The English Court after reviewing many cases in Dorchester Finance Dorchester Finance

Co. Ltd v Stebbing, 1989 BCLC498 (Ch D) Co. Ltd v Stebbing, 1989 BCLC498 (Ch D) held as follows:held as follows: A Director is to exhibit in the performance of his duties such degree of A Director is to exhibit in the performance of his duties such degree of

skill as may be reasonably expected from a person of his knowledge skill as may be reasonably expected from a person of his knowledge and experience and experience

A Director is to exhibit in the performance of his duties such care as A Director is to exhibit in the performance of his duties such care as an ordinary man might be expected to take on his own behalfan ordinary man might be expected to take on his own behalf

A Director must act in good faith and in the best interests of the A Director must act in good faith and in the best interests of the CompanyCompany

These standards of duty of care and skill apply equally to non-These standards of duty of care and skill apply equally to non-executive Directorsexecutive Directors

Directors’ Duties

Acting in good faith a valid defense for the Directors Acting in good faith a valid defense for the Directors In Re The Walt Disney Company, the US Court in its In Re The Walt Disney Company, the US Court in its

decision decided in August 2005 upheld the rule of acting decision decided in August 2005 upheld the rule of acting in good faith by saying that the concept of intentional in good faith by saying that the concept of intentional dereliction of duty, a conscious disregard for one’s dereliction of duty, a conscious disregard for one’s responsibilities, is an appropriate (although not the only), responsibilities, is an appropriate (although not the only), standard for determining whether fiduciaries have acted in standard for determining whether fiduciaries have acted in good faithgood faith

Directors’ Responsibilities

Present directorsPresent directors Past directorsPast directors Members of Audit CommitteeMembers of Audit Committee Explicit and implicitExplicit and implicit Responsibility for subsidiariesResponsibility for subsidiaries

Statutory Responsibilities Section 274 of the Companies Act list out disqualifications of directors. Section 274 of the Companies Act list out disqualifications of directors.

Director should conduct himself in such a way that he does not incur such Director should conduct himself in such a way that he does not incur such disqualificationdisqualification

Director should maintain absolute secrecy of confidential informationDirector should maintain absolute secrecy of confidential information Director should not derive undue personal advantage or benefit by virtue of Director should not derive undue personal advantage or benefit by virtue of

his positionhis position Director should ensure that company at all times complies with statutes, rules Director should ensure that company at all times complies with statutes, rules

and regulations in letter and spiritand regulations in letter and spirit Director with other Directors of the Board is responsible that report and Director with other Directors of the Board is responsible that report and

recommendation of Audit Committee and Shareholders’ / Investors’ recommendation of Audit Committee and Shareholders’ / Investors’ Grievance Committee receive due considerationGrievance Committee receive due consideration

Director is accountable for the company practicing the highest standard of Director is accountable for the company practicing the highest standard of corporate governance with a underlying view of increasing the shareholders’ corporate governance with a underlying view of increasing the shareholders’ valuevalue

Fiduciary Duty of Directors

Director should not enter into engagements Director should not enter into engagements in which he can have a personal interest in which he can have a personal interest conflicting with the interest of the company.conflicting with the interest of the company.

Director must display the utmost good faith Director must display the utmost good faith towards the company in their dealings with towards the company in their dealings with it or on its behalf. it or on its behalf.

Directors’ Responsibilities

Arthur Levitt’s views Arthur Levitt’s views Blue Ribbon CommitteeBlue Ribbon Committee Section 292A and Audit CommitteesSection 292A and Audit Committees Section 217 (2AA)Section 217 (2AA) Clause 49 of Listing AgreementClause 49 of Listing Agreement

Recommendation of Blue Ribbon Committee

Member of the Audit Committee to be independent of the Member of the Audit Committee to be independent of the company (not employees)company (not employees)

The Audit committee to be composed exclusively of non The Audit committee to be composed exclusively of non executive directorsexecutive directors

The Audit Committee to consist of at least three member with The Audit Committee to consist of at least three member with specialist expertise in the field of finance and accountingspecialist expertise in the field of finance and accounting

The Audit committee to have a written charterThe Audit committee to have a written charter The charter to be published at least every three years in a proxy The charter to be published at least every three years in a proxy

statementstatement

Recommendation of Blue Ribbon Committee

The external auditors to be accountable to the Board of The external auditors to be accountable to the Board of Directors and particularly to the audit committee.Directors and particularly to the audit committee.

The external auditors to report annually on their independence The external auditors to report annually on their independence from the company.from the company.

The audit committee to discuss the quality of accounting The audit committee to discuss the quality of accounting principles with the external auditors. principles with the external auditors.

The audit committee to produce a report on its activities.The audit committee to produce a report on its activities. Quarterly financial statements (form 10-Q) to undergo a critical Quarterly financial statements (form 10-Q) to undergo a critical

review by the external auditorsreview by the external auditors

Section 217(2AA)

Report by Board of Directors includes Directors responsibility Report by Board of Directors includes Directors responsibility Statement indicating thereinStatement indicating therein

In preparation of annual accounts, applicable accounting standard has In preparation of annual accounts, applicable accounting standard has been followed along with explanations to material departures.been followed along with explanations to material departures.

That accounting policies has been selected and applied consistently That accounting policies has been selected and applied consistently and made judgment and estimates that are reasonable and prudent.and made judgment and estimates that are reasonable and prudent.

Proper and sufficient care for the maintenance of accounting records Proper and sufficient care for the maintenance of accounting records in accordance with the act for safeguarding the assets of company and in accordance with the act for safeguarding the assets of company and for detecting and preventing fraudfor detecting and preventing fraud

Prepared annual accounts on a going concern basisPrepared annual accounts on a going concern basis

Section 274 clause (g)

● such person is already a director of a public companysuch person is already a director of a public company((A) has not the annual accounts and annual returns for any continuous three A) has not the annual accounts and annual returns for any continuous three financial years commencing on and after the first day of April 1999; orfinancial years commencing on and after the first day of April 1999; or

(B) (B) has failed to repay its deposit or interest thereon on due date or redeem its has failed to repay its deposit or interest thereon on due date or redeem its debentures on due date or pay dividend and such default continues for one year debentures on due date or pay dividend and such default continues for one year or more:or more:

Provided that such person shall not be eligible to be appointed as a director of any Provided that such person shall not be eligible to be appointed as a director of any other public company for a period of five years from the date on which such other public company for a period of five years from the date on which such public company, in which he is a director failed to file annual accounts and public company, in which he is a director failed to file annual accounts and annual return or has failed to repay its depositannual return or has failed to repay its deposit or or interest or redeem its debentures interest or redeem its debentures on due date or pay dividendon due date or pay dividend

Section 292A

Audit committee shall consist of at least three directors other than Audit committee shall consist of at least three directors other than managing director or whole time director.managing director or whole time director.

Audit Committee shall have discussion with auditors about internal Audit Committee shall have discussion with auditors about internal control systems, the scope of audit and review half yearly and annual control systems, the scope of audit and review half yearly and annual financial statements.financial statements.

Audit committee has authority to investigate into any matter.Audit committee has authority to investigate into any matter. The recommendations of the Audit committee is binding on the BoardThe recommendations of the Audit committee is binding on the Board The chairman of the Audit Committee shall attend the annual general The chairman of the Audit Committee shall attend the annual general

meeting to provide clarification on matters relating to auditmeeting to provide clarification on matters relating to audit

Clause 49 of Listing Agreement The non executive director on the board should not be less than fifty percent The non executive director on the board should not be less than fifty percent

of the Board of Directors or in the case of non executive chairman at least of the Board of Directors or in the case of non executive chairman at least should comprise of independent directorsshould comprise of independent directors

The board meeting is to be held at least four times in a year.The board meeting is to be held at least four times in a year. The difference between two Board meeting should not exceed four monthsThe difference between two Board meeting should not exceed four months The Annual Report of a company should comprise a separate section in The Annual Report of a company should comprise a separate section in

Corporate Governance. Non compliance of any mandatory requirement which Corporate Governance. Non compliance of any mandatory requirement which is a part of listing agreement to be specifically highlighted with a reason for is a part of listing agreement to be specifically highlighted with a reason for such non compliance.such non compliance.

The compliance of conditions of corporate governance is to be certified by The compliance of conditions of corporate governance is to be certified by auditors and the same is to be annexed with directors report and also sent to auditors and the same is to be annexed with directors report and also sent to the Stock Exchange with returnthe Stock Exchange with return

Clause 49

Kumarmangalam Birla committee on Kumarmangalam Birla committee on corporate governance – SEBI – 1999corporate governance – SEBI – 1999

Narayana Murthy committee on corporate Narayana Murthy committee on corporate governacegovernace

Definition

Excludes any relatives of promoters, senior Excludes any relatives of promoters, senior managementmanagement

Cooling-off Period - for any member of any Cooling-off Period - for any member of any advisory firm (not just statutory auditors, advisory firm (not just statutory auditors, but also lawyers, consultants and internal but also lawyers, consultants and internal auditors) auditors)

Increased responsibilities

Enhances the responsibilities of the board Enhances the responsibilities of the board Company’s compliance with all applicable laws to be Company’s compliance with all applicable laws to be

discloseddisclosed Enhanced oversight over its subsidiaries Enhanced oversight over its subsidiaries

Board members also have to review all significant transactions Board members also have to review all significant transactions entered into by any subsidiary entered into by any subsidiary

Review minutes of all the subsidiaries’ board meetings Review minutes of all the subsidiaries’ board meetings Sign-off on compliance with the company’s code of conduct Sign-off on compliance with the company’s code of conduct

Improving quality of disclosure Disclosure of directors’ shareholding in the companyDisclosure of directors’ shareholding in the company Disclosure of compensation paid to non-executive Disclosure of compensation paid to non-executive

directorsdirectors Disclosure of all related-party transactionsDisclosure of all related-party transactions Use of funds raised through public issues (in case of any Use of funds raised through public issues (in case of any

use of funds for purposes other than that originally stated use of funds for purposes other than that originally stated in the offer prospectus), in the offer prospectus),

An audited statement on the deviation to be included in the An audited statement on the deviation to be included in the annual report, annual report,

Any changes in accounting policies and practices. Any changes in accounting policies and practices.

Liability

For company debtsFor company debts Ultra-vires actsUltra-vires acts Criminal liability under Negotiable Instruments ActCriminal liability under Negotiable Instruments Act Damages for breach of contractDamages for breach of contract Director’s responsibility statementsDirector’s responsibility statements Liability of directors under other laws (labour, food Liability of directors under other laws (labour, food

adulteration, essential commodities, etc.)adulteration, essential commodities, etc.)

Some Company Law Provisions

Non compliance of various provisions of the Non compliance of various provisions of the ActAct

Avoidance of provisions relieving liability of Avoidance of provisions relieving liability of officers – voidofficers – void

Unlimited liability (Section 323) – Unlimited liability (Section 323) – permissiblepermissible

Statutory Protection to Directors (Section Statutory Protection to Directors (Section 633)633)

Directors’ Responsibility StatementDirectors’ Responsibility Statement

CEO / CFO responsibilities

The CEO, i.e. the Managing Director or Manager appointed in terms The CEO, i.e. the Managing Director or Manager appointed in terms of the Companies Act, 1956 and the CFO i.e. the whole-time Finance of the Companies Act, 1956 and the CFO i.e. the whole-time Finance Director or any other person heading the finance function discharging Director or any other person heading the finance function discharging that function shall certify to the Board that:that function shall certify to the Board that:

(a) They have reviewed financial statements and the cash flow statement (a) They have reviewed financial statements and the cash flow statement for the year and that to the best of their knowledge and belief :for the year and that to the best of their knowledge and belief :

(i) these statements do not contain any materially untrue statement or omit (i) these statements do not contain any materially untrue statement or omit any material fact or contain statements that might be misleading;any material fact or contain statements that might be misleading;

(ii) these statements together present a true and fair view of the (ii) these statements together present a true and fair view of the company’s affairs and are in compliancecompany’s affairs and are in compliance with existing accounting with existing accounting standards, applicable laws and regulations.standards, applicable laws and regulations.

Management certification Management has to certify the Management has to certify the key financial assertionskey financial assertions like like

completeness, validity, valuation etc. underlying in the preparation of completeness, validity, valuation etc. underlying in the preparation of the financial statements.the financial statements.

Opinion of the statutory auditors is not the only criterion on which the Opinion of the statutory auditors is not the only criterion on which the financial statements will be evaluated.financial statements will be evaluated.

ResponsibilityResponsibility on the management to ensure compliance with on the management to ensure compliance with applicable standards, laws etc. and to ensure that the financial applicable standards, laws etc. and to ensure that the financial statements give true and fair view of the affairs of the Company.statements give true and fair view of the affairs of the Company.

