A group of promoters propose to establish a company for charitable purposes without the addition of the word ‘Limited’ as part of its name

A group of promoters propose to establish a company for charitable purposes without the addition of the word ‘Limited’ as part of its name. Discuss briefly the procedure to be followed in addition to the normal procedure for incorporation of a

company. [C.A. (Final) May, 2001)

flLns. For establishing a company for charitable purpose and without the addition of the word ‘Limited” as part of its name, the promoters have to take the following steps

to obtain permission of the Central Government.

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I. An application has to be made to the Regional Director of the concerned !,egicm

along with the following documents:

(a) Three ce:; of draft memorandum and articles of association of the

proposed company.

(b) A declaration that all requirements pertaining to the formation of the

company have been duly complied with.

(c) Three copies of list of names of the promoters as well as the proposed

directors together with the narhes of companies in which they are inter

ested along with the relevant particulars.

(d) A statement showing the assets and liabilities of the association as on the

date of the application or within seven days of that date. J ‘,. I

(e) An eS’timate of the future annual income and expenditure of the proposed

company.

(j) A statement giving a brief description of the work proposed to be done

after formation which must be non-commercial.

(g) A declaration that profits, if any, shall not be distributed by way of

dividends but shall instead be used for furtherance of the cause for which

the company has been established.

(It) A statement specifying briefly the grounds on which the application is made. (i) A declaration by the applicants regarding their competence to make the

application.

. XYZLimited decided to terminate the services of Mr. X, who was employed as sales manager

It is apprehended by the company that the sales manager may not vacate the company’s flat at Bombay. What action can be taken by the company under the Companies Act to regain possession of the flat? Is it necessary to take such action under the Companies Act before terminating the services of Mr. X? Will it make any difference if the flat is not owned by the company but taken on lease?

fC.A. (Final) May, 2000J

.9L1l.5 .

Wrongful Withholding of Property

The company can take action under Section 630 of the Companies Act, 1956 if the sales manager refuses to vacate the residential accommodation provided by the company.

According to Section 630, it is an’offence if .Y_9.f!icror employee of a company (a) wrongfully obtains possession of anfprop-erty of a company”or (b) having any such property in his possession wrongfully withholds it or knowingly applies ito purposes other than those expressed or directed in the Articles and authoed by the Act and such an offence is punishable with fine which may extend to,Rs. 1,00(r[Section 630(1)]. Further, the Court trying the offence may also order such officer or employee to. deliver to the company, any such property wrongfully’ obtained or wrongfully withheld, within a time fixed by the Court. Non-compliance of the court’s order is an offence

punishable with imprisonment for a term which may extend to two years [Section 630(2)J.

So, the company can file a complaint under Section 630 as it provides speedy relief to the company.

Tl).ough the expression used in Section 630 is not ‘past or present officer or employee’, it has been held by the Supreme Court that the term ‘officer or employee’ in Section 630 applies not only to existing officers or employees of a company but also to past officers or employees if such officer or employee either (a) wrongfully obtains possession of any property of the company; or (b) having obtained such property during the course of his employment withholds the same after the termination of his employment [Baldev Krishna Sahi Vs. Shipping Corporation of India Ltd. (1988)]. In view of the Supreme Court’s decision, it is possible to initiate action under Section 630 even after terminating the services of Mr. X.

It is not necessary that the property in question should be actually owned by the company. Even if the company exercises only a leasehold right, the provisions of Section 630 can be invoked [Po V. George Vs. Jayens Engineering Co. (P) Ltd. (1990)].

State the disclosure requirements. if any under Schedule VI to the Companies A9t. 1956 in respect of the following

(i) Loans received from directors.

(ii) Loans received from director’s relatives.

(iii) Debts due by directors towards goods supplied and advances made by the

company.

(iv) Debts due by partnership firms in which the directors or relatives of directors

are partners.

(v) Debts due by companies in which the directors or their relatives are directors

or members. .

