Post on 08-Apr-2018
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Module VI
Companies Act 1956
Ms.Sandhya K N
15-04-2010
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Companies act 1956: Definition, Characteristics
and Kinds of Companies, Steps in Formation of
Company. Memorandum of Association, Articles
Association and Prospectus. Shares: Kinds of
Shares, Kinds of Debentures. Directors:
Appointment, Power, Duties and Liabilities of
Directors. Meeting and Resolutions: Types of Meetings. Auditor: Appointment, Rights and
Liabilities of Auditor. Modes of Winding-up of a
Company.
MODULE 6 (7 Hours)
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Meaning and Definition of a
CompanySection 3(1)(i) of the Companies
Act, 1956 defines a company as: a
company formed and registeredunder this Act or an existing
Company.
An Existing Company means a
company formed and registered
under any of the previous
Companies Law.
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Definitions
According to Justice Lindley a company is
An association of many persons who
contribute money or money's worth to a
common stock and employed for a commonpurpose. The common stock So contributed is
denoted in money and is capital of the
company. The persons who contribute it or to
whom it belongs are members. The proportionof capital to which each member is entitled is
his share. Shares are always transferable
altough the right to transfer them is aften more
or less restricted.
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Definitions
A company may be defined as an
incorporated association,which is an
artificial person,having an independentlegal entity,with a perpetual seccession, a
common seal, a common stock capital
comprised of transferable shares and
carrying limited liability in relation to its
members.
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Characteristics of a company
1. Separate legal entity
Salomon vs. Saloman & Co Ltd
2. Limited liability
3. Perpetual succession (long continuity)4. Common seal
5. Transferability of shares
6. Separate property
7. Capacity to sue & to be sued8. Not a citizen
9. Company's actions limited
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Kinds of Companies
Chart showing kinds of Companies
On the basis of
Constitution
On the basis of
incorporation
On the basis of
control
Public Co Private CoGovt Co
Holding &
Subsidiary
Co
Chartered
Co
Registered
Co
Statutor
yCo
Foreign
Co
Limited
By Shares
Limited by
Guarantee
Unlimited
Co
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I. On the basis of Constitution
a. Public Company: A public company means a
company which is not a private company.
There is no maximum limit as to its number of
shareholders or members
There must be at least seven persons to form a
public company
The shares of a public company are capable of
being dealt in on a stock exchange
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b.Private Company: [Section 3(10)(iii)]
A private company means a company which byits Articles
i) Restricts the rights to transfer its shares
ii) Limits the number of its members to fiftyIii) Prohibits any invitation to the public to
subscribe for any shares or debentures of the
company
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Privileges of a Private Company
1.A private Company may consist of two membersonly
2.A private Company is entitled to commence
business immediately on incorporation
3. It may allot shares without issuing a prospectusor delivering to the Registrar a statement in lieu
of prospectus
4. It is not required to hold a statutory meeting or file
a statutory report with the registrar 5.It can have a minimum of two directors
6. The provisions of section 81 as regards further
issue of capital do not apply to a private
company.
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7.It can give financial assistance for purchase of its
shares or its holding companys shares8.Copies of Balance sheet and Profit and Loss Accountfiled with the Registrar can not be inspected by the
Public9.A director of a private company need not hold the
share qualification10.Restriction in regard to overall managerial
remuneration imposed by Section 309 do not apply to aprivate company
10.An interested director can participate in the Boardproceedings and exercise his vote
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The privileges mentioned above are not
available to a private company which is asubsidiary of a public company
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Distinction Between Public and Private CoBasis Public Co Private Co
1.Minimum Numberof members Seven Two
2.Maximum Numberof Members
No limit Fifty
3.Commencement ofBusiness
Shall not commence itsbusiness immediatelyunless it has beengranted the Certificateof Commencement ofBusiness
Can commence itsbusiness as soon as it isincorporated
4.Invitation to public By issuing a
prospectus may invitepublic to subscribe toits shares/debentures
Can not extend such
invitation to the public
5.Transferability ofShares
No restriction on thetransfer of shares
By its Articles mustrestrict the right of
members to transfer theshares
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Distinction between Public and Private Co
Basis Public Co Private Co
6. Number of Directors Must have at least threedirectors
May have two directors
7.Statutory Meeting Must hold as statutorymeeting and file with the
Registrar a Statutoryreport
There are no suchobligations
8.Restrictions onappointment of Directors
Shall file with theRegistrar a consent to actas such
These restrictions do notapply
9.ManageralRemuneration Total ManagerialRemuneration can notexceed 11% of the NetProfits
These restrictions do notapply
10.Further issue ofCapital
Proposing further issueof shares must offer themto the existing members
Is free to allot new issuesto outsiders
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II.On the basis ofIncorporationa. Chartered company:The Crowning the exercise of
the royal prerogative, has power to create a corporationby the grant of a charter to persons assenting to beincorporated. Such companies or Corporations are
known as Chartered Companies
Examples: Bank of England, East India Company
b.Statutory Companies:A company may beincorporated by means of a special Act of the
Parliament or any StateLegislature. They are generally formed to carry out some
special public undertaking. Examples:Railways,waterworks,electricity generation,LIC,RBI,UTI
etc
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#
Statutory companies are governed by the Actscreating them
#They are not required to have any memorandumor articles of Association changing in their structure are
possible only by amendment in the Acts creating them.