Management certification

They accept responsibility for They accept responsibility for establishingestablishing and and maintainingmaintaining internal controls and that they have internal controls and that they have evaluatedevaluated the the effectivenesseffectiveness of the internal control systems of the company of the internal control systems of the company and they have and they have discloseddisclosed to the auditors and the Audit to the auditors and the Audit Committee, Committee, deficienciesdeficiencies in the in the design ordesign or operationoperation of of internal controls, if any, of which they are aware and the steps internal controls, if any, of which they are aware and the steps they have taken or propose to take they have taken or propose to take to rectifyto rectify these these deficiencies.deficiencies.

Guidance for Independent Directors-The Taste and Smell Tests

Reputation of companyReputation of company Capability to meet the requirements and Capability to meet the requirements and

expectationsexpectations Demonstrate independenceDemonstrate independence Whether the company has adequate controls Whether the company has adequate controls

and whether they can be relied uponand whether they can be relied upon Ability to resist pressureAbility to resist pressure

Guidance for Independent Directors-The Taste and Smell Tests

Knowledge on current developmentsKnowledge on current developments Aware and abide by corporate code of Aware and abide by corporate code of

conductconduct Seek expert helpSeek expert help Prepare in advance for board meetingsPrepare in advance for board meetings Maintain confidentialityMaintain confidentiality

Way Ahead

Independent directors here to stayIndependent directors here to stay Board and audit committee procedures will Board and audit committee procedures will

need to be revampedneed to be revamped Need to be more proactive at watching over Need to be more proactive at watching over

compliancecompliance Identify and manage risksIdentify and manage risks Have processes to test and evaluate controlsHave processes to test and evaluate controls

PUBLIC DEPOSIT

58A-PUBLIC DEPOSIT NOT TO BE INVITED WITHOUT ISSUING AN ADVERTISEMENT

Provision:

1[58A. Deposits#02 not to be invited without issuing an advertisement] (1) The Central Government may, in consultation with the Reserve Bank of India, prescribe the limits up to which, the manner in which and the conditions subject to which deposits may be invited or accepted by a company either from the public or from its members.(2) No company shall invite, or allow any other person to invite or cause to be invited on its behalf, any deposit unless- (a) such deposit is invited or is caused to be invited in accordance with the rules made under sub-section (1), #03[* * *] (b) an advertisement, including therein a statement showing the financial position of the company, has been issued by the company in such form and in such manner as may be prescribed #05[, and] #06[(c) the company is not in default in the repayment of any deposit or part thereof and any interest thereupon in accordance with the terms and conditions of such deposit.]

Provision:b) No deposit referred to in clause(a) shall be renewed by the company after the expiry of the term thereof unless the deposit is such that it could have been accepted if the rules made under sub-section (1) were in force at the time when the deposit was initially accepted by the company. (3)(a) Every deposit accepted by a company at any time before the commencement of the Companies (Amendment) Act, 1974 (14 of 1974) in accordance with the directions made by the Reserve Bank of India under Chapter IIIB of the Reserve Bank of India Act, 1934 (2 of 1934), shall, unless renewed in accordance with clause (b), be repaid in accordance with the #07[terms and conditions of such deposit] 08[(3A) Every deposit accepted by a company after the commencement of the Companies (Amendment) Act, 1988, shall, unless renewed in accordance with the rules made under sub-section (1), be repaid in accordance with the terms and conditions of such deposit.]

Provision:Where any deposit is accepted by a company after the commencement of the Companies (Amendment) Act, 1974 (41 of 1974), in contravention of the rules made under sub-section (1), repayment of such deposit shall be made by the company within thirty days from the date of acceptance of such deposit or within such further time, not exceeding thirty days, as the Central Government may, on sufficient cause being shown by the company, allow. 5. Where a company omits or fails to make repayment of a deposit in accordance with the provisions of clause (c) of sub-section (3), or in the case of a deposit referred to in sub-section (4), within the time specified in that sub-section,- (a) the company shall be punishable with fine which shall not be less than twice the amount in relation to which the repayment of the deposit has not been made, and out of the fine, if realised, an amount equal to the amount in relation to which the repayment of deposit has not been made, shall be paid by the Court, trying the offence, to the person to whom repayment of the deposit was to be made, and on such payment, the liability of the company to make repayment of the deposit shall, to the extent of the amount paid by the Court, stand discharged;

Provision: b)Every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to five years and shall also be liable to fine.

#09(6) Where a company accepts or invites, or allows or causes any other person to accept or invite on its behalf, any deposit in excess of the limits prescribed

under sub-section (1) or in contravention of the manner of condition prescribed under that sub-section or in contravention of the provisions of sub-section (2), as the case may be: 7)(a) Nothing contained in this section shall apply to,-

(i) a banking company, or(ii) such other company as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

(b) Except the provisions relating to advertisement contained in clause (b) of sub-section (2),#12 nothing in this section shall apply to such classes of financial companies as the Central Government may, after consultation with the Reserve Bank of India, specify in this behalf.

Provision:

[(8) The Central Government may, if it considers it necessary for avoiding any hardship or for any other just and sufficient reason, by order, issued either prospectively or retrospectively from a date not earlier than the commencement of the Companies (Amendment) Act, 1974 (41 of 1974), grant extension of time to a company or class of companies to comply with, or exempt any company or class of companies from, all or any of the provisions of this section#14 either generally or for any specified period subject to such conditions as may be specified in the order: Provided that no order under this sub-section shall be issued in relation to a class of companies except after consultation with the Reserve Bank of India.]

[(9) Where a company has failed to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the #16[Tribunal] may, if it is satisfied, either on its own motion or on the application of the depositor,#17 that it is necessary so to do to safeguard the interests of the company, the depositors or in the public interest, direct, by order, the company to make repayment of such deposit#18 or part thereof forthwith or within such time and subject to such conditions as may be specified in the order: Provided that the #19[Tribunal] may, before making any order under this sub-section, give a reasonable opportunity of being heard to the company and the other persons interested in the matter.

Provision:

10) Whoever fails to comply with any order made by the #20[Tribunal] under sub-section (9) shall be punishable with imprisonment which may extend to three years and shall also be liable to a fine of #21[not less than rupees five hundred] for every day during which such non-compliance continues.] (11) A depositor may, at any time, make a nomination#23 and the provisions of sections 109A and 109B shall, as far as may be, apply to the nomination made under this sub-section.] Explanation.-For the purposes of this section, "deposit" means any deposit of money with, and includes any amount borrowed by, a company but shall not include such categories of amount as may be prescribed in consultation with the Reserve Bank of India.

Provision:

#01 Inserted by Act 41 of 1974, section 7, w.e.f. 1-2-1975.#02 See Companies (Acceptance of Deposits) Rules, 1975.#03 The word "and" omitted by the Companies (Amendment) Act, 1996, w.e.f. 1-3-1997.#04 See The Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977.#05 Inserted by the Companies (Amendment) Act, 1996, w.e.f. 1-3-1997.#06 Ibid.#07 Substituted by the Companies (Amendment) Act, 1988, section 9, w.e.f. 1-9-1989 for the words "terms of such deposit".#08 Inserted by the Companies (Amendment) Act, 1988, section 9, w.e.f. 1-9-1989.#09 Powers delegated to Chief Officer, Deputy Chief Officer and Assistant Chief Officers attached to the Department of Non-Banking Companies, RBI vide

Notification No. GSR 473(E), dated 26-9-1978.

Provision:

#10 Substituted for "one lakh rupees" by the Companies (Amendment) Act, 2000, w.e.f. 13-12-2000.#11 Substituted for "five thousand rupees" by the Companies (Amendment) Act, 2000, w.e.f. 13-12-2000.#12 See The Non-Banking Financial Companies and Miscellaneous Non-Banking Companies (Advertisement) Rules, 1977.#13 Inserted by Act 46 of 1977, section 3, w.e.f. 24-12-1977.#14 See Companies (Application for Extension of time or Exemption under sub-section (8) of section 58A) Rules, 1979.#15 Inserted by the Companies (Amendment) Act, 1988, section 9, w.e.f. 1-9-1989.#16 Substituted for "Company Law Board" by the Companies (Second Amendment) Act, 2002.#17 Application to be made in Form 4 of the Company Law Board Regulations, 1991.#18 Fees prescribed is Rs. 50. On notification of the commencement of the amendment, power will be transferred to the National Company Law Tribunal.

Provision:

#19 Substituted for "Company Law Board" by the Companies (Second Amendment) Act, 2002.#20 Ibid.#21 Substituted for "not less than rupees fifty" by the Companies (Amendment) Act, 2000, w.e.f. 13-12-2000.#22 Inserted by the Companies (Amendment) Act, 1999, w.r.e.f. 31-10-1998.#23 See Form 2B, Companies (Central Government's) General Rules & Forms, 1999, w.e.f. 12-1-1999.

Procedure for Inviting and Accepting Public Deposits under Section 58A

In view of the provisions of the companies act, 1956 and the companies (Acceptance of Deposits ) Rules, 1975, a company, which proposes to invite and accept deposit from public should comply with the procedural requirements:

1.Authority in Memorandum to borrow funds: Check if the Memorandum of Association of the company contains

provision empowering the company to borrow the funds. Trading companies have implied power of borrowing. If the Memorandum of Association does not give such power to the company, then the Memorandum is required to be altered by incorporating an appropriating object clause therein, for which the general meeting (GM) of the company shall have to be convened and held for passing the special resolution in accordance with the provision of section 17 of the companies Act,1956, before attempting to invite and accept deposit from public.

Cont… 2.Powers of the board:

Section 291 of the Companies Act, 1956 provides that subject to the provisions of the Act, the Board of directors of a company shall be entitled to exercise all such powers, and to do all such acts and things, as the company is authorized to exercise and do. However the Board shall not exercise any power or do any act or things, which is directed or required, whether by the companies Act, or any other Act or by the Memorandum or Article of the company or otherwise, to be exercised or done by the company in general meeting. Section 292 confers on the Board of Directors of a company power to borrow moneys Otherwise than on Debenture but such powers must exercised by means of resolutions passed at meetings of the Board. According to Section 293(1)(d) of the Act, in order to enable the Board of directors of a company to borrow funds in excess of the paid up share capital and free reserves of the company, consent of the company in general meeting has to be obtained. In view of the provisions of sections 291, 292, 293, the company must ensure that, before passing Board resolution for inviting and accepting public deposit under section 292 of the Act, the amount of the proposed deposit together with the amount of existing borrowings, does not exceed the company’s paid up share capital and free reserves and if it does, it must convene the general meeting of the shareholders of the company to pass a resolution under section 293(1)(d) of the Act, fixing the limit on the total amount of borrowing.

Cont…..

3.Holding of Board meeting: Board meeting required to convene to approve the scheme of acceptance of deposits, Amount of deposit, terms and conditions of acceptance, repayment approve the text of advertisement. 4. Filing of advertisement with the ROC: A copy of the advertisement duly signed by the majority of directors of the company and same required to be filed to the Registrar of Companies for approval of Registration..5.Publication of advertisement: company must publish the advertisement in a leading English newspaper and one in a vernacular( homely language) circulating in the state in which the Registered office of the company is situated.6.Issue of Application Forms: An application inviting deposit being attached with the text of advertisement distributed to the public through brokers and intermediaries, the same which must have been prepared strictly in accordance with the provision of rule 5 of the companies ( Acceptance of Deposits ) Rules, 19757.Statement in lieu of Advertisement : If a company intends to accept deposit without inviting, it can do so by filing the Statement in lieu of Advertisement With ROC, duly signed by the Directors and containing all the particulars required in the Advertisement

Cont…..

8.Acceptance of deposit during validity of advertisement: A company can accept deposit / renew during the validity of the advertisement i.e for a period of six months from the date of closure of financial years in which it is issued or until the date on which balance sheet of the company laid before the company in AGM whichever is earlier.

9.Issue of deposit Receipt to each Depositor: The company must issue a Receipt of Deposit(signed by the Authorized officer) to all the depositors within 8 weeks from the date of receipt of money or cheques from the depositors. Receipt should contain all the details like names and address of the depositors, date of deposit, Amount received and the interest payable thereon.

SPECIMEN DEPOSIT RECEIPT (NOT TRANSFERABLE)

NAME OF THE COMPANYRegd Office: _____________________________Fixed Deposit Receipt No________________ for Rs_______________________Repayable on ______________________Received from _____________________________________________________Name and Address(es) of depositors(s)]________________________________________________________________________ the sum of rupees ________________ on __________________ as a deposit for _________________ years from the ______________ day of _________________ 20_ _ bearing interest at _________________ percent per annum payable half yearly on __________ and _________________ each year.Date: For ABC Company Ltd Company secretary Authorised SignatoryNOTE: This receipt is subject to the terms and conditions of the fixed deposit scheme of the company.

REVERSE OF THE RECEIPT

Received from ….. co Ltd ______________________________________this _________________ day of ____________________ 20_ _ Princcipal Rs_________________________________________________Interest Rs___________________________________________________Total Rs ____________________________________________________Signature(S) of Depositor(S) ____________________________________ Revenue Stamp

Name and Address

Cont…..