(vi) Loans and advances received from and given to a subsidiary company and

the partnership firm in which the subsidiary company is a partner.

(vii) Remuneration received by a director of a company from its subsidiary

company.

(viii) C6mmission paid to selling agents including sole selling agents.

.9Lns. The disclosure requirements under Schedule VI are as follows: .

(i) Loans received from directors - It should be classified as secured and URSecured

..J loans and shown separately on the liabilities side of the Balance-sheet.

(ii) Loans received from directors’ relatives are not required to be disclosed in the

Balance-sheet.

(iii) Debts due by directors towards goods supplied by the Company must be shown separately under Sundry Debtors. The maximum amount due by directors of the’ company at any tfme during the year must also be disclosed in the Balance-sheet by way of a note. Similar disclosure is required in respect of loans and advances made to directors.

(iv) Debts due by partnership firms in which any director of the company is a partner must be disclosed separately. But no disclosure is required if only the relatives of directors are partners.

(v) Debts due by private companies on which the directors are directors or members must be stated separately in the Balance-sheet. But, it is not necessary if the amount is due from public companies. Similarly, it is not necessary to disclose separately the amount due by companies in which the relatives of directors are directors or members.

(vi) Loans and advances received from subsidiary companies should be classified as secured and unsecured loans and shown separately. But no such disclosure is required in respect of loans received from partnership firms in which the subsidiary company is a partner. Loans and advances given to subsidiary companies and the partnership finri in which the subsidiary company is a partner must be disclosed in the Balance-sheet.

(vii) Managerial remuneration received by a director of a company from its subsidiary

should be shown separately in the Profit and Loss account by way of note.

(viii) Commission paid to sole selling agents and other agents must be shown separately

in the Profit & Loss Account.

The concept of ‘Public Interest’ has been making rapid inroads into the Indian

A survey of the provision of the Companies Act would reveal the truth of the statement that concept of ‘Public interest’ has been making rapid inroads into the Company Law. Some of such provisions are stated below very briefly:

(i) Section 396 empowers the Central Government to provide for compulsory amalgamation of companies into a single company in the public interest. Such a provision was made in the Company Law for the first time by the Companies Act, 1956.

(ii) Section 211 (3) empowers the Central Government to exempt any class of companies from compliance requirements in Schedule VI pertaining to form and contents of Balance-sheet and Profit & Loss Account, if it deems fit for public interest.

(iii) Regarding transfer of shares which is likely to change the composition of the Board of Directors prejudicial to public interest, Central Government is now empowered under the 1956 Act [section 250 (3) & (4) to impose restriction on such transfer, i.e., for voting right, upto 3 years, without its sanction].

(iv) Under Section 397 the members can file application to the CLB for appropriate relief where the affairs of the company are being conducted in a manner prejudicial to public interest, provided the requirements of Section 399 are fulfilled.

(v) Again, under Section 398, shareholders can file an application to the CLB for

relief for public interest.

(vi) Under Section 408, the Central Government, on recommendation of CLB may

appoint directors to the Board for safeguarding public interest.

(vii) Qnder Section 394(1) the Court is empowered to refuse its sanction to any

compromise or arrangement, when a company is being wound-up, when the

Court feels that the scheme is prejudicial to public interest.

the Court must consider the report, and direct the person charged/ concerned

the Court must consider the report, and direct the person charged/ concerned

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to attend on a qay appointed for the purpose and publicly examine the person,

as to the complained conduct and dealings in his capacity as such promoter or officer;

(iii) the Official Liquidator shall take part in the examination, and if authorised by the Court, may employ counsel for the purpose of assisting him in the proceedings;

(iv) any creditor or contributory may also take part in the examination either

personally orby counsel, entitled to appear before the Court;

(v) the Court may put such questions to the examinee, as it thinks fit; .