# A statutory company though owned by theGovernment has a separate legal entity
# It can not be regarded as a department of theGovernment
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C.Foreign Company : A company incorporated outsideIndia and having a place of business in India
i.Documentsii.Accountsiii.Namesiv.Winding up
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d.Registered Companies : Companies registeredunder the Companies Act,1956 or the earlier
Companies Act are called Registered CompaniesSuch companies come into existence when they are
registered under the Companies Act and a certificate ofincorporation is granted to them by the registrar
i.Companies limited by shares
ii.Companies limited by guaranteeiii.Unlimited Companies
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i.Companies limited by shares:This is a companywhere the liability of its members is limited to the
amount fixed by the memorandum of the company,if
any unpaid on the shares respectively held by them.The liability can be enforced during the existence of the
company as well as during the winding upWhere the shares are fully paid up, no further liability
rests on them
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ii.Companies limited by guarantee:This is a
company where the liability of its members is limited tosuch amounts as they may respectively undertake asfixed by the memorandum to contribute to the assetsof the company in the event of its being wound up.
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iii.Unlimited Companies : It is a company where theliability of its members is not limited at all. In such acompany, the liability of each member extends to
the whole amount of the companys debts andliabilities, but he will be entitled to claim rateable
contribution from other members.
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III. On the basis of Control
a. Government company : Section 617 of theCompanies Act defines a government company
as a company in which not less than fifty onepercent of the paid up share capital is held by the
Central Government or by any Stategovernment,or partly by the central Governmentand partly by one or more state governments.
It also includes a company which is a subsidiaryof a Government company
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b. Holding Company & Subsidiary Company
A company which controls another company is knownas the holding company and the company so controlled
is termed as subsidiary company
A holding company is one of it:
1.controls the composition of board of directors ofanother company or
2.holds more than half of the nominal value of equityshare capital of another company or
3.controls more than of the total voting power of theother company
4.is a subsidiary of any company which is in turn asubsidiary of another company
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Example: Company P is a subsidiary of companyQ, and company R is a subsidiary of company P.
Company R will be a subsidiary of company Q
Q P
R
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Other companies
One man company and family Company
These are companies in which one man holdsvirtually the whole of the share capital with a fewextra members holding the remainder,who may
be his relations and nominees.Being the largest holder ,such a person is
generally the sole or the managing director andenjoys complete control over the company
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Licensed Companies or Companies not for Profit(Section 25)These licensed companies are formed for a nontrading object or for a noble cause,like the promotion
of art,science,education,commerce etc.Charitable associations,sports clubs,tradeassociations,chamber of commerce etc are examplesof companies not for profit
Such companies can be formed only on obtaining thelicense from the Government i,e they can beregistered only after such licence
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Steps in Formation of Company
Company formation is an elaborate,timeconsuming and an expensive affair. A typical
formation involves three stages:
a)Registration
b)Capital raising andc) Commencement of business
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a) Registration
The registrar of companies is the appropriate official to
register companies. Before registration, the registrar
expects the promoters to submit a list of names of theproposed company, memorandum of association, articles of
association and a list of directors
The memorandum of association is an important document,
it contains such details as the name of the company, thepurpose of the company, the place of its registered office,
the fact that the members' liability is limited and capital of
the company. The memorandum should be printed, be
divided in to suitable paragraphs and be affixed with stamps
worth Rs 120.