10.Entry in the Register(s) of Deposit: Details of the depositors are entered in the Register:Name and Adress of the depositors Date and Amount of depositDuration of the deposit and the date of maturityRate of interest and date of paymentAny other information.

1.Filing of Return of deposit: Return of deposit must be filed witgh the registrar on or before 30th june of each year, in the manner prescribed in the companies deposit Rules, 1975 and furnish the same as on 31st of March duly certified by the Auditors.

12. Copy to RBI copy of Return of Deposit also be filed with the RBI ( Reserve bank of India ) 13.Payment of Interest on Deposit and Repayment of Deposit: Repayment of deposit and interest thereon must be paid in accordance with the terms and condition on which deposit have been accepted.

Cont…..

14. Premature Repayment of deposit: company must make premature repayment of deposit , if and when a depositor approaches the company, strictly according to the provisions of rule 8(1) of the said rules which provides that barring the exception contained in the proviso to the sub rule, where the company makes repayment of a deposit after the expiry of six months from the date of such deposit but before the expiry of such deposit was accepted by the company, the rate of interest payable by the company on such deposit, shall be reduced by one percent from the rate which the company would have paid had the deposit been accepted for a period for which such deposit had run and the company shall not pay interest at any rate higher than the rate so desired.

15. Maintenance of liquid Assets: At least 15% of the Amount deposited maturing during the year ending shall be deposited or invest in any of the following:In a current or other deposit account with any scheduled bank, free from charge or lien.In a encumbered securities of the Central Government or the state GovernmentIn a encumbered securities mentioned in clauses (a) to (d) and (ee) of section 20 of the Indian Trust Act, 1882;In a encumbered bonds issued by the Housing Development Finance Corporation Limited. The amount so deposited shall not be utilized for any purpose other than the repayment of deposit maturing during the year, provided that the sum remaining deposited or invested as the case may be, shall not, at any time, fall ten percent of the amount deposits maturing that year.

Cont…..

16. Refund of Excess Deposit: Ceiling limit as required under rule 3(2) provides that any excess received by the company shall be refund within 30 days or such other extended time not exceeding 30 days as may be allowed by the central Government.

17.Brokerage payable: The Brokerage payable by the company shall not exceed the limit prescribed under Rule 3(1) (d) i.e no company shall pay brokerage exceeding one percent of the deposit for a period upto one year, one and half percent of the deposit for a period of more than one year but upto two years and two percent of deposit for a period exceeding two years collected by and through such broker and such payment shall be on one time basis.

18. Rate of Interest: Rate of interest offered by the company on Deposit does not exceed the maximum rate of interest prescribed by the Reserve Bank of India that the non Banking Financial Companies can pay on their public Deposit.

Only after complying with the above provision and procedure a company can accept deposit under section 58A of the companies Act, 1956.

CERTIFICATIONCERTIFICATION

OFOF

E-FORMSE-FORMS

UNDER COMPANIES ACT, 1956UNDER COMPANIES ACT, 1956

CATEGORIZATION OF E - FORMSCATEGORIZATION OF E - FORMS

• CATEGORIZATION OF E - FORMS

FORM -23AC -FILLING BALANCE SHEET AND OTHER DOCUMENTS WITH REGISTRAR

FORM -23ACA -FILLING PROFIT AND LOSS AND OTHER DOCUMENTS WITH REGISTRAR

FORM -20B -FOR FILLING ANNUAL RETURN BY A COMPANY HAVING SHARE CAPITAL WITH THE REGISTRAR

CERTIFICATION

Form 23AC

Date of board

meeting

Due date of AGM?

SRN of Form 23B?

Category in which

share capital raised ?

Auditors remark

and explanati

on of BOD

Various attachme

ntsResolution No. and date of

BM

Form 23ACA

EPS ?

Rent- Recd or Paid?

Attachments

Form 20B

Extension for F.Y. or A.G.M.

Issued Capital?

Subscribed

Capital?

Indebtness

Breakup of Equity Capital

Attachments

FORM -18 Change of Registered Office

FORM -32 Appointment / Resignation of Director / Secretary

FORM -5 Increase / Change in Share Capital

FORM – 2 Return of Allotment

FORM - 23Filing of Special Resolution / Agreement

Form – 17 Satisfaction of Charge

FORM - 25C Appointment of Managing Director / Whole Time Director / Manager

FORM - 21 Filing of Order of Court / CLB

Form 18

Provisions in respect of

various type of changes

Name and Address of

Police Station

SRN of form 23, 1AD, 21

Form 32

Designation, Category,

Chairman, ED , etc.

Manager or Secretary

Form 5

Various purposes

Ordinary or Special

Bifurcation of additional

capitalAnd

conditions

Other purposes

for change in capital

Revised Capital

Structure

Change of AOA

Payment of Stamp duty

Attachments

Form 2

Number of Allotment

Details of terms, V.R.,

No. of Shares and Premium

Allotment for consideration

other than cash

Allotment of Bonus Shares

Post Allotment

Capital Structure

Special Resolution u/s. 81(1A)

Attachments

Form 23

Date of dispatch of Notice

Different type of Resolutions

Change of objects

SRN of form 21 ?

Attachments

Form 17

Date of Satisfaction of charge in full

NDC from charge holder

Form 25C

Date of B.R, Effective

D.O.A. and Remuneration

Structure

CERTIFICATION

Form 21

Ordered passed by

Details in case of

Amalgamation order

SRN of relevant form and payment

of penalty

PRACTICAL ASPECTS IN PRACTICAL ASPECTS IN APPOINTMENT & REMOVAL APPOINTMENT & REMOVAL

OF AUDITORSOF AUDITORS

AUDITOR

First AuditorSubsequent

Auditor

Special Auditor

Branch Auditor

Cost Auditor

Auditor appointed by Central Govt.

Auditor of GovernmentCompanies

Appointed by BOD within 1 month of registration of the Appointed by BOD within 1 month of registration of the company. company. `̀ Sec 224(5)Sec 224(5)

If BOD fails to appoint,the company may appoint at a If BOD fails to appoint,the company may appoint at a General Meeting.General Meeting.

Holds office until the conclusion of first AGM.Holds office until the conclusion of first AGM.

Members at any GM may remove such auditor and appoint Members at any GM may remove such auditor and appoint another one in his place,of whose nomination special another one in his place,of whose nomination special notice has been given.notice has been given.

Proviso to section 224(5Proviso to section 224(5))

Appointment of first auditors through the MOA &AOA -Appointment of first auditors through the MOA &AOA -not a valid appointment.not a valid appointment.

Appointment & Removal of First Auditor

Appointed at each AGM to hold office until the conclusion of Appointed at each AGM to hold office until the conclusion of next AGM.next AGM.

Sec 224(1)Sec 224(1)

Intimation to the auditor within 7 days.Intimation to the auditor within 7 days.

Auditor to file form 23B to ROC within 30 days. Auditor to file form 23B to ROC within 30 days. Sec 224(1A)Sec 224(1A)

Appointment of auditor is mandatory in the AGM for the Appointment of auditor is mandatory in the AGM for the ensuing year.ensuing year.

ICAI v.J Saikia.ICAI v.J Saikia.

Appointment of Subsequent Auditors

Tenure of Auditor is not for a particular Tenure of Auditor is not for a particular year or financial year.year or financial year.

Tenure-From one AGM to another AGM.Tenure-From one AGM to another AGM.

If AGM not held- will continue up to the If AGM not held- will continue up to the factual conclusion of the AGM.factual conclusion of the AGM.

Tenure of Auditor

Obligatory on every company to appoint an Obligatory on every company to appoint an Auditor i.e. Auditor i.e. STATUTORY AUDITORSTATUTORY AUDITOR

The Auditor, if Individual, should be a Chartered The Auditor, if Individual, should be a Chartered Accountant.Accountant.

In case of Firm of Auditors,every Partner should In case of Firm of Auditors,every Partner should be qualified for appointment as an Auditor in the be qualified for appointment as an Auditor in the Firm’s name.Firm’s name.

Statutory auditor can not be internal auditor. Statutory auditor can not be internal auditor. DCA-Circular No.5/77[1/1/76-CL-V]dated 8-4-1977DCA-Circular No.5/77[1/1/76-CL-V]dated 8-4-1977

Appointment of Auditor

Who can not be appointed as Auditor?Section 226(3)

A Body CorporateA Body Corporate

An Officer or Employee of the CompanyAn Officer or Employee of the Company

A Person who is a Partner,or in the employment,of an A Person who is a Partner,or in the employment,of an Officer or Employee of the Company.Officer or Employee of the Company.

A Person who is indebted to the Company for an A Person who is indebted to the Company for an amount exceeding Rs.1000.amount exceeding Rs.1000.

A Person holding any security of that Company after a A Person holding any security of that Company after a period of one year from the date of commencement of period of one year from the date of commencement of the Companies Amendment Act 2000.the Companies Amendment Act 2000.

Restrictions Should not be in ‘FULL TIME EMPLOYMENT’Should not be in ‘FULL TIME EMPLOYMENT’

Auditor of max 20 Companies – only 10 can be Big Auditor of max 20 Companies – only 10 can be Big CompaniesCompanies

Big Companies - paid up capital of or exceeding 25 Big Companies - paid up capital of or exceeding 25 lacslacs

In a Firm of Auditors, the limit of 20 Companies is In a Firm of Auditors, the limit of 20 Companies is per Partner.per Partner.

As per Companies(Amendment)Act,2000, Private As per Companies(Amendment)Act,2000, Private Companies will not be taken into account for Companies will not be taken into account for counting the limit of 20 Companies.counting the limit of 20 Companies.

Joint audit assignments - to be counted as one Joint audit assignments - to be counted as one

company.company.

Branch Audits – not includedBranch Audits – not included

DCA-Circular No.21 of 75 dated 24-9-1975DCA-Circular No.21 of 75 dated 24-9-1975

Guarantee companies having no share capital – also Guarantee companies having no share capital – also

excludedexcluded

DCA-Letter No.8/12/(224)/74-CL-V dated28-9-1974DCA-Letter No.8/12/(224)/74-CL-V dated28-9-1974

Foreign companies audit - not included Foreign companies audit - not included

DCA-Circular No.21 of 75 dated 24-9-1975DCA-Circular No.21 of 75 dated 24-9-1975

Re-appointment of Retiring Auditors- Sec 224(2)

Normally, retiring Auditor is appointed for the next year.Normally, retiring Auditor is appointed for the next year.

He shall be re-appointed unless:He shall be re-appointed unless:

he is not qualified for re-appointment.he is not qualified for re-appointment.

he has given the Company notice of his unwillingness to be re-he has given the Company notice of his unwillingness to be re-appointed.appointed.

a resolution has been passed at that meeting appointing a resolution has been passed at that meeting appointing somebody instead of him or expressly providing that he shall not somebody instead of him or expressly providing that he shall not be re-appointed.be re-appointed.

notice has been given of an intended resolution to appoint some notice has been given of an intended resolution to appoint some other person but the resolution can not be proceeded with.other person but the resolution can not be proceeded with.

‘‘AA retiring Auditor shall re-appointed except in retiring Auditor shall re-appointed except in

four types of cases referred in 224(2)’. But the four types of cases referred in 224(2)’. But the

passing of resolution is essential for the re-passing of resolution is essential for the re-

appointment of the retiring Auditor.appointment of the retiring Auditor.

Circular No.5/72,dated 21-2-1972Circular No.5/72,dated 21-2-1972

Removal of Auditor Special notice required - Special notice required - Section 225(1)Section 225(1)

Auditor can be removed before expiry of his term by Auditor can be removed before expiry of his term by Company in GM after previous approval of Central Company in GM after previous approval of Central Govt Govt (powers delegated to Regional Director)(powers delegated to Regional Director)..

Section 224(5)Section 224(5)

Approval of Central Govt. not required for removal Approval of Central Govt. not required for removal of First Auditor.of First Auditor.

Prior approval of Central govt. require before Prior approval of Central govt. require before actually removing an Auditor. Though resolution for actually removing an Auditor. Though resolution for removal can be passed before.removal can be passed before.

CODE OF ETHICS

Cases & Issues of UnjustifiedCases & Issues of Unjustified

Removal of Auditors:Removal of Auditors:

Independence of AuditorsIndependence of Auditors

Unjustified Removal of Auditors

Section 224 – Appointment & Remuneration of Section 224 – Appointment & Remuneration of AuditorAuditor

Section 224A – Auditor not to appointed except Section 224A – Auditor not to appointed except with the approval of the company by special with the approval of the company by special resolution in certain cases.resolution in certain cases.