(vi) the public examination of the person shall be on oath, and the examinee shall

be liable to answer all questions as may be put tohun by the Court or allowed

to be put to him by the other person, with the leave of the Court;

(vii) the person examined,hall before his examination be fu..rnished (at his own

cost) a copy of the rt of the Official Liquidator, and engage at his own

cost, a co who may put to him such questions as the Court may deem just for the purpose of enabling him to explain or qualify any answers given by him;

(viii) if the examinee applies to the Court to be exc.ulpated from any charges made, it would be the duty of the Official Liquidator to appear at the hearing of the application and call attention of the Court, to relevant matters, whereafter, the Court may on hearing evidence, grant or refuse the application; .

(ix) notes of the examination shall be taken down in writing, read over to or by, and signed by, the person examined and thereafter may be used in evidence against him, and shall be open to inspection of any creditor or contributory at all reasonable times.

Scope of Section 391. The aid of the section may be invoked when it is not otherwise

Scope of Section 391. The aid of the section may be invoked when it is not otherwise possible to made some arrangement or compromise which would be in the interests of the company and the other party or parties to the arrangement. It can be used whether the company is a going concern or is in the course of winding up.

Exercise of the Court’s discretion

Before the Court sanctions a scheme, it will normally need to be satisfied on the

following matters:

1. The Statutory Provisions must have been Complied With. The Court must see

that the resolutions are passed by the statutory majority in value and number in accordance with the legislation at a meeting or meetings duly convened and held. In this regard, it may be noted that Section 391 contemplates a scheme between a company and its creditors or any class of them or between the company and its members or any class of them. Thus, where a scheme was agreed to by the company and its ordinary shareholders only, without interfering with the rights of the preference shareholders, the scheme was held to be valid even though a meeting of the preference shareholders was not called to ascertain their views-Mcleod & Co. V s. S.K. Ganguly [1975]45 Compo Cas. 563:

The Court shall not make any order sanctioning the compromise or arrangement unless it is satisfied that the company or any other party making the application has disclosed to the Court, by affidavit or otherwise, all material fact relating to the company, such as :

(a) the latest financial position of the company;

(b) the latest auditor’s report on the accounts of the company;

(c) whether any investigation or proceedings under Sections 235 to 251 are pending against the company, etc. (Proviso to Sub-section (2) of Section 391). “Further, an order made by the Court sanctioning the compromise or arrangement shall have no effect until a certified copy of the same is filed with the Registrar. Moreover a copy of every such order must be annexed to every copy of the Memorandum, issued after the filing of the certified copy of the order or, if the company has no Memorandum, to every copy of the instrument constituting or defining its constitution [Sub-sections (3) and (4) of Section 391].

Ramana Dayaram Shetty Vs. International Airports Authority of India AIR 1979 SC 1628.

(i) If the entire share capital of the corporation is held by Government, it would go a long way towards indicating that the corporation is an instrumentality or agency of government;

(ii) Existence of deep and pervasive State control may afford an indication that the corporation is a State agency or instrumentality;

(iii) It may also be a relevant factor... whether the corporation enjoys monopoly status which is State conferred or State protected;

(iv) If the functions of the corporation are of public importance and closely related

to Government functions, it would be a relevant factor in classifying the

corporation as an instrumentality or agency of government;

(v) Specifically, if a department of Government is transferred tc a corporation it would be strong factor supporting this inference of the corporation being an instrumentality or agency of Government.

It should be noted, however, that the tests referred to above are not individually decisive; their cumulative effect in each particular case has to be taken into account.

A Government Company-Whether a Private or Public Company

Should a government company be incorporated as a private company or a public company, is a question on which the Companies Act, 1956 is silent. As a result, a government company may be incorporated either way.

Exemptions

duplicate is rarely issued and that too upon satisfactory evidence and indemnity

Surrender. Section 115(2) of the Companies Act entitles the bearers of a share-warrant to surrender it for cancellation and, on payment of a fee

prescribed by the Board of Directors and subject to the articles of the company, he can have his name entered as a member in the register in respect of

shares which were included in the wammt and to have a share certificate isslled in his name.