The articles of association contain details about the way in
which the internal affairs of the company are to be carried
out. The article should be printed, be divided in to suitable
paragraphs and be affixed with stamps worth Rs 120.
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The registrar will scrutinize all documents submitted
to him and will ensure that all formalities are complied
with. The registrar will then enter the name of thecompany in the Register maintained by him for the
purpose and will issue certificate of incorporation. It is the
birth certificate of the company.
On registration, the company becomes an independentperson in the eyes of law. For registration the registrar will
charge a fee which depends on the authorized capital of
the company. For an authorized capital of Rs. 1 lakh the
registration fee is Rs. 750. and for a capital of Rs. 1 crore
the fee is Rs. 18,500.
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b) Raising of Capital
The next step in company formation is the raising
of the capital. A public company raises its capitalby inviting the public to subscribe to its share
capital. The steps involved in raising the capital
are :
(i) obtain the SEBI clearance
(ii)entering in to an agreement with the underwriter
(iii) applying to the stock exchange for listing of its
share(iv) inviting the public to subscribe its share
capital through a prospectus
(v) allotment of shares
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c) Commencement of Business
A private company can commence its business
immediately after it is incorporated. But a public
company can't commence its business unless it obtains
a certificate for the purpose. To obtain a certificate the
following statement must be submitted to the registrar :
A declaration that a copy of the prospectus is filed with
him A declaration that minimum subscription has been
received.
A declaration that directors have taken up the
qualification shares and have paid for them.
A certificate issued by a director or secretory to the
effect that all conditions for the commencement of
business have been fulfilled
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PromoterA promoter is one who undertakes to form a
company with reference to a given object and toset it going and who takes the necessary steps to
accomplish that purpose.
The promoter of a company decide the scope of itsbusiness activities
A promoter stands in fiduciary position towards the
company
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Alteration of Memorandum
Various clauses of memorandum of
association can be altered by
following the procedure laid down inthe Act. Different requirements are
prescribed for different clauses:
1. Name Clause: can be altered by:(a)Passing a special resolution; and
(b)Obtaining the approval of the Central
Govt.
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Alteration of Memorandum
2. Registered Office Clause: may beshifted:
(a)within the same city by passing
Directors Resolution;(b)From one city to anothercity within the
same State:
by passing special resolution only, ifno change in jurisdiction of RegionalDirector
by passing special resolution, and
Obtaining the approval of RegionalDirector.
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Alteration of Memorandum
3. Objects Clause
Special Resolution
Only on Grounds stated in Sec.17(1).4. Liability Clause
Cannot be increased without written
consent of each and every member. Can be reduced:
by passing special resolution
Confirmation of court
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Alteration of Memorandum
5. Capital Clause
Authorised capital may be
increased by passing an ordinary
resolution at a meeting of the
shareholders.
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Articles of Association
The articles of association of a company are its
bye-laws or rules and regulations that govern the
management of its internal affairs and the
conduct of its business.
The articles regulate the internal management of
the company. They define the powers of its
officers. They also establish a contract between
the company and the members and between the
members inter se. This contract governs the
ordinary rights and obligations incidental to
membership in the company [Naresh Chandra
Sanyal v. Calcutta Stock Exchange Association
Ltd. (1971)].
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Companies which must have Articles
Unlimited Companies:
The Articles of such a company
must state:Total number of members; and
Share capital.
Companies limited by Guarantee:Articles of such company must
state total number of members.
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Companies which must have Articles
contd.
Private Companies limited by
shares:
must include requirements ofSection 3(1)(iii).
No Article Company
A public limited company havingshare capital may be registered
without Articles.
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Alteration of Articles
Articles may be altered by a
company by passing special
resolution at a general body meeting
of shareholders.
However, where alteration has the
effect of converting a public
company into a private company (i.e.,introduction of restrictive clauses of
Section 3(1)(iii), approval of Central
Government must be obtained.