Section 225 – Provisions as to resolutions for Section 225 – Provisions as to resolutions for appointing or removing auditorsappointing or removing auditors

Clause (8)&(9) Part I of Schedule I of CA Clause (8)&(9) Part I of Schedule I of CA Act,1949Act,1949

Relationship with Other Members in Practice

Communication with outgoing Auditor in Communication with outgoing Auditor in case of change of auditorcase of change of auditor

Compliance with the requirement of section Compliance with the requirement of section 224, 224A & 225 of the Companies Act, 224, 224A & 225 of the Companies Act, 19561956

Communication with outgoing Auditor in case of change of auditor

Non-compliance of the Provisions of Non-compliance of the Provisions of Section 224, 224A & 225 of the Companies Section 224, 224A & 225 of the Companies act, 1956act, 1956

Undercutting of FeesUndercutting of Fees Non-payment of undisputed audit feesNon-payment of undisputed audit fees Issuance of a qualified reportIssuance of a qualified report

Compliance with the requirement of Sec. 224, 224A & 225 of the Companies Act

To ensure that the outgoing is properly To ensure that the outgoing is properly removed removed

That the guidelines prescribed by the That the guidelines prescribed by the Institute have been complied withInstitute have been complied with

To ensure that the incoming auditor is To ensure that the incoming auditor is properly appointed.properly appointed.

INDEPENDENCE

• Independence of MindIndependence of Mind• Independence in AppearanceIndependence in Appearance

Independence Should be Exhibited in

ObjectivityObjectivity IntegrityIntegrity Professional ServicesProfessional Services

Threats of Independence

Self - Interest ThreatSelf - Interest Threat Advocacy ThreatAdvocacy Threat Familiarity ThreatFamiliarity Threat Intimidation ThreatIntimidation Threat Self Review ThreatSelf Review Threat

Safeguards

Safeguards Created by the Profession, Safeguards Created by the Profession, Legislation or RegulationLegislation or Regulation

Safeguards within the Assurance ClientSafeguards within the Assurance Client Safeguards within the Firm/s own Systems Safeguards within the Firm/s own Systems

& Procedures & Procedures

Safeguards Created by the Profession, Legislation or Regulation

Education, Training & Experience Education, Training & Experience Continuing Education Requirements Continuing Education Requirements Professional Standards & Disciplinary Professional Standards & Disciplinary

Processes.Processes. External Review of Firms Quality Control External Review of Firms Quality Control

System.System. Legislation Governing IndependenceLegislation Governing Independence

Safeguards within the Assurance Client Competent Employees to make Managerial Competent Employees to make Managerial

Decisions.Decisions. Policies and Procedures for fair Financial Policies and Procedures for fair Financial

Reporting.Reporting. Internal ProceduresInternal Procedures Corporate Governance StructureCorporate Governance Structure

Safeguards within the Firms own Systems & Procedures Firm LeadershipFirm Leadership Policies & Procedures for Quality ControlPolicies & Procedures for Quality Control Documented Independence regarding Documented Independence regarding

Identification of threats and Application of Identification of threats and Application of Safeguards.Safeguards.

Disciplinary Mechanism Disciplinary Mechanism

Objective & Structure

Identifying Threats to IndependenceIdentifying Threats to Independence Evaluating the Threats Evaluating the Threats Applying appropriate Safeguards to Applying appropriate Safeguards to

eliminate or reduce the threats.eliminate or reduce the threats.

Public InterestPublic Consists of

ClientsClients Credit GrantersCredit Granters GovernmentGovernment EmployersEmployers

EmployeesEmployees InvestorsInvestors BusinessBusiness Financial Community Financial Community

Objectives

Credibility Credibility ProfessionalismProfessionalism Quality of ServicesQuality of Services ConfidenceConfidence

Fundamental Principles

Integrity Integrity ObjectivityObjectivity Professional Competence and Due CareProfessional Competence and Due Care Confidentiality Confidentiality Professional BehaviorProfessional Behavior Technical Standards. Technical Standards.

Filling up of Casual Vacancy

BOD may fill any casual vacancy. BOD may fill any casual vacancy. Sec 224(6)(a)Sec 224(6)(a)

Vacancy caused by resignation - filled by the Vacancy caused by resignation - filled by the company in GM.company in GM.

Such Auditor holds office till conclusion of next Such Auditor holds office till conclusion of next AGM. AGM. Sec 224(6)(b)Sec 224(6)(b)

A casual vacancy is not a vacancy created by a A casual vacancy is not a vacancy created by a deliberate omission on the part of the company to deliberate omission on the part of the company to appoint an auditor at its AGM.appoint an auditor at its AGM.

ICAI Vs.J.SakiaICAI Vs.J.Sakia

Where an auditor refuses to accept appointment or Where an auditor refuses to accept appointment or re-appointment – not resignation.re-appointment – not resignation.

If one of the two joint Auditors resigns before the If one of the two joint Auditors resigns before the completion of the tenure - Casual Vacancy completion of the tenure - Casual Vacancy

If there is a complete change in the constitution of If there is a complete change in the constitution of the firm of Auditors i.e. all the earlier partners the firm of Auditors i.e. all the earlier partners retire and new partners joins - Casual Vacancy.retire and new partners joins - Casual Vacancy.

Appointment of Auditor by Central Government

If no Auditor appointed at an AGM- Central Govt. If no Auditor appointed at an AGM- Central Govt. may appoint. may appoint. Sec 224(3)Sec 224(3)

Company to give notice to Central Govt within 7 days Company to give notice to Central Govt within 7 days after AGM that no auditor has been appointed.after AGM that no auditor has been appointed.

Sec 224(4)Sec 224(4)

Delay in giving such notice does not affect the Delay in giving such notice does not affect the

jurisdiction of the Central Govt. jurisdiction of the Central Govt.

Powers of Central Govt. - Delegated to Regional Powers of Central Govt. - Delegated to Regional Director.Director.

Appointment of Auditor by Special Resolution -Sec 224A

Where not less than 25% of subscribed share capital is held byWhere not less than 25% of subscribed share capital is held by-Public Financial Institution/ Govt.Company/ Central Govt./ -Public Financial Institution/ Govt.Company/ Central Govt./ State Govt.State Govt.-any institution established under State/ Provincial Act in -any institution established under State/ Provincial Act in

which State Govt.holds not less than 51% of subscribed which State Govt.holds not less than 51% of subscribed share capital.share capital.

-Nationalised bank/ Insurance company.-Nationalised bank/ Insurance company.

DCA has clarified that the above three clauses are not DCA has clarified that the above three clauses are not mutually exclusive. It would apply to all cases of mutually exclusive. It would apply to all cases of

shareholding in any combinationshareholding in any combination .. DCA-Circular No.14 of 2001 dated 16-07-2001DCA-Circular No.14 of 2001 dated 16-07-2001

Material date for 25% holding of subscribed share capital - Material date for 25% holding of subscribed share capital - date of AGM at which Special Resolution is to be passed date of AGM at which Special Resolution is to be passed and not the date of notice of meeting.and not the date of notice of meeting.

DCA-Circular No.2/76[1/1/76-CL-V] dated 5-6-1976DCA-Circular No.2/76[1/1/76-CL-V] dated 5-6-1976

Irrespective of the circumstances in which a nationalized Irrespective of the circumstances in which a nationalized bank is holding shares,if the name of the bank is entered in bank is holding shares,if the name of the bank is entered in the register of members of the company,such holding of the register of members of the company,such holding of shares will have to be taken into account for the purposes of shares will have to be taken into account for the purposes of sec 224A.sec 224A.

DCA-Circular No.18/74 dated 12-12-1974DCA-Circular No.18/74 dated 12-12-1974

Auditor of Government Companies(Sec 619)

Appointed or re-appointed by the

C&AG

Submits a copy of report to C&AG

Branch Auditor- Section 228

May be the Company’s Auditor or some other May be the Company’s Auditor or some other person qualified to be appointed as Auditor.person qualified to be appointed as Auditor.

Where Branch Auditor is different from Where Branch Auditor is different from Company’s Auditor, he is appointed by the Company’s Auditor, he is appointed by the Company in GM or BOD are authorised to appoint Company in GM or BOD are authorised to appoint him in consultation with Company’s Auditor.him in consultation with Company’s Auditor.

Same powers as Company’s Auditor.Same powers as Company’s Auditor.

Forwards his report to the Central Govt.Forwards his report to the Central Govt.

COST AUDITOR(Sec 233B)

Appointed by the BOD with previous Approval of Central Government

Same powers & duties as that of Statutory Auditor

Submits report to Central Govt.& the Company

Statutory Auditor can not be appointed as Cost Auditor

Special Auditor(Sec 233A)

Central Govt.may either Appoint C.A. or

Company’s Auditor

Same powers as Company’s Auditor

Makes his report to Central Govt.

254

LIQUIDATION PROCEEDINGS SPECIFICALLY RELATAING TO NBFCs AND OTHER COMPANIES

Changes in Schedule VIChanges in Schedule VI

TITLELiabilities and Assets were classified under the heading

of SOURCE OF FUNDS & APPLICATION OF FUNDS

The Liabilities and Assets to be classified under the

heading of EQUITY AND LIBILITIES & ASSETS

New Disclosures in Share Capital

A reconciliation of the number of shares A reconciliation of the number of shares outstanding at the beginning and at the end of the outstanding at the beginning and at the end of the reporting period reporting period

Shares in in the company held by each shareholder Shares in in the company held by each shareholder holding more than 5% share specifying the number holding more than 5% share specifying the number of share heldof share held

New Disclosures in Share CapitalNew Disclosures in Share CapitalOld Discloser New Discloser

Authorised Capital: 1,00,000 Authorised Capital: 1,00,000

Issued & subscribed Capital: 1,00,000 Issued & subscribed Capital: 1,00,000

Share Application: 10,00,000Pending for Allotment

Share Application: 10,00,000Pending for Allotment

No Restriction Now terms & conditions of share application money needs to be disclosed as if sufficient balance of Authorised capital is not available.

RESERVES & SURPLUSOld Schedule VI Revised Schedule VI

P&L debit balance was shown under the head Miscellaneous expenditure & losses

Debit balance of Profit and Loss Account to be shown as negative figure under the head Surplus. Therefore, reserve & surplus balance can be negative.

Separate disclosure of Current LiabilityOld Discloser New Discloser

Earlier Current Liabilities and Provisions are shown by deducting from Current Assets under the Head of APPLICATION OF FUNDS

Now it is to be shown separately as Non Current Liabilities and Current Liabilities under the Head EQUITY AND LIBILITIES

Criteria for classifying Current LiabilityIt is expected to be settled in the company’s It is expected to be settled in the company’s

normal operating cycle.normal operating cycle.It is held primarily for the purpose of being traded.It is held primarily for the purpose of being traded.It is due to be settled within twelve months after It is due to be settled within twelve months after

the reporting date; orthe reporting date; orThe company does not have an unconditional right The company does not have an unconditional right

to defer settlement of the liability for at least to defer settlement of the liability for at least twelve months after the reporting date.twelve months after the reporting date.

Other than that all should be classified as Non Other than that all should be classified as Non Current LiabilitiesCurrent Liabilities

BorrowingsOld Schedule VI Revised Schedule VI

Short term & long term borrowings are grouped together under the head Loan funds sub-head Secured / Unsecured 

Long term borrowings to be shown under non-current liabilities and short term borrowings to be shown under current liabilities. Borrowings shall further be sub- classified as Secured and Unsecured.

Period and amount of continuing default as on the balance sheet date in repayment of loans and interest to be separately specified

Deferred Tax Assets / LiabilitiesOld Schedule VI Revised Schedule VI

Deferred Tax assets / liabilities were not specified.

Deferred Tax assets / liabilities to be disclosed under non-current assets / liabilities as the case may be.

Sundry CreditorsOld Schedule VI Revised Schedule VI

Creditors were broken up in to micro & small suppliers and other creditors

Classified under Long Term Liabilities as Trade Payables and under current Liabilities.

LONG TERM DEBT – CURRENT MATURITY

Old Schedule VI Revised Schedule VI

No specific mention for separate disclosure of Current maturities of long term debt

Current maturities of long term debt to be disclosed under other current liabilities

Fixed AssetsOld Schedule VI Revised Schedule VI

There was no bifurcation required of tangible & intangible assets on the face of the Balance sheet.

Fixed assets to be shown under non-current assets and it has to be bifurcated in to Tangible & intangible assets on the face of the Balance Sheet.

InvestmentsOld Schedule VI Revised Schedule VI

Both current & non-current investments to be disclosed under the head investments

Current and non-current investments are to be discosed separately under current assets & non-current assets respectively

Criteria for classifying Current Assets It is expected to be realized in, or is intended for It is expected to be realized in, or is intended for

sale or consumption in the company’s normal sale or consumption in the company’s normal operating cycle.operating cycle.

It is held primarily for the purpose of being tradedIt is held primarily for the purpose of being traded It is Expected to be realized within 12 months It is Expected to be realized within 12 months

after reporting date.after reporting date. It is cash or cash equivalent unless it is restricted It is cash or cash equivalent unless it is restricted

from being exchanged or used to settle a liability from being exchanged or used to settle a liability foe at least twelve months after the report date.foe at least twelve months after the report date.