ReSI)Onsibility of Compan)’. The company shall be responsible for any loss incurred by an)’ person by reason of the company entering in its register of

members the name of a bearer of a share warrant in respect of the shares therein specified, without the warrant being surrendered and cancelled.

Penalty. Non-compliance of the provisions of Sec. 115 shall entail a fine for the company and its every officer who is in default upto Rs. 500 for every day

till such time the default continues. [Sec. 115(6)].

Share Warrant and Share-Certificate.

Share Certificate and Share Warrant

I. Issue

Share Certificate

Share Warrant

A share eertilieate can be issued originally at any stage, whether shares are fully paid-up or not.

A prospectus is a document which induces the public to invest

their money in the shares or debentures of the company. The public invest . the money in the company on the basis of the information disclosed in the nature of the company must be truly, honestly and accurately disclosed in the prospectus. It should neither contain any

omit to disclose any material fact. This is known as the golden rule as to the framing the prospectus

According to Section 65(J) of the Companies Act, 1956.

(i) a statement included in a prospectus shall be deemed to be untrue,

if the statement is untrue in the form and context in which it is included: and

(ii) where the omission from a prospectus of any matter is calculated

to mislead, the prospectus shall be deemed, in respect of such omission. to be a prospectus in which an untrue statement is included. The expression “included’ with reference to a prospectus. means included in the prospectus itself or contained in any report or Memorandum appearing on the face thereof or by reference incorporated therein or issued therewith. In order to call a prospectus misleading these must be misrepresentation of facts and not of law r expectation. For example, a prospectus contained that the company will issue the shares at half of their nominal value, whereas Sec. 79 prohibits a company to issue shares at a discount exceeding 10 per

cent. It is a misrepresentation of law and not of fact. The allotted of shares therefore has no remedy. One thing should also be looted that the statement should not be true only at the time of their inclusion in the prospectus. but milts continue to be so. till the

shares are allotted. [In Rajagopala Iyer Vs. The South Indian Rubber Works Ltd. (1942) A.I.R. Mad. 656].

Remedies for Mis-statements ami Omissions in a PrOSI)CctllS. The remedies available to a person who has subscribed for shares on the faith of a misleading prospectus, may broadly be grouped into two categories:

I. Remedies against the company.

II. Remedies against the directors, promoters and experts. We shall now examine the nature of these remedies in detail.

Registrar of Companies within 30 days of making the change

Shifting of Rcgistcl'cd Office from thc JUI'isdiction of onc Rustler of Companies to the Jurisdiction of anthill' Registrar of Coml.):micas in the same State. In two States, i.e., Maharashtra and Tamil Nadu-there arc more than one Registrar of Companies (RoC). Where the registered office of the company is to be shifted from one city to another in the same tate but within the jurisdiction of another RoC. In such case; confirmation from the Regional
Director is required. The Regional Director, on an application for shifting of registered office, after giving an opportunity being heard to the company, shall complicate confirmation or otherwise within four weeks. Before making an application to the Regional Director, the company shall pass a special Resolution to that effect. After the confirmation. the company shall file the certified copy of the confirmation within two months with the RoC who shall
make the necessary changes in the register and talker the records to the Registrar in whose jurisdiction the registered office is being shifted. A copy of the altered Memorandum is also to be filed with the new Registrar of Companies (perhaps there is a drafting mistake in this section. Memorandum of Association only mentions the name of the State and when the registered office is shifted within the State, it requires no alteration of Memorandum). The
Registrar will issue fresh registration certificate within one month of filing the certified copy of the confirmation order. In the meanwhile, the company shifts the registered office to its new location. A notice of the new address shall be given to the new Registrar within 30 days of shifting the office.
3. Shifting of Registered Office within the Same State. Where the' registered office of the company is to be shifted from one city. town or villageto another city, town or village in the same State (and within the jurisdiction of the same RoC), the company shall pass a special resolution at the general meeting of members authorizing the change and file a copy of such resolution with the Registrar of Companies within 30 days from the date of passing of
the resolution. A notice of change of registered office should be given to the Registrar within 30 days of the shifting of the registered office.
4. Shifting of Registered Office from one State to Another. Where the registered office is proposed to be shifted to some other State, only then the Memorandum of Association is to be altered. The change is permissible only on any of the reasons enumerated for altering the object clause of the Memorandum. (See next question for alteration of object clause). In addition, the company has to follow the following procedure-
(0) It must pass a special resolution authorizing the change in the registered office. A copy of such resolution should be filed with the Registrar within 30 days of passing of the resolution.
(b) The alteration nulls be confirmed by the Company Law Board. Before confirming the alteration, the Company Law Board should satisfy itself sufficient
notice has been given to (a) all creditors; (b) other persons whose interests are likely to be affected by the proposed change e.g. banks, financial institutions, employees, etc. and every such creditor who objects to it has either been paid in full or his debt has been fully secured; (c) Registrar of Companies so that he may state his objections and suggestions to the Company

