Company Law: Shares, Debentures, Meetings, and Winding Up

Posted on May 7, 2024 in Law & Jurisprudence

Forfeiture of Shares

When a person fails to pay calls on their allotted shares, the company may sue for payment or forfeit the shares.

Conditions for Share Forfeiture

  1. Authorized by the company’s Articles of Association.
  2. Notice of at least 14 days, stating the possibility of forfeiture.
  3. Directors must pass a resolution for forfeiture.

Effects of Share Forfeiture

  1. The person ceases to be a member concerning forfeited shares.
  2. Their liability ceases upon full payment for the shares.

Transfer and Transmission of Shares

Share transfer is a statutory right. To register a transfer, a stamped and executed instrument of transfer, along with the share certificate, must be submitted to the company. The company must issue a new share certificate within one month. (Mathrubumi Printing vs. Vardham Publishing Ltd., 1992)

Transmission of Shares

Transmission occurs when share ownership changes by operation of law, such as upon the death of a registered member. Legal representatives are entitled to registration and a new share certificate within one month. An instrument of transfer is not required.

Pre-emptive Right of Shareholders or Rights Issue (Sec 62)

If a company proposes to increase subscribed capital by allotting further shares, existing equity shareholders have the right to be offered these shares in proportion to their current holdings. This is known as a rights issue. The notice must provide a minimum of 15 to 30 days to accept the offer. Unaccepted shares may be sold to the public.

Debentures (Sec 71)

A debenture is an instrument issued by a company, evidencing debt. It includes debenture stocks and bonds.

Characteristics of Debentures

  1. Document as evidence of debt.
  2. Issued under the company seal.
  3. Usually specifies the repayment date.
  4. Specifies the interest rate.
  5. Debenture holders do not have voting rights.

Fixed Charge vs. Floating Charge

A fixed charge is created on specific, fixed assets of the company, preventing the company from dealing with that property without the charge holder’s consent. A floating charge is created on assets that constantly change, such as raw materials or book debts.

Meetings of Shareholders

Types of Meetings

  1. Annual General Meeting (AGM)
  2. Ordinary Business and Special Business Meetings
  3. Extraordinary General Meeting (EGM)

Essentials of a Valid Meeting

  1. Proper authority calls the meeting.
  2. Notice given to entitled persons.
  3. Quorum present.
  4. Chairman of the meeting.
  5. Minutes of the meeting.
  6. Voting and poll.

Proxies (Sec 105)

A proxy is an instrument appointing a person to vote for a shareholder at a general meeting. It must be in writing, signed by the shareholder, and deposited with the company 48 hours before the meeting.

Resolutions

A resolution is a formal decision on a proposal at a meeting.

Types of Resolutions

  1. Ordinary Resolution: Passed by a simple majority of shareholders.
  2. Special Resolution: Passed by a 3/4th majority.

Resolutions Requiring Special Notice

Similar to an ordinary resolution, but the mover must give the company at least 14 days’ notice before moving the resolution.

Situations Requiring Special Notice

  1. Appointment of an auditor other than the retiring auditor.
  2. Removal of a director before their term expires.
  3. Appointment of a director to replace a removed director.

Board of Directors (Sec 149-179)

Directors are responsible for the company’s actions and business operations. They collectively form the Board of Directors. (Bath vs. Standard Land Co., 1910)

Independent Directors

Independent directors are not managing directors, whole-time directors, or nominee directors. They are appointed from a data bank notified by the central government and approved by the company in a general meeting.

Appointment of Directors

  1. First directors.
  2. Appointment by shareholders.
  3. Appointment by the Board: (i) Additional directors, (ii) Alternate directors, (iii) Casual vacancy.

Disqualification of Directors

  1. Unsound mind.
  2. Undischarged insolvent.
  3. Pending application for insolvency.
  4. Conviction for an offense involving moral turpitude with imprisonment for at least 6 months within the past 5 years.
  5. Disqualification by court order due to fraud in the company’s promotion, formation, or management.

Duties of Directors

  1. Exercise duties with due and reasonable care.
  2. Avoid conflicts of interest.
  3. Not achieve undue gain or advantage for themselves or relatives.
  4. Not assign their office.

Meetings of the Board

Rules for Board Meetings

  1. Number of meetings.
  2. Notice of meeting.
  3. Quorum for meeting.
  4. Adjournment of meeting.
  5. Minutes book.
  6. Restrictions on voting.

Auditors (Sec 139-148)

An auditor is an authorized person who examines the company’s books of accounts.

Powers and Rights of Auditors

  1. Access to books and accounts.
  2. Require information and explanations from company officers.
  3. Receive notice of and attend general meetings.
  4. Receive remuneration.

Duties of Auditors

  1. Enquire about personal expenses charged to revenue accounts.
  2. Enquire about cash received on share issues.
  3. Ensure proper maintenance of books of accounts.

Supremacy of Majority and Protection of Minorities (Foss v. Harbottle Rule and Exceptions)

The rule of majority shareholder supremacy was established in Foss v. Harbottle (1843). The court held that the majority’s decision prevails, even if a minority disagrees.

Exceptions to Foss v. Harbottle Rule

  1. Ultra vires or illegal acts.
  2. Fraud on the minority.
  3. Acts against the Articles of Association.
  4. Violation of individual members’ personal rights.
  5. Prevention of oppression and mismanagement.

Winding Up of a Company (Sec 270-365)

Winding up is the process of ending a company’s life and administering its property for the benefit of creditors and members. A liquidator is appointed to take control, collect assets, pay debts, and distribute any surplus among members.

Modes of Winding Up

1) Winding Up by the Tribunal (Compulsory Winding Up)

The National Company Law Tribunal (NCLT) can order winding up under Section 271 of the Companies Act, 2013, in various circumstances, including:

  • Inability to pay debts.
  • Special resolution passed by the company.
  • Acting against India’s sovereignty and integrity.
  • Being a sick company.
  • Application by the Registrar.
  • Default in filing financial statements and annual returns.
  • Just and equitable grounds.

“Just and equitable” grounds depend on the specific facts of each case and may include situations such as:

  • Loss of the company’s substratum.
  • Unfair or oppressive conduct by the majority towards the minority.
  • Deadlock in management.
  • Potential prejudice to public interest.
  • Company being a sham or bubble. (Re German Date Coffee Company, N.K. Prasad v. Andhra Bank)

Who Can Apply for a Winding Up Order?

  • The company.
  • Any creditor(s), including contingent or prospective creditors.
  • Any contributory(ies).
  • The Registrar.
  • Any person authorized by the Central Government.

2) Voluntary Winding Up (Sec 304-365)

Voluntary winding up occurs based on a simple or special resolution passed by shareholders in a general meeting. A company may be voluntarily wound up with a simple resolution under the following circumstances:

  • Expiry of the company’s duration as per its Articles of Association.
  • Occurrence of an event specified in the Articles of Association for dissolution.

A company can also be voluntarily wound up without assigning any reason if a special resolution is passed in a general meeting.