Other than that all should be classified as Non Other than that all should be classified as Non Current Assets.Current Assets.

DepositsOld Schedule VI Revised Schedule VI

Lease deposits are part of loans & advances

Lease deposits to be disclosed as long term loans & advances under the head non-current assets

Cash & Bank BalancesOld Schedule VI Revised Schedule VI

Bank balance to be bifurcated in scheduled banks & others

Bank balances in relation to earmarked balances, held as margin money against borrowings, deposits with more than 12 months maturity, each of these to be shown separately.

Loans & AdvancesOld Schedule VI Revised Schedule VI

Loans & Advance are disclosed alongwith current assets

Loans & Advances to be broken up in long term & short term and to be disclosed under non-current & current assets respectively

And further bifurcation with capital advances security deposits etc.

PROFIT & LOSS – EXPENSES

Old Schedule VI Revised Schedule VI

Any item under which expense exceeds one per cent of the total revenue of the company or5,000 which ever is higher; was disclosed separately

Any item of income / expense which exceeds one per cent of the revenue from operations or1,00,000, which ever is higher; to be disclosed separately

Finance CostOld Schedule VI Revised Schedule VI

Finance cost to be classified in fixed loans & other loans

Finance cost shall be classified as interest expense, other borrowing costs & Gain / Loss on foreign currency transaction & translation

Rounding off of Figures appearing in Rounding off of Figures appearing in financial statement financial statement 

Old Schedule VI Revised Schedule VI

Turnover of less than 100 Crores - R/off to the nearest Hundreds, thousands or decimal thereof

Turnover of less than 100 Croress - R/off to the nearest Hundreds, thousands, lakhs or millions or decimal thereof

Turnover of 100 Crores or more but less than500 Crores - R/off to the nearest Hundreds, thousands, lakhs or millions or decimal thereof

Turnover of 100 Croress or more - R/off to the nearest lakhs, millions or crores, or decimal thereof 

Turnover of 500 Crs or more - R/off to the nearest Hundreds, thousands, lakhs, millions or crores, or decimal thereof

PurchasesOld Schedule VI Revised Schedule VI

The purchase made and the opening & closing stock, giving break up in respect of each class of goods traded in by the company and indicating the quantities thereof.

Goods traded in by the company to be disclosed in broad heads in notes. Disclosure of quantitative details of goods is diluted

276

THE PHOLOSOPHICAL FOUNDATIONS OF CORPORATE INSOLVENCY LAW FROM THE ENGLISH LAW

Corporate Insolvency law has four overriding objectives:Corporate Insolvency law has four overriding objectives:

1.1. to restore the debtor company to profitable trading where this is to restore the debtor company to profitable trading where this is practicable; practicable;

2.2. to maximize the return to creditors as a whole where the company itself to maximize the return to creditors as a whole where the company itself can not be saved; can not be saved;

3.3. to establish a fair and equitable system for the ranking of claims and the to establish a fair and equitable system for the ranking of claims and the distribution of assets among creditors, involving a limited redistribution distribution of assets among creditors, involving a limited redistribution of rights; andof rights; and

4.4. to provide a mechanism by which the causes of failure can be identified to provide a mechanism by which the causes of failure can be identified and those guilty of mismanagement brought to book and, where and those guilty of mismanagement brought to book and, where appropriate, deprived of the right to be involved in the management of appropriate, deprived of the right to be involved in the management of the other companies.the other companies.

To facilitate achievement of these objectives the insolvency law provides a battery of To facilitate achievement of these objectives the insolvency law provides a battery of legal and administrative instruments and institutional structures. legal and administrative instruments and institutional structures.

VISION, OBJECT AND CONCLUSION OF THE LIQUIDATION

VISION:VISION: To maximize the collective returns to creditors what US To maximize the collective returns to creditors what US

commentators sacommentators say;y;

OBJECT:OBJECT: For Just Distribution of the Net Assets on the principle of “For Just Distribution of the Net Assets on the principle of “pari pari

passu” rule, of course, distribution on “pro rata” methodpassu” rule, of course, distribution on “pro rata” method - - [[the pari the pari

passu rule has a long history in insolvency law. It is to be found in a statute of passu rule has a long history in insolvency law. It is to be found in a statute of Henry VIII Henry VIII calling for the sale of a bankrupt’s assets ‘for the satisfaction and payment of (his) creditors: calling for the sale of a bankrupt’s assets ‘for the satisfaction and payment of (his) creditors: that is to say, to every of the said creditors, a portion Rate and Rate like, according to the that is to say, to every of the said creditors, a portion Rate and Rate like, according to the quantity of their Debts’. Ref Case of the Bankrupts (1592) 2 Co Rep 25; 76 ER 441 applying quantity of their Debts’. Ref Case of the Bankrupts (1592) 2 Co Rep 25; 76 ER 441 applying the same principle in a later statute.] ANDthe same principle in a later statute.] AND

CONCLUSION:CONCLUSION: To bring company in liquidation to a logical end : Termination of To bring company in liquidation to a logical end : Termination of

Company’s existence -Company’s existence - dissolution dissolution

04/18/23 277

04/18/23 278

SCHME OF INSOLVENCY LAWS

Two Kinds of Insolvency Laws:Two Kinds of Insolvency Laws:

1. Personal Insolvency, which deals with individuals and 1. Personal Insolvency, which deals with individuals and partnership firms governed by Provisional Insolvency partnership firms governed by Provisional Insolvency

Act, Act, 1920 and Presidency Towns Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1908; (the 1908; (the process is through the appointment of process is through the appointment of “ “Receiver”) andReceiver”) and

2. Corporate Insolvency – It results in winding up of the 2. Corporate Insolvency – It results in winding up of the company under the Companies Act, 1956. company under the Companies Act, 1956. if it is for revival of if it is for revival of the company, the Sick the company, the Sick Industrial Companies (Special Industrial Companies (Special Provisions) Act,1985 (SICA) deals with it. (the process of Provisions) Act,1985 (SICA) deals with it. (the process of insolvency triggers through the appointment of “Liquidator”).insolvency triggers through the appointment of “Liquidator”).

04/18/23 279

MAIN REASONS FOR CORPORATE INSOLVENCY-I

Company’s entire capital is eroded due to heavy losses:- Company’s entire capital is eroded due to heavy losses:-

Lack of financial management; Lack of financial management; Inadequate capital investment; Inadequate capital investment;

Excess percentage of credit borrowing in disproportionate to Excess percentage of credit borrowing in disproportionate to actual capital investment; too much reliance on external actual capital investment; too much reliance on external marketing;marketing;

Unpreparedness with the changes in business scenarioUnpreparedness with the changes in business scenario;; In competencies in facing with global competition In competencies in facing with global competition

MAIN REASONS FOR CORPORATE INSOLVENCY-II

04/18/23 280

Company’s entire capital is eroded due to heavy losses:-

•Lack of business skills (risk management); Lack of experience or poor strategies in marketing and customer service;

•Lack of harmonious relations with stakeholders as well as among the management;

•Failure to prevent frauds; Diversification of funds; to cherish self driven goals at the cost of stakeholders interests;

•Circumstantial collapses ( Recession; Unfavorable court verdicts; Cancellation of Product Licenses; Disturbance in external relations); Anti trade polices;

MODES OF WINDING UP

S. 425. Modes of winding up.‑S. 425. Modes of winding up.‑ (1) (1) The winding up of a The winding up of a company may be eithercompany may be either

(a) by the Court; or (a) by the Court; or

(b) voluntary; or(b) voluntary; or

(c) subject to the supervision of the Court.(c) subject to the supervision of the Court.

(2) The provisions of this Act with respect to winding up (2) The provisions of this Act with respect to winding up apply, unless the contrary appears, to the winding up of a apply, unless the contrary appears, to the winding up of a company in any of those modes.company in any of those modes.

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CORPORATE INSOLVENCY WITH REFERNECE TO THE PROVISIONS OF COMPANIES ACT, 1956

The Act does not provide any precise definition for the word “Corporate Insolvency”The Act does not provide any precise definition for the word “Corporate Insolvency”

Section 433 (e) of the Act only to some extent answer the “Insolvency”- The company Section 433 (e) of the Act only to some extent answer the “Insolvency”- The company unable to pay its debt- (i). Debt and (ii). Inability to pay:unable to pay its debt- (i). Debt and (ii). Inability to pay:

Cash Flow Test : Inability to Pay TestCash Flow Test : Inability to Pay Test Balance Sheet Test: Liability of the Debtor exceeds his assets Balance Sheet Test: Liability of the Debtor exceeds his assets

Debt is admitted if there is no bona fide dispute;( Seciton 434 is deeming Debt is admitted if there is no bona fide dispute;( Seciton 434 is deeming provision to decide inability to pay debts if it is due of Rs. 500 or more)provision to decide inability to pay debts if it is due of Rs. 500 or more)

The court can hardly exercise any discretion where the company is so The court can hardly exercise any discretion where the company is so hopelessly insolventhopelessly insolvent that there is absolutely no chance of resurrection. that there is absolutely no chance of resurrection. A bona A bona fide fide dispute implies existence of a substantial ground for the dispute raised. dispute implies existence of a substantial ground for the dispute raised. The companies were unable to pay debts. They could not substantiate their The companies were unable to pay debts. They could not substantiate their defence. Winding up was inevitable. defence. Winding up was inevitable. Sicom Ltd. v. Shree Panduranga Poultries Sicom Ltd. v. Shree Panduranga Poultries P. Ltd., P. Ltd., (1999) 2 Comp LJ 218: (2001) 103 Com Cases 318 (AP).(1999) 2 Comp LJ 218: (2001) 103 Com Cases 318 (AP).

  

S. 433. CIRCUMSTANCES IN WHICH COMPANY BE WOUND MAY UP BY COURT

(a) if the company has, by special resolution, resolved that the (a) if the company has, by special resolution, resolved that the company may be wound up by the court;company may be wound up by the court;

(b) if default is made in delivering the statutory report to the Registrar (b) if default is made in delivering the statutory report to the Registrar or in holding the statutory meeting;or in holding the statutory meeting;

(c) if the company does not commence its business within a year from (c) if the company does not commence its business within a year from its incorporation, or suspends its business for a whole year;its incorporation, or suspends its business for a whole year;

(d) if the number of members is reduced, in the case of a public (d) if the number of members is reduced, in the case of a public company, below seven, and in the case of a private company, below company, below seven, and in the case of a private company, below two;two;

(e) if the company is unable to pay its debts;(e) if the company is unable to pay its debts;

(f) if the court is of opinion that it is just and equitable that the (f) if the court is of opinion that it is just and equitable that the company should be wound up.company should be wound up.

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STATUTORY DECLARATION – INSOLVENT-I

Company’s assets are not sufficient to pay its debts;Company’s assets are not sufficient to pay its debts;

A company carrying on business with borrowed money and carrying A company carrying on business with borrowed money and carrying forward its losses, in the balance‑sheet and a company whose assets forward its losses, in the balance‑sheet and a company whose assets are so locked‑up that they cannot be realised for payment of its debts, are so locked‑up that they cannot be realised for payment of its debts, these are indications of commercial insolvency. these are indications of commercial insolvency. Ramesh Premchand Ramesh Premchand Shah v. Engineers Enterprises P. Ltd., Shah v. Engineers Enterprises P. Ltd., (1977) 47 Com Cases 294 (1977) 47 Com Cases 294 (Bom); (Bom); Concord Finance P. Ltd v. Rawalpindi Theatres P. Ltd., Concord Finance P. Ltd v. Rawalpindi Theatres P. Ltd., (1970) 40 Com Cases 156 (Del).(1970) 40 Com Cases 156 (Del).

Company becomes defunct and it has not been carrying business Company becomes defunct and it has not been carrying business operations for the last several years.operations for the last several years.

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WINDING UP ORDER AND ITS CONSEQUENCES-II

Section 454: Statement of Affairs to be made to OL;Section 454: Statement of Affairs to be made to OL; Section 456- Custody of the company’s propertySection 456- Custody of the company’s property

Ownership of company’s property vests with the liquidator though Ownership of company’s property vests with the liquidator though the title stands in the name of the company. But the rights of the the title stands in the name of the company. But the rights of the company has been divested on the date of winding up order itself.company has been divested on the date of winding up order itself.