Law Board. The Company Law Board then issues a confirmation order on such terms and conditions as it thinks fit.
(c) The certified copy of the confirmation order together with the altered copy ofMemorandl Un of Association must be filed with the Resisting of both the States within three months of the order. Both the Registrars must register the same and certif.(y the registration within one month from the date of filing of such documents. Further, the Registrar oath present State shall send the records of the company to the Registrar of the proposed State.
(d) Certificates of registration of the transfer are to be obtained from both the Registrars.
(e) The registered office is shifted to its new location in the proposed" State. The company must submit the notice of new address to the Registrar within 30 days oithe shifting of the office.

CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC COMPANY

What are the provisions of the Companies Act, 1956 for the conversion of
(i) a private company into a public company, and (ii) a public company into a private company.
1. CONVERSION OF A PRIVATE COMPANY INTO A PUBLIC COMPANY
A private company becomes a public company in the following circumstances:1. Conversion by default (Section 43) or automatic conversion.
2. Conversion by choice (Section 44) or deliberate conversion.
1. Conversion by default. A private company may become a public
company by default, as provided in Section 43.
If a private company fails to comply with the essential requirements
of a private company (via, restrictions on transfer of shares; limitation of the number of members to 50; and, prohibition of invitation to the public to buy
shares or debentures) or prohibition of invitation or acceptance of deposits from the public), it becomes a public company automatically, it shall cease to
enjoy the privileges of private companies and the company will be treated as if it were a public company-Section 43. However, discretion is given to the
Company Law Board to grant relief to the company from such consequences where the Company Law Board is satisfied that the failure to comply with
the conditions was accidental or due to the inadvertence or to some other sufficient cause. Such relief may be granted under such terms and conditions
as the Company Law Board thinks it just and equitable.
2. Conversion by Choice (Section 44). A company may, of its own
choice, become a public company.
The following steps are necessary for this purpose:
(i) Special Resolution. A private company desiring to become a
public company must pass a special resolution in order to alter its Articles of Association and deleting the restrictions contained therein under Section 3
(1) (iii) (i) restrictions on transfer of shares, (ii) the limitation on maximum membership, (iii) prohibition of invitation to the public for subscribing to its
shares] or debentures (iv) prohibition of invitation or acceptance of public deposits]. A copy of the special resolution so passed, a copy of altered Articles
together with a copy of 'prospectus' or 'statement in lieu of prospectus' must be filed with the Registrar within 30 days of its passing: The other steps to be

taken are
(i) Enhancement of paid up capital. The company will raise its paid up capital upto Rs. 5,00,000 if it is below this limit.
(ii) Deleting the word Ltd. The company will delete the word 'private' from its name.
(iii) Increase in membership. If the number of members is less than seven, it must be raised to not less than seven.
(i1') Increase in number of directors. If the number of directors is less than three, it must be raised to not less than three.