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Doctrine of Constructive Notice
According to Section 610, every person
dealing with the company is deemed to
have read M/A and A/A and understood the
contents thereof in the correct perspective. Doctrine of Indoor Management
The rule was first laid down in Royal British
Bankv. Turquand.
Rule ofIndoor Management is an exception
to the Doctrine of Constructive notice.
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xceptions of Indoor Management
1. Knowledge of irregularity: Case: Howardv. Patent Ivory Co.
2. Negligence : Case:Anand Behari Lal v.
Dinshaw & Co. (Bankers) Ltd.3. Forgery: Case: Ruben v. Great Fingal
Consolidated[Secy. Forged signatures of
two directors]
4. No knowledge of articles : Case: Rama
Corporation v. Proved Tin & General
Investment Co.
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Prospectus
A prospectus, as per Section 2(36),
means any document described or
issued as prospectus and includes any
notice, circular, advertisement or otherdocument inviting deposits from the
public or inviting offers from the public
for the subscription or purchase of anyshares or debentures of a body
corporate.
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Prospectus contd.
Thus, a prospectus is not merely an
advertisement; it may be a circular or
even a notice. A document shall be
called a prospectus if it satisfies twothings:
(a) It invites subscription to shares or
debentures or invites deposits.(b) The aforesaid invitation is made to the
public.
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What constitutes Invitation to
Public
As per Section 67, Invitation to public
includes:
invitation to any section of the publichowsoever selected provided the
invitation is made to all the members of
that section of public indiscriminately.
Invitation calculated to be madeavailable even to those who do not
receive the same.
Invitation to 50 or more persons.
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Mis-statement in a Prospectus and
its consequences
What is Mis-statement?
According to Section 65(1) of the Act:
(a) a statement included in a prospectus shallbe deemed to be untrue, if the statement is
misleading in the form and context in which it
is included; and
(b) where the omission from a prospectus ofany 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. Case: Rex
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emediesLiability for Mis-statements inaProspectus
CivilLiability (Sec.62&56) CriminalLiability (Sec. 63)
panyAgainst the Promoters,
Directors, other
Officers and ExpertsAgainst the Company
Against the Promoters,
Directors and Other officers
(not available against experts)
escission of Contract
Claim forD
amages
Damages
Compensation under Sections
62 and 56
Fine upto
Rs. 50,000Imprisonment
Fine upto
Bo
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Share and Share Capital
According to Section 2(46), A Sharerepresents a unit into which capital of acompany is divided. However, courts haveheld that a share is not merely a unit ofcapital, it represents a bundle of rights andobligations. Holder of a share is entitled tocertain rights (say, right to receive dividends,to receive notice of meetings, to participate in
the proceedings of a meeting, to electdirectors) and is also subjected to a numberof obligations (say, to abide by Articles ofAssociation, to maintain decorum of the
meetings).
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Kinds of Shares
The following kinds of shares may be
issued by a company:
1. Equity shares carrying voting rights.
2. Equity shares carrying differential
rights as to voting or dividend
(commonly called Non-Voting Equity
Shares)3. Preference Shares
4. Cumulative convertible Preferable
Shares
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Kinds of Shares contd.
Preference Shares carry preference
with respect to two things:
1. Preference with respect to dividend at
a fixed rate or of a fixed amount.
2. Preference with respect to return of
capital in case of winding up.
Equity Shares means a share which is
not a preference share.
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Allotment of Shares
Allotment is an acceptance to an offer
for purchase of shares.
Where allotment does not conform to
the statutory requirements, it is calledirregular allotment. For allotment to be
valid, following requirements must be
satisfied:
1. A copy of prospectus or statement in
lieu of prospectus must have been
delivered to Registrar of Companies.
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Allotment of Shares contd.
1. Application money must not be less
than 5% of the nominal value.
2. Minimum subscription (i.e., at least 90%of the issue) must have been received.
3. Application money must be kept
deposited in a Scheduled Bank till the
minimum subscription has beenreceived.
4. Shares must have been listed on the
stock exchange(s) mentioned in the
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Administration/Management of
a company
A company functions through the medium
of Board ofDirectors. However, certain
powers have been reserved to be exercised
by shareholders in general body meetings.Section 291 of the Companies Act, 1956
confers general power on the Board of
Directors. It provides: Subject to the
provisions of the Act, the Board ofDirectorsof a company shall be entitled to exercise all
such powers, and to do all such acts and
things, as the company is authorised to
exercise and do.