The Liquidator can take the assistance of the District Magistrate The Liquidator can take the assistance of the District Magistrate and other revenue staff;and other revenue staff;(Since the object of winding up proceedings is to put all unsecured creditors (Since the object of winding up proceedings is to put all unsecured creditors on par and to pay them pari passu, an attachment effected by the revenue on par and to pay them pari passu, an attachment effected by the revenue authority on the immovable properties of the company in respect of dues to the authority on the immovable properties of the company in respect of dues to the Employees' State Insurance Corporation, Wages Authority and Regional Employees' State Insurance Corporation, Wages Authority and Regional Provident Fund Commissioner, was ineffective and the liquidator could take Provident Fund Commissioner, was ineffective and the liquidator could take the properties into his custody free from all attachments and realise their value the properties into his custody free from all attachments and realise their value according to winding up procedures. Ananta Mills Ltd. (In Liquidation) v. according to winding up procedures. Ananta Mills Ltd. (In Liquidation) v. City Deputy Collector, Ahmedabad, (1972) 42 Com Cases 476 (Guj)). City Deputy Collector, Ahmedabad, (1972) 42 Com Cases 476 (Guj)).

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STATUTORY DECLARATION – INSOLVENT-III

The shares of a company were accepted by the stock The shares of a company were accepted by the stock exchange for listing but subsequently the permission was exchange for listing but subsequently the permission was cancelled. The application money became refundable. cancelled. The application money became refundable. There was no prospect of the company doing any business There was no prospect of the company doing any business and there was a complete deadlock among the directors. It and there was a complete deadlock among the directors. It was doubtful if the creditors were likely to be paid. It was was doubtful if the creditors were likely to be paid. It was held to be a case of commercial insolvency. held to be a case of commercial insolvency. Deccan Farms Deccan Farms & Distilleries Ltd. v. Velabai Laxmidas Bhanji, (1979) 49 & Distilleries Ltd. v. Velabai Laxmidas Bhanji, (1979) 49 Com Cases Com Cases 321 321 (Bom) (DB). (Bom) (DB).

S. 439. Provisions as to applications for winding up

(1)(1) An application to the Court for the winding up of a company shall be An application to the Court for the winding up of a company shall be by petition presented, subject to the provisions of this section,by petition presented, subject to the provisions of this section,

(2)(2) -by the company; or-by the company; or

-by any creditor or creditors, including any contingent or prospective -by any creditor or creditors, including any contingent or prospective creditor or creditors; orcreditor or creditors; or

- by any contributory or contributories; or- by any contributory or contributories; or

- by all or any of the parties specified in clauses (a), (b) and (c) - by all or any of the parties specified in clauses (a), (b) and (c) whether together or separately; orwhether together or separately; or

-by the Registrar with the previous sanction of the Central -by the Registrar with the previous sanction of the Central Government to the presentation of the petitionGovernment to the presentation of the petition

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S. 441. Commencement of winding up by Court.-

Voluntary Winding up- deemed to have commenced at Voluntary Winding up- deemed to have commenced at the date of passing of special resolution;the date of passing of special resolution;

Compulsory winding up or winding up by the court – Compulsory winding up or winding up by the court – deemed to have commenced at the date of presentation of deemed to have commenced at the date of presentation of the petition for winding up. the petition for winding up.

S. 443. Powers of Court on hearing petition.-S. 443. Powers of Court on hearing petition.- (1) On hearing a (1) On hearing a winding-up petition, the Court maywinding-up petition, the Court may

(a) dismiss it, with or without costs; or(a) dismiss it, with or without costs; or (b) adjourn the hearing conditionally or unconditionally; or(b) adjourn the hearing conditionally or unconditionally; or (c) make any interim order that it thinks fit; or(c) make any interim order that it thinks fit; or (d) make an order for winding-up the company with or without costs, (d) make an order for winding-up the company with or without costs,

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S. 445. Copy of winding up order to be filed with Registrar

-- On the making of a winding up order, it shall be the duty of the On the making of a winding up order, it shall be the duty of the petitioner in the winding up proceedings and of the company to file petitioner in the winding up proceedings and of the company to file with the Registrar a certified copy of the order, within with the Registrar a certified copy of the order, within 2[thirty days] [thirty days] from the date of the making of the order. (Sub Section (1))from the date of the making of the order. (Sub Section (1))

--Such order shall be deemed to be notice of discharge to the Such order shall be deemed to be notice of discharge to the officers and employees of the company, except when the business officers and employees of the company, except when the business of the company is continued (Sub Section (3))of the company is continued (Sub Section (3))

S. 446. Suits stayed on winding up order.S. 446. Suits stayed on winding up order.

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Effect of winding up order

S. 447. Effect of winding up order.-S. 447. Effect of winding up order.- An An order for winding up a order for winding up a company shall operate in favour of all the creditors and of all the company shall operate in favour of all the creditors and of all the contributories of the company as if it had been made on the joint contributories of the company as if it had been made on the joint petition of a creditor and of a contributory.petition of a creditor and of a contributory.

The effect of an order of winding up is to put the company into the hands of The effect of an order of winding up is to put the company into the hands of the Official Liquidator for completing the process. Till an order of the court the Official Liquidator for completing the process. Till an order of the court for distribution of the company's assets has been obtained and the assets have for distribution of the company's assets has been obtained and the assets have been distributed, the properties continue to be those of the company. The been distributed, the properties continue to be those of the company. The company under liquidation continues to exist as a juristic personality until an company under liquidation continues to exist as a juristic personality until an order under S. 481 for dissolution is made. It is only thereafter that the order under S. 481 for dissolution is made. It is only thereafter that the company can be said to become non-existent in the eye of the law. company can be said to become non-existent in the eye of the law. Official Official Liquidator of Gannon Dunkerley v. Urban Land Tax, Liquidator of Gannon Dunkerley v. Urban Land Tax, (1992) 73 Com Cases (1992) 73 Com Cases 168 (Mad).168 (Mad).

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CERTAIN PROVISISONS – OFFICIAL LIQUIDATOR

Appointment of Official Liquidator – Sec.448Appointment of Official Liquidator – Sec.448 Official Liquidator to be Liquidator – Sec.449Official Liquidator to be Liquidator – Sec.449 Appointment and powers of provisional liquidator – Sec.450Appointment and powers of provisional liquidator – Sec.450 General Provisions as to Liquidators – Sec.451General Provisions as to Liquidators – Sec.451 Style, etc., of liquidator – Sec.452Style, etc., of liquidator – Sec.452 Receiver not to be appointed of assets with Liquidator – Sec.453Receiver not to be appointed of assets with Liquidator – Sec.453 Statement of Affairs to be made to Official Liquidator – Sec.454Statement of Affairs to be made to Official Liquidator – Sec.454 Report by Official Liquidator – Sec.455Report by Official Liquidator – Sec.455 Custody of company’s property – Sec.456Custody of company’s property – Sec.456 Powers of Liquidator – Sec.457; Discretion of liquidator – Sec.458Powers of Liquidator – Sec.457; Discretion of liquidator – Sec.458 Exclusion of certain time in computing periods of limitation – Sec.458AExclusion of certain time in computing periods of limitation – Sec.458A Provision for legal assistance to liquidator – Sec.459Provision for legal assistance to liquidator – Sec.459 Exercise and control of liquidator’s powers – Sec.460Exercise and control of liquidator’s powers – Sec.460 Books to be kept by liquidator – Sec.461Books to be kept by liquidator – Sec.461 Audit of liquidator’s accounts – Sec.462Audit of liquidator’s accounts – Sec.462 Control of Central Government over liquidators – Sec.463Control of Central Government over liquidators – Sec.463

S. 456. CUSTODY OF COMPANY’S PROPERTY

- - take into his custody or under his control, all the property, effects take into his custody or under his control, all the property, effects and actionable claims to which the company is or appears to be and actionable claims to which the company is or appears to be entitled.entitled.

-by writing request the Chief Presidency Magistrate or the District -by writing request the Chief Presidency Magistrate or the District Magistrate within whose jurisdiction such property, effects or Magistrate within whose jurisdiction such property, effects or actionable claims or any books of account or other documents of the actionable claims or any books of account or other documents of the company may be found to take possession thereof, To securing company may be found to take possession thereof, To securing compliance with the provisions of subsection, they may take or cause compliance with the provisions of subsection, they may take or cause to be taken such steps and use or cause to be used such force as may to be taken such steps and use or cause to be used such force as may in his opinion be necessary.]in his opinion be necessary.]

- All the property and effects of the company shall be deemed to be in - All the property and effects of the company shall be deemed to be in the Custody of the Court as from the date of the order for the winding the Custody of the Court as from the date of the order for the winding up of the company.up of the company.

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STEPS INVOLVED IN THE WINDING UP-1

To take into custody or under control, all the property, To take into custody or under control, all the property, effects and actionable claims to which the company is or effects and actionable claims to which the company is or appears to be entitled.appears to be entitled. To take steps to provide security guards to protect such properties;To take steps to provide security guards to protect such properties; To make inventory of such properties with reference to Statement of To make inventory of such properties with reference to Statement of

Affairs;Affairs; To get properties valued To get properties valued To put properties for saleTo put properties for sale To call and adjudicate claims of all creditorsTo call and adjudicate claims of all creditors To distribute the amount so realized among the creditors on the To distribute the amount so realized among the creditors on the

principle ofprinciple of pari passu and on pari passu and on pro ratapro rata basis with reference to their basis with reference to their respective prioritiesrespective priorities

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STEPS INVOLVED IN THE WINDING UP-2 To get the accounts audited twice in the To get the accounts audited twice in the

year and submit to the court;year and submit to the court; To invest the realized amounts in To invest the realized amounts in

investments as per the court ordersinvestments as per the court orders To file misfeasance application in case of To file misfeasance application in case of

frauds;frauds; To file dissolution application To file dissolution application

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BASIS FOR ON IDENTIFICATION ASSETS Audited financial statementsAudited financial statements Interim financial statementsInterim financial statements General LedgerGeneral Ledger Other specifically maintained asset registers Other specifically maintained asset registers

(e.g.. investments, receivables, fixed assets (e.g.. investments, receivables, fixed assets or bank accounts)or bank accounts)

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CONDUCTING OF THE INSOLVENCY All correspondence should clearly indicate that the All correspondence should clearly indicate that the

company is insolvent.company is insolvent. Meeting and accountsMeeting and accounts Realization of assets (power of sale)Realization of assets (power of sale) Tracing of assets if necessaryTracing of assets if necessary Identifying creditorsIdentifying creditors Litigating if requiredLitigating if required Suggest Court Order for any major decisions especially Suggest Court Order for any major decisions especially

sale or disposal of major assets.sale or disposal of major assets. Distribution to creditors (interim or final) dividends or Distribution to creditors (interim or final) dividends or

return of capitalreturn of capital

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VOLUNTARY LIQUIDATIONS

Members’ resolution by passing a special Members’ resolution by passing a special resolution at a general or special meeting.resolution at a general or special meeting.

Creditors liquidation through members’ resolution Creditors liquidation through members’ resolution Officers and Directors powers cease.Officers and Directors powers cease.

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MARSHALLING AND DISTRIBUTION OF ASSETS

Cost & expenses including Insolvency Practitioner Cost & expenses including Insolvency Practitioner remuneration.remuneration.

Preferred creditorsPreferred creditors Ordinary creditorsOrdinary creditors MembersMembers

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PROOF OF RANKING OF CLAIMS

Section 528 to 530Section 528 to 530 Sections 541 to 542 _Misfeasance Proceedings against delinquent;Sections 541 to 542 _Misfeasance Proceedings against delinquent; Companies (Court) Rules 1956 Proof of debts: fixation of date by the Companies (Court) Rules 1956 Proof of debts: fixation of date by the

OL by advertisement; claimants to prove their debt; liquidator to OL by advertisement; claimants to prove their debt; liquidator to communicate acceptance or rejection of debt – Rules 147-163communicate acceptance or rejection of debt – Rules 147-163

Appeal by creditor against decision of OL – Rule 164Appeal by creditor against decision of OL – Rule 164 Proof and list of creditors to be filed in court – Rule 167Proof and list of creditors to be filed in court – Rule 167

Application of the assets of the company Application of Insolvency Application of the assets of the company Application of Insolvency Rules – sec 528/529; Priority of Payments – sec 529/529A/ 530Rules – sec 528/529; Priority of Payments – sec 529/529A/ 530

Section 481- Dissolution of company.Section 481- Dissolution of company.

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CROSS-BORDER INSOLVENCY IN INDIA

There is no mechanism under the Companies Act, 1956;There is no mechanism under the Companies Act, 1956;

The question of choice of law arises in all cross-border The question of choice of law arises in all cross-border transactions due to (1) development of international trade in transactions due to (1) development of international trade in which inter-country debtor-creditor relations across the border which inter-country debtor-creditor relations across the border develops; (2) development of transnational and multinational develops; (2) development of transnational and multinational institutions through building up trans border organizational institutions through building up trans border organizational structure through permanent establishment, branches or structure through permanent establishment, branches or franchises; (3) development of organizational relations through franchises; (3) development of organizational relations through chain of organization structure of subsidiaries, and joint venture chain of organization structure of subsidiaries, and joint venture and finally (4) development of complexities in modern business and finally (4) development of complexities in modern business relations.relations.

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“UNCITRAL” MODEL INSOLVENCY LAW STILL UNDER

DISCUSSION The UNCITRAL came out with a Model Law on Cross-Border Insolvency The UNCITRAL came out with a Model Law on Cross-Border Insolvency

negotiated among more than 40 countries representing a broad spectrum of negotiated among more than 40 countries representing a broad spectrum of differing legal systems.differing legal systems.

The law applies in the following situations where:The law applies in the following situations where:

(1)(1) assistance is sought in a state by a foreign court or a foreign assistance is sought in a state by a foreign court or a foreign representative in connection with a proceeding under the domestic law of representative in connection with a proceeding under the domestic law of a state;a state;

(2) assistance is sought in a foreign state in connection with a proceeding (2) assistance is sought in a foreign state in connection with a proceeding under the domestic law of a state;under the domestic law of a state;

(3). a foreign proceeding and a proceeding under the domestic law of a state (3). a foreign proceeding and a proceeding under the domestic law of a state in respect of the same debtor are taking place concurrently; orin respect of the same debtor are taking place concurrently; or

(4) creditors or other interested persons in a foreign state have an(4) creditors or other interested persons in a foreign state have aninterest in requesting the commencement of, or participating in, ainterest in requesting the commencement of, or participating in, aproceeding under the domestic law of the state.proceeding under the domestic law of the state.

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CONSTITUION OF HIGH LEVEL EXPERT COMMITTEES

In the year 1999, the Government of India set up a high level In the year 1999, the Government of India set up a high level committee headed by V.B. Balakrishna Eradi, J., for remodeling the committee headed by V.B. Balakrishna Eradi, J., for remodeling the existing laws relating to insolvency and winding up of companies and existing laws relating to insolvency and winding up of companies and bringing them in time with the international practices in this field.bringing them in time with the international practices in this field.

In 2001, the Report of the Advisory Group on Bankruptcy Laws, In 2001, the Report of the Advisory Group on Bankruptcy Laws, called the N L Mitra committee, made several recommendations on called the N L Mitra committee, made several recommendations on bankruptcy law reforms, the first among which was consolidation of bankruptcy law reforms, the first among which was consolidation of bankruptcy laws into a separate code. However, no legislative steps bankruptcy laws into a separate code. However, no legislative steps have still been taken in this regard.have still been taken in this regard.

Non Banking Financial Companies (NBFCs)-1

Non Banking Financial Companies-Non Banking Financial Companies- ACTIVITIES ACTIVITIES COVERED UNDER NBFC SECTOR:COVERED UNDER NBFC SECTOR:

1. 1. MERCHANT BANKING 2.      UNDER WRITING 3.  MERCHANT BANKING 2.      UNDER WRITING 3.  PORTFOLIO MANAGEMENT SERVICES 4.  INVESTMENT PORTFOLIO MANAGEMENT SERVICES 4.  INVESTMENT ADVISORY SERVICES 5.      FINANCIAL CONSULTANCY 6. ADVISORY SERVICES 5.      FINANCIAL CONSULTANCY 6. STOCK-BROKING 7.   ASSET MANAGEMENT 8.   STOCK-BROKING 7.   ASSET MANAGEMENT 8.   VENTURE CAPITAL 9.   CUSTODIAL SERVICES 10.  VENTURE CAPITAL 9.   CUSTODIAL SERVICES 10.  FACTORING CREDIT REFERENCE AGENCIES 12.  FACTORING CREDIT REFERENCE AGENCIES 12.  CREDIT RATING AGENCIES 13.  LEASING & FINANCE 14 CREDIT RATING AGENCIES 13.  LEASING & FINANCE 14 HOUSING FINANCE 15. FOREX-BROKING 16.  CREDIT HOUSING FINANCE 15. FOREX-BROKING 16.  CREDIT CARD BUSINESS 17.  MONEY-CHANGING BUSINESS 18. CARD BUSINESS 17.  MONEY-CHANGING BUSINESS 18. MICRO-CREDIT 19.  RURAL CREDITMICRO-CREDIT 19.  RURAL CREDIT

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Non Banking Financial Companies (NBFCs)-2 Chit Fund Companies;Chit Fund Companies; Collective Investment Scheme (CISs) Companies (Eg. Plantation Collective Investment Scheme (CISs) Companies (Eg. Plantation

companies etc) companies etc) Others doing business at the cost of investors investmentsOthers doing business at the cost of investors investments

Note:- In certain matters, the above category companies have Note:- In certain matters, the above category companies have proved to be detrimental to the interest of investors. The NBFCs proved to be detrimental to the interest of investors. The NBFCs fall under the jurisdiction of RBI. The Collective Investment fall under the jurisdiction of RBI. The Collective Investment Schemes (CISs) Companies fall under the jurisdiction of the Schemes (CISs) Companies fall under the jurisdiction of the Stock and Exchange Board of India. The Chit Fund business Stock and Exchange Board of India. The Chit Fund business comes under the purview of the A.P. Chit Fund Act. The Listed comes under the purview of the A.P. Chit Fund Act. The Listed Companies (Public Issue Companies) comes under the Companies (Public Issue Companies) comes under the jurisdiction of SEBI mostly and in certain issues which come jurisdiction of SEBI mostly and in certain issues which come under the purview of the Registrar of Companies.under the purview of the Registrar of Companies.

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NBFCs – Chit Fund or Deposit Accepted Companies in Liquidation-1

In respect of some chit fund companies, which are under In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated liquidation proceedings, the ex-directors floated partnership/proprietary firms for doing finance business. partnership/proprietary firms for doing finance business. The claim of chit holders / deposit holders is that The claim of chit holders / deposit holders is that

   The successful bidders kept their bid amount as deposit The successful bidders kept their bid amount as deposit

in the firm.in the firm.

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NBFCs – Chit Fund or Deposit Accepted Companies in Liquidation-2

The firm promised that the interest earned on the said The firm promised that the interest earned on the said FD will be adjusted towards chit installments. Hence FD will be adjusted towards chit installments. Hence the chit holders are contending that they are not liable the chit holders are contending that they are not liable to pay balance subscription.to pay balance subscription.

The FD holders of finance firm are lodging claims The FD holders of finance firm are lodging claims against the chit fund company under liquidation on the against the chit fund company under liquidation on the ground that both the firm and the Company in liqn. are ground that both the firm and the Company in liqn. are under the same management.under the same management.

  

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During adjudication of claims,

i. Whether to consider the payments made through i. Whether to consider the payments made through temporary / manual vouchers & details not entered in temporary / manual vouchers & details not entered in concerned ledgers?concerned ledgers?

ii. Whether to consider the large cash payments made ii. Whether to consider the large cash payments made towards future installments in respect of which the towards future installments in respect of which the company has not conducted the chit auctions ?company has not conducted the chit auctions ?

iii. iii. Whether to consider dividends already earned ?Whether to consider dividends already earned ?

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Services of CAs is vital – investigation of claims in respect of Chit Fund Companies

During adjudication of claims: During adjudication of claims:

i. Whether to consider the payments made through temporary / manual i. Whether to consider the payments made through temporary / manual vouchers & details not entered in concerned ledgers?vouchers & details not entered in concerned ledgers?

  

ii.ii. Whether to consider the large cash payments made towards future Whether to consider the large cash payments made towards future installments in respect of which the company has not conducted the installments in respect of which the company has not conducted the chit auctions ?chit auctions ?

- Claims Investigation in complicated transactions – Chartered - Claims Investigation in complicated transactions – Chartered accountant service is vital; valuation of properties of companies; accountant service is vital; valuation of properties of companies; preparation of Balance sheet for the gap periodspreparation of Balance sheet for the gap periods

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STATEMENT OF AFFAIRS

DETAILS TO BE FURNISHED IN THE DETAILS TO BE FURNISHED IN THE STATEMENT OF AFFAIRSSTATEMENT OF AFFAIRS

Statement of Affairs to be filed as on the Statement of Affairs to be filed as on the date of order for winding up in Form No.57 date of order for winding up in Form No.57 and is required to be seconded with the and is required to be seconded with the Affidavit of concurrence of other directors Affidavit of concurrence of other directors as per Form No.58.as per Form No.58.

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Assets not specifically pledged : List-A:

Assets not specifically pledged : List-A:Assets not specifically pledged : List-A:

Balance at Bank: To be furnished along with full address of the Banks, Account Nos., Balance at Bank: To be furnished along with full address of the Banks, Account Nos., amounts lying therein supported by the statement of account for the last one year.amounts lying therein supported by the statement of account for the last one year.

Marketable securities: Full details of the securities such as shares etc along with Marketable securities: Full details of the securities such as shares etc along with certificates, their realizable value as on date etc.certificates, their realizable value as on date etc.

Trade debtors: Names, address, L.F.No., date of transaction, last date of payment, Book Trade debtors: Names, address, L.F.No., date of transaction, last date of payment, Book value, realizable value, details of security if any and other relevant information.value, realizable value, details of security if any and other relevant information.

Loans & Advances: Names, address, date of security if any and other relevant Loans & Advances: Names, address, date of security if any and other relevant information.information.

Freehold properties: Detailed description of the properties, estimated value, title Freehold properties: Detailed description of the properties, estimated value, title documents etc.documents etc.

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Assets not specifically pledged : List-A: (In continuation)

Leasehold propertiesLeasehold properties: Details of lease, lease documents, : Details of lease, lease documents, unexpired period of lease, transferability of lease, its value unexpired period of lease, transferability of lease, its value etc.etc.

Details of Plant & Machinery, furniture fittings etcDetails of Plant & Machinery, furniture fittings etc , , vehicles, investments other than marketable securities such vehicles, investments other than marketable securities such as deposits etc : location of the assets, as deposits etc : location of the assets, inventory/description, maturity value (deposits), realizable inventory/description, maturity value (deposits), realizable value of other assets etc.value of other assets etc.

Debts from contributoriesDebts from contributories: Name of the shareholder, : Name of the shareholder, address, S.No. in share register, nature of debt, amount address, S.No. in share register, nature of debt, amount due, security held etc.due, security held etc.

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Assets specifically pledged and creditors fully or partly secured:

Assets specifically pledged and creditors fully or partly Assets specifically pledged and creditors fully or partly secured:secured:

Complete description of the assets charged, list of plant Complete description of the assets charged, list of plant and machinery, current assets, date of mortgage, and machinery, current assets, date of mortgage, estimated value of security, details of each creditor, estimated value of security, details of each creditor, date of contract, consideration etc., to be given date of contract, consideration etc., to be given separately.separately.

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List ‘C’ Preferential creditors under Sec.530 including workmen:

Details such as, name and address, nature of claim, period Details such as, name and address, nature of claim, period of accrual of the claim, due date, amount of claim, amount of accrual of the claim, due date, amount of claim, amount payable, details of workmen such as E.No., basic, payable, details of workmen such as E.No., basic, allowances, Gratuity dues, last date of payment etc.allowances, Gratuity dues, last date of payment etc.

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List ‘D’ Debenture holders:List ‘D’ Debenture holders: Name of the holder, address, Name of the holder, address, amount, assets secured.amount, assets secured.

List ‘E’ Unsecured CreditorsList ‘E’ Unsecured Creditors: : Name and address of the Name and address of the creditor, amount of debt, date of contract, LF No., creditor, amount of debt, date of contract, LF No., Consideration.Consideration.

  Details of Preference and equity share holdersDetails of Preference and equity share holders such as such as Register No., Name, address, number of shares held, Register No., Name, address, number of shares held, nominal amount of share, amount called up per share, total nominal amount of share, amount called up per share, total called up amount.called up amount.

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Difficulties in Liquidation Proceedings

The ex-Directors are not traceable. The ex-Directors are not traceable. Statement of Affairs is not filed or is defective. Statement of Affairs is not filed or is defective. Books of Accounts are not delivered. Books of Accounts are not delivered. Registered office is not traceable. Registered office is not traceable. Books seized are irrelevant/in dilapidated condition. Books seized are irrelevant/in dilapidated condition. Diversion and misappropriation of funds. Diversion and misappropriation of funds. Ledgers are not updated. Debts become time-barred. Ledgers are not updated. Debts become time-barred. Manipulation of Records & receipts is found. Manipulation of Records & receipts is found. Monies/properties are attached/sold by courts/consumer forums on complaints Monies/properties are attached/sold by courts/consumer forums on complaints

by the depositors.by the depositors. Ex-Directors fail to respond to the queries of Official Liquidator.Ex-Directors fail to respond to the queries of Official Liquidator. Details of assets secured to the Bond holders is not furnished or no charge is Details of assets secured to the Bond holders is not furnished or no charge is

created with the Registrar of Companies with regard to such bonds.created with the Registrar of Companies with regard to such bonds.