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Powers which are exerciseable
only by the shareholders.1. Sell, lease or otherwise dispose of the
whole, substantially the whole, of the
undertaking of the company, or where the
company owns more than one undertaking, ofthe whole or substantially the whole, of any
such undertaking.
2. Remit or give time for the repayment of any
debt due by a director except in the case ofrenewal or of continuance of an advance made
by a banking company to its directors in the
ordinary course of business.
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Powers contd.
3. Invest, otherwise than in trust securities,the amount of compensation received by thecompany in respect of compulsory acquisitionof any property or fixed assets of thecompany.
4. Borrow monies exceeding the aggregate ofthe paid-up capital of the company and its freereserves. Borrowing does not include
temporary loans (i.e., loans payable ondemand or within six months but excludingloans for capital expenditure) obtained fromthe companys bankers in the ordinary course
of business.
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Powers contd.
The resolution passed at the general
meeting must specify the total amount upto
which moneys may be borrowed by the Board
of directors in any financial year.5. Contribute in any year, to charitable and
other funds not directly relating to the
business of the company or the welfare of its
employees any amount exceeding Rs. 50,000or five per cent of its average net profits of
the last three financial years, whichever is
higher.
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Powers contd.
However, the resolution must specify the
total amount that may be contributed by
the Board of directors in any financial
year.However, contributions to National
Defence Fund, the Prime Ministers
National Relief Fund or any other fund
approved by the Central Government* forthe purpose are exempted from the above
provisions.
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Qualifications and
Disqualifications for Directors
Qualifications
A public company cannot prescribe any
qualifications for directorship exceptshare qualification. Again, share
qualification requirement cannot exceed
holding of shares exceeding Rs. 5000/-
in nominal value or value of one sharewhere nominal value of one share
exceeds Rs.5000/-. A director may
obtain his share qualification within 2
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Disqualifications
Section 274 of the Companies Act,
1956 provides that the following
persons shall not be capable of being
appointed as directors of anycompany :
(a) a person found by a competent court
to be of unsound mind and such findingremaining in force;
(b) an undischarged insolvent;
(c) a person who has applied to be
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Disqualifications contd.
(d) a person who has been convicted by a Court
of an offence involving moral turpitude and
sentenced in respect thereof to imprisonment for
not less than six months, and a period of fiveyears has not elapsed from the date of the expiry
of the sentence;
(e) a person who has not paid any call in respect
of shares of the company held by him, whetheralone or jointly with others and six months have
elapsed from the last date fixed for the payment
of the call; and
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Disqualifications contd.
(g) a person who is already a director of a
public company which,
(i) has not filed the annual accounts and
annual returns for any continuous three
financial years commencing on and after the
first day of April, 1999; or
(ii) has failed to repay its deposit or interestthereon on due date or redeem its
debentures on due date or pay dividend and
such failure continues for one year or more.
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Number of Directorships
Whole-time Directorship
A person cannot be appointed as a
whole-time director in more thanone company.
Part-time Directorship
Not more than 15 companiesexcluding the directorships of,
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No. of Directorships contd.
i. private companies [other thansubsidiaries or holding companies ofpublic company(ies)].
ii. unlimited companies,iii. associations not carrying on business
for profit or which prohibit payment of adividend, and
iv. alternate directorships (i.e., he isappointed to act as a director only duringthe absence or incapacity of some otherdirector).
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Criminal Liability (Sec. 63)Civil Liability (Sec.62 & 56)
BothFine upto
Rs.50,000
Imprisonment
upto 2 years
Compensation under
Sections 62 and 56
Damages
Liability for Mis-statements in a Prospectus
DamagesCompensation
under Sections
62 and 56
Imprisonment
upto 2 years
Fine upto
Rs.50,000Both
Rescission
of Contract
Claim for
Damages Fine upto Rs. 50,000
Against the Promoters,Directors and Other
officers (not available
against experts)
Against theCompany
Against the Promoters,
Directors, otherOfficers and Experts
Against theCompany
Civil Liability (Sec.62 & 56) Criminal Liability (Sec. 63)
Remedies