HOW BEST THE SERVICES OF CAs BE AVAILED IN INSOLVENCY PROCEEDINGS:

I

The classical investigative auditing goals in insolvency The classical investigative auditing goals in insolvency cases fall mainly into three fields:cases fall mainly into three fields: Irregular activities of the managers or employees of the company in Irregular activities of the managers or employees of the company in

the pre insolvency era – dilution of funds or assets of the company;the pre insolvency era – dilution of funds or assets of the company;

Possible frauds committed by clients or suppliers in respect of the Possible frauds committed by clients or suppliers in respect of the company in pre insolvency era; andcompany in pre insolvency era; and

Tracing assets belonged to the company and disappeared in the final Tracing assets belonged to the company and disappeared in the final stages of the company closure before insolvency or even beforehand.stages of the company closure before insolvency or even beforehand.

-(creditcontrol.co.uk)-(creditcontrol.co.uk)

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II

- Latest available balance sheet with the ROC is ordinarily 3 to 5 - Latest available balance sheet with the ROC is ordinarily 3 to 5 years older to the winding up order;years older to the winding up order;

- Difficulties in identifying the properties’Difficulties in identifying the properties’- Difficulties in estimating the actual/realisable values – Difficulties in estimating the actual/realisable values –

resolution – to get a balance sheet prepared with the help resolution – to get a balance sheet prepared with the help of CA for the gap period;of CA for the gap period;

- Money laundering, diversification of funds, manipulation Money laundering, diversification of funds, manipulation of accounts, destruction of records;of accounts, destruction of records;

- Collusion with the borrowers and allowing the debts time Collusion with the borrowers and allowing the debts time barredbarred

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Services of CAs is vital – investigation of records of Chit Fund Companies

In respect of some chit fund companies, which are under liquidation proceedings, the ex-In respect of some chit fund companies, which are under liquidation proceedings, the ex-directors floated partnership/proprietory firms for doing finance business. The claim of directors floated partnership/proprietory firms for doing finance business. The claim of chit holders / deposit holders is that chit holders / deposit holders is that

   The successful bidders kept their bid amount as deposit in the firm.The successful bidders kept their bid amount as deposit in the firm.

   The firm promised that the interest earned on the said FD will be adjusted towards The firm promised that the interest earned on the said FD will be adjusted towards

chit installments. Hence the chit holders are contending that they are not liable to chit installments. Hence the chit holders are contending that they are not liable to pay balance subscription.pay balance subscription.

   The FD holders of finance firm are lodging claims against the chit fund company The FD holders of finance firm are lodging claims against the chit fund company

under liquidation on the ground that both the firm and the Company in liqn. are under liquidation on the ground that both the firm and the Company in liqn. are under the same management.under the same management.

  

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Services of CAs – E-form based

- Tracking and analyzing e-from based accounts;Tracking and analyzing e-from based accounts;- Dubious transactions – diversification of - funds Dubious transactions – diversification of - funds

for personal gain; for personal gain; - -Ascertaining loss- Misfeasance-Ascertaining loss- Misfeasance- -Amalgamation – voluntary liquidation matters;-Amalgamation – voluntary liquidation matters;- - Office purpose- auditing specific- Office purpose- auditing specific

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Company Law Settlement Scheme, 2010 All India level more than 370000 All India level more than 370000

companies have not filed documentscompanies have not filed documents In the state of Karnataka, more than 13000 In the state of Karnataka, more than 13000

companies have not filed documentscompanies have not filed documents

Issued under

Sec.611 (2) and 637B (b) of the Companies Sec.611 (2) and 637B (b) of the Companies Act, 1956Act, 1956

Not applicable to Sec.637B (a) of the Not applicable to Sec.637B (a) of the Companies Act, 1956Companies Act, 1956

Who can avail Defunt companyDefunt company - a company registered under the - a company registered under the Companies Act, 1956 which is not Companies Act, 1956 which is not carrying over any business activity or carrying over any business activity or operation on or after 01/04/2008 and operation on or after 01/04/2008 and includes a company which has not includes a company which has not raised its paid up capital to threshold limit raised its paid up capital to threshold limit . In case the defunct company is govt. company No objection from the . In case the defunct company is govt. company No objection from the

concerned Ministry or department or state govt. shall be attachedconcerned Ministry or department or state govt. shall be attached. It should be an active company on the MCA . It should be an active company on the MCA portalportal

Who cannot avail the scheme

Listed companiesListed companies Sec.25 CompaniesSec.25 Companies Vanishing CompaniesVanishing Companies Where inspection or investigation is ordered Where inspection or investigation is ordered

and being carried out or yet to be taken up or and being carried out or yet to be taken up or where completed prosecutions arising out of where completed prosecutions arising out of such inspection of investigation are pending such inspection of investigation are pending in the courtin the court

contd….contd….

Who cannot avail the scheme

Where order Sec.234 of the CA 1956 has been Where order Sec.234 of the CA 1956 has been issued and reply thereto is pending or where issued and reply thereto is pending or where prosecution, if any, is pending in the courtprosecution, if any, is pending in the court

Prosecution for non compoundable offence is Prosecution for non compoundable offence is pending before a courtpending before a court

Public deposits which are either outstanding or the Public deposits which are either outstanding or the company is in default in repayment of the samecompany is in default in repayment of the same

contd…contd…

Who cannot avail the scheme

Having secured loanHaving secured loan Having management disputeHaving management dispute Where the filing of the documents have been Where the filing of the documents have been

stayed by Court or Company Law Board or central stayed by Court or Company Law Board or central government or any other competent authoritygovernment or any other competent authority

Having dues towards income tax or sales tax or Having dues towards income tax or sales tax or central excise or banks and financial institutions or central excise or banks and financial institutions or any other central government or state government any other central government or state government departments or authorities or any local authoritiesdepartments or authorities or any local authorities

How to make application

Form EES 2010Form EES 2010 No fee is payableNo fee is payable To be digitally signed by Managing Director To be digitally signed by Managing Director

or Director or Manager or Secretaryor Director or Manager or Secretary Shall be authorised by board resolutionShall be authorised by board resolution Resolution shall be attachedResolution shall be attached

contd…. contd….

How to make application

In case form is not digitally signed by any In case form is not digitally signed by any of the Director or Manager or Secretary, a of the Director or Manager or Secretary, a physical copy of the form duly filled in physical copy of the form duly filled in manually by a director authorised shall be manually by a director authorised shall be attached with the formattached with the form

Shall be certified by chartered accountant Shall be certified by chartered accountant in whole time practice or company in whole time practice or company secretary in whole time practice or cost secretary in whole time practice or cost accountant in whole time practiceaccountant in whole time practice

Attachments

Affidavit as per Annexure A by each of the Affidavit as per Annexure A by each of the existing director sworn to before a first class existing director sworn to before a first class judicial magistrate or executive magistrate or oath judicial magistrate or executive magistrate or oath commissioner or the notary shall be attachedcommissioner or the notary shall be attached

Indemnity Bond executed by each of director as Indemnity Bond executed by each of director as per Annexure B shall be attachedper Annexure B shall be attached

Statement of Account as per Annexure C prepared Statement of Account as per Annexure C prepared on a date not prior to one month of preceding the on a date not prior to one month of preceding the date of filing and duly certified by a stautory date of filing and duly certified by a stautory auditor or chartered accountant in whole time auditor or chartered accountant in whole time practicepractice

AFFIDAVIT

Proof of Directorship – in case no DIN is allotted – Proof of Directorship – in case no DIN is allotted – to be certified by Chartered Accountant/ Company to be certified by Chartered Accountant/ Company Secretary/ Cost Accountant in practice or a Secretary/ Cost Accountant in practice or a Company Secretary in full time employmentCompany Secretary in full time employment

Address Proof – permanent and present address to be Address Proof – permanent and present address to be attested by Chartered Accountant/ Company attested by Chartered Accountant/ Company Secretary/ Cost Accountant in practice or a Secretary/ Cost Accountant in practice or a Company Secretary in full time employment Company Secretary in full time employment alternatively an affidavit sworn before a Magistrate alternatively an affidavit sworn before a Magistrate to be attached.to be attached.

Some teething problems

Where there is only one director – what to Where there is only one director – what to dodo

Company has huge unsecured loans not Company has huge unsecured loans not coming under the definition of public coming under the definition of public depositdeposit

Whether earlier year balance sheets shall be Whether earlier year balance sheets shall be filed especially when the company has filed especially when the company has huge assets and liablities – discretion of the huge assets and liablities – discretion of the ROCROC

What ROC shall do

Registrar shall give notice, if found in Registrar shall give notice, if found in order, to the company under Sec.560 (3) by order, to the company under Sec.560 (3) by e mail to the email address giving 30 days e mail to the email address giving 30 days timetime

Shall put the name of the company and date Shall put the name of the company and date of making application on daily basis in of making application on daily basis in MCA portal inviting objections within 30 MCA portal inviting objections within 30 days from the stakeholdersdays from the stakeholders

contd….contd….

What ROC shall do

ROC shall at the end of every week shall send ROC shall at the end of every week shall send intimation to other regulators such as RBI and intimation to other regulators such as RBI and SEBI in respect of NBFCs and Collective SEBI in respect of NBFCs and Collective Investment Management Company inviting Investment Management Company inviting objections giving 30 days timeobjections giving 30 days time

ROC shall at the end of every week to Income Tax ROC shall at the end of every week to Income Tax Department in respect of every company giving Department in respect of every company giving 30 days time30 days time

Strike off the company and send notice under Strike off the company and send notice under Sec.560(5) for Gazette PublicationSec.560(5) for Gazette Publication

Immunity Certificate

NecessityNecessity By filing documents belatedly only an end By filing documents belatedly only an end

to offence is made; does not mean that the to offence is made; does not mean that the offence has not taken placeoffence has not taken place

Sec.611 (2) – without preudice to any other Sec.611 (2) – without preudice to any other liabilityliability

Immunity Certificate

Hanuman Mills pvt. Ltd. And others Vs. Hanuman Mills pvt. Ltd. And others Vs. State AIR 1968 All 604State AIR 1968 All 604

Pylo Luka Muricken Vs. ROC , Kerala Pylo Luka Muricken Vs. ROC , Kerala (1977) 47 Com Cas 291 (Ker)(1977) 47 Com Cas 291 (Ker)

Duration of the scheme and the quantum of additional fee 30/05/2010 to 31/08/201030/05/2010 to 31/08/2010 Basic statutory filing fee and additional fee Basic statutory filing fee and additional fee

of 25 percent of the actual additional fee of 25 percent of the actual additional fee standardised under Sec.611 (2) are to be standardised under Sec.611 (2) are to be paidpaid

Who can avail

Any defaulting companyAny defaulting company In case the defaulting company has no adequate In case the defaulting company has no adequate

paid up capital it must be raised firstpaid up capital it must be raised first Company means a company registered under the Company means a company registered under the

Companies Act, 1956 and a foreign company Companies Act, 1956 and a foreign company falling under Sec.591 of the Actfalling under Sec.591 of the Act

Companies against which action Sec.560 (5) is Companies against which action Sec.560 (5) is initiated cannot availinitiated cannot avail

Whether the scheme can be used for all documents Not to apply to Not to apply to (a) incorporation documents;(a) incorporation documents; (b) documents for establishment of place of(b) documents for establishment of place of business in India;business in India; (d) where specific order for condonation of (d) where specific order for condonation of delay or prior approval under the delay or prior approval under the provisions of the companies Act , 1956 is to provisions of the companies Act , 1956 is to be obtained from the CLB or CG or Court or be obtained from the CLB or CG or Court or any other Competent Authority any other Competent Authority

What about appeals filed by the company It shall have to withdraw the appeal petition It shall have to withdraw the appeal petition

before filing application for grant of before filing application for grant of immunity certificateimmunity certificate

In case petition under Sec.633 for relief is In case petition under Sec.633 for relief is filed it should also be withdrawnfiled it should also be withdrawn

Proof of withdrawal shall be filed along Proof of withdrawal shall be filed along with application for grant of immunity with application for grant of immunity certificatecertificate

Application for immunity certificate

Shall be made in the form annexedShall be made in the form annexed No fee is payable;No fee is payable; Shall be made after the closure of the scheme Shall be made after the closure of the scheme

and the documents are taken on file, on and the documents are taken on file, on record or approvedrecord or approved

Shall be made before the expiry of six Shall be made before the expiry of six months from the date of closure of the months from the date of closure of the scheme scheme

When immunity certificate will be issued Designated authority (ROC) shall consider Designated authority (ROC) shall consider

the application and upon being satisfied the application and upon being satisfied shall grant immunity certificate in respect shall grant immunity certificate in respect of documents filed in the schemeof documents filed in the scheme

341

Presented By Presented By

CA Swatantra Singh, B.Com , FCA, MBA CA Swatantra Singh, B.Com , FCA, MBA Email ID: Email ID: singh.swatantra@gmail.com New Delhi , 9811322785,New Delhi , 9811322785, www.caindelhiindia.com, www.caindelhiindia.com, www.carajput.comwww.carajput.com